Item 1.
BUSINESS
Introduction
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 majority of our revenues are attributable to the sale of engineered materials and opto-electronic components for industrial, military and medical laser applications, optical communications products, compound semiconductor substrate-based products and elements for material processing and refinement. Reference to “fiscal” or “fiscal year” means our fiscal year ended June 30 for the year referenced.
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 segment information (revenue through operating income) for all periods presented in this document reflects the realigned segment organization.
·
The II-VI Laser Solutions segment contains the former Infrared Optics segment, the semiconductor laser portion of the former Active Optical Products segment (now II-VI Laser Enterprise), and smaller units of high-power laser technology from the former Near-Infrared Optics segment (now II-VI Suwtech) and the former Advanced Products Group segment (now II-VI Lasertech).
·
The II-VI Photonics segment contains the remaining majority of the former Near-Infrared Optics segment (now part of both II-VI Photop and II-VI Optical Communications) as well as the pump laser and optical amplifier businesses of the former Active Optical Products segment (now II-VI Optical Communications).
·
The II-VI Performance Products segment contains the former Military & Materials and the majority of the former Advanced Products Group segments.
In August 2013, 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, while maintaining production of its rare earth element. The Company’s goal was to provide a reliable supply of selenium for the Company’s internal needs while significantly decreasing write-downs and profit volatility associated with minor metal index pricing. Financial and operational data included herein for all periods presented reflects the presentation of the tellurium product line as a discontinued operation.
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
Item 1A.
RISK FACTORS
The Company cautions investors that its performance and, therefore, any forward-looking statement, is subject to risks and uncertainties. The following material risk factors may cause the Company’s 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.
Our Future Success Depends on International Sales and Successful Management of Global Operations
Sales to customers in countries other than 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 portion of our revenues for the foreseeable future. In addition, 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, the promulgation of new laws, changing in existing laws and abrogation 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, results of operations or financial condition.
Our Continued Success Depends on Our Ability to Develop New Products and Processes
In order to 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 research and development and to continue to consider from time to time the strategic acquisition of businesses, products or technologies complementary to our business. Our success in developing, introducing and selling new and enhanced products depends upon a variety of factors including 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 product performance in the field. 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 upon our ability to develop 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 that our products, applications or processes will adequately meet the requirements of the marketplace and achieve market acceptance. Our business, results of operations and financial condition could be materially and adversely affected if we were to incur delays in developing new products, applications or processes or if they do not achieve market acceptance.
We May Expand Product Lines 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 ability to realize the anticipated benefits from integrating and successfully running the businesses acquired. The strategic acquisition of businesses, products or technologies complementary to our business involves numerous potential risks, including difficulties in the assimilation of the acquired business and products, uncertainties associated with operating 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, or at all, or may take longer to realize than expected, and as a result our results of operations, financial position, and cash flow may be adversely affected.
Further, any future business acquisitions completed by us may result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities and amortization expense related to intangible assets acquired, any of which could have a material adverse effect on our business, results of operations or financial condition.
Declines in the Operating Performance of One of Our Business Segments Could Result 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 value of our assets is still supported by the fair value of the underlying business. To the extent that it is not, we are required to record an impairment charge 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 which could have a material adverse effect on our results of operations or financial condition.
General Global Economic Conditions 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 components of our forecasting are dependent upon estimates of growth or contraction in the markets we serve and demand for our products, the prevailing global economic uncertainties render estimates of future income and expenditures very difficult to make. In addition, changes in general economic conditions 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 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 to the credit and financial markets in the U.S., Europe and elsewhere; adverse effects of ongoing stagnation in the European economy; slowdown in the Chinese economy; contractions or limited growth in consumer spending or consumer credit; and adverse economic conditions that may be specific to the Internet, e-commerce and payments industries. These changes may negatively affect sales of products, 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 Regulation
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:
·
We are required to comply with various import laws and export control and economic sanctions laws, which may affect our transactions with certain customers, business partners and other persons, including in certain cases 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, and in other circumstances we may be required to obtain an export license before exporting the controlled item. Compliance with the various 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 technology necessary to develop and manufacture certain Company products are subject to U.S. export control laws and similar laws of other jurisdictions, and the Company 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 U.S.
·
Our agreements relating to the sale of products to government entities may be subject to termination, reduction or modification in the event of changes in government requirements, reductions in federal spending and other factors. We are also subject to investigation and audit for compliance with the requirements of government contracts, including requirements related to procurement integrity, export control, employment practices, the accuracy of records and the recording of costs. A failure to comply with these requirements might result in suspension of these contracts and suspension or debarment from government contracting or subcontracting.
In addition, failure 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.
We Are Subject to Stringent Environmental Regulation
We use or generate certain hazardous substances in our research and manufacturing facilities. 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 resulting 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.
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 Regulation
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, and have the potential to impact our operations directly or indirectly through implications on 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, costs to purchase or profits from sales of, 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 Utilize 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 utilize 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 products 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: loss of customers; increased costs of product returns and warranty expenses; damage to our
brand reputation; failure to attract new customers or achieve market acceptance; diversion of development and engineering 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 Company
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% of revenues for the fiscal year ended June 30, 2015. 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 as 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. 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.
We May Encounter Substantial Competition
We may encounter substantial competition from other companies 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 ours and may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not be able to compete successfully against our present or future competitors, and such competition could have a material adverse effect on our business, results of operations or 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 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 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. This cyclical demand 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 exposed to a variety of market risks, including the effects of changes in commodity prices. Our businesses purchase, produce and sell high purity selenium and other raw materials based upon quoted market prices from minor metal exchanges. As a result, the negative impact from changes 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 Market Price of Our Common Stock Can Be Highly Volatile
Factors that could cause fluctuation in our stock price include, among other things: general economic and market conditions; actual or anticipated variations in operating results; changes in financial estimates by securities analysts; our inability to meet or exceed securities analysts’ estimates or expectations; conditions or trends in the industries in which our products are purchased; announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; capital commitments; additions or departures of key personnel; and sales of our Common Stock.
Many of these factors are beyond our control. These factors could cause the market price of our Common Stock to decline, regardless of our actual operating performance.
Provisions in Our Articles of Incorporation and By-Laws May Limit the Price that Investors May be Willing to Pay in the Future for Shares of Our Common Stock
Our Articles of Incorporation and By-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 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 ability of the board of directors to issue additional shares of Common Stock or preferred stock without shareholder approval; and 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 contains provisions that may have the effect of delaying or preventing a change in control of the Company. All of these provisions may limit the price that investors may be willing to pay for shares of our Common Stock.
Because We Do Not Currently Intend to Pay Dividends, Shareholders Will Benefit From an Investment in our Common Stock Only if it Appreciates in Value
We have never declared or paid any dividends on our Common Stock, and do not expect to pay cash dividends in the foreseeable future, as 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 Stock will depend entirely upon any future appreciation in its value. There is no guarantee that our Common 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.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2.
PROPERTIES
Information regarding our principal U.S. properties at June 30, 2015 is set forth below:
Information regarding our principal foreign properties at June 30, 2015 is set forth below:
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.
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.
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.
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.
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 sale prices per share of the Company’s Common Stock for the fiscal periods indicated, as reported by NASDAQ.
On August 20, 2015, the last reported sale price for the Company’s Common Stock was $17.82 per share. As of such date, there were approximately 785 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, 2015 the Company purchased 936,049 shares of its Common Stock pursuant to the repurchase program for approximately $12.7 million.
The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended June 30, 2015.
(a)
Includes 432 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 2015 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, through June 30, 2015. The Company’s peer group includes Cabot Microelectronics Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., Rofin-Sinar Technologies, Inc. and Silicon Laboratories.
Item 6.
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’s audited Consolidated Financial Statements as adjusted to reflect the Company’s II-VI Performance Metals tellurium product line as a discontinued operation. 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.
Item 7.
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-electronic components for precision use in industrial, optical communications, military, semiconductor, medical and life science, and consumer 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, system integrators of high-power lasers, manufacturers of equipment and devices for the industrial, optical communications, military, semiconductor, medical and life science markets, 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 foregoing 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. 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% of the Company’s consolidated revenues.
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, 2014 and 2013. 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.
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.
The Company records an inventory reserve as a charge against earnings for all products on hand for more than twelve to eighteen 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 is 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 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 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.
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 impairment test, the Company did not record any impairments of goodwill 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 trademarks and was recorded in Other expense (income), net in the Consolidated Statements of Earnings.
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 Company performance, and the remainder is paid after fiscal year end. Other bonuses are paid annually.
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. 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, the Company recognizes share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option 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 2015 Compared to Fiscal Year 2014
Effective July 1, 2014, the Company realigned 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.
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30, 2015 and June 30, 2014 ($ in millions except per share information):
Executive Summary
Net earnings for fiscal year 2015 were $66.0 million ($1.05 per-share diluted), compared to $38.4 million ($0.60 per-share diluted) for the same period last fiscal year. During 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 percentage compared to fiscal year 2014. During the current fiscal year, the Company continued its restructuring program within the II-VI Photonics and II-VI Performance Products segments to right-size 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. Net earnings were also favorably impacted in the current fiscal year as a result of a one-time settlement relating to certain payment obligations from prior year acquisitions in the amount of $7.1 million (after-tax) or $0.11 per share-diluted. Financial results for fiscal year 2014 were negatively impacted by one-time transaction and purchase accounting expenses of approximately $8.0 million.
Consolidated
Bookings. Bookings are defined as customer orders received that are expected to be converted to revenues over the next twelve months. For long-term customer orders, the Company does not include in bookings the portion of the customer order that is beyond twelve months, due to the inherent uncertainty of such an order that far out in the future. Bookings for the year ended June 30, 2015 increased 10% to $761.7 million, compared to $691.3 million for the same period last fiscal year. The increase in bookings was mostly attributable to a full year of bookings from the prior year acquisitions of II-VI Laser Enterprise and II-VI Network Solutions. In addition, the II-VI HIGHYAG business within the II-VI Laser Solutions segment recorded increased bookings for fiber beam delivery systems and laser processing heads used in automotive manufacturing.
Revenues. Revenues for the year ended June 30, 2015 increased 9% to $742.0 million, compared to $683.3 million for the prior fiscal year. The increase in revenues was mostly attributable to a full year of revenues from the prior year acquisitions of 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 by increased demand across a variety of products, such as optical components 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.
Gross margin. Gross margin for the year ended June 30, 2015 was $271.6 million, or 36.6%, of total revenues, compared to $226.7 million, or 33.2%, of total revenues for the same period last fiscal year. The increase in gross margin during the current fiscal year was primarily the result of the incremental margin realized on the 9% revenue increase during this period and 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 fiscal 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 product lines with lower margins.
Internal research and development. Company-funded internal research and development expenses for the fiscal year ended June 30, 2015 were $51.3 million, or 6.9% of revenues, compared to $42.5 million, or 6.2% of revenues, last fiscal year. The increase in research and development expense as a percentage of revenues in the current year was due 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.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2015 were $143.5 million, or 19.3% of revenues, compared to $137.7 million, or 20.2% of revenues, last fiscal year. In relative dollar amounts, the increase in SG&A expenses was the result of increased expenses incurred to support an overall revenue base increase from the prior fiscal year. The Company experienced leverage improvement with respect to SG&A expenses as a percentage of revenues through synergies, cost savings and restructuring programs undertaken during the current fiscal year.
Interest and other, net. Interest and other, net for the year ended June 30, 2015 was income of $2.3 million compared to expense of $0.8 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.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2015 was 16.6%, compared to an effective tax rate of 16.0% 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 year-to-date effective tax rate between the two fiscal years was consistent.
Discontinued operation. During December 2013, the Company completed 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):
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)
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 Suwtech and II-VI LaserTech.
Bookings for the fiscal year ended June 30, 2015 for II-VI Laser Solutions increased 8% to $284.8 million, compared to $262.8 million last fiscal year. The increase in bookings was due in part to higher order levels at II-VI HIGHYAG, which continues to grow its product offerings into 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 prior fiscal year acquisition of II-VI Laser Enterprise, which has experienced increased demand for products in the direct diode and fiber laser components markets.
Revenues for the fiscal year ended June 30, 2015 for II-VI Laser Solutions increased 13% to $287.9 million, compared to revenues of $254.4 million last fiscal year. The increase in revenues was the result of increased shipment volumes of the segment’s fiber beam delivery systems and 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.
Operating income for the fiscal year ended June 30, 2015 for II-VI Laser Solutions increased 124% to $55.0 million, compared to $24.5 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 $3.9 million, $2.5 million of purchase accounting relating to the fair market inventory adjustment and $2.0 million of restructuring efforts at II-VI Laser Enterprise.
II-VI Photonics ($ in millions)
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, 2015 for II-VI Photonics increased 28% to $282.9 million, compared to $220.2 million for last fiscal year. The increase in bookings was due to increased demand for a variety of the segment’s products, such as optical components and modules driven by broadband initiatives, development of next generation wireless networks and increasing bandwidth trends in the datacenter and cloud applications. In addition, the segment recorded a full year of bookings from the prior fiscal year acquisition of II-VI Network Solutions.
Revenues for the year ended June 30, 2015 for II-VI Photonics increased 20% to $260.8 million, compared to $216.5 million for last fiscal year. The increase in revenues was due to 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 prior year acquisition of II-VI Network Solutions.
Operating income for the year ended June 30, 2015 for II-VI Photonics increased 7300% to $7.2 million, compared to an operating loss of $(0.1) million last fiscal year. The improvement in operating income was attributed primarily to incremental margin realized on increased revenues, and favorable product mix towards 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 $1.6 million.
II-VI Performance Products ($ in millions)
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, 2015 for II-VI Performance Products decreased 7% to $194.0 million, compared to $208.3 million for last fiscal year. The decrease in bookings related to lower order volumes of military-related products as a result of 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 offset by increased demand for SiC substrates addressing high-power high-frequency semiconductor devices.
Revenues for the year ended June 30, 2015 for II-VI Performance Products decreased 9% to $193.3 million, compared to $212.4 million for last fiscal year. The decrease in revenues was due to lower shipment volumes of military related products from lower overall defense spending as well as lower shipments to customers in the semiconductor capital equipment markets. The decrease in revenues was somewhat offset by higher revenues from the segment’s SiC substrates.
Operating income for the year ended June 30, 2015 for II-VI Performance Products decreased 34% to $14.6 million, compared to $22.1 million for last fiscal year. The decrease in operating income was a result of lower revenues during the current fiscal year as well as restructuring charges of $1.1 million relating to the consolidation of the Company’s military-related businesses.
Fiscal Year 2014 Compared to Fiscal Year 2013
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30, 2014 and 2013. ($ millions, except per share information):
Consolidated
Bookings. Bookings for the year ended June 30, 2014 increased 33% to $691.3 million, compared to $521.1 million for the 2013 fiscal year. The increase in bookings was mostly attributable to the acquisitions of II-VI Laser Enterprise and II-VI Network Solutions in fiscal year 2014 as well as the incremental bookings from the 2013 fiscal year acquisitions. In addition, the Company’s II-VI Laser
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, 2014 increased 24% to $683.3 million, compared to $551.1 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.
Gross margin. Gross margin as a percentage of revenues for the year ended June 30, 2014 was 33.2%, compared to 36.9% for fiscal year June 30, 2013. The decrease in gross margin was 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 million 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 margin at II-VI Photonics segment was negatively impacted by both lower revenue volume and pricing pressure on legacy passive optical component products from increased competition in China.
Internal research and development. Company-funded internal research and development expenses for the year ended June 30, 2014 were $42.5 million, or 6.2% of revenues, compared to $22.7 million, or 4.1% of revenues, for fiscal year June 30, 2013. The increase in research and development expense as a percentage of revenues is due to increased research and development efforts within the II-VI Photonics segment, which continued to invest in the development of component parts that support higher speed optical communication and data networks around the world. In addition, 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.
Selling, general and administrative. SG&A expenses for the fiscal year ended June 30, 2014 were $137.7 million, or 20.2% of revenues, compared to $109.3 million, or 19.8% of revenues, for fiscal year June 30, 2013. As a percentage of revenues, SG&A expenses were consistent with the prior fiscal year.
Interest and other, net. Interest and other, net for the year ended June 30, 2014 and 2013 was expense of $0.8 million compared to income of $6.0 million prior fiscal year. Included in interest and other, net for the year ended June 30, 2014 were earnings from the Company’s equity investment in Fuxin, interest expense on borrowings, interest income on excess cash reserves, unrealized gains on the Company-sponsored deferred compensation plan and foreign currency gains and losses. The majority of the income included 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.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2014 was 16.0%, compared to an effective tax rate of 24.2% for the prior fiscal year. The variations between the Company’s effective tax rates and the U.S. statutory rate of 35% were 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 was primarily the result of improved profitability in lower taxing jurisdictions such as the Philippines. In addition, the Company recorded $0.8 million of tax benefits during the year ended June 30, 2014 as a result of the expiration of the statute of limitation on previously filed income tax returns.
II-VI Laser Solutions ($ in millions)
Bookings for the year ended June 30, 2014 for II-VI Laser Solutions increased 24% to $262.8 million, compared to $212.3 million for fiscal year June 30, 2013. The increase in bookings 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 million of bookings in fiscal year 2014. At II-VI HIGHYAG, continued growth in the one-micron laser market resulted in higher bookings for fiber beam delivery systems, and laser processing heads used in the automotive manufacturing industry.
Revenues for the year ended June 30, 2014 for II-VI Laser Solutions increased 17% to $254.4 million, compared to $217.6 million for fiscal year June 30, 2013. The increase in revenues 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 million of revenues in fiscal year 2014.
Operating income for the year ended June 30, 2014 for II-VI Laser Solutions decreased 55% to $24.5 million, compared to $54.0 million for fiscal year June 30, 2013. The decrease in operating income was the result of the acquisition of II-VI Laser Enterprise in 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 $2.0 million of severance costs associated with restructuring of the acquired business. In addition, lower gross margin at II-VI Laser Enterprise caused by higher material cost, unfavorable absorption of manufacturing overhead costs, and production inefficiencies all negatively impacted operating income in fiscal year 2014.
II-VI Photonics ($ in millions)
Bookings for the year ended June 30, 2014 for II-VI Photonics increased 63% to $220.2 million, compared to $134.9 million for fiscal year June 30, 2013.The increase in bookings was due to the acquisition of II-VI Network Solutions 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.
Revenues for the year ended June 30, 2014 for II-VI Photonics increased 53% to $216.5 million, compared to $141.3 million for fiscal year June 30, 2013. The increase in revenues was due 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)
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 of 4G wireless stations in Asia. Somewhat offsetting these increases were reduced shipments at II-VI Marlow for products servicing the personal comfort market.
Operating income for the year ended June 30, 2014 for II-VI Performance Products was $22.1 million, compared to $2.5 million for fiscal year June 30, 2013. The increase in segment earnings was a result of the restructured business model at II-VI Performance Metals, which eliminated the exposure to volatility 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 Cubed as well as increased revenues at II-VI Advanced Materials.
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. 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 and purchases of treasury stock. Supplemental information pertaining to our sources and uses of cash is presented as follows:
Sources (uses) of Cash (millions):
Net cash provided by operating activities:
Net cash provided by operating activities was $129.4 million and $95.5 million for the fiscal years ended June 30, 2015 and 2014, respectively. The increase in cash flows from operating activities in fiscal year 2015 compared to fiscal year 2014 was the result of an increase in the Company’s net earnings by $27.5 million, or 72%, compared to fiscal year 2014.
Net cash provided by operating activities was $95.5 million and $107.6 million for the fiscal years ended June 30, 2014 and 2013, respectively. The decrease in cash flows from operating activities in fiscal year 2014 compared to fiscal year 2013 was mostly due to lower earnings levels, offset somewhat by favorable overall working capital changes, specifically in 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.
Net cash used in investing activities:
Net cash used in investing activities was $52.2 million and $206.8 million for the fiscal years ended June 30, 2015 and 2014, respectively. Net cash used in investing activities during the year ended June 30, 2015 consisted of $52.3 million paid for capital expenditures of which $13.4 million represented the purchase of the II-VI HIGHYAG manufacturing facility in Berlin, Germany
which was previously accounted for as a capital lease. The majority of net cash used in investing activities for fiscal year 2014 consisted 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.
Net cash provided by (used in) financing activities:
Net cash (used in) provided by financing activities was $(76.1) 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, 2014 compared to net cash provided by financing activities of $85.8 million for the fiscal year ended June 30, 2013. The change in net cash provided by financing activities was primarily due to additional borrowings used to finance the Company’s acquisitions of Laser Enterprise and Network Solutions, offset somewhat by a $3.0 million earnout payment to the former owners of LightWorks and an $8.8 million payment made to acquire the remaining ownership interest in II-VI HIGHYAG.
Company Credit Facility
The Company’s Amended and Restated Credit Agreement (the “Credit Facility”) provides for a revolving credit facility of $225 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 and term loan, respectively. The Term Loan is being re-paid 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, as follows: (i) twenty consecutive quarterly installments of $5.0 million and (ii) a final installment of all remaining principal due and payable on the maturity date. The 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 Facility in an aggregate additional amount not to exceed $100 million. The Credit Facility has a five-year term through September 2018 and has an interest rate of LIBOR, as defined in the agreement governing the Credit Facility, plus 0.75% to 1.75% based on the Company’s ratio of consolidated indebtedness to consolidated EBITDA. 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 financial covenants under the Credit Facility.
In conjunction with entering into the Credit Facility, the Company incurred approximately $1.0 million of deferred financing 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 ($4.1 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 governing the yen facility, plus 0.625% to 1.50%. At June 30, 2015 and 2014, 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, the Company had $2.5 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 million and $71.0 million under its lines of credit as of June 30, 2015 and June 30, 2014, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 2015 total outstanding letters of credit supported by the Credit Facility were $1.5 million. The weighted average interest rate of total borrowings was 1.8% for each of the years ended June 30, 2015 and 2014.
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. During the fiscal year ended June 30, 2015, the Company purchased 936,049 shares of its Common Stock for $12.7 million under this repurchase program.
In August 2014, 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.
Our cash position, borrowing capacity and debt obligations are as follows (in millions):
The Company believes cash flow from operations, existing cash reserves and available borrowing capacity will be sufficient to fund its working capital needs, capital expenditures and internal and external growth for fiscal year 2016. 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. As of June 30, 2015, the Company held approximately $145 million of cash and cash equivalents outside of the U.S. Cash balances held outside the United States could be repatriated to the U.S., but, under current law, would potentially be subject to U.S. 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., 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
(1)
Variable rate interest obligations are based on the interest rate in place at June 30, 2015 and relate to the Credit Facility.
(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 2056, respectively.
(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.
Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $2.0 million in 2016. 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, which are excluded from the above table, were $4.0 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.
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 instrument as part of its overall risk management strategy, primarily focused on its exposure to the Japanese Yen. The Company also has transactions denominated in euros, pounds sterling, renminbi and swiss francs. No significant changes have occurred in the techniques and instruments used other than those described below.
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. The Company enters into foreign currency forward contracts that permit it to sell specified amounts of foreign currencies 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 million and $7.4 million at June 30, 2015 and June 30, 2014, respectively. The Company continually 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, the Company’s total borrowings of $176.0 million were from a line of credit borrowing of $108.5 million denominated in U.S. dollars, a term loan denominated in U.S. dollars of $65.0 million and a line of credit borrowing of $2.5 million denominated in Japanese yen. 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 million, or $0.02 per-share diluted, for the fiscal year ended June 30, 2015.
Discount Rate Risks
As of June 30, 2015, 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.
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. 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. Based on the evaluation, management concluded that as of June 30, 2015, 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.
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. 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, 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.
In our opinion, II-VI Incorporated and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, 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, 2015 and 2014, 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 of II-VI Incorporated and Subsidiaries and our report dated August 28, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 2015
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, 2015 and 2014, 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. 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, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2015, 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, 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, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 2015
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Earnings
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
See Notes to Consolidated Financial Statements.
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
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-electronic components, is a vertically-integrated manufacturing company that develops innovative products for diversified applications in the industrial, optical communications, military, life sciences, semiconductor equipment and consumer markets. 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.”) and South Korea.
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, 2015 and 2014. Factoring is done with high credit quality financial institutions in Japan. During the years ended June 30, 2015 and 2014, $17.8 million and $12.7 million, respectively, of accounts receivable had been factored. As of June 30, 2015 and 2014, the amount included in other 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 records an inventory reserve as a charge against earnings for all products on hand more than twelve to eighteen 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 is 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 million and $12.0 million at June 30, 2015 and 2014, 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 3 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.
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 5 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, 2015 and June 30, 2014 was $11.9 million and $11.6 million, respectively. During the years ended June 30, 2015, 2014 and 2013, the Company’s pro-rata share of earnings from this investment was $0.9 million, $0.7 million and $1.0 million, respectively, and was recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years ended June 30, 2015, 2014 and 2013 the Company recorded dividends from this equity investment of $0.6 million, $0.3 million and $0.5 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 loss contingency liabilities at June 30, 2015 related to commitments and contingencies.
Accrued Bonus and Profit Sharing Contribution. 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, 2015 was 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 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% 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, 2014 and 2013.
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-based compensation arrangements, which requires 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 million and $18.0 million as of June 30, 2015 and 2014, respectively, and pension adjustments of ($0.8) million and $1.4 million as of June 30, 2015 and 2014, 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.
Leases. The Company classifies 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. The Company corrected an immaterial error related to its long term deferred tax asset for share based compensation in the Consolidated Balance Sheet as of June 30, 2015. The recorded reclassification 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.
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.
Note 2.
Discontinued Operation
During December 2013, the Company completed the discontinuance 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 and was 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) of the tellurium product line have been reflected as a discontinued operation for the periods presented as follows ($000):
Note 3.
Inventories
The components of inventories, net of reserves, were as follows:
Note 4.
Property, Plant and Equipment
Property, plant and equipment consists of the following:
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, the Company implemented a plan to sell one of its manufacturing facilities located in New Port Richey, Florida. The Company anticipates completing the sale within the next twelve months, and has reclassified the carrying value of the land and building of approximately $1.2 million as assets held for sale and has included the carrying value in Prepaid and other current assets in the Consolidated Balance Sheets at June 30, 2015.
Depreciation expense was $41.1 million, $41.8 million and $34.1 million for the fiscal years ended June 30, 2015, 2014 and 2013, 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):
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 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 2015 and 2014, 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, 2015 and 2014 were as follows ($000):
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2015, 2014 and 2013 was $12.0 million, $11.3 million, and $6.7 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 114 months. The customer lists are being amortized over 60 to 192 months with a weighted-average remaining life of approximately 146 months.
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 trademarks 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 trademarks 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 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):
Note 6.
Debt
The components of debt were as follows ($000):
The Company’s First Amended and Restated Credit Agreement (the “Credit Facility”) provides for a revolving credit facility of $225 million, as well as a $100 million Term Loan. The Term 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, 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. The Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiaries of the Company. The Company has the option to request an increase to the size of the Amended Credit Facility in an aggregate additional amount not to exceed $100 million. The Credit Facility has a five-year term through September 2018 and has an interest rate of LIBOR, as defined in the agreement, plus 0.75% to 1.75% based on the Company’s ratio of consolidated indebtedness to consolidated EBITDA. 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 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 million and $71.0 million under its lines of credit as of June 30, 2015 and 2014, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 2015 and 2014, total outstanding letters of credit supported by the credit facilities were $1.5 million.
The weighted-average interest rate of total borrowings for each of the years ended June 30, 2015 and 2014 was 1.8%. The weighted-average of total borrowings for the fiscal years ended June 30, 2015 and 2014 was $210.0 million and $222.6 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 million for the fiscal years ended June 30, 2015 and 2014. 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, 2015 and June 30, 2014. At June 30, 2015 and 2014, there were no outstanding borrowings under this facility.
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, 2015, 2014 and 2013 were $4.0 million and $4.2 million and $1.1 million, respectively.
Remaining annual principal payments under the Company’s existing credit facilities as of June 30, 2015 were as follows ($000):
Note 7.
Income Taxes
The components of income (loss) before income taxes were as follows:
The components of income tax expense (benefit) from continuing operations were as follows:
Principal items comprising deferred income taxes were as follows:
The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:
During the fiscal years ended June 30, 2015, 2014, and 2013, net cash paid by the Company for income taxes was $13.0 million, $17.2 million, and $11.9 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%, 0.12% and 0.07% for the fiscal years ended June 30, 2015, 2014 and 2013 respectively.
The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was approximately $419 million at June 30, 2015. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an additional deferred tax liability of approximately $83 million would have been required as of June 30, 2015. 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:
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2015:
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, 2014 and 2013 were as follows:
The Company classifies all estimated and actual interest and penalties as 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 $0.1 million, $0.2 million, and $0.2 million of interest and penalties accrued at June 30, 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 million and $2.8 million at June 30, 2015 and 2014, respectively. The Company expects a decrease of $0.7 million of unrecognized tax benefits during the next twelve months due to the expiration of statutes of limitation.
Fiscal years 2012 to 2015 remain open to examination by the Internal Revenue Service, fiscal years 2011 to 2015 remain open to examination by certain state jurisdictions, and fiscal years 2008 to 2015 remain open to examination by certain foreign taxing jurisdictions. The Company’s fiscal years 2011 and 2012 California state income tax returns 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.
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, 507,000 and 470,000 for the fiscal years ended June 30, 2015, 2014 and 2013, respectively, because they were anti-dilutive.
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, 2015 are as follows:
Rent expense was approximately $15.0 million, $13.6 million, and $9.8 million for the fiscal years ended June 30, 2015, 2014 and 2013, 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, there were approximately 3,502,571 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, 2014 and 2013 is as follows ($000):
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 $1.6 million in fiscal year 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, 2014 and 2013, the weighted-average fair value of options granted under the stock option plan was $5.76, $8.21 and $8.37, respectively, per option using the following assumptions:
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%. 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, 2015 was as follows:
As of June 30, 2015, 2014 and 2013, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $14.3 million, $5.2 million and $9.7 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, 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. 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, 2015, 2014, and 2013 was $2.9 million, $3.1 million, and $2.9 million, respectively. As of June 30, 2015, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $7.7 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, 2015 were as follows:
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%.
Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2015, was as follows:
As of June 30, 2015, total unrecognized compensation cost related to non-vested restricted share and cash-based restricted share unit awards was $5.8 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, 2015, 2014 and 2013, was $5.9 million, $4.5 million and $7.0 million, respectively. The total fair value of restricted shares vested was $5.1 million, $3.8 million and $0.7 million during fiscal years 2015, 2014 and 2013, 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, the Company had outstanding grants covering performance periods ranging from 24 to 48 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, was as follows:
As of June 30, 2015, total unrecognized compensation cost related to non-vested performance share and cash-based performance share unit awards was $2.6 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, 2015, 2014 and 2013 was $2.3 million, $2.1 million and $5.9 million, respectively. The total fair value of performance shares vested during the fiscal years ended June 30, 2015, 2014 and 2013 was $1.6 million, $1.3 million and $2.6 million, respectively.
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., Singapore, China, Germany, Switzerland, Japan, Belgium, the U.K., Italy, South Korea and the Philippines. 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 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.
The II-VI Photonics segment is located in the U.S., China, Vietnam, Australia, Germany, Japan, the U.K., 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-electronic modules for use in optical communication networks and other diverse consumer and commercial applications. In addition, the segment also manufactures pump lasers, 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., Vietnam, Japan, China, Germany and the Philippines. II-VI Performance Products is directed by a Corporate Executive Vice President, 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-electric and silicon carbide applications servicing the semiconductor, military and medical markets.
The Company completed 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 part of the II-VI Performance Products segment. Segment information for all periods presented has been adjusted to properly reflect the tellurium product as a discontinued operation.
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:
Geographic information for revenues from the country of origin, 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:
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, 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. 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, 2015 and 2014($000):
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 2015 and 2014.
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 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 million and $7.4 million at June 30, 2015 and June 30, 2014, respectively. As of June 30, 2015, these forward contracts had expiration dates ranging from July 2015 through October 2015, with Japanese Yen denominations individually between 250 million and 350 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. The change in the fair value of these contracts for the fiscal years ended June 30, 2015, 2014 and 2013 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 million, $2.5 million, and $2.2 million for the years ended June 30, 2015, 2014 and 2013, 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 514,031 and 543,234 shares of Common Stock available for purchase under the plan at June 30, 2015 and 2014, respectively.
Switzerland Defined Benefit Plan
In conjunction with the acquisition of Oclaro’s Switzerland-Based Semiconductor Laser Business, 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, 2015 were $1.9 million. Expected employer contributions in fiscal year 2016 are $2.0 million.
The funded status of the Swiss Plan in the fiscal years ended June 30, 2015 and 2014 were as follows:
Net periodic pension cost associated with the Swiss Plan included the following components:
The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 2015 and 2014 using the following assumptions:
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, the Swiss Plan’s asset allocation was as follows:
Estimated future benefit payments under the Swiss Plan are estimated to be as follows:
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 million, $1.9 million, and $1.8 million for the fiscal years ended June 30, 2015, 2014, and 2013, respectively. There were no employer contributions made to the Compensation Plan for the fiscal years ended June 30, 2015, 2014 and 2013.
Note 15.
Other Accrued Liabilities
The components of other accrued liabilities were as follows:
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:
The following table summarizes the change in the carrying value of the company’s warranty reserve included in Other Accrued Liabilities as of and for the year ended June 30, 2015.
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:
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, 2015, the Company purchased 936,049 shares of its Common Stock for $12.7 million 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, and 2013 were as follows ($000):
Note 19.
Subsequent Events
On August 8, 2014, the Company’s Fuzhou manufacturing facility in the Fujian province of China was impacted by super typhoon Soudelor, as flood waters infiltrated certain manufacturing areas on the Company’s Fuzhou campus. The Fuzhou manufacturing facility primarily services II-VI Photop and II-VI Optical Communications in the II-VI Photonics segment. Almost all of the manufacturing activities have been restored and the Company is assessing damages and working 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.
Quarterly Financial Data (unaudited)
Fiscal Year 2015
Fiscal Year 2014
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2015, 2014, 2013 AND
(IN THOUSANDS OF DOLLARS)
(1)
Relates to the warranty reserve acquired from the acquisitions.
(2)
Primarily relates to allowance for doubtful accounts from the acquisitions.
(3)
Primarily relates to write-offs of accounts receivable.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
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(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. Kramer and Ms. Raymond concluded that, as of June 30, 2015, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
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. 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. Based on the evaluation, management concluded that as of June 30, 2015, 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.
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.
Item 9B.
OTHER INFORMATION
None.
PART III
Item 10.
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 2015 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.
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,” “Executive Compensation,” “Compensation Committee Report” and “Compensation and Risk” in the Company’s Proxy Statement.
Item 12.
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.
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.
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.
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, 2015 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
2.01
Share and Asset Purchase Agreement dated as of September 12, 2013, between II-VI Holdings B.V. and Oclaro Technology Limited
Incorporated herein by reference to Exhibit 2.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 12, 2013.
2.02
Asset Purchase Agreement dated as of October 10, 2013, between II-VI Incorporated and Oclaro Technology Limited
Incorporated herein by reference to Exhibit 2.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on October 11, 2013.
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
Second Amended and Restated Credit Agreement, dated as of September 10, 2013, by and among II-VI Incorporated, each of the Guarantors party thereto, each of the Lenders party thereto, and PNC Bank, National Association, as administrative agent ($225,000,000 Revolving Credit Facility and $100,000,000 Term Loan Facility)
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 12, 2013.
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)
Filed herewith.
10.03
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.
10.04
Amended and Restated Employment Agreement, dated September 19, 2008, by and between II-VI and Vincent D. Mattera, Jr.*
Incorporated herein by reference to Exhibit 10.2 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2008.
10.05
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.
10.06
Consulting Agreement, dated June 10, 2015, by and between II-VI Incorporated and James Martinelli*
Filed herewith.
10.07
Employment Agreement, dated October 3, 2012, by and between II-VI Incorporated and Giovanni Barbarossa*
Filed herewith.
10.08
Employment Agreement, dated November 10, 2008, by and between II-VI Incorporated and David G. Wagner*
Filed herewith.
10.09
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).
10.10
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).
10.11
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).
10.12
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.
10.13
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).
10.14
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.
10.15
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.
10.16
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.
10.17
Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods prior to January 1, 2015)*
Filed herewith.
10.18
Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods after January 1, 2015)*
Filed herewith.
10.19
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.
10.20
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.
10.21
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.
10.22
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.
10.23
Form of Performance Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*
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.
10.24
Form of Stock Appreciation Rights Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*
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.
10.25
Form of Performance Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*
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.
10.26
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.
10.27
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.
10.28
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.
10.29
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.
10.30
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.
10.31
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.
10.32
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.
10.33
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.
10.34
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.
10.35
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.
10.36
Form of Performance Share Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Filed herewith.
10.37
Form of Performance Unit Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Filed herewith.
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.
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.
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.
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.
Date: August 28, 2015
By:
/s/ William Schromm
William Schromm
Director
EXHIBIT INDEX
Exhibit No.
Description
Location
2.01
Share and Asset Purchase Agreement dated as of September 12, 2013, between II-VI Holdings B.V. and Oclaro Technology Limited
Incorporated herein by reference to Exhibit 2.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 12, 2013.
2.02
Asset Purchase Agreement dated as of October 10, 2013, between II-VI Incorporated and Oclaro Technology Limited
Incorporated herein by reference to Exhibit 2.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on October 11, 2013.
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
Second Amended and Restated Credit Agreement, dated as of September 10, 2013, by and among II-VI Incorporated, each of the Guarantors party thereto, each of the Lenders party thereto, and PNC Bank, National Association, as administrative agent ($225,000,000 Revolving Credit Facility and $100,000,000 Term Loan Facility)
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 12, 2013.
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)
Filed herewith.
10.03
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.
10.04
Amended and Restated Employment Agreement, dated September 19, 2008, by and between II-VI and Vincent D. Mattera, Jr.*
Incorporated herein by reference to Exhibit 10.2 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2008.
10.05
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.
10.06
Consulting Agreement, dated June 10, 2015, by and between II-VI Incorporated and James Martinelli*
Filed herewith.
10.07
Employment Agreement, dated October 3, 2012, by and between II-VI Incorporated and Giovanni Barbarossa*
Filed herewith.
10.08
Employment Agreement, dated November 10, 2008, by and between II-VI Incorporated and David G. Wagner*
Filed herewith.
10.09
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).
10.10
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).
10.11
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).
10.12
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.
10.13
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).
10.14
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.
10.15
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.
10.16
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.
10.17
Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods prior to January 1, 2015)*
Filed herewith.
10.18
Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods after January 1, 2015)*
Filed herewith.
10.19
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.
10.20
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.
10.21
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.
10.22
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.
10.23
Form of Performance Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*
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.
10.24
Form of Stock Appreciation Rights Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*
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.
10.25
Form of Performance Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*
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.
10.26
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.
10.27
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.
10.28
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.
10.29
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.
10.30
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.
10.31
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.
10.32
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.
10.33
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.
10.34
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.
10.35
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.
10.36
Form of Performance Share Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Filed herewith.
10.37
Form of Performance Unit Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Filed herewith.
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.
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.