United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended June 30, 20152017
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to .
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA |
| 25-1214948 |
(State or other jurisdiction of |
| (I.R.S. Employer |
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375 Saxonburg Boulevard |
| 16056 |
(Address of principal executive offices) |
| (Zip code) |
Registrant’s telephone number, including area code: 724-352-4455
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Name of Each Exchange on Which Registered |
Common Stock, no par value |
| Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☒ No ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨☐ No x☒
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitiondefinitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at December 31, 2014,30, 2016, was approximately $798,334,460$1,763,329,797 based on the closing sale price reported on the Nasdaq Global Select Market. For purposes of this calculation only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant.
Number of outstanding shares of Common Stock, no par value, at August 20, 2015,14, 2017, was 61,222,480.
63,279,520.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 20152017 Annual Meeting of Shareholders of II-VI Incorporated, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K (including certain information incorporated herein by reference) contains forward-looking statements made pursuant to Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. TheseThe statements in this Annual Report on Form 10-K that are not purely historical are forward-looking statements, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, these forward-looking statements can be identified as those that may predict, forecast, indicate or imply future results, performance or advancements and by forward-looking wordsterminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “plans,“estimates,” “predicts,” “projects,” “believes,“potential,” “estimates” or similar expressions.“continue” or the negative of these terms or other comparable terminology. Forward-looking statements address, among other things, our expectations, our growth strategies, our efforts to increase bookings, sales and revenues, projections of our future profitability, results of operations, capital expenditures, our financial condition, our ability to integrate acquired businesses or other “forward-looking” information and include statements about revenues, earnings, spending, margins, costs or our actions, plans or strategies.
The forward-looking statements in this Annual Report on Form 10-K involve risks and uncertainties, which could cause actual results, performance or trends to differ materially from those expressed in the forward-looking statements herein or in previous disclosures. II-VI Incorporated believesWe believe that all forward-looking statements made by itus have a reasonable basis, but there can be no assurance that these expectations, beliefs or projections will actually occur or prove to be correct. Actual results could materially differ from such statements. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA for our forward-looking statements.
The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results, and could cause actual results for fiscal 20162018 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Annual Report on Form 10-K or otherwise made by our management:
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Investments in future markets of potential significant growth may not result in expected returns.
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Our competitive position depends on our ability to develop new products and processes.
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Our competitive position may require significant investments in strategic acquisitions, with associated integration risks, which may not be successful.
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Our future success depends on continued international sales.
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Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign exchange losses.
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Our inability to access financial markets from time to time to raise capital, finance working capital requirements or our acquisition strategies, or otherwise to support our liquidity needs could negatively impact our ability to finance our operations, meet certain obligations or implement our growth strategy.
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We may fail to accurately estimate our customers’ demands.
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We may encounter substantial competition.
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There are limitations on the protection of our intellectual property.
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A significant portion of our business depends on cyclical industries.
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Data breach incidents and breakdown of information and communication technologies could disrupt our operations and impact our financial results.
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Global economic downturns may adversely affect our business, operating results and financial condition.
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We are subject to governmental import and export regulations.
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Our global operations are complex to manage.
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We have entered into supply agreements which commit us to supply products on specified terms.
We depend on highly complex manufacturing processes that require products from limited sources of supply. |
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We use and generate hazardous substances that are subject to stringent environmental regulations.
We may be adversely affected by climate change regulations.
Some systems that use our products are complex in design, and our products may contain defects that are not detected until deployed which could increase our costs and reduce our revenues.
Significant defense spending cuts and/or reductions in defense programs could adversely impact our business.
Change in tax rates, tax liabilities or tax accounting rules could affect future results.
Increases in commodity prices may adversely affect our results of operations and financial condition.
Natural disasters or other global or regional catastrophic events could disrupt our operations and adversely affect our results.
Our success depends on our ability to retain key personnel.
We have agreements with government entities that are subject to significant compliance requirements and changes in government spending.
Our stock price has been highly volatile in the past and may be extremely volatile in the future.
Some anti-takeover provisions contained in our articles of incorporation and by-laws, as well as provisions of Pennsylvania law, could impair a takeover attempt, which could also reduce the market price of our common stock.
Because we do not currently intend to pay dividends, holders of our common stock will benefit from an investment in our common stock only if it appreciates in value.
The foregoing and additional risk factors are described in more detail herein under Item 1A. “Risk Factors”. All such factors, as well as factors described or referred to in other filings we make with the Securities and Exchange Commission (the “SEC”) from time to time, should be considered in evaluating our business and prospectus. Many of these factors are beyond our control. In addition, we operate in a highly competitive and rapidly changing environment, and, therefore, new risk factors can arise. It is not possible for management to predict all such risk factors, assess the impact of all such risk factors on our business nor estimate the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Annual Report on Form 10-K speak only as of the date of this Annual Report on Form 10-K. We do not assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or developments, or otherwise, except as may be required by the securities laws. We caution you not to rely on them unduly.
Investors should also be aware that while the CompanyII-VI Incorporated does communicate with securities analysts, from time to time, suchthose communications are conducted in accordance with applicable securities laws. Investors should not assume that the CompanyII-VI Incorporated agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
PART I
Item 1. | BUSINESS |
IntroductionDefinitions
II-VI Incorporated (“II-VI,” the “Company,” “we,” “us,” or “our”) was incorporated in Pennsylvania in 1971. Our executive offices are located at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056. Our telephone number is 724-352-4455. Reference to “II-VI,” the “Company,” “we,” “us,” or “our” in this Annual Report on Form 10-K, unless the context requires otherwise, refers to II-VI Incorporated and its wholly-owned subsidiaries. The Company’s name is pronounced “Two Six Incorporated.” The name II-VI refers to Groups II and VI on the Periodic Table of Elements (Zn and Se) from which II-VI originally designed and produced infrared optics for high-power CO2 lasers used in materials processing. The majority of our revenues are attributable to the sale of engineered materials and opto-electronicoptoelectronic components and devices for industrial military and medical laser applications, optical communications products, compound semiconductor substrate-based products and elements for material processing and refinement.consumer products. Reference to “fiscal” or “fiscal year” means our fiscal year ended June 30 for the year referenced.
Effective July 1, 2014,The following acronyms are defined for reference: 3 dimensional (“3D”); 4th generation (“4G”) wireless; 5th generation (“5G”) wireless; carbon monoxide (“CO”); carbon dioxide (“CO2”); chemical vapor deposited (“CVD”) diamond; dense wavelength division multiplexing (“DWDM”); extreme ultraviolet (“EUV”) lithography; gallium arsenide (“GaAs”); gigabit per second (“Gb/s”); infrared (“IR”); light detection and ranging (“LiDAR”); near infrared (“NIR”); nanometers (“nm”); optical time domain reflectometer (“OTDR”); research, development and engineering (“RD&E”); radio frequency (“RF”); reconfigurable add/drop multiplexer (“ROADM”); silicon carbide (“SiC”); ultraviolet (“UV”); vertical cavity surface emitting laser (“VCSEL”); wavelength division multiplexing (“WDM”); zinc selenide (“ZnSe”); and zinc sulfide (“ZnS”).
General Description of Business
We develop, manufacture and market engineered materials, optoelectronic components and devices for precision use in industrial materials processing, optical communications, military, consumer electronics, semiconductor equipment, life science and automotive applications. We use advanced engineered material growth technologies coupled with proprietary high-precision fabrication, micro-assembly, thin-film coating and electronic integration to enable complex optoelectronic devices and modules. Our products are deployed in applications that we believe reduce costs and improve performance and reliability in a variety of applications, including (i) laser cutting, welding and marking operations; (ii) 3D sensing consumer applications; (iii) optical communication products; (iv) intelligence, surveillance and reconnaissance; (v) semiconductor processing and tooling; and (vi) thermoelectric cooling and power generation solutions.
Through RD&E and acquisitions, II-VI has expanded its portfolio of materials grown and fabricated in-house. We believe that the materials that we grow and fabricate are differentiated by one or a combination of unique optical, electrical, thermal and mechanical properties. II-VI’s optics are shaped by precision surfacing techniques to meet the most stringent requirements for flat or curved geometries, with smooth or structured surfaces, or with patterned metallization. Proprietary processes developed at our global optical coating centers enhance our products’ durability to high energy lasers and harsh environments. Optical coatings also provide the desired spectral characteristics ranging from the ultraviolet to the far-infrared. II-VI leverages these capabilities to deliver miniature- to large-scale precision optical assemblies, including in combination with thermal management components, integrated electronics, and/or software.
Since 2013, II-VI also has offered a broad portfolio of compound semiconductor lasers that are used in a variety of applications in most of our end markets. These compound semiconductor lasers enable several types of high power lasers for materials processing, optical signal amplification in terrestrial and submarine communications networks, high bit rate server connectivity within datacenters and 3D sensing in consumer electronics.
II-VI continues to work to perfect its operational capabilities, develop next generation products, and invest in new technology platforms. With a strategic focus on fast growing markets, II-VI pursues its vision of enabling the world to be safer, healthier, closer and more efficient.
Information Regarding Market Segments and Foreign Operations
Financial data regarding our revenues, results of operations, industry segments and international sales for the three years ended June 30, 2017 are set forth in the Consolidated Statements of Earnings and in Note 11 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference. We also discuss certain Risk Factors set forth in Item 1A of this Annual Report on Form 10-K related to our foreign operations, which are incorporated herein by reference.
Bookings and Backlog
We define our bookings as customer orders received that are expected to be converted to revenues over the next 12 months. For long-term customer orders, to address the inherent uncertainty of orders that extend far into the future, the Company realignedrecords only those orders which are expected to be converted into revenues within 12 months from the end of the reporting period. Bookings are adjusted if changes in customer demands or production schedules cause the expected time of a delivery to extend beyond 12 months. For the year ended June 30, 2017, our bookings were approximately $1.1 billion compared to bookings of approximately $875 million for the year ended June 30, 2016.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2017, our backlog was approximately $400 million, compared to approximately $290 million as of June 30, 2016.
Global Operations
II-VI is headquartered in Saxonburg, PA, with RD&E, manufacturing and sales facilities worldwide. Our U.S. production and research and development operations are located in Pennsylvania, California, New Jersey, Texas, Mississippi, Massachusetts, Connecticut, Delaware, New York, Florida and Illinois and our non-U.S. production operations are based in China, Singapore, Vietnam, the Philippines, Germany and Switzerland. We also utilize a contract manufacturer in Thailand. In addition to sales offices at most of our manufacturing sites, we have sales and marketing subsidiaries in Hong Kong, Japan, Germany, China, Switzerland, Belgium, the United Kingdom, Italy, South Korea, and Taiwan. Approximately 69% of our revenues for the fiscal year ended June 30, 2017 were generated from sales to customers outside of the United States.
Employees
The table below summarizes the number of our employees as of June 30, 2017. We have a long-standing practice of encouraging active employee participation in areas of operations management. We believe our relations with our employees are good. We reward our employees with incentive compensation based on achievement of performance goals. There are approximately 136 employees located in the United States and the Philippines who are covered under collective bargaining agreements. The Company’s collective bargaining agreement in the Philippines expires in June 2019. The collective bargaining agreement covering certain U.S. based employees expires in January 2021. There are 849 employees of Photop in China who work under contract manufacturing arrangements for customers of the Company.
| Number of employees | Percent of total |
Direct production | 8,216 | 79% |
Research, development & engineering | 1,117 | 11% |
Sales, marketing, administration, finance and supporting services | 1,016 | 10% |
Total: | 10,349 | 100% |
Manufacturing Processes
Our success in developing and manufacturing many of our products depends on our ability to manufacture and refine technically-challenging materials and components. The ability to produce, process and refine these complex materials and to control their quality and in-process yields is an expertise of the Company that is critical to the performance of our customers’ instruments and systems. In the markets we serve, there are a limited number of suppliers of many of the components we manufacture and there are very few industry-standard products.
Our network of worldwide manufacturing sites allows us to manufacture our products in regions that provide cost-effective advantages. We employ numerous advanced manufacturing technologies and systems at our manufacturing facilities. These include automated Computer Numeric Control optical fabrication, high throughput thin-film coaters, micro-precision metrology and custom-engineered automated furnace controls for crystal growth processes. Manufacturing products for use across the electro-magnetic spectrum requires the capability to repeatedly produce products with high yields to atomic tolerances. II-VI continuously updates its comprehensive quality management systems that feature manufacturing quality best practices. II-VI is committed to delivering products within specification, on time and with high quality, with a goal of fully satisfying customers and continually improving.
Sources of Supply
The major raw materials we use include zinc, selenium, ZnSe, ZnS, hydrogen selenide, hydrogen sulfide, tellurium, yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, GaAs, copper, germanium, molybdenum, quartz, optical glass, diamond, and other materials.
The continued high-quality of and access to these materials is critical to the stability and predictability of our manufacturing yields. We test materials at the onset of the production process. Additional research and capital investment may be needed to better define future material specifications. We have not experienced significant production delays due to shortages of materials. However, we do occasionally experience problems associated with vendor-supplied materials not meeting contract specifications for quality or purity. As discussed in greater detail in Item 1A – Risk Factors, of this Annual Report on Form 10-K, significant failure of our suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a materially adverse effect on our results of our operations.
Business Units
The Company’s organizational structure is divided into three reporting segments for the purpose of making operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products. TheThese segments, and the units within the segments, are reflected in the organization chart below:
II-VI Laser Solutions designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI Infrared brand name and used primarily in high-power CO2 lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices, and high-speed communication systems and manufactures 6-inch gallium arsenide wafers allowing for the production of high performance lasers and integrated circuits in high volume sold under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brand names.
II-VI Photonics manufactures crystal materials, optics, microchip lasers and optoelectronic modules for use in optical communication networks and other diverse consumer and commercial applications. In addition, the segment information (revenue through operating income)also manufactures pump lasers, optical isolators, and optical amplifiers and micro-optics for all periods presented in this document reflectsoptical amplifiers for both terrestrial and submarine applications within the realignedoptical communications market.
II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical and commercial laser imaging applications. In addition, the segment organization.designs, manufactures and markets unique engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, military and medical markets.
During the fiscal year ended June 30, 2017, the Company completed the following acquisitions:
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June 19, 2017 | Integrated Photonics, Inc. (“IPI”) | $41.7 million |
In August 2013,DPI joined the Company announced that its subsidiary, II-VI Performance Metals, a business in the II-VI Performance Products segment, would discontinue its tellurium product line. In addition, the Company downsized its selenium product line and now only provides selenium metal to the Company’s II-VI Laser Solutions segment and IPI joined the II-VI Photonics segment. See Note 2 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding the Company’s acquisitions, which information is incorporated herein by reference.
II-VI’s segments are organized by business unit at the group or division level. Each of these business units develops and markets products as described below.
Segment: | Group/Division: | Our Products: |
II-VI Laser Solutions | II-VI Infrared | • Laser optics and accessories for CO2 lasers used in materials processing semiconductor and life sciences • High power fiber and direct diode laser optics • Infrared thermal imaging optics and assemblies • II-VI compound crystalline material production including ZnSe, ZnS, ZnS multispectral and CVD diamond |
II-VI HIGHYAG | • Laser processing heads and beam delivery systems for laser materials processing with fiber lasers, disk lasers, and diode lasers | |
II-VI Laser Enterprise | • High-power semiconductor lasers and laser bars enabling fiber and direct diode lasers for materials processing, medical, defense, consumer and printing applications • VCSELs for optical navigation, optical interconnects and 3D sensing | |
II-VI OptoElectronic Devices | • VCSELs for 3D sensing in consumer electronics and automotive • RF wafers for optical/telecommunications | |
II-VI EpiWorks | • III-V epitaxial wafers to enable higher performance photonic and RF components for consumer, communications, network and mobile applications, including wireless handsets, tablets and the Internet of things | |
II-VI Suwtech | • Diode pumped solid state lasers, green lasers and Q-switched lasers • Laser diode modules for multiple markets and applications, including aiming, leveling, range finding, machine vision, bio-medical instrumentation, Raman spectroscopy, and fluorescence spectroscopy • Fiber coupled high power diode lasers in the 8xx and 9xx nm wavelength ranges for fiber laser and solid state laser pumping, as well as for medical and other applications | |
II-VI Lasertech | • Laser cutting and drilling machines for processing a wide variety of super hard materials such as CVD diamond, polycrystalline diamond, polycrystalline cubic boron nitride, and ceramics among others as well as for high efficiency laser cutting of non-conductive materials | |
II-VI DirectPhotonics | • High brightness, high power direct diode laser engines for cutting, welding, and thermal processing applications, including optimized solutions for aluminum and aluminum-copper processing applications |
Segment: | Group/Division: | Our Products: |
II-VI Photonics | II-VI Optical Communications | • Products and solutions that enable high bit rate interconnects for datacenters and communication service providers, datacenter inter-connects, ROADM systems and submarine transmission |
II-VI Photop | • Fiber optics and precision optics used in projection and displays, crystal materials and components for optical communications, high power UV, visible and NIR optics for industrial lasers, filters and assemblies for life sciences, as well as for sensors, instrumentation and semiconductor equipment | |
II-VI Performance Products | II-VI Optical Systems | • Precision optical assemblies, objectives, infrared optics, thin film coatings and optical materials • Optical solutions to critical and complex designs, engineering and production challenges in defense, aerospace and commercial industries |
II-VI M Cubed | • Advanced ceramic and metal matrix composite products for semiconductor equipment, flat panel display equipment, industrial and optical equipment, as well as for defense applications | |
II-VI Marlow | • Thermoelectric components, sub-assemblies and systems for heating, cooling, temperature tuning, thermal cycling and power generation in aerospace, defense, medical, industrial, automotive, consumer, telecommunications and power generation markets | |
II-VI Advanced Materials | • SiC and advanced semiconductor materials for high frequency and high power electronic device applications in defense, telecommunications, automotive and industrial markets | |
II-VI Performance Metals | • Specialty refining, recycling and materials recovery services for high purity rare metals such as Selenium and Tellurium, as well as related chemical products such as Tellurium Dioxide, for optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy, agriculture and industrial applications. |
Our Markets
Our market-focused businesses are organized by technology and products. Our businesses are composed of the following primary markets: Materials Processing, Communications (“Comms”), Military and Semiconductor Equipment (“Semi Cap”). Other markets (“Other”) include: Life Sciences, Consumer Electronics and Automotive. The table below summarizes our revenue by reported segments and the distribution of that revenue by end markets.
Reported Segments | FY17 Revenue ($M) | Materials Processing | Comms | Military | Semi Cap | Other |
II-VI Laser Solutions | 339 | 69% | 13% | 4% | 5% | 9% |
II-VI Photonics
| 419 | 9% | 84% | - % | 3% | 4% |
II-VI Performance Products | 214 | 9% | 16% | 42% | 18% | 15% |
Total
| 972 | 30% | 44% | 11% | 7% | 8% |
Communications Market:
II-VI’s optical communications products and technologies enable the next generation of high-speed optical transmission systems, networks, and datacenter solutions necessary to meet the accelerating global bandwidth demand. At the core of both terrestrial and undersea optical networks, our market-leading 980 nm pump lasers boost the power of the optical signal in the fiber optic cable along the way to enable a larger number of high speed signals to be transmitted over longer distances. Our latest generation of 980 nm pump lasers along with miniature tunable filters and hybrid passives are part of our ultra-compact family of components critical to a new generation of small size, long reach DWDM transmission modules operating at 100, 200 and 400 Gb/s.
Customers continue to rely on us for our industry-leading optical amplification and embedded monitoring solutions for their next generation ROADM systems to compensate for the inherent signal loss and monitor the signal integrity. Our proprietary OTDR modules allow systems to automatically detect and pinpoint issues along the transmission path in real time. The accelerating adoption of applications such as cloud computing are driving the rapid growth of datacenter buildouts. Our high-speed 25 Gb/s VCSELs enable intra-datacenter transceivers to transmit and receive signals. Our miniature WDM thin film filter assemblies are used to increase the bandwidth within many modern transceiver designs by combining wavelengths at the transmitter end and separating them out at the receiver end.
In mobile wireless applications, II-VI supplies base SiC substrates to customers who manufacture RF power amplifier devices that are embedded in remote radio heads in 4G wireless bases stations to boost the power of RF signal before it reaches the antenna. These devices are also widely expected to be embedded in next generation active antennas for 5G wireless where multiple devices per antenna will be required to enable higher bandwidth. SiC has a high number of intrinsic physical and electronic advantages such as high thermal conductivity that enables them to operate at high-power levels and still dissipate the excess heat generated.
Materials Processing Market:
Our industrial laser optics and solutions for the materials processing market remain in strong demand. There continues to be a steady global demand to support existing installations and new deployments of CO2 and fiber laser systems, especially for our greater than 1 kilowatt high-power handling optics and beam delivery solutions. Our vertically integrated and market leading ZnSe optics and components, due to their inherent low loss at around 10 micron wavelength, have enabled high-power CO2 laser systems for many decades and remain critical to the steady stream of new deployments as well as to the continued operation, serving as replacement optics, of the installed base of CO2 lasers. II-VI continues to introduce products that address new and growing applications for low-power CO2 lasers, such as cutting textiles, leather, wood and other organic materials, for which the CO2 laser’s 10 micron wavelength is ideally suited. CO2 lasers are also at the core of EUV lithography systems which are now emerging on the market to enable a new generation of smaller and more powerful personal computing devices.
Over the past several years, fiber laser-based systems operating at one micron wavelength in pulsed or continuous mode have taken a central role in nearly all materials processing segments and especially for precision machining such as marking and micro drilling. From the laser chips that generate the input optical power to the beam delivery systems that direct the output optical power to the target, II-VI supplies a broad set of laser optics and fused fiber products that enable many functions within these systems. The same set of II-VI products is also at the core of existing and emerging direct diode laser systems. II-VI is also driving innovation with a direct-diode laser engine small enough to be mounted on a robotic arm so that the end user can apply square beams directly to the work piece at wavelengths optimized for aluminum processing.
Another emerging and fast growing application is the processing of displays for consumer electronics including those based on the OLED technology that are scribed with CO lasers and sealed with UV lasers. II-VI’s broad portfolio of coated optics and crystal materials serve all of these growing laser markets.
Military Market:
Our focus in the military market is enabling lasers for targeting, night vision, navigation, as well as intelligence, surveillance and reconnaissance systems. Multiple fighter jets are equipped with our large area sapphire windows that surround advanced targeting and imaging systems. Infrared domes are used on missiles with infrared guidance systems ranging from small, man-portable designs to larger designs mounted on helicopters, fixed-wing aircraft and ground vehicles. High-precision domes are an integral component of a missile’s targeting system, providing efficient tactical capability, while maintainingserving as a protective cover to its internal components.
Rotary and fixed-wing aircraft also use missile warning systems to protect against shoulder fired man-portable missiles. Our competencies in material growth for UV crystals and our optical assembly capabilities provide significant support to these missile warning systems. A key attribute to several of these systems is the ability to filter electro-magnetic interference using micro-fine conductive mesh patterns. This technology is also applied to non-optical applications for absorbing and transmitting energy from the surfaces of aircraft and missiles.
Many military systems employ laser designation and range-finding capabilities supported by our semiconductor lasers bars and yttrium-based materials and laser optics, all manufactured in-house, as well as our competency in short wave infrared and visible optics. Our thermo-electric coolers are used to increase thermal imaging sensitivity or to maintain a constant window temperature in various visible and infrared applications.
We provide a range of battlefield-ready technologies for soldier equipment or for law enforcement. Our precision patterned reticles are embedded in rifle scopes. Our reaction bonded boron carbide materials are shaped into torso plates and employed as protective body armor. Our thermo-electric coolers are used to regulate the soldier’s body heat. They are also used to convert heat produced by battlefield fuel burners into electrical power, for example to extend battery life on the battlefield.
We maintain engineering and manufacturing facilities in the United States with strictly controlled access that are dedicated to our U.S. government supported contracts.
Semiconductor Equipment Market:
Semiconductor equipment requires advanced materials to meet the need for tighter tolerances, enhanced thermal stability, faster wafer transfer speeds and reduced stage settling times. Our metal matrix composites and reaction bonded ceramics enable these applications thanks to their optimum combination of light weight, strength, hardness and coefficient of thermal expansion. Our reaction bonded SiC materials are used to manufacture wafer chucks, light-wave scanning stages and high temperature, corrosion resistant wafer support systems. Our cooled SiC mirrors and precision patterned reticles are used in the illumination systems of lithography tools.
In the emerging market of EUV lithography systems, CO2 lasers are used to generate extreme ultraviolet radiation. These CO2 lasers and beam delivery systems leverage our broad portfolio of CO2 laser optics, CdTe Modulators, high power handling polycrystalline CVD diamond windows to route the powerful laser beam to a tin droplet from which EUV light will emanate. Due to their very high mechanical and thermal performance characteristics, our reaction bonded SiC are used in structural support systems that are integral to EUV optics to meet critical requirements for optical system stability.
Life Sciences Market:
Today the majority of our business in the life sciences end market is in analytical tools. Many such analytical tools found in modern biotech laboratories are based on some form of interaction with light. This applies to flow cytometry, cell sorting, confocal microscopy, genome sequencing, Raman spectroscopy, fluorescence spectroscopy and particle sizing to name a few. Our multi-colored laser engines along with our broad portfolio of application-specific optics, filters and gratings are embedded in these analytical tools. We also supply objective lenses, precision patterned reticles and assemblies for microscopes.
Genome sequencing involves temperature cycling DNA in flow cells with a high degree of temperature uniformity and precision. We believe that our thermal engines are the state of the art in chiller technology, and they achieve what we believe to be industry-leading temperature control and uniformity across large areas. Our green lasers are used to excite the fluorescence of the DNA to reveal their structure. Our flow cells are micro-machined with a high degree of precision to insure the smooth flow of sample fluids undergoing analysis. Our thermal engines are also used in a multitude of other biomedical applications, for example to measure substance concentration in complex mixtures, to protect blood supplies and to perform heating- and cooling-based physical therapy.
Clinical procedures are increasingly performed with tools that embed our lasers and optics. For example, our semiconductor laser bars are used in hair and wrinkle removal procedures and our custom designed lens assemblies are used for laser eye surgery. We continue to leverage our core lasers, optics and temperature control expertise into new applications to grow our business in life sciences.
Consumer Electronics Market:
II-VI manufactures low cost VCSELs, VCSEL arrays and low angle shift filters for the consumer electronics market. Our VCSEL products leverage our world-class 6-inch GaAs platform, comprising our epitaxial wafer growth and wafer fabrication capabilities.
Our VCSELs, unlike many on the market, have already been designed into consumer products such as the computer mouse as well as for menu navigation in smart phones and in car steering wheels. Our VCSELs are also widely deployed in datacenters and in the emerging market for HDMI optical cables. This expertise in VCSEL technology is being leveraged for the upcoming 3D sensing market. Following our acquisition in fiscal year 2016 of a 6-inch epitaxy and wafer capabilities, we invested significantly in fiscal year 2017 to complete our capacity expansion and be ready to ramp our sales significantly in the near future.
Automotive Market:
Power conversion electronics for high-efficiency electric vehicles need a combination of high-power density, high-efficiency and high temperature operation that are only afforded by advanced material systems based on SiC substrates. Our SiC substrates are available in large diameters and have what we believe to be best-in-class quality and low defect levels.
Our thermo-electric modules are used to cool the batteries to extend their operating life. They are also more efficient than resistive heaters when used in heated car seats and extend a battery’s range of travel in cold environments.
To operate safely, self-driving cars will rely on control systems that are informed by a comprehensive number of sensors. One such sensor is based on LiDAR, which employs semiconductor lasers to properly identify and measure the distance to obstacles ahead. Our GaAs-based semiconductor laser platform, which already enables a broad portfolio of products in communications and materials processing, is now being scaled further for consumer electronics, and will be leveraged to deliver a highly reliable and cost-effective laser product for this emerging market.
Marketing and Sales
We market our products through a direct sales force and through representatives and distributors around the world. Our market strategy is focused on understanding our customers’ requirements and building market awareness and acceptance of our products. New products are continually being produced and introduced to our new and established customers in all markets.
The Company has centralized its worldwide marketing and sales functions across the Company’s business units. Sales offices have been strategically established to best serve and distribute products to our worldwide customer base. There is significant cooperation, coordination and synergies among our business units that capitalize on the most efficient and appropriate marketing channels to address diverse applications within our markets.
Our sales forces develop effective communications with our OEM and end-user customers worldwide. Products are actively marketed through targeted mailings, telemarketing, select advertising and attendance at trade shows and customer partnerships. Our sales force includes a highly-trained team of applications engineers to assist customers in designing, testing and qualifying our parts as key components of our customers’ systems. As of June 30, 2017, we employed approximately 246 individuals in sales, marketing and support.
We do business with a number of customers in the defense industry, who in turn generally contract with a governmental entity, typically a U.S. governmental agency. Most governmental programs are subject to funding approval and can be modified or terminated without warning by a legislative or administrative body. For further information regarding our exposure to government markets, see the discussion set forth in Item 1A – Risk Factors of this Annual Report on Form 10-K.
Customers
The main groups of customers by segments are as follows:
Segment: | Group/Division: | Our Customers Are: | Representative Customers: |
II-VI Laser Solutions | II-VI Infrared | OEM and system integrators of industrial, medical and military laser systems. Laser end-users who require replacement optics for their existing laser systems. | • TRUMPF GmbH + Co. KG • Bystronic Laser AG • Coherent, Inc. |
II-VI HIGHYAG | Automotive manufacturers, laser manufacturers and system integrators. | • Ford Motor Company • Laserline GmbH | |
II-VI Laser Systems | OEM and subsystem integrators of aiming, machine vision, bio-medical instruments, and fiber lasers. | • BGI Complete Genomics, Shenzhen Co., Ltd. • SPI Lasers Limited | |
II-VI Opto Electronics | Manufacturers of industrial laser components, optical communication equipment and consumer technology applications. | • Laserline GmbH • Wuhan Raycus Fiber Laser Technologies Co., Ltd | |
II-VI Photonics | II-VI Optical Communications & II-VI Photop | Worldwide network system and sub-system providers of telecommunications, data communications and CATV. | • Cisco Systems, Inc. • Fujitsu Network Communications • Corning Incorporated • Coherent, Inc. • Acacia Communications, Inc. • Han’s Laser Technology Industry Group Co. Ltd. |
Global manufacturers of industrial and medical laser optics and crystals including commercial and consumer products used in a wide array of instruments, sensors, fiber lasers, displays and projection devices. | |||
II-VI Performance Products | II-VI Optical Systems | Manufacturers of equipment and devices for aerospace, defense and commercial markets. | • Lockheed Martin Corporation |
II-VI M Cubed | Manufacturers and developers of integrated circuit capital equipment for the semiconductor industry. | • ASML Holding NV • Carl Zeiss AG • Nikon Corporation • KLA-Tencor Corporation | |
Manufacturers and developers of products and components for various defense and industrial markets. | • Corning Incorporated | ||
II-VI Marlow | Manufacturers and developers of equipment and devices for defense, space, telecommunications, medical, industrial, automotive, personal comfort and commercial markets. | ||
II-VI Advanced Materials | Manufacturers and developers of equipment and devices for high-power RF electronics and high-power and voltage switching and power conversion systems for both commercial and military applications. | • Sumitomo Electric Device Innovations, Inc. • Showa Denko K. K. • STMicroelectronics • IQE PLC • Infineon Technologies AG | |
II-VI Performance Metals | Primary mineral processors, refineries and providers of specialized materials that are used in laser optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy and industrial products. | •Aurubis AG |
Competition
We believe we are a global leader in many of our product families. We compete on the basis of our reputation for offering the highly engineered nature of our products, product and technology roadmaps, IP, ability to scale, quality, delivery time, technical support and pricing. We believe that we compete favorably with respect to these factors and that our vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees and worldwide marketing and distribution channels provide us with competitive advantages. The main groups of our competitors are as follows:
Segment: | Areas of Competition: | Competitors: |
II-VI Laser Solutions | Infrared laser optics | • Sumitomo Electric Industries, Ltd. • Newport Corporation |
Automated equipment and laser material processing tools to deliver high-power one-micron laser systems | • Optoskand AB • Precitece GmbH | |
Bio-medical instruments for flow cytometry, DNA sequencing, fluoresce microscopy | • Lumentum Operations LLC • Coherent, Inc. • BWT Beijing Ltd | |
Semiconductor laser diodes for the industrial and consumer markets | • Lumentum Operations LLC • Finisar Corporation • Broadcom Ltd. • Koninklijke Philips N.V • Jenoptik AG • Osram Licht AG | |
II-VI Photonics | Optics and optical components for networking | • O-Net Communications Group Ltd. • OPLINK Communication, LLC • Axsun • Casix, Inc. (Fabrinet) |
Optical modules and subsystems for amplification, monitoring and wavelength management | • Lumentum Operations LLC • Finisar Corporation • Accelink • O-Net Communications Group, Ltd. | |
Optical and crystal components, thin film coatings and sub-assemblies for lasers and metrology instruments | • Casix, Inc. (Fabrinet) • Castech • REO • Laser Components | |
II-VI Performance Products | Infrared optics for military applications | • UTC Aerospace Systems (formerly Goodrich Corporation) • In-house fabrication and thin-film coating capabilities of major military customers |
Thermoelectric components, sub-assemblies and systems | • Komatsu, Ltd. • Laird plc • Ferrotec Corporation | |
Metal Matrix Composites and reaction bonded ceramics products | • Berliner Glas • CoorsTek, Inc. • Japan Fine Ceramics Co. Ltd. | |
Single crystal SiC substrates | • Cree, Inc. • Dow Corning Corporation • Nippon Steel & Sumitomo Metal • SiCrystal AG | |
Refining and materials recovery services for high purity rare metals | • Vital • 5NPlus |
In addition to competitors who manufacture products similar to those we produce, there are other technologies and products available that may compete with our technologies and products.
Our Strategy
Our strategy is to grow businesses with world-class engineered material capabilities to advance our current customers’ strategies, penetrate new markets through innovative technologies and platforms, and enable new applications in large and growing markets. A key strategy of ours is to develop and manufacture high-performance materials that are differentiated from those produced by our competitors. We focus on providing components that are critical to the heart of our customers’ assembly lines for products serving the applications mentioned above.
A substantial portion of our business is based on sales orders with market leaders, which enable our forward planning and production efficiencies. We intend to continue capitalizing and executing on this proven model, participating effectively in the growth of its rare earth element.the markets discussed above, and continuing our focus on operational excellence as we execute business strategies in the areas of:
Key Business Strategies: | Our Plan to Execute: |
Identify New Products and Markets | Identify new technologies, products and markets to meet evolving customer requirements for high performance engineered materials through our dedicated corporate R&D program to increase new product revenue and maximize return on investment. |
Balanced Approach to Research and Development | Internally and externally funded R&D expenditures, targeting an overall investment of between 7 and 10 percent of revenues. |
We are committed to accepting the right mix of internally and externally funded research that ties closely to our long-term strategic objectives. | |
Leverage Vertical Integration | Combine R&D and manufacturing expertise, operating with a bias to both components and production machines, reducing cost and lead time to enhance competitiveness, time to market, and profitability. |
Investment in Scalable Manufacturing | Strategically invest in, evaluate and identify opportunities to consolidate manufacturing operations worldwide to increase production capacity, capabilities and cost effectiveness. |
Enhance Our Performance and Reputation as a Quality and Customer Service Leader | Continue to improve upon our established reputation as a consistent, high-quality supplier of engineered materials and optoelectrical components into our customers’ products. |
Execute our global quality transformation process thereby eliminating costs of non-conforming materials and processes. | |
Identify and Complete Strategic Acquisitions and Alliances | Identify acquisition opportunities that accelerate our access to emerging high-growth segments of the markets we serve and further leverage our competencies and economies of scale. |
Research, Development and Engineering
During the fiscal year ended June 30, 2017, the Company continued to identify, invest in and focus our research and development on new products across the Company in an effort to accelerate our organic growth. This approach is managed under a disciplined innovation program that we refer to as the “II-VI Phase Gate Process”.
Our research and development program includes internally and externally funded research and development expenditures targeting an overall annual investment of between 7% and 10% of product revenues. From time to time, the ratio of externally funded contract activity to internally funded contract activity varies due to the unevenness of government funded research programs and changes in the focus of our internally funded research programs. We are committed to having the right mix of internally and externally funded research that ties closely to our long-term strategic objectives. The Company continues to believe that externally funded research and development will decrease in the near term due to governmental budget constraints.
We devote significant resources to RD&E programs directed at the continuous improvement of our existing products and processes and to the timely development of new technologies, materials and products. We believe that our RD&E activities are essential to establish and maintain a leadership position in each of the markets we serve. As of June 30, 2017, we employed 1,117 people in RD&E functions, 687 of whom are engineers or scientists. In addition, certain manufacturing personnel support or participate in our research and development efforts on an ongoing basis. We believe this interaction between the development and manufacturing functions enhances the direction of our projects and design for manufacturing, reducing costs and accelerating technology transfers.
During the fiscal year ended June 30, 2017, we focused our research and development investments in the following areas:
Segment: | Area of Development: | Our Research and Development Investments: |
II-VI Laser Solutions | High Power Laser Diodes and High Volume Manufacturing | Focusing on increasing fiber coupled optical output power of multi-emitter modules. |
Developing high power VCSELs for consumer devices and next generation high speed VCSELs for 3D sensing and datacom applications. | ||
CVD Diamond Technology | Developing CVD synthetic diamond for EUV applications. | |
Focusing on broadening our portfolio beyond infrared windows applications. | ||
II-VI Photonics | Photonics Design | Continuing to improve photonic crystal materials, precision optical parts, and laser device components. |
Pump Lasers | Continuing to invest in next generation GaAs pump portfolio to address evolving terrestrial and undersea markets | |
Developing indium phosphide growth and processing capability. | ||
Optical Amplifiers | Investing and broadening the range of semi-custom and custom amplifiers for Tier 1 customers. | |
Optical Monitoring | Continuing optical channel monitor investment. | |
Developing compact OTDRs embedded in optical system equipment to monitor the health of the fiber plant. | ||
Micro-Optics Manufacturing | Shifting toward smaller, more compact platforms and packages. | |
Investing in manufacturing equipment for computerized processes. | ||
II-VI Performance Products | Silicon Carbide Technology | Developing advanced SiC substrate growth technologies to support emerging markets in GaN RF and power electronics. |
Focused on continuous improvements to maintain world-class, high quality, large diameter substrates. | ||
Thermoelectric Materials and Devices | Continuing to develop leading bismuth telluride for thermoelectric cooling/heating. | |
Focusing on thermoelectric power generation capability in order to introduce new products to the market. | ||
Metal Matrix Composites and Reaction Bonded Ceramics | Support Industrial customers in developing application specific wear and thermal management solutions. |
The development of our products and manufacturing processes is largely based on proprietary technical know-how and expertise. We rely on a combination of contract provisions, trade secret laws, invention disclosures and patents to protect our proprietary rights. We have entered into selective intellectual property licensing agreements. We have in the past and expect that we will continue to assert and vigorously protect our intellectual property rights.
Internally funded research and development expenditures were $96.8 million, $60.4 million and $51.3 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. For these same periods, externally funded research and development expenditures were $7.8 million, $8.7 million and $9.5 million, respectively.
Export and Import Compliance
We are required to comply with various export/import control and economic sanction laws, including:
The International Traffic in Arms Regulations administered by the U.S. Department of State, Directorate of Defense Trade Controls, which, among other things, impose licensing requirements on the export from the United States of certain defense articles and defense services, which generally include items that are specially designed or adapted for a military application and/or listed on the U.S. Munitions List;
The Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and Security, which, among other things, impose licensing requirements on certain dual-use goods, technology and software, which are items that potentially have both commercial and military applications;
The regulations administered by the U.S. Department of Treasury, Office of Foreign Assets Control, which implement economic sanctions imposed against designated countries, governments and persons based on U.S. foreign policy and national security considerations; and
The import regulations administered by the U.S. Customs and Border Protection.
Foreign governments have also implemented similar export and import control regulations, which may affect our operations or transactions subject to their jurisdiction. For additional discussions regarding our import and export compliance, see the discussion set forth in Item 1A – Risk Factors of this Annual Report Form on Form 10-K.
Trade Secrets, Patents and Trademarks
Our use of trade secrets, proprietary know-how, trademarks, copyrights, patents and contractual confidentiality and IP ownership provisions help us develop and maintain our competitive position with respect to our products and manufacturing processes. We aggressively pursue process and product patents in certain areas of our businesses. We have entered into selective intellectual property licensing agreements. We have in the past and will continue to assert and vigorously protect our intellectual property rights. We have confidentiality and non-competition agreements with certain personnel. We require that our U.S. employees sign a confidentiality and noncompetition agreement upon their commencement of employment with us.
The design, processes and specialized equipment utilized in our engineered materials, advanced components and subsystems are innovative, complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a variety of materials, devices, equipment, configurations and processes, and others could obtain patents covering technology similar to our technology. We may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted which may adversely affect our results of operations. In addition, our research and development contracts with agencies of the U.S. Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and positions as of June 30, 2017 are set forth below. Each executive officer listed has been appointed by the Board of Directors to serve until removed or until such person’s successor is appointed and qualified.
Name | Age | Position | ||
Vincent D. Mattera, Jr. | 61 | President and Chief Executive Officer; Director | ||
Mary Jane Raymond | 57 | Chief Financial Officer and Treasurer and Assistant Secretary | ||
Gary A. Kapusta | 57 | Chief Operating Officer | ||
Giovanni Barbarossa | 57 | Chief Technology Officer and President II-VI Laser Solutions | ||
David G. Wagner | 54 | Vice President, Human Resources | ||
Jo Anne Schwendinger | 62 | General Counsel and Secretary |
Vincent D. Mattera, Jr. Dr. Mattera initially served as a member of the II-VI Board of Directors from 2000-2002. Dr. Mattera joined the company as a Vice President in 2004 and served as Executive Vice President from January of 2010 to November of 2013, when he became the Chief Operating Officer. In November of 2014, Dr. Mattera became the President and Chief Operating Officer, and was reappointed to the Board of Directors. In November of 2015, he became the President of II-VI. In September of 2016, Dr. Mattera became the Company’s goal wasthird President and Chief Executive Officer in 45 years. During his career at II-VI he has assumed successively broader management roles, including as a lead architect of the Company’s diversification strategy. He has provided vision, energy and dispatch to the Company’s growth initiatives including overseeing the acquisition-related integration activities in the US, Europe, and Asia-especially in China-thereby establishing additional platforms. These have contributed to a new positioning of the Company into large and transformative global growth markets while increasing considerably the global reach of the Company, deepening the technology and IP portfolio, broadening the product roadmap and customer base, and increasing potential of II-VI.
Prior to joining II-VI as an executive, Dr. Mattera had a continuous 20 year career in the Optoelectronic Device Division of AT&T Bell Laboratories, Lucent Technologies and Agere Systems during which he led the development and manufacturing of semiconductor laser based materials and devices for optical and data communications networks. Dr. Mattera has 34 years of leadership experience in the compound semiconductor materials and device technology, operations and markets that are core to II-VI’s business and strategy. Dr. Mattera holds a B.S. in chemistry from the University of Rhode Island (1979), and a Ph.D. degree in chemistry from Brown University (1984). He completed the Stanford University Executive Program (1996). His 14 year tenure at II-VI underpins a valuable historical knowledge about the Company’s operational and strategic issues. We believe that Dr. Mattera’s expertise and experience qualifies him to provide the board with continuity and a reliable supplyunique perspective about on the Company.
Mary Jane Raymond has been Chief Financial Officer and Treasurer of selenium forthe Company since March 2014. Previously, Ms. Raymond was Executive Vice President and Chief Financial Officer of Hudson Global, Inc. (NASDAQ: HSON) from 2005 to 2013. Ms. Raymond was the Chief Risk Officer and Vice President and Corporate Controller at Dun and Bradstreet, Inc., from 2002 to 2005. Additionally, she was the Vice President, Merger Integration, at Lucent Technologies, Inc., from 1997 to 2002 and held several management positions at Cummins Engine Company from 1988 to 1997. Ms. Raymond holds a B.A. degree in Public Management from St. Joseph’s University, and an MBA from Stanford University.
Gary A. Kapusta joined II-VI in February 2016 and has served as the Company’s internal needs while significantly decreasing write-downsChief Operating Officer. Prior to his employment with the Company, Mr. Kapusta served in various roles at Coca-Cola, including as President & Chief Executive Officer, Coca-Cola Bottlers’ Sales & Services L.L.C., President, Customer Business Solutions and profit volatility associatedVice President, Procurement Transformation, Coca-Cola Refreshments. He joined Coca-Cola following a 19 year career at Agere Systems, Lucent Technologies, and AT&T. Mr. Kapusta graduated from The University of Pittsburgh with minor metal index pricing. FinancialB.S. and operational data included herein for all periods presented reflectsM.S. degrees in Industrial Engineering, and holds an M.B.A from Lehigh University.
Giovanni Barbarossa joined II-VI in 2012 and has been the presentationPresident, Laser Solutions Segment, since 2014, and the Chief Technology Officer since 2012. Dr. Barbarossa was employed at Avanex Corporation from 2000 through 2009, serving in various executive positions in product development and general management, ultimately serving as President and Chief Executive Officer. When Avanex merged with Bookham Technology, forming Oclaro, Dr. Barbarossa became a member of the tellurium product lineBoard of Directors of Oclaro and served as such from 2009 to 2011. Previously, he had management responsibilities at British Telecom, AT&T Bell Labs, Lucent Technologies, and Hewlett-Packard. Dr. Barbarossa graduated from the University of Bari, Italy, with a discontinued operation.B.S. in Electrical Engineering, and a Ph.D. in Photonics from the University of Glasgow, U.K.
David G. Wagner has been employed by the Company since 2008 and has been the Vice President, Human Resources since 2011. Prior to his employment with the Company, Mr. Wagner was employed with Owens Corning (NYSE:OC) from 1985 through 2008, serving in various human resource management positions, ultimately becoming the Vice President, Human Resources, for Owen Corning’s global sales force. Mr. Wagner graduated with a B.S. degree in Human Resources Management from Juniata College in 1985.
Jo Anne Schwendinger joined II-VI in March 2017 and serves as the Company’s General Counsel and Secretary. Prior to her employment with the Company, Ms. Schwendinger practiced law with the law firm Blank Rome, LLP from August 2016 until February 2017. Previously, Ms. Schwendinger served in various legal roles at Deere & Company from February 2000 until August 2016, including Regional General Counsel and Assistant General Counsel. Ms. Schwendinger holds a Bachelor’s degree from the Université d'Avignon et des Pays de Vaucluse, a Master’s degree from the Université de Strasbourg, Maitrise and a Juris Doctor degree from the University of Pittsburgh Law School.
Availability of Information
Our Internet address is www.ii-vi.com. Information contained on our website is not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K. We post the following reports on our website as soon as reasonably practical after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”): our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, we post our proxy statements on
Schedule 14A related to our annual shareholders’ meetings as well as reports filed by our directors, officers and ten-percent beneficial owners pursuant to Section 16 of the Exchange Act. In addition, all filings are available via the SEC’s website (www.sec.gov). We also make our corporate governance documents available on our website, including the Company’s Code of Business Conduct and Ethics, governance guidelines and the charters for various board committees. All such documents are located on the Investors page of our website and are available free of charge.
Information Regarding Market Segments and Foreign Operations
Financial data regarding our revenues, results of operations, industry segments and international sales for the three years ended June 30, 2015 are set forth in the Consolidated Statements of Earnings and in Note 11 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference. We also discuss certain Risk Factors set forth in Item 1A of this Annual Report on Form 10-K related to our foreign operations, which are incorporated herein by reference.
General Description of Business
We develop and manufacture engineered materials, opto-electronic components and products for precision use in industrial, optical communications, military, semiconductor and life science applications. We use advanced engineered material growth technologies coupled with proprietary high-precision fabrication, micro-assembly, thin-film coating and electronic integration to enable complex opto-electronic devices and modules. Our products are deployed in applications that we believe reduce costs and improve performance and reliability in a variety of applications, including:
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A key Company strategy is to develop and manufacture high performance materials that are differentiated from those produced by our competitors. We focus on providing critical components to the heart of our customers’ assembly lines for products serving the above noted applications.
Our U.S. production and research and development operations are located in Pennsylvania, California, New Jersey, Texas, Mississippi, Massachusetts, Connecticut, Delaware, New York and Florida and our non-U.S. production operations are based in China, Singapore, Vietnam, the Philippines, Germany and Switzerland. We also utilize contract manufacturers in Thailand and China. In addition to sales offices at most of our manufacturing sites, we have sales and marketing subsidiaries in Hong Kong, Japan, Germany, China, Switzerland, Belgium, the United Kingdom (“U.K.”), Italy and South Korea. Approximately 63% of our revenues for the fiscal year ended June 30, 2015 were generated from sales to customers outside of the U.S.
Our Products
The main products for each of our markets are described as follows:
II-VI Laser Solutions Segment
II-VI Infrared Optics Group:
We supply a broad line of precision infrared opto-electronic components such as lenses, output couplers, windows, mirrors and scan-lenses for use in CO2 lasers. Our precision opto-electronic components are used to attenuate the amount of laser energy, enhance the properties of the laser beam and focus and direct laser beams to a target work surface. The opto-electronic components include both reflective and transmissive optics and are made from materials such as zinc selenide, zinc sulfide, copper, silicon, gallium arsenide and germanium. Transmissive optics used with CO2 lasers are predominately made from zinc selenide. We believe we are the largest manufacturer of zinc selenide in the world. We supply replacement optics to end users of CO2 lasers. Over time, optics may become contaminated and must be replaced to maintain peak laser operations. This aftermarket portion of our business continues to grow as laser applications proliferate worldwide and the installed base of serviceable laser systems increases each year. We estimate that 85% to 90% of our infrared optics sales service this installed base of CO2 laser systems. We serve the aftermarket via a combination of selling to OEMs and directly
to system end users. We are also one of the leading producers of CVD Diamond substrates for applications including multi-spectral laser optics, dielectric windows, heat sinks, and other applications. Diamond is the ultimate material for a wide variety of applications because of its outstanding physical properties, including extreme hardness and strength, high thermal conductivity, low thermal expansion, excellent dielectric properties, resistance to chemical attack, and optical transmission over a wide spectral range.
II-VI HIGHYAG Division:
Our broad expertise in laser technology, optics, sensor technology and laser applications enables us to supply a broad array of tools for laser materials processing, including modular laser processing heads for fiber lasers, YAG lasers and other one-micron laser systems. We also manufacture beam delivery systems including fiber optic cables and modular beam systems.
II-VI Laser Enterprise Division:
Our semiconductor laser diode products cover a broad wavelength from 750 nm to 1500 nm and varying optical output power ranges. The laser diode products are available as integrated modules with and without active cooling, fiber pigtails or assemblies.
II-VI Suwtech Division:
We supply high-power laser, green laser, narrow linewidth laser and Q-switched laser solutions for various applications, including laser leveling, range finding, bio-medical instrumentation, Raman spectroscopy, machine vision, laser entertainment and display, and digital printing.
II-VI Lasertech Division:
The need for industry to be able to process very hard materials is growing as more applications for materials such as CVD and PCD Diamond, Poly Crystalline Boron Nitride, and ultra-hard ceramics emerge. The laser cutting machines manufactured by II-VI Lasertech are specifically designed to cut, drill and etch these kinds of materials.
II-VI Photonics Segment
II-VI Photop Group:
We manufacture products across a broad spectral range in the visible and near-infrared wavelengths. We offer a wide variety of standard and custom laser gain materials, optics, optical components and optical module assemblies for optical communications, laser systems, and photonic applications in the medical, life science, industrial, scientific and research and development markets. Laser gain materials are produced to stringent industry specifications and precisely fabricated to customer specifications. Key materials and precision optical components for YAG, fiber lasers and other solid-state laser systems are an important part of our product offerings. We manufacture lenses, windows, prisms, mirrors, gratings, wave-plates, and polarizers for visible and near-infrared applications, which are used to control or alter visible or near-infrared energy and its polarization. In addition, we manufacture specialty coated glass wafers used as optical filters in the life science and optical communications markets, and coated windows used as debris shields in the industrial and medical laser aftermarkets. We offer fiber optics, micro optics and photonic crystal parts for optical communications, instrumentation and laser applications, optical components and modules for optical communication networks, as well as diode pumped solid-state laser devices for optical instruments, display and biotechnology.
II-VI Optical Communications Group:
We manufacture a broad range of passive optical components and modules, leveraging our core micro optics platform for the filtering, combining, splitting, attenuating and monitoring of optical wavelengths within optical communication systems. We supply a broad portfolio of cooled and uncooled pumps, both single and multi-mode designs in single chip and multi-chip configurations based on our gallium arsenide (GaAs) chip technology, facet passivation processes and wafer fab and module manufacturing capabilities. The single chip designs are predominantly used as low noise pump sources for EDFA covering gain block, single channel to multi-channel data wavelength-division multiplexing (DWDM), addressing access, cross-connect, metro and also long haul requirements of the telecom market. Our dual chip pump solutions are designed and able to address the arrayed amplifier market where 8 or 16 amplification stages are required. Our single mode high-power uncooled pump modules address both the single channel and small form factor terrestrial market and also the stringent high reliability demands of the submarine (subsea) network market. The latter is a testament to the stability of our chip, module design technology and manufacturing capabilities. Finally, we are able to address segments of the cable television market with both single mode and uncooled multimode GaAs pump lasers, typically used for distribution amplification. In addition, we offer a wide variety of standard, semi-custom and customer amplifiers. These products are offered at varying levels of sophistication ranging from a simple collection of active and passive components mounted to a printed circuit board
assembly (“PCBA”) through assemblies with large amounts of firmware and software which are either mounted onto our customer’s PCBA’s controlled amplifier modules or plug directly into our customers’ equipment shelf line cards. We offer EDFA and Raman amplifiers as well as amplifiers which are combined with wavelength selective switches. Also, we are starting to offer a range of 40G and 100G transceivers which are focused on meeting the transmission needs within data centers.
II-VI Performance Products Segment
II-VI Optical Systems operation:
We offer optics and optical sub-assemblies for UV, Visible, and Infrared systems including thermal imaging, night vision, laser designation, missile warning, targeting and navigation systems. Our product offering is comprised of missile domes, electro-optical windows and sub-assemblies, imaging lenses, UV filter assemblies, laser cavity optics and prisms and other optical components. Our precision optical products utilize optical materials such as sapphire, germanium, zinc sulfide, zinc selenide, silicon and spinel. In addition, our products also include crystalline materials such as calcium fluoride, barium fluoride, YAG, YLF and fused silica. Our products are currently utilized on the F-35 Joint Strike Fighter, F-16 fighter jet, Apache Attack Helicopter, unmanned platforms such as the Predator and Reaper UAV and ground vehicles such as the Abrams M-1 Tank and Bradley Fighting Vehicle.
II-VI Performance Metals operation:
Our product offering includes a rare earth element in specific purity levels and forms.
II-VI Marlow operation:
We supply a broad array of TEMs and related assemblies to various market segments. In the defense market, TEMs are used in guidance systems, smart weapons and night vision systems, as well as soldier cooling. TEMs are also used in products providing temperature stabilization for telecommunication lasers that generate and amplify optical signals for fiber optic communication systems. TEMs are also used in the personal comfort market. We also produce and sell a variety of solutions from thermoelectric components to complete sub-assemblies used in the medical equipment market and other industrial, commercial and personal comfort applications. Thermoelectric modules, used as power generators, are also applied in a range of end-use applications. We offer single-stage TEMs, micro TEMs, multi-stage TEMs, planar multi-stage TEMs, extended life thermo-cyclers, thermoelectric thermal reference sources, power generators and thermoelectric assemblies.
II-VI M Cubed operation:
We supply a diverse array of products to several market segments. In the semiconductor market, reaction bonded SiC is used to produce wafer chucks, robot end effectors, structural components, and mechanical stage assemblies. In the defense market, we supply next generation personnel armor, monolithic helicopter seats, and vehicle and aviation armor sub systems. In the industrial market, we supply wear resistant components, refractory assemblies, and precision optical substrates for chemical, refractory, and scientific applications.
II-VI Advanced Materials operation:
Our product offerings include 6H-SiC (semi-insulating) and 4H-SiC (semi-insulating and semi-conducting) substrates which are used in the wireless communications infrastructure, radio frequency (“RF”) electronics, thermal management, highly efficient (green energy) power conversion and power switching markets. We are also one of the leading producers of CVD Diamond substrates for applications including multi-spectral laser optics, dielectric windows, heat sinks, and other applications. Diamond is the ultimate material for a wide variety of applications because of its outstanding physical properties, including extreme hardness and strength, high thermal conductivity, low thermal expansion, excellent dielectric properties, resistance to chemical attack, and optical transmission over a wide spectral range. Our CVD diamond materials are being utilized in semiconductor equipment manufacturing, microwave frequency windows and thermal management applications.
Our Markets
Our market-focused businesses are organized by technology and products. Our businesses are composed of the following primary markets:
II-VI Laser Solutions Segment
II-VI Infrared Optics Group:
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Increases in the installed worldwide base of laser machines for a variety of laser processing applications have driven CO2 laser optics component consumption. It is estimated that there are over 75,000 CO2 laser systems currently deployed in the world. CO2 lasers offer benefits in a wide variety of cutting, welding, drilling, ablation, cladding, heat treating and marking applications for materials such as steel alloys, non-ferrous metals, plastics, wood, paper, fiberboard, ceramics and composites. Laser systems enable manufacturers to reduce parts cost and improve quality, as well as improve process precision, speed, throughput, flexibility, repeatability and automation. Automobile manufacturers, for example, deploy lasers both to cut body components and to weld those parts together in high-throughput production lines. Manufacturers of motorcycles, lawn mowers and garden tractors cut, trim, and weld metal parts with lasers to reduce post-processing steps and, therefore, lower overall manufacturing costs. Furniture manufacturers utilize lasers because of their easily reconfigurable, low-cost prototyping and production capabilities for customer-specified designs. In high-speed food and pharmaceutical packaging lines, laser marking is used to provide automated product, date and lot coding on containers. In addition to being installed by original equipment manufacturers (“OEMs”) of laser systems in new machine builds, our optical components are purchased as replacement parts by end-users of laser machines to maintain proper system performance. In newer and developing market segments, SiC and CVD Diamond both exhibit very high thermal conductivities for use in high-end applications in the semiconductor and opto-electronic markets. CVD Diamond also has applications in the windows, tooling, microwave and radiation detection markets. We believe that the current addressable markets serviced by our II-VI Infrared Optics operations are approximately $500 million.
II-VI HIGHYAG Division:
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In many areas of material processing, laser technology has proven to be a better alternative to conventional production techniques. It has also enabled novel processing steps not previously achievable with legacy technologies. The precise cut and elegant seam are visible proof of a laser beam’s machining efficiency. Industrial applications such as welding, drilling and cutting have driven the recent market growth of the one-micron laser systems, and are demanding increased performance, lower total cost of ownership, ease of use and portability of the one-micron laser systems. One-micron laser systems require efficient and reliable tools, including modular laser processing heads for fiber lasers, beam delivery systems, including fiber optic cables, and modular beam systems. We believe that the current addressable markets serviced by our II-VI HIGHYAG operations are approximately $700 million.
II-VI Laser Enterprise Division:
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We market advanced laser technology diodes for material processing, medical, cosmetic, 3-D sensing and printing applications and are exploring other new market opportunities for our high-power lasers. In addition, we sell low-power polarization locked products for optical mouse and finger navigation applications. Our market opportunities for Vertical-Cavity Surface-Emitting Laser (“VCSEL”) products are expanding to include optical high-speed datacom applications and high-power sensing for consumer electronics applications. We believe that the current addressable markets serviced by our II-VI Laser Enterprise operations are approximately $300 million.
II-VI Suwtech & II-VI Lasertech Divisions:
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The need for high-power and green laser for industrial and medical applications continue to grow as does the need for a laser cutting device capable of processing the next generation of ultra-hard materials like diamond. We believe that the
current addressable markets serviced by our II-VI Lasertech and II-VI Suwtech operations are approximately $400 million.
II-VI Photonics Segment
II-VI Photop Group:
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The II-VI Photop market is driven by applications in the optical communications, medical and life science, and industrial markets. The optical communications market segment requires delivery of ever-increasing data bandwidth and necessitates innovations in performance and cost of the underlying optics and optical components. Medical and life science applications continue to gain traction in the market and include aesthetic, vision correction, dental, ophthalmic and diagnostic lasers and instruments. Industrial market segments are addressed by solid state lasers and fiber lasers, which are used in high-power applications such as cutting, welding, drilling, and lower power applications such as marking and engraving. These industrial applications are demanding higher performance levels for less cost and more efficiency, creating competition for other technologies. II-VI Photop also addresses opportunities in the semiconductor processing, instrumentation, test and measurement and research segments. We believe that the current addressable markets serviced by our II-VI Photop operations are approximately $1.4 billion.
II-VI Optical Communications Group:
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The optical communications market is being driven in part by demand for high-bandwidth communication capabilities through increasing worldwide usage of the Internet and data services, the growing number of broadband users, mobile device and cloud computing users, and the greater reliance on high-bandwidth capabilities in our daily lives. High-bandwidth communication networks are being extended closer to the end user with fiber-to-the-home and other fiber optic networks. Mobile data traffic also is increasing as smart phones continue to proliferate with increasingly sophisticated audio, photo, video, email and Internet capabilities, as well as data connection and storage through cloud computing networks. The resulting traffic, in turn, is felt throughout the network, including the core that depends on optical technology. Our passive components, assemblies and modules are used for filtering, switching, combining and routing optical wavelengths within optical networks. Our monitoring products are used for measuring the performance of optical channels and systems. Our 980 nm pump laser diodes are designed for use as high-power, highly reliable pump sources for EDFAs in terrestrial access, cross-connect, metro to long haul and undersea (submarine) repeater applications. Single mode high-power uncooled modules are designed for both the single channel and small form factor terrestrial market and also the stringent high reliability demands of the submarine (subsea) network market. In addition, we market EDFAs which are used to compensate for losses in optical fiber and other optical components and modules in optical transmission systems. We offer optical amplifiers at all levels of functionality, from simple optical modules through full circuit cards, which plug directly into our customers’ equipment racks and service the metro, regional and long-haul optical transmission markets. In some cases, we add additional switching and monitoring functionality to the base amplifier. We believe that the currently addressable markets serviced by our II-VI Optical Communications Group operations are approximately $1.9 billion.
II-VI Performance Products Segment
II-VI Optical Systems operation:
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We provide several key assemblies and optical components such as windows, domes, laser rods and optics and related subassemblies to military, semiconductor, medical, and life sciences markets for UV, Visible, and Infrared applications in night vision, targeting, navigation, missile warning, and Homeland Security intelligence, surveillance and reconnaissance (“ISR”) systems. Infrared window and window assemblies for navigational and targeting systems are deployed on fixed and rotary-wing aircraft, such as the F-35 Joint Strike Fighter, F-16 fighter jet, Apache Attack Helicopter, unmanned platforms such as the Predator and Reaper Unmanned Aerial Vehicle (“UAV”) and ground vehicles such as the Abrams M-1 Tank and Bradley Fighting Vehicle. Additionally, multiple fighter jets, including the F-16, are being equipped with large area sapphire windows, as a key component for the aircraft, providing advanced targeting and imaging systems. Our ability to grow large sapphire materials and manufacture these materials into large area sapphire windows has played a key role in our ability to provide an even larger suite of sapphire panels, which are a key component of the F-35 Joint Strike Fighter Electro Optical Targeting System. Infrared domes are used on missiles with infrared guidance systems ranging from small, man-portable designs to larger designs mounted on helicopters, fixed-wing aircraft and ground vehicles. High-precision domes are an integral component of a missile’s targeting system, providing efficient tactical capability, while serving as a protective cover to its internal components. The Company also offers precision optical engineering and manufacturing, with particular efficiency in designing to customer end-item specifications, assisting with co-engineering designs, and designing for manufacturability. The high precision optical components and assemblies programs include Deep Impact Comet Flyby HRI & MRI, Lunar Reconnaissance Orbiter, Hellfire II Missile Optics, Missile launch detection sensor optical assembly, and High Altitude Observatory telescopes among others. In addition to imaging, many of these systems employ laser designation and range-finding capabilities supported by our YAG material growth and competency in short wave infrared and visible optics. Turreted systems and mounted targeting pods employ these capabilities in addition to hand-held soldier systems. Rotary and fixed-wing platforms also use missile warning systems to protect against shoulder fired man-portable missiles. Our competencies in material growth for UV crystals and our optical assembly capabilities provide significant support to these missile warning systems. A key attribute to several of these systems is the ability to filter electro-magnetic interference using micro-fine conductive mesh patterns. This technology is also applied to non-optical applications for absorbing and transmitting energy from the surfaces of aircraft and missiles. Our military optical and non-optical products are sold primarily to U.S. Government prime contractors and directly to various U.S. Government agencies. Certain products have applications in commercial, medical and life science markets. We believe that the current addressable markets serviced by our II-VI Optical Systems operations business are approximately $1.6 billion.
II-VI Performance Metals operation:
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Rare earth elements are used in many electronic and alternative green energy applications. We believe that the current addressable market serviced by our II-VI Performance Metals business for its rare earth element is approximately $40 million.
II-VI Marlow operation:
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Thermoelectric Modules (“TEMs”) are solid-state semiconductor devices that act as small heat pumps to cool, heat and temperature stabilize a wide range of materials, components and systems. Conversely, the principles underlying thermoelectrics allow TEMs to be used as a source of power when subjected to temperature differences. TEMs are more reliable than alternative cooling solutions that require moving parts and provide more precise temperature control solutions than competing technologies. TEMs also have many other advantages which have spurred their adoption in a variety of industries and applications including defense and space applications that involve infrared cooled and uncooled night vision technologies and thermal reference sources that are deployed in state-of-the-art weapons, as well as cooling high-powered lasers used for range-finding target designation by military personnel. TEMs also allow for temperature stabilization of telecommunication lasers that generate and amplify optical signals for fiber optics systems. Thermoelectric-based solutions appear in a variety of medical applications including instrumentation and analytical applications such as DNA replication, blood analyzers and medical laser equipment. The industrial, commercial and consumer markets provide a variety of niche applications ranging from desktop refrigerators and wine coolers to
personal comfort technology, semiconductor processes and test equipment. In addition, power generation applications are expanding into fields such as waste heat recovery, heat scavenging and co-generation. We believe that the current addressable markets serviced by our II-VI Marlow operations are approximately $250 million.
II-VI M Cubed operation:
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Metal matrix composites (“MMC”) and reaction bonded ceramics products are found in applications requiring precision, lightweight, strength, hardness and matched coefficient of thermal expansion. Each market has its own unique requirements and applications that drive material selection. This is especially true in semiconductor tool applications that require advanced materials to meet the need for increased tolerance, enhanced thermal stability, faster wafer transfer speeds, increased yields and reduced stage settling times. The semiconductor markets employ SiC for wafer chucks, light-wave scanning stages and high temperature, corrosion resistant wafer support systems. Cooled SiC mirrors are used in the illumination systems of lithography tools. The industrial market uses a variety of ceramic materials for applications requiring chemical inertness or high temperature tolerance such as in flat panel display capital equipment, and refractory components. The defense market uses MMCs for protective body armor as well as protection for ground, air and naval resources. We believe that the current addressable markets serviced by our II-VI M Cubed operations are approximately $400 million.
II-VI Advanced Materials operation:
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SiC is a wide bandgap semiconductor material that offers high-temperature, high-power and high-frequency capabilities as a substrate for applications at the high-performance end of the defense, telecommunication and industrial markets. SiC has a high number of intrinsic physical and electronic advantages over competing semiconductor materials such as silicon and gallium arsenide. For example, the high thermal conductivity of SiC enables SiC-based devices to operate at high-power levels and still dissipate the excess heat generated. II-VI Advanced Materials supplies the base SiC substrates into this market. SiC based structures are being developed and deployed for the manufacture of a wide variety of microwave and power switching devices. High-power, high-frequency SiC-based microwave devices are used in next generation wireless switching telecommunication applications and in both commercial and military radar applications. SiC-based, high-power, high-speed devices improve the performance, efficiency and reliability of electrical power transmission and distribution systems (“smart grid”). They also provide power conditioning and switching in power supplies and motor controls in a wide variety of applications including aircraft, hybrid vehicles, industrial, communications and green energy applications. Both SiC and CVD Diamond are being utilized in optical and electronic applications requiring high thermal conductivity for advanced thermal management. CVD Diamond also has applications in the semiconductor equipment (EUV Lithography), windows, tooling, microwave and radiation detection markets. We believe that the current addressable markets serviced by our II-VI Advanced Materials operations are approximately $125 million.
Our Strategy
Our strategy is to build businesses with core world-class engineered materials capabilities to penetrate new markets through innovative technologies and platforms, new product introductions and performance improvements. Our materials capabilities include:
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A substantial portion of our business is based on sales orders with market leaders, which enable our forward planning and production efficiencies. We intend to continue capitalizing and executing on this proven model, participating effectively in the growth of the markets discussed above, and continuing our focus on operational excellence as we execute additional growth initiatives in the areas of:
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Research, Development and Engineering
During the current fiscal year ended June 30, 2015, the Company launched a new initiative to identify, invest in and focus our research and development on new products across the Company in an effort to accelerate our organic growth. This initiative is managed under a disciplined innovation program that we refer to as the “II-VI Phase Gate Process”.
Our research and development program includes internally and externally funded research and development expenditures targeting an overall annual investment of between 7 and 9 percent of product revenues. From time to time, the ratio of externally funded contract activity to internally funded contract activity varies due to the unevenness of government funded research programs and changes in the focus of our internally funded research programs. We are committed to having the right mix of internally and externally funded research that ties closely to our long-term strategic objectives. The Company continues to believe that externally funded research and development will decrease in the near term due to governmental budget constraints.
We devote significant resources to research, development and engineering programs directed at the continuous improvement of our existing products and processes and to the timely development of new technologies, materials and products. We believe that our research, development and engineering activities are essential to establish and maintain a leadership position in each of the markets we serve. As of June 30, 2015, we employed 1,010 people in research, development and engineering functions, 645 of whom are engineers or scientists. In addition, certain manufacturing personnel support or participate in our research and development efforts on an ongoing basis. We believe this interaction between the development and manufacturing functions enhances the direction of our projects and design for manufacturing, reducing costs and accelerating technology transfers.
During the fiscal year ended June 30, 2015, we focused our research and development investments in the following areas:
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The development of our products and manufacturing processes is largely based on proprietary technical know-how and expertise. We rely on a combination of contract provisions, trade secret laws, invention disclosures and patents to protect our proprietary rights. We have entered into selective intellectual property licensing agreements. When faced with potential infringement of our proprietary information, we have in the past and will continue to assert and vigorously protect our intellectual property rights.
Internally funded research and development expenditures were $51.3 million, $42.5 million and $22.7 million for the fiscal years ended June 30, 2015, 2014 and 2013, respectively. For these same periods, externally funded research and development expenditures were $9.5 million, $3.5 million and $4.5 million, respectively.
Marketing and Sales
We market our products through a direct sales force and through representatives and distributors around the world. Our market strategy is focused on understanding our customers’ requirements and building market awareness and acceptance of our products. New products are continually being produced and sold to our new and established customers in all markets.
Each of our subsidiaries is responsible for its own worldwide marketing and sales functions, although certain subsidiaries sell more than one product line. However, there is significant cooperation and coordination among our subsidiaries to utilize the most efficient and appropriate marketing channel when addressing diverse applications within markets.
Our sales forces develop effective communications with our OEM and end-user customers worldwide. Products are actively marketed through targeted mailings, telemarketing, select advertising and attendance at trade shows and customer partnerships. Our sales force includes a highly-trained team of application engineers to assist customers in designing, testing and qualifying our parts as key components of our customers’ systems. As of June 30, 2015, we employed 293 individuals in sales, marketing and support.
We do business with a number of customers in the defense industry, who in turn generally contract with a governmental entity, typically a U.S. governmental agency. Most governmental programs are subject to funding approval and can be modified or terminated without warning by a legislative or administrative body. For further information regarding our exposure to government markets, see the discussion set forth in Item 1A of this Annual Report on Form 10-K.
Manufacturing Technology and Processes
As noted in the “Our Strategy” section, many of the products we produce depend on our ability to manufacture and refine technically challenging materials and components. The ability to produce, process and refine these difficult materials and to control their quality and yields is an expertise of the Company that is critical to the performance of our customers’ instruments and systems. In the markets we serve, there are a limited number of suppliers of many of the components we manufacture and there are very few industry-standard products.
Our network of worldwide manufacturing sites allows us to manufacture our products in regions that provide cost-effective advantages and proximity to our customers. We employ numerous advanced manufacturing technologies and systems at our manufacturing facilities. These include automated CNC (Computer Numeric Control) optical fabrication, high throughput thin-film coaters, micro-precision metrology and custom-engineered automated furnace controls for the crystal growth processes. Manufacturing products for use across the electro-magnetic spectrum requires the capability to repeatedly produce products with high yields to atomic tolerances. We embody a technology and quality mindset that gives our customers the confidence to utilize our products on a just-in-time basis straight into the heart of their production lines.
Export and Import Compliance
We are required to comply with various export/import control and economic sanction laws, including:
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Foreign governments have also implemented similar export and import control regulations, which may affect our operations or transactions subject to their jurisdiction. For additional discussions regarding our import and export compliance, see the discussion set forth in Item 1A of this Annual Report Form on Form 10-K.
Sources of Supply
The major raw materials we use include zinc, selenium, zinc selenide, zinc sulfide, hydrogen selenide, hydrogen sulfide, tellurium, yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, gallium arsenide, copper, germanium, molybdenum, quartz, optical glass, diamond, and other materials. Excluding our own production, there are more than two external suppliers for all of the above materials except for zinc sulfide, hydrogen selenide and thorium fluoride, for which there is only one proven source of supply outside of the Company’s capabilities, and zinc selenide, for which there are no other proven external sources of supply. For many materials, we have entered into purchase arrangements which provide discounts for annual volume purchases in excess of specified amounts.
The continued high-quality of and access to these materials is critical to the stability and predictability of our manufacturing yields. We test materials at the onset of the production process. Additional research and capital investment may be needed to better define future starting material specifications. We have not experienced significant production delays due to shortages of materials. However, we do occasionally experience problems associated with vendor-supplied materials not meeting contract specifications for quality or purity. As discussed in greater detail in Item 1A, of this Annual Report on Form 10-K, significant failure of our suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a materially adverse effect on our results of our operations.
Customers
The main groups of customers by segments are as follows:
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Competition
We believe we are a global leader in many of our product families. We compete on the basis of the highly engineered nature of our products, quality, delivery time, technical support and pricing. We believe that we compete favorably with respect to these factors and that our vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees and worldwide marketing and distribution channels provide us with competitive advantages. The main groups of our competitors are as follows:
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In addition to competitors who manufacture products similar to those we produce, there are other technologies and products available that may compete with our technologies and products.
Bookings and Backlog
We define our bookings as customer orders received that are expected to be converted to revenues over the next twelve months. For long-term customer orders, to address the inherent uncertainty of orders that extend far into the future, the Company records only those orders which are expected to be converted into revenues within twelve months from the end of the reporting period. Bookings are adjusted if changes in customer demands or production schedules move a delivery beyond twelve months. For the year ended June 30, 2015, our bookings were approximately $762 million compared to bookings of approximately $691 million for the year ended June 30, 2014.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2015, our backlog was approximately $242 million, compared to approximately $220 million at June 30, 2014.
Employees
As of June 30, 2015, we employed 8,490 persons worldwide. Of these employees, 1,010 were engaged in research, development and engineering, 6,516 in direct production (of which 1,114 are employees of Photop in China who work under contract manufacturing arrangements for customers of the Company) and the remaining balance of the Company’s employees work in sales and marketing, administration, finance and support services. Our production staff includes highly skilled optical craftsmen. We have a long-standing practice of encouraging active employee participation in areas of operations management. We believe our relations with our employees are good. We reward our employees with incentive compensation based on achievement of performance goals. There are 131 employees located in the United States and the Philippines who are covered under collective bargaining agreements. The Company’s collective bargaining agreement in the Philippines will expire in June 2016. The collective bargaining agreement covering certain U.S. based employees expired August 5, 2015. The Company is currently in negotiations to extend the collective bargaining agreement that expired in the U.S.
Trade Secrets, Patents and Trademarks
We rely on a combination of trade secrets, proprietary know-how, invention disclosures, patents and contractual provisions to help us develop and maintain our competitive position with respect to our products and manufacturing processes. We aggressively pursue process and product patents in certain areas of our businesses. We have entered into selective intellectual property licensing agreements. When faced with potential infringement of our proprietary information, we have in the past and will continue to assert and vigorously protect our intellectual property rights. We have confidentiality and noncompetition agreements with certain personnel. We require that all U.S. employees sign a confidentiality and noncompetition agreement upon their commencement of employment with us.
The processes and specialized equipment utilized in crystal growth, infrared materials fabrication and infrared optical coatings as developed by us are complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a variety of infrared optical configurations and processes, and others could obtain patents covering technology similar to our technology. We may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted which may adversely affect our results of operations. In addition, our research and development contracts with agencies of the U.S. Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.
Item 1A. | RISK FACTORS |
The Company cautionsWe caution our investors that itsour performance and, therefore, any forward-looking statement, is subject to risks and uncertainties. The following material risk factors may cause the Company’sour future results to differ materially from those projected in any forward-looking statement. You should carefully consider these factors, as well as the other information contained in this Annual Report on Form 10-K when evaluating an investment in our securities.
Investments in Future Markets of Potential Significant Growth May Not Result in Expected Returns
We previously announced an investment program with the goal of gaining a greater share of end markets using semiconductor lasers, especially those used for 3D sensing. We cannot guarantee that our investments in capital and capabilities will be sufficient. The potential market, as well as our ability to gain market share in such market, may not materialize on the timeline anticipated or at all. We cannot be sure of the end market price for products incorporating our technologies. Our Future Success Depends on International Sales and Successful Management of Global Operations
Salestechnologies could fail to customers in countries other thanfulfill, completely or at all, our target customers’ finalized specifications. We cannot guarantee the U.S. accounted for approximately 63%, 65% and 56% of revenues during the years ended June 30, 2015, 2014 and 2013, respectively. We anticipate that international sales will continue to account for a significant portionend market customers’ acceptance of our revenues for the foreseeable future. In addition,technologies. Further, we manufacture products in China, Singapore, Vietnam, the Philippines, Germany, and Switzerland, and through contract manufacturers in Thailand and China, and maintain direct sales offices in Hong Kong, Japan, Germany, Switzerland, the U.K., Belgium, China, Singapore, Italy and South Korea. Sales and operations outside of the U.S. are subject to certain inherent risks, including fluctuations in the value of the U.S. dollar relative to foreign currencies, global economic uncertainties, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations and potentially adverse tax consequences, and required compliance with U.S.- and non-U.S. laws and regulations. More specifically, we are subject to laws and regulations worldwide affecting our operations outside the U.S. in areas including, but not limited to, IP ownership and infringement, tax, customs, import and export requirements, anti-corruption and anti-bribery, foreign exchange controls and cash repatriation restrictions, foreign investment, data privacy requirements, anti-competition, pensions and social insurance, employment, and environment, health, and safety. Compliance with these laws and regulations may be onerous and expensive and requirements may differ among jurisdictions. Further,unable to fulfill the promulgationterms of new laws, changingour contracts with our target customers, which could result in existing laws and abrogationpenalties of local regulations by national laws may have a negative impact on our business and prospects. In addition, certain laws and regulations are relatively new and their interpretation and enforcement involve significant uncertainties. There can be no assurance that any of these factors will not have a material adverse effect on our business, resultsnature, including consequential damages, loss of operations or financial condition.market share and loss of reputation.
Our Continued SuccessCompetitive Position Depends on Our Ability to Develop New Products and Processes
In order toTo meet our strategic objectives, we must continue to develop, manufacture and market new products develop new processes and improve existing processes. As a result, we expect to continue to make significant investments in researchupdate our existing products and development andprocesses to continuekeep pace with market developments to consider from time to time the strategic acquisition of businesses, products or technologies complementary to our business.address increasingly sophisticated customer requirements. Our success in developing introducing and selling new and enhanced products and processes depends upon a variety of factors including strategic product selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes, effective sales and marketing, and successful product performance in the field.market.
The introduction by our competitors of products or processes using new developments better or faster than ours could render our products or processes obsolete or unmarketable. We intend to continue to make significant investments in research and development to achieve our goals. There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products and processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could have a material adverse effect on our ability to grow our business.
Keeping Pace with Key Industry Developments is Essential
The introduction of products or processes utilizing new developments could render existing products or processes obsolete or unmarketable. Our continued success will depend uponbusiness and maintain our ability to developcompetitive position and introduce, in a timely and cost-effective manner, new products, processes and applications that keep pace with developments and address increasingly sophisticated customer requirements. There can be no assurance that we will be successful in identifying, developing and marketing new products, applications and processes and that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of product or process enhancements or new products, applications or processes, or thaton our products, applications or processes will adequately meet the requirements of the marketplace and achieve market acceptance. Our business, results of operations andand/or financial condition could be materially and adversely affected if we were to incur delayscondition.
Our Competitive Position May Require Significant Investments in developing new products, applications or processes or if they do not achieve market acceptance.Strategic Acquisitions, With Associated Integration Risks, Which May Not Be Successful
We May Expand Product Linescontinuously monitor the marketplace for strategic opportunities, and Markets by Acquiring Other Businesses, Which May Adversely Affect our Results and Affect the Value of our Stock Following Such Acquisitions
Our business strategy includes expanding our product lines and markets through both internal product development and acquisitions. We have completed various acquisitions in recent years and the success of these acquisitions will depend, in part, on our abilityConsequently, we expect to realize the anticipated benefits from integrating and successfully running the businesses acquired. Thecontinue to consider strategic acquisition of businesses, products or technologies complementary to our business involves numerous potential risks, including difficultiesbusiness. This may require significant investments of management time and financial resources. If market demand is outside our organic capabilities, if a strategic acquisition is required and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the assimilationexpected return on investment, expose us to unforeseen liabilities or jeopardize our ability to comply with our credit facility covenants due to any inability to integrate the business, retain staff, or work with the customers or otherwise we could suffer a material adverse effect on our business, results of operations or financial condition.
Our Future Success Depends on Continued International Sales
Sales to customers in countries other than the United States accounted for approximately 69%, 63% and 63% of revenues during the years ended June 30, 2017, 2016 and 2015, respectively. We anticipate that international sales will continue to account for a significant portion of our revenues for the foreseeable future. If we do not maintain our current volume of international sales, we could suffer a material adverse effect on our business, results of operations and/or financial condition.
Foreign Currency Risk May Negatively Affect our Revenues, Cost of Sales and Operating Margins and Could Result in Foreign Exchange Losses
We conduct our business and incur costs in the local currency of most countries in which we operate. Our net sales outside the United States represented a majority of our total sales in each of the acquired business and products, uncertainties associated withlast three fiscal years. We incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in new markets, working with new customers and the potential loss of the acquired company’s key personnel. In addition, acquired businesses may experience operating
losses as of, and subsequent to, the acquisition date. Further, we significantly increased our long-term debt to finance these acquisitions, the costs of which (in terms of interest expense and similar debt service costs), must be weighed against the potential benefits of such acquisitions. The anticipated benefits and cost savings of an acquisition may not be realized fully,it operates or at all,holds assets or may take longer to realizeliabilities in a currency different than expected, and as a resultits functional currency. Changes in exchange rates can also affect our results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S. dollars. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we may not be able to effectively manage our currency risks, and any volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers or increase the manufacturing cost of our products, either of which may have an adverse effect on our financial position,condition, cash flows and cash flowprofitability.
Any Inability to Access Financial Markets from Time to Time to Raise Capital, Finance Working Capital Requirements or Our Acquisition Strategies, or Otherwise to Support our Liquidity Needs Could Negatively Impact our Ability to Finance our Operations, Meet Certain Obligations or Implement our Growth Strategy.
We occasionally borrow under our existing credit facilities to fund operations, including working capital investments, and to finance our acquisition strategies. In the past, market disruptions experienced in the United States and abroad have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive, and, in certain cases, have resulted in the unavailability of certain types of financing. Uncertainty in the financial markets may negatively impact our ability to access additional financing or to refinance our existing credit facilities or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future expansion as well as future acquisitions and development. These disruptions may include turmoil in the financial services industry, volatility in the markets where our outstanding securities trade, and general economic downturns in the areas where we do business. If we are unable to access funds at competitive rates, or if our short-term or long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategies could be adversely affected.
In the future we may be required to raise additional capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business and prospects. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants that may limit our ability to undertake certain operational activities that we otherwise would find to be desirable. Further, debt service obligations associated with any futuresuch debt financing could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business acquisitions completed byor respond to competitive pressures.
We May Fail to Accurately Estimate Our Customers’ Demands
We make significant decisions based on our estimates of customer requirements. We use our estimates to determine the levels of business we seek and accept, production schedules, personnel needs and other resource requirements.
Customers may require rapid increases in production on short notice. We may not be able to purchase sufficient supplies or allocate sufficient manufacturing capacity to meet such increases in demand. Rapid customer ramp-up and significant increases in demand may strain our resources or negatively affect our margins. Inability to satisfy customer demand in a timely manner may harm our reputation, reduce our other opportunities, damage our relationships with customers, reduce revenue growth, and/or incur contractual penalties.
Alternatively, downturns in the industries in which we compete may cause our customers to significantly reduce their demand. With respect to orders we initiate with our suppliers to address anticipated demand from our customers, certain suppliers may have required non-cancelable purchase commitments or advance payments from us, mayand those obligations and commitments could reduce our ability to adjust our inventory or expense levels to declining market demands. Unexpected decline in customer demands can result in potentially dilutive issuancesexcess or obsolete inventory and result in additional charges. Because certain of our equity securities,sales, research and development and internal manufacturing overhead expenses are relatively fixed, a reduction in customer demand likely would decrease our gross margins and operating income.
We May Encounter Substantial Competition
We may encounter substantial competition from other companies in the incurrencesame market, including established companies with significant resources. Some of debt, contingent liabilitiesour competitors may have financial, technical, marketing or other capabilities that are more extensive than ours. They may be able to respond more quickly than we can to new or emerging technologies and amortization expense relatedother competitive pressures. We may not be able to intangible assets acquired, any of whichcompete successfully against our present or future competitors. Our failure to effectively compete could have a material adverse effect on our business, results of operations or financial condition.
DeclinesThere Are Limitations on the Protection of Our Intellectual Property
We rely on a combination of trade secret, patent, copyright and trademark laws combined with employee confidentiality, noncompetition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps taken by us will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance that third-parties will not assert infringement claims against us in the Operating Performance of One of Our Business Segments Could Resultfuture.
Asserting our intellectual property rights or defending against third-party claims could involve substantial expense. In the event a third-party were successful in an Impairment of the Segment’s Goodwill and Indefinite-Lived Intangible Assets
As of June 30, 2015, we had goodwill and indefinite-lived intangible assets of approximately $195.9 million and $14.4 million, respectively, on our Consolidated Balance Sheet. In accordance with applicable accounting guidance, we test our goodwill and indefinite-lived intangible assets for impairment on an annual basis or when an indication of possible impairment exists, to determine whether the carrying valuea claim that one of our assets is still supported by the fair value of the underlying business. To the extent that it is not,processes infringed its proprietary rights, we arecould be required to record an impairment chargepay substantial damages or royalties, or spend substantial amounts in order to reduce the asset to fair value. A decline in the operating performance of any of our business segments could result in an impairment charge whichobtain a license or modify processes so that they no longer infringe such proprietary rights. Any such events could have a material adverse effect on our business, results of operations or financial condition.
General A Significant Portion of Our Business is Dependent on Cyclical Industries
Our business is significantly dependent on the demand for products produced by end-users of industrial lasers and optical communication products. Many of these end-users are in industries that have historically experienced a highly cyclical demand for their products. As a result, demand for our products is subject to these cyclical fluctuations. Fluctuations in demand could have a material adverse effect on our business, results of operations or financial condition.
Data Breach Incidents and Breakdown of Information and Communication Technologies Could Disrupt our Operations and Impact Our Financial Results
In the course of our business, we collect and store sensitive data, including intellectual property (both our own and that of our customers), as well as proprietary business information. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted or we could suffer legal claims, loss of reputation, financial loss, property damage, or regulatory penalties because of lost or misappropriated information.
Global Economic ConditionsDownturns May Adversely Affect Our Business, Operating Results and Financial Condition
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction for the global economy as a whole. It is even more difficult to estimate growth or contraction in various parts, sectors and regions of the economy, including industrial, military, optical communications, telecommunications, semiconductor, and medical and life science markets in which we participate. Because all componentsAll aspects of our forecasting are dependent uponcompany forecast depend on estimates of growth or contraction in the markets we serve and demand for our products, theserve. Thus, prevailing global economic uncertainties render estimates of future income and expenditures very difficult to make. In addition, changes in general
Global economic conditionsdownturns may affect industries in which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’ products due to economic downturn, and suchproducts. Such conditions could have a material adverse effect on demand for our customers’ products, and in turn, on demand for our products.
Adverse changes may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, decline in stock markets, contraction of credit availability or other factors affecting economic conditions. For example, factors that may affect our operating results include disruptions todisruption in the credit and financial markets in the U.S.,United States, Europe and elsewhere;elsewhere, adverse effects of ongoing stagnation in the European economy;economy, slowdown in the Chinese economy; contractionseconomy, reductions or limited growth in consumer spending or consumer credit;credit, and other adverse economic conditions that may be specific to the Internet, e-commerce and payments industries.
These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, increase the cost and availability of financing, and increase costs associated with manufacturing and distributing products. Any economic downturn could have a material adverse effect on our business, results of operations or financial condition.
There Are Limitations on the Protection of Our Intellectual Property
We rely on a combination of trade secret, patent, copyright and trademark laws combined with employee noncompetition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps taken by us will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance that third-parties will not assert infringement claims against us in the future. Asserting our intellectual property rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting our business, results of operations or financial condition. In the event a third-party were successful in a claim that one of our processes infringed its proprietary rights, we could be required to pay substantial damages or royalties, or expend substantial amounts in order to obtain a license or modify processes so that they no longer infringe such proprietary rights, any of which could have a material adverse effect on our business, results of operations or financial condition.
We Are Subject to Governmental RegulationImport and Export Regulations
We are subject to the passage of and changes in the interpretation of regulation by U.S. government entities at the federal, state and local levels and non-U.S. agencies, including, but not limited to, the following:
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We are required to comply with import laws and export control and economic sanctions laws, which may affect our transactions with certain customers, business partners and other persons, including dealings with or between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies. We may be required to obtain an export license before exporting a controlled item. Compliance with the import laws that apply to our businesses may restrict our access to, and may increase the cost of obtaining, certain products and could interrupt our supply of imported inventory.
Exported technologies necessary to develop and manufacture certain products are subject to U.S. export control laws and similar laws of other jurisdictions. We may be subject to adverse regulatory consequences, including government oversight of facilities and export transactions, monetary penalties and other sanctions for violations of these laws. In certain instances, these regulations may prohibit the Company from developing or manufacturing certain of its products for specific end applications outside the United States.
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In addition, failureFailure to comply with any of these laws and regulations could result in civil and criminal, monetary and non-monetary penalties, disruptions to our business, limitations on our ability to import and export products and services and damage to our reputation.
Our Global Operations are Complex to Manage
We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, and Switzerland, and through contract manufacturers in Thailand and China. We also maintain direct sales offices in Hong Kong, Japan, Germany, Switzerland, the United Kingdom, Belgium, China, Singapore, Italy, South Korea, and Taiwan. Our operations vary by location and are influenced on a location-by-location basis by local customs, languages and work practices, as well as different local weather conditions, management styles and education systems. In addition, multiple complex issues may arise concurrently in different countries, potentially hampering our management’s ability to respond in an effective and timely manner. Any inability to respond in an effective and timely manner to issues in our global operations could have a material adverse effect on our business, results of operations or financial condition.
We Have Entered into Supply Agreements which Commit Us to Supply Products on Specified Terms
We have supply agreements with some customers which require us to supply products and to allocate sufficient capacity to make these products. We have also agreed to pricing schedules and methodologies which could result in penalties if we fail to meet development, supply and quality commitments. Failure to do so may cause us to be unable to generate the amount of revenue or the level of profitability we expect from these arrangements. Our ability to realize a profit under some of these agreements will be subject to the level of customer demand, the cost of maintaining facilities and manufacturing capacity, and supply chain capability.
If we fail to fulfill our commitments under these supply agreements our business, after using all remedies available, financial conditions and results of operations may suffer a material adverse effect.
We Depend on Highly Complex Manufacturing Processes That Require Products from Limited Sources of Supply
Our operations are dependent upon a supply chain of difficult-to-make or difficult-to-refine products and materials. Some of our product inflow is subject to yield reductions from growth or fabrication losses, and thus the quantities we may receive are not consistently predictable. Customers may also change the specification for a product that our suppliers cannot meet.
We also make products for which the Company is one of the world’s largest suppliers. We use high-quality, optical grade ZnSe in the production of many of our IR optical products. We are a leading producer of ZnSe for our internal use and for external sale. The production of ZnSe is a complex process requiring a highly controlled environment. A number of factors, including defective or contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high quality ZnSe. Lack of adequate availability of high quality ZnSe could have a material adverse effect upon our business. There can be no assurance that we will not experience manufacturing yield inefficiencies which could have a material adverse effect on our business, results of operations or financial condition.
We produce hydrogen selenide gas which is used in our production of ZnSe. There are risks inherent in the production and handling of such material. Our lack of proper handling of hydrogen selenide could require us to curtail our production of hydrogen selenide. Our potential inability to internally produce hydrogen selenide could have a material adverse effect on our business, results of operations or financial condition.
In addition, we produce and use other high purity and relatively uncommon materials and compounds to manufacture our products including, but not limited to, ZnS, GaAs, Yttrium Aluminum Garnet, Yttrium Lithium Fluoride, Calcium Fluoride, Germanium, Selenium, Telluride, Bismuth Telluride and SiC. A significant failure of our internal production processes or our suppliers to deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on our business, results of operations or financial condition.
Our Global Operations Are Subject to Complex Legal and Regulatory Requirements
We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, and Switzerland, and through contract manufacturers in Thailand and China. We also maintain direct sales offices in Hong Kong, Japan, Germany, Switzerland, the United Kingdom, Belgium, China, Singapore, Italy, South Korea and Taiwan. Operations outside of the United States are subject to many legal and regulatory requirements, some of which are not aligned with others. These include tariffs, quotas, taxes and other market barriers, restrictions on the export or import of technology, potentially limited intellectual property protection, customs import and export requirements, anti-corruption and anti-bribery laws, foreign exchange controls and cash repatriation restrictions, foreign investment rules and regulations, data privacy requirements, anti-competition laws, employment and labor laws, pensions and social insurance, and environmental health, and safety laws and regulations.
Compliance with these laws and regulations can be onerous and expensive, and requirements differ among jurisdictions. New laws, changes in existing laws and abrogation of local regulations by national laws result in significant uncertainties in how they will be interpreted and enforced. Failure to comply with any of these foreign laws and regulations could have a material adverse effect on our business, results of operations or financial condition.
We Use and Generate Hazardous Substances that Are Subject to Stringent Environmental RegulationRegulations
We useHazardous substances used or generate certain hazardous substancesgenerated in our research and manufacturing facilities.facilities are subject to stringent environmental regulation. We believe that our handling of such substances is in material compliance with applicable local, state and federal environmental, safety and health regulations at each operating location. We invest substantially in proper protective equipment, process controls and specialized training to minimize risks to employees, surrounding communities and the environment resultingthat could result from the presence and handling of such hazardous substances. We regularly conduct employee physical examinations and workplace monitoring regarding such substances. When exposure problems or potential exposure problems have been uncovered, corrective actions have been implemented and re-occurrence has been minimal or non-existent. We do not carry environmental impairment insurance.
We have in place an emergency response plan with respect to our generation and use of the hazardous substance Hydrogen Selenide. Special attention has been given to all procedures pertaining to this gaseous material to minimize the chances of its accidental release into the atmosphere.
With respect to the manufacturing, use, storage and disposal of the low-level radioactive material Thorium Fluoride, our facilities and procedures have been inspected and licensed by the Nuclear Regulatory Commission. Thorium-bearing by-products are collected and shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah.
The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy metals or airborne particulates, are believed by us to be in material compliance with regulations. We believe that we have obtained all of the permits and licenses required for operation of our business.
We do not carry environmental impairment insurance. Although we do not know of any material environmental, safety or health problems in our properties or processes, there can be no assurance that problems will not develop in the future which could have a material adverse effect on our business, results of operations or financial condition.
We May Be Adversely Affected by Climate Change RegulationRegulations
In many of the countries in which we operate, government bodies are increasingly enacting or contemplating enacting legislation and regulations in response to potential impacts of climate change. These laws and regulations may be mandatory or voluntary, andmandatory. They have the potential to impact our operations directly or indirectly through implications onas a result of required compliance by our customers or our supply chain. Inconsistency of regulations may also affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change legislation, regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate.
We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations, added costs to purchase or lower profits from sales of our products, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers, and changes to profit or loss arising from increased or decreased demand for goods produced by us and indirectly, from changes in costs of goods sold.
Regulations Related to Conflict Minerals Could Adversely Impact Our Business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contain provisions to improve transparency and accountability concerning the supply of gold, columbite-tantalite (coltan), cassiterite and wolframite, including their derivatives, which are limited to tantalum, tin and tungsten, known as “conflict minerals,” originating from the Democratic Republic of Congo (DRC) and adjoining countries (collectively known as the "covered countries"). Pursuant to these rules, the SEC has adopted certain annual disclosure and reporting requirements for those companies that use conflict minerals in their products, regardless of whether such minerals were mined from the covered countries, compliance with which began in 2014. We could incur significant costs associated with complying with these disclosure requirements, including costs related to our due diligence efforts to determine the sources of any conflict minerals used in our products. These rules could adversely affect the sourcing, supply and pricing of materials we use in our products, particularly if it turns out that there are only a limited number of suppliers offering conflict minerals that are not from recycled or scrap sources, can be traced to a country of origin other than the covered countries, or can be traced to a source within the covered countries that definitely does not finance or benefit armed groups in those countries. We cannot be sure that we will be able to obtain products from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain conflict minerals originating from the covered countries and we cannot definitively determine whether the conflict minerals financed or otherwise benefited armed groups, or if we are unable to sufficiently verify the origins of all of the conflict minerals used in our products through the due diligence procedures we implement.
Data Breach Incidents and Breakdown of Information and Communication Technologies Could Disrupt our Operations and Impact Our Financial Results
In the course of our business, we collect and store sensitive data, including intellectual property [both proprietary and of our customers], as well as proprietary business information. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or data including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations could be disrupted or we may suffer legal claims, loss of reputation, financial loss, property damage, or regulatory penalties because of lost or misappropriated information.
We Depend on Highly Complex Manufacturing Processes That Require Products from Limited Sources of Supply
We utilize high-quality, optical grade zinc selenide (ZnSe) in the production of many of our infrared optical products. We are the leading producer of ZnSe for our internal use and for external sale. The production of ZnSe is a complex process requiring a highly controlled environment. A number of factors, including defective or contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high quality ZnSe. No proven external sources of ZnSe are currently available. Lack of adequate availability of high quality ZnSe could have a material adverse effect upon us. There can be no assurance that we will not experience manufacturing yield inefficiencies which could have a material adverse effect on our business, results of operations or financial condition.
We produce Hydrogen Selenide gas which is used in our production of ZnSe. There are risks inherent in the production and handling of such material. Our lack of proper handling of Hydrogen Selenide could require us to curtail our production of Hydrogen Selenide. Hydrogen Selenide is available from only one outside source whose quantities and quality may be limited. The cost of purchasing such material is greater than the cost of internal production. As a result, the purchase of a substantial portion of such material from the outside source would increase our ZnSe production costs. Therefore, our inability to internally produce Hydrogen Selenide could have a material adverse effect on our business, results of operations or financial condition.
In addition, we produce and utilize other high purity and relatively uncommon materials and compounds to manufacture our products including, but not limited to, Zinc Sulfide (ZnS), Yttrium Aluminum Garnet (YAG), Yttrium Lithium Fluoride (YLF), Calcium Fluoride (CaF2), Germanium (Ge), Selenium (Se), Telluride (Te), Bismuth Telluride (Bi2Te3) and Silicon Carbide (SiC). A significant failure of our internal production processes or our suppliers to deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on our business, results of operations or financial condition.
Some Systems That UtilizeUse our Products Are Complex in Design and May Contain Defects that Are Not Detected Until Deployed Which Could Increase Our Costs and Reduce Our Revenues
Some systems that utilizeuse our products are inherently complex in design and require ongoing maintenance. Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other vendors and these third-party productswhich may contain defects. Should problems occur, it may be difficult to identify the source of the problem. If we are unable to correct defects or other problems, we could experience, among other things:things loss of customers;customers, increased costs of product returns and warranty expenses;expenses, damage to our
brand reputation;reputation, failure to attract new customers or achieve market acceptance;acceptance, diversion of development and engineering resources;resources, or legal action by our customers.
The occurrence of any one or more of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.
Continued U.S. Budget Deficits Could Result in Significant Defense Spending Cuts and/or Reductions in Defense Programs which Could Adversely Impact the CompanyOur Business
Specific to the military business within our II-VI Laser Solutions and II-VI Performance Products segments, sales to customers in the defense industry totaled approximately 12%11% of our revenues for the fiscal year ended June 30, 2015.2017. These customers in turn generally contract with a governmental entity, typically a U.S. governmental agency. Future reductions in defense spending could result from the current or future economic or political environment, such asenvironment. For example, the ongoing sequestration of the defense budget which could result in reductions in demand for defense-related products that we produce. Further, changes to existing defense procurement laws and regulations could adversely affect our results of operations. Most governmental programs are subject to funding approval and can be modified or terminated with no warning upon the determination of a legislative or administrative body. The loss of or failure to obtain certain contracts or the loss of a major government customer could have a material adverse effect on our business, results of operations or financial condition.
Changes in Tax Rates, Tax Liabilities or Tax Accounting Rules Could Affect Future Results
As a global company, we are subject to taxation in the U.S.United States and various other countries and jurisdictions. As such, we must exercise a level of judgment in determining our worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of earnings in countries with differing tax rates or changes in tax laws. Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. For example, proposals for fundamental U.S. international tax reform, if enacted, could have a significant adverse impact on our effective tax rate. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in our historical income tax provision and accruals, which could materially and adversely affect our business, results of operation or financial condition.
WeIncreases in Commodity Prices May Encounter Substantial CompetitionAdversely Affect Our Results of Operations and Financial Condition
We may encounter substantial competition from other companiesare exposed to a variety of market risks, including the effects of increases in the same market, including established companies with significant resources. Some of our competitors may have financial, technical, marketing or other capabilities that are more extensive than ourscommodity prices. Our businesses purchase, produce and may be able to respond more quickly than we can to new or emerging technologiessell high-purity selenium and other competitive pressures. Weraw materials based upon quoted market prices from minor metal exchanges. The negative impact from increases in commodity prices may not be able to compete successfully againstrecovered through our present or future competitors, and such competitionproduct sales which could have a material adverse effect on our business, results of operations ornet earnings and financial condition.
Our Success Depends on Our Ability to Retain Key Personnel
We are highly dependent upon the experience and continuing services of certain scientists, engineers, production and management personnel. Competition for the services of these personnel is intense, and there can be no assurance that we will be able to retain or attract the personnel necessary for our success. The loss of the services of our key personnel could have a material adverse effect on our business, results of operations or financial condition.
Natural Disasters or Other Global or Regional Catastrophic Events Could Disrupt Our Operations and Adversely Affect Our Results
We may be exposed to business interruptions due to catastrophe, natural disaster, pandemic, terrorism or acts of war that are beyond our control. Disruptions to our facilities or systems, or to those of our key suppliers, could also interrupt operational processes and adversely impact our ability to manufacture our products and provide services and support to our customers. As a result, our business, results of operations or financial condition could be materially adversely affected.
A Significant PortionOur Success Depends on Our Ability to Retain Key Personnel
We are highly dependent upon the experience and continuing services of Our Business is Dependent on Cyclical Industries
Our business is significantly dependent oncertain scientists, engineers, production and management personnel. Competition for the demand for products produced by end-users of industrial lasers and optical communication products. Manyservices of these end-users are in industriespersonnel is intense. There can be no assurance that have historically experienced a highly cyclical demand for their products. As a result, demandwe will be able to retain or attract the personnel necessary for our products is subject to these cyclical fluctuations. This cyclical demandsuccess. The loss of the services of our key personnel could have a material adverse effect on our business, results of operations or financial condition.
Commodity Prices May Adversely Affect Our Results of Operations and Financial Condition
We are exposedHave Agreements with Government Entities That Are Subject to a varietySignificant Compliance Requirements and Changes in Government Spending
Our agreements relating to the sale of market risks, includingproducts to government entities may be subject to termination, reduction or modification in the effectsevent of changes in commodity prices. Our businesses purchase, produce and sell high purity seleniumgovernment requirements, reductions in federal spending and other raw materials based upon quoted market pricesfactors. We are also subject to investigation and audit for compliance with the requirements of government contracts, including procurement integrity, export control, employment practices, the accuracy of records and the recording of costs. Failure to comply with these requirements might result in suspension of these contracts and suspension or debarment from minor metal exchanges. As a result,government contracting or subcontracting.
Our Stock Price Has Been Highly Volatile in the negative impact from changesPast and May Be Extremely Volatile in commodity prices may not be recovered through our product sales, and as such could have a material adverse effect on our net earnings and financial condition.the Future
The market price for our common stock on The NASDAQ Global Select Market Pricevaried between a high of Our Common Stock Can Be Highly Volatile
$41.10 and a low of $17.76 in the fiscal year ended June 30, 2017. We expect that this volatility will continue. Factors that could cause fluctuation in our stock price include, among other things:things, general economic and market conditions;conditions, actual or anticipated variations in operating results;results, changes in financial estimates by securities analysts;analysts, our inability to meet or exceed securities analysts’ estimates or expectations;expectations, conditions or trends in the industries in which our products are purchased;purchased, announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives;initiatives, capital commitments;commitments, additions or departures of key personnel;personnel and sales of our Common Stock.common stock or equity-linked securities.
Many of these factors are beyond our control. TheseHowever, these factors could cause the market price of our Common Stockcommon stock to decline, regardless of our actual operating performance. In addition, in recent years, the stock market in general, and The NASDAQ Stock Market and the securities of technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations have in the past, and may in the future, materially and adversely affect our stock price, regardless of our operating results. This volatility may affect the price at which our shareholders can sell our common stock.
Some Anti-takeover Provisions Contained in Our Articles of Incorporation and By-Laws May LimitBy-laws, as Well as Provisions of Pennsylvania Law, Could Impair a Takeover Attempt, Which Could Also Reduce the Market Price that Investors May be Willing to Pay in the Future for Shares of Our Common Stock
Our Articlesarticles of Incorporationincorporation and By-Lawsby-laws contain provisions that could make us a less attractive target for a hostile takeover and could make more difficult or discourage a merger proposal, a tender offer or a proxy contest. Such provisions include: a
A requirement that shareholder-nominated director nominees be nominated in advance of the meeting at which directors are elected and that specific information be provided in connection with such nomination; the
The ability of theour board of directors to issue additional shares of Common Stockcommon stock or preferred stock without shareholder approval; and certain
Certain provisions requiring supermajority approval (at least two-thirds of the votes cast by all shareholders entitled to vote thereon, voting together as a single class).
In addition, the Pennsylvania Business Corporation Law (the “BCL”) contains provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Many of these provisions are triggered if any person or group acquires, or discloses intent to acquire, 20% or more of a corporation’s voting power, subject to certain exceptions. These provisions:
provide the Company. other shareholders of the corporation with certain rights against the acquiring group or person;
prohibit the corporation from engaging in a broad range of business combinations with the acquiring group or person;
restrict the voting and other rights of the acquiring group or person; and
provide that certain profits realized by the acquiring group or person from the sale of our equity securities belong to and are recoverable by us.
Regardless of the amount of a person’s holdings, if a shareholder or shareholder group (including affiliated persons) would be a party to certain proposed transactions with us or would be treated differently from other shareholders of ours in certain proposed transactions, the BCL requires approval by a majority of votes entitled to be cast by all shareholders other than the interested shareholder or affiliate group, unless the transaction is approved by independent directors or other criteria are satisfied. Furthermore, under the BCL, a “short-form” merger of II-VI cannot be implemented without the consent of our board of directors.
In addition, as permitted by Pennsylvania law, an amendment to our articles of incorporation or other corporate action that is approved by shareholders may provide mandatory special treatment for specified groups of nonconsenting shareholders of the same class. For example, an amendment to our articles of incorporation or other corporate action may provide that shares of common stock held by designated shareholders of record must be cashed out at a price determined by the corporation, subject to applicable dissenters’ rights.
Furthermore, the BCL provides that directors may, in discharging their duties, consider, to the extent they deem appropriate, the effects of any action upon shareholders, employees, suppliers, customers and the communities in which its offices are located. Directors are not required to consider the interests of shareholders to a greater degree than other constituencies’ interests. The BCL expressly provides that directors do not violate their fiduciary duties solely by relying on “poison pills” or the anti-takeover provisions of the BCL. We do not currently have a “poison pill.”
All of these provisions may limit the price that investors may be willing to pay for shares of our Common Stock.common stock.
Because We Do Not Currently Intend to Pay Dividends, ShareholdersHolders of Our Common Stock Will Benefit Fromfrom an Investment in ourOur Common Stock Only if itIf It Appreciates in Value
We have never declared or paid any dividends on our Common Stock,common stock, and do not expect to pay cash dividends in the foreseeable future, as wefuture. We currently anticipate that we will retain any future earnings to support operations and to finance the development of our business. As a result, the success of an investment in our Common Stockcommon stock will depend entirely upon any future appreciation in its value. There is no guarantee that our Common Stockcommon stock will maintain its value or appreciate in value.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In July 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update simplifies the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new inventory measurement requirements are effective for the Company’s 2018 fiscal year and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of these changes is not expected to have a material impact to the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued as final, ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance about whether a cloud computing arrangement includes a software license. The update is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The update allows for the use of either a prospective or retrospective adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoption on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This ASU requires entities to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability, consistent with debt discounts. The guidance does not address situations in which debt issuance costs do not have an associated debt liability or exceed the carrying amount of the associated debt liability. This ASU will be effective beginning in fiscal year 2017. Management is currently evaluating the potential impact of adoption on the Company's Consolidated Financial Statements.
In February 2015, the FASB issued as final, ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which affects reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The update allows for the use of either a full retrospective or a modified retrospective adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoption on the Company’s Consolidated Financial Statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items. This ASU eliminates the requirement to separately present and disclose extraordinary and unusual items in the financial statements. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606) which supersedes virtually all existing revenue recognition guidance under U.S. GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update allows for the use of either the retrospective or modified retrospective approach of adoption. On July 9, 2015 the FASB approved a one year deferral of the effective date of the update. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (the first quarter of our fiscal year 2019). We have not yet selected a transition method and are currently evaluating the impact of this guidance on our Consolidated Financial Statements.
In April 2014, the FASB issued ASU 2014-08: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The new standard will be effective for annual periods beginning on or after December 15, 2014, with early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal year 2016. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
In July 2013, the FASB issued ASU 2013-11: Presentation of an Unrecognized Tax benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit carryforward Exists. The ASU changes how certain unrecognized tax benefits are to be presented on the consolidated balance sheet. This ASU clarified existing guidance to require that an unrecognized tax benefit, or a portion thereof, be presented in the consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, similar tax loss, or a tax credit carryforward, except when an NOL carryforward, similar tax loss, or tax credit carryforward is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. In such a case, the unrecognized tax benefit would be presented in the consolidated balance sheet as a liability. This update was effective for fiscal years beginning after December 15, 2013 and was effective for the Company
for the fiscal quarter ended September 30, 2014. The adoption of this standard did not have a significant impact on the Company’s Consolidated Financial Statements.
Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
Item 2. | PROPERTIES |
Information regarding our principal U.S. properties at June 30, 20152017 is set forth below:
Location |
| Primary Use(s) |
| Primary Business Segment(s) |
| Approximate Square |
| Ownership |
Saxonburg, PA |
| Manufacturing, Corporate Headquarters and Research and Development |
| II-VI Laser Solutions and II-VI Performance Products |
| 252,000 |
| Owned |
Warren, NJ | Manufacturing and | II-VI Laser Solutions | 151,000 | Leased | ||||
Newark, DE |
| Manufacturing and |
| II-VI Performance Products |
| 90,000 |
| Leased |
Temecula, CA |
| Manufacturing and |
| II-VI Performance Products |
| 87,000 |
| Leased |
Dallas, TX |
| Manufacturing and |
| II-VI Performance Products |
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| |
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| 67,000 |
| Owned | |||
Monroe, CT |
| Manufacturing and |
| II-VI Performance Products |
| 48,000 |
| Leased |
|
| Manufacturing and |
| II-VI |
|
|
| Leased |
Santa Rosa, CA |
| Manufacturing and |
| II-VI Photonics |
|
| Leased | |
Pine Brook, NJ | Manufacturing and | II-VI Performance Products | 36,000 | Leased | ||||
Tustin, CA | Manufacturing and | II-VI Performance Products | 31,000 |
| Leased | |||
Philadelphia, PA |
| Manufacturing and |
| II-VI Performance Products |
| 30,000 |
| Leased |
|
| Manufacturing and |
| II-VI |
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| Leased |
|
| Manufacturing and |
| II-VI |
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| Leased |
Woburn, MA |
| Manufacturing and |
| II-VI Photonics |
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| Leased | |||
Starkville, MS |
| Manufacturing |
| II-VI Performance Products |
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|
| Leased |
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| Manufacturing and |
| II-VI |
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| Leased |
|
| Research and Development |
| II-VI |
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| Leased |
We also maintain some additional small research and development, distribution, and administrative facilities in leased space in the United States.
Information regarding our principal foreign properties at June 30, 20152017 is set forth below:
Location |
| Primary Use(s) |
| Primary Business Segment(s) |
| Approximate Square |
| Ownership |
China |
| Manufacturing, Research and Development, and Distribution |
| II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products |
|
|
| Leased |
Philippines |
| Manufacturing |
| II-VI Laser Solutions and II-VI Performance Products |
|
|
| Leased |
Vietnam |
| Manufacturing |
| II-VI Photonics and II-VI Performance Products |
| 207,000 |
| Leased |
Switzerland |
| Manufacturing, Research and Development, and Distribution |
| II-VI Laser Solutions |
| 134,000 |
| Leased |
Germany |
| Manufacturing and Distribution |
| II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products |
|
|
| Owned and Leased |
Singapore |
| Manufacturing |
| II-VI Laser Solutions |
| 35,000 |
| Leased |
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We also maintain some additional small distribution facilities in leased space in Belgium, Italy, Japan, South Korea, Taiwan, and the United Kingdom.
The square footage listed for each of the above properties represents facility square footage, except in the case of the Philippines location, which includes land.
Item 3. | LEGAL PROCEEDINGS |
The Company and its subsidiaries are involved in various claims and lawsuits incidental to its business. The resolution of each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such legal proceedings will not materially affect the Company’s financial condition, liquidity or results of operation.
Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and positions are set forth below. Each executive officer listed has been appointed by the Board of Directors to serve until removed or until such person’s successor is appointed and qualified.
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Francis J. Kramer has been employed by the Company since 1983, has been its Chairman since 2014, and has been its Chief Executive Officer since July 2007. Mr. Kramer has served as a Director of the Company since 1989. Previously, Mr. Kramer served as the Company’s Chief Operating Officer from 1985 through June 2007. Mr. Kramer joined the Company as Vice President and General Manager of Manufacturing and was named Executive Vice President and General Manager of Manufacturing in 1984. Prior to his employment by the Company, Mr. Kramer was the Director of Operations for the Utility Communications Systems Group of Rockwell International Corp. Mr. Kramer graduated from the University of Pittsburgh with a B.S. degree in Industrial Engineering
and from Purdue University with a M.S. degree in Industrial Administration. Mr. Kramer has served as Director of Barnes Group Inc., a publicly traded aerospace and industrial manufacturing company (NYSE: B), since 2012.
Vincent D. Mattera, Jr. has been employed by the Company since 2004 and has been its President and Chief Operating Officer since 2013. Dr. Mattera has served as a Director of the Company since 2012. Previously, Dr. Mattera served as Executive Vice President from 2010 to 2013 and was Vice President of the Advanced Products Group from 2004 to 2010. Dr. Mattera served as Vice President, Undersea Optical Transport, Agere Systems (formerly Lucent Technologies, Microelectronics and Communications Technologies Group) from 2001 to 2004. Previously, Dr. Mattera served as Optoelectronic Device Manufacturing and Process Development Vice President with Lucent Technologies, Microelectronics and Communications Technologies Group from 2000 until 2001. He was Director of Optoelectronic Device Manufacturing and Development at Lucent Technologies, Microelectronics Group from 1997 to 2000. From 1995 to 1997 he served as Director, Indium Phosphide Semiconductor Laser Chip Design and Process Development with Lucent Technologies, Microelectronics Group. From 1984 to 1995 he held management positions with AT&T Bell Laboratories. Dr. Mattera holds B.S. and Ph.D. degrees in Chemistry from the University of Rhode Island and Brown University, respectively.
Mary Jane Raymond has been employed by the Company as its Chief Financial Officer and Treasurer since March 2014. Previously, Ms. Raymond was the Chief Financial Officer of Hudson Global, Inc. from 2005 to 2013. Ms. Raymond was the Chief Risk Officer and Vice President and Corporate Controller at Dun and Bradstreet, Inc. from 2002 to 2005. Additionally, she was the Vice President, Merger Integration at Lucent Technologies, Inc. from 1997 to 2002 and held several management positions at Cummins Engine Company from 1988 to 1997. Ms. Raymond holds a B.A. degree in Public Management from St. Joseph’s University, and an MBA from Stanford University.
Giovanni Barbarossa has been employed by the Company since 2012 and has been Vice President, II-VI Laser Solutions segment since 2014 and Chief Technology Officer since 2012. Dr. Barbarossa was employed at Avanex Corporation from 2000-2009, serving in various executive positions in product development and general management, ultimately becoming its Chief Executive Officer. When Avanex merged with Bookham Technology plc, forming Oclaro Inc., Dr. Barbarossa became a member of the Board of Directors of Oclaro and served as such from 2009 to 2011. Dr. Barbarossa graduated from the University of Bari, Italy with a B.S. in Electrical Engineering and a Ph.D. in Photonics from the University of Glasgow, U.K.
David G. Wagner has been employed by the Company since 2008 and has been the Vice President, Human Resources since 2011 Prior to his employment with the Company, Mr. Wagner was employed with Owens Corning (NYSE: OC) from 1985-2008, serving in various human resource management positions, ultimately becoming the Vice President, Human Resources for Owens Corning’s global sales forces. Mr. Wagner graduated with a B.S. degree in Human Resources Management from Juniata College in 1985.
PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s Common Stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “IIVI.” The following table sets forth the range of high and low closing saletrading prices per share of the Company’s Common Stock for the fiscal periods indicated, as reported by NASDAQ.
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| High |
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| Low |
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| High |
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| Low |
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Fiscal 2015 |
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Fiscal 2017 |
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First Quarter |
| $ | 14.71 |
|
| $ | 11.77 |
|
| $ | 24.46 |
|
| $ | 17.76 |
|
Second Quarter |
| $ | 14.44 |
|
| $ | 10.95 |
|
| $ | 32.45 |
|
| $ | 23.80 |
|
Third Quarter |
| $ | 18.70 |
|
| $ | 12.67 |
|
| $ | 41.10 |
|
| $ | 29.10 |
|
Fourth Quarter |
| $ | 19.53 |
|
| $ | 17.68 |
|
| $ | 36.35 |
|
| $ | 27.25 |
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| High |
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| Low |
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| High |
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| Low |
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Fiscal 2014 |
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Fiscal 2016 |
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First Quarter |
| $ | 20.76 |
|
| $ | 16.51 |
|
| $ | 19.30 |
|
| $ | 15.04 |
|
Second Quarter |
| $ | 19.16 |
|
| $ | 15.25 |
|
| $ | 19.46 |
|
| $ | 15.69 |
|
Third Quarter |
| $ | 17.47 |
|
| $ | 14.72 |
|
| $ | 22.18 |
|
| $ | 16.09 |
|
Fourth Quarter |
| $ | 15.62 |
|
| $ | 12.79 |
|
| $ | 23.39 |
|
| $ | 17.91 |
|
On August 20, 2015,14, 2017, the last reported sale price for the Company’s Common Stock was $17.82$36.60 per share. As of such date, there were approximately 785771 holders of record of our Common Stock. The Company historically has not paid cash dividends and does not presently anticipate paying cash dividends in the future.
ISSUER PURCHASES OF EQUITY SECURITIES
In August 2014, the Board of Directors authorized the Company to purchase up to $50.0 million of its Common Stock. The repurchase program calls for shares to be purchased in the open market or in private transactions from time to time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30, 20152017, the Company purchased 936,049did not repurchase shares of its Common Stock pursuant to the repurchase program. Since inception of the repurchase program, the Company has repurchased 1,316,587 shares of its Common Stock for approximately $12.7 million.$19.0 million in the aggregate.
The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended June 30, 2015.2017.
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| Total Number of |
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| Dollar Value of |
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| Shares Purchased |
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| Shares That May |
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| as Part of Publicly |
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| Yet be Purchased |
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| Total Number of |
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| Average Price Paid |
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| Announced Plans or |
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| Under the Plan or |
| ||||
Period |
| Shares Purchased |
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| Per Share |
|
| Programs (a) |
|
| Program |
| ||||
April 1, 2015 to April 30, 2015 |
|
| - |
|
| $ | - |
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| - |
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| $ | 37,255,646 |
|
May 1, 2015 to May 31, 2015 | 432 |
| (a) | $ | 18.66 |
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|
| - |
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| $ | 37,255,646 |
| ||
June 1, 2015 to June 30, 2015 |
|
| - |
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| $ | - |
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| - |
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| $ | 37,255,646 |
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| Total Number of |
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| Dollar Value of |
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| Shares Purchased |
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| Shares That May |
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| Total Number of |
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| Average Price Paid |
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| Announced Plans or |
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| Under the Plan or |
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Period |
| Shares Purchased |
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| Per Share |
|
| Programs (a) |
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| Program |
| ||||
April 1, 2017 to April 30, 2017 |
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| 2,698 |
| (1) | $ | 32.50 |
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| - |
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| $ | 30,906,904 |
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May 1, 2017 to May 31, 2017 | 3,873 |
| (2) | $ | 33.25 |
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| - |
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| $ | 30,906,904 |
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June 1, 2017 to June 30, 2017 |
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| 15,069 |
| (3) | $ | 34.05 |
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| - |
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| $ | 30,906,904 |
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| Includes |
(2) | Includes 3,873 shares of our Common Stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted share awards. |
(3) | Includes 15,069 shares of our Common Stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted share awards. |
The information incorporated by reference in Item 12 of this Annual Report on Form 10-K from our 20152017 Proxy Statement under the heading “Equity Compensation Plan Information” is hereby also incorporated by reference into this Item 5.
PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on the Company’s Common Stock with the cumulative total shareholder return of the Nasdaq Composite Index and with a peer group of companies constructed by the Company for the period from June 30, 2010,2012, through June 30, 2015.2017. The Company’s current fiscal year peer group includes Cabot Microelectronics Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., Silicon Laboratories, Lumentum Holdings Inc., Finisar Corp, Coherent, Inc. and Corning Inc. The Company’s prior fiscal year peer group reflected below consisted of Cabot Microelectronics Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., and Silicon Laboratories. The prior year peer group does not include Rofin-Sinar Technologies, Inc., which previously had been included in the Company’s peer group, as this company was acquired during fiscal year 2017 and Silicon Laboratories.ceased to be publicly traded.
Item 6. | SELECTED FINANCIAL DATA |
Five-Year Financial Summary
The following selected financial data for the five fiscal years presented are derived from II-VI’sthe Company’s audited Consolidated Financial Statements as adjusted to reflect the Company’s II-VI Performance Metals tellurium product line as a discontinued operation.Statements. All periods presented have been adjusted to present this product line on a discontinued operations basis. The data should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30, |
| 2015 |
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| 2013 |
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| 2012 |
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| 2016 |
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($000 except per share data) |
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Statement of Earnings |
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Net revenues from continuing operations |
| $ | 741,961 |
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| $ | 683,261 |
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| $ | 551,075 |
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| $ | 516,403 |
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| $ | 486,638 |
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| $ |
| 972,046 |
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| $ |
| 827,216 |
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| $ |
| 741,961 |
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| $ |
| 683,261 |
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| $ |
| 551,075 |
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Earnings from continuing operations |
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| 65,975 |
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| 38,316 |
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| 58,720 |
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| 70,718 |
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| 79,676 |
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| 95,274 |
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| 65,486 |
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| 65,975 |
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| 38,316 |
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| 58,720 |
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Earnings (loss) from discontinued operations |
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| - |
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| 133 |
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| (6,789 | ) |
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| (9,443 | ) |
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| 3,342 |
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| - |
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| - |
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| - |
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| 133 |
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| (6,789 | ) |
Net earnings attributable to redeemable noncontrolling interest |
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| - |
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| - |
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| 1,118 |
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| 969 |
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| 336 |
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| - |
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| - |
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| - |
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| 1,118 |
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Net earnings attributable to II-VI Incorporated |
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| 65,975 |
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| 38,449 |
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| 50,813 |
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| 60,306 |
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| 82,682 |
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| 95,274 |
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| 65,486 |
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| 65,975 |
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| 38,449 |
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| 50,813 |
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Basic earnings (loss) per shares: |
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Continuing operations |
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| 1.08 |
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| 0.62 |
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| 0.92 |
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| 1.10 |
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| 1.28 |
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| 1.52 |
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| 1.07 |
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| 1.08 |
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| 0.62 |
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| 0.92 |
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Discontinued operation |
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| - |
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| - |
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| (0.11 | ) |
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| (0.15 | ) |
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| 0.05 |
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| - |
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| - |
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| - |
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| - |
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| (0.11 | ) |
Consolidated |
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| 1.08 |
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| 0.62 |
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| 0.81 |
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| 0.96 |
|
|
| 1.33 |
|
|
|
| 1.52 |
|
|
|
| 1.07 |
|
|
|
| 1.08 |
|
|
|
| 0.62 |
|
|
|
| 0.81 |
|
Diluted earnings (loss) per shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
| 1.05 |
|
|
| 0.60 |
|
|
| 0.90 |
|
|
| 1.08 |
|
|
| 1.25 |
|
|
|
| 1.48 |
|
|
|
| 1.04 |
|
|
|
| 1.05 |
|
|
|
| 0.60 |
|
|
|
| 0.90 |
|
Discontinued operation |
|
| - |
|
|
| - |
|
|
| (0.11 | ) |
|
| (0.15 | ) |
|
| 0.05 |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| (0.11 | ) |
Consolidated |
|
| 1.05 |
|
|
| 0.60 |
|
|
| 0.80 |
|
|
| 0.94 |
|
|
| 1.30 |
|
|
|
| 1.48 |
|
|
|
| 1.04 |
|
|
|
| 1.05 |
|
|
|
| 0.60 |
|
|
|
| 0.80 |
|
Diluted weighted average shares outstanding |
|
| 62,586 |
|
|
| 63,686 |
|
|
| 63,884 |
|
|
| 64,385 |
|
|
| 63,612 |
|
|
|
| 64,507 |
|
|
|
| 62,909 |
|
|
|
| 62,586 |
|
|
|
| 63,686 |
|
|
|
| 63,884 |
|
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2012 |
|
| 2011 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||||||||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
| $ | 373,812 |
|
| $ | 370,666 |
|
| $ | 366,710 |
|
| $ | 326,645 |
|
| $ | 304,573 |
|
| $ |
| 517,344 |
|
| $ |
| 411,721 |
|
| $ |
| 373,812 |
|
| $ |
| 370,666 |
|
| $ |
| 366,710 |
|
Total assets |
|
| 1,058,164 |
|
|
| 1,071,926 |
|
|
| 863,802 |
|
|
| 706,486 |
|
|
| 647,202 |
|
|
|
| 1,477,297 |
|
|
|
| 1,211,981 |
|
|
|
| 1,057,273 |
|
|
|
| 1,070,753 |
|
|
|
| 863,317 |
|
Long-term debt |
|
| 155,957 |
|
|
| 221,960 |
|
|
| 114,036 |
|
|
| 12,769 |
|
|
| 15,000 |
|
|
|
| 322,022 |
|
|
|
| 215,307 |
|
|
|
| 155,066 |
|
|
|
| 220,787 |
|
|
|
| 113,551 |
|
Total debt |
|
| 175,957 |
|
|
| 241,960 |
|
|
| 114,036 |
|
|
| 12,769 |
|
|
| 18,729 |
|
|
|
| 342,022 |
|
|
|
| 235,307 |
|
|
|
| 175,066 |
|
|
|
| 240,787 |
|
|
|
| 113,551 |
|
Retained earnings |
|
| 587,302 |
|
|
| 521,327 |
|
|
| 482,878 |
|
|
| 434,940 |
|
|
| 377,264 |
|
|
|
| 748,062 |
|
|
|
| 652,788 |
|
|
|
| 587,302 |
|
|
|
| 521,327 |
|
|
|
| 482,878 |
|
Shareholders' equity |
|
| 729,081 |
|
|
| 675,043 |
|
|
| 636,108 |
|
|
| 586,226 |
|
|
| 521,273 |
|
|
|
| 900,563 |
|
|
|
| 782,338 |
|
|
|
| 729,081 |
|
|
|
| 675,043 |
|
|
|
| 636,108 |
|
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “projects” or similar expressions. Actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those potential risks set forth in Item 1A, of this Annual Report on Form 10-K, which are incorporated herein by reference.
Overview
The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing engineered materials and opto-electronicoptoelectronic components and devices for precision use in industrial materials processing, optical communications, military,consumer electronics, semiconductor medicalequipment, life sciences and life science, and consumerautomotive applications. We also generate revenue, earnings and cash flows from government funded research and development contracts relating to the development and manufacture of new technologies, materials and products.
Our customer base includes OEMs, laser end users,end-users, system integrators of high-power lasers, manufacturers of equipment and devices for the industrial, optical communications, military, semiconductor, medical and life science markets, consumer, U.S. government prime contractors, various U.S. Government agencies and thermoelectric integrators.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the Company’s discussion and analysis of its financial condition and results of operations requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its Consolidated Financial Statements and accompanying notes. Note 1 of the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K describes the significant accounting policies and accounting methods used in the preparation of the Company’s Consolidated Financial Statements. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.
Management believes the Company’s critical accounting estimates are those related to revenue recognition, allowance for doubtful accounts, warranty reserves, inventory valuation, business combinations, valuation of long-lived assets including acquired intangibles and goodwill, accrual of bonus and profit sharing estimates, accrual of income tax liability estimates and accounting for share-based compensation. Management believes these estimates to be critical because they are both important to the portrayal of the Company’s financial condition and results of operations, and they require management to make judgments and estimates about matters that are inherently uncertain.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the foregoingrelated disclosure. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as described above. Changes in estimates used in these and other items could have a material impact on the financial statements.
The Company recognizes revenues in accordance with U.S. GAAP. Revenue Recognition
Revenues for product shipments are realizable when we have persuasive evidence of a sales arrangement, the product has been shipped or delivered, the sales price is fixed or determinable and collectability is reasonably assured. Title and risk of loss passes from the Company to its customer at the time of shipment in most cases, with the exception of certain customers for whom customer’s title does not pass and revenue is not recognized until the customer has received the product at its physical location.
The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical locations. Further for the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions, credits and discounts, rebates and price protection or other similar privileges. Our distributors and agents are not granted price protection. Our distributors and agents, who comprise less than 10% of consolidated revenue, have no additional product return rights beyond the right to return defective products covered by our warranty policy. We believe our revenue recognition practices are consistent with Staff Accounting Bulletin (“SAB”) 104 and that we have adequately considered the requirements of Accounting Standards Codification (“ASC”) 605 Revenue Recognition. Revenues generated from transactions other than product shipments are contract-related and have historically accounted for less than 2%1% of the Company’s consolidated revenues.
Allowance for Doubtful Accounts
The Company establishes an allowance for doubtful accounts based on historical experience and believes the collection of revenues, net of this reserve, is reasonably assured. The allowance for doubtful accounts is an estimate for potential non-collection of accounts receivable based on historical experience. The Company did not experience a non-collection of accounts receivable materially affecting its financial condition or results of operations as of and for each of the fiscal years ended June 30, 2015, 20142017, 2016 and 2013.2015. If the financial condition of the Company’s customers were to deteriorate, causing an impairment of their ability to make payments, additional provisions for bad debts could be required in future periods. The Company’s allowance for doubtful accounts balance at June 30, 2015 was approximately $1.0 million. The Company’s allowance for doubtful accounts reserve estimates have historically been proven to be materially correct based upon actual charges incurred.
Warranty Reserve
The Company records a warranty reserve as a charge against earnings based on a historical percentage of revenues utilizing actual returns over a period that approximates historical warranty experience. If actual returns in the future are not consistent with the historical data used to calculate these estimates, additional warranty reserves could be required. The Company’s warranty reserve balance at June 30, 2015 was approximately $3.3 million. The Company’s warranty reserve estimates have historically been proven to be materially correct based upon actual charges incurred.
Inventory Reserves
The Company generally records an inventory reserve as a charge against earnings for all products on hand for more than twelve12 to eighteen24 months, depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative
customers. An additional reserve ismay be recorded for products on hand that are in excess of product sold to customers over the same periods noted above. If actual market conditions are less favorable than projected, additional inventory reserves may be required. The Company’s inventory reserve estimates have historically been proven to be materially correct based upon actual write-offs incurred.
Business Acquisitions
The Company accounts for business acquisitions by establishing the acquisition-date fair value as the measurement for all assets acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting.
Goodwill and Indefinite-Lived Intangibles
The Company tests goodwill and indefinite-lived intangible assets on an annual basis for impairment or when events or changes in circumstances indicate that goodwill or indefinite-lived intangible assets might be impaired. Other intangible assets are amortized over their estimated useful lives. The determination of the estimated useful lives of other intangible assets and whether goodwill or indefinite-lived intangibles are impaired requires us to make judgments based upon long-term projections of future performance. Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit considering historical and anticipated results and general economic and market conditions. The fair values of the reporting units are determined using a discounted cash flow analysis based on historical and projected financial information as well as market analysis. The carrying value of goodwill at June 30, 2015, 2014 and 2013 was $195.9 million, $196.1 million and $123.4 million, respectively. The annual goodwill impairment analysis considers the financial projections of the reporting unit based on our most recently completed long-term strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting unit. Changes in our internal structuring, financial performance, judgments and projections could result in an impairment of goodwill or indefinite-lived intangible assets. As of June 30, 2017, no reporting units are at risk for impairment as the fair value of the reporting units substantially exceed the carrying value.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise, the Company will forego the two-step process and does not need to perform any further testing.
As a result of the July 1, 2014 segment realignment, the Company reviewed the recoverability of the carrying value of goodwill at its reporting units. The Company had the option to perform a qualitative assessment of goodwill prior to completing the quantitative test to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount, including goodwill and other intangible assets. Due to the short duration of time since the Company’s most recent annual quantitative goodwill impairment test, which was completed on April 1, 2014, the Company elected to perform a qualitative test on its reporting units as part of the segment realignment. The Company did not record any impairment of goodwill as a result of the segment realignment, as the qualitative assessment did not indicate deterioration in the fair value of its reporting units since the most recent annual impairment test.
As a result of the purchase price allocations from our prior acquisitions, and due to our decentralized structure, our goodwill is included in multiple reporting units which are the same as the Company’s operating segments. Due to the cyclical nature of our business, and the other factors described in the section on Risk Factors set forth in Item 1A, of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically suffer from downturns in customer demand, operational challenges and other factors. These factors may have a relatively more pronounced impact on the individual reporting units as compared to the Company as a whole, and might adversely affect the fair value of the individual reporting units. If material adverse conditions occur that impact one or more of our reporting units, our determination of future fair value may not support the carrying amount of one or more of our reporting units, and the related goodwill would need to be impaired.
Based upon our annual quantitative goodwill and indefinite-lived intangible assets impairment test,tests, the Company did not record any impairments of goodwill or indefinite-lived intangible assets for the fiscal years ended June 30, 2015, 2014 or 2013.
As the estimated fair value of the II-VI Photonics reporting unit was approximately 5% greater than its carrying value, the Company has concluded that this reporting unit is at risk of not passing step one of future goodwill impairment tests. In the event of unfavorable changes to the existing assumptions used in the impairment test, such as the weighted average cost of capital (discount rate), growth rates and market multiples as well as changes in our internal structure, the carrying value of the Company’s goodwill could be impaired. Although the Company believes that the current assumptions and estimates are reasonable, supportable and appropriate, the II-VI Photonics reporting unit competes in a challenging environment with significant pricing pressure and rapidly changing technology and there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment test will prove to be accurate predictions of future performance.
During the year ended June 30, 2015, the Company recognized an impairment charge on two of its indefinite lived trademarks in the II-VI Photonics reporting unit, as these trademarks were abandoned as a result of the Company’s re-branding efforts. Total impairment recorded during the year ended June 30, 2015 was $2.0 million, which represented the entire carrying value of these two trademarks2017.
Bonus and was recorded in Other expense (income), net in the Consolidated Statements of Earnings.Profit Sharing
The Company records certain bonus and profit sharing estimates as a charge against earnings. These estimates are adjusted to actual based on final results of operations achieved during the fiscal year. Certain partial bonus amounts are paid quarterly based on interim Companycompany performance, and the remainder is paid after the fiscal year end. Other bonuses are paid annually.
Income Taxes
The Company prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on these judgments and interpretations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities, which may result in future tax, interest and penalty assessments by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation and/or as concluded through the various jurisdictions’ tax court systems. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
The Company has recorded valuation allowances against certain of its deferred tax assets, primarily those that have been generated from net operating losses in certain foreign taxing jurisdictions.jurisdictions and acquired U.S. carryforwards. The Company adopted an accounting policy to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets. In evaluating whether the Company would more likely than not recover these deferred tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carry-forwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense.
In accordance with U.S. GAAP, theShare-Based Compensation
The Company recognizes share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company utilizedutilizes the Black-Scholes valuation model for estimating the fair value of stock optionshare-based equity expense using assumptions such as the risk-free interest rate, expected stock price volatility, expected stock option life and expected dividend yield. The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect at the time of grant related to the expected life of the options. Expected volatility is based on the historical volatility of the Company’s Common Stock over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield is zero, based on the fact the Company has never paid cash dividends and has no current intention to pay cash dividends in the future.
Fiscal Year 20152017 Compared to Fiscal Year 20142016
Effective July 1, 2014, theThe Company realignedaligns its organizational structure into the following three reporting segments for the purpose of making operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products. The Company is reporting financial information (revenue through operating income) for these new reporting segments in this Annual Report on Form 10-K, which management believes provides enhanced visibility and transparency into the operations, business drivers and the value of the enterprise.10-K.
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30, 20152017 and June 30, 20142016 ($ in millions except per share information):
|
| Year Ended |
|
| Year Ended |
|
| Year Ended |
|
| Year Ended |
| ||||||||||||||||||||
|
| June 30, 2015 |
| �� | June 30, 2014 |
|
| June 30, 2017 |
|
| June 30, 2016 |
| ||||||||||||||||||||
Bookings |
| $ | 761.7 |
|
|
|
|
|
| $ | 691.3 |
|
|
|
|
|
| $ | 1,072.2 |
|
|
|
|
|
| $ | 875.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| % of |
|
|
|
|
|
| % of |
|
|
|
|
|
| % of |
|
|
|
|
|
| % of |
| ||||
|
|
|
|
|
| Revenues |
|
|
|
|
|
| Revenues |
|
|
|
|
|
| Revenues |
|
|
|
|
|
| Revenues |
| ||||
Total Revenues |
| $ | 742.0 |
|
|
| 100.0 | % |
| $ | 683.3 |
|
|
| 100.0 | % | ||||||||||||||||
Total revenues |
| $ | 972.0 |
|
|
| 100.0 | % |
| $ | 827.2 |
|
|
| 100.0 | % | ||||||||||||||||
Cost of goods sold |
|
| 470.4 |
|
|
| 63.4 |
|
|
| 456.5 |
|
|
| 66.8 |
|
|
| 583.7 |
|
|
| 60.1 |
|
|
| 514.4 |
|
|
| 62.2 |
|
Gross margin |
|
| 271.6 |
|
|
| 36.6 |
|
|
| 226.7 |
|
|
| 33.2 |
|
|
| 388.3 |
|
|
| 39.9 |
|
|
| 312.8 |
|
|
| 37.8 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal research and development |
| 51.3 |
|
|
| 6.9 |
|
|
| 42.5 |
|
|
| 6.2 |
|
| 96.8 |
|
|
| 10.0 |
|
|
| 60.4 |
|
|
| 7.3 |
| ||
Selling, general and administrative |
| 143.5 |
|
|
| 19.3 |
|
|
| 137.7 |
|
|
| 20.2 |
|
|
| 176.0 |
|
|
| 18.1 |
|
|
| 160.6 |
|
|
| 19.4 |
| |
Interest and other, net |
|
| (2.3 | ) |
|
| (0.3 | ) |
|
| 0.8 |
|
|
| 0.1 |
|
|
| (3.3 | ) |
|
| (0.3 | ) |
|
| 1.9 |
|
|
| 0.2 |
|
Earnings before income tax |
|
| 79.1 |
|
|
| 10.7 |
|
|
| 45.6 |
|
|
| 6.7 |
|
|
| 118.8 |
|
|
| 12.2 |
|
|
| 89.9 |
|
|
| 10.9 |
|
Income taxes |
|
| 13.1 |
|
|
| 1.8 |
|
|
| 7.3 |
|
|
| 1.1 |
|
|
| 23.5 |
|
|
| 2.4 |
|
|
| 24.5 |
|
|
| 3.0 |
|
Earnings from Continuing Operations |
|
| 66.0 |
|
|
| 8.9 |
|
|
| 38.3 |
|
|
| 5.6 |
| ||||||||||||||||
Earnings from Discontinued Operation, net of income tax |
|
| - |
|
|
| - |
|
|
| 0.1 |
|
|
| - |
| ||||||||||||||||
Net Earnings |
| $ | 66.0 |
|
|
| 8.9 | % |
| $ | 38.4 |
|
|
| 5.6 | % | ||||||||||||||||
Net earnings |
| $ | 95.3 |
|
|
| 9.8 | % |
| $ | 65.5 |
|
|
| 7.9 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
| $ | 1.05 |
|
|
|
|
|
| $ | 0.60 |
|
|
|
|
| ||||||||||||||||
Diluted earnings per share |
| $ | 1.48 |
|
|
|
|
|
| $ | 1.04 |
|
|
|
|
|
Executive Summary
Net earnings for fiscal year 20152017 were $66.0$95.3 million ($1.051.48 per-share diluted), compared to $38.4$65.5 million ($0.601.04 per-share diluted) for the same period last fiscal year. DuringThe increase in net earnings for the fiscal year 2015, the Company began to realize synergies from prior year acquisitions, resulting in increased market share and revenues as well as operational efficiencies that are reflected in the Company’s 340 basis point increase in gross margin percentageended June 30, 2017 compared to fiscalthe same period last year 2014. Duringwas primarily the current fiscal year, the Company continued its restructuring program withinresult of increased revenues, favorable product mix at the II-VI Photonics segment and improved operational performance from all three segments. In particular, the Company has seen continued increased demand from the optical communications customer base as a result of continuation of the China broadband initiative, datacenter and U.S. metro upgrade cycles (including cable television). The Company’s II-VI Performance Products segments to right-sizeLaser Solutions segment realized increased demand for its business operations. Total after-tax restructuring charges recorded in fiscal year 2015 were $4.1 million compared to $3.4 million in fiscal year 2014.carbon dioxide (“CO2”), one-micron laser and diamond optics product lines. Net earnings were also favorably impacted inby the currentearnout and technology transfer income received as part of the sale of the RF business of ANADIGICS last fiscal year recorded in Other expense (income), net. The Company recorded $7.0 million or $0.09 per share diluted of other income related to these transactions. In addition, the Company benefitted from lower income tax expenses as a result of a one-time settlement relating toreversing certain payment obligations from prior year acquisitionsU.S. valuation allowances in conjunction with the acquisition of IPI. Partially offsetting the increase in net earnings were increased internal research and development expenses incurred in the amount of $7.1 million (after-tax) or $0.11 per share-diluted. Financial resultsII-VI Laser Solutions segment for fiscal year 2014 were negatively impacted by one-time transaction and purchase accounting expenses of approximately $8.0 million.the Company’s investment in the high-volume VCSELs platform.
Consolidated
Bookings. Bookings are defined as customer orders received that are expected to be converted to revenues over the next twelve12 months. For long-term customer orders, the Company does not include in bookings the portion of the customer order that is beyond twelve12 months, due to the inherent uncertainty of such an order that far out in the future. Bookings for the year ended June 30, 20152017 increased 10%22% to $761.7 million,$1.1 billion, compared to $691.3$875.3 million for the same period last fiscal year. The increase inCompany’s II-VI Photonics segment realized increased bookings was mostly attributableof $81.3 million, or 22%, over the same period last fiscal year due to a full year of bookingsincreased orders from the prior year acquisitions of II-VI Laser Enterpriseongoing Chinese broadband initiative, U.S. Metro, datacenter communications, and II-VI Network Solutions. In addition, the II-VI HIGHYAG business within thecontinued investment in undersea fiber optic networks. The Company’s II-VI Laser Solutions segment recordedrealized increased bookings of $60.8 million, or 20%, over the same period last fiscal year. The increase was driven by higher demand for high and low power laser optics, fiber beam delivery systemslaser and direct diode laser processing heads usedcomponents and optics and components supporting semiconductor photolithography. Additionally, the Company’s II-VI Performance Products segment realized increased bookings of $54.8 million, or 28% driven by increased demand for silicon carbide (“SiC”) substrates supporting radio frequency (“RF”) development and also power device products in automotive manufacturing.and industrial markets.
Revenues. Revenues for the year ended June 30, 20152017 increased 9%18% to $742.0$972.0 million, compared to $683.3$827.2 million for the prior fiscal year. The increase in revenues was mostly attributable to a full year of revenuesCompany has seen continued increased demand from the prior year acquisitionsoptical communications customer base as a result of continuation of the China broadband initiative, datacenter and U.S. metro upgrade cycles (including cable television). In addition, the Company’s II-VI Laser Enterprise and II-VI Network Solutions. In addition, increased revenues at II-VI HIGHYAG from the automotive markets as well as higher revenues at II-VI Photonics driven bySolutions segment saw increased demand across a variety offor its products such as optical componentsaddressing CO2, one-micron laser and modules required by global cable television operators for their broadband initiatives and ongoing investments drove this increase. Somewhat offsetting these higher revenue levels was a decrease in shipment volumes at the Company’s military related businesses, driven primarily by reduced U.S. defense spending. diamond optic products.
Gross margin. Gross margin for the year ended June 30, 20152017 was $271.6$388.3 million, or 36.6%39.9%, of total revenues, compared to $226.7$312.8 million, or 33.2%37.8%, of total revenues for the same period last fiscal year. The increaseimprovement in gross margin during the current fiscal year was primarily the result of thedriven by incremental marginmargins realized on the 9%Company’s higher revenue increase during this period andlevels which increased approximately $145.0 million from the elimination of unprofitable product lines. In addition, as noted above, the Company has begun to realize synergies and operational improvements in connection with its fiscalprior year 2014 acquisitions, which resulted in higher margin levels. Gross margin for fiscal year 2014 was
negatively impacted by a one-time purchase accounting fair market inventory adjustment of $4.1 million relating to the fiscal year 2014 acquisitions as well as favorable product lines with lower margins.mix primarily in the II-VI Photonics segment.
Internal research and development. Company-funded internal research and development expenses for the fiscal year ended June 30, 20152017 were $51.3$96.8 million, or 6.9%10.0% of revenues, compared to $42.5$60.4 million, or 6.2%7.3% of revenues, last fiscal year. The increase in internal research and development expense for fiscal year 2017 is the result of the Company’s continued investments in the development of the technology required to produce new optoelectronic devices in large volume for future applications as well as new product introductions across the Company’s segments. The Company anticipates the internal research and development expenses as a percentage of revenues into approximate the current year was duerun rate as the Company continues to a full year of internal research and development from businesses acquired in prior fiscal years, which invest in higher levels of research and development activity to support their ongoing product development of fiber and direct diode laser components, fiber optical amplifiers and micro-optics.its growth strategies across its segments.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 20152017 were $143.5$176.0 million, or 19.3%18.1% of revenues, compared to $137.7$160.6 million, or 20.2%19.4% of revenues, last fiscal year. In relative dollar amounts, theThe increase in SG&A expenses wasin absolute dollars is the result of increased expenses incurred to support an overalla higher revenue base increase from the prior fiscal year.requiring more level of SG&A support. The Company experienced favorable leverage improvement with respect to SG&A expenses as a percentageresult of revenues throughcapitalizing on synergies cost savings and restructuring programs undertaken duringcreated from the current fiscal year. Company’s recent acquisitions over the past several years.
Interest and other, net. Interest and other, net for the year ended June 30, 20152017 was income of $2.3$3.3 million compared to expense of $0.8$1.9 million last fiscal year. Other income of $2.3 million for the current fiscal year was primarily the result of a one-time settlement income of $7.7 million (pre-tax, $7.1 million after tax) related to certain payment obligations from the prior fiscal year acquisitions offset by foreign currency losses of $2.2 million due to weakened foreign currencies against the U.S. dollar and a $2.0 million impairment recorded during the current year for the write-off of certain tradenames in the II-VI Photonics segment. Included in interest and other, net for the year ended June 30, 2015 were earnings from the Company’s equity investment in Guangdong Fuxin Electronic Technology (“Fuxin”), interest expense on borrowings, interest income on excess cash reserves, unrealized gains on the Company sponsored deferred compensation plan, foreign currency gains and losses. losses and contingent earnout and technology transfer income from the sale of the ANADIGICS RF business that occurred in June 2016. In particular, for the fiscal year ended June 30, 2017, other income consisted primarily of foreign currency gains of $1.3 million, income from the residual agreements on the sale of the RF business noted above of $7.0 million, and interest income of $0.9 million on the Company’s excess cash reserves offset by interest expense of $6.8 million on outstanding borrowings. The prior year’s expense of $1.9 million included $3.1 million of interest expense on the Company’s
outstanding borrowings offset by $1.2 million of interest income on the Company’s excess cash reserves. The increase in interest expense in the current fiscal year is the result of higher levels of outstanding borrowings during the current fiscal year.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 20152017 was 16.6%19.8%, compared to an effective tax rate of 16.0%27.3% last fiscal year. The variation between the Company’s effective tax rate from continuing operations and the U.S. statutory rate of 35% was primarily due to the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The lower year-to-date effective tax rate betweenwas primarily driven by the two fiscal years was consistent.
Discontinued operation. During December 2013,reversal of certain valuation allowances triggered by the Company completedacquisition of IPI which generated deferred tax liabilities which offset the discontinuation of its tellurium product line by exiting all business activities associated with this product. This product line was previously serviced by II-VI Performance Metals, which is part of the II-VI Performance Products segment. Financial information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K has been adjusted to properly reflect the tellurium product line as a discontinued operation for all periods presented. The revenues and earnings (losses) of the tellurium product line reflected as a discontinued operation for the periods presented are as follows (in millions):reserved deferred tax asset.
June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Revenues |
| $ | - |
|
| $ | 1.8 |
|
| $ | 7.3 |
|
Earnings (loss) from discontinued operation before income taxes |
|
| - |
|
|
| 0.1 |
|
|
| (6.8 | ) |
Income tax benefit (expense) |
|
| - |
|
|
| - |
|
|
| - |
|
Earnings (loss) from discontinued operation, net of taxes |
| $ | - |
|
| $ | 0.1 |
|
| $ | (6.8 | ) |
Segment Reporting
Bookings, revenues and operating income for each of the Company’s reportable segments are discussed below. Operating income differs from income from operations in that operating income excludes certain operational expenses included in other expense (income) – net as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See “Note 11. Segment and Geographic Reporting,” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference.
II-VI Laser Solutions ($ in millions)
|
|
|
|
|
|
|
|
|
| % |
| |||||||||||||
|
| Year Ended |
|
| % |
|
| Year Ended |
|
| Increase |
| ||||||||||||
|
| June 30, |
|
| Increase |
|
| June 30, |
|
| (Decrease) |
| ||||||||||||
|
| 2015 |
|
| 2014 |
|
|
|
|
|
| 2017 |
|
| 2016 |
|
|
|
|
| ||||
Bookings |
| $ | 284.8 |
|
| $ | 262.8 |
|
|
| 8 | % |
| $ | 366.8 |
|
| $ | 306.0 |
|
|
| 20 | % |
Revenues |
| $ | 287.9 |
|
| $ | 254.4 |
|
|
| 13 | % |
| $ | 339.3 |
|
| $ | 303.0 |
|
|
| 12 | % |
Operating income |
| $ | 55.0 |
|
| $ | 24.5 |
|
|
| 124 | % |
| $ | 30.9 |
|
| $ | 36.2 |
|
|
| (15 | %) |
The Company’s II-VI Laser Solutions segment includes the combined operations of II-VI Infrared Optics, II-VI HIGHYAG, II-VI Laser Enterprise, II-VI SuwtechLaser Systems Group, II-VI OED, and II-VI LaserTech.EpiWorks. The Company acquired II-VI EpiWorks on February 1, 2016 and II-VI OptoElectronic Devices Division, on March 15, 2016.
Bookings for the fiscal year ended June 30, 20152017 for II-VI Laser Solutions increased 8%20% to $284.8$366.8 million, compared to $262.8$306.0 million last fiscal year. TheBookings included $27.2 million for fiscal year 2017 and $14.3 million for fiscal year 2016, respectively, attributed to the acquisitions of II-VI EpiWorks and II-VI OED. Exclusive of acquisitions, the increase in bookings was due in part to higher order levels at II-VI HIGHYAG, which continues to grow its product offerings intofor the one-micron fiber laser market, for fiber beam delivery systems and for laser processing heads used in automotive manufacturing. In addition, the II-VI Laser Solutions segment recorded a full year of bookings from the priorcurrent fiscal year acquisition of II-VI Laser Enterprise, which has experienced increasedwas driven by higher demand for products in the direct diodeCO2 and fiber laser and direct diode laser components markets.and photolithography related products, including diamond product optics.
Revenues for the fiscal year ended June 30, 20152017 for II-VI Laser Solutions increased 13%12% to $287.9$339.3 million, compared to revenues of $254.4$303.0 million last fiscal year. TheRevenues included $24.0 million for fiscal 2017 and $13.9 million for fiscal year 2016, respectively, attributed to the recent acquisitions. Exclusive of acquisitions, the increase in revenues for the fiscal year ended June 30, 2017 was the result of increased shipment volumes of the segment’s fiber beam delivery systemshigher demand for high and low power laser process heads from II-VI HIGHYAG as well as a full year of revenues from the prior fiscal year acquisition of II-VI Laser Enterprise. optics, one-micron laser applications and semiconductor photolithography tools and precision optics in laser applications up to 1 kilowatt for marking and engraving.
Operating income for the fiscal year ended June 30, 20152017 for II-VI Laser Solutions increased 124%decreased 15% to $55.0$30.9 million, compared to $24.5$36.2 million last fiscal year. The increase in segment earnings was the result of higher revenues as well as gross margin improvements from II-VI Laser Enterprise, as this business unit has begun to realize certain operational efficiencies and acquisition related synergies. Operating income for fiscal year 2014 was negatively impacted by transaction expenses of $3.9the segment’s ongoing internal research and development investments for its new optoelectronic laser platform. During the current year, this expense increased approximately $30.2 million $2.5 million of purchase accounting relating toover the fair market inventory adjustment and $2.0 million of restructuring efforts at II-VI Laser Enterprise.prior year.
II-VI Photonics ($ in millions)
|
| Year Ended |
|
| % |
|
| Year Ended |
|
| % |
| ||||||||||||
|
| June 30, |
|
| Increase |
|
| June 30, |
|
| Increase |
| ||||||||||||
|
| 2015 |
|
| 2014 |
|
|
|
|
|
| 2017 |
|
| 2016 |
|
|
|
|
| ||||
Bookings |
| $ | 282.9 |
|
| $ | 220.2 |
|
|
| 28 | % |
| $ | 453.5 |
|
| $ | 372.2 |
|
|
| 22 | % |
Revenues |
| $ | 260.8 |
|
| $ | 216.5 |
|
|
| 20 | % |
| $ | 418.5 |
|
| $ | 325.9 |
|
|
| 28 | % |
Operating income (loss) |
| $ | 7.2 |
|
| $ | (0.1 | ) |
|
| 7300 | % | ||||||||||||
Operating income |
| $ | 63.0 |
|
| $ | 37.8 |
|
|
| 67 | % |
The Company’s II-VI Photonics segment includes the combined operations of II-VI Photop and II-VI Optical Communications.
Bookings for the year ended June 30, 20152017 for II-VI Photonics increased 28%22% to $282.9$453.5 million, compared to $220.2$372.2 million for lastthe prior fiscal year. The increase in bookings during the current fiscal year was duethe result of increased orders from the ongoing Chinese broadband initiative, U.S. Metro, datacenter communications, and the continued investment in undersea fiber optic networks. The broadband China initiative continued to increasedincrease demand for a variety of the segment’s transport and amplification component products, such asparticularly 980nm pumps, optical channel monitors and integrated passive components and modules driven by broadband initiatives, development of next generation wireless networks and increasing bandwidth trendsused in the datacenter and cloud applications.optical communications. In addition, the segment recorded a full year of bookings from the prior fiscal year acquisition of II-VI Network Solutions.saw increased demand for its infrared optics and industrial filters.
Revenues for the year ended June 30, 20152017 for II-VI Photonics increased 20%28% to $260.8$418.5 million, compared to $216.5$325.9 million for last fiscal year. The increase in revenues was dueCompany continued to realize increased customer demand for optical filters, optical components and assemblies, pump lasers and fiber amplifier modules that serve multiple markets. In addition, the segment recorded a full year of revenues from the priorbroadband China initiative as China continues to expand its geographical broadband networks. In addition, increased market share gains in the datacenter communications market and undersea fiber optic networks and new product introductions fueled the higher revenues during the fiscal year acquisition of II-VI Network Solutions.ended June 30, 2017.
Operating income for the year ended June 30, 20152017 for II-VI Photonics increased 7300%67% to $7.2$63.0 million, compared to an operating lossincome of $(0.1)$37.8 million last fiscal year. The improvementincrease in operating income was attributed primarily due to incremental margin realized on increased revenues, and favorablethe higher revenue volume as well as higher margin product mix, towardsincluding terrestrial and submarine 980nm pumps and amplifiers, and new product introductions which have higher margin products, operational efficiencies and the absence of certain one-time purchase accounting fair market inventory adjustments that occurred in fiscal 2014, offset by $4.5 million of restructuring expenses to “right-size” its business in fiscal 2015. During fiscal year 2014, one-time fair market inventory purchase accounting adjustments totaled $1.6 million. profiles.
II-VI Performance Products ($ in millions)
|
| Year Ended |
|
| % |
|
| Year Ended |
|
| % |
| ||||||||||||
|
| June 30, |
|
| (Decrease) |
|
| June 30, |
|
| Increase |
| ||||||||||||
|
| 2015 |
|
| 2014 |
|
|
|
|
|
| 2017 |
|
| 2016 |
|
|
|
|
| ||||
Bookings |
| $ | 194.0 |
|
| $ | 208.3 |
|
|
| (7 | %) |
| $ | 251.9 |
|
| $ | 197.1 |
|
|
| 28 | % |
Revenues |
| $ | 193.3 |
|
| $ | 212.4 |
|
|
| (9 | %) |
| $ | 214.2 |
|
| $ | 198.3 |
|
|
| 8 | % |
Operating income |
| $ | 14.6 |
|
| $ | 22.1 |
|
|
| (34 | %) |
| $ | 21.6 |
|
| $ | 17.8 |
|
|
| 21 | % |
The Company’s II-VI Performance Products segment includes the business units of II-VI Marlow, II-VI M Cubed, II-VI Advanced Materials, II-VI Optical Systems and II-VI Performance Metals.
Bookings for the year ended June 30, 20152017 for II-VI Performance Products decreased 7%increased 28% to $194.0$251.9 million, compared to $208.3$197.1 million for last fiscal year. The decreaseincrease in bookings related to lower order volumes of military-related products as a result offor the decline in overall defense spending and funding constraints specific to certain U.S. military programs, as well as softness in the semiconductor capital equipment market. The decrease in bookings was somewhat offsetyear ended June 30, 2017 were driven by increasedincreasing demand for SiC substrates addressing high-power high-frequency semiconductor devices.for RF and power applications supporting growth in the 4G base station market, and supporting development of power device products in automotive and industrial markets as well as increased demand for EUV lithography wafer handling components for the segment’s reaction bonded SiC material.
Revenues for the year ended June 30, 20152017 for II-VI Performance Products decreased 9%increased 8% to $193.3$214.2 million, compared to $212.4$198.3 million for last fiscal year. The decreaseincrease in revenues for the year ended June 30, 2017 was due to lower shipment volumes of military related products from lower overall defense spending as well as lower shipments to customersdriven by continued growth in the semiconductor capital equipment markets. The decrease4G base station market which is expanding geographically. Revenue growth was also driven by increasing demand for 150mm power device products as the market enters the manufacturing phase in revenues was somewhat offset by higher revenuesthe transition from 100mm to 150mm SiC substrates. In addition, the segment’s SiC substrates.semiconductor product offerings experienced increased demands as EUV lithography begins to ramp as part of its anticipated adoption.
Operating income for the year ended June 30, 20152017 for II-VI Performance Products decreased 34%increased 21% to $14.6$21.6 million, compared to $22.1$17.8 million for last fiscal year. The decrease in operating income was a result of lowerIncremental margins on higher segment revenues during the current fiscal year as well as restructuring charges of $1.1 million relatingled by SiC substrate revenues contributed to the consolidation of the Company’s military-related businesses.increased operating income.
Fiscal Year 20142016 Compared to Fiscal Year 20132015
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30, 20142016 and 2013.2015. ($ millions, except per share information):
|
| Year Ended |
|
| Year Ended |
|
| Year Ended |
|
| Year Ended |
| ||||||||||||||||||||
|
| June 30, 2014 |
|
| June 30, 2013 |
|
| June 30, 2016 |
|
| June 30, 2015 |
| ||||||||||||||||||||
Bookings |
| $ | 691.3 |
|
|
|
|
|
| $ | 521.1 |
|
|
|
|
|
| $ | 875.3 |
|
|
|
|
|
| $ | 761.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| % of |
|
|
|
|
|
| % of |
|
|
|
|
|
| % of |
|
|
|
|
|
| % of |
| ||||
|
|
|
|
|
| Revenues |
|
|
|
|
|
| Revenues |
|
|
|
|
|
| Revenues |
|
|
|
|
|
| Revenues |
| ||||
Total Revenues |
| $ | 683.3 |
|
|
| 100.0 | % |
| $ | 551.1 |
|
|
| 100.0 | % | ||||||||||||||||
Total revenues |
| $ | 827.2 |
|
|
| 100.0 | % |
| $ | 742.0 |
|
|
| 100.0 | % | ||||||||||||||||
Cost of goods sold |
|
| 456.5 |
|
|
| 66.8 |
|
|
| 347.6 |
|
|
| 63.1 |
|
|
| 514.4 |
|
|
| 62.2 |
|
|
| 470.4 |
|
|
| 63.4 |
|
Gross margin |
|
| 226.7 |
|
|
| 33.2 |
|
|
| 203.5 |
|
|
| 36.9 |
|
|
| 312.8 |
|
|
| 37.8 |
|
|
| 271.5 |
|
|
| 36.6 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal research and development |
|
| 42.5 |
|
|
| 6.2 |
|
|
| 22.7 |
|
|
| 4.1 |
|
|
| 60.4 |
|
|
| 7.3 |
|
|
| 51.3 |
|
|
| 6.9 |
|
Selling, general and administrative |
|
| 137.7 |
|
|
| 20.2 |
|
|
| 109.3 |
|
|
| 19.8 |
|
|
| 160.6 |
|
|
| 19.4 |
|
|
| 143.5 |
|
|
| 19.3 |
|
Interest and other, net |
|
| 0.8 |
|
|
| 0.1 |
|
|
| (6.0 | ) |
|
| (1.1 | ) |
|
| 1.9 |
|
|
| 0.2 |
|
|
| (2.3 | ) |
|
| (0.3 | ) |
Earnings before income tax |
|
| 45.6 |
|
|
| 6.7 |
|
|
| 77.5 |
|
|
| 14.1 |
|
|
| 89.9 |
|
|
| 10.9 |
|
|
| 79.1 |
|
|
| 10.7 |
|
Income taxes |
|
| 7.3 |
|
|
| 1.1 |
|
|
| 18.8 |
|
|
| 3.4 |
|
|
| 24.5 |
|
|
| 3.0 |
|
|
| 13.1 |
|
|
| 1.8 |
|
Earnings from Continuing Operations |
|
| 38.3 |
|
|
| 5.6 |
|
|
| 58.7 |
|
|
| 10.7 |
| ||||||||||||||||
Earnings (loss) from Discontinued Operation, net of income tax |
|
| 0.1 |
|
|
| - |
|
|
| (6.8 | ) |
|
| (1.2 | ) | ||||||||||||||||
Net Earnings |
|
| 38.4 |
|
|
| 5.6 |
|
|
| 51.9 |
|
|
| 9.4 |
| ||||||||||||||||
Net earnings attributable to noncontrolling interest |
|
| - |
|
|
| - |
|
|
| 1.1 |
|
|
| 0.2 |
| ||||||||||||||||
Net earnings |
| $ | 65.5 |
|
|
| 7.9 | % |
| $ | 66.0 |
|
|
| 8.9 | % | ||||||||||||||||
|
| $ | 38.4 |
|
|
| 5.6 | % |
| $ | 50.8 |
|
|
| 9.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Diluted earnings per shares: |
| $ | 0.60 |
|
|
|
|
|
| $ | 0.90 |
|
|
|
|
| ||||||||||||||||
Diluted earnings per shares |
| $ | 1.04 |
|
|
|
|
|
| $ | 1.05 |
|
|
|
|
|
Consolidated
Bookings. Bookings for the year ended June 30, 20142016 increased 33%15% to $691.3$875.3 million, compared to $521.1$761.7 million for the 20132015 fiscal year. The increase in bookings was mostly attributable toAll of the acquisitions of II-VI Laser Enterprise and II-VI Network SolutionsCompany’s operating segments experienced stronger booking volumes in fiscal year 2014ended June 30, 2016 compared to fiscal year ended June 30, 2015. The increased bookings were primarily lead by II-VI Photonics which realized increased bookings of $89.3 million or 32% over fiscal year ended June 30, 2015. This segment experienced strong orders from the China broadband buildout program as well as increased demand for 100G metro deployments in the incremental bookings fromUnited States and demand for products that served the 2013 fiscal year acquisitions. In addition, the Company’s II-VI Laserdatacenter expansion.
Solutions segment recorded increased bookings at its legacy business for both diamond window optics used in EUV photolithography systems and at II-VI HIGHYAG for fiber beam delivery systems and laser processing heads used in automotive manufacturing.
Revenues. Revenues for the year ended June 30, 20142016 increased 24%11% to $683.3$827.2 million, compared to $551.1$742.0 million for the fiscal year ended June 30, 2015. The increase in revenues during fiscal year 2016 as compared to fiscal year 2015 was driven by optical and data communication markets which experienced a cycle of investment and expansion. The Company’s II-VI Photonics segment capitalized on these markets dynamics and realized increased revenues of $65.1 million for fiscal year June 30, 2013. The increase in revenues was mostly attributable to the acquisitions of II-VI Laser Enterprise and II-VI Network Solutions in fiscal year 2014, incremental revenues from fiscal year 2013 acquisitions and higher revenues associated with shipments of diamond windows at II-VI Laser Solutions and SiC wafers at II-VI Advanced Materials. Somewhat offsetting these higher revenue levels was a decrease in shipment volumes of passive optical components sold by II-VI Photonics segment as well as lower shipments at the Company’s military-related businesses, driven primarily by reduced U.S. defense spending.2016.
Gross margin. Gross margin as a percentage of revenues for the year ended June 30, 20142016 was 33.2%37.8%, compared to 36.9%36.6% for the fiscal year ended June 30, 2015. Improvement in gross margin for fiscal year June 30, 2013. The decrease in gross margin2016 was primarily driven by incremental margins realized on the result of purchase accounting fair market value inventory adjustments related to the acquisitions of II-VI Laser Enterprise and II-VI Network Solutions of $4.1 millionCompany’s higher revenue levels as well as restructuring charges of $2.2 million (pre-tax) related to inventory write-offs at II-VI Performance Products and severance costs at II-VI Laser Enterprise and II-VI Network Solutions. Exclusive of the restructuring charges, the operating gross margin profile of these two acquisitions put downward pressure on gross margin during fiscal year 2014 as the Company continued to align the operating costs of the new businesses with their existing and prospective revenue profile. In addition, gross margin decreased at II-VI Laser Solutions’ legacy business due to pricing pressure and increased raw material costs and gross marginproduct mix at II-VI Photonics segment was negatively impacted by both lower revenue volumetowards higher margin products relating to 980 nm pumps and pricing pressure on legacy passive optical component products from increased competition in China.undersea network deployments. The inclusion of the fiscal year 2016 acquisitions did not have a material impact to the year’s gross margin.
Internal research and development. Company-funded internal research and development expenses for the year ended June 30, 20142016 were $42.5$60.4 million, or 6.2%7.3% of revenues, compared to $22.7$51.3 million, or 4.1%6.9% of revenues, for the fiscal year ended June 30, 2013.2015. The increase in internal research and development expense as a percentageis the result of revenues is due to increased research and development efforts within the II-VI Photonics segment, whichCompany’s continued to investinvestments in the development of component parts that support higher speed optical communication and data networks around the world. In addition,technology required to fabricate VCSELs in large volume for future applications as well as new product introductions across the acquisitions of II-VI Laser Enterprise and II-VI Network Solutions increased levels of research and development activity to support ongoing product development of high-power laser components, micro-optics and amplifiers.Company’s business units.
Selling, general and administrative. SG&A expenses for the fiscal year ended June 30, 20142016 were $137.7$160.6 million, or 20.2%19.4% of revenues, compared to $109.3$143.5 million, or 19.8%19.3% of revenues, for the fiscal year ended June 30, 2013. As a percentage of revenues,2015. The increase in SG&A expense in absolute dollars was primarily due to the fiscal year 2016 acquisitions’ transaction expenses were consistent withand severance totaling approximately $11.3 million. The remaining increase in relative dollars was to support the priorhigher revenue base in fiscal year.year 2016.
Interest and other, net. Interest and other, net for the year ended June 30, 2014 and 20132016 was expense of $0.8$1.9 million compared to income of $6.0$2.3 million for the prior fiscal year. Included in interest and other, net for the year ended June 30, 20142016 were earnings fromon the Company’s equity investmentinterest in Guangdong Fuxin Electronic Technology, interest expense on borrowings, interest income on excess cash reserves, and unrealized gains and losses on the Company-sponsoredCompany’s deferred compensation plan and foreign currency gains and losses. The majorityIn, the fiscal year ended June 30, 2016 expense of $1.9 million included $3.1 million of interest expense on the Company’s outstanding
borrowings, offset by $1.2 million of interest income on the Company’s excess cash reserves. In the fiscal year ended June 30, 2015, income of $2.3 million primarily included a one-time settlement gain of $7.7 million related to certain payment obligations from prior year acquisitions offset by foreign currency losses of $2.2 million and $2.0 million impairment charge on certain tradenames in the 2013 fiscal year was the result of a $5.3 million contractual settlement with a contract manufacturer related to the October 2011 Thailand flood.II-VI Photonics segment.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 20142016 was 16.0%27.3%, compared to an effective tax rate of 24.2% for the prior16.6% in fiscal year.year 2015. The variationsvariation between the Company’s effective tax ratesrate from continuing operations and the U.S. statutory rate of 35% werewas primarily due to the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The lower year-to-datehigher effective tax rate was primarilyduring the result of improved profitability in lower taxing jurisdictions such as the Philippines. In addition, the Company recorded $0.8 million of tax benefits during thefiscal year ended June 30, 2014 as a result of the expiration of the statute of limitation on previously filed income2016 is due to an $8.5 million valuation allowance against certain U.S. based deferred tax returns.assets.
II-VI Laser Solutions ($ in millions)
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| 2016 |
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| 2015 |
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Bookings |
| $ | 262.8 |
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| $ | 212.3 |
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| 24 | % |
| $ | 306.0 |
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| $ | 284.8 |
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| 7 | % |
Revenues |
| $ | 254.4 |
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| $ | 217.6 |
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| 17 | % |
| $ | 303.0 |
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| $ | 287.9 |
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| 5 | % |
Operating income |
| $ | 24.5 |
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| $ | 54.0 |
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| (55 | %) |
| $ | 36.2 |
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| $ | 55.0 |
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| (34 | %) |
Bookings for the year ended June 30, 20142016 for II-VI Laser Solutions increased 24%7% to $262.8$306.0 million, compared to $212.3$284.8 million for fiscal year June 30, 2013. The increase2015. Included in the bookings amounts was due to higher order levels from European customers specific to diamond windows and other products used in EUV lithography systems. The acquisition of II-VI Laser Enterprise in September 2013
contributed approximately $33.0$14.3 million of bookings inattributed to the fiscal year 2014. At II-VI HIGHYAG, continued growth in2016 acquisitions. Exclusive of this amount, bookings increased approximately $6.9 million driven by demand for one-micron components for the one-micronindustrial materials processing market as well higher aftermarket demand for the segment’s CO2 laser market resulted in higher bookings for fiber beam delivery systems, and laser processing heads used in the automotive manufacturing industry.optics.
Revenues for the year ended June 30, 20142016 for II-VI Laser Solutions increased 17%5% to $254.4$303.0 million, compared to $217.6$287.9 million for fiscal year ended June 30, 2013. The increase2015. Included in revenuesthe revenue amount was the result of increased shipment volumes in Europe of replacement optics for CO2 laser systems as well as diamond windows and other component parts used in EUV lithography systems. In addition, the acquisition of II-VI Laser Enterprise contributed approximately $35.0$13.9 million of revenues inrevenue attributed to the fiscal year 2014.2016 acquisitions. Exclusive of this amount, revenues were consistent with fiscal year 2015.
Operating income for the year ended June 30, 20142016 for II-VI Laser Solutions decreased 55%34% to $24.5$36.2 million, compared to $54.0$55.0 million for fiscal year June 30, 2013.2015. The decrease in operating income was primarily due to the resultinclusion of the acquisitionoperating results of II-VI Laser Enterprise inthe fiscal year 2014. The segment recorded $2.5 million of purchase accounting adjustments relating to the fair value of inventory, $3.9 million of transaction expenses and $2.0 million of severance costs associated with restructuring of the acquired business. In addition, lower gross margin at II-VI Laser Enterprise caused by higher material cost, unfavorable absorption of manufacturing overhead costs, and production inefficiencies all2016 acquisitions. Operating income was also negatively impacted operating income in fiscal year 2014.by acquisition related transaction and severance expenses of $11.3 million.
II-VI Photonics ($ in millions)
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| 2014 |
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| 2013 |
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| 2016 |
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| 2015 |
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Bookings |
| $ | 220.2 |
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| $ | 134.9 |
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| 63 | % |
| $ | 372.2 |
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| $ | 282.9 |
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| 32 | % |
Revenues |
| $ | 216.5 |
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| $ | 141.3 |
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| 53 | % |
| $ | 325.9 |
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| $ | 260.8 |
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| 25 | % |
Operating (loss) income |
| $ | (0.1 | ) |
| $ | 15.0 |
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| (101 | %) | ||||||||||||
Operating income |
| $ | 37.8 |
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| $ | 7.2 |
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| 425 | % |
Bookings for the year ended June 30, 20142016 for II-VI Photonics increased 63%32% to $220.2$372.2 million, compared to $134.9$282.9 million for the fiscal year ended June 30, 2013.The2015. The increase in bookings was due to the acquisitionresult of II-VI Network Solutionsmarket demand from the China broadband build-out, 100G metro deployments in November 2014, which contributed approximately $84.0 million of bookings in fiscal year 2014. Absent that acquisition, bookings were consistent between the two fiscal years.United States and undersea 980 nm pumps and high performance optical amplifiers.
Revenues for the year ended June 30, 20142016 for II-VI Photonics increased 53%25% to $216.5$325.9 million, compared to $141.3$260.8 million for the fiscal year ended June 30, 2013.2015. The increase in revenues was duemainly attributable to increased customer demand for optical components and modules for the new deployment of CATV optical networks, the continued strength of the China broadband program by the government to extend the fiber to the acquisition of II-VI Network Solutions, which contributed approximately $80.0 million of revenues in fiscal year 2014. Revenues decreased from the segment’s legacy businesses due to price erosion for products serving 10G and 40G applications in the optical communications market.
Operating (loss) income for the year ended June 30, 2014 for II-VI Photonics decreased 101% to an operating loss of $(0.1) million, compared to operating income of $15.0 million for fiscal year June 30, 2013. The decrease in operating income was the result of the acquisition of II-VI Network Solutions in fiscal year 2014. The segment recorded $1.6 million of purchase accounting adjustments relating to the fair value of inventory as well as lower gross margin at II-VI Network Solutions caused by higher material cost and production inefficiencies, all of which negatively impacted operating income in fiscal year 2014. In addition, the legacy businesses experienced a downward shift in gross margin as the technology shifted to higher speed networks in the optical communications industry resulting in price erosion on shipments of the segment’s legacy products. In addition, operating expenses increased when compared to the prior fiscal year, primarily due to increased compensation costs in China as well as higher levels of investment regarding internal research and development of next generation products aimed at serving higher speed networks and data centers.
II-VI Performance Products ($ in millions)
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Bookings |
| $ | 208.3 |
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| $ | 174.0 |
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| 20 | % |
Revenues |
| $ | 212.4 |
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| $ | 192.2 |
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| 11 | % |
Operating income |
| $ | 22.1 |
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| $ | 2.5 |
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| 784 | % |
Bookings for the year ended June 30, 2014 for II-VI Performance Products increased 20% to $208.3 million, compared to $174.0 million for fiscal year June 30, 2013. The increase in bookings was attributable to strong order placement from Japanese OEMs specific to II-VI Advanced Materials 100mm and 150mm SiC wafers used in commercial applications in the wireless infrastructure and power device markets. II-VI Advanced Materials also received a $4.0 million research and development contract from the
Department of Defense for ongoing development of 150mm SiC wafers. In addition, incremental bookings from the November 2012 acquisition of II-VI M Cubed helped contribute to the increase.
Revenues for the year ended June 30, 2014 for II-VI Performance Products increased 11% to $212.4 million, compared to $192.2 million for fiscal year June 30, 2013. The increase in revenues was primarily due to the acquisition of II-VI M Cubed as well as strong product sales at II-VI Advanced Materials specific to 100mm and 150mm semi-insulating SiC wafers used by Japanese OEMs to support the continued growth ofhome deployment, 4G wireless stations in Asia. Somewhat offsetting these increases were reduced shipments at II-VI Marlow for products servicing the personal comfort market.deployment, and accelerated 5G wireless development.
Operating income for the year ended June 30, 20142016 for II-VI Photonics increased 425% to $37.8 million, compared to an operating income of $7.2 million for the fiscal year ended June 30, 2015. The increase in operating income was primarily due to incremental margins realized on the higher revenue levels as well as product mix to higher margin products including 980 nm pumps and optical amplifiers.
II-VI Performance Products ($ in millions)
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Bookings |
| $ | 197.1 |
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| $ | 194.0 |
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| 2 | % |
Revenues |
| $ | 198.3 |
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| $ | 193.3 |
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| 3 | % |
Operating income |
| $ | 17.8 |
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| $ | 14.6 |
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| 22 | % |
Bookings for the year ended June 30, 2016 for II-VI Performance Products was $22.1increased 2% to $197.1 million, compared to $2.5$194.0 million for fiscal year June 30, 2013.2015. The moderate increase in bookings was driven by increased demand of silicon carbide substrates used in RF applications.
Revenues for the year ended June 30, 2016 for II-VI Performance Products increased 3% to $198.3 million, compared to $193.3 million for fiscal year June 30, 2015. The increase in segment earningsrevenues was a resultdue to increased shipments of military and personal comfort related products.
Operating income for the restructured business model atyear ended June 30, 2016 for II-VI Performance Metals, which eliminated the exposureProducts increased 22% to volatility$17.8 million, compared to $14.6 million for fiscal year June 30, 2015. The increase in the minor metals market for selenium. In addition, operating income was favorably impacted in fiscal year 2014 from increased revenues and profit contribution from II-VI M Cubeda combination of higher revenue levels as well as increased revenues at II-VI Advanced Materials.a shift in product mix to higher margin products primarily serving the segment’s military markets.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of cash have been provided through operations and long-term borrowings. Other sources of cash include proceeds received from the exercise of stock options and sales of equity investments.investments and businesses. Our historical uses of cash have been for capital expenditures, investments in research and development, business acquisitions, payments of principal and interest on outstanding debt obligations payments in satisfaction of employees’ minimum tax obligations and purchases of treasury stock. Supplemental information pertaining to our sources and uses of cash is presented as follows:
Sources (uses) of Cash (millions):
|
| Year Ended June 30, |
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| 2015 |
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| 2014 |
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| 2013 |
| |||
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Net cash provided by operating activities |
| $ | 129.4 |
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| $ | 95.5 |
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| $ | 107.6 |
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Additions to property, plant and equipment |
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| (52.3 | ) |
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| (29.2 | ) |
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| (25.3 | ) |
Net (payments) proceeds on long-term borrowings |
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| (65.5 | ) |
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| 128.0 |
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| 102.0 |
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Purchases of treasury shares |
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| (12.7 | ) |
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| (20.0 | ) |
|
| (20.0 | ) |
Proceeds from exercises of stock options |
|
| 5.2 |
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| 4.4 |
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| 4.1 |
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Purchases of businesses, net of cash acquired |
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| - |
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| (177.7 | ) |
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| (126.2 | ) |
Payments of redeemable noncontrolling interest |
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| - |
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| (8.8 | ) |
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| - |
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Payments on holdback arrangements |
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| (2.4 | ) |
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| (3.0 | ) |
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| - |
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Proceeds received from contractual settlement from Thailand flooding |
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| - |
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| - |
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| 4.8 |
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Proceeds from sale of equity method investment |
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| - |
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| - |
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|
| 2.1 |
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Other |
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| (2.7 | ) |
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| - |
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| 1.5 |
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Year Ended June 30, |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Net cash provided by operating activities |
| $ | 118.6 |
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| $ | 123.0 |
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| $ | 129.4 |
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Additions to property, plant & equipment |
|
| (138.5 | ) |
|
| (58.2 | ) |
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| (52.3 | ) |
Net proceeds (payments) on long-term borrowings |
|
| 104.0 |
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| 59.5 |
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| (65.5 | ) |
Purchases of businesses, net of cash acquired |
|
| (40.0 | ) |
|
| (122.2 | ) |
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| - |
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Proceeds from exercises of stock options |
|
| 15.1 |
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| 9.7 |
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| 5.2 |
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Payments in satisfaction of employees' minimum tax obligations |
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| (4.1 | ) |
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| (2.0 | ) |
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| (1.1 | ) |
Payment on earnout consideration |
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| (2.0 | ) |
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| - |
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| - |
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Purchases of treasury stock |
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| - |
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|
| (6.3 | ) |
|
| (12.7 | ) |
Proceeds from the sale of business |
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| - |
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| 45.0 |
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| - |
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Payments on holdback arrangements |
|
| - |
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|
| - |
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|
| (2.4 | ) |
Other financing activities |
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| - |
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|
| 0.6 |
|
|
| 0.4 |
|
Effect of exchange rate changes on cash and cash equivalents and other |
|
| 0.3 |
|
|
| (4.3 | ) |
|
| (2.1 | ) |
Net cash provided by operating activities:
Net cash provided by operating activities was $129.4$118.6 million and $95.5$123.0 million for the fiscal years ended June 30, 20152017 and 2014,2016, respectively. The increasedecrease in cash flows fromprovided by operating activities induring the current fiscal year 2015 comparedwas due to fiscal year 2014 wasincreased working capital requirements to support higher revenue growth mainly relating to increased inventory build to address product demand as well as higher levels of accounts receivable from the result of an increase in the Company’s net earnings by $27.5 million, or 72%, compared to fiscal year 2014. revenue growth.
Net cash provided by operating activities was $95.5$123.0 million and $107.6$129.4 million for the fiscal years ended June 30, 20142016 and 2013,2015, respectively. The decrease in cash flows from operating activities in fiscal year 20142016 compared to the fiscal year 20132015 was mostly due to lower earnings levels, offset somewhat by favorable overallhigher working capital changes, specifically inrequirements to accommodate the areas of inventory and accounts payable. In addition, the higher non-cash charges for depreciation, amortization and share-based compensation expense that impacted net earnings did not affect operating cash flow.Company’s increased business activities.
Net cash used in(used in) investing activities:
Net cash used in investing activities was $52.2$177.2 million and $206.8$135.2 million for the fiscal years ended June 30, 20152017 and 2014,2016, respectively. The increase in cash used in investing activities was the result of increased levels of capital expenditures of $138.5 million in fiscal year 2017 compared to $58.2 million in fiscal year 2016 was primarily driven by additional capital expenditures to increase the Company’s capability to produce new optoelectronic devices as it accelerates its new technology investment platform. Additionally, during fiscal year 2017, the Company purchased Integrated Photonics Inc., located in Hillsborough, New Jersey, for $39.4 million net of cash acquired and certain assets of DirectPhotonics Industries GmbH, located in Berlin, Germany, for $0.6 million.
Net cash used in investing activities was $135.2 million and $52.2 million for the fiscal years ended June 30, 2016 and 2015, respectively. Net cash used in investing activities during the year ended June 30, 20152016 consisted of $52.3$122.2 million paid for purchases of businesses, net of cash acquired, capital expenditures of which $13.4$58.2 million representedoffset by cash received for the purchasesale of the II-VI HIGHYAG manufacturing facilityRF business in Berlin, Germany
which was previously accounted for as a capital lease. The majoritythe amount of net$45.0 million. Net cash used in investing activities for fiscal year 20142015 consisted entirely of $93.1 million for the acquisition of II-VI Laser Enterprise and $84.6 million net cash for the acquisition of II-VI Network Solutions. In addition, the Company paid $29.2 million for capital expenditures in fiscal year 2014.
Net cash used in investing activities was $206.8 million and $144.5 million for the fiscal years ended June 30, 2014 and 2013, respectively. The majority of net cash used in investing activities during the year ended June 30, 2014 consisted of $93.1 million net cash for the acquisition of Laser Enterprise and $84.6 million net cash paid for the acquisition of Network Solutions. This compares to $126.2 million of net cash during the year ended June 30, 2013 for the acquisitions of M Cubed, the thin-film filter business and interleaver product lines of Oclaro and LightWorks. In addition, during the year ended June 30, 2014, the Company paid $29.2 million for capital expenditures, increasing its investment from fiscal year 2013 in an effort to support revenue growth and capacity expansion.expenditures.
Net cash provided by (used in) financing activities:
Net cash (used in) provided by financing activities was $(76.1)$111.6 million for the year ended June 30, 2015 compared to $99.1 million for the year ended June 30, 2014. During fiscal year 2015, the Company repaid $65.5 million on its outstanding long-term borrowings, repurchased $12.7 million of treasury shares under a current share repurchase plan and paid $2.4 million pursuant to a holdback arrangement from our fiscal year 2014 acquisitions. Net cash paid was somewhat offset by cash received from exercises of stock options.
Net cash provided by financing activities was $99.1 million for the year ended June 30, 20142017 compared to net cash provided by financing activities of $85.8$61.5 million for the fiscal year ended June 30, 2013. The change in net cash provided by financing activities was primarily due to additional borrowings used2016. During fiscal year 2017, the Company borrowed $129.0 million to finance its current year acquisitions and investments in capital expenditures for its new VCSEL investment platform and other growth platforms. The Company also received $15.1 million of proceeds from stock option exercises. Offsetting the Company’s acquisitionsincrease in cash were payments made on outstanding borrowings of Laser Enterprise$25.0 million, $4.1 million of minimum tax withholding obligations on the vesting of employees’ restricted and Network Solutions, offset somewhat by a $3.0performance shares, $2.0 million of payments on contingent earnout payment toarrangements and $1.4 million of debt issuance costs associated with the former owners of LightWorks and an $8.8 million payment made to acquire the remaining ownership interest in II-VI HIGHYAG. Amended Credit Facility (as defined below) entered into on July 28, 2016.
Company Credit FacilityFacilities
On July 28, 2016, the Company amended and restated its existing credit agreement. The Company’sThird Amended and Restated Credit Agreement (the “Credit“Amended Credit Facility”) provides for a revolving credit facility of $225$325 million, as well as a $100 million term loan (“the Term Loan”). As of June 30, 2015, the Company had $108.5 million and $65.0 million outstanding under the line of credit andloan. The term loan respectively. The Term Loan is being re-paidrepaid in consecutive quarterly principal payments on the first business day of each January, April, July and October, with the first payment having commenced on October 1, 2013,2016, as follows: (i) twenty consecutive quarterly installments of $5.0$5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 2021. Amounts borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiary of the Company. The Company has the option to request an increase to the size of the Credit Facilityrevolving credit facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through September 2018July 28, 2021 and has an interest rate of LIBOR,either a Base Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility, plus 0.75%Facility. If the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.75%1.25% and if the Euro-Rate Option is selected for a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the Company’s ratio of consolidated indebtedness to consolidated EBITDA. Additionally, the facilityAmended Credit Facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2015,2017, the Company was in compliance with all financial covenants under theits Amended Credit Facility.
In conjunction with entering into the Company’s Amended Credit Facility, the Company incurred approximately $1.0$1.4 million of deferred financingdebt issuance costs which are being amortized over the term of the agreement. As a result of the overall increase in borrowing capacity, existing deferred financing costs at the time of the amendment of $0.5 million are also being amortized over the term of the Credit Facility.
The Company’s yen denominated line of credit is a 500 million Yen ($4.14.5 million) facility that has a five-year term through June 2016 and has anfacility. The Yen line of credit matures in August 2020. The interest rate equal to LIBOR,the Euro-Rate, as defined in the loan agreement, governing the yen facility, plus 0.625%1.00% to 1.50%2.25%. At June 30, 20152017 and 2014,2016, the Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2015,2017, the Company had $2.5$2.7 million outstanding and was in compliance with all financial covenants under its Yen facility. On August 21, 2015, the Company received and accepted a commitment from its lender to extend the maturity date of the Yen facility to August 2020 on substantially the same terms of the current facility. The lender’s commitment to provide the extension is subject to the satisfaction of certain customary conditions.
The Company had aggregate availability of $116.6$73.5 million and $71.0$37.7 million under its lines of credit as of June 30, 20152017 and June 30, 2014,2016, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 20152017 and 2016, total outstanding letters of credit supported by the Credit Facilitycredit facilities were $1.5 million. $1.3 million and $1.2 million respectively.
The weighted average interest rate of total borrowings was 1.8%2.2% and 1.6% for each of the years ended June 30, 20152017 and 2014.2016, respectively. The weighted-average of total borrowings for the fiscal years ended June 30, 2017 and 2016 was $272.1 million and $193.7 million, respectively.
In August 2014, the Board of Directors authorized the Company to purchase up to $50.0 million of its Common Stock. The repurchase program has no expiration date and provides for shares to be purchased in the open market or in private transactions from time to time. Shares purchased by the Company are retained as treasury stock and are available for general corporate purposes. DuringSince inception of the fiscal year ended June 30, 2015,repurchase program the Company purchased 936,049has repurchased 1,316,587 shares of its Common Stock for $12.7approximately $19.0 million under this repurchase program.
In August 2014,in the Company exited its capital lease obligation related to the existing manufacturing facility in Berlin, Germany utilized by the Company’s II-VI HIGHYAG business. The total cash paid for this purchase was approximately $13.4 million and was financed through existing cash balances.aggregate.
Our cash position, borrowing capacity and debt obligations are as follows (in millions):
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||
|
| 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 173.6 |
|
| $ | 174.7 |
|
| $ | 271.9 |
|
| $ | 218.4 |
|
Available borrowing capacity |
|
| 116.6 |
|
|
| 71.0 |
|
|
| 73.5 |
|
|
| 37.7 |
|
Total debt obligation |
|
| 176.0 |
|
|
| 242.0 |
|
|
| 343.5 |
|
|
| 235.9 |
|
The Company believes cash flow from operations, existing cash reserves and additional available borrowing capacity from its Amended Credit Facility will be sufficient to fund its working capital needs, capital expenditures and internal and external growth forat least through fiscal year 2016.2018. The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the U.S.United States As of June 30, 2015,2017, the Company held approximately $145$245 million of cash and cash equivalents outside of the U.S.United States. Cash balances held outside the United States could be repatriated to the U.S.,United States, but, under current law, would potentially be subject to U.S.United States federal income taxes, less applicable foreign tax credits. The Company has not recorded deferred income taxes related to the majority of its undistributed earnings outside of the U.S.,United States, as the majority of the earnings of the Company’s foreign subsidiaries are indefinitely reinvested.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the operating lease obligations and the purchase obligations disclosed in the contractual obligations table below as well as letters of credit as discussed in Note 6 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The Company enters into these off-balance sheet arrangements to acquire goods and services used in its business.
Tabular Disclosure of Contractual Obligations
| Payments Due By Period |
|
| Payments Due By Period |
| ||||||||||||||||||||||||||||||||||
|
|
|
|
| Less Than 1 |
|
| 1-3 |
|
| 3-5 |
|
| More Than 5 |
|
|
|
|
|
| Less Than 1 |
|
| 1-3 |
|
| 3-5 |
|
| More Than 5 |
| ||||||||
Contractual Obligations | Total |
|
| Year |
|
| Years |
|
| Years |
|
| Years |
|
| Total |
|
| Year |
|
| Years |
|
| Years |
|
| Years |
| ||||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations | $ | 175,957 |
|
| $ | 20,000 |
|
| $ | 40,000 |
|
| $ | 113,500 |
|
| $ | 2,457 |
|
| $ | 343,513 |
|
| $ | 20,000 |
|
| $ | 43,834 |
|
| $ | 279,679 |
|
| $ | - |
|
Interest payments(1) |
| 9,288 |
|
|
| 2,965 |
|
|
| 4,806 |
|
|
| 1,510 |
|
|
| 7 |
|
|
| 47,381 |
|
|
| 10,058 |
|
|
| 18,375 |
|
|
| 12,854 |
|
|
| 6,094 |
|
Capital lease obligations |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||
Capital lease obligation |
|
| 24,489 |
|
|
| 1,069 |
|
|
| 2,349 |
|
|
| 2,664 |
|
|
| 18,407 |
| |||||||||||||||||||
Operating lease obligations(2) |
| 51,813 |
|
|
| 12,875 |
|
|
| 15,775 |
|
|
| 6,514 |
|
|
| 16,649 |
|
|
| 66,600 |
|
|
| 14,400 |
|
|
| 22,900 |
|
|
| 11,400 |
|
|
| 17,900 |
|
Purchase obligations |
| 18,136 |
|
|
| 13,062 |
|
|
| 5,074 |
|
|
| - |
|
|
| - |
|
|
| 29,227 |
|
|
| 25,918 |
|
|
| 3,309 |
|
|
| - |
|
|
| - |
|
Other long-term liabilities reflected on the balance sheet under GAAP |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 255,194 |
|
| $ | 48,902 |
|
| $ | 65,655 |
|
| $ | 121,524 |
|
| $ | 19,113 |
|
| $ | 511,210 |
|
| $ | 71,445 |
|
| $ | 90,767 |
|
| $ | 306,597 |
|
| $ | 42,401 |
|
(1) |
|
(2) | Includes an obligation for the use of two parcels of land related to II-VI Performance Metals. The lease obligations extend through years 2039 and |
(3) | A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including fixed or minimum quantities to be purchased; minimum or variable price provisions, and the approximate timing of the transaction. These amounts are primarily comprised of open purchase order commitments to vendors for the purchase of supplies and materials. |
(4) | Includes cash earnout opportunities based upon II-VI EpiWorks and IPI for the achievement of certain agreed upon financial and operational targets. |
Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $2.0$2.6 million in 2016.2018. Estimated funding obligations are determined by asset performance, workforce and retiree demographics, tax and employment laws and other actuarial assumptions which may change the annual funding obligations. The funded status of our defined benefit plans is disclosed in Note 14 to the Company’s Consolidated Financial Statements.
The gross unrecognized income tax benefits at June 30, 2015,2017, which are excluded from the above table, were $4.0$7.6 million. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect a significant payment related to these obligations within the next fiscal year.
Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
MARKET RISKS
The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates and interest rates. In the normal course of business, the Company uses certain techniques and a derivative financial instrumentinstruments as part of its overall risk management strategy, primarily focused on its exposure to the Japanese Yen.Yen, Chinese Renminbi and the Euro. The Company also has transactions denominated in euros, pounds sterling, renminbiEuros, British Pounds Sterling, Chinese Renminbi and swiss francs. No significant changes have occurred inSwiss Francs. The Company commenced certain techniques to limit its exposure to the techniquesRenminbi and instruments used other than those described below.Euro during fiscal year 2017.
Foreign Exchange Risks
In the normal course of business, the Company enters into foreign currency forward exchange contracts with its financial institutions. The purpose of these contracts is to hedge ordinary business risks regarding foreign currencies on product sales. Foreign currency exchange contracts are used to limit transactional exposure to changes in currency rates.
Japanese Yen
The Company enters into foreign currency forward contracts that permit it to sell specified amounts of foreign currenciesJapanese Yen expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts provide the Company with an economic hedge in which settlement will occur in future periods, thereby limiting the Company’s exposure. These contracts had a total notional amount of $10.8$12.7 million and $7.4$9.2 million at June 30, 20152017 and 2016, respectively.
A 10% change in the yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of approximately $6.9 million to an increase of approximately $8.5 million for the year ended June 30, 2014, respectively. 2017.
Chinese Renminbi
During June 2017, the Company entered into a $50.0 million month-to-month forward contract that matured on June 30, 2017, to limit exposure to the Chinese Renminbi. Upon expiration of this contract, the Company recorded $1.1 million gain in the Consolidated Statement of Earnings.
Euro
During June 2017, the Company entered into a $25.0 million month-to-month forward contract that matured on June 30, 2017, to limit exposure to the Euro. Upon expiration of this contract, the Company recorded an immaterial gain in the Consolidated Statement of Earnings.
The Company continuallyhas short-term intercompany notes that are denominated in U.S. dollars with certain European subsidiaries. A 10% change in the euro to dollar exchange rate would have changed net earnings in the range from a decrease of $1.7 million to an increase of $2.0 million for the year ended June 30, 2017.
The Company monitors its positions and the credit ratings of the parties to these contracts. While the Company may be exposed to potential losses due to risk in the event of non-performance by the counterparties to these financial instruments, it does not currently anticipate such losses.
A 10% change in the yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of approximately $4.8 million to an increase of approximately $5.9 million for the year ended June 30, 2015.
The Company has short-term intercompany notes that are denominated in U.S. dollars with certain European subsidiaries. A 10% change in the euro to dollar exchange rate would have changed net earnings in the range from a decrease of $1.3 million to an increase of $1.6 million for the year ended June 30, 2015.
Assets and liabilities of foreign operations are translated into U.S. dollars using the period-end exchange rate, while income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income within shareholders’ equity.
Interest Rate Risks
As of June 30, 2015,2017, the Company’s total borrowings of $176.0$343.5 million were from a line of credit borrowing of $108.5$252.0 million denominated in U.S. dollars, a term loan denominated in U.S. dollars of $65.0$85.0 million, and a line of credit borrowing of $2.5$2.7 million denominated in Japanese yen.yen and a non-interest bearing note payable assumed in the acquisition of IPI of $3.8 million. As such, the Company is exposed to changes in interest rates. A change in the interest rate of 100 basis points on these borrowings would have changed net earnings by $1.4$1.3 million, or $0.02 per-share diluted, for the fiscal year ended June 30, 2015.2017.
Discount Rate Risks
As of June 30, 2015,2017, a 10% change in the Company’s discount rate used to determine the pension benefit obligation of the Switzerland Defined Benefit Plan would have had an immaterial impact on the Consolidated Financial Statements.
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Responsibility for Preparation of the Financial Statements
Management is responsible for the preparation of the financial statements included in this Annual Report on Form 10-K. The financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management. The other financial information contained in this Annual Report on Form 10-K is consistent with the financial statements.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance concerning the reliability of the financial data used in the preparation of the Company’s financial statements, as well as reasonable assurance with respect to safeguarding the Company’s assets from unauthorized use or disposition.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement presentation and other results of such systems.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2015.2017. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included reviewing the documentation of its controls, evaluating the design effectiveness of controls and testing their operating effectiveness. Management excluded from the scope of its assessment of internal control over financial reporting the operations and related assets of Integrated Photonics, Inc. which was acquired on June 19, 2017. The recent acquisition excluded from management’s assessment of internal controls over financial reporting represented approximately $59.8 million and $45.3 million of total assets and net assets, respectively, as of June 30, 2017 and approximately $1.3 million and $0.1 million of total revenues and net income, respectively, for the fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2015,2017, the Company’s internal controls over financial reporting were effective and provide reasonable assurance that the accompanying financial statements do not contain any material misstatement.effective.
Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal control over financial reporting as of June 30, 2015.2017. Its report is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2015,2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). II-VI Incorporated and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Integrated Photonics, Inc., which is included in the 2017 consolidated financial statements of II-VI Incorporated and Subsidiaries and constituted $59.8 million and $45.3 million of total and net assets, respectively, as of June 30, 2017 and approximately $1.3 million and $0.1 million of total revenues and net income, respectively, for the fiscal year then ended. Our audit of internal control over financial reporting of II-VI Incorporated and Subsidiaries also did not include an evaluation of the internal control over financial reporting of Integrated Photonics
In our opinion, II-VI Incorporated and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015,2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 20152017 and 2014,2016, and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 20152017 of II-VI Incorporated and Subsidiaries and our report dated August 28, 201521, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 201521, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 20152017 and 2014,2016, and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2015.2017. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of II-VI Incorporated and Subsidiaries at June 30, 20152017 and 2014,2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2015,2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), II-VI Incorporated and Subsidiaries' internal control over financial reporting as of June 30, 2015,2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 28, 201521, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 201521, 2017
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
($000)
June 30, |
| 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 173,634 |
|
| $ | 174,660 |
|
| $ | 271,888 |
|
| $ | 218,445 |
|
Accounts receivable - less allowance for doubtful accounts of $1,048 at June 30, 2015 and $1,852 at June 30, 2014 |
|
| 140,772 |
|
|
| 136,723 |
| ||||||||
Accounts receivable - less allowance for doubtful accounts of $1,314 at June 30, 2017 and $2,016 at June 30, 2016 |
|
| 193,379 |
|
|
| 164,817 |
| ||||||||
Inventories |
|
| 164,388 |
|
|
| 165,873 |
|
|
| 203,695 |
|
|
| 175,133 |
|
Deferred income taxes |
|
| 13,260 |
|
|
| 11,118 |
| ||||||||
Prepaid and refundable income taxes |
|
| 6,881 |
|
|
| 4,440 |
|
|
| 6,732 |
|
|
| 6,535 |
|
Prepaid and other current assets |
|
| 14,033 |
|
|
| 12,917 |
|
|
| 26,602 |
|
|
| 18,033 |
|
Total Current Assets |
|
| 512,968 |
|
|
| 505,731 |
|
|
| 702,296 |
|
|
| 582,963 |
|
Property, plant & equipment, net |
|
| 203,812 |
|
|
| 208,939 |
|
|
| 367,728 |
|
|
| 242,857 |
|
Goodwill |
|
| 195,894 |
|
|
| 196,145 |
|
|
| 250,342 |
|
|
| 233,755 |
|
Other intangible assets, net |
|
| 122,462 |
|
|
| 136,404 |
|
|
| 133,957 |
|
|
| 124,590 |
|
Investment |
|
| 11,914 |
|
|
| 11,589 |
|
|
| 11,727 |
|
|
| 11,354 |
|
Deferred income taxes |
|
| 2,210 |
|
|
| 4,038 |
|
|
| 3,023 |
|
|
| 7,848 |
|
Other assets |
|
| 8,904 |
|
|
| 9,080 |
|
|
| 8,224 |
|
|
| 8,614 |
|
Total Assets |
| $ | 1,058,164 |
|
| $ | 1,071,926 |
|
| $ | 1,477,297 |
|
| $ | 1,211,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | 20,000 |
|
| $ | 20,000 |
|
| $ | 20,000 |
|
| $ | 20,000 |
|
Accounts payable |
|
| 45,275 |
|
|
| 45,767 |
|
|
| 65,540 |
|
|
| 53,796 |
|
Accrued compensation and benefits |
|
| 39,310 |
|
|
| 32,461 |
|
|
| 58,178 |
|
|
| 59,012 |
|
Accrued income taxes payable |
|
| 9,310 |
|
|
| 4,584 |
|
|
| 12,178 |
|
|
| 12,588 |
|
Deferred income taxes |
|
| 685 |
|
|
| 732 |
| ||||||||
Other accrued liabilities |
|
| 24,576 |
|
|
| 31,521 |
|
|
| 29,056 |
|
|
| 25,846 |
|
Total Current Liabilities |
|
| 139,156 |
|
|
| 135,065 |
|
|
| 184,952 |
|
|
| 171,242 |
|
Long-term debt |
|
| 155,957 |
|
|
| 221,960 |
|
|
| 322,022 |
|
|
| 215,307 |
|
Capital lease obligation |
|
| 23,415 |
|
|
| - |
| ||||||||
Deferred income taxes |
|
| 7,105 |
|
|
| 7,440 |
|
|
| 15,345 |
|
|
| 11,103 |
|
Other liabilities |
|
| 26,865 |
|
|
| 32,418 |
|
|
| 31,000 |
|
|
| 31,991 |
|
Total Liabilities |
|
| 329,083 |
|
|
| 396,883 |
|
|
| 576,734 |
|
|
| 429,643 |
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; authorized - 5,000,000 shares; none issued |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Common stock, no par value; authorized - 300,000,000 shares; issued - 71,779,704 shares at June 30, 2015; 70,935,098 shares at June 30, 2014 |
|
| 226,609 |
|
|
| 213,573 |
| ||||||||
Accumulated other comprehensive income |
|
| 8,665 |
|
|
| 19,406 |
| ||||||||
Common stock, no par value; authorized - 300,000,000 shares; issued - 74,081,451 shares at June 30, 2017; 72,840,257 shares at June 30, 2016 |
|
| 269,638 |
|
|
| 243,812 |
| ||||||||
Accumulated other comprehensive income (loss) |
|
| (13,778 | ) |
|
| (14,017 | ) | ||||||||
Retained earnings |
|
| 587,302 |
|
|
| 521,327 |
|
|
| 748,062 |
|
|
| 652,788 |
|
|
|
| 822,576 |
|
|
| 754,306 |
|
|
| 1,003,922 |
|
|
| 882,583 |
|
Treasury stock, at cost - 10,565,209 shares at June 30, 2015 and 9,481,963 shares at June 30, 2014 |
|
| (93,495 | ) |
|
| (79,263 | ) | ||||||||
Treasury stock, at cost - 10,940,062 shares at June 30, 2017 and 10,965,925 shares at June 30, 2016 |
|
| (103,359 | ) |
|
| (100,245 | ) | ||||||||
Total Shareholders' Equity |
|
| 729,081 |
|
|
| 675,043 |
|
|
| 900,563 |
|
|
| 782,338 |
|
Total Liabilities and Shareholders' Equity |
| $ | 1,058,164 |
|
| $ | 1,071,926 |
|
| $ | 1,477,297 |
|
| $ | 1,211,981 |
|
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Earnings
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
($000, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 274,142 |
|
| $ | 240,534 |
|
| $ | 241,045 |
|
International |
|
| 467,819 |
|
|
| 442,727 |
|
|
| 310,030 |
|
Total Revenues |
|
| 741,961 |
|
|
| 683,261 |
|
|
| 551,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs, Expenses and Other Expense (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 470,363 |
|
|
| 456,545 |
|
|
| 347,558 |
|
Internal research and development |
|
| 51,260 |
|
|
| 42,523 |
|
|
| 22,689 |
|
Selling, general and administrative |
|
| 143,539 |
|
|
| 137,707 |
|
|
| 109,337 |
|
Interest expense |
|
| 3,863 |
|
|
| 4,479 |
|
|
| 1,160 |
|
Other expense (income), net |
|
| (6,176 | ) |
|
| (3,634 | ) |
|
| (7,155 | ) |
Total Costs, Expenses and Other Expense (Income) |
|
| 662,849 |
|
|
| 637,620 |
|
|
| 473,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from Continuing Operations Before Income Taxes |
|
| 79,112 |
|
|
| 45,641 |
|
|
| 77,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes |
|
| 13,137 |
|
|
| 7,325 |
|
|
| 18,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from Continuing Operations |
|
| 65,975 |
|
|
| 38,316 |
|
|
| 58,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from Discontinued Operation, net of income tax |
|
| - |
|
|
| 133 |
|
|
| (6,789 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
| 65,975 |
|
|
| 38,449 |
|
|
| 51,931 |
|
Less: Earnings Attributable to Redeemable Noncontrolling Interest |
|
| - |
|
|
| - |
|
|
| 1,118 |
|
Net Earnings Attributable to II-VI Incorporated |
| $ | 65,975 |
|
| $ | 38,449 |
|
| $ | 50,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (loss) Attributable to II-VI Incorporated Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
| $ | 1.08 |
|
| $ | 0.62 |
|
| $ | 0.92 |
|
Discontinued Operation |
| $ | - |
|
| $ | - |
|
| $ | (0.11 | ) |
Consolidated |
| $ | 1.08 |
|
| $ | 0.62 |
|
| $ | 0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (loss) Attributable to II-VI Incorporated Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
| $ | 1.05 |
|
| $ | 0.60 |
|
| $ | 0.90 |
|
Discontinued Operation |
| $ | - |
|
| $ | - |
|
| $ | (0.11 | ) |
Consolidated |
| $ | 1.05 |
|
| $ | 0.60 |
|
| $ | 0.80 |
|
Year Ended June 30, |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
($000, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 972,046 |
|
| $ | 827,216 |
|
| $ | 741,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs, Expenses and Other Expense (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 583,693 |
|
|
| 514,403 |
|
|
| 470,363 |
|
Internal research and development |
|
| 96,810 |
|
|
| 60,354 |
|
|
| 51,260 |
|
Selling, general and administrative |
|
| 176,002 |
|
|
| 160,646 |
|
|
| 143,539 |
|
Interest expense |
|
| 6,809 |
|
|
| 3,081 |
|
|
| 3,863 |
|
Other expense (income), net |
|
| (10,056 | ) |
|
| (1,223 | ) |
|
| (6,176 | ) |
Total Costs, Expenses and Other Expense (Income) |
|
| 853,258 |
|
|
| 737,261 |
|
|
| 662,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
| 118,788 |
|
|
| 89,955 |
|
|
| 79,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes |
|
| 23,514 |
|
|
| 24,469 |
|
|
| 13,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
| $ | 95,274 |
|
| $ | 65,486 |
|
| $ | 65,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
| $ | 1.52 |
|
| $ | 1.07 |
|
| $ | 1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
| $ | 1.48 |
|
| $ | 1.04 |
|
| $ | 1.05 |
|
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
| $ | 65,975 |
|
| $ | 38,449 |
|
| $ | 51,931 |
|
| $ | 95,274 |
|
| $ | 65,486 |
|
| $ | 65,975 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (8,497 | ) |
|
| 2,363 |
|
|
| 5,362 |
|
|
| (2,275 | ) |
|
| (15,651 | ) |
|
| (8,497 | ) |
Pension adjustment, net of taxes of ($602) for the year ended June 30, 2015 and $387 for the year ended June 30, 2014, respectively |
|
| (2,244 | ) |
|
| 1,443 |
|
|
| - |
| ||||||||||||
Pension adjustment, net of taxes of $674, ($1,886), and $($602) for the years ended June 30, 2017, 2016, and 2015, respectively |
|
| 2,514 |
|
|
| (7,031 | ) |
|
| (2,244 | ) | ||||||||||||
Other comprehensive income (loss) |
|
| 239 |
|
|
| (22,682 | ) |
|
| (10,741 | ) | ||||||||||||
Comprehensive income |
| $ | 55,234 |
|
| $ | 42,255 |
|
| $ | 57,293 |
|
| $ | 95,513 |
|
| $ | 42,804 |
|
| $ | 55,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net earnings attributable to redeemable noncontrolling interest |
| $ | - |
|
| $ | - |
|
| $ | 1,118 |
| ||||||||||||
Other comprehensive income (loss) attributable to redeemable noncontrolling interest: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign currency translation adjustments attributable to redeemable noncontrolling interest |
| $ | - |
|
| $ | - |
|
| $ | (295 | ) | ||||||||||||
Comprehensive income attributable to redeemable noncontrolling interest |
| $ | - |
|
| $ | - |
|
| $ | 823 |
| ||||||||||||
Comprehensive income attributable to II-VI Incorporated |
| $ | 55,234 |
|
| $ | 42,255 |
|
| $ | 56,470 |
|
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Common Stock |
|
| Comprehensive |
|
| Retained |
|
| Treasury Stock |
|
|
|
|
|
| Common Stock |
|
| Comprehensive |
|
| Retained |
|
| Treasury Stock |
|
|
|
|
| |||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Income |
|
| Earnings |
|
| Shares |
|
| Amount |
|
| Total |
|
| Shares |
|
| Amount |
|
| Income (Loss) |
|
| Earnings |
|
| Shares |
|
| Amount |
|
| Total |
| |||||||||||||||||||
(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2012 |
|
| 69,627 |
|
| $ | 176,295 |
|
| $ | 10,238 |
|
| $ | 434,940 |
|
|
| (6,794 | ) |
| $ | (35,247 | ) |
| $ | 586,226 |
| |||||||||||||||||||||||||||||||||
Shares issued under share-based compensation plans |
|
| 596 |
|
|
| 4,104 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,104 |
| |||||||||||||||||||||||||||||||||
Net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 50,813 |
|
|
| - |
|
|
| - |
|
|
| 50,813 |
| |||||||||||||||||||||||||||||||||
Purchases of treasury stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,141 | ) |
|
| (19,978 | ) |
|
| (19,978 | ) | |||||||||||||||||||||||||||||||||
Treasury stock under deferred compensation arrangements |
|
| - |
|
|
| 1,291 |
|
|
| - |
|
|
| - |
|
|
| (70 | ) |
|
| (1,291 | ) |
|
| - |
| |||||||||||||||||||||||||||||||||
Minimum tax withholding requirements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (7 | ) |
|
| (138 | ) |
|
| (138 | ) | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
|
| - |
|
|
| - |
|
|
| 5,362 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,362 |
| |||||||||||||||||||||||||||||||||
Share-based compensation expense |
|
| - |
|
|
| 11,959 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 11,959 |
| |||||||||||||||||||||||||||||||||
Excess tax benefits from share-based compensation expense |
|
| - |
|
|
| 635 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 635 |
| |||||||||||||||||||||||||||||||||
Adjustment to redeemable noncontrolling interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,875 | ) |
|
| - |
|
|
| - |
|
|
| (2,875 | ) | |||||||||||||||||||||||||||||||||
Balance - June 30, 2013 |
|
| 70,223 |
|
| $ | 194,284 |
|
| $ | 15,600 |
|
| $ | 482,878 |
|
|
| (8,012 | ) |
| $ | (56,654 | ) |
| $ | 636,108 |
| |||||||||||||||||||||||||||||||||
Shares issued under share-based compensation plans |
|
| 712 |
|
|
| 4,482 |
|
|
| - |
|
|
| - |
|
|
| (44 | ) |
|
| (827 | ) |
|
| 3,655 |
| |||||||||||||||||||||||||||||||||
Net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 38,449 |
|
|
| - |
|
|
| - |
|
|
| 38,449 |
| |||||||||||||||||||||||||||||||||
Purchases of treasury stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,333 | ) |
|
| (19,973 | ) |
|
| (19,973 | ) | |||||||||||||||||||||||||||||||||
Treasury stock under deferred compensation arrangements |
|
| - |
|
|
| 1,809 |
|
|
| - |
|
|
| - |
|
|
| (93 | ) |
|
| (1,809 | ) |
|
| - |
| |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
|
| - |
|
|
| - |
|
|
| 2,363 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,363 |
| |||||||||||||||||||||||||||||||||
Share-based compensation expense |
|
| - |
|
|
| 12,347 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 12,347 |
| |||||||||||||||||||||||||||||||||
Pension adjustment, net of taxes of $387 |
|
| - |
|
|
| - |
|
|
| 1,443 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,443 |
| |||||||||||||||||||||||||||||||||
Excess tax benefits from share-based compensation expense |
|
| - |
|
|
| 651 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 651 |
| |||||||||||||||||||||||||||||||||
Balance - June 30, 2014 |
|
| 70,935 |
|
| $ | 213,573 |
|
| $ | 19,406 |
|
| $ | 521,327 |
|
|
| (9,482 | ) |
| $ | (79,263 | ) |
| $ | 675,043 |
|
|
| 70,935 |
|
| $ |
| 213,573 |
|
| $ |
| 19,406 |
|
| $ |
| 521,327 |
|
|
| (9,482 | ) |
| $ |
| (79,263 | ) |
| $ |
| 675,043 |
|
Shares issued under share-based compensation plans |
|
| 773 |
|
|
| 5,196 |
|
|
| - |
|
|
| - |
|
|
| (75 | ) |
|
| (1,085 | ) |
|
| 4,111 |
|
|
| 773 |
|
|
|
| 5,196 |
|
|
|
| - |
|
|
|
| - |
|
|
| (75 | ) |
|
|
| (1,085 | ) |
|
|
| 4,111 |
|
Net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 65,975 |
|
|
| - |
|
|
| - |
|
|
| 65,975 |
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| 65,975 |
|
|
| - |
|
|
|
| - |
|
|
|
| 65,975 |
|
Purchases of treasury stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (936 | ) |
|
| (12,729 | ) |
|
| (12,729 | ) |
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
| (936 | ) |
|
|
| (12,729 | ) |
|
|
| (12,729 | ) |
Treasury stock under deferred compensation arrangements |
|
| 72 |
|
|
| 418 |
|
|
| - |
|
|
| - |
|
|
| (72 | ) |
|
| (418 | ) |
|
| - |
|
|
| 72 |
|
|
|
| 418 |
|
|
|
| - |
|
|
|
| - |
|
|
| (72 | ) |
|
|
| (418 | ) |
|
|
| - |
|
Foreign currency translation adjustments |
|
| - |
|
|
| - |
|
|
| (8,497 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (8,497 | ) |
|
| - |
|
|
|
| - |
|
|
|
| (8,497 | ) |
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (8,497 | ) |
Share-based compensation expense |
|
| - |
|
|
| 11,340 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 11,340 |
|
|
| - |
|
|
|
| 11,340 |
|
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| 11,340 |
|
Pension adjustment, net of taxes of ($602) |
|
| - |
|
|
| - |
|
|
| (2,244 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,244 | ) |
|
| - |
|
|
|
| - |
|
|
|
| (2,244 | ) |
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (2,244 | ) |
APIC pool reclassification |
|
| - |
|
|
| (3,812 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,812 | ) |
|
| - |
|
|
|
| (3,812 | ) |
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (3,812 | ) |
Tax deficiency from share-based compensation expense |
|
| - |
|
|
| (106 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (106 | ) |
|
| - |
|
|
|
| (106 | ) |
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (106 | ) |
Balance - June 30, 2015 |
|
| 71,780 |
|
| $ | 226,609 |
|
| $ | 8,665 |
|
| $ | 587,302 |
|
|
| (10,565 | ) |
| $ | (93,495 | ) |
| $ | 729,081 |
|
|
| 71,780 |
|
| $ |
| 226,609 |
|
| $ |
| 8,665 |
|
| $ |
| 587,302 |
|
|
| (10,565 | ) |
| $ |
| (93,495 | ) |
| $ |
| 729,081 |
|
Shares issued under share-based compensation plans |
|
| 1,046 |
|
|
|
| 9,653 |
|
|
|
| - |
|
|
|
| - |
|
|
| (112 | ) |
|
|
| (2,004 | ) |
|
|
| 7,649 |
| ||||||||||||||||||||||||||||
Net earnings |
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| 65,486 |
|
|
| - |
|
|
|
| - |
|
|
|
| 65,486 |
| ||||||||||||||||||||||||||||
Purchases of treasury stock |
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
| (381 | ) |
|
|
| (6,284 | ) |
|
|
| (6,284 | ) | ||||||||||||||||||||||||||||
Treasury stock under deferred compensation arrangements |
|
| 14 |
|
|
|
| (1,538 | ) |
|
|
| - |
|
|
|
| - |
|
|
| 92 |
|
|
|
| 1,538 |
|
|
|
| - |
| ||||||||||||||||||||||||||||
Foreign currency translation adjustments |
|
| - |
|
|
|
| - |
|
|
|
| (15,651 | ) |
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (15,651 | ) | ||||||||||||||||||||||||||||
Share-based compensation expense |
|
| - |
|
|
|
| 9,675 |
|
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| 9,675 |
| ||||||||||||||||||||||||||||
Pension adjustment, net of taxes of ($1,886) |
|
| - |
|
|
|
| - |
|
|
|
| (7,031 | ) |
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (7,031 | ) | ||||||||||||||||||||||||||||
Tax deficiency from share-based compensation expense |
|
| - |
|
|
|
| (587 | ) |
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (587 | ) | ||||||||||||||||||||||||||||
Balance - June 30, 2016 |
|
| 72,840 |
|
| $ |
| 243,812 |
|
| $ |
| (14,017 | ) |
| $ |
| 652,788 |
|
|
| (10,966 | ) |
| $ |
| (100,245 | ) |
| $ |
| 782,338 |
| ||||||||||||||||||||||||||||
Shares issued under share-based compensation plans |
|
| 1,204 |
|
|
|
| 15,092 |
|
|
|
| - |
|
|
|
| - |
|
|
| (159 | ) |
|
|
| (4,136 | ) |
|
|
| 10,956 |
| ||||||||||||||||||||||||||||
Net earnings |
|
| - |
|
|
|
| - |
|
|
|
| - |
|
|
|
| 95,274 |
|
|
| - |
|
|
|
| - |
|
|
|
| 95,274 |
| ||||||||||||||||||||||||||||
Treasury stock under deferred compensation arrangements |
|
| 37 |
|
|
|
| (1,022 | ) |
|
|
| - |
|
|
|
| - |
|
|
| 185 |
|
|
|
| 1,022 |
|
|
|
| - |
| ||||||||||||||||||||||||||||
Foreign currency translation adjustments |
|
| - |
|
|
|
| - |
|
|
|
| (2,275 | ) |
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| (2,275 | ) | ||||||||||||||||||||||||||||
Share-based compensation expense |
|
| - |
|
|
|
| 11,756 |
|
|
|
| - |
|
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| 11,756 |
| ||||||||||||||||||||||||||||
Pension adjustment, net of taxes of $674 |
|
| - |
|
|
|
| - |
|
|
|
| 2,514 |
|
|
|
| - |
|
|
| - |
|
|
|
| - |
|
|
|
| 2,514 |
| ||||||||||||||||||||||||||||
Balance - June 30, 2017 |
|
| 74,081 |
|
| $ |
| 269,638 |
|
| $ |
| (13,778 | ) |
| $ |
| 748,062 |
|
|
| (10,940 | ) |
| $ |
| (103,359 | ) |
| $ |
| 900,563 |
|
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
| $ | 65,975 |
|
| $ | 38,449 |
|
| $ | 51,931 |
|
| $ | 95,274 |
|
| $ | 65,486 |
|
| $ | 65,975 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Earnings) loss from discontinued operation, net of tax |
|
| - |
|
|
| (133 | ) |
|
| 6,789 |
| ||||||||||||
Depreciation |
|
| 41,114 |
|
|
| 41,805 |
|
|
| 34,135 |
|
|
| 50,894 |
|
|
| 44,324 |
|
|
| 41,114 |
|
Amortization |
|
| 11,969 |
|
|
| 11,293 |
|
|
| 6,657 |
|
|
| 12,743 |
|
|
| 12,339 |
|
|
| 11,969 |
|
Share-based compensation expense |
|
| 11,340 |
|
|
| 12,347 |
|
|
| 11,959 |
|
|
| 11,756 |
|
|
| 9,675 |
|
|
| 11,340 |
|
Impairment of intangible assets |
|
| 1,964 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,964 |
|
Losses on foreign currency remeasurements and transactions |
|
| 2,178 |
|
|
| 700 |
|
|
| 1,244 |
| ||||||||||||
(Gains) losses on foreign currency remeasurements and transactions |
|
| (1,275 | ) |
|
| (51 | ) |
|
| 2,178 |
| ||||||||||||
Earnings from equity investment |
|
| (948 | ) |
|
| (698 | ) |
|
| (1,048 | ) |
|
| (744 | ) |
|
| (29 | ) |
|
| (948 | ) |
Deferred income taxes |
|
| (3,781 | ) |
|
| (4,435 | ) |
|
| 1,962 |
|
|
| (1,184 | ) |
|
| 977 |
|
|
| (3,781 | ) |
Excess tax benefits from share-based compensation expense |
|
| (335 | ) |
|
| (651 | ) |
|
| (635 | ) |
|
| - |
|
|
| (589 | ) |
|
| (335 | ) |
Impairment on property, plant, and equipment |
|
| - |
|
|
| - |
|
|
| 900 |
| ||||||||||||
Increase (decrease) in cash from changes in: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Increase (decrease) in cash from changes in (net of effects of acquisitions and dispositions): |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Accounts receivable |
|
| (10,742 | ) |
|
| (28,486 | ) |
|
| 5,441 |
|
|
| (26,247 | ) |
|
| (20,770 | ) |
|
| (10,742 | ) |
Inventories |
|
| (4,207 | ) |
|
| 12,794 |
|
|
| 1,969 |
|
|
| (24,992 | ) |
|
| (8,650 | ) |
|
| (4,207 | ) |
Accounts payable |
|
| 61 |
|
|
| 19,813 |
|
|
| (9,376 | ) |
|
| 6,704 |
|
|
| 5,715 |
|
|
| 61 |
|
Income taxes |
|
| 7,589 |
|
|
| (6,282 | ) |
|
| 4,351 |
|
|
| 735 |
|
|
| 13,416 |
|
|
| 7,589 |
|
Other operating net assets |
|
| 7,189 |
|
|
| (2,251 | ) |
|
| (5,807 | ) |
|
| (5,048 | ) |
|
| 1,127 |
|
|
| 7,189 |
|
Net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Continuing Operations |
|
| 129,366 |
|
|
| 94,265 |
|
|
| 110,472 |
| ||||||||||||
Discontinued Operation |
|
| - |
|
|
| 1,197 |
|
|
| (2,865 | ) | ||||||||||||
Net cash provided by operating activities |
|
| 129,366 |
|
|
| 95,462 |
|
|
| 107,607 |
|
|
| 118,616 |
|
|
| 122,970 |
|
|
| 129,366 |
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant & equipment |
|
| (52,313 | ) |
|
| (29,220 | ) |
|
| (25,205 | ) |
|
| (138,517 | ) |
|
| (58,170 | ) |
|
| (52,313 | ) |
Proceeds from the sale of business |
|
| - |
|
|
| 45,000 |
|
|
| - |
| ||||||||||||
Purchases of businesses, net of cash acquired |
|
| - |
|
|
| (177,676 | ) |
|
| (126,193 | ) |
|
| (40,015 | ) |
|
| (122,157 | ) |
|
| - |
|
Proceeds received from contractual settlement from Thailand flooding |
|
| - |
|
|
| - |
|
|
| 4,797 |
| ||||||||||||
Proceeds received from sale of equity method investment |
|
| - |
|
|
| - |
|
|
| 2,138 |
| ||||||||||||
Other investing activities |
|
| 67 |
|
|
| 79 |
|
|
| - |
|
|
| 1,291 |
|
|
| 161 |
|
|
| 67 |
|
Net cash used in investing activities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Continuing Operations |
|
| (52,246 | ) |
|
| (206,817 | ) |
|
| (144,463 | ) | ||||||||||||
Discontinued Operation |
|
| - |
|
|
| - |
|
|
| (68 | ) | ||||||||||||
Net cash used in investing activities |
|
| (52,246 | ) |
|
| (206,817 | ) |
|
| (144,531 | ) |
|
| (177,241 | ) |
|
| (135,166 | ) |
|
| (52,246 | ) |
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
| 3,000 |
|
|
| 183,000 |
|
|
| 113,000 |
|
|
| 129,000 |
|
|
| 125,200 |
|
|
| 3,000 |
|
Payments on borrowings |
|
| (68,500 | ) |
|
| (55,000 | ) |
|
| (11,000 | ) |
|
| (25,000 | ) |
|
| (65,700 | ) |
|
| (68,500 | ) |
Payment on earnout consideration |
|
| (2,000 | ) |
|
| - |
|
|
| - |
| ||||||||||||
Proceeds from exercises of stock options |
|
| 15,092 |
|
|
| 9,653 |
|
|
| 5,196 |
| ||||||||||||
Payments in satisfaction of employees' minimum tax obligations |
|
| (4,136 | ) |
|
| (2,004 | ) |
|
| (1,089 | ) | ||||||||||||
Debt issuance costs |
|
| (1,384 | ) |
|
| - |
|
|
| - |
| ||||||||||||
Purchases of treasury stock |
|
| (12,729 | ) |
|
| (19,973 | ) |
|
| (19,978 | ) |
|
| - |
|
|
| (6,284 | ) |
|
| (12,729 | ) |
Payments of redeemable noncontrolling interest |
|
| - |
|
|
| (8,789 | ) |
|
| - |
| ||||||||||||
Payments on holdback arrangements |
|
| (2,350 | ) |
|
| (3,000 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,350 | ) |
Proceeds from exercises of stock options |
|
| 5,196 |
|
|
| 4,358 |
|
|
| 4,104 |
| ||||||||||||
Other financing activities |
|
| (681 | ) |
|
| (1,514 | ) |
|
| (347 | ) |
|
| - |
|
|
| 587 |
|
|
| 408 |
|
Net cash (used in) provided by financing activities |
|
| (76,064 | ) |
|
| 99,082 |
|
|
| 85,779 |
| ||||||||||||
Net cash provided by (used in) financing activities |
|
| 111,572 |
|
|
| 61,452 |
|
|
| (76,064 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
|
| (2,082 | ) |
|
| 1,500 |
|
|
| 1,634 |
|
|
| 496 |
|
|
| (4,445 | ) |
|
| (2,082 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (1,026 | ) |
|
| (10,773 | ) |
|
| 50,489 |
| ||||||||||||
Net increase (decrease) in cash and cash equivalents |
|
| 53,443 |
|
|
| 44,811 |
|
|
| (1,026 | ) | ||||||||||||
Cash and Cash Equivalents at Beginning of Period |
|
| 174,660 |
|
|
| 185,433 |
|
|
| 134,944 |
|
|
| 218,445 |
|
|
| 173,634 |
|
|
| 174,660 |
|
Cash and Cash Equivalents at End of Period |
| $ | 173,634 |
|
| $ | 174,660 |
|
| $ | 185,433 |
|
| $ | 271,888 |
|
| $ | 218,445 |
|
| $ | 173,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Non cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of businesses - holdback amount recorded in Other accrued liabilities |
| $ | - |
|
| $ | 10,000 |
|
| $ | - |
| ||||||||||||
Purchases of business - earnout consideration recorded in Other liabilities |
| $ | - |
|
| $ | 2,417 |
|
| $ | - |
| ||||||||||||
Purchases of business - earnout consideration recorded in Other accrued liabilities |
| $ | 2,250 |
|
| $ | 1,935 |
|
| $ | - |
| ||||||||||||
Capital lease obligation incurred on facility lease |
| $ | - |
|
| $ | 11,636 |
|
| $ | - |
|
| $ | 25,000 |
|
| $ | - |
|
| $ | - |
|
Purchase of business utilizing earnout consideration recorded in other current liabilities |
| $ | - |
|
| $ | - |
|
| $ | 3,300 |
| ||||||||||||
Additions to property, plant & equipment included in accounts payable |
| $ | 4,428 |
|
| $ | - |
|
| $ | - |
|
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
Note 1. | Nature of Business and Summary of Significant Accounting Policies |
Nature of Business. II-VI Incorporated and its subsidiaries (the “Company,” “we,” “us,” or “our”), a global leader in engineered materials and opto-electronicoptoelectronic components and devices, is a vertically-integrated manufacturing company that develops, innovative productsmanufactures and markets engineered materials and optoelectronic componenets and devices for diversified applicationsprecision use in the industrial materials processing, optical communications, military, consumer electronics, semiconductor equipment, life sciences semiconductor equipment and consumer markets.automotive applications. The Company markets its products through its direct sales force and through distributors and agents.
The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company’s manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the Company does occasionally experience problems associated with vendor-supplied materials not meeting specifications for quality or purity. A significant failure of the Company’s suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a material adverse effect on the Company’s results of operations.
Effective July 1, 2014, the Company realigned its organizational structure into three reporting segments for the purpose of making operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products. The Company is reporting financial information (revenue through operating income) for these new reporting segments which management believes will provide enhanced visibility and transparency into the operations, business drivers and the value of the enterprise.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company. All intercompany transactions and balances have been eliminated.
Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation. For II-VI Singapore Pte., Ltd. and its subsidiaries, II-VI Suisse S.a.r.l. and II-VI Laser Enterprise of the II-VI Laser Solutions segment, II-VI Network Solutions Division of the II-VI Photonics segment, and II-VI Performance Metals of the II-VI Performance Products segment the functional currency is the United States (U.S.) dollar. The determination of the functional currency is made based on the appropriate economic and management indicators.
For all other foreign subsidiaries, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates while income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income within shareholders’ equity in the accompanying Consolidated Balance Sheets.
Cash and Cash Equivalents. The Company considers highly liquid investment instruments with an original maturity of three months or less to be cash equivalents. We place our cash and cash equivalents with high credit quality financial institutions and to date have not experienced credit losses in these instruments. Cash of foreign subsidiaries is on deposit at banks in China, Vietnam, Singapore, Japan, Switzerland, the Netherlands, Germany, the Philippines, Belgium, Italy, Hong Kong, Australia, the United Kingdom, (“U.K.”)South Korea and South Korea.Taiwan.
Accounts Receivable. The Company establishes an allowance for doubtful accounts based on historical experience and believes the collection of revenues, net of this allowance, is reasonably assured.
The Company factored a portion of the accounts receivable of its Japan subsidiary during each of the years ended June 30, 20152017 and 2014.2016. Factoring is done with high credit quality financial institutions in Japan. During the years ended June 30, 20152017 and 2014, $17.82016, $23.1 million and $12.7$20.5 million, respectively, of accounts receivable had been factored. As of June 30, 20152017 and 2014,2016, the amount included in otherOther accrued liabilities representing the Company’s obligation to the bank for these receivables factored with recourse was immaterial.
Inventories. Inventories are valued at the lower of cost or market (“LCM”), with cost determined on the first-in, first-out basis. Inventory costs include material, labor and manufacturing overhead. Market cannot exceed the net realizable value (i.e., estimated selling price in the ordinary course of business less reasonably predicted costs of completion and disposal) and market shall not be less than net realizable value reduced by an allowance for an approximately normal profit margin. In evaluating LCM, management also
considers, if applicable, other factors as well, including known trends, market conditions, currency exchange rates and other such issues. The Company generally records an inventory reserve as a charge against earnings for all products on hand more than twelve12 to eighteen24 months depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative customers. An additional reserve ismay be recorded for product on hand that is in excess of product sold to customers over the same periods noted above. Inventories are presented net of reserves. The reserves totaled $22.3$18.5 million and $12.0$17.7 million at June 30, 20152017 and 2014,2016, respectively. The increase in reserves for fiscal year 2015 was primarily due to excess inventory on hand at II-VI Laser Enterprise.
Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair market value upon acquisition. Major improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its property, plant and equipment and other long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. Depreciation for financial reporting purposes is computed primarily by the straight-line method over the estimated useful lives for building, building improvements and land improvements of 10 to 20 years and 3three to 20 years for machinery and equipment.
Business Combinations. The Company accounts for business acquisitions by establishing the acquisition-date fair value as the measurement for all assets acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting. The Company accounts for contingent consideration received in accordance with the “Loss Recovery Approach” under U.S. GAAP. Contingent consideration is accounted for as a gain contingency and not recognized in other expense (income), net until all contingencies have been satisfied.
Goodwill. The excess purchase price over the fair market value allocated to identifiable tangible and intangible net assets of businesses acquired is reported as goodwill in the accompanying Consolidated Balance Sheets. The Company tests goodwill for impairment at least annually as of April 1, or when events or changes in circumstances indicate that goodwill might be impaired. The evaluation of impairment involves comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill). The Company uses a discounted cash flow (“DCF”) model and a market analysis to determine the current fair value of its reporting units. A number of significant assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical experience and all available information at the time the fair values of the reporting units are estimated.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise, the Company will forego the two-step process and does not need to perform any further testing.
Intangibles. Intangible assets are initially recorded at their cost or fair market value upon acquisition. Finite-lived intangible assets are amortized for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from 5five to 20 years. Indefinite-lived intangible assets are not amortized but tested annually for impairment at April 1, or when events or changes in circumstances indicate that indefinite-lived intangible assets might be impaired.
Equity Method Investments. The Company has an equity investment in Guangdong Fuxin Electronic Technology (“Fuxin”) based in Guangdong Province, China of 20.2%, which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at June 30, 20152017 and June 30, 20142016 was $11.9$11.7 million and $11.6$11.4 million, respectively. During the years ended June 30, 2015, 20142017, 2016 and 2013,2015, the Company’s pro-rata share of earnings from this investment was $0.9 million, $0.7 million, $0.1 million and $1.0$0.9 million, respectively, and was recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years ended June 30, 2015, 20142017, 2016 and 20132015, the Company recordedreceived dividends from this equity investment of $0.4 million, $0.6 million $0.3 million and $0.5$0.6 million, respectively.
Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Such accruals are adjusted as further information develops or circumstances change. The Company had no material loss contingency liabilities at June 30, 20152017 related to commitments and contingencies.
Accrued Bonus Compensation and Profit Sharing Contribution.Benefits. The Company records bonus and profit sharing estimates as a charge against earnings. These estimates are adjusted to actual based on final results of operations achieved during the fiscal year. Certain partial bonus amounts are paid on an interim basis, and the remainder is paid after the fiscal year end after the final determination of the applicable percentage or amounts. Other bonuses are paid annually.
Warranty Reserve. The Company records a warranty reserve as a charge against earnings based on a percentage of revenues utilizing actual returns over a period that approximates historical warranty experience with adjustments possible for changes in product lines or
unusual conditions that come to the Company’s attention. Our warranty reserve balance at June 30, 2015was approximately $3.3 million.
Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount more likely than not to be realized. The Company adopted an accounting policy to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Revenue Recognition. The Company recognizes revenues for product shipments when persuasive evidence of a sales arrangement exists, the product has been shipped or delivered, the sale price is fixed or determinable and collectability is reasonably assured. Title and risk of loss passes from the Company to its customer at the time of shipment in most cases with the exception of certain customers. For these customers, title does not pass and revenue is not recognized until the customer has received the product at its physical location.
We establish an allowance for doubtful accounts based on historical experience and believe the collection of revenues, net of this reserve, is reasonably assured. Our allowance for doubtful accounts balance at June 30, 2015 was approximately $1.0 million. Our reserve estimate has historically been proven to be materially correct based upon actual charges incurred.
The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical locations. Further for the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions, credits and discounts, rebates and price protection, or other similar privileges. Our distributors and agents are not granted price protection. Our distributors and agents, which comprise less than 10% of consolidated revenues, have no additional product return rights beyond the right to return defective products covered by our warranty policy. Revenues generated from transactions other than product shipments are contract related and have historically accounted for less than 2%1% of consolidated revenues. We believe our revenue recognition practices have adequately considered the requirements under U.S. GAAP.
Shipping and Handling Costs. Shipping and handling costs billed to customers are included in revenues. Shipping and handling costs incurred by the Company are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Earnings. Total shipping and handling revenue and costs included in revenues and in selling, general and administrative expenses were not significant for the fiscal years ended June 30, 2015, 20142017, 2016 and 2013.2015.
Research and Development. Internal research and development costs and costs not related to customer and government funded research and development contracts are expensed as incurred.
Share-Based Compensation. The Company follows U.S. GAAP in accounting for share-basedShare-based compensation arrangements which requiresrequire the recognition of the grant-date fair value of stock compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period.
Workers’ Compensation. The Company is self-insured for certain losses related to workers’ compensation for the majority of its U.S. employees. When estimating the self-insurance liability, the Company considers a number of factors, including historical claims experience, demographic and severity factors and valuations provided by independent third-party consultants. At least annually, management reviews its assumptions and valuations to determine the adequacy of the self-insurance liability.
Accumulated Other Comprehensive Income. Accumulated other comprehensive income is a measure of all changes in shareholders’ equity that result from transactions and other economic events in the period other than transactions with owners. Accumulated other comprehensive income is a component of shareholders’ equity and consists of accumulated foreign currency translation adjustments of $9.5($8.4) million and $18.0($6.2) million as of June 30, 20152017 and 2014,2016, respectively, and pension adjustments of ($0.8)5.4) million and $1.4($7.8) million as of June 30, 20152017 and 2014,2016, respectively.
Fair Value Measurements. The Company applies fair value accounting for all financial assets and liabilities that are required to be recognized or disclosed at fair value in the financial statements. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which the Company would transact, and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
Operating Leases. The Company classifies operating leases as operating in accordance with the provisions of lease accounting. Rent expense under noncancelable operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess of straight-line rent expense over scheduled payments is recorded as a deferred liability. The current portion of unamortized deferred lease costs is included in other accrued liabilities and the long-term portion is included in other liabilities in the Consolidated Balance Sheets.
Reclassifications.Capital Leases. The Company corrected an immaterial error related to its long term deferred tax assetaccounts for share based compensationcapital leases at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments. The current and long-term portion of the capital lease obligation is recorded in Other accrued liabilities and Capital lease obligations, respectively, in the Consolidated Balance Sheet asSheet. Capital lease assets are included in property, plant & equipment and are generally depreciated over the term of June 30, 2015. The recorded reclassificationthe lease. Interest expense on capital leases are included in interest expense in the Consolidated Statement of $3.8 million reduced both the long term deferred tax asset and additional paid in capital (“APIC”) associated with the Company’s APIC tax pool. This reclassification had no impact on previously reported revenues, income tax expense and net earnings in any annual or interim periods.Earnings.
Recently Issued Financial Accounting Standards
Adopted Pronouncements
In JulyApril 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting StandardStandards Update (“ASU”) 2015-11, Inventory (Topic 330)2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the MeasurementPresentation of Inventory.Debt Issuance Costs. This update simplifies the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling priceASU requires entities to present debt issuance costs in the ordinary coursebalance sheet as a direct deduction from the carrying amount of business, less reasonably predictable costs of completion, disposal and transportation.the corresponding debt liability, consistent with debt discounts. The new inventory measurement requirements are effective for the Company’s 2018 fiscal year and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of these changes isCompany adopted ASU 2015-03, as clarified by ASU 2015-15, which did not expected to have a material impact on the Company’s Consolidated Financial Statements other than corresponding reductions to total assets and total liabilities on the Condensed Consolidated Balance Sheets. Prior to adoption, the Company recorded deferred financing costs as Other assets. Upon adoption, the Company reclassified these costs as a reduction to long term debt and retrospectively reclassified $0.6 million that were previously presented as deferred financing costs, an asset on the Consolidated Balance Sheets as of June 30, 2016. There was no effect on the Consolidated Statements of Earnings as a result of the adoption.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued as final, ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance about whether a cloud computing arrangement includes a software license. The update is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The update allows for the use of eitherthis standard did not have a prospective or retrospective adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoptionmaterial effect on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This ASU requires entities to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability, consistent with debt discounts. The guidance does not address situations in which debt issuance costs do not have an associated debt liability or exceed the carrying amount of the associated debt liability. This ASU will be effective beginning in fiscal year 2017. Management is currently evaluating the potential impact of adoption on the Company's Consolidated Financial Statements.
In February 2015, the FASB issued as final, ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, whichAnalysis. This update affects reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The update allows for the use of eitherthis standard did not have a full retrospective or a modified retrospective adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoptionmaterial effect on the Company’s Consolidated Financial Statements.
In January 2015,August 2014, the FASB issued ASU 2015-01, Income Statement - Extraordinary2014-15, Presentation of Financial Statements-Going Concern. This update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and Unusual Items. This ASU eliminatesabout related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the requirement to separately present and disclose extraordinary and unusual items indate the financial statements. This ASU will be effective beginning in 2016.statements are issued. The adoption of this ASU isdid not expected to have a material effect on ourthe Company’s Consolidated Financial Statements.
Revenue Recognition Pronouncement Currently Under Evaluation
In May 2014, the FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606) which supersedes virtually all existing revenue recognition guidance under U.S. GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update allows for the use of either the retrospective or modified retrospective approach of adoption. On July 9, 2015, the FASB approved a one year deferral of the effective date of the update. The update will be effective for the Company’s 2019 fiscal year (July 1, 2018). In May 2016, the FASB issued an amendment which did not change the core principles of the guidance in Topic 606. Rather, the amendments in this update affect only narrow aspects of Topic 606.
We commenced our evaluation of the impact of the ASU in fiscal 2017 by evaluating its impact on selected contracts at each of our business segments. As the ASU will supersede all existing revenue guidance affecting U.S. GAAP, it could impact revenue and cost recognition on our contracts across all our business segments, as well as our business processes and our information technology. As a result, our evaluation of the effect of the ASU will extend through fiscal year 2018. To date, the Company has completed its assessment of its military related contracts that comprise approximately 10% of consolidated revenues and have tentatively concluded that the Company will accelerate the recognition of revenue under the ASU for these contracts as the customer obtains control of the goods or service promised in the contract. For the commercial portion of the Company’s business, we will complete our assessment in fiscal year 2018. Based upon our evaluation to date, we cannot currently estimate the impacts of adopting the ASU. We have periodically updated our Audit Committee on our progress made towards this adoption. The Company will adopt this ASU using the modified retrospective method whereby the cumulative effect of applying the ASU would be recognized at the beginning of the year of adoption.
Other Pronouncements Currently Under Evaluation
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The new guidance will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for fiscal years,annual periods, and interim periods within those years,annual periods, beginning after December 15, 2017. Early adoption is permitted. The standard will be effective for the Company’s 2018 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In March 2017, (the first quarterthe FASB issued ASU 2017-07, Consolidation (Topic 715): Improving the Presentation of ourNet Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update affects employers’ presentation of defined benefit retirement plan costs. Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year 2019). Weyear. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This standard removes the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit were needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not yet selectedto exceed the carrying amount of goodwill. The Company will adopt this for any impairment test performed after July 1, 2017 as permitted under the standard.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a transition methodbusiness. This update changes the definition of a business to assist entities with evaluating when a set of transferred assets and are currentlyactivities is a business. Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This update requires that when intra-entity asset transfers occur, the entity must recognize tax effects in the period in which the transfer occurs. The standard will be effective for The Company’s 2019 fiscal year. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flow. The update will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The Company is evaluating the impact of this guidance on ourthe Company’s Consolidated Financial Statements.
In April 2014,June 2016, the FASB issued ASU 2014-08: Reporting Discontinued Operations2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update is intended to provide financial statement users with more decision-useful information about expected credit losses and Disclosures of Disposals of Components of an Entity, which changesother commitments to extend credit held by the criteria for determining which disposals can be presented as discontinued operationsreporting entity. The standard replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposalrequires consideration of a component or groupbroader range of components thatreasonable and supportable information to inform credit loss estimates. The update will be effective for the Company’s 2021 fiscal year. Early adoption is disposedpermitted. The Company is evaluating the impact of or is classified as heldthis guidance on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for saleemployee share-based payment transactions, including the accounting for income taxes, forfeitures, and represents a strategic shift that has or will have a major effect on an entity's operationsstatutory tax withholding requirements, and financial results.classification in the statement of cash flows. The new standard will be effective for annual periods beginning on or after December 15, 2014, with earlythe Company’s 2018 fiscal year. Early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal year 2016.is permitted. The adoption of this standardASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This update eliminates the requirement to retrospectively apply the equity method in previous periods when an investor obtains significant influence over an investee. The standard will be effective for the Company’s 2018 fiscal year. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): This update requires that a lessee recognize leased assets with terms greater than 12 months on the balance sheet for the rights and obligations created by those leases. The standard will be effective for the Company’s 2020 fiscal year. Early adoption is permitted. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Recognition and measurement of Financial Assets and Financial Liabilities (Topic 825): This update requires that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income. This ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. Early adoption is permitted. The standard will be effective for the Company’s 2018 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In July 2013,2015, the FASB issued ASU 2013-11: Presentation2015-11, Inventory (Topic 330): Simplifying the Measurement of an Unrecognized Tax benefit when aInventory. This update simplifies the measurement of inventory valuation at the lower of cost or net realizable value. Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit carryforward Exists. The ASU changes how certain unrecognized tax benefits are to be presented onrealizable value is the consolidated balance sheet. This ASU clarified existing guidance to require that an unrecognized tax benefit, or a portion thereof, be presentedestimated selling price in the consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss ("NOL") carryforward, similar tax loss, or a tax credit carryforward, except when an NOL carryforward, similar tax loss, or tax credit carryforward is not available under the tax lawordinary course of the applicable jurisdiction to settle any additional income taxes that would result from the disallowancebusiness, less reasonably predictable costs of a tax position. In such a case, the unrecognized tax benefit wouldcompletion, disposal and transportation. The new inventory measurement requirements will be presented in the consolidated balance sheet as a liability. This update was effective for fiscal years beginning after December 15, 2013 and was effective for the Company forCompany’s 2018 fiscal year and will replace the fiscal quarter ended September 30, 2014.current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of this standard didASU is not expected to have a significant impactmaterial effect on the Company’s Consolidated Financial Statements.
Note 2. |
|
During December 2013,Acquisition of Integrated Photonics, Inc.
In June 2017, the Company completedacquired all the discontinuanceoutstanding shares of Integrated Photonics, Inc. (“IPI”) a privately held company based in New Jersey. IPI is a leader in engineered magneto-optic materials that enable high-performance directional components such as optical isolators for the optical communications market. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $39.4 million, net of cash acquired and a working capital adjustment of $0.7 million. In addition, the agreement provides up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving certain agreed upon financial and transitional objectives, which if earned would be payable in the amount of $2.5 million for the achievement of the annual target.
The following table presents the preliminary purchase price at the date of acquisition ($000):
Net cash paid at acquisition |
| $ | 39,436 |
|
Fair value of cash earnout arrangement |
|
| 2,250 |
|
Purchase price |
| $ | 41,686 |
|
The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition, as the Company intends to finalize its tellurium product line by exitingaccounting for the valuation of property, plant and equipment, identifiable intangibles and deferred income tax liabilities and anticipates completion of the valuation within one year from the date of the acquisition ($000):
Assets |
|
|
|
|
Accounts receivable |
| $ | 2,083 |
|
Inventories |
|
| 3,968 |
|
Prepaid and other assets |
|
| 322 |
|
Property, plant & equipment |
|
| 11,257 |
|
Intangible assets |
|
| 22,213 |
|
Goodwill |
|
| 17,107 |
|
Total assets acquired |
| $ | 56,950 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts payable |
| $ | 846 |
|
Other accrued liabilities |
|
| 1,032 |
|
Long-term debt assumed |
|
| 3,834 |
|
Deferred tax liabilities |
|
| 9,552 |
|
Total liabilities assumed |
|
| 15,264 |
|
Net assets acquired |
| $ | 41,686 |
|
The goodwill of $17.1 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled workforce of IPI. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1 million with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $0.3 million for the year ended June 30, 2017.
The amount of revenues and net earnings of IPI included in the Company’s Consolidated Statement of Earnings since the acquisition was immaterial. Pro forma information was omitted due to the immaterial impact of IPI financial results.
Acquisition of DirectPhotonics Industries GmbH
During the quarter ended December 31, 2016, the Company purchased certain assets, mainly inventory and fixed assets, of DirectPhotonics Industries GmbH located in Berlin, Germany for approximately $0.6 million. This business activities associatedwas combined with the Company’s II-VI HIGHYAG division in the II-VI Laser Solutions segment. Due to the insignificant amount of the acquisition purchase price, certain business combinations disclosures typically required under U.S. GAAP have been omitted.
Acquisition of EpiWorks, Inc.
In February 2016, the Company acquired all the outstanding shares of EpiWorks, Inc. (“EpiWorks”) a privately held company based in Illinois. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $43.0 million, net of cash acquired and a working capital adjustment of $0.2 million. In addition, the agreement provided up to a maximum of $6.0 million of additional cash earnout opportunities based upon EpiWorks achieving certain agreed upon financial and operational targets for capacity, wafer output and gross margin, which if earned would be payable in the amount of $2.0 million for the achievement of each specific annual target over the next three years. EpiWorks develops and manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices and high-speed communication systems. EpiWorks is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.
The following table presents the allocation of the purchase price at the date of acquisition ($000):
Net cash paid at acquisition |
| $ | 42,981 |
|
Cash paid for working capital adjustment |
|
| 163 |
|
Fair value of cash earnout arrangement |
|
| 4,352 |
|
Purchase price |
| $ | 47,496 |
|
The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition. ($000):
Assets |
|
|
|
|
Accounts receivable |
| $ | 2,121 |
|
Inventories |
|
| 2,435 |
|
Prepaid and other assets |
|
| 68 |
|
Property, plant & equipment |
|
| 9,043 |
|
Intangible assets |
|
| 14,124 |
|
Goodwill |
|
| 27,588 |
|
Total assets acquired |
| $ | 55,379 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts payable |
| $ | 605 |
|
Other accrued liabilities |
|
| 859 |
|
Deferred tax liabilities |
|
| 6,419 |
|
Total liabilities assumed |
|
| 7,883 |
|
Net assets acquired |
| $ | 47,496 |
|
The goodwill of $27.6 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of EpiWorks. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1 million with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $0.4 million for the year ended June 30, 2016.
The purchase price allocation was finalized in the 2017 first quarter and did not result in any adjustments to the preliminary fair values.
Acquisition of ANADIGICS, Inc.
In March 2016, the Company acquired all the outstanding shares of ANADIGICS (Nasdaq:ANAD), which was a publicly traded company based in New Jersey. Under the terms of the merger agreement, the consideration consisted of both a working capital advance of $3.5 million and cash paid of $78.2 million at the acquisition date, net of cash acquired of $2.7 million. ANADIGICS has a 6-inch gallium arsenide wafer fabrication capability allowing for the production of high performance lasers and integrated circuits in high volume. In addition, at the time of the acquisition, ANADIGICS designed and manufactured innovative radio frequency (RF) solutions for CATV infrastructure, small-cell, WIFI and cellular markets. The Company divested this product. This product lineportion of the business in June 2016. In conjunction with the sale of the RF business, the Company renamed ANADIGICS as II-VI Optoelectronic Devices Division. OED is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.
The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition. ($000):
Assets |
|
|
|
|
Accounts receivable |
| $ | 3,973 |
|
Inventories |
|
| 8,322 |
|
Prepaid and other assets |
|
| 2,347 |
|
Property, plant & equipment |
|
| 25,810 |
|
Intangible assets |
|
| 1,060 |
|
Goodwill |
|
| 48,312 |
|
Total assets acquired |
| $ | 89,824 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts payable |
| $ | 3,586 |
|
Other accrued liabilities |
|
| 7,226 |
|
Total liabilities assumed |
|
| 10,812 |
|
Net assets acquired |
| $ | 79,012 |
|
The goodwill of $48.3 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of ANADIGICS. None of the goodwill is deductible for income tax purposes. In conjunction with the June 3, 2016 sale of the RF business noted below, the Company disposed of $35.4 million of goodwill. The fair value of accounts receivable acquired was previously serviced by II-VI Performance Metals$4.0 million with the gross contractual amount being $4.0 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $2.9 million for the year ended June 30, 2016.
The purchase price allocation was finalized in the 2017 first quarter and wasdid not result in any adjustments to the preliminary fair values.
Deferred Income Taxes
In connection with the acquisitions of EpiWorks and ANADGICS, the Company adopted an accounting policy to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets. During fiscal year 2016, the Company recorded a $36.2 million valuation allowance within purchase accounting as a result of the Company incurring a cumulative U.S. three year loss.
Divesture of the RF Business of ANADIGICS
On June 3, 2016, the Company sold the RF business of ANADIGICS that it acquired on March 15, 2016. The consideration consisted of $45.0 million of cash received at closing, a working capital adjustment of $0.6 million to be received within 60 days after closing and $5.0 million contingent consideration to be earned based upon supplying minimum volumes of wafers to the purchaser over an 18-month period through December 2017. The $5.0 million contingent consideration will be recognized in net earnings when earned and received from the purchaser. The Company believes the sale of this non-strategic business will allow the Company to focus its financial resources and devote greater attention to the 6-inch wafer fab business. The Company incurred approximately $0.4 million in transaction expenses and recorded an immaterial gain of less than $0.1 million on the sale of the RF business.
The following table presents the carrying value of the assets and liabilities included as part of the II-VI Performance Products segment. Prior periods have been restated to present this product line on a discontinued operation basis. The revenues and earnings (losses)disposal of the tellurium product line have been reflected as a discontinued operation for the periods presented as followsRF business of ANADIGICS ($000):
June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | - |
|
| $ | 1,849 |
|
| $ | 7,321 |
|
Earnings (loss) from discontinued operation before income taxes |
|
| - |
|
|
| 133 |
|
|
| (6,789 | ) |
Income tax benefit (expense) |
|
| - |
|
|
| - |
|
|
| - |
|
Earnings (loss) from discontinued operation, net of taxes |
| $ | - |
|
| $ | 133 |
|
| $ | (6,789 | ) |
Assets |
|
|
|
|
Inventories |
| $ | 5,378 |
|
Equipment |
|
| 5,813 |
|
Goodwill |
|
| 35,352 |
|
|
| $ | 46,543 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts payable |
| $ | 963 |
|
|
|
|
|
|
Total Consideration |
| $ | 45,580 |
|
In conjunction with the sale of the RF business, the Company recorded approximately $7.5 million of severance expense for employees of the business. The amount of revenue and net loss from the RF business of ANADIGICS from the acquisition date to the date of sale included in the Company’s Consolidated Statements of Earnings were $10.1 million and $8.4 million, respectively, for the year ended June 30, 2016.
Note 3. | Inventories |
The components of inventories, net of reserves, were as follows:
June 30, |
| 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials |
| $ | 71,210 |
|
| $ | 71,949 |
|
| $ | 78,979 |
|
| $ | 70,623 |
|
Work in progress |
|
| 52,726 |
|
|
| 44,739 |
|
|
| 61,679 |
|
|
| 57,566 |
|
Finished goods |
|
| 40,452 |
|
|
| 49,185 |
|
|
| 63,037 |
|
| �� | 46,944 |
|
|
| $ | 164,388 |
|
| $ | 165,873 |
|
| $ | 203,695 |
|
| $ | 175,133 |
|
Note 4. | Property, Plant and Equipment |
Property, plant and equipment consistsconsist of the following:
June 30, |
| 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements |
| $ | 4,566 |
|
| $ | 2,381 |
|
| $ | 5,667 |
|
| $ | 4,990 |
|
Buildings and improvements |
|
| 91,171 |
|
|
| 96,551 |
|
|
| 144,293 |
|
|
| 110,219 |
|
Machinery and equipment |
|
| 366,560 |
|
|
| 335,408 |
|
|
| 492,042 |
|
|
| 409,551 |
|
Construction in progress |
|
| 17,749 |
|
|
| 16,990 |
|
|
| 88,458 |
|
|
| 34,602 |
|
|
|
| 480,046 |
|
|
| 451,330 |
|
|
| 730,460 |
|
|
| 559,362 |
|
Less accumulated depreciation |
|
| (276,234 | ) |
|
| (242,391 | ) |
|
| (362,732 | ) |
|
| (316,505 | ) |
|
| $ | 203,812 |
|
| $ | 208,939 |
|
| $ | 367,728 |
|
| $ | 242,857 |
|
During the quarter ended March 31, 2015, as part of the Company’s ongoing restructuring of its military related businesses in the II-VI Performance Products segment,2017, the Company implemented a plan to sell one ofsold its manufacturing facilitiesfacility located in New Port Richey,Newport Ritchey, Florida. The Company anticipates completing thereceived $1.7 million, net of customary closing costs and a $0.3 million reserve held in escrow for environmental purposes. The gain on sale within the next twelve months, and has reclassified the carrying value of the land and building of approximately $1.2$0.3 million as assets held for sale and has included the carrying valuewas recorded in Prepaid and other current assetsexpense (income), net in the Consolidated Balance Sheets at June 30, 2015.Statement of Earnings.
Depreciation expense was $41.1$50.9 million, $41.8$44.3 million and $34.1$41.1 million for the fiscal years ended June 30, 2015, 20142017, 2016 and 2013,2015, respectively.
Included in the cost and accumulated depreciation of property, plant and equipment is the effect of foreign currency translation on the portion relating to the Company’s foreign subsidiaries.
Note 5. | Goodwill and Other Intangible Assets |
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable intangible assets acquired in business combinations are recorded based upon fair market value at the date of acquisition.
Changes in the carrying amount of goodwill were as follows ($000):
|
| Year Ended June 30, 2015 |
|
| Year Ended June 30, 2017 |
| ||||||||||||||||||||||||||
|
| II-VI Laser |
|
| II-VI |
|
| II- VI Performance |
|
|
|
|
|
| II-VI Laser |
|
| II-VI |
|
| II- VI Performance |
|
|
|
|
| ||||||
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Total |
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Total |
| ||||||||
Balance-beginning of period |
| $ | 44,041 |
|
| $ | 99,214 |
|
| $ | 52,890 |
|
| $ | 196,145 |
|
| $ | 84,105 |
|
| $ | 96,760 |
|
| $ | 52,890 |
|
| $ | 233,755 |
|
Goodwill acquired |
|
| - |
|
|
| 17,107 |
|
|
| - |
|
|
| 17,107 |
| ||||||||||||||||
Foreign currency translation |
|
| (463 | ) |
|
| 212 |
|
|
| - |
|
|
| (251 | ) |
|
| 75 |
|
|
| (595 | ) |
|
| - |
|
|
| (520 | ) |
Balance-end of period |
| $ | 43,578 |
|
| $ | 99,426 |
|
| $ | 52,890 |
|
| $ | 195,894 |
|
| $ | 84,180 |
|
| $ | 113,272 |
|
| $ | 52,890 |
|
| $ | 250,342 |
|
|
| Year Ended June 30, 2014 |
|
| Year Ended June 30, 2016 |
| ||||||||||||||||||||||||||
|
| II-VI Laser |
|
| II-VI |
|
| II- VI Performance |
|
|
|
|
|
| II-VI Laser |
|
| II-VI |
|
| II- VI Performance |
|
|
|
|
| ||||||
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Total |
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Total |
| ||||||||
Balance-beginning of period |
| $ | 13,233 |
|
| $ | 56,713 |
|
| $ | 53,406 |
|
| $ | 123,352 |
|
| $ | 43,578 |
|
| $ | 99,426 |
|
| $ | 52,890 |
|
| $ | 195,894 |
|
Goodwill acquired |
|
| 30,718 |
|
|
| 42,375 |
|
|
| - |
|
|
| 73,093 |
|
|
| 75,900 |
|
|
| - |
|
|
| - |
|
|
| 75,900 |
|
Goodwill adjustment |
|
| - |
|
|
| - |
|
|
| (516 | ) |
|
| (516 | ) | ||||||||||||||||
Goodwill attributed to the RF business sold |
|
| (35,352 | ) |
|
| - |
|
|
| - |
|
|
| (35,352 | ) | ||||||||||||||||
Foreign currency translation |
|
| 90 |
|
|
| 126 |
|
|
| - |
|
|
| 216 |
|
|
| (21 | ) |
|
| (2,666 | ) |
|
| - |
|
|
| (2,687 | ) |
Balance-end of period |
| $ | 44,041 |
|
| $ | 99,214 |
|
| $ | 52,890 |
|
| $ | 196,145 |
|
| $ | 84,105 |
|
| $ | 96,760 |
|
| $ | 52,890 |
|
| $ | 233,755 |
|
The Company reviews the recoverability of goodwill at least annually and any time business conditions indicate a potential change in recoverability. The measurement of a potential impairment begins with comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill). The Company primarily used a discounted cash flow (DCF) model and a market analysis to determine the current fair value of all its reporting units. A number of significant assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical experience and all available information at the time the fair values of the reporting units are estimated. The Company has the option to perform a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. As of April 1 of fiscal years 20152017 and 2014,2016, the Company completed its annual impairment tests of its
reporting units. Based on the results of these analyses, the Company’s goodwill of $195.9 million as of June 30, 2015 and $196.1 million as of June 30, 2014 was not impaired.
As the estimated fair value of the II-VI Photonics reporting unit was approximately 5% greater than its carrying value, the Company has concluded that this reporting unit is at risk of not passing step one of future goodwill impairment tests. In the event of unfavorable changes to the existing assumptions used in the impairment test such as the weighted average cost of capital (discount rate), growth rates and market multiples as well as changes in our internal structure, the carrying value of the Company’s goodwill could be impaired. Although the Company believes that the current assumptions and estimates are reasonable, supportable and appropriate, the II-VI Photonics reporting unit competes in a challenging environment with significant pricing pressure and rapidly changing technology and there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment test will prove to be accurate predictions of future performance.
As a result of the July 1, 2014 segment realignment, the Company reassigned the existing goodwill balances at July 1, 2014 to the new reporting units utilizing a relative fair value allocation approach in accordance with authoritative accounting guidance. The Company also reviewed the recoverability of the carrying value of goodwill at its reporting units. The Company performed a qualitative assessment of goodwill prior to completing the quantitative test to determine whether it is more likely than not that the fair value of a reporting unit was less than its carrying amount, including goodwill and other intangible assets due to the short duration of time since the Company’s annual quantitative goodwill impairment test for fiscal year 2014, which was completed on April 1, 2014. The Company did not record any impairment of goodwill or long-lived assets as the qualitative assessment did not indicate deterioration in the fair value of its reporting units since the most recent annual impairment test.
During the year ended June 30, 2014, the Company recorded an adjustment to goodwill of $0.5 million associated with the November 2012 acquisition of M Cubed Technologies, Inc. (“M Cubed”). This adjustment related to a change in deferred income tax assets and was recorded in conjunction with the finalization and filing of the M Cubed final income tax return.
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 20152017 and 20142016 were as follows ($000):
|
| June 30, 2015 |
|
| June 30, 2014 |
|
| June 30, 2017 |
|
| June 30, 2016 |
| ||||||||||||||||||||||||||||||||||||
|
| Gross |
|
|
|
|
|
| Net |
|
| Gross |
|
|
|
|
|
| Net |
|
| Gross |
|
|
|
|
|
| Net |
|
| Gross |
|
|
|
|
|
| Net |
| ||||||||
|
| Carrying |
|
| Accumulated |
|
| Book |
|
| Carrying |
|
| Accumulated |
|
| Book |
|
| Carrying |
|
| Accumulated |
|
| Book |
|
| Carrying |
|
| Accumulated |
|
| Book |
| ||||||||||||
|
| Amount |
|
| Amortization |
|
| Value |
|
| Amount |
|
| Amortization |
|
| Value |
|
| Amount |
|
| Amortization |
|
| Value |
|
| Amount |
|
| Amortization |
|
| Value |
| ||||||||||||
Technology and Patents |
| $ | 50,520 |
|
| $ | (18,838 | ) |
| $ | 31,682 |
|
| $ | 50,505 |
|
| $ | (14,474 | ) |
| $ | 36,031 |
|
| $ | 65,438 |
|
| $ | (27,313 | ) |
| $ | 38,125 |
|
| $ | 54,344 |
|
| $ | (22,724 | ) |
| $ | 31,620 |
|
Trade names |
|
| 15,869 |
|
|
| (1,111 | ) |
|
| 14,758 |
|
|
| 17,870 |
|
|
| (1,037 | ) |
|
| 16,833 |
| ||||||||||||||||||||||||
Trade Names |
|
| 15,806 |
|
|
| (1,340 | ) |
|
| 14,466 |
|
|
| 15,869 |
|
|
| (1,209 | ) |
|
| 14,660 |
| ||||||||||||||||||||||||
Customer Lists |
|
| 102,489 |
|
|
| (26,583 | ) |
|
| 75,906 |
|
|
| 102,839 |
|
|
| (19,448 | ) |
|
| 83,391 |
|
|
| 123,058 |
|
|
| (41,740 | ) |
|
| 81,318 |
|
|
| 112,141 |
|
|
| (33,912 | ) |
|
| 78,229 |
|
Other |
|
| 1,572 |
|
|
| (1,456 | ) |
|
| 116 |
|
|
| 1,586 |
|
|
| (1,437 | ) |
|
| 149 |
|
|
| 1,571 |
|
|
| (1,523 | ) |
|
| 48 |
|
|
| 1,571 |
|
|
| (1,490 | ) |
|
| 81 |
|
Total |
| $ | 170,450 |
|
| $ | (47,988 | ) |
| $ | 122,462 |
|
| $ | 172,800 |
|
| $ | (36,396 | ) |
| $ | 136,404 |
|
| $ | 205,873 |
|
| $ | (71,916 | ) |
| $ | 133,957 |
|
| $ | 183,925 |
|
| $ | (59,335 | ) |
| $ | 124,590 |
|
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2017, 2016 and 2015 2014 and 2013 was $12.0$12.7 million, $11.3$12.3 million, and $6.7$12.0 million, respectively. The technology and patents are being amortized over a range of 60 to 240 months with a weighted-average remaining life of approximately 114100 months. The customer lists are being amortized over 60 to 192240 months with a weighted-average remaining life of approximately 146149 months.
In conjunction with the acquisitions of IPI, the Company recorded $11.3 million of technology and patents and $10.9 million of customer lists. The intangibles were recorded based on the Company’s preliminary purchase price allocation which is expected to be finalized within one year from the date of the acquisition.
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade names of $14.0 million as of June 30, 2017 is not amortized but tested annually for impairment. The Company completed its impairment test of these trade names with indefinite lives in the fourth quarter of fiscal years 2017 and 2016. Based on the results of these tests, the trade names were not impaired in fiscal years 2017 and 2016.
During the year ended June 30, 2015, the Company recognized an impairment charge on two of its indefinite lived trade names in the II-VI Photonics reporting unit as these trademarkstrade names were abandoned as a result of the Company’s rebranding efforts. Total impairment recorded during the year ended June 30, 2015 was $2.0 million, which represented the entire carrying value of these two trademarkstrade names and was recorded in other expense (income), net in the Consolidated Statements of Earnings.
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade names of $14.4 million as of June 30, 2015 is not amortized but tested annually for impairment. The Company completed its impairment test of these trade names with indefinite lives in the fourth quarter of fiscal years 2015 and 2014. Based on the results of these tests, the trade names were not impaired at June 30, 2015 or 2014.
Included in the gross carrying amount and accumulated amortization of the Company’s technology and patents, customer list and other component of intangible assets and goodwill is the effect of the foreign currency translation on the portion relating to the Company’s German and China subsidiaries. The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows ($000):
Year Ending June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
| $ | 11,619 |
| ||||||
2017 |
|
|
|
| 11,607 |
| ||||||
2018 |
|
|
|
| 11,139 |
|
|
|
| $ | 13,800 |
|
2019 |
|
|
|
| 10,706 |
|
|
|
|
| 13,500 |
|
2020 |
|
|
|
| 10,593 |
|
|
|
|
| 12,500 |
|
2021 |
|
|
|
| 11,800 |
| ||||||
2022 |
|
|
|
| 10,300 |
|
Note 6. | Debt |
The components of debt were as follows ($000):
June 30, | 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
Line of credit, interest at LIBOR, as defined, plus 1.5% and 1.75%, respectively | $ | 108,500 |
|
| $ | 154,000 |
| ||||||||
Term loan, interest at LIBOR, as defined, plus 1.25% |
| 65,000 |
|
|
| 85,000 |
| ||||||||
Line of credit, interest at LIBOR, as defined, plus 1.5% |
| $ | 252,000 |
|
| $ | 188,000 |
| |||||||
Term loan, interest at LIBOR, as defined, plus 1.5% |
|
| 85,000 |
|
|
| 45,000 |
| |||||||
Yen denominated line of credit, interest at LIBOR, as defined, plus 0.625% |
| 2,457 |
|
|
| 2,960 |
|
|
| 2,679 |
|
|
| 2,917 |
|
Note payable assumed in IPI acquisition |
|
| 3,834 |
|
|
| - |
| |||||||
Total debt |
| 175,957 |
|
|
| 241,960 |
|
|
| 343,513 |
|
|
| 235,917 |
|
Current portion of long-term debt |
| (20,000 | ) |
|
| (20,000 | ) |
|
| (20,000 | ) |
|
| (20,000 | ) |
Unamortized debt issuance costs |
|
| (1,491 | ) |
|
| (610 | ) | |||||||
Long-term debt, less current portion | $ | 155,957 |
|
| $ | 221,960 |
|
| $ | 322,022 |
|
| $ | 215,307 |
|
On July 28, 2016, the Company amended and restated its existing credit agreement. The Company’s FirstThird Amended and Restated Credit Agreement (the “Credit“Amended Credit Facility”) provides for a revolving credit facility of $225$325 million, as well as a $100 million Term Loan.term loan. The Term Loanterm loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July and October, with the first payment having commenced on October 1, 2013,2016, as follows: (i) twenty consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 2021. Amounts borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiariessubsidiary of the Company. The Company has the option to request an increase to the size of the Amended Credit Facilityrevolving credit facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through September 2018July 28, 2021 and has an interest rate of LIBOR,either a Base Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement plus 0.75%governing the Amended Credit Facility. If the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.75%1.25% and if the Euro-Rate Option is selected for a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the Company’s ratio of consolidated indebtedness to consolidated EBITDA. Additionally, the Amended Credit Facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2017, the Company was in compliance with all financial covenants under its Amended Credit Facility.
The Company’s Yen denominated line of credit is a 500 million Yen ($4.9 million) facility. The Yen line of credit matures August 2020. The interest rate equal to the Euro-Rate, as defined in the loan agreement, plus 1.00% to 2.25%. At June 30, 2017, the Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2015,2017, the Company had $2.7 million outstanding and was in compliance with all financial covenants under its Credit Facility.
The Company’s Yen denominated line of credit is a 500 million Yen ($4.1 million) facility that has a five-year term through June 2016 and has an interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.50%. Additionally, the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2015, the Company was in compliance with all covenants under the Yen facility. On August 21, 2015, the Company received and accepted a commitment from its lender to extend the maturity date of the Yen facility to August 2020 on substantially the same terms of the current facility. The lender’s commitment to provide the extension is subject to the satisfaction of certain customary conditions.
The Company had aggregate availability of $116.6$73.5 million and $71.0$37.7 million under its lines of credit as of June 30, 20152017 and 2014,2016, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 20152017 and 2014,2016, total outstanding letters of credit supported by the credit facilities were $1.5 million.$1.3 million and $1.2 million, respectively.
The weighted-average interest rate of total borrowings for each of the years ended June 30, 20152017 and 20142016 was 1.8%.2.2% and 1.6%, respectively. The weighted-average of total borrowings for the fiscal years ended June 30, 20152017 and 20142016 was $210.0$272.1 million and $222.6$193.7 million, respectively.
The Company has a line of credit facility with a Singapore bank which permits maximum borrowings in the local currency of approximately $0.3$0.6 million for the fiscal years ended June 30, 20152017 and 2014.2016, respectively. Borrowings are payable upon demand with interest charged at the rate of 1.00% above the bank’s prevailing prime lending rate. The interest rate was 5.25% at June 30, 20152017 and June 30, 2014.2016. At June 30, 20152017 and 2014,2016, there were no outstanding borrowings under this facility. The Company had $0.3 million and $0.2 million of letters of credit supported by the Singapore line of credit facility as of June 30, 2017 and 2016, respectively.
In conjunction with the acquisition of IPI, the Company assumed a non-interest bearing note payable owed to a major customer of IPI. The agreement if not terminated early by either party is payable in full in May 2019.
There are no interim maturities or minimum payment requirements related to the credit facilities before their respective expiration dates. Interest and commitment fees paid during the fiscal year ended June 30, 2017, 2016 and 2015 2014 and 2013 were $4.0$6.1 million, $3.1 million and $4.2 million and $1.1$4.0 million, respectively.
Remaining annual principal payments under the Company’s existing credit facilities and note payable as of June 30, 20152017 were as follows ($000):
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| U.S. |
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| U.S. |
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| Dollar |
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| Dollar |
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| Term |
|
| Yen Line |
|
| Line of |
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| Term |
|
| Yen Line |
|
| Line of |
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| Note |
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| |||||||
Period |
| Loan |
|
| of Credit |
|
| Credit |
|
| Total |
|
| Loan |
|
| of Credit |
|
| Credit |
|
| Payable |
|
| Total |
| |||||||||
Year 1 |
| $ | 20,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 20,000 |
|
| $ | 20,000 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 20,000 |
|
Year 2 |
|
| 20,000 |
|
|
| - |
|
|
| - |
|
|
| 20,000 |
|
|
| 20,000 |
|
|
| - |
|
|
| - |
|
|
| 3,834 |
|
| $ | 23,834 |
|
Year 3 |
|
| 20,000 |
|
|
| - |
|
|
| - |
|
|
| 20,000 |
|
|
| 20,000 |
|
|
| - |
|
|
|
|
|
|
|
|
|
| $ | 20,000 |
|
Year 4 |
|
| 5,000 |
|
|
| - |
|
|
| 108,500 |
|
|
| 113,500 |
|
|
| 20,000 |
|
|
| 2,679 |
|
|
| - |
|
|
| - |
|
| $ | 22,679 |
|
Year 5 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,000 |
|
|
| - |
|
|
| 252,000 |
|
|
| - |
|
| $ | 257,000 |
|
Thereafter |
|
| - |
|
|
| 2,457 |
|
|
| - |
|
|
| 2,457 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| $ | - |
|
Total |
| $ | 65,000 |
|
| $ | 2,457 |
|
| $ | 108,500 |
|
| $ | 175,957 |
|
| $ | 85,000 |
|
| $ | 2,679 |
|
| $ | 252,000 |
|
| $ | 3,834 |
|
| $ | 343,513 |
|
Note 7. | Income Taxes |
The components of income (loss)earnings (losses) before income taxes were as follows:
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. income (loss) |
| $ | (5,326 | ) |
| $ | (2,863 | ) |
| $ | 19,253 |
| ||||||||||||
U.S. loss |
| $ | (6,944 | ) |
| $ | (5,809 | ) |
| $ | (5,326 | ) | ||||||||||||
Non-U.S. income |
|
| 84,438 |
|
|
| 48,504 |
|
|
| 58,233 |
|
|
| 125,732 |
|
|
| 95,764 |
|
|
| 84,438 |
|
Total Earnings Before Tax |
| $ | 79,112 |
|
| $ | 45,641 |
|
| $ | 77,486 |
| ||||||||||||
Earnings before income taxes |
| $ | 118,788 |
|
| $ | 89,955 |
|
| $ | 79,112 |
|
The components of income tax expense (benefit) from continuing operations were as follows:
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Current: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | (146 | ) |
| $ | (1,067 | ) |
| $ | 2,759 |
|
| $ | 2,133 |
|
| $ | 3,704 |
|
| $ | (146 | ) |
State |
|
| 86 |
|
|
| 152 |
|
|
| 68 |
|
|
| 253 |
|
|
| 5 |
|
|
| 86 |
|
Foreign |
|
| 16,978 |
|
|
| 12,675 |
|
|
| 13,977 |
|
|
| 22,312 |
|
|
| 19,783 |
|
|
| 16,978 |
|
Total Current |
| $ | 16,918 |
|
| $ | 11,760 |
|
| $ | 16,804 |
|
| $ | 24,698 |
|
| $ | 23,492 |
|
| $ | 16,918 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | (2,762 | ) |
| $ | (16 | ) |
| $ | 1,721 |
|
| $ | (6,963 | ) |
| $ | 2,759 |
|
| $ | (2,762 | ) |
State |
|
| (251 | ) |
|
| 148 |
|
|
| 113 |
|
|
| (1,251 | ) |
|
| 1,302 |
|
|
| (251 | ) |
Foreign |
|
| (768 | ) |
|
| (4,567 | ) |
|
| 128 |
|
|
| 7,030 |
|
|
| (3,084 | ) |
|
| (768 | ) |
Total Deferred |
| $ | (3,781 | ) |
| $ | (4,435 | ) |
| $ | 1,962 |
|
| $ | (1,184 | ) |
| $ | 977 |
|
| $ | (3,781 | ) |
Total Income Tax Expense |
| $ | 13,137 |
|
| $ | 7,325 |
|
| $ | 18,766 |
|
| $ | 23,514 |
|
| $ | 24,469 |
|
| $ | 13,137 |
|
Principal items comprising deferred income taxes were as follows:
June 30, |
| 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory capitalization |
| $ | 6,614 |
|
| $ | 5,402 |
|
| $ | 6,338 |
|
| $ | 6,814 |
|
Non-deductible accruals |
|
| 1,902 |
|
|
| 1,926 |
|
|
| 1,705 |
|
|
| 2,212 |
|
Accrued employee benefits |
|
| 10,297 |
|
|
| 9,226 |
|
|
| 9,738 |
|
|
| 15,543 |
|
Net-operating loss and credit carryforwards |
|
| 22,232 |
|
|
| 21,976 |
|
|
| 53,048 |
|
|
| 43,516 |
|
Share-based compensation expense |
|
| 13,222 |
|
|
| 16,005 |
|
|
| 12,386 |
|
|
| 11,693 |
|
Other |
|
| 1,468 |
|
|
| 577 |
|
|
| 1,761 |
|
|
| 1,770 |
|
Valuation allowances |
|
| (2,713 | ) |
|
| (2,212 | ) |
|
| (42,562 | ) |
|
| (42,641 | ) |
Total deferred income tax assets |
| $ | 53,022 |
|
| $ | 52,900 |
|
| $ | 42,414 |
|
| $ | 38,907 |
|
Deferred income tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax over book accumulated depreciation |
| $ | (15,937 | ) |
| $ | (17,625 | ) |
| $ | (7,803 | ) |
| $ | (9,759 | ) |
Intangible assets |
|
| (25,132 | ) |
|
| (25,505 | ) |
|
| (38,108 | ) |
|
| (29,628 | ) |
Tax on unremitted earnings |
|
| (1,753 | ) |
|
| (714 | ) |
|
| (6,210 | ) |
|
| (797 | ) |
Other |
|
| (2,520 | ) |
|
| (2,072 | ) |
|
| (2,615 | ) |
|
| (1,978 | ) |
Total deferred income tax liabilities |
| $ | (45,342 | ) |
| $ | (45,916 | ) |
| $ | (54,736 | ) |
| $ | (42,162 | ) |
Net deferred income taxes |
| $ | 7,680 |
|
| $ | 6,984 |
|
| $ | (12,322 | ) |
| $ | (3,255 | ) |
The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:
Year Ended June 30, |
| 2015 |
|
| % |
|
| 2014 |
|
| % |
|
| 2013 |
|
| % |
|
| 2017 |
|
| % |
|
| 2016 |
|
| % |
|
| 2015 |
|
| % |
| ||||||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes at statutory rate |
| $ | 27,689 |
|
|
| 35 |
|
| $ | 15,974 |
|
|
| 35 |
|
| $ | 27,120 |
|
|
| 35 |
|
| $ | 41,576 |
|
|
| 35 |
|
| $ | 31,484 |
|
|
| 35 |
|
| $ | 27,689 |
|
|
| 35 |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes-net of federal benefit |
|
| (196 | ) |
|
| - |
|
|
| 254 |
|
|
| 1 |
|
|
| 168 |
|
|
| - |
|
|
| (641 | ) |
|
| - |
|
|
| 864 |
|
|
| 1 |
|
|
| (196 | ) |
|
| - |
|
Taxes on non U.S. earnings |
|
| (11,687 | ) |
|
| (15 | ) |
|
| (6,672 | ) |
|
| (15 | ) |
|
| (6,991 | ) |
|
| (9 | ) |
|
| (12,907 | ) |
|
| (11 | ) |
|
| (13,860 | ) |
|
| (15 | ) |
|
| (11,687 | ) |
|
| (15 | ) |
Settlement of unrecognized tax benefits |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||
Valuation allowance |
|
| (806 | ) |
|
| (1 | ) |
|
| 8,464 |
|
|
| 9 |
|
|
| 678 |
|
|
| 1 |
| ||||||||||||||||||||||||
Research and manufacturing incentive deductions |
|
| (2,573 | ) |
|
| (3 | ) |
|
| (2,190 | ) |
|
| (5 | ) |
|
| (1,458 | ) |
|
| (2 | ) |
|
| (3,346 | ) |
|
| (3 | ) |
|
| (3,074 | ) |
|
| (3 | ) |
|
| (2,573 | ) |
|
| (3 | ) |
Other |
|
| (96 | ) |
|
| - |
|
|
| (41 | ) |
|
| - |
|
|
| (73 | ) |
|
| - |
|
|
| (362 | ) |
|
| - |
|
|
| 591 |
|
|
| - |
|
|
| (774 | ) |
|
| (1 | ) |
|
| $ | 13,137 |
|
|
| 17 |
|
| $ | 7,325 |
|
|
| 16 |
|
| $ | 18,766 |
|
|
| 24 |
|
| $ | 23,514 |
|
|
| 20 |
|
| $ | 24,469 |
|
|
| 27 |
|
| $ | 13,137 |
|
|
| 17 |
|
During the fiscal years ended June 30, 2015, 2014,2017, 2016, and 2013,2015, net cash paid by the Company for income taxes was $13.0$23.6 million, $17.2$18.5 million, and $11.9$13.0 million, respectively.
Our foreign subsidiaries in the Philippines operate under various tax holiday arrangements. The benefits of such arrangements phase out through the fiscal year ended June 30, 2019. The impact of the tax holidays on our effective rate is a reduction in the rate of 0.22%0.31%, 0.12%0.37% and 0.07%0.22% for the fiscal years ended June 30, 2017, 2016 and 2015, 2014respectively, and 2013 respectively.the impact of the tax holidays on diluted earnings per share is immaterial.
The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was approximately $419$715 million at June 30, 2015.2017. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an additional deferred tax liability of approximately $83$108 million would have been required as of June 30, 2015.2017. It is the Company’s intention to permanently reinvest substantially all of its undistributed earnings of its foreign subsidiaries; therefore, no provision has been made for future income taxes on the undistributed earnings of the majority of foreign subsidiaries, as they are considered indefinitely reinvested. The Company has provided a deferred tax liability for future income taxes on the earnings of certain foreign subsidiaries as these earnings are planned to be repatriated.
The sources of differences resulting in deferred income tax expense (benefit) from continuing operations and the related tax effect of each were as follows:
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | (1,844 | ) |
| $ | (3,581 | ) |
| $ | (2,825 | ) |
Inventory capitalization |
|
| (1,273 | ) |
|
| 646 |
|
|
| 84 |
|
Net operating loss and credit carryforwards net of valuation allowances |
|
| 418 |
|
|
| 533 |
|
|
| 4,786 |
|
Share-based compensation expense |
|
| (1,029 | ) |
|
| (984 | ) |
|
| (3,487 | ) |
Other |
|
| (53 | ) |
|
| (1,049 | ) |
|
| 3,404 |
|
|
| $ | (3,781 | ) |
| $ | (4,435 | ) |
| $ | 1,962 |
|
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2015:2017:
Type |
| Amount |
|
| Expiration Date |
| Amount |
|
| Expiration Date | ||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
Tax credit carryforwards: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal research and development credits |
| $ | 6,179 |
|
| June 2019-June 2035 |
| $ | 10,953 |
|
| June 2019-June 2037 |
Foreign tax credits |
|
| 2,396 |
|
| June 2024-June 2025 |
|
| 4,539 |
|
| June 2024-June 2027 |
State tax credits |
|
| 2,918 |
|
| June 2016-June 2034 |
|
| 4,820 |
|
| June 2018-June 2037 |
Operating loss carryforwards: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss carryforwards – federal |
| $ | 24,766 |
|
| June 2027-June 2029 | ||||||
Loss carryforwards – state |
|
| 22,554 |
|
| June 2017-June 2035 | ||||||
Loss carryforwards – foreign |
|
| 9,146 |
|
| June 2016-June 2024 | ||||||
Loss carryforwards - federal |
| $ | 100,922 |
|
| June 2020-June 2037 | ||||||
Loss carryforwards - state |
|
| 71,536 |
|
| June 2018-June 2037 | ||||||
Loss carryforwards - foreign |
|
| 2,610 |
|
| June 2018-June 2024 |
The Company has recorded a valuation allowance against the majority of the foreign loss carryforwards and select state tax credit carryforwards. The Company’s federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulted from the Company’s acquisitions of Photop Aegis and M Cubed and are subject to various annual limitations under Section 382 of the Internal Revenue Code.
Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2015, 20142017, 2016 and 20132015 were as follows:
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
| $ | 2,775 |
|
| $ | 3,181 |
|
| $ | 2,850 |
|
| $ | 5,559 |
|
| $ | 4,022 |
|
| $ | 2,775 |
|
Increases in current year tax positions |
|
| 2,450 |
|
|
| 298 |
|
|
| 338 |
|
|
| 895 |
|
|
| 2,146 |
|
|
| 2,450 |
|
Increases in prior year tax positions |
|
| 203 |
|
| 2 |
|
|
| - |
|
|
| 2,605 |
|
|
| 190 |
|
| 203 |
| ||
Decreases in prior year tax positions |
|
| - |
|
|
| - |
|
|
| (7 | ) |
|
| - |
|
|
| (67 | ) |
|
| - |
|
Settlements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,143 | ) |
|
| - |
|
|
| - |
|
Expiration of statute of limitations |
|
| (1,406 | ) |
|
| (706 | ) |
|
| - |
|
|
| (339 | ) |
|
| (732 | ) |
|
| (1,406 | ) |
Balance at End of Year |
| $ | 4,022 |
|
| $ | 2,775 |
|
| $ | 3,181 |
|
| $ | 7,577 |
|
| $ | 5,559 |
|
| $ | 4,022 |
|
The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal year 2017, there was $0.5 million of interest and penalties within income tax expense. During the fiscal year 2016, there was no interest and penalties within income tax expense. During the fiscal year 2015, there was a benefit of $0.1 million of interest and penalties within tax expense. There was no interest and penalties within income tax expense for fiscal year 2014. During the fiscal years ended June 30, 2013, the Company recognized $0.1 million of expense for interest and penalties within income tax expense. The Company had $0.3 million, $0.1 million, $0.2 million, and $0.2$0.1 million of interest and penalties accrued at June 30, 2017, 2016, and 2015, 2014, and 2013, respectively. The increase in the Company’s current year tax positions are the result of certain unrecognized tax benefits associated with transfer pricing. The Company has classified the uncertain tax positions as non-current income tax liabilities as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate was approximately $3.6$1.3 million and $2.8$0.5 million at June 30, 20152017 and 2014,2016, respectively. The Company expects a decrease of $0.7$0.4 million of unrecognized tax benefits during the next twelve12 months due to the expiration of statutes of limitation.
Fiscal years 20122014 to 20152017 remain open to examination by the Internal Revenue Service, fiscal years 20112012 to 20152017 remain open to examination by certain state jurisdictions, and fiscal years 20082007 to 20152017 remain open to examination by certain foreign taxing jurisdictions. The Company’s subsidiary in Germany has been notified of an examination to start in fiscal years 2011 and 2012 California stateyear 2018. The Company believes its income tax returnsreserves for these tax matters are currently under examination by the
State of California’s Franchise Tax Board. The Company’s fiscal years 2012 and 2013 German income tax returns are currently under examination.adequate.
Note 8. | Earnings Per Share |
The following table sets forth the computation of earnings per share for the periods indicated. Weighted-average shares issuable upon the exercise of stock options that were not included in the calculation were 576,000, 507,000140,000, 153,000 and 470,000576,000 for the fiscal years ended June 30, 2015, 20142017, 2016 and 2013,2015, respectively, because they were anti-dilutive.
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
($000 except per share) |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
| $ | 65,975 |
|
| $ | 38,316 |
|
| $ | 57,602 |
|
Earnings (loss) from discontinued operation |
|
| - |
|
|
| 133 |
|
|
| (6,789 | ) |
Net earnings from continuing operations |
| $ | 65,975 |
|
| $ | 38,449 |
|
| $ | 50,813 |
|
Divided by: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
| 61,219 |
|
|
| 62,248 |
|
|
| 62,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 1.08 |
|
| $ | 0.62 |
|
| $ | 0.92 |
|
Discontinued operation |
| $ | - |
|
| $ | - |
|
| $ | (0.11 | ) |
Consolidated |
| $ | 1.08 |
|
| $ | 0.62 |
|
| $ | 0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
| $ | 65,975 |
|
| $ | 38,316 |
|
| $ | 57,602 |
|
Earnings (loss) from discontinued operation |
|
| - |
|
|
| 133 |
|
|
| (6,789 | ) |
Net earnings from continuing operations |
| $ | 65,975 |
|
| $ | 38,449 |
|
| $ | 50,813 |
|
Divided by: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
| 61,219 |
|
|
| 62,248 |
|
|
| 62,411 |
|
Dilutive effect of common stock equivalents |
|
| 1,367 |
|
|
| 1,438 |
|
|
| 1,473 |
|
Diluted weighted average common shares |
|
| 62,586 |
|
|
| 63,686 |
|
|
| 63,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 1.05 |
|
| $ | 0.60 |
|
| $ | 0.90 |
|
Discontinued operation |
| $ | - |
|
| $ | - |
|
| $ | (0.11 | ) |
Consolidated |
| $ | 1.05 |
|
| $ | 0.60 |
|
| $ | 0.80 |
|
Year Ended June 30, |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
($000 except per share) |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
| $ | 95,274 |
|
| $ | 65,486 |
|
| $ | 65,975 |
|
Divided by: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
| 62,576 |
|
|
| 61,366 |
|
|
| 61,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
| $ | 1.52 |
|
| $ | 1.07 |
|
| $ | 1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
| $ | 95,274 |
|
| $ | 65,486 |
|
| $ | 65,975 |
|
Divided by: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
| 62,576 |
|
|
| 61,366 |
|
|
| 61,219 |
|
Dilutive effect of common stock equivalents |
|
| 1,931 |
|
|
| 1,543 |
|
|
| 1,367 |
|
Diluted weighted average common shares |
|
| 64,507 |
|
|
| 62,909 |
|
|
| 62,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
| $ | 1.48 |
|
| $ | 1.04 |
|
| $ | 1.05 |
|
Note 9. | Operating Leases |
The Company leases certain property under operating leases that expire at various dates. Future rental commitments applicable to the operating leases at June 30, 20152017 are as follows:
Year Ending June 30, |
|
|
|
|
|
|
|
|
($000) |
|
|
|
|
|
|
|
|
2016 |
| $ | 12,875 |
| ||||
2017 |
|
| 9,500 |
| ||||
2018 |
|
| 6,275 |
|
| $ | 14,400 |
|
2019 |
|
| 3,449 |
|
|
| 12,400 |
|
2020 |
|
| 3,065 |
|
|
| 10,500 |
|
2021 |
|
| 6,800 |
| ||||
2022 |
|
| 4,600 |
| ||||
Thereafter |
|
| 16,649 |
|
|
| 17,900 |
|
Rent expense was approximately $15.0$14.7 million, $13.6$14.2 million, and $9.8$15.0 million for the fiscal years ended June 30, 2015, 20142017, 2016 and 2013,2015, respectively.
Note 10. | Share-Based Compensation Plans |
The Company’s Board of Directors adopted the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan (the “Plan”) which was approved by the shareholders at the Annual Meeting in November 2014. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to employees, officers and directors of the Company. The maximum number of shares of the Company’s Common Stock authorized for issuance under the Plan is limited to 4,900,000 shares of Common Stock, not including any remaining shares forfeited
under the predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability of the grantee. As of June 30, 2015,2017, there were approximately 3,502,5711,644,000 shares available to be issued under the Plan, including forfeited shares from predecessor plans.
The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, which requires the recognition of the grant-date fair value of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-based stock appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as liability awards, in accordance with applicable accounting standards.
Share-based compensation expense for the fiscal years ended June 30, 2015, 20142017, 2016 and 20132015 is as follows ($000):
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Stock Options and Cash-Based Stock Appreciation Rights |
| $ | 5,158 |
|
| $ | 5,818 |
|
| $ | 5,046 |
|
| $ | 5,611 |
|
| $ | 4,309 |
|
| $ | 5,158 |
|
Restricted Share Awards and Cash-Based Restricted Share Unit Awards |
|
| 5,182 |
|
|
| 4,868 |
|
|
| 4,411 |
|
|
| 6,799 |
|
|
| 4,401 |
|
|
| 5,182 |
|
Performance Share Awards and Cash-Based Performance Share Unit Awards |
|
| 2,649 |
|
|
| 2,311 |
|
|
| 3,200 |
|
|
| 3,626 |
|
|
| 2,196 |
|
|
| 2,649 |
|
|
| $ | 12,989 |
|
| $ | 12,997 |
|
| $ | 12,657 |
|
| $ | 16,036 |
|
| $ | 10,906 |
|
| $ | 12,989 |
|
The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and administrative expense in the Consolidated Statements of Earnings, based on the employee classification of the grantees. Share-based compensation expense associated with liability awards was $4.3 million, $1.2 million, and $1.6 million, in fiscal yearyears ended June 30, 2017, 2016, and 2015, and $0.7 million in fiscal years 2014 and 2013, respectively.
Stock Options and Cash-Based Stock Appreciation Rights:
The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense. During the fiscal years ended June 30, 2015, 20142017, 2016 and 2013,2015, the weighted-average fair value of options granted under the stock option plan was $5.76, $8.21$8.88, $7.35 and $8.37,$5.76, respectively, per option using the following assumptions:
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Risk-free interest rate |
|
| 1.71 | % |
|
| 1.71 | % |
|
| 0.98 | % |
|
| 1.43 | % |
|
| 1.68 | % |
|
| 1.71 | % |
Expected volatility |
|
| 41 | % |
|
| 47 | % |
|
| 49 | % |
|
| 37 | % |
|
| 38 | % |
|
| 41 | % |
Expected life of options |
| 5.94 years |
|
| 5.56 years |
|
| 5.66 years |
|
| 6.28 years |
|
| 6.43 years |
|
| 5.94 years |
| ||||||
Dividend yield |
| None |
|
| None |
|
| None |
|
| None |
|
| None |
|
| None |
|
The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted average rate for all options granted during the fiscal year. Expected volatility is based on the historical volatility of the Company’s Common Stock over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no current intention to pay cash dividends in the future. The estimated annualized forfeitures are based on the Company’s historical experience of option pre-vesting cancellations and are estimated at a rate of 17%18.71%. The Company will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future periods if the actual forfeitures are higher than estimated.
Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 20152017 was as follows:
|
| Stock Options |
|
| Cash-Based Stock Appreciation Rights |
|
| Stock Options |
|
| Cash-Based Stock Appreciation Rights |
| ||||||||||||||||||||
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
| ||||||||
|
| Shares |
|
| Exercise Price |
|
| Rights |
|
| Exercise Price |
|
| Shares |
|
| Exercise Price |
|
| Rights |
|
| Exercise Price |
| ||||||||
Outstanding - July 1, 2014 |
|
| 4,704,554 |
|
| $ | 16.37 |
|
|
| 108,718 |
|
| $ | 18.28 |
| ||||||||||||||||
Outstanding - July 1, 2016 |
|
| 4,251,926 |
|
| $ | 17.15 |
|
|
| 178,234 |
|
| $ | 17.13 |
| ||||||||||||||||
Granted |
|
| 648,540 |
|
| $ | 14.03 |
|
|
| 63,550 |
|
| $ | 14.19 |
|
|
| 771,900 |
|
| $ | 23.15 |
|
|
| 86,705 |
|
| $ | 22.51 |
|
Exercised |
|
| (498,250 | ) |
| $ | 10.41 |
|
|
| (136 | ) |
| $ | 14.03 |
|
|
| (858,445 | ) |
| $ | 17.58 |
|
|
| (44,856 | ) |
| $ | 17.42 |
|
Forfeited and Expired |
|
| (290,020 | ) |
| $ | 18.72 |
|
|
| (4,960 | ) |
| $ | 16.28 |
|
|
| (84,466 | ) |
| $ | 19.62 |
|
|
| (5,616 | ) |
| $ | 19.39 |
|
Outstanding - June 30, 2015 |
|
| 4,564,824 |
|
| $ | 16.54 |
|
|
| 167,172 |
|
| $ | 16.80 |
| ||||||||||||||||
Exercisable - June 30, 2015 |
|
| 2,899,994 |
|
| $ | 16.42 |
|
|
| 31,672 |
|
| $ | 18.50 |
| ||||||||||||||||
Outstanding - June 30, 2017 |
|
| 4,080,915 |
|
| $ | 18.15 |
|
|
| 214,467 |
|
| $ | 19.17 |
| ||||||||||||||||
Exercisable - June 30, 2017 |
|
| 2,242,901 |
|
| $ | 16.97 |
|
|
| 34,334 |
|
| $ | 17.59 |
|
As of June 30, 2015, 20142017, 2016 and 2013,2015, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $14.3$69.3 million, $5.2$10.1 million and $9.7$14.3 million, respectively. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30, 2015,2017, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2015.2017. This amount varies based on the fair market value of the Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years ended June 30, 2017, 2016, and 2015 2014, and 2013 was $2.9$12.3 million, $3.1$4.5 million, and $2.9 million, respectively. As of June 30, 2015,2017, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $7.7$12.0 million. This cost is expected to be recognized over a weighted-average period of approximately three years. Outstanding and exercisable stock options at June 30, 20152017 were as follows:
|
| Stock Options and Cash-Based Stock |
|
| Stock Options and Cash-Based Stock |
| ||||||||||||||||||
|
| Appreciation Rights Outstanding |
|
| Appreciation Rights Exercisable |
| ||||||||||||||||||
|
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
|
| Weighted |
|
| Weighted |
| ||||
|
| Number of |
|
| Average Remaining |
|
| Average |
|
| Number of |
|
| Average Remaining |
|
| Average |
| ||||||
Range of |
| Shares or |
|
| Contractual Term |
|
| Exercise |
|
| Shares or |
|
| Contractual Term |
|
| Exercise |
| ||||||
Exercise Prices |
| Rights |
|
| (Years) |
|
| Price |
|
| Rights |
|
| (Years) |
|
| Price |
| ||||||
$8.80 - $13.23 |
|
| 933,284 |
|
|
| 2.97 |
|
| $ | 11.27 |
|
|
| 932,670 |
|
|
| 2.97 |
|
| $ | 11.27 |
|
$13.34 - $20.26 |
|
| 3,211,940 |
|
|
| 6.79 |
|
| $ | 16.81 |
|
|
| 1,434,334 |
|
|
| 5.17 |
|
| $ | 17.03 |
|
$20.47 - $27.18 |
|
| 586,772 |
|
|
| 3.38 |
|
| $ | 23.51 |
|
|
| 564,662 |
|
|
| 3.27 |
|
| $ | 23.49 |
|
|
|
| 4,731,996 |
|
|
| 5.51 |
|
| $ | 16.55 |
|
|
| 2,931,666 |
|
|
| 4.07 |
|
| $ | 16.44 |
|
|
| Stock Options and Cash-Based Stock |
|
| Stock Options and Cash-Based Stock |
| ||||||||||||||||||
|
| Appreciation Rights Outstanding |
|
| Appreciation Rights Exercisable |
| ||||||||||||||||||
|
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
|
| Weighted |
|
| Weighted |
| ||||
|
| Number of |
|
| Average Remaining |
|
| Average |
|
| Number of |
|
| Average Remaining |
|
| Average |
| ||||||
Range of |
| Shares or |
|
| Contractual Term |
|
| Exercise |
|
| Shares or |
|
| Contractual Term |
|
| Exercise |
| ||||||
Exercise Prices |
| Rights |
|
| (Years) |
|
| Price |
|
| Rights |
|
| (Years) |
|
| Price |
| ||||||
$10.04 - $15.38 |
|
| 1,093,446 |
|
|
| 4.80 |
|
| $ | 13.18 |
|
|
| 717,394 |
|
|
| 3.59 |
|
| $ | 12.74 |
|
$15.41 - $23.45 |
|
| 2,852,141 |
|
|
| 6.61 |
|
| $ | 19.12 |
|
|
| 1,331,371 |
|
|
| 4.76 |
|
| $ | 18.13 |
|
$23.49 - $35.50 |
|
| 328,075 |
|
|
| 3.78 |
|
| $ | 25.53 |
|
|
| 228,470 |
|
|
| 1.29 |
|
| $ | 23.65 |
|
$39.65 - $39.65 |
|
| 21,720 |
|
|
| 9.62 |
|
|
| 39.65 |
|
|
| - |
|
|
| - |
|
| $ | - |
|
|
|
| 4,295,382 |
|
|
| 5.95 |
|
| $ | 18.20 |
|
|
| 2,277,235 |
|
| $ | 4.04 |
|
| $ | 16.98 |
|
Restricted Share Awards and Cash-Based Restricted Share Unit Awards:
Restricted share awards and cash-based restricted share unit awards compensation expense was calculated based on the number of shares or units expected to be earned by the grantee multiplied by the stock price at the date of grant (for restricted share awards) or the stock price at the period end date (for cash-based restricted share unit awards), and is being recognized over the vesting period. Generally, the restricted share awards and restricted share unit awards have a three year cliff-vesting provision and an estimated forfeiture rate of 10.3%13.0%.
Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2015,2017, was as follows:
|
| Restricted Share Awards |
|
| Cash-Based Restricted Share Units |
|
| Restricted Share Awards |
|
| Cash-Based Restricted Share Units |
| ||||||||||||||||||||
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
| ||||||||
|
| Shares |
|
| Grant Date Fair Value |
|
| Units |
|
| Grant Date Fair Value |
|
| Shares |
|
| Grant Date Fair Value |
|
| Units |
|
| Grant Date Fair Value |
| ||||||||
Nonvested - June 30, 2014 |
|
| 784,035 |
|
| $ | 17.66 |
|
|
| 64,310 |
|
| $ | 17.72 |
| ||||||||||||||||
Nonvested - June 30, 2016 |
|
| 760,915 |
|
| $ | 17.49 |
|
|
| 105,935 |
|
| $ | 16.67 |
| ||||||||||||||||
Granted |
|
| 323,365 |
|
| $ | 16.28 |
|
|
| 41,585 |
|
| $ | 14.74 |
|
|
| 271,113 |
|
| $ | 23.23 |
|
|
| 67,790 |
|
| $ | 22.09 |
|
Vested |
|
| (273,125 | ) |
| $ | 18.09 |
|
|
| (415 | ) |
| $ | 18.93 |
|
|
| (200,799 | ) |
| $ | 17.22 |
|
|
| (29,470 | ) |
| $ | 17.22 |
|
Forfeited |
|
| (43,265 | ) |
| $ | 17.69 |
|
|
| (6,485 | ) |
| $ | 16.13 |
|
|
| (19,396 | ) |
| $ | 18.32 |
|
|
| (3,328 | ) |
| $ | 18.61 |
|
Nonvested - June 30, 2015 |
|
| 791,010 |
|
| $ | 16.94 |
|
|
| 98,995 |
|
| $ | 16.57 |
| ||||||||||||||||
Nonvested - June 30, 2017 |
|
| 811,833 |
|
| $ | 19.45 |
|
|
| 140,927 |
|
| $ | 19.12 |
|
As of June 30, 2015,2017, total unrecognized compensation cost related to non-vested restricted share and cash-based restricted share unit awards was $5.8$9.5 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The
restricted share compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the date of grant and is being recognized over the vesting period. The cash-based restricted share unit compensation expense
was calculated based on the number of shares expected to be earned multiplied by the stock price at the period-end date and is being recognized over the vesting period. The total fair value of the restricted share and cash-based restricted share unit awards granted during the years ended June 30, 2017, 2016 and 2015, 2014 and 2013, was $5.9$7.8 million, $4.5$6.3 million and $7.0$5.9 million, respectively. The total fair value of restricted shares vested was $5.1$6.2 million, $3.8$5.5 million and $0.7$5.1 million during fiscal years 2015, 20142017, 2016 and 2013,2015, respectively.
Performance Share Awards and Cash-Based Performance Share Unit Awards:
The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees performance share awards and performance share unit awards under the Plan. As of June 30, 2015,2017, the Company had outstanding grants covering performance periods ranging from 2412 to 4836 months. These awards are intended to provide continuing emphasis on specified financial performance goals that the Company considers important contributors to the creation of long-term shareholder value. These awards are payable only if the Company achieves specified levels of financial performance during the performance periods.
The performance share compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the period-end date, and is being recognized over the vesting period. Performance share and cash-based performance share unit award activity relating to the plan during the year ended June 30, 2015,2017, was as follows:
|
| Performance Share Awards |
|
| Cash-Based Performance Share Units |
|
| Performance Share Awards |
|
| Cash-Based Performance Share Units |
| ||||||||||||||||||||
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
| ||||||||
|
| Shares |
|
| Grant Date Fair Value |
|
| Units |
|
| Grant Date Fair Value |
|
| Shares |
|
| Grant Date Fair Value |
|
| Units |
|
| Grant Date Fair Value |
| ||||||||
Nonvested - June 30, 2014 |
|
| 332,180 |
|
| $ | 18.46 |
|
|
| 99,144 |
|
| $ | 18.94 |
| ||||||||||||||||
Nonvested - June 30, 2016 |
|
| 293,541 |
|
| $ | 16.12 |
|
|
| 98,659 |
|
| $ | 18.44 |
| ||||||||||||||||
Granted |
|
| 152,226 |
|
| $ | 13.99 |
|
|
| 8,709 |
|
| $ | 13.99 |
|
|
| 234,174 |
|
| $ | 21.67 |
|
|
| 10,808 |
|
| $ | 21.67 |
|
Vested |
|
| (73,631 | ) |
| $ | 18.93 |
|
|
| (1,663 | ) |
| $ | 18.93 |
|
|
| (88,354 | ) |
| $ | 15.56 |
|
|
| (58,654 | ) |
| $ | 18.52 |
|
Forfeited |
|
| (103,330 | ) |
| $ | 18.88 |
|
|
| (4,756 | ) |
| $ | 18.93 |
|
|
| (61,651 | ) |
| $ | 17.16 |
|
|
| (33,661 | ) |
| $ | 18.70 |
|
Nonvested - June 30, 2015 |
|
| 307,445 |
|
| $ | 15.99 |
|
|
| 101,434 |
|
| $ | 18.52 |
| ||||||||||||||||
Nonvested - June 30, 2017 |
|
| 377,710 |
|
| $ | 19.52 |
|
|
| 17,152 |
|
| $ | 19.37 |
|
As of June 30, 2015,2017, total unrecognized compensation cost related to non-vested performance share and cash-based performance share unit awards was $2.6$4.2 million. This cost is expected to be recognized over a weighted-average period of approximately one year. The total fair value of the performance share and cash-based performance share unit awards granted during the fiscal years ended June 30, 2017, 2016 and 2015 2014 and 2013 was $2.3$5.3 million, $2.1$2.4 million and $5.9$2.3 million, respectively. The total fair value of performance shares vested during the fiscal years ended June 30, 2017, 2016 and 2015 2014was $5.9 million, $1.5 million and 2013 was $1.6 million, $1.3 millionrespectively.
For our relative Total Shareholder Return, or TSR, performance-based awards, which are based on market performance of our stock as compared to the Russel 2000 Index, the compensation cost is recognized over the performance period on a straight-line basis net of forfeitures, because the awards vest only at the end of the measurement period and $2.6 million, respectively.the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate the fair value of the TSR performance-based awards using the Monte-Carlo simulation model.
Note 11. | Segment and Geographic Reporting |
The Company reports its business segments using the “management approach” model for segment reporting. This means that the Company determines its reportable business segments based on the way the chief operating decision maker organizes business segments within the Company for making operating decisions and assessing performance.
Effective July 1, 2014, the Company realigned its reportable segments from five to three reporting segments to increase focus on end markets and customers, better align the Company’s businesses and technical processes, improve the line of sight on profitability and cash usage and streamline communications. The Company reports its financial results in the following three segments: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products, and the Company’s chief operating decision maker receives and reviews financial information based on these segments. The Company evaluates business segment performance based upon segment operating income, which is defined as earnings before income taxes, interest and other income or expense. The segments are managed separately due to the market, production requirements and facilities unique to each segment. The Company has the following reportable segments at June 30, 2015, which are the Company’s operating segments: (i) II-VI Laser Solutions, which consists of the Company’s infrared optics and material products businesses, II-VI HIGHYAG, the semiconductor laser portion of the former Active Optical Products segment, and smaller units of high-power laser technology from the former Near-Infrared Optics segment and certain remaining corporate activities (primarily corporate assets and capital expenditures); (ii) II-VI Photonics, which consists of the former Near-Infrared Optics segment and the pump laser and optical amplifier businesses of the former Active Optical Products segment; and (iii) II-VI Performance Products, which contains the former Military & Materials and Advanced Products Group segments.
The II-VI Laser Solutions segment is located in the U.S.,United States, Singapore, China, Germany, Switzerland, Japan, Belgium, the U.K.,United Kingdom, Italy, South Korea, the Philippines and the Philippines.Taiwan. II-VI Laser Solutions is directed by the President of II-VI Laser Solutions, while each geographic location is directed by a general manager, and is further divided into production and administrative units that are directed by managers. II-VI Laser Solutions designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI Infrared brand name and used primarily in high-power CO2 lasers. II-VI Laser Solutions also manufactures lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise
brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices, and high-speed communication systems and manufactures 6-inch gallium arsenide wafers allowing for the production of high performance lasers and integrated circuits in high volume sold under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brand names.
The II-VI Photonics segment is located in the U.S.,United States, China, Vietnam, Australia, Germany, Japan, the U.K.United Kingdom., Italy and Hong Kong. II-VI Photonics is directed by the President of II-VI Photonics and is further divided into production and administrative units that are directed by managers. II-VI Photonics manufactures crystal materials, optics, microchip lasers and opto-electronicoptoelectronic modules for use in optical communication networks and other diverse consumer and commercial applications. In addition, the segment also manufactures pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for both terrestrial and submarine applications within the optical communications market.
The II-VI Performance Products segment is located in the U.S.,United States, Vietnam, Japan, China, Germany and the Philippines. II-VI Performance Products is directed by a Corporate Executive Vicethe President of II-VI Performance Products, while each geographic location is directed by a general manager. II-VI Performance Products is further divided into production and administrative units that are directed by managers. II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical and commercial laser imaging applications. In addition, the segment designs, manufactures and markets unique engineered materials for thermo-electricthermoelectric and silicon carbide applications servicing the semiconductor, military and medical markets.
TheOn June 19, 2017, the Company completed its acquisition of IPI. See Note 2. Acquisitions. The operating results of this acquisition have been reflected in the discontinuance of its tellurium product line by exiting all business activities associated with this product in December 2013. This product line was previously serviced by II-VI Performance Metals and was included as partselected financial information of the Company’s II-VI Performance Products segment. Segment information for all periods presented has been adjusted to properly reflect the tellurium product as a discontinued operation.Photonics segment
The accounting policies of the segments are the same as those of the Company. The Company’s corporate expenses are allocated to the segments. The Company evaluates segment performance based upon reported segment operating income, which is defined as earnings from continuing operations before income taxes, interest and other income or expense. Inter-segment sales and transfers have been eliminated.
The following tables summarize selected financial information of the Company’s operations by segment:
|
| II-VI |
|
|
|
|
|
| II-VI |
|
|
|
|
|
|
|
|
|
| II-VI |
|
|
|
|
|
| II-VI |
|
|
|
|
|
|
|
|
| ||||
|
| Laser |
|
| II-VI |
|
| Performance |
|
|
|
|
|
|
|
|
|
| Laser |
|
| II-VI |
|
| Performance |
|
|
|
|
|
|
|
|
| ||||||
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Eliminations |
|
| Total |
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Eliminations |
|
| Total |
| ||||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Revenues |
| $ | 287,881 |
|
| $ | 260,825 |
|
| $ | 193,255 |
|
| $ | - |
|
| $ | 741,961 |
|
| $ | 339,341 |
|
| $ | 418,515 |
|
| $ | 214,190 |
|
| $ | - |
|
| $ | 972,046 |
|
Inter-segment revenues |
|
| 21,021 |
|
|
| 13,210 |
|
|
| 9,325 |
|
|
| (43,556 | ) |
|
| - |
|
|
| 33,792 |
|
|
| 14,236 |
|
|
| 10,189 |
|
|
| (58,217 | ) |
|
| - |
|
Operating income |
|
| 55,039 |
|
|
| 7,208 |
|
|
| 14,552 |
|
|
| - |
|
|
| 76,799 |
|
|
| 30,931 |
|
|
| 62,975 |
|
|
| 21,635 |
|
|
| - |
|
|
| 115,541 |
|
Interest expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,863 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,809 | ) |
Other income, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6,176 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 10,056 |
|
Income taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (13,137 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,514 | ) |
Net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 65,975 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 95,274 |
|
Depreciation and amortization |
|
| 14,127 |
|
|
| 21,073 |
|
|
| 17,883 |
|
|
| - |
|
|
| 53,083 |
|
|
| 24,958 |
|
|
| 21,442 |
|
|
| 17,237 |
|
|
| - |
|
|
| 63,637 |
|
Expenditures for property, plant and equipment |
|
| 27,349 |
|
|
| 11,324 |
|
|
| 13,640 |
|
|
| - |
|
|
| 52,313 |
| ||||||||||||||||||||
Expenditures for property, plant & equipment |
|
| 82,760 |
|
|
| 27,397 |
|
|
| 32,788 |
|
|
| - |
|
|
| 142,945 |
| ||||||||||||||||||||
Segment assets |
|
| 330,308 |
|
|
| 450,763 |
|
|
| 277,093 |
|
|
| - |
|
|
| 1,058,164 |
|
|
| 589,239 |
|
|
| 578,315 |
|
|
| 309,743 |
|
|
| - |
|
|
| 1,477,297 |
|
Equity investment |
|
| - |
|
|
| - |
|
|
| 11,914 |
|
|
| - |
|
|
| 11,914 |
|
|
| - |
|
|
| - |
|
|
| 11,727 |
|
|
| - |
|
|
| 11,727 |
|
Goodwill |
|
| 43,578 |
|
|
| 99,426 |
|
|
| 52,890 |
|
|
| - |
|
|
| 195,894 |
|
|
| 84,180 |
|
|
| 113,272 |
|
|
| 52,890 |
|
|
| - |
|
|
| 250,342 |
|
|
| II-VI |
|
|
|
|
|
| II-VI |
|
|
|
|
|
|
|
|
|
| II-VI |
|
|
|
|
|
| II-VI |
|
|
|
|
|
|
|
|
| ||||
|
| Laser |
|
| II-VI |
|
| Performance |
|
|
|
|
|
|
|
|
|
| Laser |
|
| II-VI |
|
| Performance |
|
|
|
|
|
|
|
|
| ||||||
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Eliminations |
|
| Total |
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Eliminations |
|
| Total |
| ||||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Revenues |
| $ | 254,342 |
|
| $ | 216,493 |
|
| $ | 212,426 |
|
| $ | - |
|
| $ | 683,261 |
|
| $ | 303,002 |
|
| $ | 325,879 |
|
| $ | 198,335 |
|
| $ | - |
|
| $ | 827,216 |
|
Inter-segment revenues |
|
| 9,825 |
|
|
| 9,533 |
|
|
| 12,000 |
|
|
| (31,358 | ) |
|
| - |
|
|
| 24,290 |
|
|
| 12,081 |
|
|
| 7,274 |
|
|
| (43,645 | ) |
|
| - |
|
Operating income (loss) |
|
| 24,457 |
|
|
| (113 | ) |
|
| 22,142 |
|
|
| - |
|
|
| 46,486 |
| ||||||||||||||||||||
Operating income |
|
| 36,184 |
|
|
| 37,849 |
|
|
| 17,780 |
|
|
| - |
|
|
| 91,813 |
| ||||||||||||||||||||
Interest expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4,479 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,081 | ) |
Other income, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,634 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,223 |
|
Income taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (7,325 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (24,469 | ) |
Earnings from discontinued operation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 133 |
| ||||||||||||||||||||
Net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 38,449 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 65,486 |
|
Depreciation and amortization |
|
| 15,018 |
|
|
| 20,123 |
|
|
| 17,957 |
|
|
| - |
|
|
| 53,098 |
|
|
| 17,222 |
|
|
| 19,855 |
|
|
| 19,586 |
|
|
| - |
|
|
| 56,663 |
|
Expenditures for property, plant and equipment |
|
| 11,797 |
|
|
| 8,359 |
|
|
| 9,064 |
|
|
| - |
|
|
| 29,220 |
| ||||||||||||||||||||
Expenditures for property, plant & equipment |
|
| 25,620 |
|
|
| 21,096 |
|
|
| 11,454 |
|
|
| - |
|
|
| 58,170 |
| ||||||||||||||||||||
Segment assets |
|
| 312,281 |
|
|
| 468,055 |
|
|
| 291,590 |
|
|
| - |
|
|
| 1,071,926 |
|
|
| 469,754 |
|
|
| 467,486 |
|
|
| 274,741 |
|
|
| - |
|
|
| 1,211,981 |
|
Equity investment |
|
| - |
|
|
| - |
|
|
| 11,589 |
|
|
| - |
|
|
| 11,589 |
|
|
| - |
|
|
| - |
|
|
| 11,354 |
|
|
| - |
|
|
| 11,354 |
|
Goodwill |
|
| 44,041 |
|
|
| 99,214 |
|
|
| 52,890 |
|
|
| - |
|
|
| 196,145 |
|
|
| 84,105 |
|
|
| 96,760 |
|
|
| 52,890 |
|
|
| - |
|
|
| 233,755 |
|
|
| II-VI |
|
|
|
|
|
| II-VI |
|
|
|
|
|
|
|
|
|
| II-VI |
|
|
|
|
|
| II-VI |
|
|
|
|
|
|
|
|
| ||||
|
| Laser |
|
| II-VI |
|
| Performance |
|
|
|
|
|
|
|
|
|
| Laser |
|
| II-VI |
|
| Performance |
|
|
|
|
|
|
|
|
| ||||||
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Eliminations |
|
| Total |
|
| Solutions |
|
| Photonics |
|
| Products |
|
| Eliminations |
|
| Total |
| ||||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Revenues |
| $ | 217,604 |
|
| $ | 141,319 |
|
| $ | 192,152 |
|
| $ | - |
|
| $ | 551,075 |
|
| $ | 287,881 |
|
| $ | 260,825 |
|
| $ | 193,255 |
|
| $ | - |
|
| $ | 741,961 |
|
Inter-segment revenues |
|
| 5,671 |
|
|
| 3,950 |
|
|
| 9,458 |
|
|
| (19,079 | ) |
|
| - |
|
|
| 21,021 |
|
|
| 13,210 |
|
|
| 9,325 |
|
|
| (43,556 | ) |
|
| - |
|
Operating income |
|
| 53,963 |
|
|
| 15,037 |
|
|
| 2,491 |
|
|
| - |
|
|
| 71,491 |
|
|
| 55,039 |
|
|
| 7,208 |
|
|
| 14,552 |
|
|
| - |
|
|
| 76,799 |
|
Interest expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,160 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,863 | ) |
Other income, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,155 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6,176 |
|
Income taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (18,766 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (13,137 | ) |
Loss from discontinued operation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,789 | ) | ||||||||||||||||||||
Net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 51,931 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 65,975 |
|
Depreciation and amortization |
|
| 8,554 |
|
|
| 17,181 |
|
|
| 15,057 |
|
|
| - |
|
|
| 40,792 |
|
|
| 14,127 |
|
|
| 21,073 |
|
|
| 17,883 |
|
|
| - |
|
|
| 53,083 |
|
Expenditures for property, plant and equipment |
|
| 6,536 |
|
|
| 8,849 |
|
|
| 9,820 |
|
|
| - |
|
|
| 25,205 |
| ||||||||||||||||||||
Expenditures for property, plant & equipment |
|
| 27,349 |
|
|
| 11,324 |
|
|
| 13,640 |
|
|
| - |
|
|
| 52,313 |
|
Geographic information for revenues from the country of origin (shipped from), and long-lived assets from the country of origin, which include property, plant and equipment, net of related depreciation, and certain other long-term assets, were as follows:
|
| Revenues |
|
| Revenues |
| ||||||||||||||||||
Year-Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||||||||||||||
Year Ended June 30, |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||||||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 241,974 |
|
| $ | 263,493 |
|
| $ | 251,735 |
|
| $ | 294,200 |
|
| $ | 266,347 |
|
| $ | 241,974 |
|
Non-United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
| 140,586 |
|
|
| 114,247 |
|
|
| 123,306 |
|
|
| 208,595 |
|
|
| 172,292 |
|
|
| 140,586 |
|
Hong Kong |
|
| 109,428 |
|
|
| 54,602 |
|
|
| - |
|
|
| 190,702 |
|
|
| 140,821 |
|
|
| 109,428 |
|
Germany |
|
| 77,524 |
|
|
| 69,983 |
|
|
| 59,628 |
|
|
| 88,304 |
|
|
| 72,070 |
|
|
| 77,524 |
|
Japan |
|
| 76,212 |
|
|
| 57,287 |
|
|
| 52,864 |
| ||||||||||||
Switzerland |
|
| 56,940 |
|
|
| 70,260 |
|
|
| 10,268 |
|
|
| 50,497 |
|
|
| 54,760 |
|
|
| 56,940 |
|
Japan |
|
| 52,864 |
|
|
| 38,110 |
|
|
| 29,462 |
| ||||||||||||
Vietnam |
|
| 24,307 |
|
|
| 23,141 |
|
|
| 29,425 |
|
|
| 22,497 |
|
|
| 24,267 |
|
|
| 24,307 |
|
Philippines |
|
| 11,334 |
|
|
| 14,959 |
|
|
| 17,400 |
| ||||||||||||
Italy |
|
| 9,313 |
|
|
| 8,897 |
|
|
| 7,593 |
|
|
| 10,791 |
|
|
| 10,160 |
|
|
| 9,313 |
|
United Kingdom |
|
| 7,749 |
|
|
| 7,148 |
|
|
| 6,865 |
|
|
| 8,473 |
|
|
| 8,154 |
|
|
| 7,749 |
|
Belgium |
|
| 5,731 |
|
|
| 6,578 |
|
|
| 5,821 |
|
|
| 7,503 |
|
|
| 6,026 |
|
|
| 5,731 |
|
Korea |
|
| 6,584 |
|
|
| 3,887 |
|
|
| - |
| ||||||||||||
Singapore |
|
| 3,897 |
|
|
| 8,273 |
|
|
| 6,280 |
|
|
| 3,913 |
|
|
| 3,039 |
|
|
| 3,897 |
|
Philippines |
|
| 3,057 |
|
|
| 8,106 |
|
|
| 11,334 |
| ||||||||||||
Taiwan |
|
| 718 |
|
|
| - |
|
|
| - |
| ||||||||||||
Australia |
|
| 314 |
|
|
| 3,570 |
|
|
| 3,292 |
|
|
| - |
|
|
| - |
|
|
| 314 |
|
Total Non-United States |
|
| 499,987 |
|
|
| 419,768 |
|
|
| 299,340 |
|
|
| 677,846 |
|
|
| 560,869 |
|
|
| 499,987 |
|
|
| $ | 741,961 |
|
| $ | 683,261 |
|
| $ | 551,075 |
|
| $ | 972,046 |
|
| $ | 827,216 |
|
| $ | 741,961 |
|
|
| Long-Lived Assets |
|
| Long-Lived Assets |
| ||||||||||||||||||
June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 102,171 |
|
| $ | 109,138 |
|
| $ | 110,337 |
|
| $ | 240,029 |
|
| $ | 137,521 |
|
| $ | 102,171 |
|
Non-United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
| 46,794 |
|
|
| 45,667 |
|
|
| 43,139 |
|
|
| 62,024 |
|
|
| 51,824 |
|
|
| 46,794 |
|
Switzerland |
|
| 26,384 |
|
|
| 22,524 |
|
|
| 5 |
|
|
| 36,795 |
|
|
| 38,202 |
|
|
| 26,384 |
|
Germany |
|
| 15,790 |
|
|
| 16,129 |
|
|
| 2,107 |
|
|
| 15,323 |
|
|
| 15,162 |
|
|
| 15,790 |
|
Vietnam |
|
| 7,985 |
|
|
| 9,107 |
|
|
| 10,081 |
|
|
| 8,272 |
|
|
| 8,895 |
|
|
| 7,985 |
|
Philippines |
|
| 6,003 |
|
|
| 6,205 |
|
|
| 7,207 |
|
|
| 6,115 |
|
|
| 4,399 |
|
|
| 6,003 |
|
Hong Kong |
|
| 2,476 |
|
|
| 5,111 |
|
|
| - |
|
|
| 1,914 |
|
|
| 1,765 |
|
|
| 2,476 |
|
Other |
|
| 1,282 |
|
|
| 2,218 |
|
|
| 3,244 |
|
|
| 1,100 |
|
|
| 1,146 |
|
|
| 1,282 |
|
Total Non-United States |
|
| 106,714 |
|
|
| 106,961 |
|
|
| 65,783 |
|
|
| 131,543 |
|
|
| 121,393 |
|
|
| 106,714 |
|
|
| $ | 208,885 |
|
| $ | 216,099 |
|
| $ | 176,120 |
|
| $ | 371,572 |
|
| $ | 258,914 |
|
| $ | 208,885 |
|
Note 12. | Fair Value of Financial Instruments |
The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:
|
|
Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurements.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
At June 30, 2015,2017, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts.
In February 2016, the Company entered into a contingent earnout arrangement which provides up to a maximum of $6.0 million of additional cash earnout opportunities based upon EpiWorks achieving certain agreed upon financial and operational targets for capacity, wafer output and gross margin, which if earned would be payable for the achievement of each specific annual target over the next three years. The Company paid the first year earnout amount of $2.0 million during the quarter ended June 30, 2017.
In June 2017, the Company entered into a contingent earnout arrangement which provides up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving certain agreed upon financial and transitional objectives relating to finance, information technology and human resources, which if earned would be payable for the achievement of each specific annual target over the next year.
The fair values of these contingent earnout arrangements were measured using valuations based upon other unobservable inputs that are significant to the fair value measurement (Level 3).
The following tables provide a summary by level of the fair value of financial instruments that are measured on a recurring basis as of June 30, 20152017 and 2014($2016 ($000):
|
| Fair Value Measurements at June 30, 2015 Using: |
|
| Fair Value Measurements at June 30, 2017 Using: |
| ||||||||||||||||||||||||||
|
|
|
|
|
| Quoted Prices in |
|
| Significant |
|
|
|
|
|
|
|
|
|
| Quoted Prices in |
|
| Significant |
|
|
|
|
| ||||
|
|
|
|
|
| Active Markets |
|
| Other |
|
| Significant |
|
|
|
|
|
| Active Markets |
|
| Other |
|
| Significant |
| ||||||
|
|
|
|
|
| for Identical |
|
| Observable |
|
| Unobservable |
|
|
|
|
|
| for Identical |
|
| Observable |
|
| Unobservable |
| ||||||
|
|
|
|
|
| Assets |
|
| Inputs |
|
| Inputs |
|
|
|
|
|
| Assets |
|
| Inputs |
|
| Inputs |
| ||||||
|
| June 30, 2015 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| June 30, 2017 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
| $ | 130 |
|
| $ | - |
|
| $ | 130 |
|
| $ | - |
|
| $ | 191 |
|
| $ | - |
|
| $ | 191 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Contingent earnout arrangements |
| $ | 5,795 |
|
| $ | - |
|
| $ | - |
|
| $ | 5,795 |
|
|
| Fair Value Measurements at June 30, 2014 Using: |
|
| Fair Value Measurements at June 30, 2016 Using: |
| ||||||||||||||||||||||||||
|
|
|
|
|
| Quoted Prices in |
|
| Significant |
|
|
|
|
|
|
|
|
|
| Quoted Prices in |
|
| Significant |
|
|
|
|
| ||||
|
|
|
|
|
| Active Markets |
|
| Other |
|
| Significant |
|
|
|
|
|
| Active Markets |
|
| Other |
|
| Significant |
| ||||||
|
|
|
|
|
| for Identical |
|
| Observable |
|
| Unobservable |
|
|
|
|
|
| for Identical |
|
| Observable |
|
| Unobservable |
| ||||||
|
|
|
|
|
| Assets |
|
| Inputs |
|
| Inputs |
|
|
|
|
|
| Assets |
|
| Inputs |
|
| Inputs |
| ||||||
|
| June 30, 2014 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| June 30, 2016 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
| $ | 54 |
|
| $ | - |
|
| $ | 54 |
|
| $ | - |
|
| $ | 511 |
|
| $ | - |
|
| $ | 511 |
|
| $ | - |
|
Contingent earnout arrangement |
| $ | 4,352 |
|
| $ | - |
|
| $ | - |
|
| $ | 4,352 |
|
The Company’s policy is to report transfers into and out of Levels 1 and 2 of the fair value hierarchy at fair values as of the beginning of the period in which the transfers occur. There were no transfers in and out of Levels 1 and 2 of the fair value hierarchy during fiscal years 20152017 and 2014.2016.
The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s level 3 contingent earnout arrangement related to the acquisitions of II-VI EpiWorks and IPI ($000):
| Significant |
| |
| Unobservable Inputs |
| |
| (Level 3) |
| |
Balance at July 1, 2016 | $ | 4,352 |
|
|
|
|
|
Contingent earnout arrangements: |
|
|
|
Contingent earnout - IPI |
| 2,250 |
|
Payments |
| (2,000 | ) |
Changes in fair value recorded in other expense, (income) |
| 1,193 |
|
|
|
|
|
Balance at June 30, 2017 | $ | 5,795 |
|
There were no Significant Unobservable Inputs (Level 3) during the fiscal year ended June 30, 2015.
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings include variable interest rate, non-interest bearing debt and a capital lease obligation and are considered Level 2 among the fair value hierarchy and are variable interest rates and accordingly their carrying amounts approximate fair value.
Note 13. | Derivative Instruments |
The Company, from time to time, purchases foreign currency forward exchange contracts, primarily in Japanese Yen, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk.
The Company has recorded the fair market value of these contracts in the Company’s financial statements. These contracts had a total notional amount of $10.8$12.7 million and $7.4$9.2 million at June 30, 20152017 and June 30, 2014,2016, respectively. As of June 30, 2015,2017, these forward contracts had expiration dates ranging from July 20152017 through October 2015,2017, with Japanese Yen denominations individually between 250300 million and 350400 million Yen. The Company does not account for these contracts as hedges as defined by U.S. GAAP and records the change in the fair value of these contracts in Other expense (income), net in the Consolidated Statements of Earnings as they occur. The fair value measurement takes into consideration foreign currency rates and the current creditworthiness of the counterparties to these contracts, as applicable, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments and thus represents a Level 2 measurement. These contracts are recorded in prepaid and other current assets in the Company’s Consolidated Balance Sheets.Sheets as of June 30, 2017. The change in the fair value of these contracts for the fiscal yearsyear ended June 30, 2015, 20142017, 2016 and 20132015 was insignificant.
Note 14. | Employee Benefit Plans |
Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at the discretion of the Company’s board of directors and were $2.8$4.3 million, $2.5$3.4 million, and $2.2$2.8 million for the years ended June 30, 2015, 20142017, 2016 and 2013,2015, respectively.
The Company has an employee stock purchase plan available for employees who have completed six months of continuous employment with the Company. The employee may purchase the Company’s Common Stock at 5% below the prevailing market price. The amount of shares which may be bought by an employee during each fiscal year is limited to 10% of the employee’s base pay. This plan, as amended, limits the number of shares of Common Stock available for purchase to 1,600,000 shares. There were 514,031477,949 and 543,234492,913 shares of Common Stock available for purchase under the plan at June 30, 20152017 and 2014,2016, respectively.
Switzerland Defined Benefit Plan
In conjunction with the acquisition of Oclaro’s Switzerland-Based SemiconductorII-VI Laser Business,Enterprise in fiscal year 2014, the Company assumed a pension plan covering employees of our Swiss subsidiary (the “Swiss Plan”). Employer and employee contributions are made to the Swiss Plan based on various percentages of salary and wages that vary according to employee age and other factors. Employer contributions to the Swiss Plan for year ended June 30, 20152017 were $1.9$2.4 million. Expected employer contributions in fiscal year 20162018 are $2.0$2.6 million.
The funded status of the Swiss Plan in the fiscal years ended June 30, 20152017 and 20142016 were as follows:
Year ended June 30, |
| 2015 |
|
| 2014 |
| ||||||||||
Year Ended June 30, |
| 2017 |
|
| 2016 |
| ||||||||||
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of period |
|
| 39,390 |
|
| $ | 38,748 |
|
| $ | 54,094 |
|
| $ | 42,575 |
|
Service cost |
|
| 2,791 |
|
|
| 3,375 |
|
|
| 3,689 |
|
|
| 2,680 |
|
Interest cost |
|
| 744 |
|
|
| 812 |
|
|
| 163 |
|
|
| 434 |
|
Plan amendments |
|
| - |
|
|
| (1,661 | ) | ||||||||
Participant contributions |
|
| 965 |
|
|
| 1,110 |
|
|
| 1,262 |
|
|
| 1,046 |
|
Benefits (paid) received |
|
| (1,279 | ) |
|
| (3,959 | ) | ||||||||
Benefits received |
|
| 1,743 |
|
|
| 1,567 |
| ||||||||
Actuarial (gain) loss on obligation |
|
| 1,520 |
|
|
| (867 | ) |
|
| (2,777 | ) |
|
| 8,071 |
|
Currency translation adjustment |
|
| (1,556 | ) |
|
| 1,832 |
|
|
| 1,344 |
|
|
| (2,279 | ) |
Projected benefit obligation, end of period |
| $ | 42,575 |
|
| $ | 39,390 |
|
| $ | 59,518 |
|
| $ | 54,094 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value, beginning of period |
|
| 31,965 |
|
|
| 30,167 |
|
|
| 35,857 |
|
|
| 32,509 |
|
Actual return on plan assets |
|
| 207 |
|
|
| 776 |
|
|
| 805 |
|
|
| 431 |
|
Employer contributions |
|
| 1,914 |
|
|
| 2,253 |
|
|
| 2,432 |
|
|
| 2,043 |
|
Participant contributions |
|
| 965 |
|
|
| 1,110 |
|
|
| 1,262 |
|
|
| 1,046 |
|
Benefits (paid) received |
|
| (1,279 | ) |
|
| (3,959 | ) | ||||||||
Benefits received |
|
| 1,743 |
|
|
| 1,567 |
| ||||||||
Currency translation adjustment |
|
| (1,263 | ) |
|
| 1,617 |
|
|
| 891 |
|
|
| (1,739 | ) |
Plan assets at fair value, end of period |
| $ | 32,509 |
|
| $ | 31,965 |
|
| $ | 42,990 |
|
| $ | 35,857 |
|
Amounts recognized in consolidated balance sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset |
| $ | 2,129 |
|
| $ | 1,570 |
|
| $ | 3,496 |
|
| $ | 3,857 |
|
Other non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded pension liability |
| $ | 10,066 |
|
|
| 7,425 |
|
| $ | 16,528 |
|
|
| 18,237 |
|
Amounts recognized in accumulated other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension adjustment |
| $ | (2,244 | ) |
| $ | 1,443 |
|
| $ | 2,514 |
|
| $ | (7,031 | ) |
Accumulated benefit obligation, end of period |
| $ | 38,734 |
|
| $ | 35,581 |
|
| $ | 56,457 |
|
| $ | 50,772 |
|
Net periodic pension cost associated with the Swiss Plan included the following components:
Year ended June 30, |
| 2015 |
|
| 2014 |
| ||||||||||
Year Ended June 30, |
| 2017 |
|
| 2016 |
| ||||||||||
Service cost |
|
| 2,791 |
|
| $ | 3,375 |
|
| $ | 3,689 |
|
| $ | 2,680 |
|
Interest cost |
|
| 744 |
|
|
| 812 |
|
|
| 163 |
|
|
| 434 |
|
Expected return on plan assets |
|
| (1,106 | ) |
|
| (1,338 | ) |
|
| (742 | ) |
|
| (1,097 | ) |
Net amortization |
|
| - |
|
| - |
| |||||||||
Prior service cost |
|
| 594 |
|
|
| (234 | ) | ||||||||
Net period pension cost |
| $ | 2,429 |
|
| $ | 2,849 |
|
| $ | 3,704 |
|
| $ | 1,783 |
|
The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 20152017 and 20142016 using the following assumptions:
Year ended June 30, |
| 2015 |
|
| 2014 |
| ||||||||||
Year Ended June 30, |
| 2017 |
|
| 2016 |
| ||||||||||
Discount rate |
|
| 1.1 | % |
|
| 2.0 | % |
|
| 0.8 | % |
|
| 0.3 | % |
Salary increase rate |
|
| 2.0 | % |
|
| 2.0 | % |
|
| 2.0 | % |
|
| 2.0 | % |
Expected return on plan assets |
|
| 3.5 | % |
|
| 3.5 | % |
|
| 2.0 | % |
|
| 2.0 | % |
Expected average remaining working life (in years) |
| 13.1 |
|
|
| 13.1 |
|
| 9.9 |
|
|
| 10.2 |
|
The discount rate is based on assumed pension benefit maturity and estimates developed using the rate of return and yield curves for high quality Swiss corporate and government bonds. The salary increase rate is based on our best assessment for on-going increases over time. The expected long-term rate of return on plan assets is based on the expected asset allocation and taking into consideration historical long-term rates of return for the relevant asset categories.
As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no investment authority over the assets of the plan that are held and invested by a Swiss insurance company. The Swiss Plan assets are measured at fair value and are classified within Level 2 of the fair value hierarchy. The investment strategy of the Swiss Plan is managed by an independent asset manager with the objective of achieving a consistent long-term return which will provide sufficient funding for future pension obligations while limiting risk.
The Swiss Plan is legally separate from II-VI, as are the assets of the plan. As of June 30, 2015,2017, the Swiss Plan’s asset allocation was as follows:
Year ended June 30, |
| 2015 |
|
| 2014 |
| ||||||||||
Year Ended June 30, |
| 2017 |
|
| 2016 |
| ||||||||||
Fixed income investments |
|
| 22.0 | % |
|
| 22.0 | % |
|
| 10.0 | % |
|
| 15.0 | % |
Equity investments |
|
| 52.0 | % |
|
| 54.0 | % |
|
| 52.0 | % |
|
| 51.0 | % |
Real estate |
|
| 16.0 | % |
|
| 14.0 | % |
|
| 26.0 | % |
|
| 28.0 | % |
Cash |
|
| 8.0 | % |
|
| 8.0 | % |
|
| 9.0 | % |
|
| 3.0 | % |
Alternative investments |
|
| 2.0 | % |
|
| 2.0 | % |
|
| 3.0 | % |
|
| 3.0 | % |
|
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Estimated future benefit payments under the Swiss Plan are estimated to be as follows:
Year Ending June 30, |
|
|
|
|
|
|
|
|
($000) |
|
|
|
|
|
|
|
|
2016 |
| $ | 1,649 |
| ||||
2017 |
|
| 2,129 |
| ||||
2018 |
|
| 1,250 |
|
| $ | 2,683 |
|
2019 |
|
| 3,429 |
|
|
| 4,062 |
|
2020 |
|
| 1,164 |
|
|
| 1,575 |
|
2021 |
|
| 2,533 |
| ||||
2022 |
|
| 2,681 |
| ||||
Next five years |
|
| 14,259 |
|
|
| 19,163 |
|
II-VI Performance Metals Defined Benefit Plan
As a requirement of a collective bargaining agreement, II-VI Performance Metals maintains a defined benefit plan for substantially all of its employees. The plan provides for retirement benefits based on a certain percentage of the latest monthly salary of an employee per year of service. The pension liability was $0.6 million at June 30, 2015 and June 30, 2014. The Plan is an unfunded pension plan under which the Company makes payments directly to employees. As these payments are made directly by the Company, there are no separate assets utilized to fund this plan.
Other Employee Benefit Plans
The Company has no program for post-retirement health and welfare benefits.
The II-VI Incorporated Deferred Compensation Plan (the “Compensation Plan”) is designed to allow officers and key employees of the Company to defer receipt of compensation into a trust fund for retirement purposes. Under the Compensation Plan, as it is currently implemented by the Company, eligible participants can elect to defer up to 100% of certain discretionary incentive compensation and certain equity awards into the Compensation Plan. The Compensation Plan is a nonqualified, defined contribution employees’ retirement plan. At the Company’s discretion, the Compensation Plan may be funded by the Company making contributions based on compensation deferrals, matching contributions and discretionary contributions. Compensation deferrals will be based on an election by the participant to defer a percentage of compensation under the Compensation Plan. All assets in the Compensation Plan are subject to claims of the Company’s creditors until such amounts are paid to the Compensation Plan participants. Employees of the Company made contributions to the Compensation Plan in the amounts of approximately $0.7$0.8 million, $1.9$1.2 million, and $1.8$0.7 million for the fiscal years ended June 30, 2017, 2016, and 2015, 2014, and 2013, respectively. During the fiscal year ended June 30, 2017, the Company made a contribution of $0.1 million to the Compensation Plan on behalf of Dr. Mattera for his appointment as Chief Executive Officer. There were no employer contributions made to the Compensation Plan for the fiscal years ended June 30, 2015, 20142016 and 2013.2015.
Note 15. | Other Accrued Liabilities |
The components of other accrued liabilities were as follows:
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
| 8,767 |
|
|
| 4,318 |
|
| $ | 2,345 |
|
| $ | 4,014 |
|
Warranty reserve |
|
| 3,251 |
|
|
| 2,859 |
|
|
| 4,546 |
|
|
| 3,908 |
|
Acquisition holdbacks |
| $ | - |
|
| $ | 10,000 |
| ||||||||
Current portion of earnout arrangements |
|
| 3,930 |
|
|
| 1,935 |
| ||||||||
Other accrued liabilities |
|
| 12,558 |
|
|
| 14,344 |
|
|
| 18,235 |
|
|
| 15,989 |
|
|
| $ | 24,576 |
|
| $ | 31,521 |
|
| $ | 29,056 |
|
| $ | 25,846 |
|
In June 2013, the Company received notice from the noncontrolling interest holder of II-VI HIGHYAG of its intention to exercise a put option. The value of the put option was calculated using a formulaic model based upon earnings before interest, income taxes, depreciation and amortization (EBITDA), revenue growth and other variables. The price for the 25.07% noncontrolling interest the Company did not already own was $7.6 million; in addition, a dividend of $1.0 million also was declared and was paid to the noncontrolling interest holder in fiscal year 2014. These amounts were paid in August 2013.
Changes in the carrying amount of the Company’s redeemable noncontrolling interest were as follows:
Year Ended June 30, |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
| $ | - |
|
| $ | - |
|
| $ | 5,160 |
|
Net earnings attributable to redeemable noncontrolling interest |
|
| - |
|
|
| - |
|
|
| 1,118 |
|
Other changes |
|
| - |
|
|
| - |
|
|
| (585 | ) |
Redemption value adjustment to redeemable noncontrolling interest |
|
| - |
|
|
| - |
|
|
| 2,875 |
|
Reclassification of redeemable noncontrolling interest to Other accrued liabilities |
|
| - |
|
|
| - |
|
|
| (8,568 | ) |
Balance at End of Year |
| $ | - |
|
| $ | - |
|
| $ | - |
|
The following table summarizes the change in the carrying value of the company’sCompany’s warranty reserve included in Other Accrued Liabilities as of and for the year ended June 30, 2015.2017.
Year Ended June 30, |
| 2015 |
|
| 2017 |
| ||
($000) |
|
|
|
|
|
|
|
|
Balance-Beginning of Year |
| $ | 2,859 |
|
| $ | 3,908 |
|
Settlements during the period |
|
| (4,655 | ) |
|
| (4,212 | ) |
Additional warranty liability recorded |
|
| 5,047 |
|
|
| 4,850 |
|
Balance-End of Year |
| $ | 3,251 |
|
| $ | 4,546 |
|
Note 16. | Commitments and Contingencies |
The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature of some of the Company’s materials and processes, certain contracts may contain penalty provisions for early termination. The Company does not believe that a significant amount of penalties are reasonably likely to be incurred under these commitments based upon historical experience and current expectation. Total future commitments are as follows:
Year Ending June 30, |
|
|
|
|
|
|
|
|
($000) |
|
|
|
|
|
|
|
|
2016 |
| $ | 13,062 |
| ||||
2017 |
|
| 2,537 |
| ||||
2018 |
|
| 2,537 |
|
| $ | 21,988 |
|
2019 |
|
| - |
|
|
| 866 |
|
2020 |
|
| - |
|
|
| 578 |
|
2021 |
|
| - |
| ||||
2022 |
|
| - |
|
Note 17. | Share Repurchase Programs |
In February 2014 and May 2012, the Board of Directors authorized the Company to purchase up to $20 million and $25 million, respectively, of its Common Stock. The repurchase programs called for shares to be purchased in the open market or in private transactions from time to time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. During the fiscal years ended June 30, 2014, 2013 and 2012, the Company purchased 1,333,355 shares, 1,141,022 shares and 301,716 shares of its Common Stock for $20.0 million, $20.0 million, and $5.0 million, respectively, under the repurchase programs.
In August 2014, the Board of Directors authorized the Company to purchase up to $50 million of its Common Stock. The repurchase program has no expiration and calls for shares to be purchased in the open market or in private transactions from time to time. Shares purchased by the Company will be retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30, 2017, the Company did not repurchase shares of its Common Stock. During fiscal years ended June 30, 2016 and 2015, the Company purchased 380,538 and 936,049 shares of its Common Stock for $6.3 million and $12.7 million respectively, under this new repurchase program.
Note 18. | Accumulated Other Comprehensive Income (Loss) |
The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2015, 2014,2017, 2016, and 20132015 were as follows ($000):
|
| Foreign |
|
|
|
|
|
| Total |
|
| Foreign |
|
|
|
|
|
| Total |
| ||||
|
| Currency |
|
| Defined |
|
| Accumulated Other |
|
| Currency |
|
| Defined |
|
| Accumulated Other |
| ||||||
|
| Translation |
|
| Benefit |
|
| Comprehensive |
|
| Translation |
|
| Benefit |
|
| Comprehensive |
| ||||||
|
| Adjustment |
|
| Pension Plan |
|
| Income |
|
| Adjustment |
|
| Pension Plan |
|
| Income |
| ||||||
AOCI - June 30, 2012 |
| $ | 10,238 |
|
| $ | - |
|
| $ | 10,238 |
| ||||||||||||
Other comprehensive income before reclassifications |
|
| 5,362 |
|
|
| - |
|
|
| 5,362 |
| ||||||||||||
Amounts reclassified from AOCI |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||
Net current-period other comprehensive income |
|
| 5,362 |
|
|
| - |
|
|
| 5,362 |
| ||||||||||||
AOCI - June 30, 2013 |
|
| 15,600 |
|
|
| - |
|
|
| 15,600 |
| ||||||||||||
Other comprehensive income before reclassifications |
|
| 2,363 |
|
|
| 1,443 |
|
|
| 3,806 |
| ||||||||||||
Amounts reclassified from AOCI |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||
Net current-period other comprehensive income |
|
| 2,363 |
|
|
| 1,443 |
|
|
| 3,806 |
| ||||||||||||
AOCI - June 30, 2014 |
| $ | 17,963 |
|
| $ | 1,443 |
|
| $ | 19,406 |
|
| $ | 17,963 |
|
| $ | 1,443 |
|
| $ | 19,406 |
|
Other comprehensive income before reclassifications |
|
| (8,497 | ) |
|
| (2,244 | ) |
|
| (10,741 | ) | ||||||||||||
Other comprehensive income (loss) before reclassifications |
|
| (8,497 | ) |
|
| (2,244 | ) |
|
| (10,741 | ) | ||||||||||||
Amounts reclassified from AOCI |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Net current-period other comprehensive income |
|
| (8,497 | ) |
|
| (2,244 | ) |
|
| (10,741 | ) |
|
| (8,497 | ) |
|
| (2,244 | ) |
|
| (10,741 | ) |
AOCI - June 30, 2015 |
| $ | 9,466 |
|
| $ | (801 | ) |
| $ | 8,665 |
|
|
| 9,466 |
|
|
| (801 | ) |
|
| 8,665 |
|
Other comprehensive income (loss) before reclassifications |
|
| (15,651 | ) |
|
| (6,805 | ) |
|
| (22,456 | ) | ||||||||||||
Amounts reclassified from AOCI |
|
| - |
|
|
| (226 | ) |
|
| (226 | ) | ||||||||||||
Net current-period other comprehensive income |
|
| (15,651 | ) |
|
| (7,031 | ) |
|
| (22,682 | ) | ||||||||||||
AOCI - June 30, 2016 |
| $ | (6,185 | ) |
| $ | (7,832 | ) |
| $ | (14,017 | ) | ||||||||||||
Other comprehensive income (loss) before reclassifications |
|
| (2,275 | ) |
|
| 1,920 |
|
|
| (355 | ) | ||||||||||||
Amounts reclassified from AOCI |
|
| - |
|
|
| 594 |
|
|
| 594 |
| ||||||||||||
Net current-period other comprehensive income |
|
| (2,275 | ) |
|
| 2,514 |
|
|
| 239 |
| ||||||||||||
AOCI - June 30, 2017 |
| $ | (8,460 | ) |
| $ | (5,318 | ) |
| $ | (13,778 | ) |
Note 19. | Capital Lease |
During the quarter ended December 31, 2016, the Company’s OptoElectronic Devices subsidiary entered into a capital lease related to a building in Warren, New Jersey. The following table shows the future minimum lease payments due under the non-cancelable capital lease ($000):
Fiscal Year Ending June 30, |
| Amount |
| |
2018 |
| $ | 2,579 |
|
2019 |
|
| 2,579 |
|
2020 |
|
| 2,579 |
|
2021 |
|
| 2,579 |
|
2022 |
|
| 2,579 |
|
Thereafter |
|
| 24,503 |
|
Total minimum lease payments |
| $ | 37,398 |
|
Less amount representing interest |
|
| 12,909 |
|
Present value of capitalized payments |
| $ | 24,489 |
|
Less: current portion |
|
| 1,074 |
|
Long-term portion |
| $ | 23,415 |
|
The current and long-term portion of the capital lease obligation was recorded in Other accrued liabilities and Capital lease obligation, respectively, in the Company’s Consolidated Balance Sheet as of June 30, 2017. The present value of the minimum capital lease payments at inception was $25.0 million recorded in Property, Plant & Equipment, net, in the Company’s Consolidated Balance Sheet as of June 30, 2017, with associated depreciation being recorded over the 15 year life of the lease. During the fiscal year ended June 30, 2017, the Company recorded $0.8 million of depreciation expense associated with the capital leased asset.
Note | Subsequent Events |
On August 8, 2014,July 26, 2017, the Company’s Fuzhou manufacturing facilityCompany signed a definitive purchase agreement to acquire 100% of the outstanding stock of Kaim Laser Limited, a company located in the Fujian province of China was impacted by super typhoon Soudelor, as flood waters infiltrated certain manufacturing areas onUnited Kingdom for $80 million. The Company will operate under the Company’s Fuzhou campus. The Fuzhou manufacturing facility primarily servicesname II-VI PhotopCompound Semiconductor Ltd. and II-VI Optical Communicationswill be included in the II-VI Photonics segment. Almost all of the manufacturing activities have been restoredLaser Solutions segment for financial reporting purposes. The preliminary purchase price allocation is incomplete at this time and the Company is assessing damages and workingwill be accounted for in accordance with its insurance providers to determine the extent of the damages. As of the filing date of this Annual Report on Form 10-K, the Company is not able to estimate the financial consequences related to the flood.ASU 805 Business Combinations.
Quarterly Financial Data (unaudited)
Fiscal Year 20152017
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| June 30, |
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| June 30, |
| ||||||||
Quarter Ended |
| 2014 |
|
| 2014 |
|
| 2015 |
|
| 2015 |
|
| 2016 |
|
| 2016 |
|
| 2017 |
|
| 2017 |
| ||||||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net revenues |
| $ | 185,833 |
|
| $ | 176,736 |
|
| $ | 182,709 |
|
| $ | 196,683 |
|
| $ | 221,520 |
|
| $ | 231,822 |
|
| $ | 244,987 |
|
| $ | 273,717 |
|
Cost of goods sold |
|
| 117,974 |
|
|
| 113,718 |
|
|
| 116,984 |
|
|
| 121,687 |
|
|
| 133,918 |
|
|
| 137,559 |
|
|
| 147,277 |
|
|
| 164,939 |
|
Internal research and development |
|
| 12,943 |
|
|
| 12,845 |
|
|
| 12,874 |
|
|
| 12,598 |
|
|
| 21,832 |
|
|
| 23,632 |
|
|
| 25,380 |
|
|
| 25,966 |
|
Selling, general and administrative |
|
| 35,520 |
|
|
| 33,642 |
|
|
| 35,192 |
|
|
| 39,185 |
|
|
| 42,079 |
|
|
| 43,495 |
|
|
| 43,291 |
|
|
| 47,137 |
|
Interest expense |
|
| 1,204 |
|
|
| 1,038 |
|
|
| 844 |
|
|
| 777 |
|
|
| 1,246 |
|
|
| 1,365 |
|
|
| 1,936 |
|
|
| 2,262 |
|
Other expense (income) - net |
|
| 1,682 |
|
|
| (9,295 | ) |
|
| 1,534 |
|
|
| (97 | ) |
|
| (1,402 | ) |
|
| (6,045 | ) |
|
| (2,164 | ) |
|
| (445 | ) |
Earnings before income taxes |
|
| 16,510 |
|
|
| 24,788 |
|
|
| 15,281 |
|
|
| 22,533 |
|
|
| 23,847 |
|
|
| 31,816 |
|
|
| 29,267 |
|
|
| 33,858 |
|
Income taxes |
|
| 4,208 |
|
|
| 2,692 |
|
|
| 773 |
|
|
| 5,464 |
|
|
| 7,553 |
|
|
| 7,913 |
|
|
| 6,837 |
|
|
| 1,211 |
|
Net Earnings |
| $ | 12,302 |
|
| $ | 22,096 |
|
| $ | 14,508 |
|
| $ | 17,069 |
|
| $ | 16,294 |
|
| $ | 23,903 |
|
| $ | 22,430 |
|
| $ | 32,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic earnings per share: |
| $ | 0.20 |
|
| $ | 0.36 |
|
| $ | 0.24 |
|
| $ | 0.28 |
| ||||||||||||||||
Basic earnings per share |
| $ | 0.26 |
|
| $ | 0.38 |
|
| $ | 0.36 |
|
| $ | 0.52 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted earnings per share: |
| $ | 0.20 |
|
| $ | 0.35 |
|
| $ | 0.23 |
|
| $ | 0.27 |
| ||||||||||||||||
Diluted earnings per share |
| $ | 0.26 |
|
| $ | 0.37 |
|
| $ | 0.35 |
|
| $ | 0.50 |
|
Fiscal Year 20142016
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| June 30, |
| ||||
Quarter Ended |
| 2013 |
|
| 2013 |
|
| 2014 |
|
| 2014 |
| ||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
| $ | 150,020 |
|
| $ | 171,765 |
|
| $ | 173,555 |
|
| $ | 187,921 |
|
Cost of goods sold |
|
| 93,709 |
|
|
| 118,371 |
|
|
| 118,865 |
|
|
| 125,600 |
|
Internal research and development |
|
| 7,747 |
|
|
| 11,355 |
|
|
| 12,099 |
|
|
| 11,322 |
|
Selling, general and administrative |
|
| 35,093 |
|
|
| 32,471 |
|
|
| 33,848 |
|
|
| 36,295 |
|
Interest expense |
|
| 483 |
|
|
| 1,169 |
|
|
| 1,412 |
|
|
| 1,415 |
|
Other expense (income) - net |
|
| 53 |
|
|
| (1,125 | ) |
|
| (1,694 | ) |
|
| (868 | ) |
Earnings from continuing operations before income taxes |
|
| 12,935 |
|
|
| 9,524 |
|
|
| 9,025 |
|
|
| 14,157 |
|
Income taxes |
|
| 3,243 |
|
|
| 2,086 |
|
|
| 494 |
|
|
| 1,502 |
|
Earnings from continuing operations |
|
| 9,692 |
|
|
| 7,438 |
|
|
| 8,531 |
|
|
| 12,655 |
|
Earnings (loss) from discontinued operations, net of income taxes |
|
| 2 |
|
|
| 131 |
|
|
| - |
|
|
| - |
|
Net Earnings |
| $ | 9,694 |
|
| $ | 7,569 |
|
| $ | 8,531 |
|
| $ | 12,655 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.16 |
|
| $ | 0.12 |
|
| $ | 0.14 |
|
| $ | 0.21 |
|
Discontinued operation |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Consolidated |
| $ | 0.16 |
|
| $ | 0.12 |
|
| $ | 0.14 |
|
| $ | 0.21 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.15 |
|
| $ | 0.12 |
|
| $ | 0.13 |
|
| $ | 0.20 |
|
Discontinued operation |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Consolidated |
| $ | 0.15 |
|
| $ | 0.12 |
|
| $ | 0.13 |
|
| $ | 0.20 |
|
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| June 30, |
| ||||
Quarter Ended |
| 2015 |
|
| 2015 |
|
| 2016 |
|
| 2016 |
| ||||
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
| $ | 189,207 |
|
| $ | 191,434 |
|
| $ | 205,105 |
|
| $ | 241,470 |
|
Cost of goods sold |
|
| 118,018 |
|
|
| 120,090 |
|
|
| 127,436 |
|
|
| 148,859 |
|
Internal research and development |
|
| 13,151 |
|
|
| 12,155 |
|
|
| 14,946 |
|
|
| 20,102 |
|
Selling, general and administrative |
|
| 36,310 |
|
|
| 37,408 |
|
|
| 43,333 |
|
|
| 43,595 |
|
Interest expense |
|
| 649 |
|
|
| 597 |
|
|
| 769 |
|
|
| 1,066 |
|
Other expense (income) - net |
|
| (1,057 | ) |
|
| (994 | ) |
|
| 1,257 |
|
|
| (429 | ) |
Earnings before income taxes |
|
| 22,136 |
|
|
| 22,178 |
|
|
| 17,364 |
|
|
| 28,277 |
|
Income taxes |
|
| 4,922 |
|
|
| 3,187 |
|
|
| 2,426 |
|
|
| 13,934 |
|
Net Earnings |
| $ | 17,214 |
|
| $ | 18,991 |
|
| $ | 14,938 |
|
| $ | 14,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
| $ | 0.28 |
|
| $ | 0.31 |
|
| $ | 0.24 |
|
| $ | 0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
| $ | 0.27 |
|
| $ | 0.30 |
|
| $ | 0.24 |
|
| $ | 0.23 |
|
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2017, 2016, 2015 2014, 2013 AND
(IN THOUSANDS OF DOLLARS)
|
|
|
|
|
| Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additions |
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Balance at |
|
| Charged |
|
| Charged |
|
|
| Deduction |
|
|
| Balance |
|
| Balance at |
|
| Charged |
|
| Charged |
|
| Deduction |
|
| Balance |
| ||||||||||||
|
| Beginning |
|
| to |
|
| to Other |
|
|
| from |
|
|
| at End |
|
| Beginning |
|
| to |
|
| to Other |
|
| from |
|
| at End |
| ||||||||||||
|
| of Year |
|
| Expense |
|
| Accounts |
|
|
| Reserves |
|
|
| of Year |
|
| of Year |
|
| Expense |
|
| Accounts |
|
| Reserves |
|
| of Year |
| ||||||||||||
YEAR ENDED JUNE 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Allowance for doubtful accounts |
| $ | 2,016 |
|
| $ | (134 | ) |
| $ | - |
|
| $ | (568 | ) | (2) | $ | 1,314 |
| ||||||||||||||||||||||||
Warranty reserves |
| $ | 3,908 |
|
| $ | 4,850 |
|
| $ | - |
|
| $ | (4,212 | ) |
| $ | 4,546 |
| ||||||||||||||||||||||||
Deferred tax asset valuation allowance |
| $ | 42,641 |
|
| $ | (79 | ) |
| $ | - |
|
| $ | - |
|
| $ | 42,562 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
YEAR ENDED JUNE 30, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Allowance for doubtful accounts |
| $ | 1,048 |
|
| $ | 1,123 |
|
| $ | - |
|
| $ | (155 | ) | (2) | $ | 2,016 |
| ||||||||||||||||||||||||
Warranty reserves |
| $ | 3,251 |
|
| $ | 4,648 |
|
| $ | 82 |
| (1) | $ | (4,073 | ) |
| $ | 3,908 |
| ||||||||||||||||||||||||
Deferred tax asset valuation allowance |
| $ | 2,713 |
|
| $ | 8,464 |
|
| $ | 36,240 |
| (3) | $ | (4,776 | ) | (4) | $ | 42,641 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
YEAR ENDED JUNE 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Allowance for doubtful accounts |
| $ | 1,852 |
|
| $ | (482 | ) |
| $ | - |
|
|
| $ | (322 | ) |
| (3) |
| $ | 1,048 |
|
| $ | 1,852 |
|
| $ | (482 | ) |
| $ | - |
|
| $ | (322 | ) | (2) | $ | 1,048 |
| |
Warranty reserves |
| $ | 2,859 |
|
| $ | 5,047 |
|
| $ | - |
|
|
|
| $ | (4,655 | ) |
|
|
| $ | 3,251 |
|
| $ | 2,859 |
|
| $ | 5,047 |
|
| $ | - |
|
| $ | (4,655 | ) |
| $ | 3,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
YEAR ENDED JUNE 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Allowance for doubtful accounts |
| $ | 1,479 |
|
| $ | 993 |
|
| $ | - |
|
|
| $ | (620 | ) |
| (3) |
| $ | 1,852 |
| |||||||||||||||||||||
Warranty reserves |
| $ | 1,661 |
|
| $ | 1,868 |
|
| $ | 1,173 |
|
| (1) |
| $ | (1,843 | ) |
|
|
| $ | 2,859 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
YEAR ENDED JUNE 30, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Allowance for doubtful accounts |
| $ | 1,536 |
|
| $ | (92 | ) |
| $ | 179 |
|
| (2) |
| $ | (144 | ) |
| (3) |
| $ | 1,479 |
| ||||||||||||||||||||
Warranty reserves |
| $ | 1,247 |
|
| $ | 1,851 |
|
| $ | - |
|
|
| $ | (1,437 | ) |
|
|
| $ | 1,661 |
|
(1) | Relates to the warranty reserve acquired from the acquisitions. |
(2) | Primarily relates to |
(3) |
|
(4) | Reduction in valuation allowance as a result of |
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
Item 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of Francis J. Kramer, the Company’s Chairman and Chief Executive Officer, and Mary Jane Raymond, the Company’s Chief Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended(theamended (the “Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K. The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, Mr. Kramerthe Chief Executive Officer and Ms. RaymondChief Financial Officer concluded that, as of June 30, 2015,2017, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance concerning the reliability of the financial data used in the preparation of the Company’s financial statements, as well as reasonable assurance with respect to safeguarding the Company’s assets from unauthorized use or disposition. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement presentation and other results of such systems. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2015.2017. In making this
evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included reviewingManagement excluded from the documentationscope of its assessment of internal control over financial reporting, the operations and related assets of Integrated Photonics Inc. which was acquired on June 19, 2017. The recent acquisition excluded from management’s assessment of internal controls evaluatingover financial reporting represented approximately $59.8 million and $45.3 million of total assets and net assets, respectively, as of June 30, 2017 and approximately $1.3 million and $0.1 million of total revenues and net income, respectively, for the design effectiveness of controls, and testing their operating effectiveness.fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2015,2017, the Company’s internal controls over financial reporting were effective and provides reasonable assurance that the accompanying financial statements do not contain any material misstatement.effective.
Report of the Registered Public Accounting Firm
The report of Ernst & Young LLP, an independent registered public accounting firm, with respect to our internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. | OTHER INFORMATION |
None.
PART III
Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information set forth above in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” is incorporated herein by reference. The other information required by this item is incorporated herein by reference to the information set forth under the captions “Election of Directors Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the 20152017 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A of the Exchange Act (the “Proxy Statement”).
Audit Committee Financial Expert
The information as to the Audit Committee and the Audit Committee Financial Expert is incorporated herein by reference to the information set forth in the Company’s Proxy Statement.
Code of Ethics
The Company has adopted its Code of Business Conduct and Ethics for all of its employees and its Code of Ethics for Senior Financial Officers including the principal executive officer and principal financial officer. The Code of Business Conduct and Ethics and Code of Ethics for Senior Financial Officers can be found on the Company’s Internet web site at www.ii-vi.com under “Investors Information – Corporate Governance Documents.” The Company will promptly disclose on its web site (i) any amendments or waivers with respect to a director’s or executive officer’s compliance with the Code of Business Conducts and Ethics and (ii) any amendments or waivers with respect to any provision of the Code of Ethics for Senior Financial Officers. Any person may also obtain a copy of the Code of Business Conduct and Ethics and/or the Code of Ethics for Senior Financial Officer without charge by submitting their request to the Chief Financial Officer and Treasurer of II-VI Incorporated, 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056 or by calling (724) 352-4455.
The web site and information contained on it or incorporated in it are not intended to be incorporated in this Annual Report on Form 10-K or other filings with the SEC.
Item 11. | EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by reference to the information set forth under the caption “Director Compensation in Fiscal Year 2015,2017,” “Executive Compensation,” “Compensation Committee Report” and “Compensation and Risk” in the Company’s Proxy Statement.
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated herein by reference to the information set forth under the captions “Equity Compensation Plan Information” and “Security Owners of Certain Beneficial Owners and Management” in the Company’s Proxy Statement.
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated herein by reference to the information set forth under the caption “Director Independence and Corporate Governance Policies” in the Company’s Proxy Statement.
Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is incorporated herein by reference to the information set forth under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement.
PART IV
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) | (1) Financial Statements |
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K.
(2) Schedules
Schedule II – Valuation and Qualifying Accounts for each of the three fiscal years in the period ended June 30, 20152017 is set forth under Item 8 of this Annual Report on Form 10-K.
Financial statements, financial statement schedules and exhibits not listed have been omitted where the required information is included in the Consolidated Financial Statements or notes thereto, or is not applicable or required.
(3) Exhibits.
Exhibit No. |
| Description |
| Location |
|
|
| ||
|
|
| ||
3.01 |
|
Amended and Restated Articles of Incorporation of II-VI Incorporated |
|
Incorporated herein by reference to Exhibit 3.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 8, 2011. |
3.02 |
|
Amended and Restated By-Laws of II-VI Incorporated |
|
Incorporated herein by reference to Exhibit 3.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 14, 2014. |
10.01 |
|
|
|
Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on |
10.02 |
|
Credit Agreement, dated as of January 31, 2012, by and among II-VI Japan Incorporated, each of the Guarantors party thereto, PNC Bank, National Association, the other Banks party thereto, and PNC Bank, National Association, in its capacity as agent for the Banks thereunder (500,000,000 Yen Revolving Credit Facility) |
|
|
10.03 | First Amendment to Credit Agreement, dated as of September 18, 2015, by and among II-VI Japan Incorporated, the Guarantors party thereto, the Banks party thereto, and PNC Bank, National Association, as agent. | Incorporated herein by reference to Exhibit 10.01 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2015. | ||
10.04 |
|
Amended and Restated Employment Agreement, dated September 19, 2008, by and between II-VI and Francis J. Kramer* |
|
Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2008. |
|
|
|
|
Incorporated herein by reference to Exhibit |
|
|
Employment Agreement, dated March 6, 2014, by and between II-VI Incorporated and Mary Jane Raymond* |
|
Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2014. |
|
|
| ||
10.07 |
|
Employment Agreement, dated October 3, 2012, by and between II-VI Incorporated and Giovanni Barbarossa* |
|
|
10.08 |
|
Employment Agreement, dated November 10, 2008, by and between II-VI Incorporated and David G. Wagner* |
|
Incorporated herein by reference to Exhibit 10.08 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the year ended June 30, 2015. |
10.09 | Secondment Engagement Letter, dated November 6, 2015, among Sherrard, German & Kelly, P.C., II-VI Incorporated, and Walter R. Bashaw II* | Incorporated herein by reference to Exhibit 10.02 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the Quarter ended December 31, 2015. | ||
10.10 | Employment Agreement, dated February 1, 2016, by and between II-VI Incorporated and Gary A. Kapusta* | Incorporated herein by reference to Exhibit 10.01 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on February 1, 2016. |
10.11 | Employment Agreement, dated March 6, 2017, by and between II-VI Incorporated and Jo Anne Schwendinger * | Filed herewith. | ||
| Consulting Agreement, dated June 30, 2016, between II-VI Incorporated and Carl J. Johnson* | Incorporated herein by reference to Exhibit 10.01 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2017. | ||
10.13 |
|
Form of Employment Agreement* |
|
Incorporated herein by reference to Exhibit 10.16 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
| Form of Executive Employment Agreement | Filed herewith | ||
10.15 | Form of Exhibit 1 to Employment Agreement | Filed herewith | ||
10.16 | Form of Indemnification Agreement | Filed herewith | ||
10.17 |
|
Form of Representative Agreement between II-VI and its foreign representatives |
|
Incorporated herein by reference to Exhibit 10.15 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
|
|
II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan |
|
Incorporated herein by reference to Exhibit 10.04 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
|
|
First Amendment to the II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan |
|
Incorporated herein by reference to Exhibit 10.01 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 1996. |
|
|
II-VI Incorporated Amended and Restated Employees’ Profit-Sharing Plan and Trust Agreement, as amended |
|
Incorporated herein by reference to Exhibit 10.05 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
|
|
Description of Bonus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.14 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1996. |
|
|
Description of Discretionary Incentive Plan (now known as the Goal/ Results Incentive Program)* |
|
Incorporated herein by reference to Exhibit 10.27 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2009. |
|
|
Description of Management-By-Objective Plan* |
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Incorporated herein by reference to Exhibit 10.09 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1993. |
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Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods prior to January 1, 2015)* |
|
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Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods after January 1, 2015)* |
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Trust Under the II-VI Incorporated Deferred Compensation Plan* |
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Incorporated herein by reference is Exhibit 10.13 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1996. |
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II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit A to II-VI’s Definitive Proxy Statement on Schedule 14A (File No. 000-16195) filed on September 25, 2009. |
|
|
Form of Nonqualified Stock Option Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.27 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
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Form of Restricted Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.28 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
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Form of Performance Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.29 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
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Form of Stock Appreciation Rights Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.30 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
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Form of Performance Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.31 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2012. |
|
|
Form of Restricted Share Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.32 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2012. |
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|
II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.01 to II-VI’s Registration Statement on Form S-8 (File No. 333-199855) filed on November 4, 2014. |
|
|
Form of Nonqualified Stock Option Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.30 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
|
Form of Restricted Share Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.31 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
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Form of Performance Share Award Agreement (Consolidated Revenue) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.32 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
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Form of Stock Appreciation Rights Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.33 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
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Form of Performance Unit Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.34 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
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Form of Restricted Share Unit Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.35 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
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Form of Performance Share Award Agreement (Total Shareholder Return) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.38 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2014. |
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Form of Performance Unit Award Agreement (Total Shareholder Return) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.39 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2014. |
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Form of Performance Share Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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Form of Performance Unit Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
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10.45 | II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.1to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2015. | ||
10.46 | Form of Nonqualified Stock Option Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.03 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.47 | Form of Stock Appreciation Rights Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.04 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.48 | Form of Restricted Share Award Agreement (3 year) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.05 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.49 | Form of Restricted Share Award Agreement (1 year) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.06 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.50 | Form of Restricted Share Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.07 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.51 | Form of Performance Share Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.08 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.52 | Form of Performance Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.09 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. |
10.53 | Form of Performance Share Award Agreement (June 30, 2019) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.10 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.54 | Form of Total Shareholder Return Performance Share Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.11 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.55 | Form of Total Shareholder Return Performance Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.12 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
21.01 |
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List of Subsidiaries of II-VI Incorporated |
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Filed herewith. |
23.01 |
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Consent of Ernst & Young LLP |
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Filed herewith. |
31.01 |
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 |
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Filed herewith. |
31.02 |
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 |
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Filed herewith. |
32.01 |
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Furnished herewith. |
32.02 |
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Furnished herewith. |
101 |
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Interactive Data File |
|
|
(101.INS) |
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XBRL Instance Document |
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Filed herewith. |
(101.SCH) |
|
XBRL Taxonomy Extension Schema Document |
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Filed herewith. |
(101.CAL) |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
Filed herewith. |
(101.DEF) |
|
XBRL Taxonomy Definition Linkbase |
|
Filed herewith. |
(101.LAB) |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
Filed herewith. |
(101.PRE) |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
Filed herewith. |
* | Denotes management contract or compensatory plan, contract or arrangement. |
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.
Item 16. | FORM 10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| II-VI INCORPORATED | ||
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Date: August |
| By: |
| /s/ |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Principal Executive Officer: | ||
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Date: August |
| By: |
| /s/ |
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Principal Financial and Accounting Officer: | ||
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Date: August |
| By: |
| /s/ Mary Jane Raymond |
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| Mary Jane Raymond |
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| Chief Financial Officer and Treasurer |
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Date: August | By: | /s/ Francis J. Kramer | ||
Francis J. Kramer | ||||
Chairman of the Board and Director | ||||
Date: August 21, 2017 |
| By: |
| /s/ Joseph J. Corasanti |
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| Joseph J. Corasanti |
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| Director |
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Date: August |
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| ||
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| By: |
| /s/ RADM Marc Y. E. Pelaez (retired) |
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| RADM Marc Y. E. Pelaez (retired) |
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| Director |
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Date: August |
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| By: |
| /s/ Howard H. Xia |
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| Howard H. Xia |
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| Director |
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Date: August |
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| By: |
| /s/ William Schromm |
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| William Schromm |
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| Director |
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Date: August 21, 2017 | By: | /s/ Shaker Sadasivam | ||
Shaker Sadasivam | ||||
Director | ||||
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EXHIBIT INDEX
Exhibit No. |
| Description |
| Location |
|
|
| ||
|
|
| ||
3.01 |
|
Amended and Restated Articles of Incorporation of II-VI Incorporated |
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Incorporated herein by reference to Exhibit 3.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 8, 2011. |
3.02 |
|
Amended and Restated By-Laws of II-VI Incorporated |
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Incorporated herein by reference to Exhibit 3.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 14, 2014. |
10.01 |
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|
|
Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on |
10.02 |
|
Credit Agreement, dated as of January 31, 2012, by and among II-VI Japan Incorporated, each of the Guarantors party thereto, PNC Bank, National Association, the other Banks party thereto, and PNC Bank, National Association, in its capacity as agent for the Banks thereunder (500,000,000 Yen Revolving Credit Facility) |
|
|
10.03 | First Amendment to Credit Agreement, dated as of September 18, 2015, by and among II-VI Japan Incorporated, the Guarantors party thereto, the Banks party thereto, and PNC Bank, National Association, as agent. | Incorporated herein by reference to Exhibit 10.01 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2015. | ||
10.04 |
|
Amended and Restated Employment Agreement, dated September 19, 2008, by and between II-VI and Francis J. Kramer* |
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Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2008. |
|
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|
|
Incorporated herein by reference to Exhibit |
|
|
Employment Agreement, dated March 6, 2014, by and between II-VI Incorporated and Mary Jane Raymond* |
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Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2014. |
|
|
| ||
10.07 |
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Employment Agreement, dated October 3, 2012, by and between II-VI Incorporated and Giovanni Barbarossa* |
|
|
10.08 |
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Employment Agreement, dated November 10, 2008, by and between II-VI Incorporated and David G. Wagner* |
|
Incorporated herein by reference to Exhibit 10.08 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the year ended June 30, 2015. |
10.09 | Secondment Engagement Letter, dated November 6, 2015, among Sherrard, German & Kelly, P.C., II-VI Incorporated, and Walter R. Bashaw II* | Incorporated herein by reference to Exhibit 10.02 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the Quarter ended December 31, 2015. | ||
10.10 | Employment Agreement, dated February 1, 2016, by and between II-VI Incorporated and Gary A. Kapusta* | Incorporated herein by reference to Exhibit 10.01 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on February 1, 2016. |
10.11 | Employment Agreement, dated March 6, 2017, by and between II-VI Incorporated and Jo Anne Schwendinger * | Filed herewith. | ||
| Consulting Agreement, dated June 30, 2016, between II-VI Incorporated and Carl J. Johnson | Incorporated herein by reference to Exhibit 10.01 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2017. | ||
10.13 |
|
Form of Employment Agreement* |
|
Incorporated herein by reference to Exhibit 10.16 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
| Form of Executive Employment Agreement | Filed herewith | ||
10.15 | Form of Exhibit 1 to Employment Agreement | Filed herewith | ||
10.16 | Form of Indemnification Agreement | Filed herewith | ||
10.17 |
|
Form of Representative Agreement between II-VI and its foreign representatives |
|
Incorporated herein by reference to Exhibit 10.15 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
|
|
II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan |
|
Incorporated herein by reference to Exhibit 10.04 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
|
|
First Amendment to the II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan |
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Incorporated herein by reference to Exhibit 10.01 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 1996. |
|
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II-VI Incorporated Amended and Restated Employees’ Profit-Sharing Plan and Trust Agreement, as amended |
|
Incorporated herein by reference to Exhibit 10.05 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389). |
|
|
Description of Bonus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.14 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1996. |
|
|
Description of Discretionary Incentive Plan (now known as the Goal/ Results Incentive Program)* |
|
Incorporated herein by reference to Exhibit 10.27 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2009. |
|
|
Description of Management-By-Objective Plan* |
|
Incorporated herein by reference to Exhibit 10.09 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1993. |
|
|
Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods prior to January 1, 2015)* |
|
|
|
|
Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods after January 1, 2015)* |
|
|
|
|
Trust Under the II-VI Incorporated Deferred Compensation Plan* |
|
Incorporated herein by reference is Exhibit 10.13 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1996. |
|
|
II-VI Incorporated 2009 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit A to II-VI’s Definitive Proxy Statement on Schedule 14A (File No. 000-16195) filed on September 25, 2009. |
|
|
Form of Nonqualified Stock Option Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.27 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
|
Form of Restricted Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.28 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
|
Form of Performance Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.29 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
|
Form of Stock Appreciation Rights Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.30 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011. |
|
|
Form of Performance Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
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Incorporated herein by reference to Exhibit 10.31 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2012. |
|
|
Form of Restricted Share Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.32 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2012. |
|
|
II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.01 to II-VI’s Registration Statement on Form S-8 (File No. 333-199855) filed on November 4, 2014. |
|
|
Form of Nonqualified Stock Option Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.30 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
|
Form of Restricted Share Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.31 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
|
Form of Performance Share Award Agreement (Consolidated Revenue) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.32 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
|
Form of Stock Appreciation Rights Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.33 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
|
Form of Performance Unit Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.34 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
|
|
Form of Restricted Share Unit Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.35 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013. |
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|
Form of Performance Share Award Agreement (Total Shareholder Return) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.38 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2014. |
|
|
Form of Performance Unit Award Agreement (Total Shareholder Return) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
Incorporated herein by reference to Exhibit 10.39 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2014. |
|
|
Form of Performance Share Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
|
|
|
Form of Performance Unit Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan* |
|
|
10.45 | II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.1to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2015. | ||
10.46 | Form of Nonqualified Stock Option Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.03 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.47 | Form of Stock Appreciation Rights Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.04 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.48 | Form of Restricted Share Award Agreement (3 year) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.05 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.49 | Form of Restricted Share Award Agreement (1 year) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.06 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.50 | Form of Restricted Share Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.07 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.51 | Form of Performance Share Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.08 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.52 | Form of Performance Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.09 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. |
10.53 | Form of Performance Share Award Agreement (June 30, 2019) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.10 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.54 | Form of Total Shareholder Return Performance Share Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.11 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
10.55 | Form of Total Shareholder Return Performance Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan* | Incorporated herein by reference to Exhibit 10.12 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016. | ||
21.01 |
|
List of Subsidiaries of II-VI Incorporated |
|
Filed herewith. |
23.01 |
|
Consent of Ernst & Young LLP |
|
Filed herewith. |
31.01 |
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 |
|
Filed herewith. |
31.02 |
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 |
|
Filed herewith. |
32.01 |
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
Furnished herewith. |
32.02 |
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
Furnished herewith. |
101 |
|
Interactive Data File |
|
|
(101.INS) |
|
XBRL Instance Document |
|
Filed herewith. |
(101.SCH) |
|
XBRL Taxonomy Extension Schema Document |
|
Filed herewith. |
(101.CAL) |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
Filed herewith. |
(101.DEF) |
|
XBRL Taxonomy Definition Linkbase |
|
Filed herewith. |
(101.LAB) |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
Filed herewith. |
(101.PRE) |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
Filed herewith. |
* | Denotes management contract or compensatory plan, contract or arrangement. |
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.
Item 16. | FORM 10-K SUMMARY |
None.
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