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II-VI Inc – ‘10-Q’ for 12/31/19

On:  Monday, 2/10/20, at 4:47pm ET   ·   For:  12/31/19   ·   Accession #:  1564590-20-4069   ·   File #:  0-16195

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 2/10/20  II-VI Inc                         10-Q       12/31/19   89:14M                                    ActiveDisclosure/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

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                (Parenthetical)                                                  
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                (Loss) (Unaudited)                                               
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                Income (Unaudited)                                               
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                Income (Unaudited) (Parenthetical)                               
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                (Unaudited)                                                      
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                Equity (Unaudited)                                               
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                (Policies)                                                       
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                (Tables)                                                         
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                (Detail)                                                         
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                Estimated Fair Value of Assets Acquired and                      
                Liabilities Assumed (Detail)                                     
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                Information (Detail)                                             
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                Disaggregated Revenue by Revenue Market and                      
                Product (Detail)                                                 
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                Information (Detail)                                             
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                Short-Term Leases, Lease Term, and Discount Rates                
                (Details)                                                        
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                Including Short Term Leases (Details)                            
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                (Detail)                                                         
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                (Detail)                                                         
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                Information (Detail)                                             
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                Information (Detail)                                             
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                (Detail)                                                         
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                (Parenthetical) (Detail)                                         
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                Excluded from the Calculation of Diluted Net                     
                Income Per Share (Details)                                       
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                Excluded from the Calculation of Diluted Net                     
                Income Per Share (Parenthetical) (Detail)                        
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                (Detail)                                                         
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                Segment (Detail)                                                 
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                (Detail)                                                         
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                (Detail)                                                         
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                Information (Detail)                                             
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                Notes and Finisar Notes (Detail)                                 
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‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Part I -- Financial Information
"Financial Statements
"Condensed Consolidated Balance Sheets -- December 31, 2019 and June 30, 2019 (Unaudited)
"Condensed Consolidated Statements of Earnings (Loss) -- Three and six months ended December 31, 2019 and 2018 (Unaudited)
"Condensed Consolidated Statements of Comprehensive Income (Loss) -- Three and six months ended December 31, 2019 and 2018 (Unaudited)
"Condensed Consolidated Statements of Cash Flows -- Six months ended December 31, 2019 and 2018 (Unaudited)
"Condensed Consolidated Statements of Shareholders' Equity -- Three and six months ended December 31, 2019 and 2018 (Unaudited)
"Notes to Condensed Consolidated Financial Statements (Unaudited)
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures About Market Risk
"Controls and Procedures
"Part Ii -- Other Information
"Legal Proceedings
"Risk Factors
"Issuer Purchases of Equity Securities
"Exhibits

This is an HTML Document rendered as filed.  [ Alternative Formats ]



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\

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM  i 10-Q

 

 i 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended  i December 31, 2019

 i 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                     .

Commission File Number:  i 0-16195

 

 i II-VI INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

PENNSYLVANIA

 

 i 25-1214948

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

 i 375 Saxonburg Boulevard

 

 

 i Saxonburg,  i PA

 

 i 16056

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code:  i 724- i 352-4455

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 i Common Stock, no par value

 i IIVI

 i Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     i Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     i Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐  

Smaller reporting company

 i 

 

 

Emerging growth company

 i 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act       

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   i     No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At February 6, 2020,  i 91,059,636 shares of Common Stock, no par value, of the registrant were outstanding.

 

 

 


 

II-VI INCORPORATED

INDEX

 

 

 

Page No.

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – December 31, 2019 and June 30, 2019 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings (Loss) – Three and six months ended December 31, 2019 and 2018 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended December 31, 2019 and 2018 (Unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Six months ended December 31, 2019 and 2018 (Unaudited)

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity – Three and six months ended December 31, 2019 and 2018 (Unaudited)

 

8

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

Item 2.

 

Issuer Purchases of Equity Securities

 

33

 

 

 

 

 

Item 6.

 

Exhibits

 

34

 

 

 

2


 

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 i 376,840

 

 

$

 i 204,872

 

Accounts receivable - less allowance for doubtful accounts of $ i 1,868 at December 31, 2019 and $ i 1,292 at June 30, 2019

 

 

 i 488,902

 

 

 

 i 269,642

 

Inventories

 

 

 i 662,982

 

 

 

 i 296,282

 

Prepaid and refundable income taxes

 

 

 i 8,449

 

 

 

 i 11,778

 

Prepaid and other current assets

 

 

 i 52,016

 

 

 

 i 30,337

 

Total Current Assets

 

 

 i 1,589,189

 

 

 

 i 812,911

 

Property, plant & equipment, net

 

 

 i 1,347,147

 

 

 

 i 582,790

 

Goodwill

 

 

 i 1,096,691

 

 

 

 i 319,778

 

Other intangible assets, net

 

 

 i 929,773

 

 

 

 i 139,324

 

Investments

 

 

 i 77,795

 

 

 

 i 76,208

 

Deferred income taxes

 

 

 i 17,487

 

 

 

 i 8,524

 

Other assets

 

 

 i 150,127

 

 

 

 i 14,238

 

Total Assets

 

$

 i 5,208,209

 

 

$

 i 1,953,773

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 i 69,250

 

 

$

 i 23,834

 

Accounts payable

 

 

 i 229,042

 

 

 

 i 104,462

 

Accrued compensation and benefits

 

 

 i 95,019

 

 

 

 i 71,847

 

Operating lease current liabilities

 

 

 i 29,245

 

 

 

-

 

Accrued income taxes payable

 

 

 i 21,121

 

 

 

 i 20,476

 

Other accrued liabilities

 

 

 i 127,922

 

 

 

 i 49,944

 

Total Current Liabilities

 

 

 i 571,599

 

 

 

 i 270,563

 

Long-term debt

 

 

 i 2,228,207

 

 

 

 i 443,163

 

Deferred income taxes

 

 

 i 98,448

 

 

 

 i 23,913

 

Operating lease liabilities

 

 

 i 93,347

 

 

 

-

 

Other liabilities

 

 

 i 150,911

 

 

 

 i 82,925

 

Total Liabilities

 

 

 i 3,142,512

 

 

 

 i 820,564

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, no par value; authorized -  i  i 5,000,000 /  shares;  i  i none /  issued

 

 

-

 

 

 

-

 

Common stock, no par value; authorized -  i  i 300,000,000 /  shares; issued -  i 104,043,057 shares at December 31, 2019;  i 76,315,337 shares at June 30, 2019

 

 

 i 1,441,180

 

 

 

 i 382,423

 

Accumulated other comprehensive income (loss)

 

 

( i 9,208

)

 

 

( i 24,221

)

Retained earnings

 

 

 i 819,370

 

 

 

 i 943,581

 

 

 

 

 i 2,251,342

 

 

 

 i 1,301,783

 

Treasury stock, at cost -  i 13,080,375 shares at December 31, 2019 and  i 12,603,781 shares at June 30, 2019

 

 

( i 185,645

)

 

 

( i 168,574

)

Total Shareholders' Equity

 

 

 i 2,065,697

 

 

 

 i 1,133,209

 

Total Liabilities and Shareholders' Equity

 

$

 i 5,208,209

 

 

$

 i 1,953,773

 

 

 

 

 

 

 

 

 

 

- See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

3


 

II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)

($000 except per share data)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Revenues

 

$

 i 666,331

 

 

$

 i 342,839

 

 

 

 

 

 

 

 

 

 

Costs, Expenses, and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

 i 517,991

 

 

 

 i 211,333

 

Internal research and development

 

 

 i 107,700

 

 

 

 i 33,764

 

Selling, general and administrative

 

 

 i 119,218

 

 

 

 i 58,136

 

Interest expense

 

 

 i 28,390

 

 

 

 i 5,580

 

Other expense (income), net

 

 

 i 487

 

 

 

( i 701

)

Total Costs, Expenses, & Other Expense (Income)

 

 

 i 773,786

 

 

 

 i 308,112

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Before Income Taxes

 

 

( i 107,455

)

 

 

 i 34,727

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

( i 9,242

)

 

 

 i 6,025

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss)

 

$

( i 98,213

)

 

$

 i 28,702

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) Per Share

 

$

( i 1.08

)

 

$

 i 0.45

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share

 

$

( i 1.08

)

 

$

 i 0.44

 

 

 

 

- See notes to condensed consolidated financial statements.

 

 

 

 

 

4


 

II-VI Incorporated and Subsidiaries

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)

 

 

 

 

 

 

 

 

($000 except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Revenues

 

$

 i 1,006,740

 

 

$

 i 657,272

 

 

 

 

 

 

 

 

 

 

Costs, Expenses, and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

 i 735,260

 

 

 

 i 401,859

 

Internal research and development

 

 

 i 143,820

 

 

 

 i 66,935

 

Selling, general and administrative

 

 

 i 224,713

 

 

 

 i 111,659

 

Interest expense

 

 

 i 35,358

 

 

 

 i 11,164

 

Other expense (income), net

 

 

 i 5,566

 

 

 

( i 1,414

)

Total Costs, Expenses, & Other Expense (Income)

 

 

 i 1,144,717

 

 

 

 i 590,203

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Before Income Taxes

 

 

( i 137,977

)

 

 

 i 67,069

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

( i 13,766

)

 

 

 i 12,218

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss)

 

$

( i 124,211

)

 

$

 i 54,851

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) Per Share

 

$

( i 1.58

)

 

$

 i 0.86

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share

 

$

( i 1.58

)

 

$

 i 0.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

5


 

II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net earnings (loss)

 

$

( i 98,213

)

 

$

 i 28,702

 

 

$

( i 124,211

)

 

$

 i 54,851

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

$

 i 24,590

 

 

$

( i 4,454

)

 

$

 i 11,571

 

 

$

( i 15,105

)

Change in fair value of interest rate swap, net of taxes of $ i  i 989 /  for both the three and six months ended December 31, 2019

 

$

 i 3,609

 

 

$

-

 

 

$

 i 3,609

 

 

$

-

 

Pension adjustment, net of taxes of ($ i 92) and ($ i 69) for the three and six months ended December 31, 2019, respectively, and ($ i 24) and ($ i 9) for the three and six months ended December 31, 2018, respectively

 

$

( i 251

)

 

$

( i 85

)

 

$

( i 167

)

 

$

( i 33

)

Comprehensive income (loss)

 

$

( i 70,265

)

 

$

 i 24,163

 

 

$

( i 109,198

)

 

$

 i 39,713

 

 

- See notes to condensed consolidated financial statements.

6


 

II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

( i 124,211

)

 

$

 i 54,851

 

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

 i 69,386

 

 

 

 i 36,679

 

Amortization

 

 

 i 39,714

 

 

 

 i 7,820

 

Share-based compensation expense

 

 

 i 34,380

 

 

 

 i 9,277

 

Amortization of discount on convertible debt and debt issuance costs

 

 

 i 9,639

 

 

 

 i 6,255

 

Debt extinguishment costs

 

 

 i 3,960

 

 

 

-

 

Losses on foreign currency remeasurements and transactions

 

 

 i 4,575

 

 

 

 i 1,726

 

Earnings from equity investments

 

 

( i 918

)

 

 

( i 2,767

)

Deferred income taxes

 

 

( i 42,076

)

 

 

( i 3,506

)

Increase (decrease) in cash from changes in (net of effect of acquisitions):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 i 31,237

 

 

 

( i 8,610

)

Inventories

 

 

 i 78,065

 

 

 

( i 39,588

)

Accounts payable

 

 

( i 1,963

)

 

 

 i 22,777

 

Income taxes

 

 

 i 8,930

 

 

 

( i 856

)

Accrued compensation and benefits

 

 

( i 9,642

)

 

 

( i 10,436

)

Other operating net assets (liabilities)

 

 

( i 44,816

)

 

 

 i 14,584

 

Net cash provided by operating activities

 

 

 i 56,260

 

 

 

 i 88,206

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

( i 80,288

)

 

 

( i 74,368

)

Purchases of businesses, net of cash acquired

 

 

( i 1,036,609

)

 

 

( i 54,229

)

Purchases of equity investments

 

 

-

 

 

 

( i 4,480

)

Other investing activities

 

 

( i 1,102

)

 

 

 i 116

 

Net cash used in investing activities

 

 

( i 1,117,999

)

 

 

( i 132,961

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings of Term A Facility

 

 

 i 1,241,000

 

 

 

-

 

Proceeds from borrowings of Term B Facility

 

 

 i 720,000

 

 

 

-

 

Proceeds from borrowings of Revolving Credit Facility

 

 

 i 160,000

 

 

 

-

 

Proceeds from borrowings under prior Credit Facility

 

 

 i 10,000

 

 

 

 i 120,000

 

Payments on Finisar Notes

 

 

( i 560,112

)

 

 

-

 

Payments on borrowings under prior Term Loan, Credit Facility and other loans

 

 

( i 176,596

)

 

 

( i 85,000

)

Payments on borrowings under Term A Facility

 

 

( i 15,513

)

 

 

-

 

Payments on borrowings under Term B Facility

 

 

( i 1,800

)

 

 

-

 

Payments on borrowings under Revolving Credit Facility

 

 

( i 66,000

)

 

 

-

 

Debt issuance costs

 

 

( i 63,510

)

 

 

-

 

Proceeds from exercises of stock options

 

 

 i 3,077

 

 

 

 i 6,222

 

Payments on earnout arrangements

 

 

-

 

 

 

( i 3,540

)

Common stock repurchase

 

 

( i 1,626

)

 

 

-

 

Payments in satisfaction of employees' minimum tax obligations

 

 

( i 15,031

)

 

 

( i 6,350

)

Other financing activities

 

 

( i 1,839

)

 

 

-

 

Net cash provided by financing activities

 

 

 i 1,232,050

 

 

 

 i 31,332

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 i 1,657

 

 

 

( i 3,359

)

Net increase (decrease) in cash and cash equivalents

 

 

 i 171,968

 

 

 

( i 16,782

)

Cash and Cash Equivalents at Beginning of Period

 

 

 i 204,872

 

 

 

 i 247,038

 

Cash and Cash Equivalents at End of Period

 

$

 i 376,840

 

 

$

 i 230,256

 

Cash paid for interest

 

$

 i 24,745

 

 

$

 i 4,293

 

Cash paid for income taxes

 

$

 i 25,087

 

 

$

 i 14,527

 

Additions to property, plant & equipment included in accounts payable

 

$

 i 12,502

 

 

$

 i 10,347

 

 

 

 

 

 

 

 

 

 

- See notes to condensed consolidated financial statements.

7


 

II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(000)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Comprehensive

 

 

Retained

 

 

Treasury Stock

 

 

 

 

 

Three Months Ended December 31, 2019

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

Balance - September 30, 2019

 

 

 i 103,736

 

 

$

 i 1,429,173

 

 

$

( i 37,156

)

 

$

 i 917,583

 

 

 

( i 12,855

)

 

$

( i 178,406

)

 

$

 i 2,131,194

 

Share-based and deferred compensation activities

 

 

 i 307

 

 

 

 i 12,007

 

 

 

-

 

 

 

-

 

 

 

( i 175

)

 

 

( i 5,614

)

 

 

 i 6,393

 

Common stock repurchase

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 50

)

 

 

( i 1,625

)

 

 

( i 1,625

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 98,213

)

 

 

-

 

 

 

-

 

 

 

( i 98,213

)

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

 i 24,590

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 24,590

 

Change in fair value of interest rate swap, net of taxes of $ i 989

 

 

-

 

 

 

-

 

 

 

 i 3,609

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 3,609

 

Pension adjustment, net of taxes of ($ i 92)

 

 

-

 

 

 

-

 

 

 

( i 251

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 251

)

Balance - December 31, 2019

 

 

 i 104,043

 

 

$

 i 1,441,180

 

 

$

( i 9,208

)

 

$

 i 819,370

 

 

 

( i 13,080

)

 

$

( i 185,645

)

 

$

 i 2,065,697

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Comprehensive

 

 

Retained

 

 

Treasury Stock

 

 

 

 

 

Three Months Ended December 31, 2018

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

Balance - September 30, 2018

 

 

 i 76,075

 

 

$

 i 360,276

 

 

$

( i 14,379

)

 

$

 i 862,213

 

 

 

( i 12,497

)

 

$

( i 164,522

)

 

$

 i 1,043,588

 

Share-based and deferred compensation activities

 

 

 i 49

 

 

 

 i 6,919

 

 

 

-

 

 

 

-

 

 

 

( i 41

)

 

 

( i 1,497

)

 

 

 i 5,422

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 28,702

 

 

 

-

 

 

 

-

 

 

 

 i 28,702

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

( i 4,454

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 4,454

)

Pension adjustment, net of taxes of ($ i 24)

 

 

-

 

 

 

-

 

 

 

( i 85

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 85

)

Balance - December 31, 2018

 

 

 i 76,124

 

 

$

 i 367,195

 

 

$

( i 18,918

)

 

$

 i 890,915

 

 

 

( i 12,538

)

 

$

( i 166,019

)

 

$

 i 1,073,173

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Comprehensive

 

 

Retained

 

 

Treasury Stock

 

 

 

 

 

Six Months Ended December 31, 2019

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

Balance - June 30, 2019

 

 

 i 76,315

 

 

$

 i 382,423

 

 

$

( i 24,221

)

 

$

 i 943,581

 

 

 

( i 12,604

)

 

$

( i 168,574

)

 

$

 i 1,133,209

 

Share-based and deferred compensation activities

 

 

 i 1,015

 

 

 

 i 71,050

 

 

 

-

 

 

 

-

 

 

 

( i 426

)

 

 

( i 15,446

)

 

 

 i 55,604

 

Common stock repurchase

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 50

)

 

 

( i 1,625

)

 

 

( i 1,625

)

Shares issued related to Finisar acquisition

 

 

 i 26,713

 

 

 

 i 987,707

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 987,707

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 124,211

)

 

 

-

 

 

 

-

 

 

 

( i 124,211

)

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

 i 11,571

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 11,571

 

Change in fair value of interest rate swap, net of taxes of $ i 989

 

 

-

 

 

 

-

 

 

 

 i 3,609

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 3,609

 

Pension adjustment, net of taxes of ($ i 69)

 

 

-

 

 

 

-

 

 

 

( i 167

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 167

)

Balance - December 31, 2019

 

 

 i 104,043

 

 

$

 i 1,441,180

 

 

$

( i 9,208

)

 

$

 i 819,370

 

 

 

( i 13,080

)

 

$

( i 185,645

)

 

$

 i 2,065,697

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Comprehensive

 

 

Retained

 

 

Treasury Stock

 

 

 

 

 

Six Months Ended December 31, 2018

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

Balance - June 30, 2018

 

 

 i 75,693

 

 

$

 i 351,761

 

 

$

( i 3,780

)

 

$

 i 836,064

 

 

 

( i 12,396

)

 

$

( i 159,734

)

 

$

 i 1,024,311

 

Share-based and deferred compensation activities

 

 

 i 431

 

 

 

 i 15,434

 

 

 

-

 

 

 

-

 

 

 

( i 142

)

 

 

( i 6,285

)

 

 

 i 9,149

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 54,851

 

 

 

-

 

 

 

-

 

 

 

 i 54,851

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

( i 15,105

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 15,105

)

Pension adjustment, net of taxes of $( i 9)

 

 

-

 

 

 

-

 

 

 

( i 33

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 33

)

Balance - December 31, 2018

 

$

 i 76,124

 

 

$

 i 367,195

 

 

$

( i 18,918

)

 

$

 i 890,915

 

 

$

( i 12,538

)

 

$

( i 166,019

)

 

$

 i 1,073,173

 

 

- See notes to condensed consolidated financial statements.

 

 

8


 

II-VI Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 i 

Note 1.

Basis of Presentation

The condensed consolidated financial statements of II-VI Incorporated (“II-VI”, the “Company”, “we”, “us” or “our”) for the three and six months ended December 31, 2019 and 2018 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation for the periods presented have been included. All adjustments are of a normal recurring nature unless disclosed otherwise. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K dated August 16, 2019. The consolidated results of operations for the three and six months ended December 31, 2019 are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet information as of June 30, 2019 was derived from the Company’s audited consolidated financial statements.

Effective July 1, 2019, the Company has realigned its organizational structure into two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions.

On September 24, 2019, the Company completed the acquisition of Finisar Corporation (“Finisar”). The Company’s condensed consolidated financial statements include the operating results of Finisar from the date of acquisition. Refer to Note 3 for further discussion of the acquisition.

 

 i 

Note 2.

Recently Issued Financial Accounting Standards

 i 

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). This ASU modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted this standard on July 1, 2019.  The Company has elected to utilize the optional transition method. See Note 5.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which more closely aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.  The Company adopted this standard on July 1, 2019.  The adoption of this standard did not have a material effect on the consolidated financial statements.

 

Pronouncements Currently Under Evaluation

 

In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which among other things, requires the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.

 

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2018-16”), which permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate eligible for hedge accounting purposes.  For public business entities that already have adopted the amendments in ASU 2017-12, the amendments in ASU 2018-16 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Early adoption is permitted in any interim period upon issuance of this update if an entity already has adopted ASU 2017-12.  The Company is in the process of evaluating the impact of the pronouncement.

 

 / 

9


 

 

 

 i 

Note 3.

Finisar Acquisition

 

On September 24, 2019 (the “Closing Date”), the Company completed its acquisition of Finisar, a global technology leader for subsystems and components for fiber optic communications.

 

Pursuant to the terms of the Agreement and Plan of Merger, dated as of November 8, 2018 (the “Merger Agreement”), Mutation Merger Sub Inc., a wholly owned subsidiary of the Company (“Merger Sub”), merged with and into Finisar (the “Merger”), with Finisar surviving the Merger. Each issued and outstanding share of Finisar’s common stock was automatically cancelled and converted into the right to receive the following consideration (collectively the “Merger Consideration”), at the election of the holder of the share of Finisar’s common stock:

 

 

$ i 26.00 in cash, without interest (the “Cash Consideration”),

 

 i 0.5546 of a share of the Company’s common stock (the “Stock Consideration”), or

 

a combination of $ i 15.60 in cash, without interest, and  i 0.2218 of a share of the Company’s common stock (the “Mixed Consideration”).

The per share Cash Consideration and Stock Consideration were subject to adjustment pursuant to the terms of the Merger Agreement such that the aggregate Merger Consideration consisted of approximately  i 60.0% cash and approximately  i 40.0% shares of the Company’s common stock (assuming a per share price of the Company’s common stock equal to the closing price as of November 8, 2018, which was $ i 46.88 per share) across all shares of Finisar’s common stock (the “Proration Adjustment”).  Following the Proration Adjustment, the resulting consideration for Cash Consideration was adjusted to $ i 15.94 in cash and  i 0.2146 shares of the Company’s Common Stock.  i  i No /  adjustment was made to the Stock Consideration and Mixed Consideration.

 

 i 

The preliminary total fair value of consideration paid in connection with the acquisition of Finisar consisted of the following (in $000):

 

 

Shares

 

 

Per Share

 

 

Total Consideration

 

Cash paid for outstanding shares of Finisar common stock

 

 

 

 

 

 

 

$

 

 i 1,879,086

 

II-VI common shares issued to Finisar stockholders

 

 i 26,712,822

 

$

 

 i 36.98

 

 

 

 i 987,707

 

Replacement equity awards attributable to pre-combination service

 

 

 

 

 

 

 

 

 

 i 41,710

 

 

 

 

 

 

 

 

 

$

 

 i 2,908,503

 

 / 

The Company recorded $ i 8.0 million and $ i 40.2 million of acquisition related costs in the three and six months ended December 31, 2019, respectively, representing professional and other direct acquisition costs. These costs are recorded within selling, general, and administrative expense in our Condensed Consolidated Statement of Earnings (Loss).

 

On the Closing Date, the Company entered into an Amended and Restated Credit Agreement, dated as of September 24, 2019 (the “New Credit Agreement”), by and among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lender parties thereto. Refer to Note 10 for additional information on the new credit facility.  

 

From the Closing Date, Finisar contributed $ i 306.6 million and $ i 328.7 million of our consolidated revenue for the three and six months ended December 31, 2019, respectively. Including severance related costs, Finisar’s contribution to our net loss was a loss of $ i 7.3 million and $ i 22.7 million during the three and six months ended December 31, 2019, respectively.

 

 i 

The Company allocated the fair value of the purchase price consideration to the tangible assets, liabilities, and intangible assets acquired, generally based on estimated fair values. The excess purchase price over those fair values is recorded as goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. Our preliminary allocation of the purchase price of Finisar, based on the estimated fair value of the assets acquired and liabilities assumed as of the Closing Date, is as follows (in $000):

 

 / 

10


 

 

 

 

Purchase Price Allocation

(Preliminary)

 

Cash and cash equivalents

 

$

 

 i 842,477

 

Current assets

 

 

 

 i 260,864

 

Inventories

 

 

 

 i 439,708

 

Property, plant & equipment

 

 

 

 i 748,858

 

Intangible assets

 

 

 

 i 828,630

 

Other assets

 

 

 

 i 82,929

 

Deferred tax assets

 

 

 

 i 12,267

 

Accounts payable

 

 

 

( i 123,707

)

Other accrued liabilities

 

 

 

( i 163,109

)

Deferred tax liabilities

 

 

 

( i 219,544

)

Debt

 

 

 

( i 575,000

)

Goodwill

 

 

 

 i 774,130

 

Total Purchase Price

 

$

 

 i 2,908,503

 

 

 

The purchase price allocation set forth herein is preliminary and will be revised as additional information becomes available during the measurement period, which could be up to 12 months from the Closing Date. Any such revisions or changes may be material. The Company utilized market available benchmarking analysis to perform the preliminary allocation above.

 

As of December 31, 2019, the goodwill and intangibles have been allocated to the Photonic Solutions and Compound Semiconductors segments. The preliminary goodwill of $ i 774.1 million arising from the acquisition is attributed to the expected synergies, including future cost savings, and other benefits expected to be generated by combining II-VI and Finisar. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes. See Note 9 for additional information on goodwill and intangibles.

 

Supplemental Pro Forma Information

 

The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position.  The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.

 

The following supplemental pro forma information presents the combined results of operations for the three and six months ended December 31, 2018 and 2019, as if Finisar had been acquired as of July 1, 2018.  The supplemental pro forma information includes adjustments to amortization and depreciation for acquired intangible assets, property, plant and equipment, adjustments to share-based compensation expense, fair value adjustments on the inventories acquired, transaction costs, and interest expense and amortization of debt issuance costs related to the New Senior Credit Facilities as defined in Note 10.

 

 i 

The unaudited supplemental pro forma financial information for the period presented is as follows (in $000):

 

 

 

 

Three Months

 

 

 

Six Months

 

 

 

Three Months

 

 

 

Six Months

 

 

 

 

Ended December

 

 

 

Ended December

 

 

 

Ended December

 

 

 

Ended December

 

 

 

 

31, 2019

 

 

 

31, 2019

 

 

 

31, 2018

 

 

 

31, 2018

 

Revenue

 

$

 

 i 666,331

 

 

$

 

 i 1,274,487

 

 

$

 

 i 672,403

 

 

$

 

 i 1,300,266

 

Net Earnings (Loss)

 

 

 

( i 29,318

)

 

 

 

( i 30,956

)

 

 

 

( i 16,633

)

 

 

 

( i 147,820

)

 / 

 

11


 

 i 

Note 4.

Revenue from Contracts with Customers

 i 

The following tables summarize disaggregated revenue by revenue market, and product for the three and six months ended December 31, 2019 and 2018 ($000):

 

 

Three Months Ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound

 

 

Photonic

 

 

Unallocated

 

 

 

 

 

 

Semiconductors

 

 

Solutions

 

 

& Other

 

 

Total

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

`

 

 

 

 

Direct Ship Parts

 

$

 

 i 157,848

 

 

$

 

 i 459,253

 

 

$

 

-

 

 

$

 

 i 617,101

 

Services

 

 

 

 i 3,297

 

 

 

 

 i 1,140

 

 

 

 

-

 

 

 

 

 i 4,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Ship Parts

 

 

 

 i 40,165

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 40,165

 

Services

 

 

 

 i 4,628

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 4,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

 

 i 205,938

 

 

$

 

 i 460,393

 

 

$

 

-

 

 

$

 

 i 666,331

 

 

 

 

Three Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound

 

 

Photonic

 

 

Unallocated

 

 

 

 

 

 

Semiconductors

 

 

Solutions

 

 

& Other

 

 

Total

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

`

 

 

 

 

Direct Ship Parts

 

$

 

 i 140,698

 

 

$

 

 i 157,965

 

 

$

 

-

 

 

$

 

 i 298,663

 

Services

 

 

 

 i 2,889

 

 

 

 

 i 1,729

 

 

 

 

-

 

 

 

 

 i 4,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Ship Parts

 

 

 

 i 33,507

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 33,507

 

Services

 

 

 

 i 6,051

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 6,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

 

 i 183,145

 

 

$

 

 i 159,694

 

 

$

 

-

 

 

$

 

 i 342,839

 

 

 

 

Six Months Ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound

 

 

Photonic

 

 

Unallocated

 

 

 

 

 

 

Semiconductors

 

 

Solutions

 

 

& Other

 

 

Total

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Ship Parts

 

$

 

 i 288,036

 

 

$

 

 i 599,598

 

 

$

 

 i 22,051

 

 

$

 

 i 909,685

 

Services

 

 

 

 i 8,989

 

 

 

 

 i 2,151

 

 

 

 

-

 

 

 

 

 i 11,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Ship Parts

 

 

 

 i 77,247

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 77,247

 

Services

 

 

 

 i 8,668

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 8,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

 

 i 382,940

 

 

$

 

 i 601,749

 

 

$

 

 i 22,051

 

 

$

 

 i 1,006,740

 

 

 / 
 / 

12


 

 

 

Six Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound

 

 

Photonic

 

 

Unallocated

 

 

 

 

 

 

Semiconductors

 

 

Solutions

 

 

& Other

 

 

Total

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Ship Parts

 

$

 

 i 285,565

 

 

$

 

 i 291,330

 

 

$

 

-

 

 

$

 

 i 576,895

 

Services

 

 

 

 i 6,884

 

 

 

 

 i 3,520

 

 

 

 

-

 

 

 

 

 i 10,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Ship Parts

 

 

 

 i 60,687

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 60,687

 

Services

 

 

 

 i 9,286

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 i 9,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

 

 i 362,422

 

 

$

 

 i 294,850

 

 

$

 

-

 

 

$

 

 i 657,272

 

 

Contract Liabilities

 

Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the three and six months ended December 31, 2019, the Company recognized revenue of $ i 21.2 million and $ i 50.2 million, respectively, related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of July 1, 2019. The Company had $ i 37.7 million and $ i 19.4 million of contract liabilities recorded in the Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2019, respectively.

 

 i 

Note 5.

Leases

 

On July 1, 2019, the Company adopted Topic 842, Leases, using the modified retrospective transition approach. The reported results for the three and six months ended December 31, 2019 reflect the application of Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.

 i The Company elected the practical expedient package permitted under the transition approach. As such, the Company did not reassess whether any expired or existing contracts are or contain leases, did not reassess historical lease classification, and did not reassess initial direct costs for any leases that existed prior to July 1, 2019.

As of the date of adoption, the Company recognized operating lease assets and liabilities of approximately $ i  i 80.1 /  million on the Condensed Consolidated Balance Sheet. In addition, we acquired approximately $ i 45 million and $ i 48 million of operating lease assets and liabilities, respectively, through the acquisition of Finisar, which remains preliminary as discussed in Note 3.

 

All existing leases that were classified as capital leases under Topic 840 are classified as finance leases under Topic 842. As of the date of adoption, the Company recognized finance lease assets of $ i 25 million in property, plant and equipment, net, with corresponding finance lease liabilities of $ i 24 million on the Condensed Consolidated Balance Sheet.

 

We determine if an arrangement is a lease at inception and classify it as either finance or operating.

 

Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life. Finance leases are recorded in property, plant and equipment, net, and finance lease liabilities within other current and other non-current liabilities on our Condensed Consolidated Balance Sheet. Finance lease assets are amortized in operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component for lease liabilities included in interest expense and recognized using the effective interest method over the lease term.

 

Operating leases are recorded in other assets and operating lease liabilities, current and non-current on the Company’s Condensed Consolidated Balance Sheet. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.

 

The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to the Company. For the purpose of lease liability measurement, we consider only payments that are fixed and determinable at the time of commencement. Any variable payments that depend on an index or rate are expensed as incurred. We account for non-lease components, such as common area maintenance, as a component of the lease, and include it in the initial measurement of our lease assets and corresponding liabilities. The Company’s lease terms and

 / 

13


 

conditions may include options to extend or terminate. An option is recognized when it is reasonably certain that we will exercise that option.

 

The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to commencement. Our lease assets are tested for impairment in the same manner as long-lived assets used in operations.

 i 

 

The following table presents lease costs, which include short-term leases, lease term, and discount rates ($000):

 

 

Three Months

 

 

 

 

 

 

Six Months

 

 

 

Ended

 

 

 

 

 

 

Ended

 

 

 

December 31, 2019

 

 

 

 

 

 

December 31, 2019

 

Finance Lease Cost

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use Assets

 

$

 i 417

 

 

 

 

 

 

$

 i 833

 

Interest on Lease Liabilities

 

 

 i 334

 

 

 

 

 

 

 

 i 671

 

Total Finance Lease Cost

 

 

 i 751

 

 

 

 

 

 

 

 i 1,505

 

Operating Lease Cost

 

 

 i 11,073

 

 

 

 

 

 

 

 i 17,180

 

Total Lease Cost

 

$

 i 11,824

 

 

 

 

 

 

$

 i 18,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Paid for Amounts Included in the Measurement of Lease Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flows from Finance Leases

 

 

 i 334

 

 

 

 

 

 

 

 i 671

 

Operating Cash Flows from Operating Leases

 

 

 i 10,731

 

 

 

 

 

 

 

 i 16,671

 

Financing Cash Flows from Finance Leases

 

 

 i 247

 

 

 

 

 

 

 

 i 490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average Remaining Lease Term (in Years)

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

12.0

 

 

 

 

 

Operating Leases

 

 

 

 

 

 

6.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average Discount Rate

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

 i 5.6

%

 

 

 

 

Operating Leases

 

 

 

 

 

 

 i 6.0

%

 

 

 

 

 / 

 

 

 

 i 

The following table presents future minimum lease payments, which include short-term leases ($000):

 

 

 

Payments Due By Period

 

 

 

 

 

 

 

Less Than

 

 

1-3

 

 

3-5

 

 

 

 

 

 

 

Total

 

 

1 Year

 

 

Years

 

 

Years

 

 

Thereafter

 

Operating leases

 

$

 i 159,620

 

 

$

 i 35,107

 

 

$

 i 49,305

 

 

$

 i 29,818

 

 

$

 i 45,390

 

Less interest

 

 

 i 37,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease liability

 

$

 i 122,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

$

 i 33,393

 

 

$

 i 2,387

 

 

$

 i 4,972

 

 

$

 i 5,249

 

 

$

 i 20,785

 

Less interest

 

 

 i 9,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease liability

 

$

 i 23,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 / 

 

 

14


 

 i 

Note 6.

Other Investments

The Company holds a  i 93.8% equity investment in a privately-held company (“Equity Investment”), which it acquired for $ i 51.7 million. The Company’s pro-rata share of earnings/(loss) from this investment for the three and six months ended December 31, 2019 was insignificant. The Company’s pro rata share of earnings from this investment for the three and six months ended December 31, 2018 was $ i 0.9 million and $ i 2.0 million, and was recorded in other expense (income), net in the Condensed Consolidated Statement of Earnings (Loss).  

This investment is accounted for under the equity method of accounting.  i The following table summarizes the Company's equity in this nonconsolidated investment:

 

 

 

Interest

 

Ownership % as of

 

 

Equity as of

 

Location

 

Type

 

December 31, 2019

 

 

December 31, 2019 ($000)

 

USA

 

Equity Investment

 

 i 93.8%

 

 

$

 i 57,658

 

 

The Equity Investment has been determined to be a variable interest entity because the Company has an overall  i 93.8% economic position in the investee, comprising a significant portion of its capitalization, but has only a  i 25% voting interest. The Company’s right to receive rewards and obligation to absorb expected losses is disproportionate to its voting interest. The Company is not the primary beneficiary because it does not have the power to direct the activities of the equity investment that most significantly impacts its economic performance. Certain business decisions, including decisions with respect to operating budgets, material capital expenditures, indebtedness, significant acquisitions or dispositions, and strategic decisions, require the approval of owners holding a majority percentage in the Equity Investment.  The Company accounts for its interest as an equity method investment as the Company has the ability to exercise significant influence over operating and financial policies of the Equity Investment.

As of December 31, 2019 and June 30, 2019, the Company’s maximum financial statement exposure related to this Equity Investment was approximately $ i 57.7 million and $ i 57.6 million, respectively, which is included in Investments on the Condensed Consolidated Balance Sheets.

The Company has the right to purchase all of the outstanding interest of each of the minority equity holders, and the minority equity holders have the right to cause the Company to purchase all of their outstanding interests, at any time on or after the third anniversary of the investment, or earlier upon certain events.  

 

 / 
 i 

Note 7.

Inventories

 i 

The components of inventories were as follows ($000):

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Raw materials

 

$

 i 208,364

 

 

$

 i 119,917

 

Work in progress

 

 

 i 307,303

 

 

 

 i 101,091

 

Finished goods

 

 

 i 147,315

 

 

 

 i 75,274

 

 

 

$

 i 662,982

 

 

$

 i 296,282

 

 

 / 
 / 
 i 

Note 8.

Property, Plant and Equipment

 i 

Property, plant and equipment consists of the following ($000):

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Land and improvements

 

$

 i 17,552

 

 

$

 i 9,001

 

Buildings and improvements

 

 

 i 310,398

 

 

 

 i 249,238

 

Machinery and equipment

 

 

 i 1,411,511

 

 

 

 i 739,330

 

Construction in progress

 

 

 i 136,514

 

 

 

 i 71,425

 

Finance lease right-of-use asset

 

 

 i 25,000

 

 

 

-

 

 

 

 

 i 1,900,975

 

 

 

 i 1,068,994

 

Less accumulated depreciation

 

 

( i 553,828

)

 

 

( i 486,204

)

 

 

$

 i 1,347,147

 

 

$

 i 582,790

 

 

 

 / 

15


 

Included in the table above is a building acquired under a finance lease. As of December 31, 2019 and June 30, 2019, the accumulated depreciation of the finance lease right-of-use asset was $ i 5.0 million and $ i 4.2 million, respectively.

 

 

 i 

Note 9.

Goodwill and Other Intangible Assets

Effective July 1, 2019, the Company realigned its organizational structure into two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. All applicable information has been restated to reflect this change.

 i 

Changes in the carrying amount of goodwill were as follows ($000):

 

 

Six Months Ended December 31, 2019

 

 

 

Compound

 

 

Photonic

 

 

 

 

 

 

 

Semiconductors

 

 

Solutions

 

 

Total

 

Balance-beginning of period

 

$

 i 185,721

 

 

$

 i 134,057

 

 

$

 i 319,778

 

Goodwill acquired

 

 

 i 61,085

 

 

 

 i 713,045

 

 

 

 i 774,130

 

Foreign currency translation

 

 

 i 2,482

 

 

 

 i 301

 

 

 

 i 2,783

 

Balance-end of period

 

$

 i 249,288

 

 

$

 i 847,403

 

 

$

 i 1,096,691

 

 / 
 i 

 

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of December 31, 2019 and June 30, 2019 were as follows ($000):

 

 

 

December 31, 2019

 

 

June 30, 2019

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

 i 92,513

 

 

$

( i 43,397

)

 

$

 i 49,116

 

 

$

 i 91,637

 

 

$

( i 39,679

)

 

$

 i 51,958

 

Trade Names

 

 

 i 15,714

 

 

 

( i 1,667

)

 

 

 i 14,047

 

 

 

 i 15,759

 

 

 

( i 1,601

)

 

 

 i 14,158

 

Customer Lists

 

 

 i 133,656

 

 

 

( i 64,355

)

 

 

 i 69,301

 

 

 

 i 132,872

 

 

 

( i 59,664

)

 

 

 i 73,208

 

Other

 

 

 i 830,199

 

 

 

( i 32,890

)

 

 

 i 797,309

 

 

 

 i 1,572

 

 

 

( i 1,572

)

 

 

-

 

Total

 

$

 i 1,072,082

 

 

$

( i 142,309

)

 

$

 i 929,773

 

 

$

 i 241,840

 

 

$

( i 102,516

)

 

$

 i 139,324

 

 

 / 

Other intangible assets primarily include $ i 828.6 million related to the preliminary purchase price allocation of Finisar. This includes preliminary amounts for technology of $ i 615.8 million, customer lists of $ i 125.4 million, in process research and development of $ i 76.0 million, and trade names of $ i 11.4 million. These items will be included in other intangible assets until the purchase price allocation is finalized.

 

As a result of the July 1, 2019 segment realignment, the Company reviewed the recoverability of the carrying value of goodwill at its reporting units. The Company performed a quantitative test 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. The Company did  i not record any impairment of goodwill or long-lived assets, as the quantitative assessment did not indicate deterioration in the fair value of its reporting units.

 

 / 

16


 

 i 

Note 10.

Debt

 i 

The components of debt for the periods indicated were as follows ($000):

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Term A Facility, interest at LIBOR, as defined, plus  i 2.00%

 

$

 i 1,225,488

 

 

$

-

 

Revolving Credit Facility, interest at LIBOR, as defined, plus  i 2.00%

 

 

 i 94,000

 

 

 

-

 

Debt issuance costs, Term A Facility and Revolving Credit Facility

 

 

( i 35,592

)

 

 

-

 

Term B Facility, interest at LIBOR, as defined, plus  i 3.50%

 

 

 i 718,200

 

 

 

-

 

Debt issuance costs, Term B Facility

 

 

( i 27,214

)

 

 

-

 

 i 0.50% convertible senior notes, assumed in the Finisar acquisition

 

 

 i 14,888

 

 

 

-

 

 i  i 0.25 / % convertible senior notes

 

 

 i 345,000

 

 

 

 i 345,000

 

 i 0.25% convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount

 

 

( i 37,313

)

 

 

( i 43,859

)

Term loan, interest at LIBOR, as defined, plus  i 1.75%

 

 

-

 

 

 

 i 45,000

 

Line of credit, interest at LIBOR, as defined, plus  i 1.75%

 

 

-

 

 

 

 i 115,000

 

Credit facility unamortized debt issuance costs

 

 

-

 

 

 

( i 761

)

Yen denominated line of credit, interest at LIBOR, as defined, plus  i 1.75%

 

 

-

 

 

 

 i 2,783

 

Note payable assumed in IPI acquisition

 

 

-

 

 

 

 i 3,834

 

 

 

 

 

 

 

 

 

 

Total debt

 

 

 i 2,297,457

 

 

 

 i 466,997

 

Current portion of long-term debt

 

 

( i 69,250

)

 

 

( i 23,834

)

Long-term debt, less current portion

 

$

 i 2,228,207

 

 

$

 i 443,163

 

 

 / 

New Senior Credit Facilities

On September 24, 2019, in connection with the Finisar acquisition, the Company entered the New Senior Credit Facilities with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.

The New Credit Agreement provides for senior secured financing of $ i 2.425 billion in the aggregate, consisting of

 

(i)

Aggregate principal amount of $ i 1.255 billion for a five-year senior secured first-lien term A loan facility (the “Term A Facility”),

 

(ii)

Aggregate principal amount of $ i 720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”) and

 

(iii)

Aggregate principal amount of $ i 450 million for a five-year senior secured first-lien revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “New Senior Credit Facilities”).

The New Credit Agreement also provides for a letter of credit sub-facility not to exceed $ i 25.0 million and a swing loan sub-facility initially not to exceed $ i 20.0 million.

The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to  i 1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of the Closing Date. Similarly, the Company is obligated to repay the outstanding principal amount of the Term B Facility in quarterly installments equal to  i 0.25% of the initial aggregate principal amount of the Term B Facility, with the remaining outstanding balance due and payable on the seventh anniversary of the Closing Date. The Company is obligated to repay the aggregate principal amount of all outstanding revolving loans made under the Revolving Credit Facility on the fifth anniversary of the Closing Date.

The Company’s obligations under the New Senior Credit Facilities are guaranteed by each of the Company’s existing or future direct and indirect domestic subsidiaries, including Finisar and its domestic subsidiaries (collectively, the “Guarantors”). Borrowings under the New Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and the Guarantors, except that no real property is collateral under the New Senior Credit Facilities.

All amounts outstanding under the New Senior Credit Facilities will become due and payable  i 120 days prior to the maturity of the Company’s currently outstanding  i 0.25% Convertible Senior Notes due  i 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI Notes.

 / 

17


 

The Company voluntarily may prepay, at any time or from time to time, any amounts outstanding under the New Senior Credit Facilities in whole or in part without premium or penalty; except for the Term B Facility, pursuant to which in the event of (a) a repayment made before September 24, 2020, (b) the occurrence of a repricing event, or (c) a change to the lenders, the Company will be subject to a prepayment premium in an amount equal to one percent of: (i) the principal amount of the Term B Facility that is prepaid under an optional or mandatory prepayment due to a repricing event, (ii) the aggregate outstanding principal amount of the Term B Facility resulting from an amendment to the New Credit Agreement, and (iii) the principal amount of the Term B Facility that is mandatorily assigned. The Company may be subject to mandatory prepayment of amounts outstanding under the New Senior Credit Facilities under certain circumstances, including in connection with certain asset sales or other dispositions of property and debt issuances.

The Company also may be required to prepay amounts under the Term B Facility based on the Company’s excess cash flow (as calculated in accordance with the terms of the New Credit Agreement) for the Company’s prior fiscal year beginning with its fiscal year ending June 30, 2020 and the Company’s consolidated secured net leverage ratio (as calculated in accordance with the terms of the New Credit Agreement) as of the end of such fiscal year.

Amounts outstanding under the New Senior Credit Facilities will bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus  i 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus  i 1.00%, in each case as calculated in accordance with the terms of the New Credit Agreement. The applicable interest rate would increase under certain circumstances relating to events of default.  The Company has entered into an interest rate swap contract to hedge its exposure to interest rate risk on its variable rate borrowings under the New Senior Credit Facilities.  Refer to Note 15 for further information regarding this interest rate swap.

The New Credit Agreement contains customary affirmative and negative covenants with respect to the New Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the new Credit Agreement) as of the end of each fiscal quarter of not less than  i 3.00:1.00. The Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the New Credit Agreement) of not greater than (i)  i 5.00 to 1.00 for the first four fiscal quarters after the Closing Date, commencing with the first full fiscal quarter after the Closing Date, (ii)  i 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Closing Date, and (iii)  i 4.00 to 1.00 for each subsequent fiscal quarter. As of December 31, 2019, the Company was in compliance with all financial covenants under the New Credit Agreement.

The Company incurred $ i 69.8 million of debt issuance costs in connection with the New Senior Credit Facilities. The Company evaluated these costs to determine appropriate recognition of expense under ASC 470, to account for debt modification and extinguishment. As a result of the Company’s assessment, $ i 65.8 million have been capitalized in the Condensed Consolidated Balance Sheet.  Debt extinguishment costs of $ i 4.0 million were expensed in other expense (income), net in the Condensed Consolidated Statement of Earnings (Loss) during the six months ended December 31, 2019.  The Company expensed $ i  i 2.9 /  million of capitalized debt issuance costs during the three and six months ended December 31, 2019 in interest expense in the Condensed Consolidated Statement of Earnings (Loss). The capitalized costs are being amortized to interest expense using the effective interest rate method from the issuance date of September 24, 2019, through the end of each facility.   The unamortized discount amounted to $ i 62.8 million as of December 31, 2019 and is being amortized over five and  i seven years, for the Term A Facility and Revolving Credit Facility, and the Term B Facility, respectively.

0.50% Finisar Convertible Notes

Finisar’s outstanding  i 0.50% Convertible Senior Notes due 2036 (the “Finisar Notes”) may be redeemed at any time on or after  i December 22, 2021 in whole or in part at the option of the Company at a redemption price equal to one hundred percent ( i 100%) of the principal amount of such Finisar Notes plus accrued and unpaid interest. Each holder of Finisar Notes also may require Finisar to repurchase all or any portion of such holder’s outstanding Finisar Notes for cash on December 15, 2021, December 15, 2026 and December 15, 2031 at a repurchase price equal to one hundred percent (100%) of the principal amount of such Finisar Notes plus accrued and unpaid interest.  i The Finisar Notes will mature on  i December 15, 2036 / .  i Interest on the Finisar Notes accrues at  i 0.50% per annum, paid  i semi-annually, in arrears, on June 15 and December 15 of each year. / 

In connection with the acquisition of Finisar, the Company, Finisar and the trustee entered into a First Supplemental Indenture, dated as of September 24, 2019 (the “First Supplemental Indenture). The First Supplemental Indenture supplements the base indenture (as supplemented, the “Finisar Indenture), which governs the Finisar Notes. Pursuant to the terms of the First Supplemental Indenture, the Company has fully and unconditionally guaranteed, on a senior unsecured basis, the due and punctual payment and performance of all obligations of Finisar to the holders of the Finisar Notes. The First Supplemental Indenture also provides that the right of holders of

18


 

Finisar Notes to convert Finisar Notes into cash and/or shares of Finisar’s common stock, is changed to a right to convert Finisar Notes into cash and/or shares of the Company’s common stock, subject to the terms of the Finisar Indenture.

Under the terms of the Finisar Indenture, the consummation and effectiveness of the Merger on the Closing Date constituted a Fundamental Change (as defined in the Finisar Indenture) and a Make-Whole Fundamental Change (as defined in the Finisar Indenture). Accordingly, in accordance with the terms of the Finisar Indenture, each holder of Finisar Notes had the right to (i) convert its Finisar Notes into cash and/or shares of Company Common Stock, at Finisar’s option, or (ii) require that Finisar repurchase such holder’s Finisar Notes for an amount in cash equal to one hundred percent ( i 100%) of the principal amount of such Finisar Notes plus accrued and unpaid interest.

Holders of approximately $ i 560.1 million in aggregate principal amount of Finisar Notes exercised the repurchase right. The Company repurchased those Finisar Notes on  i October 23, 2019 for an aggregate consideration of approximately $ i 561.1 million in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed $ i 561.0 million under a delayed draw on its Term Loan A to fund the payment to the holders of Finisar Notes that exercised the repurchase right. As of December 31, 2019, approximately $ i 14.9 million in aggregate principal amount of Finisar Notes remain outstanding.

 

0.25% Convertible Senior Notes

In August 2017, the Company issued and sold $ i 345 million aggregate principal amount of the II-VI Notes in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.

As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the II-VI Notes using the effective interest method.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is  i 21.25 shares of common stock per $ i 1,000 principal amount of II-VI Notes, which is equivalent to an initial conversion price of $ i 47.06 per share of common stock. Throughout the term of the II-VI Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Notes amounted to $ i 246.8 million as of December 31, 2019 and $ i 268.0 million as of June 30, 2019 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended). As of December 31, 2019, the II-VI Notes are not yet convertible based upon the II-VI Notes’ conversion features.  Holders of the II-VI Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.

 i 

The following tables set forth total interest expense recognized related to the II-VI Notes for the three and six months ended December 31, 2019 and 2018:

 

 

 

 

Three Months Ended December 31, 2019

 

 

Six Months Ended December 31, 2019

 

 i 0.25% contractual coupon

 

 

$

 i 221

 

 

$

 i 441

 

Amortization of debt discount and debt issuance costs including initial purchaser discount

 

 

 

 i 3,291

 

 

 

 i 6,546

 

Interest expense

 

 

$

 i 3,512

 

 

$

 i 6,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018

 

 

Six Months Ended December 31, 2018

 

 i 0.25% contractual coupon

 

 

$

 i 221

 

 

$

 i 441

 

Amortization of debt discount and debt issuance costs including initial purchaser discount

 

 

 

 i 3,145

 

 

 

 i 6,255

 

Interest expense

 

 

$

 i 3,366

 

 

$

 i 6,696

 

 / 

 

The effective interest rate on the liability component for both periods presented was  i  i 4.5 / %. The unamortized discount amounted to $ i 32.6 million as of December 31, 2019 and $ i 38.3 million as of June 30, 2019 and is being amortized over  i three years.

 

19


 

Aggregate Availability

The Company had aggregate availability of $ i 356.0 million under its line of credit as of December 31, 2019.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was  i 3.8% and  i 1.7% for the six months ended December 31, 2019 and 2018, respectively.     

 

 

 i 

Note 11.

Income Taxes

The Company’s year-to-date effective income tax rate at December 31, 2019 was an income tax benefit of  i 10.0% compared to an income tax expense of  i 18.2% for the same period in fiscal 2018. The variations between the Company’s effective tax rate and the U.S. statutory rate of  i 21% were primarily due to the impact of the U.S. enacted tax legislation partially offset by research and development incentives in certain jurisdictions. 

U.S. GAAP prescribes the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements which includes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2019 and June 30, 2019, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $ i 74.0 million and $ i 11.5 million, respectively. In conjunction with the acquisition of Finisar, the Company assumed $ i 64.0 million of uncertain tax positions. The Company has classified the uncertain tax positions as noncurrent income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, $ i 70.3 million of the gross unrecognized tax benefits at December 31, 2019 would impact the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision in the Condensed Consolidated Statements of Earnings (Loss). The amount of accrued interest and penalties included in the gross unrecognized income tax benefit was $ i 15.6 million and $ i 1.2 million, at December 31, 2019 and June 30, 2019, respectively. Fiscal years  i 2017 to  i 2020 remain open to examination by the U.S. Internal Revenue Service, fiscal years  i 2015 to  i 2020 remain open to examination by certain state jurisdictions, and fiscal years  i 2009 to  i 2020 remain open to examination by certain foreign taxing jurisdictions.  The Company is currently under examination for certain subsidiary companies in Florida for the years  i 2016 through  i 2018; Philippines for the year  i 2017; Germany for the years  i 2012 through  i 2015; Vietnam for the years  i 2018 through  i 2019; Australia for the years  i 2011 through  i 2014; and India for the year  i 2016. The Company believes its income tax reserves for these tax matters are adequate.

 / 
 i 

Note 12.

Earnings Per Share

 i 

The following table sets forth the computation of earnings per share for the periods indicated. Basic net income per share has been computed using the weighted average number of shares of Common Stock outstanding during the period. Diluted net income per share has been computed using the weighted average number of common shares outstanding during the period plus dilutive potential shares of Common Stock from (1) stock options, performance and restricted shares (under the treasury stock method) and (2) convertible debt (under the If Converted method) outstanding during the period. The Company’s convertible debt calculated under the if-converted method was anti-dilutive for the three and six months ended December 31, 2019 and 2018, and was excluded from the calculation of earnings per share (000 except per share data):

 

 

 / 

20


 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

( i 98,213

)

 

$

 i 28,702

 

 

$

( i 124,211

)

 

$

 i 54,851

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

 i 90,886

 

 

 

 i 63,588

 

 

 

 i 78,428

 

 

 

 i 63,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

( i 1.08

)

 

$

 i 0.45

 

 

$

( i 1.58

)

 

$

 i 0.86

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

( i 98,213

)

 

$

 i 28,702

 

 

$

( i 124,211

)

 

$

 i 54,851

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

 i 90,886

 

 

 

 i 63,588

 

 

 

 i 78,428

 

 

 

 i 63,504

 

Dilutive effect of common stock equivalents

 

 

-

 

 

 

 i 2,085

 

 

 

-

 

 

 

 i 2,412

 

Diluted weighted average common shares

 

 

 i 90,886

 

 

 

 i 65,673

 

 

 

 i 78,428

 

 

 

 i 65,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

$

( i 1.08

)

 

$

 i 0.44

 

 

$

( i 1.58

)

 

$

 i 0.83

 

 

 

 

 

 

 

 i 

The following table presents potential shares of Common Stock excluded from the calculation of diluted net income per share as their effect would have been anti-dilutive (000):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Common stock equivalents

 

 

 i 3,392

 

 

 

 i 138

 

 

 

 i 2,714

 

 

 

 i 125

 

 i 0.25% Convertible Senior Notes due 2022

 

 

 i 7,331

 

 

 

 i 7,331

 

 

 

 i 7,331

 

 

 

 i 7,331

 

 i 0.50% Finisar Convertible Notes

 

 

 i 391

 

 

 

-

 

 

 

 i 502

 

 

 

-

 

Total anti-dilutive shares

 

 

 i 11,114

 

 

 

 i 7,469

 

 

 

 i 10,547

 

 

 

 i 7,456

 

 

 / 
 i 

Note 13.

Segment 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 financial performance.

The Company reports its financial results in the following  i two segments: (i) Compound Semiconductors, and (ii) Photonic Solutions, 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.

On September 24, 2019, the Company completed its acquisition of Finisar. See Note 3, Finisar Acquisition. Through September 30, 2019, the operating results of the Finisar acquisition are reflected in Unallocated and Other.  Finisar results have been included in the Photonic Solutions and Compound Semiconductors segments during the three months ended December 31, 2019.

The accounting policies are consistent across each segment. To the extent possible, the Company’s corporate expenses and assets are allocated to the segments. Unallocated and Other includes eliminating inter-segment sales and transfers, the results of Finisar since the acquisition date through September 30, 2019, and transaction costs related to the Finisar transaction. See Note 3 for additional information.

 / 

21


 

 i 

The following tables summarize selected financial information of the Company’s operations by segment ($000):

 

 

 

Three Months Ended December 31, 2019

 

 

 

Photonic

 

 

Compound

 

 

Unallocated

 

 

 

 

 

 

 

Solutions

 

 

Semiconductors

 

 

& Other

 

 

Total

 

Revenues

 

$

 i 460,393

 

 

$

 i 205,938

 

 

$

-

 

 

$

 i 666,331

 

Inter-segment revenues

 

 

 i 22,190

 

 

 

 i 66,123

 

 

 

( i 88,313

)

 

 

-

 

Operating loss

 

 

( i 60,937

)

 

 

( i 8,835

)

 

 

( i 8,808

)

 

 

( i 78,580

)

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 28,390

)

Other income (expense), net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 487

)

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 9,242

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 98,213

)

Depreciation and amortization

 

 

 i 55,174

 

 

 

 i 26,978

 

 

 

-

 

 

 

 i 82,152

 

Expenditures for property, plant & equipment

 

 

 i 21,313

 

 

 

 i 33,339

 

 

 

-

 

 

 

 i 54,652

 

Segment assets

 

 

 i 3,194,032

 

 

 

 i 2,014,177

 

 

 

-

 

 

 

 i 5,208,209

 

Goodwill

 

 

 i 847,403

 

 

 

 i 249,288

 

 

 

-

 

 

 

 i 1,096,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018

 

 

 

Photonic

 

 

Compound

 

 

Unallocated

 

 

 

 

 

 

 

Solutions

 

 

Semiconductors

 

 

& Other

 

 

Total

 

Revenues

 

$

 i 159,694

 

 

$

 i 183,145

 

 

$

-

 

 

$

 i 342,839

 

Inter-segment revenues

 

 

 i 2,504

 

 

 

 i 17,538

 

 

 

( i 20,041

)

 

 

-

 

Operating income (loss)

 

 

 i 23,087

 

 

 

 i 23,622

 

 

 

( i 7,103

)

 

 

 i 39,606

 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 5,580

)

Other income, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 701

 

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 6,025

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 28,702

 

Depreciation and amortization

 

 

 i 6,462

 

 

 

 i 15,867

 

 

 

-

 

 

 

 i 22,329

 

Expenditures for property, plant & equipment

 

 

 i 11,223

 

 

 

 i 27,246

 

 

 

-

 

 

 

 i 38,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended December 31, 2019

 

 

 

Photonic

 

 

Compound

 

 

Unallocated

 

 

 

 

 

 

 

Solutions

 

 

Semiconductors

 

 

& Other

 

 

Total

 

Revenues

 

$

 i 601,749

 

 

$

 i 382,940

 

 

$

 i 22,051

 

 

$

 i 1,006,740

 

Inter-segment revenues

 

 

 i 24,840

 

 

 

 i 80,056

 

 

 

( i 104,896

)

 

 

-

 

Operating income (loss)

 

 

( i 47,913

)

 

 

 i 17,686

 

 

 

( i 66,827

)

 

 

( i 97,054

)

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 35,358

)

Other income (expense), net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 5,566

)

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 13,766

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 124,211

)

Depreciation and amortization

 

 

 i 61,990

 

 

 

 i 43,367

 

 

 

 i 3,743

 

 

 

 i 109,100

 

Expenditures for property, plant & equipment

 

 

 i 30,702

 

 

 

 i 46,822

 

 

 

 i 2,764

 

 

 

 i 80,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended December 31, 2018

 

 

 

Photonic

 

 

Compound

 

 

Unallocated

 

 

 

 

 

 

 

Solutions

 

 

Semiconductors

 

 

& Other

 

 

Total

 

Revenues

 

$

 i 294,850

 

 

$

 i 362,422

 

 

$

-

 

 

$

 i 657,272

 

Inter-segment revenues

 

 

 i 7,726

 

 

 

 i 34,708

 

 

 

( i 42,434

)

 

 

-

 

Operating income (loss)

 

 

 i 38,999

 

 

 

 i 44,923

 

 

 

( i 7,103

)

 

 

 i 76,819

 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 11,164

)

Other income, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 1,414

 

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

( i 12,218

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 i 54,851

 

Depreciation and amortization

 

 

 i 12,661

 

 

 

 i 31,838

 

 

 

-

 

 

 

 i 44,499

 

Expenditures for property, plant & equipment

 

 

 i 23,274

 

 

 

 i 50,113

 

 

 

-

 

 

 

 i 73,386

 

 

 / 

22


 

 

 

 i 

Note 14.

Share-Based Compensation

The Company’s Board of Directors adopted the II-VI Incorporated 2018 Omnibus Incentive Plan (the “Plan”), which was approved by the Company’s shareholders. The Plan provides for the grant of performance-based cash incentive awards, non-qualified stock options, stock appreciation rights, restricted share awards, restricted share units, deferred share awards, performance share awards 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  i 3,550,000 shares of Common Stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, which requires the recognition of grant-date fair value of share-based compensation in net earnings (loss) and 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.  

Upon consummation of the acquisition, the Company assumed approximately  i 6.6 million restricted stock units previously granted by Finisar under the Amended and Restated Finisar Corporation 2005 Stock Incentive Plan (each an “Assumed RSU”). Each Assumed RSU is subject to substantially the same terms and conditions as applied to the Assumed RSU immediately prior to the consummation of the acquisition, except that the number of shares of the Company’s common stock subject to each Assumed RSU has been adjusted in accordance with the terms of the Merger Agreement. Other than the Assumed RSUs, the Company did not assume any other awards outstanding under the Amended and Restated Finisar Corporation 2005 Stock Incentive Plan (the “Finisar 2005 Plan”). As of the Closing Date, the Company also assumed the unused capacity under the Finisar 2005 Plan.

 i 

Share-based compensation expense for the periods indicated was as follows ($000):

 

 

Three Months Ended

 

 

Six Months Ended

 

December 31,

 

 

2019

 

 

 

2018

 

 

 

2019

 

 

 

2018

 

Stock Options and Cash-Based Stock Appreciation Rights

 

$

 i 2,989

 

 

$

 i 454

 

 

$

 i 4,659

 

 

$

 i 2,782

 

Restricted Share Awards and Cash-Based Restricted Share Unit Awards

 

 

 i 12,871

 

 

 

 i 2,007

 

 

 

 i 25,602

 

 

 

 i 4,799

 

Performance Share Awards and Cash-Based Performance Share Unit Awards

 

 

 i 3,400

 

 

 

 i 2,497

 

 

 

 i 5,159

 

 

 

 i 2,714

 

 

 

$

 i 19,260

 

 

$

 i 4,958

 

 

$

 i 35,420

 

 

$

 i 10,295

 

 

 / 
 i 

Note 15.

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.  

The Company entered into an interest rate swap with notional amount of $ i 1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate of  i 1.52%. The Company receives payments with a floor of  i 0.00%. The interest rate swap agreement has an effective date of  i November 24, 2019, with an expiration date of  i September 24, 2024. The initial notional amount of the interest rate swap is scheduled to decrease to $ i 825 million in July 2022 and will remain at that amount through the expiration date. The Company designated this instrument as a cash flow hedge and deemed the hedge relationship effective at inception of the contract. The interest rate swap is recognized in the Consolidated Balance Sheet within other assets at fair value. Changes in fair value are recorded within other comprehensive income (loss) on the consolidated balance sheet and reclassified into the Consolidated Statement of Earnings (Loss) as interest expense in the period in which the underlying transaction affects earnings.  The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs,

 / 

23


 

including interest rate curves.  The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk.  The interest rate swap is classified as a Level 2 item within the fair value hierarchy.

The Company estimated the fair value of the II-VI Notes and Finisar Notes based on quoted market prices as of the last trading day prior to December 31, 2019; however, the II-VI Notes and Finisar Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the II-VI Notes and Finisar Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the II-VI Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 10. Debt for details on the Company’s debt facilities.  i The fair value and carrying value of the II-VI Notes and Finisar Notes were as follows at December 31, 2019 ($000):

 

 

 

Fair Value

 

 

Carrying Value

 

II-VI Notes

 

$

 i 353,266

 

 

$

 i 307,687

 

Finisar Notes

 

 

 i 13,771

 

 

 

 i 14,888

 

 

 

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 including its lease obligations, excluding the  i 0.25% Convertible Notes and the  i 0.50% Finisar convertible notes are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value.

 

 i 

Note 16.

Share Repurchase Programs

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $ i 50 million of its Common Stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes.  During the three and six months ended December 31, 2019, the Company purchased  i  i 50,000 /  shares of its common stock for $ i  i 1.6 /  million under this program.  Through December 31, 2019, the Company has cumulatively purchased  i 1,416,587 shares of its Common Stock pursuant to the Program for approximately $ i 22.3 million.

 

 / 
 i 

Note 17.

Accumulated Other Comprehensive Income (Loss)

 i 

The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the six months ended December 31, 2019 were as follows ($000):

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Currency

 

 

Interest

 

 

Defined

 

 

Accumulated Other

 

 

 

Translation

 

 

Rate

 

 

Benefit

 

 

Comprehensive

 

 

 

Adjustment

 

 

Swap

 

 

Pension Plan

 

 

Income (Loss)

 

AOCI - June 30, 2019

 

$

( i 15,627

)

 

$

-

 

 

$

( i 8,594

)

 

$

( i 24,221

)

Other comprehensive income before reclassifications

 

 

 i 11,571

 

 

 

 i 3,774

 

 

 

( i 167

)

 

 

 i 15,178

 

Amounts reclassified from AOCI

 

 

-

 

 

 

( i 165

)

 

 

-

 

 

 

( i 165

)

Net current-period other comprehensive income

 

 

 i 11,571

 

 

 

 i 3,609

 

 

 

( i 167

)

 

 

 i 15,013

 

AOCI - December 31, 2019

 

$

( i 4,056

)

 

$

 i 3,609

 

 

$

( i 8,761

)

 

$

( i 9,208

)

 

 / 

24


 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis”), contains forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “intends,” “plans,” “projects” or similar expressions.

Although our management considers these expectations and assumptions to have a reasonable basis, there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to: (i) the failure of any one or more of the assumptions stated above to prove to be correct; (ii) the risks relating to forward-looking statements and other “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019; (iii) the purchasing patterns of customers and end-users; (iv) the timely release of new products, and acceptance of such new products by the market; (v) the introduction of new products by competitors and other competitive responses; (vi) the Company’s ability to assimilate recently acquired businesses, and risks, costs and uncertainties associated with such acquisitions; and/or (vii) the Company’s ability to devise and execute strategies to respond to market conditions. The Company disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or developments, or otherwise.

In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not possible for management to anticipate all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date of this Report. We do not assume any obligation, and do not intend to, update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.

Investors should also be aware that, while the Company does communicate with securities analysts from time to time, such communications are conducted in accordance with applicable securities laws. Investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

Introduction

II-VI Incorporated (“II-VI,” the “Company,” “we,” “us” or “our”), a worldwide leader in engineered materials and opto-electronic components, is a vertically integrated manufacturing company that develops innovative products industrial materials processing, communications, aerospace-and-defense, consumer electronics, semiconductor capital equipment, life sciences and automotive end markets. The Company produces a wide variety of application-specific photonic and electronic materials and components, and deploys them in various forms, including integration with advanced software.

The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products for our end markets. 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 original equipment manufacturers, laser end users, system integrators of high-power lasers, manufacturers of equipment and devices for industrial, optical communications, consumer electronics, security and monitoring applications, U.S. government prime contractors, and various U.S. government agencies.

On September 24, 2019 (the “Closing Date”), the Company completed its acquisition of Finisar Corporation (“Finisar”), a global technology leader for subsystems and components for fiber optic communications. Additional information regarding the Company’s acquisition of Finisar is set forth below and in Note 3. Finisar Acquisition to our unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. Due to timing of the acquisition, the results of Finisar for the three months ended September 30, 2019, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other. Within this quarterly report on Form 10-Q for the three months ended December 31, 2019, the results of Finisar have been allocated to the Photonic Solutions and Compound Semiconductors Segments.

25


 

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America and the Company’s discussion and analysis of its financial condition and results of operations require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K dated August 16, 2019 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. The Company adopted ASU 2016-02, Leases (Topic 842), on July 1, 2019 using the modified retrospective method of adoption. There have been no other changes in significant accounting policies as of December 31, 2019.

New Accounting Standards

See Note 2. Recent Accounting Pronouncements to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Results of Operations ($ in millions, except per share data)

The following tables set forth select items from our Condensed Consolidated Statements of Earnings (Loss) for the three and six months ended December 31, 2019 and 2018:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Revenues

 

Total revenues

 

$

666.3

 

 

 

100.0

%

 

$

342.9

 

 

 

100.0

%

Cost of goods sold

 

 

518.0

 

 

 

77.7

 

 

 

211.3

 

 

 

61.6

 

Gross margin

 

 

148.3

 

 

 

22.3

 

 

 

131.6

 

 

 

38.4

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internal research and development

 

 

107.7

 

 

 

16.2

 

 

 

33.8

 

 

 

9.9

 

Selling, general and administrative

 

 

119.2

 

 

 

17.9

 

 

 

58.1

 

 

 

16.9

 

Interest and other, net

 

 

28.9

 

 

 

4.3

 

 

 

5.0

 

 

 

1.5

 

Earnings (loss) before income tax

 

 

(107.5

)

 

 

(16.1

)

 

 

34.7

 

 

 

10.1

 

Income taxes

 

 

(9.2

)

 

 

(1.4

)

 

 

6.0

 

 

 

1.7

 

Net earnings (loss)

 

$

(98.2

)

 

 

(14.7

%)

 

$

28.7

 

 

 

8.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(1.08

)

 

 

 

 

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Revenues

 

Total revenues

 

$

1,006.7

 

 

 

100.0

%

 

$

657.3

 

 

 

100.0

%

Cost of goods sold

 

 

735.3

 

 

 

73.0

 

 

 

401.9

 

 

 

61.1

 

Gross margin

 

 

271.4

 

 

 

27.0

 

 

 

255.4

 

 

 

38.9

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internal research and development

 

 

143.8

 

 

 

14.3

 

 

 

66.9

 

 

 

10.2

 

Selling, general and administrative

 

 

224.7

 

 

 

22.3

 

 

 

111.7

 

 

 

17.0

 

Interest and other, net

 

 

40.9

 

 

 

4.1

 

 

 

9.7

 

 

 

1.5

 

Earnings (loss) before income tax

 

 

(138.0

)

 

 

(13.7

)

 

 

67.1

 

 

 

10.2

 

Income taxes

 

 

(13.8

)

 

 

(1.4

)

 

 

12.2

 

 

 

1.9

 

Net earnings (loss)

 

$

(124.2

)

 

 

(12.3

%)

 

$

54.9

 

 

 

8.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(1.58

)

 

 

 

 

 

$

0.83

 

 

 

 

 

26


 

 

 

Executive Summary

Net loss for the three months ended December 31, 2019 was $(98.2) million ($(1.08) per share diluted), compared to net earnings of $28.7 million ($0.44 per share diluted) for the same period last fiscal year.  Net loss for the six months ended December 31, 2019 was ($124.2) million ($(1.58) per share diluted), compared to net earnings of $54.9 million or ($0.83 per share diluted).

Net loss was impacted by expenses of $119.9 million and $185.6 million incurred in relation to the September 24, 2019 acquisition of Finisar Corporation during the current three and six months ended December 31, 2019, respectively.  These expenses include transaction expenses such as legal and professional fees as well as expenses related to the fair value adjustments of acquired inventory and intangible assets.

During the three months ended December 31, 2019, these expenses included $0.6 million of severance and related compensation expenses, $80.6 million of expenses associated with fair value adjustments of acquired inventory, $29.1 million of amortization expense associated with fair value adjustments of acquired intangible assets and $9.6 million of other transaction expenses.

During the six months ended December 31, 2019, these expenses included $25.3 million of investment banker fees, $18.9 million of severance and related compensation expenses, $87.7 million of expenses associated with fair value adjustments of acquired inventory, $31.3 million of amortization expense associated with fair value adjustments of acquired intangible assets, $5.6 million of expenses relating to incremental interest expenses and debt extinguishment and $16.8 million of other transaction expenses.

Consolidated

Revenues. Revenues for the three months ended December 31, 2019 increased 94% to $666.3 million, compared to $342.9 million for the same period last fiscal year. Revenues for the six months ended December 31, 2019 increased 53% to $1,006.7 million, compared to $657.3 million for the same period last fiscal year. Finisar contributed $306.6 million and $328.7 million of revenues during the three and six months December 31, 2019.  In addition to the revenues contributed by Finisar, the increase in revenues was driven by increased demand from the Company’s ROADM product line for the optical communications market as well as increased revenues related to the Company’s VCSEL products used in the 3D Sensing market and increased demand from customers in the aerospace and defense markets.

Gross margin. Gross margin for the three months ended December 31, 2019 was $148.3 million, or 22.3% of total revenues, compared to $131.6 million, or 38.4% of total revenues, for the same period last fiscal year. Gross margin for the six months ended December 31, 2019 was $271.4 million, or 27.0% of total revenues, compared to $255.4 million, or 38.9% of total revenues, for the same period last fiscal year. Gross margin was negatively impacted by approximately $80.6 million and $87.7 million of additional cost of goods sold related to the preliminary fair value adjustment of the acquired Finisar inventory for the three and six months ended December 31, 2019, respectively. Absent the above amount, gross margin as a percentage of revenues decreased despite the revenue growth primarily as a result of product mix relating to the Transceiver product line which has a lower gross margin profile than the Company’s historical margins.

Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended December 31, 2019 were $107.7 million, or 16.2% of revenues, compared to $33.8 million, or 9.9% of revenues, for the same period last fiscal year. IR&D expenses for the six months ended December 31, 2019 were $143.8 million, or 14.3% of revenues, compared to $66.9 million, or 10.2% of revenues, for the same period last fiscal year. The increase in IR&D expenses during the current three and six month period was primarily due to the acquisition of Finisar in the first quarter of fiscal 2020, as well as the Company’s continued investment in new products and technologies focused on 5G and other emerging market trends.  

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2019 were $119.2 million, or 17.9% of revenues, compared to $58.1 million, or 16.9% of revenues, for the same period last fiscal year. SG&A expenses for the six months ended December 31, 2019 were $224.7 million, or 22.3% of revenues, compared to $111.7 million, or 17.0% of revenues, for the same period last fiscal year. The increase in SG&A for the current three and six months was primarily the result of transaction costs incurred relating to the acquisition of Finisar as well as the acquired SG&A from the Finisar acquisition.  During the six months ended December 31, 2019, the Company incurred $40.2 million of transaction related expenses.

Interest and other, net. Interest and other, net for the three months ended December 31, 2019 was expense of $28.9 million, compared to expense of $5.0 million for the same period last fiscal year.  Interest and other, net for the six months ended December 31, 2019 was expense of $40.9 million, compared to expense of $9.7 million for the same period last fiscal year.  Included in interest and other, net were interest expense on borrowings, equity earnings from its unconsolidated investments, foreign currency gains and losses, and interest income on excess cash balances.  Interest expense increased $22.8 million and $24.2 million for both the current

27


 

three and six month periods, respectively, due to the higher levels of outstanding debt incurred in conjunction with the acquisition of Finisar.  In addition, the Company expensed $4.0 million of debt extinguishment costs in the six months ended December 31, 2019.

Income taxes. The Company’s year-to-date effective income tax rate at December 31, 2019 was 10.0%, compared to an effective tax rate of 18.2% for the same period last fiscal year. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were primarily due to the impact of the U.S. enacted tax legislation partially offset by research and development incentives in certain jurisdictions.

Segment Reporting

Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from net earnings (loss) 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 13. Segment Reporting, to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s reportable segments and for the reconciliation of the Company’s operating income to net earnings (loss), which is incorporated herein by reference.

Effective July 1, 2019, the Company realigned its composition of its operating segments. The Company realigned its operating segments into two segments, Photonic Solutions and Compound Semiconductors for the purpose of making operational decisions and assessing financial performance. All applicable segment information has been restated to reflect this change.

Compound Semiconductors ($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

% Increase

 

 

Six Months Ended

 

 

% Increase

 

 

 

December 31,

 

 

(Decrease)

 

 

December 31,

 

 

(Decrease)

 

 

 

2019

 

 

2018

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

Revenues

 

$

205.9

 

 

$

183.2

 

 

12%

 

 

$

382.9

 

 

$

362.5

 

 

6%

 

Operating income (loss)

 

$

(8.8

)

 

$

23.6

 

 

(137%)

 

 

$

17.7

 

 

$

44.9

 

 

(61%)

 

 

Revenues for the three months ended December 31, 2019 for Compound Semiconductors increased 12% to $205.9 million, compared to revenues of $183.2 million for the same period last fiscal year. Revenues for the six months ended December 31, 2019 for Compound Semiconductors increased 6% to $382.9 million, compared to revenues of $362.5 million for the same period last fiscal year. The increase in revenues during the three and six months ended December 31, 2019 primarily related to increased VCSEL product shipments addressing the 3D sensing commercial market.  In addition, the segment also experienced increased revenues to customers in the aerospace and defense market.

Operating loss for the three months ended December 31, 2019 decreased 137% to $(8.8) million, compared to operating income of $23.6 million for the same period last fiscal year. Operating income for the six months ended December 31, 2019 decreased 61% to $17.7 million, compared to $44.9 million for the same period last fiscal year. The decrease in operating income during the current three and six month periods compared to the same periods last fiscal year was driven by unabsorbed operating costs incurred at the segment’s Sherman, Texas wafer fabrication facility.  The Company anticipates this facility to begin shipping to customers in the second half of fiscal year 2020.  In addition, the segment incurred approximately $12.4 million and $14.4 million of acquisition related expenses associated with amortization of acquired intangible assets, expensing of the fair value inventory write-up and other related acquisition expenses during the current three and six month periods, respectively.

 

Photonic Solutions ($ in millions)

 

 

Three Months Ended

 

 

% Increase

 

 

Six Months Ended

 

 

% Increase

 

 

 

December 31,

 

 

(Decrease)

 

 

December 31,

 

 

(Decrease)

 

 

 

2019

 

 

2018

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

Revenues

 

$

460.4

 

 

$

159.7

 

 

188%

 

 

$

601.8

 

 

$

294.8

 

 

104%

 

Operating income (loss)

 

$

(60.9

)

 

$

23.1

 

 

(364%)

 

 

$

(47.9

)

 

$

39.0

 

 

(223%)

 

28


 

 

Revenues for the three months ended December 31, 2019 for Photonic Solutions increased 188% to $460.4 million, compared to $159.7 million for the same period last fiscal year. Revenues for the six months ended December 31, 2019 for Photonic Solutions increased 104% to $601.8 million, compared to $294.8 million for the same period last fiscal year. The increase in revenues for the three and six months ended December 31, 2019 compared to the same periods last fiscal year was primarily due to the acquisition of Finisar and the strengthening of demand of our transceiver product line. The segment also has experienced increased demand from customers in the optical communication market for ROADM components.

Operating loss for the three months ended December 31, 2019 decreased 364% to a loss of $(60.9) million, compared to operating income of $23.1 million for the same period last fiscal year. Operating loss for the six months ended December 31, 2019 decreased 223% to a loss of $(47.9) million, compared to operating income of $39.0 million for the same period last fiscal year.  The decrease in operating income during the current three and six month periods compared to the same periods last fiscal year was driven by acquisition related expenses of $103.4 million and $105.5 million related to amortization expense on acquired intangible assets and the expensing of inventory fair market value step-up.

 

Liquidity and Capital Resources

Historically, our primary sources of cash have been from operations, long-term borrowing, and advance funding from customers. Other sources of cash include proceeds received from the exercises of stock options and sale of equity investments and businesses. Our historic uses of cash have been for capital expenditures, investment in research and development, business acquisitions, payments of principal and interest on outstanding debt obligations and payments in satisfaction of employees’ minimum tax obligations. Supplemental information pertaining to our sources and uses of cash for the periods indicated is presented as follows:

 

Sources (uses) of Cash (millions):

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Net cash provided by operating activities

 

$

56.3

 

 

$

88.2

 

Proceeds on long-term borrowings

 

 

2,131.0

 

 

 

35.0

 

Proceeds from exercises of stock options

 

 

3.1

 

 

 

6.2

 

Purchases of businesses

 

 

(1,036.6

)

 

 

(54.2

)

Payments on Finisar Notes

 

 

(560.1

)

 

 

-

 

Debt issuance costs

 

 

(63.5

)

 

 

-

 

Additions to property, plant & equipment

 

 

(80.3

)

 

 

(74.4

)

Payments under prior term loan

 

 

(176.6

)

 

 

-

 

Payments under new credit facility

 

 

(83.3

)

 

 

-

 

Common stock repurchase

 

 

(1.6

)

 

 

-

 

Payments in satisfaction of employees' minimum tax obligations

 

 

(15.0

)

 

 

(6.4

)

Payments on earnout arrangements

 

 

-

 

 

 

(3.5

)

Purchases of equity and other investments

 

 

-

 

 

 

(4.5

)

Effect of exchange rate changes on cash and cash equivalents and other items

 

 

(1.4

)

 

 

(3.2

)

 

Net cash provided by operating activities:

Net cash provided by operating activities was $56.3 million during the current six month period compared to $88.2 million of cash provided by operating activities during the same period last fiscal year.   The lower levels of cash flow from operations during the current six months ended December 31, 2019 were the result of lower earnings generated during the current fiscal year related to acquisition related expenses incurred for the acquisition of Finisar.

Net cash used in investing activities:

Net cash used in investing activities was $1,118.0 million for the six months ended December 31, 2019, compared to net cash used of $133.0 million for the same period last fiscal year. Net cash used in investing activities during the current period primarily included

29


 

$1,036.6 million for cash paid for the acquisition of Finisar, and $80.3 million of cash paid for property, plant and equipment to increase capacity to meet the growing demand for the Company’s product portfolio.

Net cash provided by financing activities:

Net cash provided by financing activities was $1,232.1 million for the six months ended December 31, 2019, compared to net cash provided by financing activities of $31.3 million for the same period last fiscal year. Net cash provided by financing activities during the current fiscal year included net borrowings on long-term debt of $1,311.0 million primarily to fund the acquisition of Finisar, and $3.1 million of cash received from the exercise of stock options.  Net cash provided by financing activities was offset by $63.5 million of debt issuance costs associated with the increased borrowings, $15.0 million of cash payments in satisfaction of employees’ minimum tax obligations from the vesting of equity awards, a $1.6 million payment to repurchase common stock through its share repurchase program and a $1.0 million earn-out payment relating to a prior year acquisition.

 

New Senior Credit Facilities

On September 24, 2019, in connection with the Finisar acquisition, the Company entered into an Amended and Restated Credit Agreement (the “New Credit Agreement”) with Bank of America, N.A., and the other lenders.

The New Credit Agreement provides for senior secured financing of $2.425 billion in the aggregate, consisting of

 

(i)

Aggregate principal amount of $1.255 billion for a five-year senior secured first-lien term A loan facility (the “Term A Facility”),

 

(ii)

Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”) and

 

(iii)

Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “New Senior Credit Facilities”).

The New Credit Agreement also provides for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility initially not to exceed $20 million.

Additional information regarding the New Senior Credit Facilities is set forth in Note 10. Debt to our unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Contractual Obligations

The following table presents information about the Company’s contractual obligations and commitments as of December 31, 2019:

 

 

 

Payments Due By Period

 

 

 

 

 

 

 

Less Than 1

 

 

1-3

 

 

3-5

 

 

More Than 5

 

Contractual Obligations

 

Total

 

 

Year

 

 

Years

 

 

Years

 

 

Years

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations

 

$

2,397,576

 

 

$

69,250

 

 

$

498,388

 

 

 

1,147,738

 

 

$

682,200

 

Interest payments(1)

 

 

461,109

 

 

 

88,098

 

 

 

167,599

 

 

 

144,050

 

 

 

61,362

 

Operating lease obligations, including imputed interest (2)

 

 

159,620

 

 

 

35,107

 

 

 

49,305

 

 

 

29,818

 

 

 

45,390

 

Finance lease obligations, including imputed interest

 

 

33,393

 

 

 

2,387

 

 

 

4,972

 

 

 

5,249

 

 

 

20,785

 

Purchase obligations(3) (4)

 

 

148,942

 

 

 

145,148

 

 

 

3,794

 

 

 

-

 

 

 

-

 

Total

 

$

3,200,639

 

 

$

339,989

 

 

$

724,057

 

 

$

1,326,855

 

 

$

809,738

 

 

(1)

Interest payments represent both variable and fixed rate interest obligations based on the interest rate in place at December 31, 2019 relating to the New Senior Credit Facilities and the Company’s currently outstanding 0.25% Convertible Senior Notes due 2022.  These interest payments do not reflect the impact of the interest rate swap that is used to convert variable interest payments to fixed interest payments.

(2)

Includes an obligation for the use of two parcels of land related to II-VI Performance Metals. The lease obligations extend through 2039 and 2061, 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 composed of open purchase order commitments to vendors for the purchase of supplies and materials.

30


 

(4)

Includes cash earn out opportunities based on certain acquisitions’ achieving agreed-upon financial, operational and technology targets, and the value of the net purchase option for the Company’s equity investment in a privately held company.

 

 

The Company’s gross unrecognized income tax benefit at December 31, 2019 has been excluded from the table above because the Company is not currently able to reasonably estimate the amount by which the liability will increase or decrease over time.

 

 

Item 3.

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 a variety of techniques and derivative financial instruments as part of its overall risk management strategy, which is primarily focused on its exposure in relation to the Japanese Yen, Chinese Renminbi, Swiss Franc, Euro, and the Malaysian Ringgit. 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.

Japanese Yen

The Company enters into foreign currency forward contracts that permit it to sell specified amounts of Japanese Yen expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts provide the Company with an economic hedge in which settlement will occur in future periods, thereby limiting the Company’s exposure. These contracts had a total notional amount of $12.0 million and $17.0 million at December 31, 2019 and June 30, 2019, respectively.

A 10% change in the Yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of $3.9 million to an increase of $4.7 million for the three months ended December 31, 2019 and a decrease of $6.5 million to an increase of $8.0 million for the six months ended December 31, 2019.

Chinese Renminbi

The Company enters into month-to-month forward contracts at varying amounts maturing monthly to limit exposure to the Chinese Renminbi. The Company recorded a loss of $0.8 million and $2.5 million in the Condensed Consolidated Statement of Earnings (Loss) related to these contracts for the three and six months ended December 31, 2019, respectively.

Swiss Franc

The Company enters into month-to-month forward contracts to limit exposure to the Swiss Franc.  The Company recorded a gain of $0.3 million and a loss of $1.2 million in the Condensed Consolidated Statement of Earnings (Loss) related to these contracts for the three and six months ended December 31, 2019, respectively.

Interest Rate Risks

As of December 31, 2019, the Company’s total borrowings include variable rate borrowings, exposing the Company to changes in interest rates. On November 24, 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable interest rate debt by effectively converting it to fixed interest rate debt.  If the Company had not effectively fixed its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $19.7 million and $22.1 million for the three and six months ended December 31, 2019.

 

 

31


 

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s and Chief Executive Officer, and the Company’s Chief Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. 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, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

No changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) were implemented during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

On September 24, 2019, the Company completed its acquisition of Finisar. In conducting its assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020, management intends to exclude Finisar from that assessment, as permitted under SEC rules. The Company is in the process of integrating the historical internal control over financial reporting of Finisar with the rest of the Company. Finisar’s operations are included in the Company’s unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the period from September 24, 2019 to December 31, 2019 and represented 61.3% of the Company’s consolidated total assets as of December 31, 2019 and 46.0% and 32.7% of the Company’s consolidated total revenues for the three and six months ended December 31, 2019, respectively.

 

Other than the foregoing, no changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) were implemented during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

 

 

32


 

Part II – Other Information

Item 1.

LEGAL PROCEEDINGS

The Company and its subsidiaries are involved from time to time in various claims, lawsuits, and regulatory proceedings 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 these legal and regulatory proceedings will not materially affect the Company’s financial condition, liquidity or results of operations.

Item 1A.

RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, including the factors discussed below, carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2019, any of which could materially affect our business, financial condition or future results. Those risk factors are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We face risks related to worldwide health epidemics and other outbreaks.

As a company with international operations, we are exposed to the risk of business and economic disruption related to worldwide health epidemics and other outbreaks, such as the Coronavirus.  Government imposed travel restrictions and local statutory quarantines may result in direct operational and administrative disruptions to our foreign facilities and may also indirectly impact our domestic facilities.  Additionally, our suppliers and customers may be adversely affected by these disruptions, which in turn could negatively impact our sales and operating results.

Item 2.

ISSUER PURCHASES OF EQUITY SECURITIES

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its Common Stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time.  Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. As of December 31, 2019, the Company has cumulatively purchased 1,416,587 shares of its Common Stock pursuant to the Program for approximately $22.3 million. The dollar value of shares that may yet be purchased under the Program is approximately $27.7 million.

The following table sets forth repurchases of our Common Stock during the quarter ended December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Dollar Value of

 

 

 

 

 

 

 

 

 

 

 

Shares Purchased

 

 

Shares That May

 

 

 

 

 

 

 

 

 

 

 

as Part of Publicly

 

 

Yet be Purchased

 

 

 

Total Number of

 

 

Average Price Paid

 

 

Announced Plans or

 

 

Under the Plan or

 

Period

 

Shares Purchased

 

 

Per Share

 

 

Programs

 

 

Program

 

October 1, 2019 to October 31, 2019

 

 

128,212

 

(1)

$

32.64

 

 

 

50,000

 

 

$

27,658,759

 

November 1, 2019 to November 30, 2019

 

 

3,349

 

(1)

$

31.65

 

 

 

-

 

 

$

27,658,759

 

December 1, 2019 to December 31, 2019

 

 

43,718

 

(1)

$

30.10

 

 

 

-

 

 

$

27,658,759

 

Total

 

 

175,279

 

 

$

31.99

 

 

 

50,000

 

 

 

 

 

 

(1)

Represents shares of Common Stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock awards.

 

33


 

Item 6.

EXHIBITS

 

Exhibit

Number

 

Description of Exhibit

 

Reference 

 

 

 

 

 

 

 

 

 

 

10.01

 

Amended and Restated Employment Agreement, effective January 26, 2020, between II-VI Incorporated and Vincent D. Mattera, Jr.

 

Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on January 30, 2020.

 

 

 

 

 

31.01

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

 

 

 

 

 

31.02

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

 

 

 

 

 

32.01

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith.

 

 

 

 

 

32.02

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith.

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

104

 

Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

 

34


 

SIGNATURES

Pursuant to the requirements 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.

 

 

 

II-VI INCORPORATED

 

 

(Registrant)

 

 

 

 

Date: February 10, 2020

 

By:

/s/    Vincent D. Mattera, Jr.

 

 

 

Vincent D. Mattera, Jr

 

 

 

Chief Executive Officer

 

 

 

 

Date: February 10, 2020

 

By:

/s/    Mary Jane Raymond 

 

 

 

Mary Jane Raymond

 

 

 

Chief Financial Officer and Treasurer

 

 

35


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
12/15/36
12/15/31
12/15/26
9/24/24
12/22/21
12/15/21
9/24/20
6/30/2010-K,  424B5,  8-K,  S-3ASR
Filed on:2/10/208-K,  SC 13G/A
2/6/20
1/30/204,  8-K
For Period end:12/31/198-K,  SD
12/15/19
12/1/19
11/30/19
11/24/19
11/1/19
10/31/19
10/23/198-K
10/1/19
9/30/1910-Q
9/24/193,  8-K,  8-K/A
8/16/1910-K,  8-K
7/1/193
6/30/1910-K,  5
12/31/1810-Q,  SD
11/8/1810-Q
9/30/1810-Q
7/1/18
6/30/1810-K
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