2 0 1 4 A N N U A L R E P O R T
Tribute to Dr. Carl J. Johnson
At our Annual Meeting on November 7, 2014, Dr. Carl J. Johnson will be our Chairman for the final time.
Dr. Johnson has determined not to stand for re-election to the Board, setting in motion a planned
succession process for both the Board and management that has been contemplated for some time.
This is a momentous event for a company that started with two men
opened its first global site in Singapore in 1988. Today, II-VI operates
and a few thousand dollars of revenue. Dr. Johnson and the late
in fourteen countries and does business in many different languages.
James E. Hawkey co-founded the Company to provide Cadmium
Telluride (CdTe) materials capable of sustaining the high powers
being expected by carbon-dioxide (CO2) laser developers. They
named the enterprise II-VI referring to Groups II and VI of the Periodic
Table of Elements, the source of the basic materials – Group II (Zn
and Cd) and Group VI (Se and Te). From these materials, the Company
grew to be not only one of the world’s highest-quality infrared optical
materials supplier, but a leader in many aspects of innovative materials
engineering and production.
Equally as important was the personal stamp Dr. Johnson put on
the Company. He helped shape the culture, values, strategic business
direction and technical momentum of II-VI. Under his 40 years of
leadership, II-VI Incorporated grew to almost $700 million in revenues
with 7,000 employees. Several times, II-VI earned the distinction
of being among Business Week’s list of the nation’s Best Small
After his retirement as CEO in 2010, Dr. Johnson and his wife,
Margot, established the II-VI Foundation, whose mission is to
encourage, inspire and enable students to discover and pursue
careers in engineering, science, and mathematics. The Foundation
identifies promising students from kindergarten through graduate
school, providing early-education program support and undergraduate
scholarships. It also provides funding for focused, well-planned
graduate-research programs.
Our Company owes a debt of gratitude to Dr. Johnson for his
leadership, fellowship, and guidance throughout our history.
We wish him well and look forward to honoring his legacy
through the continued growth and success of the Company.
Dr. Johnson is expected to provide consulting services to the
Company and the Board of Directors upon his stepping down as
Companies. The Company was listed on the NASDAQ in 1987 and
Chairman of II-VI.
About II-VI
II-VI Incorporated, a global leader in engineered materials and opto-electronic components is a vertically integrated manufacturing company that
develops innovative products for diversified applications in the industrial, optical communications, military, life sciences, semiconductor equipment,
and consumer markets. Headquartered in Saxonburg, Pennsylvania, with research and development, manufacturing, sales, service, and distribution
facilities worldwide, the Company produces a wide variety of application-specific photonic and electronic materials and components, and deploys
them in various forms including integrated with advanced software to enable our customers.
Financial Summary
For the year ended June 30
($000 except per share data)
Bookings
Revenues from continuing operations
Net earnings from continuing operations
Diluted earnings per share
As of June 30
Total assets
Total shareholders’ equity
Working capital
2014
2013
$ 691,333
$ 683,261
38,316
$
0.60
$
$ 1,071,926
$ 675,043
$ 370,666
$ 521,137
$ 551,075
$ 58,720
0.90
$
$ 863,802
$ 636,108
$ 366,710
Prior periods have been adjusted to present the Company’s PRM tellurium product line on a discontinued operations basis.
700
600
500
400
300
200
100
0
1,000
800
600
400
200
0
683.3
100
107.6
95.5
88.1
516.4
486.6
551.1
333.0
10
11
12
13
14
Net Revenues
($ in millions)
1,071.9
863.8
706.5
647.2
509.0
10
11
12
13
14
Total Assets
($ in millions)
80
60
40
20
0
700
600
500
400
300
200
100
0
72.4
73.5
11
10
13
Cash Flow from Operations
($ in millions)
12
14
675.0
636.1
586.2
521.3
410.0
11
10
13
Total Shareholders’ Equity
($ in millions)
12
14
II-VI Incorporated 1 2014 Annual Report
Shareholder Letter
Dear II-VI Shareholders,
Fiscal 2014 was a year of transformation. Although our financial results fell short of both our
expectations and yours, we have begun the process of transforming II-VI into a company that will
compete across the multiple technology platforms for the foreseeable future with the solid financial
performance and return expected by you, our Shareholders. During the current year, we acquired
Laser Enterprise, Network Solutions and our Pump Laser division in carve-out transactions, providing
us with a semiconductor laser technology platform. These acquisitions add new and significant
capabilities, allowing us to participate in large addressable markets with attractive dynamics, global
growth opportunities, end-market expansions and potentially disruptive technology. We believe
these acquisitions will be a catalyst for a more expansive strategy to drive value.
The performance of these acquisitions in 2014 was lower than expected. We undertook a
significant amount of work to bring them up to II-VI standards, namely:
Completed the cutover to our own ERP systems, ending the reliance on other systems
and other financial and operational processes;
Assumed full control of the China module assembly and test operation;
Negotiated favorable terms with our contract manufacturers and continued to work on
the blue print to move some of the contract manufacturing under our control at Photop;
Initiated cost reduction plans to ensure competitiveness.
We know there is still much work to do. We are committed to realizing the promise of these key
technologies and maximizing the return on investment for these acquisitions.
Our legacy businesses performed well in 2014. As I announced to you in last year’s Shareholder
Letter, we refocused our Pacific Rare Specialty Metals & Chemicals, Inc. (PRM) business to toll
materials under contract and exit the businesses that were subject to commodity pricing. As a
result, PRM achieved net earnings of approximately $2.7 million in the current year compared to
a net loss of over $17.5 million in fiscal year 2013. We also announced in last year’s Letter that we
acquired the remaining 25% equity of HIGHYAG Lasertechnologies, GmbH (HIGHYAG) and are
committed to growing the business to capitalize on the growing demand for one-micron laser
systems. Under our complete ownership, we experienced a 44% increase in customer orders from
the prior year and have relocated our HIGHYAG operations to a new state-of-the-art technology
center and manufacturing facility in Berlin, Germany to address the growing profitable demand.
II-VI Incorporated 2 2014 Annual Report
Our three other acquisitions completed last
fiscal year – M Cubed Technologies, Inc., the
Thin Film business and Interleaver product
line, and LightWorks Optics, Inc. – performed
very well during their first full year inside II-VI.
We are beginning to realize process technology
and cost synergies, and those have contributed
to the revenue and earnings growth achieved
as we capitalize on the benefits of our vertical
integration, and our overall strategy.
As we enter fiscal 2015, we will align II-V to a more “Market-Focused” operating structure. This will
reduce our five operating segments to three, namely: II-VI Laser Solutions, II-VI Photonics and
II-VI Performance Products. We believe this realignment will simplify our organization, derive the
maximum advantage from our vertical and horizontal integration and enable us to integrate and
leverage our acquisitions. We also expect the more streamlined structure will allow us to realize
benefits of synergies, scale, and speed to standardize our processes in order to maximize profitable
returns on the increased investment in research, development, engineering and information systems
that are core to our growth plans.
With the many challenges that lie ahead for II-VI and our customers, we believe we have assembled
a talented and dedicated management team and a motivated global workforce who share a
common vision of the Company’s potential. We look forward to returning to consistently delivering
profitable results that drive shareholder return. On behalf of the Board of Directors, our management
and our employees, we thank you for your continued support and faith in our Company.
Francis J. Kramer
President and Chief Executive Officer
Vincent D. (Chuck) Mattera
Chief Operating Officer
II-VI Incorporated 3 2014 Annual Report
II-VI Business Segments (As of July 1, 2014)
II-VI LASER SOLUTIONS
II-VI INFRARED OPTICS
II-VI HIGHYAG
II-VI LASER ENTERPRISE
II-VI SUWTECH
II-VI LASERTECH
II-VI PHOTONICS
II-VI PHOTOP
II-VI OPTICAL COMMUNICATIONS
Zinc Selenide Material
for CO2 Laser Optics
High-power Semiconductor Laser
980nm Dual Chip Pump
Laser Module
Erbium Doped Fiber Micro Amplifier
for Optical Communications Networks
II-VI PERFORMANCE PRODUCTS
Window Assembly for
Fighter Jet Aircraft
II-VI MARLOW
II-VI M CUBED
II-VI ADVANCED MATERIALS
II-VI OPTICAL SYSTEMS
II-VI PERFORMANCE METALS
Reaction Bonded Silicon Carbide
Water Cooled Mirror for Industrial Lasers
II-VI Incorporated 4 2014 Annual Report
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended June 30, 2014
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to .
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of
incorporation or organization)
375 Saxonburg Boulevard
Saxonburg, PA
(Address of principal executive offices)
25-1214948
(I.R.S. Employer
Identification No.)
16056
(Zip code)
Registrant’s telephone number, including area code: 724-352-4455
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, no par value
Name of Each Exchange on Which Registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes No
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. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at December 31, 2013, was
approximately $940,573,000 based on the closing sale price reported on the Nasdaq Global Select Market. For purposes of this calculation
only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant.
Number of outstanding shares of Common Stock, no par value, at August 20, 2014, was 61,425,392.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2014 Annual Meeting of
Shareholders of II-VI Incorporated, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K (including certain information incorporated herein by reference) contains forward-looking
statements made pursuant to Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified as those that may
predict, forecast, indicate or imply future results, performance or advancements and by forward-looking words such as “expects,”
“anticipates,” “intends,” “plans,” “projects,” “believes,” “estimates” or similar expressions. Forward-looking statements address,
among other things, our expectations, our growth strategies, our efforts to increase bookings, sales and revenues, projections of our
future profitability, results of operations, capital expenditures, our financial condition or other "forward-looking" information and
include statements about revenues, earnings, spending, margins, costs or our actions, plans or strategies.
The forward-looking statements in this Annual Report on Form 10-K involve risks and uncertainties, which could cause actual results,
performance or trends to differ materially from those expressed in the forward-looking statements herein or in previous disclosures. II-
VI Incorporated believes that all forward-looking statements made by it have a reasonable basis, but there can be no assurance that
these expectations, beliefs or projections will actually occur or prove to be correct. Actual results could materially differ from such
statements.
The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual
results, and could cause actual results for fiscal 2015 and beyond to differ materially from those expressed or implied in any forward-
looking statements included in this Annual Report on Form 10-K or otherwise made by our management:
Our ability to successfully integrate and capitalize on newly acquired businesses,
Decline in the operating performance of a business segment resulting in impairment of the segment’s goodwill and
indefinite-lived intangible assets,
Changes in defense spending and cancellation or changes in defense programs or initiatives,
Global economic and political uncertainties,
Dependency on international sales and management of global operations,
Our ability to keep pace with key industry developments,
Our ability to develop and market new products and processes,
We provide products to customers whose industries that historically experience highly cyclical demand,
Our ability to protect our intellectual property,
The future availability and prices of raw materials,
The use of defective or contaminated materials in our products which we may be unable to detect unto deployment by
customers,
Competition in the markets that we serve,
The fluctuation of the price of our Common Stock,
Our ability to attract and retain key personnel,
Changes in tax rates, liabilities or accounting rules,
Provisions in our Articles of Incorporation and By-Laws, which may limit the price investors are willing to pay for our
Impact of commodity prices,
Common Stock,
Potential costs for violations of applicable environmental, health and safety laws and the costs of complying with
governmental regulations,
The impact of natural disasters or other global or regional catastrophic events in our areas of operation, and
Disruption of information and communication technologies, including outages or control breakdowns.
The foregoing and additional risk factors are described in more detail herein under Item 1A. “Risk Factors”. In addition, we operate in
a highly competitive and rapidly changing environment; therefore, new risk factors can arise, and it is not possible for management to
predict 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 Annual Report on Form 10-K speak only as of the date of this Annual Report on
Form 10-K, and we do not assume any obligation to update or revise any forward-looking statements, whether as a result of new
2
information, future events or developments, or otherwise, except as may be required by the securities laws, and we caution you not to
rely on them unduly.
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, and 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.
3
BUSINESS
Item 1.
Introduction
PART I
II-VI Incorporated (“II-VI,” the “Company,” “we,” “us,” or “our”) was incorporated in Pennsylvania in 1971. Our executive offices
are located at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056. Our telephone number is 724-352-4455. Reference to “II-
VI,” the “Company,” “we,” “us,” or “our” in this Annual Report on Form 10-K, unless the context requires otherwise, refers to II-VI
Incorporated and its wholly-owned subsidiaries. The Company’s name is pronounced “Two Six Incorporated.” The majority of our
revenues are attributable to the sale of engineered materials and opto-electronic components for industrial, military and medical laser
applications, optical communications products, compound semiconductor substrate-based products and elements for material
processing and refinement. Reference to “fiscal” or “fiscal year” means our fiscal year ended June 30 for the year referenced.
As of June 30, 2014, the Company consisted of five reportable segments: (i) Infrared Optics; (ii) Near-Infrared Optics; (iii) Military &
Materials; (iv) Advanced Products Group; and (v) Active Optical Products. See below for a more detailed description of each of these
segments. In connection with the acquisitions noted below and a refinement of our business strategy, the Company has, effective July
1, 2014 realigned its organizational structure into three reporting segments for the purpose of making operational decisions and
assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products. The Company
will report financial information (revenue through operating income) for these new reporting segments in fiscal 2015 which should
provide enhanced visibility and transparency into the operations, business drivers and the value of our enterprise. This change in
reporting is to occur on a prospective basis beginning with periods commencing July 1, 2014.
During the fiscal year ended June 30, 2014, the Company completed two acquisitions:
September 12, 2013
November 1, 2013
The Semiconductor Laser business of Oclaro, Inc. (“Oclaro”)
The Fiber Amplifier and Micro-Optics business of Oclaro
The above acquisitions were combined to form the Company’s new Active Optical Products segment for financial reporting purposes.
See Note 2 to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional
information regarding the Company’s acquisitions, which information is incorporated herein by reference.
In August 2013, the Company announced that its subsidiary, Pacific Rare Specialty Metals & Chemicals, Inc. (“PRM”), a business in
the Military & Materials segment, would discontinue its tellurium product line and would downsize its selenium product line to focus
on providing selenium metal to the Company’s Infrared Optics segment, and would maintain production of its rare earth element. The
Company’s goal was to provide a reliable supply of selenium for the Company’s internal needs while significantly decreasing write-
downs and profit volatility associated with minor metal index pricing. Financial and operational data included herein for all periods
presented reflect the presentation of PRM’s tellurium product line as a discontinued operation.
Our Internet address is www.ii-vi.com. Information contained on our website is not part of, and should not be construed as being
incorporated by reference into, this Annual Report on Form 10-K. We post the following reports on our website as soon as reasonably
practical after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”): our Annual
Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports
or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“the Exchange
Act”). In addition, we post our proxy statements on Schedule 14A related to our annual shareholders’ meetings as well as reports filed
by our directors, officers and ten-percent beneficial owners pursuant to Section 16 of the Exchange Act. In addition, all filings are
available via the SEC’s website (www.sec.gov). We also make our corporate governance documents available on our website,
including the Company’s Code of Business Conduct and Ethics, governance guidelines and the charters for various board committees.
All such documents are located on the Investors page of our website and are available free of charge.
Information Regarding Market Segments and Foreign Operations
Financial data regarding our revenues, results of operations, industry segments and international sales for the three years ended
June 30, 2014 are set forth in the Consolidated Statements of Earnings and in Note 12 to the Company’s Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference. We also discuss certain
Risk Factors set forth in Item 1A of this Annual Report on Form 10-K related to our foreign operations which are incorporated herein
by reference.
4
General Description of Business
We develop and manufacture engineered materials and opto-electronic components and products for precision use in industrial, optical
communications, military, semiconductor and life science applications. We use advanced engineered material growth technologies
coupled with proprietary high-precision fabrication, micro-assembly, thin-film coating and electronic integration to enable complex
opto-electronic devices and modules. Our products are supplied to manufacturers and users in a wide variety of markets including
industrial, optical communications, military, semiconductor and life-science, and are deployed in applications that we believe reduce
costs and improve performance or reliability in a variety of contexts, including laser cutting, welding and marking operations; optical
communication products; military-related products; semiconductor products; medical procedures; and cooling and power generation
solutions. A key Company strategy is to develop and manufacture complex materials. We focus on providing critical components to
the heart of our customers’ assembly lines for products such as high-power laser material processing systems, fiber optics and wireless
communication systems, military fire control and missile guidance devices, medical diagnostic systems and industrial, commercial and
consumer thermal management systems.
Our U.S. production operations are located in Pennsylvania, Florida, California, New Jersey, Texas, Mississippi, Massachusetts,
Connecticut, Delaware and New York and our non-U.S. production operations are based in China, Singapore, Vietnam, the
Philippines, Germany, Australia and Switzerland. We also utilize contract manufacturers in Thailand and Malaysia. In addition to
sales offices at most of our manufacturing sites, we have sales and marketing subsidiaries in Hong Kong, Japan, Germany, China,
Switzerland, Belgium, the United Kingdom (“U.K.”) and Italy. Approximately 65% of our revenues for the fiscal year ended June 30,
2014 were generated from sales to customers outside of the U.S.
Our primary products are as follows:
Laser-related products for CO2 lasers, forward-looking infrared systems and high-precision optical elements used to focus
and direct infrared lasers onto target work surfaces. The majority of these laser products require advanced engineered
materials that are internally produced. In addition, the company produces Chemical Vapor Deposition (“CVD”) diamond
substrates, which are used as windows in next generation silicon based lithography tools. These substrates have potential
applications in high-end systems requiring material with the highest thermal conductivity.
Laser-related products for one-micron lasers for cutting, welding, and drilling in automotive, semiconductor and other
material processing applications. We produce tools for laser material processing, including modular laser processing heads
for fiber lasers, yttrium aluminum garnet (“YAG”) lasers and other one-micron laser systems. We also manufacture beam
delivery systems including fiber optic cables and modular beam systems.
Optical and photonics components, optical assemblies and modules for use in optical communication networks and other
diverse consumer and commercial applications. We leverage our expertise in crystal materials, silicon materials, micro-
electro-mechanical systems (“MEMS”), optics and algorithms to design and manufacture a diverse range of customized
optical components and assemblies such as optical transport, amplifier, monitoring and wavelength management devices,
optical routing and switching components, test instruments and equipment, projection display components and laser
devices.
Laser-related products for solid-state lasers, high-precision optical elements and assemblies used to focus and direct laser
beams onto target work surfaces.
Ultra-violet (“UV”) filters used in systems to detect shoulder-launched missiles to help improve the survivability of low-
flying aircraft if attacked. The majority of these laser products require advanced engineered materials and crystals that are
internally produced.
Military optical products and assemblies including advanced optics for intelligence, surveillance and reconnaissance
applications.
A rare earth element via refining and reclamation processes. This product is used for green energy applications.
Thermoelectric modules, thermoelectric systems, power generation modules and power generation systems based on
engineered semiconductor materials that provide reliable and low cost temperature control or power generation capability.
Advanced ceramic materials and precision products addressing the semiconductor, display, industrial and defense markets
in the fields of metal matrix composites and reaction bonded carbides.
SiC substrates which are wide bandgap semiconductor materials that enable fabrication of electronic devices for highly
energy efficient, high-frequency and high-power applications as well as substrates for applications requiring high thermal
conductivity.
5
High-power semiconductor laser components enabling fiber and direct diode laser systems for material processing,
medical, consumer and printing applications. In addition, we manufacture pump lasers for optical amplifiers for both
terrestrial and submarine applications and vertical cavity surface emitting lasers (VCSELs) for optical navigation, optical
interconnects and optical sensing applications.
Erbium doped fiber amplifiers (“EDFAs”) used to boost the brightness of optical signals and offer compact amplification
for ultra long-haul, long-haul and metro networks.
Our Markets
Our market-focused businesses are organized by technology and products. Our businesses are comprised of the following primary
markets:
Design, manufacture and marketing of engineered materials and opto-electronic components for infrared optics for
industrial applications by our II-VI Infrared Optics operations.
Design, manufacture and marketing of customized technology for laser material processing to deliver both low-power and
high-power one-micron laser light for industrial applications by our HIGHYAG operations in our Infrared Optics
segment.
Design, manufacture and marketing of a diverse range of customized optics, optical components and assemblies, and
optical modules for consumer and commercial applications such as fiber optic communications, projection and display
products, lasers, medical equipment and bio-medical instrumentation by our Photop operations in our Near-Infrared
Optics segment.
Design, manufacture and marketing of UV to infrared optical components and high precision optical assemblies, including
micro-fine conductive mesh patterns for intelligence, surveillance, reconnaissance and other military, life science and
commercial laser and imaging applications by our Military operations in our Military & Materials segment.
Refinement, reclamation, and marketing of a rare earth element for a green energy application by our PRM processing and
refinement operations in our Military & Materials segment.
Design, manufacture and marketing of thermoelectric modules and assemblies for cooling, heating and power generation
applications in the defense, telecommunications, medical, consumer and industrial markets by our Marlow Industries, Inc.
(“Marlow”) operations in our Advanced Products Group segment.
Design, manufacture and marketing of advanced ceramic materials and precision products for the semiconductor, display,
industrial and defense markets by our M Cubed business unit in our Advanced Products Group segment.
Design, manufacture and marketing of single crystal SiC substrates and epitaxy for use in the defense and space,
telecommunications, industrial and thermal management markets by our Wide Bandgap Materials Group (“WBG”)
subsidiary in our Advanced Products Group segment.
Design, manufacture and marketing of advanced semiconductor laser diodes for material processing, medical, cosmetic, 3-
D imaging and printing applications by our II-VI Laser Enterprise (“Laser Enterprise”) subsidiary in our Active Optical
Products segment.
Design, manufacture and marketing of 980 nanometer (“nm”) pump laser diodes for high-power, reliable pump sources
for EDFAs in terrestrial and submarine applications by our Laser Enterprise subsidiary in our Active Optical Products
segment.
Design, manufacture and marketing of low-power polarization locked laser diodes for optical mouse and finger navigation
applications by our Laser Enterprise subsidiary in our Active Optical Products segment.
Design, manufacture and marketing of EDFA’s used to compensate for losses in optical fiber and other optical
components and modules in optical transmission systems. The Company offers EDFAs at all levels of functionality from
simple optical modules through full circuit cards which plug directly into our customer’s equipment racks and service the
metro, regional and long-haul optical transmission markets by our II-VI Network Solutions Division (“Network
Solutions”) subsidiary in our Active Optical Products segment.
6
Infrared Optics Market. Increases in the installed worldwide base of laser machines for a variety of laser processing applications have
driven CO2 laser optics component consumption. It is estimated that there are over 73,000 CO2 laser systems currently deployed in the
world. CO2 lasers offer benefits in a wide variety of cutting, welding, drilling, ablation, cladding, heat treating and marking
applications for materials such as steel alloys, non-ferrous metals, plastics, wood, paper, fiberboard, ceramics and composites. Laser
systems enable manufacturers to reduce parts cost and improve quality, as well as improve process precision, speed, throughput,
flexibility, repeatability and automation. Automobile manufacturers, for example, deploy lasers both to cut body components and to
weld those parts together in high-throughput production lines. Manufacturers of motorcycles, lawn mowers and garden tractors cut,
trim, and weld metal parts with lasers to reduce post-processing steps and, therefore, lower overall manufacturing costs. Furniture
manufacturers utilize lasers because of their easily reconfigurable, low-cost prototyping and production capabilities for customer-
specified designs. In high-speed food and pharmaceutical packaging lines, laser marking is used to provide automated product, date
and lot coding on containers. In addition to being installed by original equipment manufacturers (“OEMs”) of laser systems in new
machine builds, our optical components are purchased as replacement parts by end-users of laser machines to maintain proper system
performance. We believe that the current addressable market serviced by our II-VI Infrared Optics operations is approximately $500
million.
Emerging Markets – CVD Diamond and Thermal Management. SiC and CVD Diamond both exhibit very high thermal conductivities
and II-VI Advanced Materials is introducing these products for use in high-end applications in the semiconductor and opto-electronic
markets. CVD Diamond also has applications in the windows, tooling, microwave and radiation detection markets.
One-Micron Laser Market. In many areas of material processing, laser technology has proven to be a better alternative to conventional
production techniques. The precise cut and elegant seam are visible proof of a laser beam’s machining efficiency. Industrial
applications such as welding, drilling and cutting have driven the recent market growth of the one-micron laser systems, and are
demanding increased performance, lower total cost of ownership, ease of use and portability of the one-micron laser systems. One-
micron laser systems require efficient and reliable tools, including modular laser processing heads for fiber lasers, beam delivery
systems including fiber optic cables and modular beam systems. We believe that the current addressable market serviced by our
HIGHYAG operations is approximately $200 million.
Near-Infrared Optics Market. The near-infrared optics market is driven by applications in the optical communications, medical and
life science and industrial markets. The optical communications market is being driven by demand for high-bandwidth communication
capabilities through increasing worldwide usage of the Internet and data services, the growing number of broadband users, mobile
device and cloud computing users, and the greater reliance on high-bandwidth capabilities in our daily lives. High-bandwidth
communication networks are being extended closer to the end user with fiber-to-the-home and other fiber optic networks. Mobile data
traffic also is increasing as smart phones continue to proliferate with increasingly sophisticated audio, photo, video, email and Internet
capabilities, as well as data connection and storage through cloud computing networks. The resulting traffic, in turn, is felt throughout
the network, including the core that depends on optical technology. Medical and life science applications continue to gain traction in
the market and include aesthetic, vision correction, dental, ophthalmic and diagnostic lasers and instruments. Industrial market
segments are addressed by solid state lasers and fiber lasers, which are used in high power applications such as cutting, and lower
power applications such as marking and engraving. These industrial applications are demanding higher performance levels for less
cost, creating competition for other technologies. The near-infrared market also addresses opportunities in the semiconductor
processing, instrumentation, test and measurement and research segments. We believe that the current addressable markets serviced by
our Near-Infrared Optics segment are approximately $1.6 billion.
Military Optics Market. We provide several key assemblies and optical components such as windows, domes, laser rods and optics
and related subassemblies to the military, commercial and medical markets for UV infrared applications in night vision, targeting,
navigation, missile warning, and Homeland Security intelligence, surveillance and reconnaissance (“ISR”) systems. Infrared window
and window assemblies for navigational and targeting systems are deployed on fixed and rotary-wing aircraft, such as the F-35 Joint
Strike Fighter, F-16 fighter jet, Apache Attack Helicopter, unmanned platforms such as the Predator and Reaper Unmanned Aerial
Vehicle (“UAV”) and ground vehicles such as the Abrams M-1 Tank and Bradley Fighting Vehicle. Additionally, multiple fighter
jets, including the F-16, are being equipped with large area sapphire windows, as a key component for the aircraft, providing advanced
targeting and imaging systems. Our ability to develop and manufacture these large area sapphire windows has played a key role in our
ability to provide an even larger suite of sapphire panels, which are a key component of the F-35 Joint Strike Fighter Electro Optical
Targeting System. Infrared domes are used on missiles with infrared guidance systems ranging from small, man-portable designs to
larger designs mounted on helicopters, fixed-wing aircraft and ground vehicles. High-precision domes are an integral component of a
missile’s targeting system, providing efficient tactical capability, while serving as a protective cover to its internal components. The
Company also offers precision optical engineering and manufacturing, with particular efficiency in designing to customer end-item
specifications, assisting with co-engineering designs, and designing for manufacturability. The high precision optical components and
assemblies programs include Deep Impact Comet Flyby HRI & MRI, Lunar Reconnaissance Orbiter, Hellfire II Missile Optics,
Missile launch detection sensor optical assembly, and High Altitude Observatory telescopes among others. In addition to imaging,
many of these systems employ laser designation and range-finding capabilities supported by our YAG material growth and
competency in short wave infrared and visible optics. Turreted systems and mounted targeting pods employ these capabilities in
addition to hand-held soldier systems. Rotary and fixed-wing platforms also use missile warning systems to protect against shoulder
7
fired man-portable missiles. Our competencies in material growth for UV crystals and our optical assembly capabilities provide
significant support to these missile warning systems. A key attribute to several of these systems is the ability to filter electro-magnetic
interference using micro-fine conductive mesh patterns. This technology is also applied to non-optical applications for absorbing and
transmitting energy from the surfaces of aircraft and missiles. Our military optical and non-optical products are sold primarily to U.S.
Government prime contractors and directly to various U.S. Government agencies. Certain products have applications in commercial,
medical and life science markets. We believe the current addressable markets serviced by our Military Optics business is
approximately $1.3 billion.
Materials Processing and Refinement Market. Rare earth elements are used in many electronic and alternative green energy
applications. We believe that the current addressable market serviced by our PRM business for its rare earth element is approximately
$50 million.
Thermoelectric Market. Thermoelectric Modules (“TEMs”) are solid-state semiconductor devices that act as small heat pumps to cool,
heat and temperature stabilize a wide range of materials, components and systems. Conversely, the principles underlying
thermoelectrics allow TEMs to be used as a source of power when subjected to temperature differences. TEMs are more reliable than
alternative cooling solutions that require moving parts and provide more precise temperature control solutions than competing
technologies. TEMs also have many other advantages which have spurred their adoption in a variety of industries and applications.
For example, TEMs provide critical cooling and temperature stabilization solutions in a myriad of defense and space applications,
including infrared cooled and uncooled night vision technologies and thermal reference sources that are deployed in state-of-the-art
weapons, as well as cooling high powered lasers used for range-finding target designation by military personnel. TEMs also allow for
temperature stabilization of telecommunication lasers that generate and amplify optical signals for fiber optics systems.
Thermoelectric-based solutions appear in a variety of medical applications including instrumentation and analytical applications such
as DNA replication, blood analyzers and medical laser equipment. The industrial, commercial and consumer markets provide a variety
of niche applications ranging from desktop refrigerators and wine coolers to gesture recognition technology, semiconductor process
and test equipment. In addition, power generation applications are expanding into fields such as waste heat recovery, heat scavenging
and co-generation. We believe the current addressable markets serviced by our Marlow operations are approximately $300 million.
Metal Matrix Composites and Reaction Bonded Ceramics Market. Metal matrix composites (“MMC”) and reaction bonded ceramics
products are found in applications requiring precision, lightweight, strength, hardness and matched coefficient of thermal expansion.
Each market has its own unique requirements and applications that drive material selection. This is especially true in semiconductor
tool applications that require advanced materials to meet the need for increased tolerance, enhanced thermal stability, faster wafer
transfer speeds, increased yields and reduced stage settling times. The semiconductor markets employ SiC for wafer chucks, light-
wave scanning stages and high temperature, corrosion resistant wafer support systems. Cooled SiC mirrors are used in the illumination
systems of lithography tools. The industrial market uses a variety of ceramic materials for applications requiring chemical inertness or
high temperature tolerance such as in flat panel display capital equipment, and refractory components. The defense market uses
MMCs for protective body armor as well as protection for ground, air and naval resources. We believe the current addressable markets
serviced by our M Cubed operations are approximately $600 million.
Silicon Carbide Substrate and SiC Epitaxy Markets. SiC is a wide bandgap semiconductor material that offers high-temperature, high-
power and high-frequency capabilities as a substrate for applications at the high-performance end of the defense, telecommunication
and industrial markets. SiC has a high number of intrinsic physical and electronic advantages over competing semiconductor materials
such as Silicon and Gallium Arsenide. For example, the high thermal conductivity of SiC enables SiC-based devices to operate at high
power levels and still dissipate the excess heat generated. WBG addresses the SiC substrate and SiC epitaxy markets. SiC based
structures are being developed and deployed for the manufacture of a wide variety of microwave and power switching devices. High-
power, high-frequency SiC-based microwave devices are used in next generation wireless switching telecommunication applications
and in both commercial and military radar applications. SiC-based, high-power, high-speed devices improve the performance,
efficiency and reliability of electrical power transmission and distribution systems (“smart grid”), as well as power conditioning and
switching in power supplies and motor controls in a wide variety of applications including aircraft, hybrid vehicles, industrial,
communications and green energy applications. We believe the current addressable markets serviced by our SiC operations through
our WBG subsidiary are approximately $100 million.
High Powered Laser Diode Market. We market advanced laser technology diodes for material processing, medical, cosmetic, 3-D
imaging and printing applications. We are also exploring other new market opportunities for our high power lasers. We believe the
current addressable markets serviced by our Laser Enterprise high-powered laser diode operations are approximately $300 million.
Vertical Cavity Surface Emitting Laser (VCSELs) Market. We sell low-power polarization locked products for optical mouse and
finger navigation applications. Our market opportunities for VCSEL products are expanding to include optical data interconnectivity
applications. We believe the current addressable markets serviced by our Laser Enterprise VCSEL operations are approximately $400
million.
8
980 nm Pump Laser Diode Market. Our 980 nm pump laser diodes are designed for use as high-power, highly reliable pump sources
for EDFAs in terrestrial access, cross-connect, metro to long haul and undersea (submarine) repeater applications. Single mode high
power uncooled modules are designed for both the single channel and small form factor terrestrial market and also the stringent high
reliability demands of the submarine (subsea) network market. We believe the current addressable markets serviced by our Laser
Enterprise 980 nm pump laser diode operations are approximately $150 million.
Amplifier Market. We market EDFAs which are used to compensate for losses in optical fiber and other optical components and
modules in optical transmission systems. We offer EDFAs at all levels of functionality from simple optical modules through full
circuit cards, which plug directly into our customers’ equipment racks and service the metro, regional and long-haul optical
transmission markets. In some cases, we add additional switching and monitoring functionality to the base amplifier. We believe the
currently addressable markets serviced by our Network Solutions operations are approximately $425 million.
Our Strategy
Our strategy is to build businesses with world-class, engineered materials capabilities at their core. Our materials capabilities include:
Infrared Optics: Zinc Selenide (ZnSe), Zinc Sulfide (ZnS), Zinc Sulfide Multi Spectral (ZnS-MS), and CVD Diamond
Near-Infrared Optics: Yttrium Aluminum Garnet (YAG), Yttrium Lithium Fluoride (YLF), Calcium Fluoride (CaF 2),
Yttrium Vanadate (YVO4), Potassium Titanyl Phosphate (KTP), Barium Borate Oxide (BBO), Terbium Gallium Garnet
(TGG) and Amorphous Silicon (a-Si)
Military Infrared Optics: Germanium (Ge)
Materials Processing and Refinement: Selenium (Se) for internal consumption and a Rare Earth Element
Thermoelectric Modules: Bismuth Telluride (Bi2Te3)
Metal Matrix Composites: MMC, Reaction Bonded Ceramic (RB SiC and RB B4C) and Aluminum Silicon Carbide (Al-
SiC)
SiC Substrates and Epitaxy
Epitaxial growth of Aluminum Indium Gallium Arsenide (AlInGaAs) based semiconductor laser materials.
We manufacture precision parts and components from these and other materials using our expertise in low damage surface processing,
micro-fabrication, thin-film coating and exacting metrology. A substantial portion of our business is based on sales orders with market
leaders, which enable our forward planning and production efficiencies. We intend to continue capitalizing and executing on this
proven model, participating effectively in the growth of the markets discussed above, and continuing our focus on operational
excellence as we execute additional growth initiatives.
Our specific strategies are as follows:
Vertical Integration. By combining the capabilities of our various business segments and operating units, we have created
opportunities for our businesses to address manufacturing opportunities across multiple disciplines and markets. Where
appropriate, we develop and/or acquire technological capabilities in areas such as material refinement, crystal growth,
fabrication, diamond-turning, thin-film coating, metrology and assembly.
Investment in Manufacturing Operations. We strategically invest in our manufacturing operations worldwide including
Asia to increase production capacity, capabilities and cost effectiveness. The majority of our capital expenditures are used
in our manufacturing operations.
Enhance Our Performance and Reputation as a Quality and Customer Service Leader. We are committed to
understanding our customers’ needs and meeting their expectations. We have established ourselves as a consistent, high-
quality supplier of components into our customers’ products. In many cases, we deliver on a just-in-time basis. We
believe our quality and delivery performance enhances our relationships with our customers.
Identify New Products and Markets. We intend to identify new technologies, products and markets to meet evolving
customer requirements for high performance engineered materials. Due to the special properties of the advanced materials
we produce and/or refine, we believe there are numerous applications and markets for such materials.
9
Identify and Complete Strategic Acquisitions and Alliances. We will carefully pursue strategic acquisitions and alliances
with companies whose products or technologies may complement our current products, expand our market opportunities
or create synergies with our current capabilities. We intend to identify acquisition opportunities that accelerate our access
to emerging high-growth segments of the markets we serve and further leverage our competencies and economies of scale.
Balanced Approach to Research and Development. Our research and development program includes both internally and
externally funded research and development expenditures, targeting an overall investment of between 5 and 7 percent of
revenues. We are committed to accepting the right mix of internally and externally funded research that ties closely to our
long-term strategic objectives.
Our Products
The main products for each of our markets are described as follows:
Infrared Optics. We supply a broad line of precision infrared opto-electronic components such as lenses, output couplers, windows,
mirrors and scan-lenses for use in CO2 lasers. Our precision opto-electronic components are used to attenuate the amount of laser
energy, enhance the properties of the laser beam and focus and direct laser beams to a target work surface. The opto-electronic
components include both reflective and transmissive optics and are made from materials such as zinc selenide, zinc sulfide, copper,
silicon, gallium arsenide and germanium. Transmissive optics used with CO2 lasers are predominately made from zinc selenide. We
believe we are the largest manufacturer of zinc selenide in the world. We supply replacement optics to end users of CO2 lasers. Over
time, optics may become contaminated and must be replaced to maintain peak laser operations. This aftermarket portion of our
business continues to grow as laser applications proliferate worldwide and the installed base of serviceable laser systems increases
each year. We estimate that 85% to 90% of our infrared optics sales service this installed base of CO2 laser systems. We serve the
aftermarket via a combination of selling to OEMs and selling directly to system end users. We are also one of the leading producers
of CVD diamond substrates for applications including multi-spectral laser optics, dielectric windows, heat sinks, and other
applications. Diamond is the ultimate material for a wide variety of applications because of its outstanding physical properties,
including extreme hardness and strength, high thermal conductivity, low thermal expansion, excellent dielectric properties, resistance
to chemical attack, and optical transmission over a wide spectral range.
One-Micron Laser Components. Our broad expertise in laser technology, optics, sensor technology and laser applications enables us to
supply a broad array of tools for laser materials processing, including modular laser processing heads for fiber lasers, YAG lasers and
other one-micron laser systems. We also manufacture beam delivery systems including fiber optic cables and modular beam systems.
Near-Infrared Optics. We manufacture products across a broad spectral range in the visible and near-infrared wavelengths. We offer a
wide variety of standard and custom laser gain materials, optics, optical components and optical module assemblies for optical
communications, laser systems, and photonic applications in the medical, life science, industrial, scientific and research and
development markets. Laser gain materials are produced to stringent industry specifications and precisely fabricated to customer
specifications. Key materials and precision optical components for YAG, fiber lasers and other solid-state laser systems are an
important part of our near-infrared optics product offerings. We manufacture lenses, windows, prisms, mirrors, gratings, wave-plates,
and polarizers for visible and near-infrared applications, which are used to control or alter visible or near-infrared energy and its
polarization. In addition, we manufacture specialty coated glass wafers used as optical filters in the life science and optical
communications markets, and coated windows used as debris shields in the industrial and medical laser aftermarkets. We offer fiber
optics, micro optics and photonic crystal parts for optical communications, instrumentation and laser applications, optical components
and modules for optical communication networks, as well as diode pumped solid-state laser devices for optical instruments, display
and biotechnology.
Military Optics. We offer optics and optical sub-assemblies for UV to infrared systems including thermal imaging, night vision, laser
designation, missile warning, targeting and navigation systems. Our product offering is comprised of missile domes, electro-optical
windows and sub-assemblies, imaging lenses, UV filter assemblies, laser cavity optics and prisms and other optical components. Our
precision optical products utilize optical materials such as sapphire, germanium, zinc sulfide, zinc selenide, silicon and spinel. In
addition, our products also include crystalline materials such as calcium fluoride, barium fluoride, YAG and fused silica. As typical
examples our products are currently utilized on the F-35 Joint Strike Fighter, F-16 fighter jet, Apache Attack Helicopter, unmanned
platforms such as the Predator and Reaper UAV and ground vehicles such as the Abrams M-1 Tank and Bradley Fighting Vehicle as
typical examples.
Material Processing and Refinement. Our product offering includes a rare earth element in specific purity levels and forms.
Thermoelectric Modules and Assemblies. We supply a broad array of TEMs and related assemblies to various market segments. In the
defense market, TEMs are used in guidance systems, smart weapons and night vision systems, as well as soldier cooling. TEMs are
also used in products providing temperature stabilization for telecommunication lasers that generate and amplify optical signals for
fiber optic communication systems. TEMs are also used in gesture recognition technology. We also produce and sell a variety of
solutions from thermoelectric components to complete sub-assemblies used in the medical equipment market and other industrial,
10
commercial and personal comfort applications. Thermoelectric modules, used as power generators, are also applied in a range of end-
use applications. We offer single-stage TEMs, micro TEMs, multi-stage TEMs, planar multi-stage TEMs, extended life thermo-
cyclers, thermoelectric thermal reference sources, power generators and thermoelectric assemblies.
Metal Matrix Composites and Reaction Bonded Ceramics. We supply a diverse array of products to several market segments. In the
semiconductor market, reaction bonded SiC is used to produce wafer chucks, electrostatic chucks and wafer/mask stages with high
mechanical precision, and other wafer handling components. In the defense market, we supply next generation personnel armor,
monolithic helicopter seat tiles and vehicle and aviation armor tiles. In the industrial market, we supply wear resistant components,
refractory assemblies for glass production and neutron absorbing plates.
Silicon Carbide Substrates and Epitaxy. Our product offerings are both 6H-SiC (semi-insulating) and 4H-SiC (semi-insulating and
semi-conducting) poly-types and are available in sizes up to 150 mm diameter. SiC substrates are used in wireless infrastructure, radio
frequency (“RF”) electronics, and thermal management applications, while SiC substrates and epitaxy are used in the power
conversion and power switching markets.
High power laser diodes and high volume components. Our semiconductor laser diode products cover a broad wavelength from 750
nm to 1500 nm and varying optical output powers ranges. The laser diode products are available as integrated modules with and
without active cooling, fiber pigtails or assemblies.
Pump Lasers. We supply a broad portfolio of cooled and uncooled pumps, both single and multi-mode designs in single chip and
multi-chip configurations based on our Gallium Arsenide (GaAs) chip technology, facet passivation processes and wafer fab and
module manufacturing capabilities. The single chip designs are predominantly used as low noise pump sources for EDFA covering
gain block, single channel to multi-channel data wavelength-division multiplexing (DWDM), addressing access, cross-connect, metro
and also long haul requirements of the telecom market. Our dual chip pump solutions are designed and able to address the arrayed
amplifier market where 8 or 16 amplification stages are required. Our single mode high power uncooled pump modules address both
the single channel and small form factor terrestrial market and also the stringent high reliability demands of the submarine (subsea)
network market. The latter is a testament to the stability of our chip, module design technology and manufacturing capabilities.
Finally, we are able to address segments of the cable television market with both single mode and uncooled multimode GaAs pump
lasers, typically used for distribution amplification.
Optical Amplifiers. We offer a wide variety of standard, semi-custom and customer amplifiers. These products are offered at varying
levels of sophistication ranging from a simple collection of active and passive components mounted to a printed circuit board
assembly (“PCBA”) through assemblies with large amounts of firmware and software which are either mounted onto our customer’s
PCBA’s controlled amplifier modules or plug directly into our customer’s equipment shelves linecards. We offer EDFA and Raman
amplifiers as well as amplifiers which are combined with wavelength selective switches.
Research, Development and Engineering
Our research and development program includes internally and externally funded research and development expenditures targeting an
overall annual investment of between 5 and 7 percent of product revenues. From time to time, the ratio of externally funded contract
activity to internally funded contract activity varies due to the unevenness of government funded research programs and changes in the
focus of our internally funded research programs. We are committed to having the right mix of internally and externally funded
research that ties closely to our long-term strategic objectives. The Company continues to believe that externally funded research and
development will decrease in the near term due to governmental budget constraints.
We devote significant resources to research, development and engineering programs directed at the continuous improvement of our
existing products and processes and to the timely development of new technologies, materials and products. We believe that our
research, development and engineering activities are essential to our ability to establish and maintain a leadership position in each of
the markets we serve. As of June 30, 2014, we employed 1,035 people in research, development and engineering functions, 553 of
whom are engineers or scientists. In addition, certain manufacturing personnel support or participate in our research and development
efforts on an ongoing basis. We believe this interaction between the development and manufacturing functions enhances the direction
of our projects, reduces costs and accelerates technology transfers.
During the fiscal year ended June 30, 2014, we focused our research and development investments in the following areas:
Silicon Carbide Technology: SiC substrate and epitaxy technology development efforts continued to move forward, with
emphasis in the areas of defect density reduction, substrate fabrication, surface polishing, diameter expansion and cost
reduction. In fiscal year 2014, we continued work on a program funded by the Air Force Research Laboratory for
development and manufacturing optimization of 100mm and 150mm 4H SiC materials for high power switching
applications and RF applications. Through these efforts, we have become one of the leading suppliers of high quality
150mm SiC material. Our research and development efforts have been both internally and externally funded.
11
CVD Diamond Technology: The Company continues to develop CVD synthetic diamond materials for various optical
applications, including Extreme Ultra-Violet (“EUV”) lithography. The Company’s efforts are focused on improving
performance and quality, reducing cost and broadening our product portfolio beyond infrared window applications. Our
research and development efforts in this area have been internally funded.
Photonics Design: We have ongoing efforts to design, refine and improve our photonic crystal materials, precision optical
and micro-optical parts, passive and active optical components and modules, components for fiber lasers and laser devices
for instrumentation and display. Our research and development efforts in this area have been internally funded.
Micro-Optics Manufacturing: Systems are driving towards smaller, more compact platforms and packages which are also
reducing the size of the optical components that support these systems. The Company invests in equipment to manufacture
substrates from 2mm-15mm using high-volume, computer-controlled manufacturing processes. We continued to support
contract efforts funded by the Army Aviation and Missile Research, Development and Engineering Center to develop a
deterministic process for manufacturing optics, which have only been successfully completed through laborious hand-
polishing processes to date. Our research and development efforts in this area have been both internally and externally
funded.
Thermoelectric Materials and Devices: We continued to develop the industry-leading Bi2Te3 Micro-Alloyed Materials
(“MAM”) for thermoelectric cooling applications. Enabled by the thermal performance and fine grain microstructure of
MAM, our research and development has focused on achieving levels of miniaturization and watt density beyond the
current reach of TEMs based on single crystal and polycrystalline materials produced by standard crystal growth
techniques. In addition, we are developing capabilities in thermoelectric power generation materials that, combined with
our intellectual property position, will allow us to bring to market new thermoelectric compounds. Our research and
development efforts in this area have been both internally and externally funded.
Metal Matrix Composites and Reaction Bonded Ceramics: We continued to invest in new product development efforts to
support OEMs in connection with new product development relating to 300mm and 450mm diameter for the lithography
systems for the semiconductor industry. Our research and development efforts in this area have been internally funded.
High power laser diodes and high volume components: Our engineering efforts focused on increasing fiber coupled
optical output power of our multi-emitter modules. The Company is focusing on the development of high power VCSELs
for applications in consumer devices as well as on the development of next generation high speed VCSELs for use in
optical interconnects. Our research and development efforts in this area have been internally funded.
Pump Lasers: We are investing in next generation GaAs pump chip and module for both terrestrial high power and
undersea improved reliability and performance. We are investing to develop an indium phosphide growth and processing
capability in order to address the 14xx Raman market with performance competitive design elements brought across from
the high volume 980nm pump capability. Our research and development efforts in this area have been internally funded.
Optical Amplifiers: We continue to invest in broadening the range of semi-custom and custom amplifiers to service our
tier 1 customers. We have invested in increasing the capability of our Raman amplifier solutions and in associated
monitoring techniques which will enhance the ease of use and functionality of these products. Our research and
development efforts in this area have been internally funded.
The development of our products and manufacturing processes is largely based on proprietary technical know-how and expertise. We
rely on a combination of contract provisions, trade secret laws, invention disclosures and patents to protect our proprietary rights. We
have entered into selective intellectual property licensing agreements. When faced with potential infringement of our proprietary
information, we have in the past and will continue to assert and vigorously protect our intellectual property rights.
Internally funded research and development expenditures were $42.5 million, $22.7 million and $21.4 million for the fiscal years
ended June 30, 2014, 2013 and 2012, respectively. For these same periods, externally funded research and development expenditures
were $3.5 million, $4.5 million and $7.0 million, respectively.
Marketing and Sales
We market our products through a direct sales force and through representatives and distributors around the world. Our market
strategy is focused on understanding our customers’ requirements and building market awareness and acceptance of our products.
New products are continually being produced and sold to our new and established customers in all markets.
12
Each of our subsidiaries is responsible for its own worldwide marketing and sales functions, although certain subsidiaries sell more
than one product line. However, there is significant cooperation and coordination between our subsidiaries to utilize the most efficient
and appropriate marketing channel when addressing the diverse applications within markets.
Our sales forces develop effective communications with our OEM and end-user customers worldwide. Products are actively marketed
through targeted mailings, telemarketing, select advertising and attendance at trade shows and customer partnerships. Our sales force
includes a highly-trained team of application engineers to assist customers in designing, testing and qualifying our parts as key
components of our customers’ systems. As of June 30, 2014, we employed 289 individuals in sales, marketing and support.
We do business with a number of customers in the defense industry, who in turn generally contract with a governmental entity,
typically a U.S. governmental agency. Most governmental programs are subject to funding approval and can be modified or
terminated without warning by a legislative or administrative body. The discussion set forth in Item 1A of this Annual Report on Form
10-K related to our exposure to government markets is incorporated herein by reference.
Manufacturing Technology and Processes
As noted in the “Our Strategy” section, many of the products we produce depend on our ability to manufacture and refine technically
challenging materials and components. The ability to produce, process and refine these difficult materials and to control their quality
and yields is an expertise of the Company as this is critical to the performance of our customers’ instruments and systems. In the
markets we serve, there are a limited number of suppliers of many of the components we manufacture and there are very few industry-
standard products.
Our network of worldwide manufacturing sites allows us to manufacture our products in regions that provide cost-effective
advantages and enable proximity to our customers. We employ numerous advanced manufacturing technologies and systems at our
manufacturing facilities. These include automated Computer Numeric Control optical fabrication, high throughput thin-film coaters,
micro-precision metrology and custom-engineered automated furnace controls for the crystal growth processes. Manufacturing
products for use across the electro-magnetic spectrum requires the capability to repeatedly produce products with high yields to atomic
tolerances. We embody a technology and quality mindset that gives our customers the confidence to utilize our products on a just-in-
time basis straight into the heart of their production lines.
Export and Import Compliance
We are required to comply with various export/import control and economic sanction laws, including:
The International Traffic in Arms Regulations (“ITAR”) administered by the U.S. Department of State, Directorate of
Defense Trade Controls, which, among other things, imposes license requirements on the export from the U.S. of defense
articles and defense services which are items specifically designed or adapted for a military application and/or listed on
the U.S. Munitions List;
The Export Administration Regulations (“EAR”) administered by the U.S. Department of Commerce, Bureau of Industry
and Security, which, among other things, imposes licensing requirements on the export or re-export of certain dual-use
goods, technology and software which are items that potentially have both commercial and military applications;
The regulations administered by the U.S. Department of Treasury, Office of Foreign Assets Control, which implement
economic sanctions imposed against designated countries, governments and persons based on U.S. foreign policy and
national security considerations; and
The import regulatory activities of the U.S. Customs and Border Protection.
Foreign governments have also implemented similar export and import control regulations, which may affect our operations or
transactions subject to their jurisdiction. The discussion set forth in Item 1A of this Annual Report Form on Form 10-K related to our
import and export compliance is incorporated herein by reference.
Sources of Supply
The major raw materials we use include zinc, selenium, zinc selenide, zinc sulfide, hydrogen selenide, hydrogen sulfide, tellurium,
yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, gallium arsenide, copper,
germanium, molybdenum, quartz, optical glass, diamond, and other materials. Excluding our own production, there are more than two
external suppliers for all of the above materials except for zinc selenide, zinc sulfide, hydrogen selenide and thorium fluoride, for
which there is only one proven source of supply outside of the Company’s capabilities. For many materials, we have entered into
purchase arrangements whereby suppliers provide discounts for annual volume purchases in excess of specified amounts.
13
The continued high-quality of and access to these materials is critical to the stability and predictability of our manufacturing yields.
We conduct testing of materials at the onset of the production process. Additional research and capital investment may be needed to
better define future starting material specifications. We have not experienced significant production delays due to shortages of
materials. However, we do occasionally experience problems associated with vendor-supplied materials not meeting contract
specifications for quality or purity. As discussed in greater detail in Item 1A of this Annual Report on Form 10-K, significant failure
of our suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a materially adverse
effect on our results of our operations.
Customers
Our existing customer base for infrared optics, including our laser component products, consists of over 7,000 customers worldwide.
The main groups of customers for these products are as follows:
OEM and system integrators of industrial, medical and military laser systems. Representative customers include Trumpf,
Inc., Bystronic, Inc. and Rofin-Sinar Technologies, Inc.
Laser end users who require replacement optics for their existing laser systems. Representative customers include
Caterpillar, Inc. and Honda of America Mfg., Inc.
Military, aerospace and commercial customers who require products for use in advanced targeting, navigation and
surveillance. Representative customers include Lockheed Martin Corporation and Northrop Grumman Corporation.
For our one-micron laser products, our customers are automotive manufacturers, laser manufacturers and system integrators.
Representative customers include Volkswagen AG and Laserline GmbH.
For our near-infrared optics, components and modules products our customers are worldwide network system and sub-system
providers of telecommunications, data communications and cable TV, as well as global manufacturers of commercial and consumer
products used in a wide array of instruments, fiber lasers, display and projection devices. Representative customers include Huawei
Technologies, Co., Ltd., Corning Incorporated, JDS Uniphase Corporation and Google, Inc.
For our military optics products, our customers are manufacturers of equipment and devices for aerospace, defense, medical and
commercial markets. Representative customers include Lockheed Martin Corporation, Raytheon Company, bio-medical system
providers and various U.S. Government agencies.
For our thermoelectric products, our customers manufacture and develop equipment and devices for defense, space,
telecommunications, medical, industrial, automotive, gesture recognition and commercial markets. Representative customers include
Bio-Rad Laboratories, Inc., Raytheon Company and Flextronics International Ltd.
The main group of customers for our MMCs and reaction bonded ceramics products are manufacturers and developers of integrated
circuit capital equipment for the semiconductor industry. Representative customers include ASML Holding NV, Nikon Corporation,
and KLA-Tencor. Customers also include manufacturers and developers of products and components for various defense and
industrial markets including BAE Systems and Corning Incorporated.
For our SiC products, our customers are manufacturers and developers of equipment and devices for high-power RF electronics and
high-power and high-voltage switching and power conversion systems for both the U.S. Department of Defense and commercial
applications.
For our active optical products, our customers are manufacturers of industrial laser components and optical communication
equipment. Representative customers include Laserline GmbH, Huawei Technologies, Co., Ltd. and Cisco Systems, Inc.
Competition
We believe we are a global leader in many of our product families. We compete on the basis of products with a high degree of
technical specifications, quality, delivery time, technical support and pricing. Management believes that we compete favorably with
respect to these factors and that our vertical integration, manufacturing facilities and equipment, experienced technical and
manufacturing employees and worldwide marketing and distribution channels provide us with competitive advantages.
14
We have a number of present and potential competitors that are larger than us and have greater financial, selling, marketing and/or
technical resources. Competitors producing infrared laser optics include Sumitomo Electric Industries, Ltd. and Newport Corporation.
Competing producers of automated equipment and laser material processing tools to deliver high power one-micron laser systems
include Optoskand AB and Precitec, Inc. Competing producers of infrared optics for military applications include DRS Technologies,
Inc., UTC Aerospace (formerly Goodrich Corporation) and in-house fabrication and thin-film coating capabilities of major military
customers. Competing producers of TEMs include Komatsu, Ltd., Laird Technologies and Ferrotec Corporation. Competing
producers of MMCs and reaction bonded ceramics products include Berliner Glass, and Coorstek. Competing producers of single
crystal SiC substrates include Cree, Inc., Dow Corning Corporation, Nippon Steel and SiCrystal AG. Competing producers of
semiconductor laser diodes for the industrial and consumer markets include JDSU, Finisar, Avago, Sumitomo, Philips, and Osram.
Competing producers of optical component and optics products include O-Net Communications, OPLINK Communication and
Axsun. Competing producers of optical amplifier modules include JDSU, Finisar, Accelink and O-Net Communications.
In addition to competitors who manufacture products similar to those we produce, there are other technologies and products available
that may compete with our technologies and products.
Bookings and Backlog
We define our bookings as customer orders received that are expected to be converted to revenues over the next twelve months. For
long-term customer orders, to address the inherent uncertainty of orders that extend far into the future, the Company records only
those orders which are expected to be converted into revenues within twelve months from the end of the reporting period. For the year
ended June 30, 2014, our bookings were approximately $691 million compared to bookings of approximately $521 million for the
year ended June 30, 2013.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. Bookings are adjusted
if changes in customer demands or production schedules move a delivery beyond twelve months. As of June 30, 2014, our backlog
was approximately $220 million, compared to approximately $184 million at June 30, 2013.
Employees
As of June 30, 2014, we employed 6,796 persons worldwide. Of these employees, 1,035 were engaged in research, development and
engineering, 4,831 in direct production (of which 1,114 are employees of Photop in China who work under contract manufacturing
arrangements for customers of the Company) and the remaining balance of the Company’s employees work in sales and marketing,
administration, finance and support services. Our production staff includes highly skilled optical craftsmen. We have a long-standing
practice of encouraging active employee participation in areas of operations management. We believe our relations with our
employees are good. We reward our employees with incentive compensation based on achievement of performance goals. There are
126 employees located in the United States and the Philippines who are covered under collective bargaining agreements. The
Company’s collective bargaining agreement in the Philippines expired in June 2014 and the Company is currently in negotiations to
renew the agreement. The collective bargaining agreement covering certain U.S. based employees expires August 2015.
Trade Secrets, Patents and Trademarks
We rely on our trade secrets, proprietary know-how, invention disclosures and patents to help us develop and maintain our
competitive position. We aggressively pursue process and product patents in certain areas of our businesses. We have confidentiality
and noncompetition agreements with certain personnel. We require that all U.S. employees sign a confidentiality and noncompetition
agreement upon their commencement of employment with us.
The processes and specialized equipment utilized in crystal growth, infrared materials fabrication and infrared optical coatings as
developed by us are complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent
similar technology or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a variety
of infrared optical configurations and processes, and others could obtain patents covering technology similar to our technology. We
may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain such licenses, if
required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted which may adversely
affect our results of operations. In addition, our research and development contracts with agencies of the U.S. Government present a
risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.
15
The following is a representative listing of our currently held registered tradenames and trademarks:
“II-VI Incorporated(TM)” tradename
“Infraready Optics(TM)” tradename
“MP-5(TM)” tradename
“Marlow Industries, Inc. (TM)” tradename and trademark
“Photop Technologies, Inc. (TM)” tradename
“VLOC Incorporated(TM)” trademark
“Aegis Lightwave, Inc.(TM)” trademark
“M Cubed Technologies, Inc. (TM)” tradename
“LightWorks Optical Systems (TM)” tradename
Item 1A. RISK FACTORS
The Company cautions investors that its performance and, therefore, any forward-looking statement, is subject to risks and
uncertainties. The following material risk factors may cause the Company’s future results to differ materially from those projected in
any forward-looking statement. You should carefully consider these factors, as well as the other information contained in this Annual
Report on Form 10-K when evaluating an investment in our securities.
We May Expand Product Lines and Markets by Acquiring Other Businesses, Which May Adversely Affect our Results and
Affect the Value of our Stock Following Such Acquisitions
Our business strategy includes expanding our product lines and markets through both internal product development and acquisitions.
We have completed various acquisitions that we believe will be beneficial to the Company and our shareholders. The success of these
acquisitions will depend, in part, on our ability to realize the anticipated benefits from integrating and successfully running the
businesses acquired. The strategic acquisition of businesses, products or technologies complementary to our business involves
numerous potential risks, including difficulties in the assimilation of the acquired business and products, uncertainties associated with
operating in new markets, working with new customers and the potential loss of the acquired company’s key personnel. In addition,
acquired businesses may experience operating losses as of, and subsequent to, the acquisition date. Further, we recently significantly
increased our long-term debt to finance these acquisitions, the costs of which (in terms of interest expense and similar debt service
costs), must be weighed against the potential benefits of such acquisitions. The anticipated benefits and cost savings of an acquisition
may not be realized fully, or at all, or may take longer to realize than expected, and as a result our results of operations, financial
position, and cash flow may be adversely affected.
Further, any future business acquisitions completed by us may result in potentially dilutive issuances of our equity securities, the
incurrence of debt, contingent liabilities and amortization expense related to intangible assets acquired, any of which could have a
material adverse effect on our business, results of operations or financial condition.
The following information relates to acquisitions made during the periods presented in this Annual Report on Form 10-K.
Acquired Party
Semiconductor Laser business of Oclaro ..............................
Fiber Amplifier and Micro-Optics business of Oclaro ..........
M Cubed Technologies, Inc. .................................................
The Thin-Film Filter business and Interleaver Product Line
of Oclaro...........................................................................
LightWorks Optics, Inc. ........................................................
Aegis Lightwave, Inc. ...........................................................
Year Acquired
Business Segments
Fiscal 2014 Active Optical Products
Fiscal 2014 Active Optical Products
Fiscal 2013 Advanced Products Group
Fiscal 2013
Fiscal 2013
Fiscal 2012
Near-Infrared Optics
Military & Materials
Near-Infrared Optics
Percentage
Ownership
as of
June 30, 2014
100 %
100 %
100 %
100 %
100 %
100 %
Declines in the Operating Performance of One of Our Business Segments Could Result in an Impairment of the Segment’s
Goodwill and Indefinite-Lived Intangible Assets
As of June 30, 2014, we had goodwill and indefinite-lived intangible assets of approximately $196.1 million and $16.4 million,
respectively, on our Consolidated Balance Sheets. In accordance with applicable accounting guidance, we test our goodwill and
indefinite-lived intangible assets for impairment on an annual basis or when an indication of possible impairment exists, to determine
whether the carrying value of our assets is still supported by the fair value of the underlying business. To the extent that it is not, we
are required to record an impairment charge to reduce the asset to fair value. A decline in the operating performance of any of our
16
business segments could result in an impairment charge which could have a material adverse effect on our results of operations or
financial condition.
Continued U.S. Budget Deficits Could Result in Significant Defense Spending Cuts and/or Reductions in Defense Programs,
which Could Adversely Impact the Company
Specific to the military business within our Infrared Optics, Military & Materials and Advanced Products Group segments, sales to
customers in the defense industry totaled between 15% and 20% of revenues in the fiscal year ended June 30, 2014. These customers
in turn generally contract with a governmental entity, typically a U.S. governmental agency. Future reductions in defense spending
could result from the current or future economic or political environment, such as the recent sequestration of the defense budget,
which could result in reductions in demand for defense-related products that we produce. Further, changes to existing defense
procurement laws and regulations could adversely affect our results of operations. Most governmental programs are subject to
funding approval and can be modified or terminated with no warning upon the determination of a legislative or administrative body.
The loss of or failure to obtain certain contracts or the loss of a major government customer could have a material adverse effect on
our business, results of operations or financial condition.
General Global Economic Conditions May Adversely Affect Our Business, Operating Results and Financial Condition
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the
level of growth or contraction for the global economy as a whole. It is even more difficult to estimate growth or contraction in various
parts, sectors and regions of the economy, including industrial, military, optical communications, telecommunications, semiconductor,
and medical markets in which we participate. Because all components of our forecasting are dependent upon estimates of growth or
contraction in the markets we serve and demand for our products, the prevailing global economic uncertainties render estimates of
future income and expenditures very difficult to make. In addition, changes in general economic conditions may affect industries in
which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’ products due
to economic downturn, and such conditions could have a material adverse effect on demand for our customers’ products, and in turn,
on demand for our products. Adverse changes may occur in the future as a result of declining or flat global or regional economic
conditions, fluctuations in currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment,
decline in stock markets, contraction of credit availability or other factors affecting economic conditions generally. For example,
factors that may affect our operating results include disruptions to the credit and financial markets in the U.S., Europe and elsewhere;
adverse effects of ongoing stagnation in the European economy; contractions or limited growth in consumer spending or consumer
credit; and adverse economic conditions that may be specific to the Internet, e-commerce and payments industries. These changes may
negatively affect sales of products, increase exposure to losses from bad debt and commodity prices, increase the cost and availability
of financing and increase costs associated with manufacturing and distributing products. Any economic downturn could have a
material adverse effect on our business, results of operations or financial condition.
Our Future Success Depends on International Sales and Management of Global Operations
Sales to customers in countries other than the U.S. accounted for approximately 65%, 56% and 58% of revenues during the years
ended June 30, 2014, 2013 and 2012, respectively. We anticipate that international sales will continue to account for a significant
portion of our revenues for the foreseeable future. In addition, we manufacture products in China, Singapore, Vietnam, the
Philippines, Germany, Australia and Switzerland, and through contract manufacturers in Thailand and Malaysia, and maintain direct
sales offices in Hong Kong, Japan, Germany, Switzerland, the U.K., Belgium, China, Singapore and Italy. Sales and operations
outside of the U.S. are subject to certain inherent risks, including fluctuations in the value of the U.S. dollar relative to foreign
currencies, the global economic uncertainties, tariffs, quotas, taxes and other market barriers, political and economic instability,
restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and
managing international operations and potentially adverse tax consequences. There can be no assurance that any of these factors will
not have a material adverse effect on our business, results of operations or financial condition. In particular, currency exchange
fluctuations in countries where we do business in the local currency could have a material adverse effect on our business, results of
operations or financial condition by rendering us less price-competitive than foreign manufacturers.
17
Keeping Pace with Key Industry Developments is Essential
We are engaged in industries that will be affected by future developments. The introduction of products or processes utilizing new
developments could render existing products or processes obsolete or unmarketable. Our continued success will depend upon our
ability to develop and introduce, in a timely and cost-effective basis, new products, processes and applications that keep pace with
developments and address increasingly sophisticated customer requirements. There can be no assurance that we will be successful in
identifying, developing and marketing new products, applications and processes and that we will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of product or process enhancements or new products,
applications or processes, or that our products, applications or processes will adequately meet the requirements of the marketplace and
achieve market acceptance. Our business, results of operations and financial condition could be materially and adversely affected if we
were to incur delays in developing new products, applications or processes or if we do not gain market acceptance for the same.
Our Continued Success Depends on Our Ability to Develop New Products and Processes
In order to meet our strategic objectives, we must continue to develop, manufacture and market new products, develop new processes
and improve existing processes. As a result, we expect to continue to make significant investments in research and development and to
continue to consider from time to time the strategic acquisition of businesses, products or technologies complementary to our business.
Our success in developing, introducing and selling new and enhanced products depends upon a variety of factors including product
selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing
and assembly processes, effective sales and marketing and product performance in the field. There can be no assurance that we will be
able to develop and introduce new products or enhancements to our existing products and processes in a manner which satisfies
customer needs or achieves market acceptance. The failure to do so could have a material adverse effect on our ability to grow our
business.
A Significant Portion of Our Business is Dependent on Cyclical Industries
Our business is significantly dependent on the demand for products produced by end-users of industrial lasers and optical
communication products. Many of these end-users are in industries that have historically experienced a highly cyclical demand for
their products. As a result, demand for our products is subject to these cyclical fluctuations. This cyclical demand could have a
material adverse effect on our business, results of operations or financial condition.
There Are Limitations on the Protection of Our Intellectual Property
We rely on a combination of trade secrets, patents, copyright and trademark laws combined with employee noncompetition and
nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps taken by us will be
adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance that third-
parties will not assert infringement claims against us in the future. Asserting our intellectual property rights or defending against third-
party claims could involve substantial expense, thus materially and adversely affecting our business, results of operations or financial
condition. In the event a third-party were successful in a claim that one of our processes infringed its proprietary rights, we could be
required to pay substantial damages or royalties, or expend substantial amounts in order to obtain a license or modify processes so that
they no longer infringe such proprietary rights, any of which could have a material adverse effect on our business, results of operations
or financial condition.
We Depend on Highly Complex Manufacturing Processes That Require Products from Limited Sources of Supply
We utilize high-quality, optical grade zinc selenide (ZnSe) in the production of many of our infrared optical products. We are the
leading producer of ZnSe for our internal use and for external sale. The production of ZnSe is a complex process requiring a highly
controlled environment. A number of factors, including defective or contaminated materials, could adversely affect our ability to
achieve acceptable manufacturing yields of high quality ZnSe. ZnSe is available from only one significant outside source whose
quantities and quality of ZnSe may be limited. Lack of adequate availability of high quality ZnSe would have a material adverse effect
upon us. There can be no assurance that we will not experience manufacturing yield inefficiencies which could have a material
adverse effect on our business, results of operations or financial condition.
We produce Hydrogen Selenide gas which is used in our production of ZnSe. There are risks inherent in the production and handling
of such material. Our lack of proper handling of Hydrogen Selenide could require us to curtail our production of Hydrogen Selenide.
Hydrogen Selenide is available from only one outside source whose quantities and quality may be limited. The cost of purchasing
such material is greater than the cost of internal production. As a result, the purchase of a substantial portion of such material from the
outside source would increase our ZnSe production costs. Therefore, an inability to internally produce Hydrogen Selenide could have
a material adverse effect on our business, results of operations or financial condition.
18
In addition, we produce and utilize other high purity and relatively uncommon materials and compounds to manufacture our products
including, but not limited to, Zinc Sulfide (ZnS), Yttrium Aluminum Garnet (YAG), Yttrium Lithium Fluoride (YLF), Calcium
Fluoride (CaF2), Germanium (Ge), Selenium (Se), Telluride (Te), Bismuth Telluride (Bi2Te3) and Silicon Carbide (SiC). A significant
failure of our internal production processes or our suppliers to deliver sufficient quantities of these necessary materials on a timely
basis could have a material adverse effect on our business, results of operations or financial condition.
New Regulations Related to Conflict Minerals Could Adversely Impact Our Business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contain provisions to improve transparency and accountability
concerning the supply of gold, columbite-tantalite (coltan), cassiterite and wolframite, including their derivatives, which are limited to
tantalum, tin and tungsten, known as “conflict minerals,” originating from the Democratic Republic of Congo (DRC) and adjoining
countries (together known as the "covered countries"). Pursuant to these rules, the SEC recently has adopted certain annual disclosure
and reporting requirements for those companies that use conflict minerals in their products, regardless of whether such minerals were
mined from the covered countries, beginning in 2014. We could incur significant costs associated with complying with these
disclosure requirements, including costs related to our due diligence efforts to determine the sources of any conflict minerals used in
our products. These rules could adversely affect the sourcing, supply and pricing of materials we use in our products, particularly if it
turns out that there are only a limited number of suppliers offering conflict minerals that are not from recycled or scrap sources, can be
traced to a country of origin other than the covered countries, or can be traced to a source within the covered countries that definitely
does not finance or benefit armed groups in those countries. We cannot be sure that we will be able to obtain products from such
suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our
products contain conflict minerals originating from the covered countries and we cannot definitively determine whether the conflict
minerals financed or otherwise benefited armed groups, or if we are unable to sufficiently verify the origins of all of the conflict
minerals used in our products through the due diligence procedures we implement.
Some Systems That Utilize our Products Are Complex in Design and May Contain Defects that Are Not Detected Until
Deployed Which Could Increase Our Costs and Reduce Our Revenues
Some systems that utilize our products are inherently complex in design and require ongoing maintenance. As a result of the technical
complexity of our products, changes in our or our suppliers’ manufacturing processes or the use of defective or contaminated materials
could adversely impact our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not
achieve acceptable yields or product reliability, our business, results of operation, financial condition or customer relationships could
be materially adversely affected.
Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress
conditions. In addition, some of our products are combined with products from other vendors, which may contain defects. Should
problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could
experience, among other things: loss of customers; increased costs of product returns and warranty expenses; damage to our brand
reputation; failure to attract new customers or achieve market acceptance; diversion of development and engineering resources; or
legal action by our customers. The occurrence of any one or more of the foregoing factors could have a material adverse effect on our
business, results of operations or financial condition.
We May Encounter Substantial Competition
We may encounter substantial competition from other companies in the same market, including established companies with significant
resources. Some of our competitors may have financial, technical, marketing or other capabilities more extensive than ours and may
be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not be able to
compete successfully against our present or future competitors, and such competition could have a material adverse effect on our
business, results of operations or financial condition.
The Market Price of Our Common Stock and the Stock Market in General Can Be Highly Volatile
Factors that could cause fluctuation in our stock price include, among other things: general economic and market conditions; actual or
anticipated variations in operating results; changes in financial estimates by securities analysts; our inability to meet or exceed
securities analysts’ estimates or expectations; conditions or trends in the industries in which our products are purchased;
announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic
initiatives; capital commitments; additions or departures of key personnel; and sales of our Common Stock.
Many of these factors are beyond our control. These factors could cause the market price of our Common Stock to decline, regardless
of our actual operating performance.
19
Because We Do Not Currently Intend to Pay Dividends, Shareholders Will Benefit From an Investment in our Common Stock
Only if it Appreciates in Value
We have never declared or paid any dividends on our common stock, and do not expect to pay cash dividends in the foreseeable
future, as we currently anticipate that we will retain any future earnings to support operations and to finance the development of our
business . As a result, the success of an investment in our common stock will depend entirely upon any future appreciation in its value.
There is no guarantee that our common stock will appreciate in value or even maintain the price at which a shareholder originally
purchased its shares.
Our Success Depends on Our Ability to Retain Key Personnel
We are highly dependent upon the experience and continuing services of certain scientists, engineers, production and management
personnel. Competition for the services of these personnel is intense, and there can be no assurance that we will be able to retain or
attract the personnel necessary for our success. The loss of the services of our key personnel could have a material adverse effect on
our business, results of operations or financial condition.
Commodity Prices May Adversely Affect Our Results of Operations and Financial Condition
We are exposed to a variety of market risks, including the effects of changes in commodity prices. Our businesses purchase, produce
and sell high purity selenium and other raw materials based upon quoted market prices from minor metal exchanges. As a result, the
negative impact from changes in commodity prices, such as the recent decline in global selenium prices may not be recovered through
our product sales, and as such could have a material adverse effect on our net earnings and financial condition. In the event that the
global index price of selenium experiences a further decline from its current level, the Company would be required to record an
additional write-down of its selenium inventory in future periods.
Changes in Tax Rates, Tax Liabilities or Tax Accounting Rules Could Affect Future Results
As a global company, we are subject to taxation in the U.S. and various other countries and jurisdictions. As such, we must exercise a
level of judgment in determining our worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of
earnings in countries with differing tax rates or changes in tax laws. Changes in tax laws or tax rulings may have a significantly
adverse impact on our effective tax rate. For example, proposals for fundamental U.S. international tax reform, if enacted, could have
a significant adverse impact on our effective tax rate. In addition, we are subject to regular examination of our income tax returns by
the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates
are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in
our historical income tax provision and accruals, which could materially and adversely affect our business, results of operation or
financial condition.
Provisions in Our Articles of Incorporation and By-Laws May Limit the Price that Investors May be Willing to Pay in the
Future for Shares of Our Common Stock
Our Articles of Incorporation and By-Laws contain provisions that could make us a less attractive target for a hostile takeover or make
more difficult or discourage a merger proposal, a tender offer or a proxy contest. Such provisions include: a requirement that
shareholder nominated board nominees be nominated in advance of a meeting to elect such directors and that specific information be
provided in connection with such nomination; the ability of the board of directors to issue additional shares of Common Stock or
preferred stock without shareholder approval; and certain provisions requiring supermajority approval (at least two-thirds of the votes
cast by all shareholders entitled to vote thereon, voting together as a single class). In addition, the Pennsylvania Business Corporation
Law contains provisions that may have the effect of delaying or preventing a change in control of the Company. All of these
provisions may limit the price that investors may be willing to pay for shares of our Common Stock.
20
We Are Subject to Stringent Environmental Regulation
We use or generate certain hazardous substances in our research and manufacturing facilities. We believe that our handling of such
substances is in material compliance with applicable local, state and federal environmental, safety and health regulations at each
operating location. We invest substantially in proper protective equipment, process controls and specialized training to minimize risks
to employees, surrounding communities and the environment resulting from the presence and handling of such hazardous substances.
We regularly conduct employee physical examinations and workplace monitoring regarding such substances. When exposure
problems or potential exposure problems have been uncovered, corrective actions have been implemented and re-occurrence has been
minimal or non-existent. We do not carry environmental impairment insurance.
We have in place an emergency response plan with respect to our generation and use of the hazardous substance Hydrogen Selenide.
Special attention has been given to all procedures pertaining to this gaseous material to minimize the chances of its accidental release
into the atmosphere.
With respect to the manufacturing, use, storage and disposal of the low-level radioactive material Thorium Fluoride, our facilities and
procedures have been inspected and licensed by the Nuclear Regulatory Commission. Thorium-bearing by-products are collected and
shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah.
The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy
metals or airborne particulates, are believed by us to be in material compliance with regulations. We believe that we have obtained all
of the permits and licenses required for operation of our business.
Although we do not know of any material environmental, safety or health problems in our properties or processes, there can be no
assurance that problems will not develop in the future which could have a material adverse effect on our business, results of operations
or financial condition.
We Are Subject to Governmental Regulation
We are subject to extensive regulation by U.S. government entities at the federal, state and local levels and non-U.S. entities,
including, but not limited to, the following:
We are required to comply with various import laws and export control and economic sanctions laws, which may affect
our transactions with certain customers, business partners and other persons, including in certain cases dealings with or
between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may
prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain
an export license before exporting the controlled item. Compliance with the various import laws that apply to our
businesses may restrict our access to, and may increase the cost of obtaining, certain products and could interrupt our
supply of imported inventory.
Exported technology necessary to develop and manufacture certain of the Company’s products are subject to U.S. export
control laws and similar laws of other jurisdictions, and the Company may be subject to adverse regulatory consequences,
including government oversight of facilities and export transactions, monetary penalties and other sanctions for violations
of these laws. In many cases, exports of technology necessary to develop and manufacture the Company’s products are
subject to U.S. export control laws. In certain instances, these regulations may prohibit the Company from developing or
manufacturing certain of its products for specific end applications outside the U.S.
Our agreements relating to the sale of products to government entities may be subject to termination, reduction or
modification in the event of changes in government requirements, reductions in federal spending and other factors. We are
also subject to investigation and audit for compliance with the requirements of government contracts, including
requirements related to procurement integrity, export control, employment practices, the accuracy of records and the
recording of costs. A failure to comply with these requirements might result in suspension of these contracts and
suspension or debarment from government contracting or subcontracting.
In addition, failure to comply with any of these laws and regulations could result in civil and criminal, monetary and non-monetary
penalties, disruptions to our business, limitations on our ability to import and export products and services and damage to our
reputation.
21
We May Be Adversely Affected by Climate Change Regulation
In many of the countries in which we operate, government bodies are increasingly enacting or contemplating enacting legislation and
regulations in response to potential impacts of climate change. These laws and regulations may be mandatory or voluntary, and have
the potential to impact our operations directly or indirectly through customers or our supply chain. Inconsistency of regulations may
also affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change
legislation, regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in
countries in which we operate. We may realize increased capital expenditures resulting from required compliance with revised or new
legislation or regulations, costs to purchase or profits from sales of, allowances or credits under a “cap and trade” system, increased
insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position
relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods produced by us and
indirectly, from changes in costs of goods sold.
Natural Disasters or Other Global or Regional Catastrophic Events Could Disrupt Our Operations and Adversely Affect
Results
Despite our concerted effort to minimize risk to our production capabilities and corporate information systems and to reduce the effect
of unforeseen interruptions to us through business continuity planning, we still may be exposed to interruptions due to catastrophe,
natural disaster, pandemic, terrorism or acts of war which are beyond our control. Disruptions to our facilities or systems, or to those
of our key suppliers, could also interrupt operational processes and adversely impact our ability to manufacture our products and
provide services and support to our customers. As a result, our business, results of operations or financial condition could be
materially adversely affected.
Data Hacking Incidents and Breakdown of Information and Communication Technologies Could Disrupt our Operations and
Impact Our Financial Results
In the course of our business, we collect and store sensitive data, including intellectual property [both proprietary and of our
customers], as well as proprietary business information. We have in place a number of controls, processes and practices designed to
protect against intentional or unintentional misappropriation or corruption of our networks, systems and information or disruption of
our operations due to a hacking or cyber-incident. Despite such efforts, we could be subject to service outages or breaches of security
systems which may result in disruption, unauthorized access, misappropriation, or corruption of the information we are trying to
protect. Security breaches of our network or data including physical or electronic break-ins, vendor service outages, computer viruses,
attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential
information. Although we have not experienced a material impact, if we are unable to prevent such security or privacy breaches, our
operations could be disrupted or we may suffer legal claims, loss of reputation, financial loss, property damage, or regulatory penalties
because of lost or misappropriated information.
22
Recently Issued Financial Accounting Standards
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“ASU”) which
supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. The update is effective for interim and annual reporting
periods in fiscal years beginning after December 15, 2016 and prohibits early adoption. The update allows for the use of either the
retrospective or modified retrospective approach of adoption. Management is currently evaluating the available transition methods and
the potential impact of adoption on the Company's Consolidated Financial Statements.
In April 2014, the FASB issued an ASU that changes the criteria for determining which disposals can be presented as discontinued
operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of
a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will
have a major effect on an entity’s operations and financial results. The new standard will be effective for annual periods beginning on
or after December 15, 2014 with early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal
year 2016. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial
Statements.
In July 2013, the FASB issued an ASU that changes how certain unrecognized tax benefits are to be presented on the consolidated
balance sheet. This ASU clarified existing guidance to require that an unrecognized tax benefit or a portion thereof be presented in the
consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, similar tax loss, or a
tax credit carryforward except when an NOL carryforward, similar tax loss, or tax credit carryforward is not available under the tax
law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. In
such a case, the unrecognized tax benefit would be presented in the consolidated balance sheet as a liability. This update is effective
prospectively for fiscal years beginning after December 15, 2013 and will be effective for the Company beginning in the first quarter
of fiscal year 2015. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated
Financial Statements.
In March 2013, the FASB issued an ASU related to a parent’s accounting for the cumulative translation adjustment upon de-
recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The update
clarifies the applicable guidance under current U.S. GAAP for the release of the cumulative translation adjustment upon a reporting
entity’s de-recognition of a subsidiary or group of assets within a foreign entity or part or all of its investment in a foreign entity. The
update requires a reporting entity, which either sells a part or all of its investment in a foreign entity or ceases to have a controlling
financial interest in a subsidiary or group of assets within a foreign entity, to release any related cumulative translation adjustment into
net income. This update is effective prospectively for fiscal years beginning after December 15, 2013 and will be effective for the
Company beginning in the first quarter of fiscal year 2015. The adoption of this standard is not expected to have a significant impact
on the Company’s Consolidated Financial Statements.
In February 2013, the FASB issued an ASU related to disclosure requirements of reclassifications out of accumulated other
comprehensive income. The adoption of the guidance requires the Company to provide information about the amounts reclassified out
of accumulated other comprehensive income by component. In addition, the Company is required to present, either on the face of the
statement where net income is presented or in the notes, significant amounts reclassified from each component of accumulated other
comprehensive income and the income statement line items affected by the reclassification. This update was effective for the
Company beginning in the first quarter of fiscal year 2014 and did not have a significant impact on the Company’s Consolidated
Financial Statements.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
23
PROPERTIES
Item 2.
Information regarding our principal U.S. properties at June 30, 2014 is set forth below:
Primary Business Segment(s)
Infrared Optics and Advanced
Products Group
Square
Footage
252,000
Advanced Products Group
90,000
Ownership
Owned
and
Leased
Leased
Military & Materials
87,000
Leased
Advanced Products Group
68,000
Owned
and
Leased
Owned
Military & Materials and Near-
Infrared Optics
Advanced Products Group
67,000
48,000
Leased
Military & Materials
37,000
Leased
Near-Infrared Optics
33,000
Leased
Military & Materials
30,000
Leased
Advanced Products Group
26,000
Leased
Advanced Products Group
19,000
Leased
Near-Infrared Optics
17,000
Leased
Active Optical Products
Military & Materials
15,000
10,000
Leased
Leased
Advanced Products Group
Near-Infrared Optics
10,000
5,000
Leased
Leased
Active Optical Products
Near-Infrared Optics
5,000
2,300
Leased
Leased
Location
Saxonburg, PA ....................................
Newark, DE.........................................
Temecula, CA .....................................
Dallas, TX ...........................................
Primary Use(s)
Manufacturing, Corporate
Headquarters and Research and
Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
New Port Richey and Port Richey, FL
Monroe, CT .........................................
Tustin, CA ...........................................
Santa Rosa, CA ...................................
Philadelphia, PA .................................
Pine Brook, NJ ....................................
Newtown, CT ......................................
Woburn, MA .......................................
Horseheads, NY ..................................
Vista, CA.............................................
Starkville, MS .....................................
Flemington, NJ ....................................
San Jose, CA .......................................
Sunnyvale, CA ....................................
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Research and Development
Manufacturing and
Research and Development
Manufacturing
Manufacturing and
Research and Development
Research and Development
Distribution
24
Information regarding our principal foreign properties at June 30, 2014 is set forth below:
Location
China ....................................................
Primary Use(s)
Manufacturing, Research and
Development, and Distribution
Philippines............................................ Manufacturing
Switzerland ..........................................
Vietnam ................................................
Manufacturing, Research and
Development, and Distribution
Manufacturing
Germany ...............................................
Manufacturing and Distribution
Singapore ............................................. Manufacturing
Australia ...............................................
Manufacturing and Research and
Development
Japan ....................................................
Distribution
Belgium ................................................ Distribution
Distribution
Italy ......................................................
United Kingdom ...................................
Distribution
Primary Business Segment(s)
Infrared Optics, Near-Infrared
Optics, Advanced Products
Group and Active Optical
Products
Military & Materials
Infrared Optics and Active
Optical Products
Near-Infrared Optics and
Advanced Products Group
Infrared Optics, Near-Infrared
Optics and Advanced Products
Group
Infrared Optics
Near-Infrared Optics
Infrared Optics, Near-Infrared
Optics and Advanced Products
Group
Infrared Optics
Infrared Optics, Near-Infrared
Optics and Active Optical
Products
Infrared Optics, Near-Infrared
Optics and Active Optical
Products
Square
Footage
1,075,000
Ownership
Leased
249,000 Leased
Leased
134,000
99,000
Leased
78,000
Leased
35,000
18,000
Leased
Leased
4,000
Leased
3,000
2,000
Leased
Leased
1,500
Leased
The square footage listed for each of the above properties represents facility square footage except in the case of the Philippines
location which includes land.
Item 3.
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various claims and lawsuits incidental to its business. The resolution of each of these
matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company.
Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such legal proceedings
will not materially affect the Company’s financial position, liquidity or results of operation.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and positions are set forth below. Each executive officer listed has
been appointed by the Board of Directors to serve until removed or until such person’s successor is appointed and qualified.
Name
Francis J. Kramer ..................................................................................... 65 President, Chief Executive Officer and Director
Vincent D. Mattera, Jr. ............................................................................. 58 Chief Operating Officer and Director
Mary Jane Raymond ................................................................................ 54 Chief Financial Officer and Treasurer
James Martinelli ....................................................................................... 56 Vice President – Military & Materials Businesses
Age
Position
25
Francis J. Kramer has been employed by the Company since 1983, has been its President since 1985, and has been its Chief
Executive Officer since July 2007. Mr. Kramer has served as a Director of the Company since 1989. Previously, Mr. Kramer served as
Chief Operating Officer from 1985 through June 2007. Mr. Kramer joined the Company as Vice President and General Manager of
Manufacturing and was named Executive Vice President and General Manager of Manufacturing in 1984. Prior to his employment by
the Company, Mr. Kramer was the Director of Operations for the Utility Communications Systems Group of Rockwell International
Corp. Mr. Kramer graduated from the University of Pittsburgh with a B.S. degree in Industrial Engineering and from Purdue
University with a M.S. degree in Industrial Administration.
Vincent D. Mattera, Jr. has been employed by the Company since 2004 and has been Chief Operating Officer since September 2013
and served as Executive Vice President from January 2010. Dr. Mattera has served as a Director of the Company since 2012.
Previously, Dr. Mattera served as Executive Vice President 2010 to 2013 and was Vice President of the Advanced Products Group
from 2004 to 2010. Dr. Mattera served as Vice President, Undersea Optical Transport, Agere Systems (formerly Lucent Technologies,
Microelectronics and Communications Technologies Group) from 2001 to 2004. Previously, Dr. Mattera served as Optoelectronic
Device Manufacturing and Process Development Vice President with Lucent Technologies, Microelectronics and Communications
Technologies Group from 2000 until 2001. He was Director of Optoelectronic Device Manufacturing and Development at Lucent
Technologies, Microelectronics Group from 1997 to 2000. From 1995 to 1997 he served as Director, Indium Phosphide
Semiconductor Laser Chip Design and Process Development with Lucent Technologies, Microelectronics Group. From 1984 to 1995
he held management positions with AT&T Bell Laboratories. Dr. Mattera holds B.S. and Ph.D. degrees in Chemistry from the
University of Rhode Island and Brown University, respectively.
Mary Jane Raymond has been employed by the Company as its Chief Financial Officer and Treasurer since March 2014. Previously,
Ms. Raymond was the Chief Financial Officer of the publicly traded company Hudson Global, Inc. from 2005 to 2014. Ms. Raymond
was the Chief Risk Officer and Vice President and Corporate Controller at Dun and Bradstreet, Inc. from 2002 to 2005. Additionally,
she was the Vice President, Merger Integration at Lucent Technologies, Inc. from 1997 to 2002 and held several management
positions at Cummins Engine Company from 1988 to 1997. Ms. Raymond holds a BA degree in Public Management from St.
Joseph’s University, and an MBA from Stanford University.
James Martinelli has been employed by the Company since 1986 and has been Vice President – Military & Materials Businesses
since February 2003. Previously, Mr. Martinelli served as General Manager of Laser Power Corporation from 2000 to 2003.
Mr. Martinelli joined the Company as Accounting Manager in 1986, was named Corporate Controller in 1990 and named Chief
Financial Officer and Treasurer in 1994. Prior to his employment with the Company, Mr. Martinelli served as Accounting Manager at
Tippins Incorporated and Pennsylvania Engineering Corporation from 1980 to 1985. Mr. Martinelli graduated from Indiana University
of Pennsylvania with a B.S. degree in Accounting.
26
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “IIVI.” The
following table sets forth the range of high and low closing sale prices per share of the Company’s Common Stock for the fiscal
periods indicated, as reported by NASDAQ.
Fiscal 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
20.76 $
19.16 $
17.47 $
15.62 $
16.51
15.25
14.72
12.79
High
Low
19.63 $
19.87 $
19.67 $
17.54 $
15.86
15.85
16.58
14.81
$
$
$
$
$
$
$
$
On August 20, 2014, the last reported sale price for the Company’s Common Stock was $14.16 per share. As of such date, there were
approximately 615 holders of record of our Common Stock. The Company historically has not paid cash dividends and does not
anticipate paying cash dividends in the foreseeable future.
ISSUER PURCHASES OF EQUITY SECURITIES
In February 2014, the Board of Directors authorized the Company to purchase up to $20.0 million of its Common Stock. The
repurchase program called for shares to be purchased in the open market or in private transactions from time to time. Shares purchased
by the Company are retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30,
2014 the Company completed its $20.0 million program by purchasing 1,333,355 shares of its Common Stock.
The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended
June 30, 2014.
Period
April 1, 2014 to April 30, 2014
May 1, 2014 to May 31, 2014
June 1, 2014 to June 30, 2014
Total
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
Shares Purchased
Programs(a)
Per Share
Program
- $
584,979 (a) $
- $
584,979 (a) $
-
13.69
-
13.69
- $
- $
- $
- $
8,000,000
-
-
-
(a)
Includes 1,624 shares of our common stock transferred to the Company from employees in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted share awards.
In August 2014, the Board of Directors authorized the Company to purchase up to $50.0 million of its Common Stock. The repurchase
program has no expiration and calls for shares to be purchased in the open market or in private transactions from time to time. Shares
purchased by the Company will be retained as treasury stock and available for general corporate purposes. During August 2014, the
Company purchased 180,000 shares of its Common Stock for $2.5 million under this new repurchase program.
The information incorporated by reference in Item 12 of this Annual Report on Form 10-K from our 2014 Proxy Statement under the
heading “Equity Compensation Plan Information” is hereby incorporated by reference into this Item 5.
27
PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on the Company’s Common Stock with the cumulative total
shareholder return of the Nasdaq Composite Index and with a peer group of companies constructed by the Company for the period
from June 30, 2009, through June 30, 2014. The Company’s current fiscal year peer group includes Cabot Microelectronics
Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., Rofin-Sinar Technologies, Inc. and Silicon Laboratories.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among II-VI Incorporated, the NASDAQ Composite Index, and a Peer Group
$300
$250
$200
$150
$100
$50
$0
6/09
6/10
6/11
6/12
6/13
6/14
II-VI Incorporated
NASDAQ Composite
Peer Group
*$100 invested on 6/30/09 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
28
SELECTED FINANCIAL DATA
Item 6.
Five-Year Financial Summary
The following selected financial data for the five fiscal years presented are derived from II-VI’s audited consolidated financial
statements as adjusted to reflect the Company’s PRM tellurium product line as a discontinued operation for fiscal year 2014. Prior
periods have been adjusted to present this product line on a discontinued operations basis. The data should be read in conjunction with
the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30,
(000 except per share data)
2014
2013
2012
2011
2010
Statement of Earnings
Net revenues from continuing operations
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings attributable to redeemable noncontrolling interest
Net earnings attributable to II-VI Incorporated
Basic earnings (loss) per shares:
$ 683,261 $ 551,075 $ 516,403 $ 486,638 $ 333,046
38,748
(13 )
158
38,577
70,718
(9,443 )
969
60,306
58,720
(6,789 )
1,118
50,813
79,676
3,342
336
82,682
38,316
133
-
38,449
Continuing operations
Discontinued operation
Consolidated
Diluted earnings (loss) per shares:
Continuing operations
Discontinued operation
Consolidated
Diluted weighted average shares outstanding
Year Ended June 30,
($000)
Balance Sheet
Working capital
Total assets
Long-term debt
Total debt
Retained earnings
Shareholders' equity
0.62
-
0.62
0.92
(0.11 )
0.81
1.10
(0.15 )
0.96
1.28
0.05
1.33
0.64
-
0.64
0.60
-
0.60
63,686
0.90
(0.11 )
0.80
63,884
1.08
(0.15 )
0.94
64,385
1.25
0.05
1.30
63,612
0.63
-
0.63
61,504
2014
2013
2012
2011
2010
$ 370,666 $ 366,710 $ 326,645 $ 304,573 $ 215,085
508,981
1,071,926
3,384
221,960
241,960
3,384
295,380
521,327
410,050
675,043
647,202
15,000
18,729
377,264
521,273
863,802
114,036
114,036
482,878
636,108
706,486
12,769
12,769
434,940
586,226
29
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “believes,”
“intends,” “plans,” “projects” or similar expressions. Actual results could differ materially from those anticipated in these forward-
looking statements for many reasons, including risk factors described in the Risk Factors set forth in Item 1A of this Annual Report on
Form 10-K, which are incorporated herein by reference.
Overview
The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing engineered materials and
opto-electronic components for precision use in industrial, optical communications, military, semiconductor, life science and
consumer applications. We also generate revenue, earnings and cash flows from government funded research and development
contracts relating to the development and manufacture of new technologies, materials and products.
Our customer base includes OEMs, laser end users, system integrators of high-power lasers, manufacturers of equipment and devices
for the industrial, optical communications, military, semiconductor and medical markets, U.S. Government prime contractors, various
U.S. Government agencies and thermoelectric integrators.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and the Company’s discussion and analysis of its financial condition and results of
operations requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its
consolidated financial statements and accompanying notes. Note 1 of the Notes to our Consolidated Financial Statements contained in
Item 8 of this Annual Report on Form 10-K, describes the significant accounting policies and accounting methods used in the
preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.
Management believes the Company’s critical accounting estimates are those related to revenue recognition, allowance for doubtful
accounts, warranty reserves, inventory valuation, business combinations, valuation of long-lived assets including acquired intangibles
and goodwill, accrual of bonus and profit sharing estimates, accrual of income tax liability estimates and accounting for share-based
compensation. Management believes these estimates to be critical because they are both important to the portrayal of the Company’s
financial condition and results of operations, and they require management to make judgments and estimates about matters that are
inherently uncertain.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the
Board of Directors and the Audit Committee has reviewed the foregoing disclosure. In addition, there are other items within our
financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other
items could have a material impact on the financial statements.
The Company recognizes revenues in accordance with U.S. GAAP. Revenues for product shipments are realizable when we have
persuasive evidence of a sales arrangement, the product has been shipped or delivered, the sales price is fixed or determinable and
collectability is reasonably assured. Title and risk of loss passes from the Company to its customer at the time of shipment in most
cases, with the exception of certain customers for whom customers title does not pass and revenue is not recognized until the customer
has received the product at its physical location.
The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical
locations. Further, we do not have post shipment obligations such as training or installation, customer acceptance provisions, credits
and discounts, rebates and price protection or other similar privileges. Our distributors and agents are not granted price protection. Our
distributors and agents, who comprise less than 10% of consolidated revenue, have no additional product return rights beyond the right
to return defective products covered by our warranty policy. We believe our revenue recognition practices are consistent with Staff
Accounting Bulletin (“SAB”) 104 and that we have adequately considered the requirements of Accounting Standards Codification
(“ASC”) 605 Revenue Recognition. Revenues generated from transactions other than product shipments are contract-related and have
historically accounted for less than 5% of the Company’s consolidated revenues.
30
The Company establishes an allowance for doubtful accounts based on historical experience and believes the collection of revenues,
net of these reserves, is reasonably assured. The allowance for doubtful accounts is an estimate for potential non-collection of
accounts receivable based on historical experience. The Company has not experienced a non-collection of accounts receivable
materially affecting its financial position or results of operations as of and for the fiscal years ended June 30, 2014, 2013 and 2012. If
the financial condition of the Company’s customers were to deteriorate, causing an impairment of their ability to make payments,
additional provisions for bad debts could be required in future periods. The Company records a warranty reserve as a charge against
earnings based on a historical percentage of revenues utilizing actual returns over a period that approximates historical warranty
experience. If actual returns in the future are not consistent with the historical data used to calculate these estimates, additional
warranty reserves could be required. Our allowance for doubtful accounts and warranty reserve balances at June 30, 2014 was
approximately $1.9 million and $2.9 million, respectively. Our reserve estimates have historically been proven to be materially correct
based upon actual charges incurred.
The Company records an inventory reserve as a charge against earnings for all products on hand for more than twelve to eighteen
months, depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative
customers. An additional reserve is recorded for products on hand that are in excess of product sold to customers over the same
periods noted above. If actual market conditions are less favorable than projected, additional inventory reserves may be required.
The Company accounts for business acquisitions by establishing the acquisition-date fair value as the measurement for all assets
acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the determination of acquisition-
date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction
and acquisition-related restructuring costs from acquisition accounting.
The Company tests goodwill and indefinite-lived intangible assets on an annual basis for impairment or when events or changes in
circumstances indicate that goodwill or indefinite-lived intangible assets might be impaired. Other intangible assets are amortized over
their estimated useful lives. The determination of the estimated useful lives of other intangible assets and whether goodwill or
indefinite-lived intangibles are impaired requires us to make judgments based upon long-term projections of future performance.
Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit considering
historical and anticipated results and general economic and market conditions. The fair values of the reporting units are determined
using a discounted cash flow analysis based on historical and projected financial information as well as market analysis. The carrying
value of goodwill at June 30, 2014, 2013 and 2012 was $196.1 million, $123.4 million and $80.7 million, respectively. The annual
goodwill impairment analysis considers the financial projections of the reporting unit based on the most recently completed budgeting
and long-term strategic planning processes and also considers the current financial performance compared to the prior projections of
the reporting unit. Changes in our internal structuring, financial performance, judgments and projections could result in an impairment
of goodwill or indefinite-lived intangible assets.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise,
the Company will forego the two-step process and does not need to perform any further testing. Due to the timing of the Company’s
finalization of the current year acquisitions of Laser Enterprise and Network Solutions, a qualitative test was performed on the Active
Optical Products segment during fiscal year ended 2014.
As a result of the purchase price allocations from our prior acquisitions, and due to our decentralized structure, our goodwill is
included in multiple reporting units which are the same as the Company’s operating segments. Due to the cyclical nature of our
business, and the other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the
profitability of our individual reporting units may periodically suffer from downturns in customer demand, operational challenges and
other factors. These factors may have a relatively more pronounced impact on the individual reporting units as compared to the
Company as a whole, and might adversely affect the fair value of the individual reporting units. If material adverse conditions occur
that impact one or more of our reporting units, our determination of future fair value may not support the carrying amount of one or
more of our reporting units, and the related goodwill would need to be impaired.
Based upon our annual quantitative and qualitative goodwill impairment tests, the Company did not record any impairments of
goodwill or long-lived assets for the fiscal years ended June 30, 2014, 2013 or 2012.
As the estimated fair value of the Near Infrared Optics reporting unit was approximately 9% greater than its carrying value, the
Company has concluded that this reporting unit is at risk of not passing step one of future goodwill impairment tests. In the event of
unfavorable changes to the existing assumptions used in the impairment test, such as the weighted average cost of capital (discount
rate), growth rates and market multiples as well as changes in our internal structure, the carrying value of the Company’s goodwill
could be impaired. Although the Company believes that the current assumptions and estimates are reasonable, supportable and
appropriate, the Near Infrared Optics reporting unit competes in a challenging environment with significant pricing pressure and
31
rapidly changing technology and there can be no assurance that the estimates and assumptions made for purposes of the goodwill
impairment test will prove to be accurate predictions of future performance.
The risk of impairment of the underlying long-lived assets is not estimated to be significant because the assets have long remaining
useful lives and authoritative accounting guidance requires such assets to be tested for impairment on the basis of undiscounted cash
flows over their remaining useful lives.
As a result of the July 1, 2014 segment realignment as discussed in Item 1 of this Annual Report on Form 10-K, the Company will
reassign the Active Optical Products segment's existing goodwill balance to the new reporting units utilizing a relative fair value
allocation approach in accordance with authoritative accounting guidance. As part of this reassignment, the Company may be required
to review the recoverability of the carrying value of goodwill at the new reporting units.
The Company records certain bonus and profit sharing estimates as a charge against earnings. These estimates are adjusted to actual
based on final results of operations achieved during the fiscal year. Certain partial bonus amounts are paid quarterly based on interim
Company performance, and the remainder is paid after fiscal year end. Other bonuses are paid annually.
The Company prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on
these judgments and interpretations. In the normal course of business, the Company’s tax returns are subject to examination by various
taxing authorities, which may result in future tax, interest and penalty assessments by these authorities. Inherent uncertainties exist in
estimates of many tax positions due to changes in tax law resulting from legislation, regulation and/or as concluded through the
various jurisdictions’ tax court systems. The Company recognizes the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for
changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the
issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of
an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments
that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to
unrecognized tax benefits in income tax expense.
The Company has recorded valuation allowances against certain of its deferred tax assets, primarily those that have been generated
from net operating losses in certain foreign taxing jurisdictions. In evaluating whether the Company would more likely than not
recover these deferred tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated
with these carry-forwards where history does not support such an assumption. Implementation of tax planning strategies to recover
these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and
a reduction of income tax expense.
In accordance with U.S. GAAP, the Company recognizes share-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting period. The Company utilized the Black-Scholes valuation model for
estimating the fair value of stock option expense using assumptions such as the risk-free interest rate, expected stock price volatility,
expected stock option life and expected dividend yield. The risk-free interest rate is derived from the average U.S. Treasury Note rate
during the period, which approximates the rate in effect at the time of grant related to the expected life of the options. Expected
volatility is based on the historical volatility of the Company’s Common Stock over the period commensurate with the expected life of
the options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our
employees. The dividend yield is zero, based on the fact the Company has never paid cash dividends and has no current intention to
pay cash dividends in the future.
32
Fiscal Year 2014 Compared to Fiscal Year 2013
Bookings
Total Revenues
Cost of goods sold
Gross margin
Operating Expenses:
Year Ended
June 30, 2014
Year Ended
June 30, 2013
$ 691.3
$ 521.1
% of
Revenues
% of
Revenues
$ 683.3
456.5
226.7
100.0 % $ 551.1
347.6
203.5
66.8
33.2
100.0 %
63.1
36.9
Internal research and development
Selling, general and administrative
Interest and other, net
Earnings from continuing operations before income tax
Income taxes
Net earnings from continuing operations
Earnings (loss) from Discontinued Operation, net of income taxes
Net Earnings
Net earnings attributable to noncontrolling interest
Net earnings attributable to II-VI Incorporated
Diluted earnings per-share from continuing operations
$
$
42.5
137.7
0.8
45.6
7.3
38.3
0.1
38.4
-
38.4
0.60
6.2
20.2
0.1
6.7
1.1
5.6
-
5.6
-
5.6 $
$
22.7
109.3
(6.0 )
77.5
18.8
58.7
(6.8 )
51.9
1.1
50.8
0.90
4.1
19.8
(1.1 )
14.1
3.4
10.7
(1.2 )
9.4
0.2
9.2
Executive Summary
Earnings from continuing operations attributable to II-VI Incorporated for fiscal year 2014 were $38.3 million ($0.60 per-share
diluted), compared to $58.7 million ($0.90 per-share diluted) for the same period last fiscal year. During fiscal year 2014, the
Company recorded total restructuring charges of $3.4 million (after-tax), mostly driven by the Company’s effort to align the cost
structure of the current year acquisitions of Laser Enterprise and Network Solutions with future revenue and bookings
levels. Although these businesses incurred a segment operating loss during the fiscal year 2014 of $26.3 million, planned synergies
with respect to the current year acquisitions of Laser Enterprise and Network Solutions and cost saving actions have been
implemented to strengthen their financial performance in the future. Included in this segment’s operating results for fiscal year 2014
were transaction costs of $3.9 million, as well as purchase accounting adjustments related to the fair market value of inventory of $4.1
million. In addition, as a result of the increased borrowings used to finance these acquisitions, the Company incurred $3.3 million of
additional interest expense during fiscal year 2014 when compared to prior fiscal year.
Consolidated
Bookings . Bookings are defined as customer orders received that are expected to be converted to revenues over the next twelve
months. For long-term customer orders, the Company does not include in bookings the portion of the customer order that is beyond
twelve months, due to the inherent uncertainty of an order that far out in the future. Bookings for the year ended June 30, 2014
increased 32.7% to $691.3 million, compared to $521.1 million for the same period last fiscal year. The increase in bookings was
mostly attributable to the current year acquisitions of Laser Enterprise and Network Solutions as well as the incremental bookings
from prior year acquisitions. In addition, the Company’s Infrared Optics segment recorded increased bookings at its legacy business
for both diamond window optics used in Extreme Ultra-Violet (“EUV”) photolithography systems and at HIGHYAG for fiber beam
delivery systems, and laser processing heads used in automotive manufacturing.
Revenues . Revenues for the year ended June 30, 2014 increased 24% to $683.3 million, compared to $551.1 million for the same
period last fiscal year. The increase in revenues was mostly attributable to the current year acquisitions of Laser Enterprise and
Network Solutions, incremental revenues from prior year acquisitions and higher revenues associated with shipments of diamond
windows at Infrared Optics and silicon carbide wafers at WBG. Somewhat offsetting these higher revenue levels was a decrease in
shipment volumes of passive optical components sold by Photop in our Near-Infrared Optics segment as well as lower shipments at
the Company’s military related businesses, which were driven primarily by reduced U.S. defense spending.
33
Gross margin. Gross margin for the year ended June 30, 2014 was $226.7 million or 33.2% of total revenues, compared to $203.5
million or 36.9% of total revenues for the same period last fiscal year. The decrease in gross margin was the result of current year
purchase accounting fair market value inventory adjustments related to the acquisitions of Laser Enterprise and Network Solutions of
$4.1 million as well as current year restructuring charges of $2.2 million (pre-tax) related to inventory write-offs at VLOC and
severance costs at Laser Enterprise and Network Solutions. Exclusive of the restructuring charges, the operating gross margin profile
of the two acquisitions that occurred in fiscal 2014 has put downward pressure on gross margin during fiscal year 2014 as the
Company continues to align the operating costs of the new businesses with its existing and prospective revenue profile. In addition,
gross margin decreased at the Company’s Infrared Optics legacy business due to pricing pressure and increased costs in raw material
inputs, while gross margin at the Company’s Near-Infrared segment was negatively impacted by both lower revenue volume and
pricing pressure of legacy passive optical component products from increased competition in China.
Internal research and development. Company-funded internal research and development expenses for the year ended June 30, 2014
were $42.5 million, or 6.2% of revenues, compared to $22.7 million, or 4.1% of revenues last fiscal year. The increase in research and
development expense as a percentage of revenues in the current year is due to increased research and development efforts within the
Near Infrared Optics segment as Photop continues to invest in the development of components parts that support higher speed optical
communication and data networks around the world. In addition, the current year acquisitions of Laser Enterprise and Network
Solutions invest in higher levels of research and development activity, supporting ongoing product development of high-power laser
components, micro-optics and amplifiers.
Selling, general and administrative. Selling, general and administrative expenses for the year ended June 30, 2014 were $137.7
million or 20.2% of revenues, compared to $109.3 million, or 19.8% of revenues last fiscal year. As a percentage of revenues, selling,
general and administrative expenses were consistent with the prior fiscal year.
Interest and other, net. Interest and other, net for the year ended June 30, 2014 was expense of $0.8 million compared to income of
$6.0 million last fiscal year. Included in interest and other, net for the year ended June 30, 2014 were earnings from the Company’s
equity investment in Guangdong Fuxin Electronic Technology (“Fuxin”), interest expense on borrowings, interest income on excess
cash reserves, unrealized gains on the Company sponsored deferred compensation plan and foreign currency gains and losses. The
majority of the income included in the 2013 fiscal year was the result of a $5.3 million contractual settlement with a contract
manufacturer related to the October 2011 Thailand flood.
Income taxes. The Company’s year-to-date effective income tax rate from continuing operations at June 30, 2014 was 16.0%,
compared to an effective tax rate from continuing operations of 24.2% last fiscal year. The variation between the Company’s effective
tax rate from continuing operations and the U.S. statutory rate of 35% was primarily due to the Company’s foreign operations, which
are subject to income taxes at lower statutory rates. The lower year-to-date effective tax rate from continuing operations was primarily
the result of improved profitability in lower taxing jurisdictions such as the Philippines. In addition, the Company recorded $0.8
million of tax benefits during the year ended June 30, 2014 as a result of statute of limitation expirations on previously filed income
tax returns.
Discontinued operation. During December 2013, the Company completed the discontinuance of its tellurium product line by exiting
all business activities associated with this product. This product line, previously serviced by PRM, was included as part of the
Military & Materials segment. Financial information included in Management’s Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Annual Report on Form 10-K has been adjusted to properly reflect the tellurium product
line as a discontinued operation for all periods presented. The revenues and earnings (losses) of the tellurium product line reflected as
a discontinued operation for the periods presented are as follows (in millions):
June 30,
2014
2013
2012
Revenues
Earnings (loss) from discontinued operation before
income taxes
Income tax benefit
Earnings (loss) from discontinued operation net income
taxes
$
1.8 $
7.3 $
18.2
0.1
-
(6.8 )
-
(9.6 )
0.1
$
0.1 $
(6.8 ) $
(9.4 )
34
Segment Reporting
Bookings, revenues and segment earnings for the Company’s reportable segments are discussed below. Segment earnings differ from
income from operations in that segment earnings exclude certain operational expenses included in other expense (income) – net as
reported. Management believes segment earnings 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 12.
Segment and Geographic Reporting,” included in this Annual Report on Form 10-K for further information on the Company’s
reportable segments and for the reconciliation of segment earnings to net earnings, which is incorporated herein by reference.
Infrared Optics (millions)
Bookings
Revenues
Segment earnings
Year Ended
June 30,
%
Increase
(Decrease)
2014
2013
$ 220.1 $ 200.7
$ 209.7 $ 203.3
49.5
$
40.7 $
9 %
3 %
(18 %)
The Company’s Infrared Optics segment includes the combined operations of Infrared Optics and HIGHYAG.
Bookings for year ended June 30, 2014 for Infrared Optics increased 9% to $220.1 million, compared to $200.7 million last fiscal
year. The increase in bookings was due to higher order levels from European customers specific to diamond windows and other
products used in EUV lithography systems. At HIGHYAG, continued growth in the one-micron laser market resulted in higher
bookings for fiber beam delivery systems, and laser processing heads used in the automotive manufacturing industry contributed to the
increased bookings levels.
Revenues for the year ended June 30, 2014 for Infrared Optics increased 3% to $209.7 million, compared to revenues of $203.3
million last fiscal year. The increase in revenues was the result of increased shipment volumes in Europe of replacement optics for
CO2 laser systems as well as diamond windows and other component parts used in EUV lithography systems.
Segment earnings for the year ended June 30, 2014 for Infrared Optics decreased 18% to $40.7 million, compared to $49.5 million for
the same period last fiscal year. The decrease in segment earnings was the result of lower gross margin caused by higher material cost,
unfavorable absorption of manufacturing overhead costs, and higher levels of allocated corporate expenses, including share-based
compensation expense.
Near-Infrared Optics (millions)
Bookings
Revenues
Segment earnings
Year Ended
June 30,
%
(Decrease)
2014
2013
$ 144.2 $ 145.7
$ 144.7 $ 154.9
19.6
$
9.8 $
(1 %)
(7 %)
(50 %)
Bookings for the year ended June 30, 2014 for Near-Infrared Optics decreased 1% to $144.2 million, compared to $145.7 million for
last fiscal year. The decrease in bookings was due to softening demand for legacy products used in the optical communications
market as well as reclassification of certain bookings from external to internal due to the acquisitions of Laser Enterprise and Network
Solutions.
Revenues for the year ended June 30, 2014 for Near-Infrared Optics decreased 7% to $144.7 million, compared to $154.9 million for
the same period last fiscal year. The decrease in revenues was due to price erosion for legacy products serving 10G and 40G
applications in the optical communications market. In addition, certain product shipments to our recently acquired Network Solutions
are now being classified as intercompany revenues subsequent to the November 2013 acquisition date.
35
Segment earnings for the year ended June 30, 2014 for Near-Infrared Optics decreased 50% to $9.8 million, compared to $19.6
million last fiscal year. The decrease in segment earnings was mostly due to a downward shift in gross margin as the technology shift
to higher speed networks in the optical communications industry resulted in price erosion on shipments of the segment’s legacy
products. In addition, operating expenses increased when compared to the prior fiscal year primarily due to increased compensation
costs in China as well higher levels of investment regarding internal research and development of next generation products aimed at
serving higher speed networks and data centers.
Military & Materials (millions)
Bookings
Revenues
Segment earnings
Year Ended
June 30,
%
Increase
2014
2013
$
$
$
88.3 $
98.3 $
12.9 $
88.0 - %
1 %
97.1
1,743 %
0.7
The Company’s Military & Materials segment includes the combined operations of LWOS, VLOC, MLA and PRM. During
December 2013, the Company completed the discontinuance of PRM’s tellurium product line by exiting all business activities
associated with this product. Segment information for all periods presented has been adjusted to properly reflect the tellurium product
line as a discontinued operation.
Bookings for the year ended June 30, 2014 for Military & Materials were $88.3 million, consistent with $88.0 million last fiscal
year. The consistent bookings level was the result of an increase in bookings at PRM for its rare earth element product offset by
decreased bookings related to lower order volumes of military related products as a result of the decline in overall defense spending
and funding constraints specific to certain U.S. military programs.
Revenues for the year ended June 30, 2014 for Military & Materials were $98.3 million, consistent with $97.1 million last fiscal
year. The consistent revenues level was the result of higher revenues of military products mostly due to the incremental revenues
from the December 2012 acquisition of LightWorks, offset somewhat by lower revenues at PRM, which has refocused its business
model towards refining rare earth elements and providing an internal supply of selenium to the Company’s Infrared Optics segment.
Segment earnings for the year ended June 30, 2014 for Military & Materials were $12.9 million, compared to $0.7 million last fiscal
year. The increase in segment earnings was a result of increased profitability at PRM as a result of their restructured business model
described above, which eliminated the exposure to volatility in the minor metals market for selenium.
Advanced Products Group (millions)
The Company’s Advanced Products Group includes the combined operations of Marlow, M Cubed, WBG and WMG.
Bookings
Revenues
Segment earnings
Year Ended
June 30,
%
Increase
2014
2013
$
$
$
121.3 $
115.4 $
9.4 $
86.7
95.8
1.7
40 %
20 %
453 %
Bookings for the year ended June 30, 2014 for the Advanced Products Group increased 40% to $121.3 million, compared to $86.7
million last fiscal year. The increase in bookings was attributable to strong order placement from Japanese OEMs specific to WBG’s
100mm and 150mm silicon carbide wafers used in commercial applications in the wireless infrastructure and power device markets.
WBG also received a $4.0 million research and development contract from the Department of Defense for the ongoing development of
150mm silicon carbide wafers. In addition, incremental bookings from the November 2012 acquisition of M Cubed helped
contributed to the increase.
Revenues for the year ended June 30, 2014 for the Advanced Products Group increased 20% to $115.4 million, compared to $95.8
million last fiscal year. The increase in revenues was primarily due to the November 2012 acquisition of M Cubed as well as strong
product sales at WBG specific to 100mm and 150mm semi-insulating silicon carbide wafers used by Japanese OEMs to support the
36
continued growth of 4G wireless stations in Asia. Somewhat offsetting these increases in revenues were reduced shipments at Marlow
for products serving the personal comfort market.
Segment earnings for the year ended June 30, 2014 were $9.4 million, compared to $1.7 million last fiscal year. The increase in
segment earnings was largely driven by increased revenues and profit contribution from M Cubed as well as increased revenues at
WBG.
Active Optical Products (millions)
Bookings
Revenues
Segment loss
Year Ended
June 30,
2014
2013
$
$
$
117.4
115.2
(26.3 )
-
-
-
In September 2013, the Company acquired all of the outstanding shares of Oclaro Switzerland GmbH, a limited liability company
formed under the laws of the Swiss confederation, as well as certain additional assets of Oclaro, Inc. used in the semiconductor laser
business and in November 2013 acquired certain assets of Oclaro, Inc. used in the fiber amplifier and micro-optics business. The
Company operates the acquired businesses as Laser Enterprise and Network Solutions, respectively, and has included them in the
Company’s new operating segment Active Optical Products. During the year ended June 30, 2014, segment losses were impacted by
$2.0 million of severance costs associated with restructuring efforts at Laser Enterprise and Network Solutions, $3.9 million of
transaction expenses and fair market value inventory adjustments of $4.1 million.
Fiscal Year 2013 Compared to Fiscal Year 2012
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30,
2013 and 2012.
Bookings
Total Revenues
Cost of goods sold
Gross margin
Operating Expenses:
Internal research and development
Selling, general and administrative
Interest and other, net
Earnings from continuing operations before income tax
Income taxes
Net earnings from continuing operations
Loss from Discontinued Operation, net of income taxes
Net Earnings
Net earnings attributable to noncontrolling interest
Net earnings attributable to II-VI Incorporated
Diluted earnings per-share from continuing operations
Year Ended
June 30, 2013
Year Ended
June 30, 2012
$ 521.1
$ 534.9
% of
Revenues
% of
Revenues
$ 551.1
347.6
203.5
100.0 % $ 516.4
315.1
201.3
63.1
36.9
100.0 %
61.0
39.0
22.7
109.3
(6.0 )
77.5
18.8
58.7
(6.8 )
51.9
1.1
50.8
0.90
$
$
4.1
19.8
(1.1 )
14.1
3.4
10.7
(1.2 )
9.4
0.2
9.2 $
$
21.4
98.4
(7.0 )
88.5
17.8
70.7
(9.4 )
61.3
1.0
60.3
1.08
4.1
19.1
(1.4 )
17.1
3.4
13.7
(1.8 )
11.9
0.2
11.7
Consolidated
Bookings. Bookings for the year ended June 30, 2013 decreased 3% to $521.1 million, compared to $534.9 million for the 2012 fiscal
year. Excluding bookings of $47.8 million related to the three fiscal year 2013 acquisitions, bookings decreased 10% when compared
to the 2012 fiscal year, mostly as a result of reduced orders at PRM, Photop and WBG. Bookings decreased at PRM as a result of
weakening demand and pricing of its selenium materials while bookings at Photop decreased due to a temporary cyclical demand shift
37
caused by a technology transition from 40G to 100G in the optical communications market in China. In addition, WBG was negatively
impacted by delayed spending from an annual government contract order as well as the bankruptcy of a large customer.
Revenues. Revenues for the year ended June 30, 2013 increased 7% to $551.1 million, compared to $516.4 million from fiscal year
June 30, 2012. Excluding revenues of $52.3 million related to three fiscal year 2013 acquisitions, revenues decreased 5% when
compared to the 2012fiscal year, mostly as a result of reduced shipment volumes and unfavorable pricing at PRM for selenium
products. In addition, Marlow experienced a decline in revenue as a result of the end of life cycle of its gesture recognition product
line.
Gross margin. Gross margin as a percentage of revenues for the year ended June 30, 2013 was 36.9%, compared to 39.0% for fiscal
year June 30, 2012. Gross margin in fiscal year 2013 was negatively impacted by $4.4 million of inventory write-offs and equipment
impairment associated with the downsizing of PRM’s selenium product lines, respectively, as well as an additional charge of $2.7
million of selenium lower of cost or market write-downs. In addition, gross margin in fiscal 2013 was impacted negatively due to a
change in product mix at Marlow as well as lower gross margin at recently acquired M Cubed, which carries a lower gross margin
profile in comparison to other business units of the Company. Gross margin in fiscal year 2012 was negatively impacted by selenium
lower of cost or market write-downs at PRM.
Internal research and development. Company-funded internal research and development expenses for the year ended June 30, 2013
were $22.7 million, or 4.1% of revenues, compared to $21.4 million, or 4.1% of revenues, for fiscal year June 30, 2012. Fiscal year
2013 internal research and development expenditures were consistent with fiscal year June 30, 2012 internal research and
development expenditures as a percentage of revenues, as the Company’s business units invested in next generation products and
technology to fuel future revenue and earnings growth.
Selling, general and administrative. Selling, general and administrative expenses for the year ended June 30, 2013 were $109.3
million, or 19.8% of revenues, compared to $98.4 million, or 19.1% of revenues, for fiscal year June 30, 2012. Selling, general and
administrative expense as a percentage of revenues increased during the 2013 fiscal year compared to fiscal year June 30, 2012,
mostly as a result of transaction expenses of $1.1 million related to three acquisitions completed during fiscal year 2013. In addition,
the Company’s acquisitions during fiscal year 2013 contributed to the higher level of selling, general and administration expense
while higher share-based compensation expense also contributed to the unfavorable change in selling, general and administrative
expenses as a percentage of revenues.
Interest and other, net. Interest and other, net for the year ended June 30, 2013 and 2012 was income of $6.0 million and $7.0
million, respectively. Included in interest and other, net for the year ended June 30, 2013 was $4.8 million of other income related to
the contractual settlement related to the Thailand flooding, gains on the deferred compensation plan of $0.6 million, equity investment
earnings of $1.0 million and interest income on excess cash reserves that more than offset interest expense. These favorable items
were somewhat offset by foreign currency losses due to the weakening U.S. dollar. Included in interest and other, net for the year
ended June 30, 2012 was a $1.0 million gain related to the Company’s sale of its equity investment in Langfang Haobo Diamond Co.
Ltd., a $1.4 million gain related to the sale of precious metals inventory, favorable foreign currency gains resulting from the
weakening Euro, earnings from equity investments and interest income on excess cash reserves.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2013 and 2012 was 24.2% and 20.1%, respectively.
The variations between the Company’s effective tax rates and the U.S. statutory rate of 35.0% were primarily due to the consolidation
of the Company’s foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income
from these various tax jurisdictions could have a material impact on the Company’s effective tax rate. During fiscal year 2013, the
Company’s year-to-date effective income tax rate was higher than the same period last fiscal year due to lower income levels in the
Company’s lower taxing jurisdictions such as the Philippines and Vietnam.
Segment Reporting
Bookings, revenues and segment earnings for the Company’s reportable segments are discussed below. Segment earnings differ from
income from operations in that segment earnings exclude certain operational expenses included in other expense (income) – net as
reported. Management believes segment earnings to be a useful measure 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 12. Segment and
Geographic Reporting,” included in this Annual Report on Form 10-K for further information on the Company’s reportable segments
and for the reconciliation of segment earnings to net earnings, which is incorporated herein by reference.
38
Infrared Optics (millions)
Bookings
Revenues
Segment earnings
%
Year Ended
Increase
June 30,
(Decrease)
2013
2012
$ 200.7 $ 206.1
$ 203.3 $ 201.6
$
49.5 $
51.1
(3 )%
1 %
(3 )%
The Company’s Infrared Optics segment includes the combined operations of Infrared Optics and HIGHYAG.
Bookings for the year ended June 30, 2013 for Infrared Optics decreased 3% to $200.7 million, compared to $206.1 million for fiscal
year June 30, 2012. The decrease in bookings was primarily driven by decreased demand from OEMs for new high-power CO2 laser
systems in Japan in the early part of fiscal year June 30, 2013 combined with reduced demand for optics used in the U.S. military
market due to the economic uncertainties in these market sectors.
Revenues for the year ended June 30, 2013 for Infrared Optics were consistent with fiscal year June 30, 2012. Revenue shortfalls from
Japanese OEMs and U.S. military customers were offset by increased shipments for CVD diamond window optics used in high-power
laser applications and EUV lithography systems in Europe, as well as increased shipments at HIGHYAG for its one-micron welding
and cutting heads used in automotive manufacturing.
Segment earnings for the year ended June 30, 2013 for Infrared Optics were $49.5 million, compared to $51.1 million for fiscal year
June 30, 2012. The decrease in segment was the result of reduced gross margins caused by higher raw material input prices and a
higher level of allocated corporate expenses related to share-based.
Near-Infrared Optics (millions)
Bookings
Revenues
Segment earnings
Year Ended
June 30,
%
Increase
(Decrease)
2013
2012
$ 145.7 $ 155.1
$ 154.9 $ 140.0
14.1
$
19.6 $
(6 )%
11 %
40 %
Bookings for the year ended June 30, 2013 for Near-Infrared Optics decreased 6% to $145.7 million, compared to $155.1 million for
fiscal year June 30, 2012. The decrease in bookings was mostly due to cyclical softening demand for optical components used in the
telecommunications market in China, due to delayed spending by OEMs as a result of the transitioning technology shift from 40G to
100G platforms for high-speed networking service. In addition, certain customer contracts specific to Photop’s green laser business
reached their end of life in fiscal year 2013. These decreases more than offset incremental bookings associated with the December
2013 acquisition of thin-film filter business and interleaver product line from Oclaro.
Revenues for the year ended June 30, 2013 for Near-Infrared Optics increased 11% to $154.9 million, compared to $140.0 million for
fiscal year June 30, 2012. The increase in revenues was primarily driven by incremental thin-film filter and interleaver product
shipments associated with the December 2013 acquisition of the thin-film filter business and interleaver product line from Oclaro.
Segment earnings for the year ended June 30, 2013 for Near-Infrared Optics increased 40% to $19.6 million, compared to $14.1
million for fiscal year June 30, 2012. The increase in segment earnings for the year ended June 30, 2013 compared to fiscal year June
30, 2012 was driven by higher sales volumes at Photop, production and operational efficiencies realized in recovering from the
October 2011 Thailand flood, and the addition of the thin-film filter business and interleaver product line.
39
Military & Materials (millions)
Bookings
Revenues
Segment earnings
Year Ended
June 30,
%
Increase
(Decrease)
2013
2012
$
$
$
88.0 $
99.2
97.1 $ 100.3
7.9
0.7 $
(11 %)
(3 %)
(91 %)
The Company’s Military & Materials segment includes the combined operations of Exotic Electro-Optics (“EEO”), LightWorks,
VLOC, Max Levy Autograph, Inc. (“MLA”) and PRM.
Bookings for the year ended June 30, 2013 for Military & Materials decreased 11% to $88.0 million, compared to $99.2 million for
fiscal year June 30, 2012. The decrease in bookings was primarily driven by lower order volumes of selenium at PRM as well as
unfavorable index pricing of this material. In addition, reduced outlook for production of sapphire windows for the Joint Strike Fighter
program caused a decrease in orders at EEO, which were more than offset by additional bookings from the 2013 acquisition of
LightWorks business.
Revenues for the year ended June 30, 2013 for Military & Materials decreased 3% to $97.1 million, compared to $100.3 million for
fiscal year June 30, 2012. The decrease in revenues was primarily due to lower product demand and pricing for selenium at PRM,
which more than offset the additional revenue resulting from the LightWorks acquisition.
Segment earnings for the year ended June 30, 2013 for Military & Materials was $0.7 million, compared to $7.9 million for fiscal year
June 30, 2012. The unfavorable change in segment earnings was due to charges at PRM related to selenium inventory write-offs
combined with lower sales at PRM.
Advanced Products Group (millions)
Bookings
Revenues
Segment earnings
Year Ended
June 30,
%
Increase
(Decrease)
2013
2012
$
$
$
86.7 $
95.8 $
1.7 $
67.4
74.6
8.4
29 %
28 %
(79 )%
The Company’s Advanced Products Group includes the combined operations of Marlow, M Cubed, WBG and Worldwide Materials
Group (“WMG”).
The increase in bookings for the year ended June 30, 2013 compared to fiscal year June 30, 2012 was primarily due to the incremental
bookings from the 2013 acquisition of M Cubed as well as a large initial production order at Marlow received in fiscal year 2013
specific to the personal comfort market, which more than offset declines in Marlow’s gesture recognition orders which was nearing
the end of its product life cycle. These increases in bookings were somewhat offset by declines at WBG as delays in government
spending resulted in the postponed receipt of an annual government contract order. In addition, WBG was impacted by the bankruptcy
of a large customer which put further downward pressure on order patterns.
Revenues for the year ended June 30, 2013 for the Advanced Products Group increased 28% to $95.8 million, compared to $74.6
million for fiscal year June 30, 2012. Excluding M Cubed revenues of $30.3 million, revenues decreased $9.1 million for the fiscal
year ended June 30, 2013 when compared to fiscal year June 30, 2012, primarily due to lower shipment volumes at Marlow related to
telecommunication, automotive and gesture recognition products. In addition, WBG experienced lower shipments of semi-insulating
SiC substrates used for radio frequency applications due to reduced customer demand in the wireless infrastructure market and defense
sector.
Segment earnings for the year ended June 30, 2013 were $1.7 million, compared to segment earnings of $8.4 million for fiscal year
June 30, 2012. The unfavorable change in segment earnings was primarily due to reduced revenues and gross margins at Marlow
resulting from unfavorable product mix, as higher margin gesture recognition sales declined significantly. In addition, low operating
margin at the-then recently acquired M Cubed contributed to the lower earnings levels despite higher levels of segment revenues.
40
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of cash have been provided through operations and long-term borrowings. Other sources of cash
include proceeds received from the exercise of stock options and sales of equity investments. Our historical uses of cash have been for
capital expenditures, business acquisitions, payments of principal and interest on outstanding debt obligations and purchases of
treasury stock. Supplemental information pertaining to our sources and uses of cash is presented as follows:
Sources (uses) of Cash (millions):
Net cash provided by operating activities
Purchases of businesses, net of cash acquired
Additions to property, plant and equipment
Net proceeds (payments) on long-term borrowings
Proceeds from exercises of stock options
Purchases of treasury stock
Payment of redeemable noncontrolling interest
Payments on cash earnout arrangement
Proceeds received from contractual settlement from
Thailand flooding
Proceeds from sale of equity method investment
Other
Year Ended June 30,
2013
2012
2014
$
95.5 $
(177.7 )
(29.2 )
128.0
4.4
(20.0 )
(8.8 )
(3.0 )
107.6 $
(126.2 )
(25.3 )
102.0
4.1
(20.0 )
-
-
-
-
(0.0 )
4.8
2.1
1.4
88.1
(46.1 )
(42.8 )
(7.3 )
2.7
(5.0 )
-
(6.0 )
-
3.5
(1.6 )
Net cash provided by operating activities:
Net cash provided by operating activities was $95.5 million and $107.6 million for the fiscal years ended June 30, 2014 and 2013,
respectively. The decrease in cash flows from operating activities in fiscal year 2014 compared to fiscal year 2013 was mostly due to
lower earnings levels, offset somewhat by favorable overall working capital changes, specifically in the areas of inventory and
accounts payable. Higher non-cash charges for depreciation, amortization and share-based compensation also contributed in offsetting
the operating cash flow impact of the decline in earnings.
Net cash provided by operating activities was $107.6 million and $88.1 million for the fiscal years ended June 30, 2013 and 2012,
respectively. Cash flows from operating activities increased in fiscal year 2013 in spite of lower earnings levels due to a heightened
focus on working capital management of inventory and accounts receivable. Furthermore, higher non-cash charges for depreciation,
amortization, share-based compensation and unrealized foreign currency losses helped contribute to higher levels of cash flow from
operations.
Net cash used in investing activities:
Net cash used in investing activities was $206.8 million and $144.5 million for the fiscal years ended June 30, 2014 and 2013,
respectively. The majority of net cash used in investing activities during the year ended June 30, 2014 consisted of $93.1 million net
cash paid for the acquisition of Laser Enterprise and the $84.6 million net cash paid for the acquisition of Network Solutions. This
compares to $126.2 million of net cash paid during the year ended June 30, 2013 for the acquisitions M Cubed, the thin-film filter
business and interleaver product line of Oclaro and LightWorks. In addition, during the year ended June 30, 2014, the Company paid
$29.2 million for capital expenditures, increasing its investment from last fiscal year in an effort to support revenue growth and
capacity expansion.
41
Net cash used in investing activities was $144.5 million and $84.9 million for the fiscal years ended June 30, 2013 and 2012,
respectively. The majority of the increase in cash used in investing activities during fiscal 2013 was the result of the acquisitions of M
Cubed, the thin-film filter business and interleaver product line of Oclaro and LightWorks that were completed in fiscal year 2013.
This increase in spending related to acquisition activity was somewhat offset by reduced levels of property, plant and equipment
spending as well as proceeds received of $4.8 million related to the contractual settlement from the Thailand flooding.
Net cash provided by (used in) financing activities:
Net cash provided by financing activities was $99.1 million for the year ended June 30, 2014 compared to $85.8 million for the year
ended June 30, 2013. The change in net cash provided by financing activities was primarily due to additional borrowings used to
finance the Company’s acquisitions of Laser Enterprise and Network Solutions, offset somewhat by a $3.0 million earnout payment to
the former owners of LightWorks and an $8.8 million payment made to acquire the remaining ownership of HIGHYAG.
Net cash provided by financing activities was $85.8 million for the year ended June 30, 2013 compared to net cash used in financing
activities of $14.8 million for the year ended June 30, 2012. The change in net cash flows from financing activities was primarily due
to $102 million of net borrowings on long-term debt used to finance the Company’s three acquisitions in fiscal 2013, offset somewhat
by $20.0 million of cash used to repurchase Company stock under the Company’s share repurchase program.
In September 2013, the Company amended and restated its existing credit agreement. The Second Amended and Restated Credit
Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $225 million (increased from $140 million), as
well as a $100 million Term Loan. The Term Loan shall be re-paid in consecutive quarterly principal payments on the first business
day of each January, April, July and October, with the first payment commencing on October 1, 2013, as follows: (i) twenty
consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity
date. The Amended Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-
owned domestic subsidiary of the Company. The Company has the option to request an increase to the size of the Amended Credit
Facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through
September 2018 and has an interest rate of LIBOR, as defined in the agreement, plus 0.75% to 1.75% based on the Company’s ratio of
consolidated indebtedness to consolidated EBITDA. Additionally, the facility is subject to certain covenants, including those relating
to minimum interest coverage and maximum leverage ratios. As of June 30, 2014, the Company was in compliance with all financial
covenants under its Amended Credit Facility.
In conjunction with entering into the Amended Credit Facility, the Company incurred approximately $1.0 million of deferred
financing costs which are being amortized over the term of the agreement. As a result of the overall increase in borrowing capacity,
existing deferred financing costs at the time of the amendment of $0.5 million are also being amortized over the term of the Amended
Credit Facility.
The Company’s Yen denominated line of credit is a 500 million Yen facility that has a five-year term through June 2016 and has an
interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.50%. At June 30, 2014 and 2013, the Company had
300 million Yen borrowed. Additionally, the facility is subject to certain covenants, including those relating to minimum interest
coverage and maximum leverage ratios. As of June 30, 2014, the Company was in compliance with all financial covenants under its
Yen facility.
The Company had aggregate availability of $71.0 million and $29.8 million under its lines of credit as of June 30, 2014 and June 30,
2013, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June
30, 2014 and June 30, 2013, total outstanding letters of credit supported by the credit facilities were $1.9 million and $1.3 million,
respectively.
The weighted average interest rate of total borrowings was 1.8% and 1.4%, for the year ended June 30, 2014 and 2013, respectively.
In February 2014, the Board of Directors authorized the Company to purchase up to $20.0 million of its Common Stock. The
repurchase program called for shares to be purchased in the open market or in private transactions from time to time. Shares purchased
by the Company are retained as treasury stock and are available for general corporate purposes. During the fiscal year ended June 30,
2014 the Company completed its $20.0 million program by purchasing 1,333,355 shares of its Common Stock.
In August 2014, the Board of Directors authorized the Company to purchase up to $50.0 million of its Common Stock. The repurchase
program has no expiration and calls for shares to be purchased in the open market or in private transactions from time to time. Shares
purchased by the Company will be retained as treasury stock and are available for general corporate purposes. During August 2014,
the Company purchased 180,000 shares of its Common Stock for $2.5 million under this new repurchase program.
42
In August 2014, the Company exited its capital lease obligation by purchasing the existing manufacturing facility in Berlin, Germany
utilized by the Company’s HIGHYAG business. The total cash paid for this purchase was approximately $13.4 million and was
financed through existing cash balances at June 30, 2014.
Our cash position, borrowing capacity and debt obligations are as follows (in millions):
Cash and cash equivalents
Available borrowing capacity
Total debt obligation
June 30,
2014
June 30,
2013
$
174.7 $
71.0
242.0
185.4
29.8
114.0
The Company believes cash flow from operations, existing cash reserves and available borrowing capacity will be sufficient to fund
its working capital needs, capital expenditures and internal and external growth for fiscal 2015. The Company’s cash and cash
equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the U.S. As of
June 30, 2014, the Company held approximately $143 million of cash and cash equivalents outside of the U.S. Cash balances held
outside the United States could be repatriated to the U.S., but, under current law, would potentially be subject to U.S. federal income
taxes, less applicable foreign tax credits. The Company has not recorded deferred income taxes related to undistributed earnings
outside of the U.S., as the earnings of the Company’s foreign subsidiaries are indefinitely reinvested.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the Operating Lease Obligations and the Purchase Obligations disclosed in the
contractual obligations table below as well as letters of credit as discussed in Note 7 to the Company’s Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K, which information is incorporated herein by reference. The
Company enters into these off-balance sheet arrangements to acquire goods and services used in its business.
43
Tabular Disclosure of Contractual Obligations
Contractual Obligations
($000)
Long-term debt obligations
Interest payments(1)
Capital lease obligation(2)
Operating lease obligations(3)
Purchase obligations(4)(5)
Other long-term liabilities reflected on the registrant's
balance sheet
Total
Payments Due By Period
Less Than
1 Year
1-3
Years
3-5
Years
Total
More
Than
5 Years
$ 241,960 $
21,866
11,636
56,488
16,883
20,000 $
4,793
453
13,298
15,906
42,960 $ 179,000 $
5,521
8,431
1,094
982
7,148
17,247
-
977
-
3,121
9,107
18,795
-
-
$ 348,833 $
-
54,450 $
-
-
70,597 $ 192,763 $ 31,023
-
(1) Variable rate interest obligations are based on the interest 2014rate in place at June 30, 2014 and relates to both the Amended
Credit Facility and its capital lease obligation. In August 2014, the Company exited its capital lease obligation by purchasing
the existing manufacturing facility in Berlin, Germany utilized by the Company’s HIGHYAG business. The total cash paid for
this purchase was approximately $13.4 million and was financed through existing cash balances at June 30, 2014. Due to this
purchase, the amount of interest included in this table for the HIGHYAG capital lease of $0.6 million in less than one year, $1.2
million in years one through three, $1.0 million in years three through five and $3.1 million more than five years will not be
paid in future years.
(2) Due to the conversion of the HIGHYAG capital lease as discussed above, the amount of future payments included herein under
(3)
the current capital lease obligation will not be paid in future years.
Includes an obligation for the use of two parcels of land related to PRM. The lease obligations extend through years 2039 and
2056, respectively.
(4) A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the
Company and that specifies all significant terms, including fixed or minimum quantities to be purchased; minimum or variable
price provisions, and the approximate timing of the transaction. These amounts are primarily comprised of open purchase order
commitments to vendors for the purchase of supplies and materials.
Includes $10.0 million of holdback payments associated with the acquisitions of Laser Enterprise and Network Solutions.
(5)
The gross unrecognized income tax benefits at June 30, 2014, which are excluded from the above table, were $2.8 million. The
Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this
time, the Company does not expect a significant payment related to these obligations within the next fiscal year.
44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates, interest rates and
commodity prices. There were no material changes in our market risk exposures in fiscal year 2014 as compared to fiscal year 2013.
In the normal course of business, the Company uses certain techniques and a derivative financial instrument as part of its overall risk
management strategy, primarily focused on its exposure to the Japanese Yen. No significant changes have occurred in the techniques
and instruments used other than those described below.
The Company also has transactions denominated in Euros, British Pounds, Renminbi and the Swiss Francs. Changes in the foreign
currency exchange rates of the Company’s various currencies did not have a material impact on the results of operations for fiscal year
2014.
Foreign Exchange Risks
In the normal course of business, the Company enters into foreign currency forward exchange contracts with its financial institutions.
The purpose of these contracts is to hedge ordinary business risks regarding foreign currencies on product sales. Foreign currency
exchange contracts are used to limit transactional exposure to changes in currency rates. The Company enters into foreign currency
forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-
established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which
export sales are denominated. These contracts provide the Company with an economic hedge in which settlement will occur in future
periods, thereby limiting the Company’s exposure. These contracts had a total notional amount of $7.4 million and $4.7 million at
June 30, 2014 and June 30, 2013, respectively. The Company continually monitors its positions and the credit ratings of the parties to
these contracts. While the Company may be exposed to potential losses due to risk in the event of non-performance by the
counterparties to these financial instruments, it does not currently anticipate such losses.
A 10% change in the Yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of approximately
$3.5 million to an increase of approximately $4.2 million for the year ended June 30, 2014.
Assets and liabilities of foreign operations are translated into U.S. dollars using the period-end exchange rate, while income and
expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated
other comprehensive income within shareholders’ equity.
Interest Rate Risks
As of June 30, 2014, the Company’s total borrowings of $242 million were from a line of credit borrowing of $154 million
denominated in U.S. dollars, a term loan denominated in U.S. dollars of $85 million and a line of credit borrowing of $3 million
denominated in Japanese Yen. As such, the Company is exposed to changes in interest rates. A change in the interest rate of 100 basis
points on these borrowings would have changed net earnings by $1.5 million, or $0.02 per-share diluted, for the fiscal year ended
June 30, 2014.
Discount Rate Risks
As of June 30, 2014, a 10% change in the Company’s discount rate used to determine the pension benefit obligation of the Switzerland
Defined Benefit Plan would have an immaterial impact on the Consolidated Financial Statements.
45
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Responsibility for Preparation of the Financial Statements
Management is responsible for the preparation of the financial statements included in this Annual Report on Form 10-K. The financial
statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include
amounts that are based on the best estimates and judgments of management. The other financial information contained in this annual
report is consistent with the financial statements.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control system is designed to provide reasonable assurance concerning the reliability of the financial data used in the
preparation of the Company’s financial statements, as well as reasonable assurance with respect to safeguarding the Company’s assets
from unauthorized use or disposition.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement presentation and other results of such systems.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30,
2014. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control – Integrated Framework (1992). Management’s evaluation included reviewing the
documentation of its controls, evaluating the design effectiveness of controls and testing their operating effectiveness. Management
excluded from the scope of its assessment of internal control over financial reporting the operations and related assets of II-VI Laser
Enterprise which was acquired on September 12, 2013, and II-VI Network Solutions Division which was acquired on November 1,
2013. The recent acquisitions excluded from management’s assessment of internal controls over financial reporting represented
approximately $250.4 million and $152.5 million of total assets and net assets as of June 30, 2014 and approximately $115.2 million
and $(20.0) million of total revenues and net income for the fiscal year then ended. Based on the evaluation, management concluded
that as of June 30, 2014, the Company’s internal controls over financial reporting were effective and provides reasonable assurance
that the accompanying financial statements do not contain any material misstatement.
Ernst & Young LLP, an independent registered public accounting firm, has issued their report on the effectiveness of our internal
control over financial reporting as of June 30, 2014. Their report is included herein.
46
The Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
Report of Independent Registered Public Accounting Firm
We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2014, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 framework) (the COSO criteria). II-VI Incorporated and Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of
and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of II-VI Laser
Enterprises and II-VI Network Solutions Division, which is included in the 2014 consolidated financial statements of II-VI
Incorporated and Subsidiaries and constituted $250.4 million and $152.5 million of total and net assets, respectively, as of June 30,
2014 and $115.2 million and $(20.0) million of revenues and net income (loss), respectively, for the year then ended. Our audit of
internal control over financial reporting of II-VI Incorporated and Subsidiaries also did not include an evaluation of the internal
control over financial reporting of II-VI Laser Enterprises and II-VI Network Solutions Division.
In our opinion, II-VI Incorporated and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 2014 and 2013, and the related consolidated
statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended
June 30, 2014 of II-VI Incorporated and Subsidiaries and our report dated August 28, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 2014
47
The Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 2014 and 2013,
and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
II-VI Incorporated and Subsidiaries at June 30, 2014 and 2013, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2014, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), II-VI
Incorporated and Subsidiaries' internal control over financial reporting as of June 30, 2014, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework)
and our report dated August 28, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 2014
48
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30,
Current Assets
Cash and cash equivalents
Accounts receivable - less allowance for doubtful accounts
of $1,852 and $1,479, respectively
Inventories
Deferred income taxes
Prepaid and refundable income taxes
Prepaid and other current assets
Total Current Assets
Property, plant & equipment, net
Goodwill
Other intangible assets, net
Investment
Deferred income taxes
Other assets
Total Assets
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued compensation and benefits
Accrued income taxes payable
Deferred income taxes
Other accrued liabilities
Total Current Liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total Liabilities
Shareholders' Equity
Preferred stock, no par value; authorized - 5,000,000 shares;
none issued
Common stock, no par value; authorized - 300,000,000 shares;
issued - 70,935,098 shares and 70,223,286 shares, respectively
Accumulated other comprehensive income
Retained earnings
Treasury stock, at cost, 9,481,963 shares and 8,011,733 shares,
respectively
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
See Notes to Consolidated Financial Statements.
49
2014
2013
$
174,660 $
185,433
136,723
165,873
11,118
4,440
12,917
505,731
208,939
196,145
136,404
11,589
4,038
9,080
1,071,926 $
20,000 $
45,767
32,461
4,584
732
31,521
135,065
221,960
7,440
32,418
396,883
$
$
107,173
141,859
10,794
4,543
11,342
461,144
170,672
123,352
86,701
11,203
2,696
8,034
863,802
-
23,617
28,315
7,697
110
34,695
94,434
114,036
4,095
15,129
227,694
-
-
213,573
19,406
521,327
754,306
(79,263 )
675,043
1,071,926 $
$
194,284
15,600
482,878
692,762
(56,654 )
636,108
863,802
II-VI Incorporated and Subsidiaries
Consolidated Statements of Earnings
Year Ended June 30,
($000 except per share data)
Revenues
Domestic
International
Total Revenues
Costs, Expenses and Other Expense (Income)
Cost of goods sold
Internal research and development
Selling, general and administrative
Interest expense
Other expense (income), net
Total Costs, Expenses, and Other Expense (Income)
2014
2013
2012
$
240,534 $
442,727
683,261
241,045 $
310,030
551,075
214,822
301,581
516,403
456,545
42,523
137,707
4,479
(3,634 )
637,620
347,558
22,689
109,337
1,160
(7,155 )
473,589
315,056
21,410
98,415
212
(7,168 )
427,925
Earnings from Continuing Operations Before Income Taxes
45,641
77,486
88,478
Income Taxes
7,325
18,766
17,760
Earnings from Continuing Operations
38,316
58,720
70,718
Earnings (loss) from Discontinued Operation, net of income taxes
133
(6,789 )
(9,443 )
Net Earnings
Less: Net Earnings Attributable to Redeemable Noncontrolling
Interest
Net Earnings Attributable to II-VI Incorporated
Basic earnings (loss) attributable to II-VI Incorporated
per common share:
Continuing operations
Discontinued operation
Consolidated
Diluted earnings (loss) attributable to II-VI Incorporated
per common share:
Continuing operations
Discontinued operation
Consolidated
See Notes to Consolidated Financial Statements.
38,449
51,931
61,275
-
38,449 $
1,118
50,813 $
969
60,306
0.62 $
- $
0.62 $
0.60 $
- $
0.60 $
0.92 $
(0.11 ) $
0.81 $
0.90 $
(0.11 ) $
0.80 $
1.10
(0.15 )
0.96
1.08
(0.15 )
0.94
$
$
$
$
$
$
$
50
II-VI Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
Year Ended June 30,
($000)
Net earnings
Other comprehensive income (loss):
Foreign currency translation adjustments
Pension adjustment, net of taxes of $387
Comprehensive income
Net earnings attributable to redeemable noncontrolling interest
Other comprehensive income attributable to redeemable
noncontrolling interest:
Foreign currency translation adjustments attributable to
redeemable noncontrolling interest
Comprehensive income attributable to redeemable
noncontrolling interest
Comprehensive income attributable to II-VI Incorporated
See Notes to Consolidated Financial Statements.
2014
2013
2012
$
38,449 $
51,931 $
61,275
2,363
1,443
42,255 $
5,362
-
57,293 $
(2,878 )
-
58,397
- $
1,118 $
969
$
$
-
(295 )
-
$
$
- $
42,255 $
823 $
56,470 $
969
57,428
51
II-VI Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(000)
Balance-July 1, 2011
Shares issued under stock incentive plans
Net earnings attributable to II-VI Incorporated
Purchases of treasury stock
Treasury stock in deferred compensation plan
Foreign currency translation adjustment
Share-based compensation expense
Excess tax benefits from share-based compensation
expense
Adjustment to redeemable noncontrolling interest
Balance-June 30, 2012
Shares issued under stock incentive plans
Net earnings attributable to II-VI Incorporated
Purchases of treasury stock
Treasury stock in deferred compensation plan
Minimum tax withholding requirements
Foreign currency translation adjustment
Share-based compensation expense
Excess tax benefits from share-based compensation
expense
Adjustment to redeemable noncontrolling interest
Balance-June 30, 2013
Shares issued under stock incentive plans
Net earnings attributable to II-VI Incorporated
Purchases of treasury stock
Treasury stock in deferred compensation plan
Foreign currency translation adjustment
Share-based compensation expense
Pension other comprehensive income
Excess tax benefits from share-based compensation
expense
Balance-June 30, 2014
See Notes to Consolidated Financial Statements.
Accumulated
Other
Common Stock
Comprehensive Retained
Treasury Stock
Shares
Amount
Income
Earnings Shares
Amount Total
69,077 $ 159,186 $
2,738
-
-
1,966
-
11,584
550
-
-
-
-
-
13,116 $ 377,264
-
60,306
-
-
-
-
-
-
-
-
(2,878 )
-
(6,394 ) $ (28,293 ) $ 521,273
-
2,738
- 60,306
(4,988 )
(4,988 )
-
(1,966 )
-
(2,878 )
- 11,584
-
-
(302 )
(98 )
-
-
-
-
-
-
821
(2,630 )
(6,794 ) $ (35,247 ) $ 586,226
4,104
-
- 50,813
(19,978 ) (19,978 )
-
(1,291 )
(138 )
(138 )
-
5,362
- 11,959
-
-
(1,141 )
(70 )
(7 )
-
-
(827 )
-
-
-
-
635
(2,875 )
(8,012 ) $ (56,654 ) $ 636,108
3,655
- 38,449
(19,973 ) (19,973 )
-
(1,809 )
-
2,363
- 12,347
1,443
-
(44 )
-
(1,333 )
(93 )
-
-
-
-
651
(9,482 ) $ (79,263 ) $ 675,043
-
-
-
821
-
69,627 $ 176,295 $
4,104
-
-
1,291
-
-
11,959
596
-
-
-
-
-
-
-
-
635
-
70,223 $ 194,284 $
4,482
-
-
1,809
-
12,347
-
712
-
-
-
-
-
-
-
-
-
(2,630 )
10,238 $ 434,940
-
50,813
-
-
-
-
-
-
-
-
-
-
5,362
-
-
-
-
(2,875 )
15,600 $ 482,878
-
38,449
-
-
-
-
-
-
-
-
-
2,363
-
1,443
-
651
70,935 $ 213,573 $
-
-
19,406 $ 521,327
52
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
($000)
Cash Flows from Operating Activities
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Earnings) loss from discontinued operation, net of tax
Depreciation
Amortization
Share-based compensation expense
Loss (gain) on foreign currency transactions
Gain on sale of equity investment
Earnings from equity investments
Deferred income taxes
Impairment on property, plant and equipment
Excess tax benefits from share-based compensation expense
Increase (decrease) in cash from changes in:
Accounts receivable
Inventories
Accounts payable
Income taxes payable
Other operating net assets
Net cash provided by operating activities:
Continuing Operations
Discontinued Operation
Net cash provided by operating activities
Cash Flows from Investing Activities
Additions to property, plant & equipment
Purchases of businesses, net of cash acquired
Proceeds received from contractual settlement from
Thailand flooding
Proceeds received from sale of equity method investment
Other investing activities
Net cash used in investing activities:
Continuing Operations
Discontinued Operation
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds on long-term borrowings
Payments on long-term borrowings
Purchases of treasury stock
Proceeds from exercises of stock options
Payments on cash earnout arrangement
Payment of redeemed noncontrolling interest
Other financing activities
2014
2013
2012
$
38,449 $
51,931 $
61,275
(133 )
41,805
11,293
12,347
700
-
(698 )
(4,435 )
-
(651 )
(28,486 )
12,794
19,813
(6,282 )
(2,251 )
6,789
34,135
6,657
11,959
1,244
-
(1,048 )
1,962
900
(635 )
5,441
1,969
(9,376 )
4,351
(5,807 )
94,265
1,197
95,462
110,472
(2,865 )
107,607
9,443
30,072
4,451
11,584
(1,514 )
(1,021 )
(1,059 )
577
-
(821 )
(9,538 )
(15,168 )
2,921
2,824
(3,448 )
90,578
(2,509 )
88,069
(29,220 )
(177,676 )
(25,205 )
(126,193 )
(42,797 )
(46,141 )
-
-
79
4,797
2,138
-
-
3,478
615
(206,817 )
-
(206,817 )
(144,463 )
(68 )
(144,531 )
(84,845 )
(43 )
(84,888 )
183,000
(55,000 )
(19,973 )
4,358
(3,000 )
(8,789 )
(1,514 )
99,082
1,500
(10,773 )
185,433
174,660 $
113,000
(11,000 )
(19,978 )
4,104
-
-
(347 )
85,779
1,634
50,489
134,944
185,433 $
7,000
(14,295 )
(4,988 )
2,658
(6,000 )
-
821
(14,804 )
(2,893 )
(14,516 )
149,460
134,944
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
$
Non cash transactions:
Capital lease obligation incurred on facility lease
$
11,636 $
- $
-
53
Purchase of businesses - holdback amount recorded in other accrued liabilities
Purchase of business utilizing earnout consideration recorded
in other current liabilities
Note receivable received from the sale of an equity investment
See Notes to Consolidated Financial Statements.
$
10,000 $
- $
-
$
$
- $
- $
3,300 $
- $
-
2,022
54
II-VI Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
Note 1.
Nature of Business and Summary of Significant Accounting Policies
Nature of Business. II-VI Incorporated and its subsidiaries (the “Company,” “we,” “us,” or “our”), a worldwide leader in engineered
materials and opto-electronic components, is a vertically-integrated manufacturing company that creates and markets products for a
diversified customer base including industrial manufacturing, optical communications, military, high-power electronics,
semiconductor and thermo-electronics applications. The Company markets its products through its direct sales force and through
distributors and agents.
The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available
from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company’s
manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the
Company does occasionally experience problems associated with vendor-supplied materials not meeting specifications for quality or
purity. A significant failure of the Company’s suppliers to deliver sufficient quantities of necessary high-quality materials on a timely
basis could have a material adverse effect on the Company’s results of operations.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company. All intercompany
transactions and balances have been eliminated.
Foreign Currency Translation. For II-VI Singapore Pte., Ltd. and its subsidiaries, II-VI Suisse S.a.r.l., Pacific Rare Specialty
Metals & Chemicals, Inc. (“PRM”), Photop AOFR Pty. Ltd. (“AOFR”), II-VI Laser Enterprise and II-VI Network Solutions Division
the functional currency is the United States (U.S.) dollar. The determination of the functional currency is made based on the
appropriate economic and management indicators.
For all other foreign subsidiaries, the functional currency is the local currency. Assets and liabilities of those operations are translated
into U.S. dollars using period-end exchange rates while income and expenses are translated using the average exchange rates for the
reporting period. Translation adjustments are recorded as accumulated other comprehensive income within shareholders’ equity in the
accompanying Consolidated Balance Sheets.
Cash and Cash Equivalents. The Company considers highly liquid investment instruments with an original maturity of three months
or less to be cash equivalents. We place our cash and cash equivalents with high credit quality financial institutions and to date have
not experienced credit losses in these instruments. Cash of foreign subsidiaries is on deposit at banks in China, Vietnam, Singapore,
Japan, Switzerland, the Netherlands, Germany, the Philippines, Belgium, Italy, Hong Kong, Australia and the United Kingdom
(“U.K.”).
Accounts Receivable. The Company establishes an allowance for doubtful accounts based on historical experience and believes the
collection of revenues, net of this allowance, is reasonably assured.
The Company factored a portion of the accounts receivable of its Japan subsidiary during each of the years ended June 30, 2014 and
2013. Factoring is done with large banks in Japan. During the years ended June 30, 2014 and 2013, $12.7 million and $8.5 million,
respectively, of accounts receivable had been factored. As of June 30, 2014 and 2013, the amount included in other accrued liabilities
representing the Company’s obligation to the bank for these receivables factored with recourse was immaterial.
Inventories. Inventories are valued at the lower of cost or market (“LCM”), with cost determined on the first-in, first-out basis.
Inventory costs include material, labor and manufacturing overhead. Market cannot exceed the net realizable value (i.e., estimated
selling price in the ordinary course of business less reasonably predicted costs of completion and disposal) and market shall not be less
than net realizable value reduced by an allowance for an approximately normal profit margin. In evaluating LCM, management also
considers, if applicable, other factors as well, including known trends, market conditions, currency exchange rates and other such
issues. The Company records an inventory reserve as a charge against earnings for all products on hand more than twelve to eighteen
months depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative
customers. An additional reserve is recorded for product on hand that is in excess of product sold to customers over the same periods
noted above. Inventories are presented net of reserves. The reserves totaled $12.0 million and $7.1 million at June 30, 2014 and 2013,
respectively.
55
Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair market value upon acquisition. Major
improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its property,
plant and equipment and other long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts
may not be recoverable. Depreciation for financial reporting purposes is computed primarily by the straight-line method over the
estimated useful lives for building, building improvements and land improvements of 10 to 20 years and 3 to 12 years for machinery
and equipment.
Business Combinations. The Company accounts for business acquisitions by establishing the acquisition-date fair value as the
measurement for all assets acquired and liabilities assumed. Certain provisions of accounting principles generally accepted in the
United States (“U.S. GAAP”) prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a
business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs
from acquisition accounting.
Goodwill. The excess purchase price over the fair market value allocated to identifiable tangible and intangible net assets of
businesses acquired is reported as goodwill in the accompanying Consolidated Balance Sheets. The Company tests goodwill for
impairment at least annually as of April 1, or when events or changes in circumstances indicate that goodwill might be impaired. The
evaluation of impairment involves comparing the current fair value of the Company’s reporting units to the recorded value (including
goodwill). The Company uses a discounted cash flow (“DCF”) model and a market analysis to determine the current fair value of the
its reporting units. A number of significant assumptions and estimates are involved in estimating the forecasted cash flows used in the
DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax
rates. Management considers historical experience and all available information at the time the fair values of the reporting units are
estimated.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise,
the Company will forego the two-step process and does not need to perform any further testing.
Intangibles. Intangible assets are initially recorded at their cost or fair market value upon acquisition. Finite-lived intangible assets are
amortized for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from 7 to
18 years. Indefinite-lived intangible assets are not amortized but tested annually for impairment at April 1, or when events or changes
in circumstances indicate that indefinite-lived intangible assets might be impaired.
Equity Method Investments. The Company has an equity investment in Guangdong Fuxin Electronic Technology (“Fuxin”) based in
Guangdong Province, China of 20.2%, which is accounted for under the equity method of accounting. The total carrying value of the
investment recorded at June 30, 2014 and June 30, 2013 was $11.6 million and $11.2 million, respectively. During the years ended
June 30, 2014, 2013 and 2012, the Company’s pro-rata share of earnings from this investment was $0.7 million, $1.0 million and $1.3
million, respectively, and was recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years
ended June 30, 2014 and 2013, the Company recorded dividends from this equity investment of $0.3 million and $0.5 million for the
years ended June 30, 2014 and 2013, respectively.
Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties
and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or
remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Such
accruals are adjusted as further information develops or circumstances change. The Company had no loss contingency liabilities at
June 30, 2014 related to commitments and contingencies.
Accrued Bonus and Profit Sharing Contribution. The Company records bonus and profit sharing estimates as a charge against
earnings. These estimates are adjusted to actual based on final results of operations achieved during the fiscal year. Certain partial
bonus amounts are paid on an interim basis, and the remainder is paid after the fiscal year end after the final determination of the
applicable percentage or amounts. Other bonuses are paid annually.
56
Warranty Reserve. The Company records a warranty reserve as a charge against earnings based on a percentage of revenues utilizing
actual returns over a period that approximates historical warranty experience.
Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the consolidated financial
statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount more likely than not
to be realized. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and
circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of regulations
or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The
Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from
examinations of its tax returns. The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in
income tax expense.
Revenue Recognition. The Company recognizes revenues for product shipments when persuasive evidence of a sales arrangement
exists, the product has been shipped or delivered, the sale price is fixed or determinable and collectability is reasonably assured. Title
and risk of loss passes from the Company to its customer at the time of shipment in most cases with the exception of certain
customers. For these customers, title does not pass and revenue is not recognized until the customer has received the product at its
physical location.
We establish an allowance for doubtful accounts and warranty reserves based on historical experience and believe the collection of
revenues, net of these reserves, is reasonably assured. Our allowance for doubtful accounts and warranty reserve balances at June 30,
2014 were approximately $1.9 million and $2.9 million, respectively. Our reserve estimates have historically been proven to be
materially correct based upon actual charges incurred.
The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical
locations. Further, we do not have post shipment obligations such as training or installation, customer acceptance provisions, credits
and discounts, rebates and price protection, or other similar privileges. Our distributors and agents are not granted price protection.
Our distributors and agents, which comprise less than 10% of consolidated revenues, have no additional product return rights beyond
the right to return defective products covered by our warranty policy. Revenues generated from transactions other than product
shipments are contract related and have historically accounted for less than 5% of consolidated revenues. We believe our revenue
recognition practices have adequately considered the requirements under U.S. GAAP.
Shipping and Handling Costs. Shipping and handling costs billed to customers are included in revenues. Shipping and handling costs
incurred by the Company are included in selling, general and administrative expenses in the accompanying Consolidated Statements
of Earnings. Total shipping and handling revenue and costs included in revenues and in selling, general and administrative expenses
were immaterial for the fiscal years ended June 30, 2014, 2013 and 2012.
Research and Development. Internal research and development costs and costs not related to customer and government funded
research and development contracts are expensed as incurred.
Share-Based Compensation. The Company follows U.S. GAAP in accounting for share-based compensation arrangements, which
requires the recognition of the fair value of stock compensation in net earnings. The Company recognizes the share-based
compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period.
Workers’ Compensation. The Company is self-insured for certain losses related to workers’ compensation for the majority of its
U.S. employees. When estimating the self-insurance liability, the Company considers a number of factors, including historical claims
experience, demographic and severity factors and valuations provided by independent third-party consultants. Periodically,
management reviews its assumptions and valuations to determine the adequacy of the self-insurance liability.
57
Accumulated Other Comprehensive Income. Accumulated other comprehensive income is a measure of all changes in
shareholders’ equity that result from transactions and other economic events in the period other than transactions with owners.
Accumulated other comprehensive income is a component of shareholders’ equity and consists of accumulated foreign currency
translation adjustments of $18.0 million and $15.6 million, respectively, as of June 30, 2014 and 2013 and a pension adjustment of
$1.4 million as of June 30, 2014.
Fair Value Measurements. The Company applies fair value accounting for all financial assets and liabilities that are required to be
recognized or disclosed at fair value in the financial statements. Fair value is defined as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market
in which the Company would transact, and the market-based risk measurements or assumptions that market participants would use in
pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Leases. The Company classifies leases as operating in accordance with the provisions of lease accounting. Rent expense under
noncancelable operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the lease
term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess of straight-line
rent expense over scheduled payments is recorded as a deferred liability. The current portion of unamortized deferred lease costs is
included in other accrued liabilities and the long-term portion is included in other liabilities in the Consolidated Balance Sheets.
Recently Issued Financial Accounting Standards
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“ASU”) which
supersedes virtually all existing revenue recognition guidance under U.S. GAAP. The update's core principle is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. The update is effective for interim and annual reporting
periods in fiscal years beginning after December 15, 2016 and prohibits early adoption. The update allows for the use of either the
retrospective or modified retrospective approach of adoption. Management is currently evaluating the available transition methods and
the potential impact of adoption on the Company's Consolidated Financial Statements.
In April 2014, the FASB issued an ASU that changes the criteria for determining which disposals can be presented as discontinued
operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of
a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will
have a major effect on an entity’s operations and financial results. The new standard will be effective for annual periods beginning on
or after December 15, 2014 with early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal
year 2016. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial
Statements.
In July 2013, the FASB issued an ASU that changes how certain unrecognized tax benefits are to be presented on the consolidated
balance sheet. This ASU clarified existing guidance to require that an unrecognized tax benefit or a portion thereof be presented in the
consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, similar tax loss, or a
tax credit carryforward except when an NOL carryforward, similar tax loss, or tax credit carryforward is not available under the tax
law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. In
such a case, the unrecognized tax benefit would be presented in the consolidated balance sheet as a liability. This update is effective
prospectively for fiscal years beginning after December 15, 2013 and will be effective for the Company beginning in the first quarter
of fiscal year 2015. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated
Financial Statements.
In March 2013, the FASB issued an ASU related to a parent’s accounting for the cumulative translation adjustment upon de-
recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The update
clarifies the applicable guidance under current U.S. GAAP for the release of the cumulative translation adjustment upon a reporting
58
entity’s de-recognition of a subsidiary or group of assets within a foreign entity or part or all of its investment in a foreign entity. The
update requires a reporting entity, which either sells a part or all of its investment in a foreign entity or ceases to have a controlling
financial interest in a subsidiary or group of assets within a foreign entity, to release any related cumulative translation adjustment into
net income. This update is effective prospectively for fiscal years beginning after December 15, 2013 and will be effective for the
Company beginning in the first quarter of fiscal year 2015. The adoption of this standard is not expected to have a significant impact
on the Company’s Consolidated Financial Statements.
In February 2013, the FASB issued an ASU related to disclosure requirements of reclassifications out of accumulated other
comprehensive income. The adoption of the guidance requires the Company to provide information about the amounts reclassified out
of accumulated other comprehensive income by component. In addition, the Company is required to present, either on the face of the
statement where net income is presented or in the notes, significant amounts reclassified from each component of accumulated other
comprehensive income and the income statement line items affected by the reclassification. This update was effective for the
Company beginning in the first quarter of fiscal year 2014 and did not have a significant impact on the Company’s Consolidated
Financial Statements.
Acquisitions
Note 2.
Oclaro’s Fiber Amplifier and Micro-Optics Business
In November 2013, the Company acquired certain assets of Oclaro used in the fiber amplifier and micro-optics business. The
Company operates the business under the name II-VI Network Solutions Division (“Network Solutions”) and includes it with II-VI
Laser Enterprise, GmbH (“Laser Enterprise”) in the Company’s new operating segment, Active Optical Products. Network Solutions
is a manufacturer of fiber amplifiers and micro-optics used in the optical communications market. At closing, the Company paid $79.6
million in cash, plus a $4.0 million holdback amount for 14 months to address any post-closing adjustments or claims, and $5.0
million that was previously paid to Oclaro on September 12, 2013. The purchase price of the Network Solutions acquisition is
summarized as follows ($000):
Net cash paid at acquisition
Cash previously paid
Holdback amount recorded in Other liabilities
Purchase price
$
$
79,600
5,000
4,000
88,600
The following table presents the allocation of the purchase price of the assets acquired at the date of acquisition ($000):
Assets
Inventories
Property, plant & equipment
Intangible assets
Goodwill
Total assets acquired
$
$
11,314
9,700
32,000
35,586
88,600
The goodwill of $35.6 million is included in the Active Optical Products segment and is attributed to the expected synergies and the
assembled workforce of Network Solutions. All of the goodwill is deductible for income tax purposes.
The amount of revenues and net loss from operations of Network Solutions included in the Company’s Consolidated Statement of
Earnings were $53.4 million and $2.6 million, respectively, for the year ended June 30, 2014.
Oclaro’s Switzerland-Based Semiconductor Laser Business
In September 2013, the Company acquired all of the outstanding shares of Oclaro Switzerland GmbH, a limited liability company
formed under the laws of the Swiss confederation, as well as certain additional assets of Oclaro used in the semiconductor laser
business. The Company operates the acquired business under the name II-VI Laser Enterprise and includes it in the Company’s new
operating segment, Active Optical Products. Laser Enterprise is a manufacturer of high-power semiconductor laser components
enabling fiber and direct diode laser systems for material processing, medical, consumer and printing applications. In addition, the
segment manufactures pump lasers for optical amplifiers for both terrestrial and submarine applications and vertical cavity surface
emitting lasers (VCSELS) for optical navigation, optical interconnects and optical sensing applications. At closing, the Company paid
$90.6 million of cash, net of cash acquired of $1.7 million, a $6.0 million holdback amount by the Company for 15 months to address
59
any post-closing adjustments or claims, and a $2.0 million holdback amount for potential post-closing working capital
adjustments. The Company paid an additional $2.5 million for a working capital adjustment in accordance with the purchase
agreement. The purchase price of the Laser Enterprise acquisition is summarized as follows ($000):
Net cash paid at acquisition
Cash paid for working capital adjustment
Holdback amount recorded in Other liabilities
Purchase price
$ 90,601
2,475
6,000
$ 99,076
The following table presents the allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition
($000):
Assets
Inventories
Prepaid and other assets
Deferred income taxes
Property, plant & equipment
Intangible assets
Goodwill
Total assets acquired
Liabilities
Accounts payable
Deferred income taxes
Accrued income taxes
Other accrued liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
$
26,071
1,035
1,771
30,184
28,900
37,507
125,468
2,214
8,647
2,714
12,817
26,392
99,076
The goodwill of Laser Enterprise of $37.5 million is included in the Active Optical Products segment and is attributed to the expected
synergies and the assembled workforce of Laser Enterprise. None of the goodwill is deductible for income tax purposes.
The amount of revenues and net loss from operations of Laser Enterprise included in the Company’s Consolidated Statement of
Earnings for the year ended June 30, 2014 was $61.8 million and $17.4 million, respectively.
In conjunction with the acquisitions of Network Solutions and Laser Enterprise, the Company expensed transactions costs of
approximately $3.7 million, net of tax of $0.2 million, for the year ended June 30, 2014. These costs were recorded within selling,
general and administrative expenses in the Consolidated Statements of Earnings.
Pro Forma Information
The following unaudited pro forma consolidated results of operations for fiscal year 2014 have been prepared as if the acquisitions of
Network Solutions and Laser Enterprise had occurred on July 1, 2012, the beginning of the Company’s fiscal year 2013, which is the
fiscal year prior to the acquisitions. As a result, certain transaction related expenses of $3.7 million (net of tax) for the year ended
June 30, 2014 were only included in the earliest period presented below ($000 except per share data).
Net revenues
Net earnings attributable to II-VI Incorporated
Basic earnings per share
Diluted earnings per share
Year Ended June 30,
2013
2014
$
$
$
$
734,912
47,054
0.76
0.75
$
$
$
$
732,474
44,693
0.72
0.70
60
The pro forma results are not necessarily indicative of what actually would have occurred if the transactions had occurred as described
above, are not intended to be a projection of future results and do not reflect any cost savings that might be achieved from the
combined operations.
Note 3.
Discontinued Operation
During December 2013, the Company completed the discontinuance of its tellurium product line by exiting all business activities
associated with this product. This product line was previously serviced by PRM and was included as part of the Military & Materials
segment. Prior periods have been restated to present this product line on a discontinued operation basis. The revenues and earnings
(losses) of the tellurium product line have been reflected as a discontinued operation for the periods presented as follows ($000):
June 30,
($000)
Revenues
$
Earnings (loss) from discontinued operation before income taxes
Income tax benefit
Earnings (loss) from discontinued operation net income taxes
$
2014
2013
2012
1,849 $
133
-
133 $
7,321 $
(6,789 )
-
(6,789 ) $
18,227
(9,583 )
140
(9,443 )
Inventories
Note 4.
The components of inventories, net of reserves, were as follows:
June 30,
($000)
Raw materials
Work in process
Finished goods
Property, Plant and Equipment
Note 5.
Property, plant and equipment consists of the following:
June 30,
($000)
Land and improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation
2014
2013
$
$
71,949 $ 59,290
43,895
44,739
38,674
49,185
165,873 $ 141,859
2014
2013
$
$
2,381 $
96,551
2,236
87,189
335,408 276,802
10,831
451,330 377,058
(242,391 ) (206,386 )
208,939 $ 170,672
16,990
Depreciation expense was $41.8 million, $34.1 million and $30.1 million for the fiscal years ended June 30, 2014, 2013 and 2012,
respectively.
Note 6.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable
intangible assets acquired in business combinations are recorded based upon fair market value at the date of acquisition.
61
In connection with the two acquisitions completed in fiscal year 2014 and the acquisitions completed in fiscal year 2013, the Company
recorded the excess purchase prices over the net assets of the businesses acquired as goodwill in the accompanying Consolidated
Balance Sheets, based on the purchase price allocation. Changes in the carrying amount of goodwill were as follows:
Year Ended June 30, 2014
Near-
Military Advanced Active
Infrared Infrared
Optics
Optics
&
Products Optical
Materials Group
Products Total
Balance-July 1, 2013
Goodwill acquired
Goodwill adjustment
Foreign currency translation
Balance-June 30, 2014
$
$
9,677 $ 60,269 $ 30,712 $ 22,694 $
-
(516 )
-
- $ 123,352
73,093
(516 )
216
9,754 $ 60,408 $ 30,712 $ 22,178 $ 73,093 $ 196,145
73,093
-
-
-
-
139
-
-
77
-
-
-
During the year ended June 30, 2014, the Company recorded an adjustment to goodwill of $0.5 million associated with the November
2012 acquisition of M Cubed Technologies, Inc. (“M Cubed”). This adjustment related to a change in deferred income tax assets and
was recorded in conjunction with the finalization and filing of the M Cubed final income tax return.
Balance-July 1, 2012
Goodwill acquired
Foreign currency translation
Balance-June 30, 2013
Year Ended June 30, 2013
Infrared
Optics
Near-
Infrared
Optics
Military
&
Advanced
Products
Materials Group
Total
$
$
9,612 $
-
65
9,677 $
48,496 $
10,980
793
60,269 $
12,326 $
18,386
-
30,712 $
10,314 $
12,381
-
80,748
41,746
858
22,694 $ 123,352
The Company reviews the recoverability of goodwill at least annually and any time business conditions indicate a potential change in
recoverability. The measurement of a potential impairment begins with comparing the current fair value of the Company’s reporting
units to the recorded value (including goodwill). The Company used a discounted cash flow (DCF) model and a market analysis to
determine the current fair value of all its reporting units except for the Active Optical Products reporting unit. A number of significant
assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market
shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical
experience and all available information at the time the fair values of the reporting units are estimated. The Company has the option to
perform a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount, including goodwill and other intangible assets. Due to the timing of the Company’s finalization of the
current year acquisitions of Laser Enterprise and Network Solutions, a qualitative test was performed on the Active Optical Products
segment during fiscal year ended 2014. As of April 1 of fiscal years 2014 and 2013, the Company completed its annual impairment
tests of its reporting units. Based on the results of these analyses, the Company’s goodwill of $196.1 million as of June 30, 2014 and
$123.4 million as of June 30, 2013 was not impaired.
As the estimated fair value of the Near Infrared Optics reporting unit was approximately 9% greater than its carrying value, the
Company has concluded that this reporting unit is at risk of not passing step one of future goodwill impairment tests. In the event of
unfavorable changes to the existing assumptions used in the impairment test such as the weighted average cost of capital (discount
rate), growth rates and market multiples as well as changes in our internal structure, the carrying value of the Company’s goodwill
could be impaired. Although the Company believes that the current assumptions and estimates are reasonable, supportable and
appropriate, the Near Infrared Optics reporting unit competes in a challenging environment with significant pricing pressure and
rapidly changing technology and there can be no assurance that the estimates and assumptions made for purposes of the goodwill
impairment test will prove to be accurate predictions of future performance.
As a result of the July 1, 2014 segment realignment as described in Item 1 of this Annual Report on Form 10-K, the Company will
reassign the Active Optical Products segment's existing goodwill balance to the new reporting units utilizing a relative fair value
allocation approach in accordance with authoritative accounting guidance. As part of this reassignment, the Company may be required
to review the recoverability of the carrying value of goodwill at the new reporting units.
62
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2014
and 2013 were as follows:
Year Ended June 30, 2014
Year Ended June 30, 2013
Gross
Net
Carrying Accumulated Book
Amortization Value
Amount
Gross
Carrying Accumulated Book
Amortization Value
Amount
Net
Technology and patents
Trademarks
Customer lists
Other
Total
$
50,505 $
17,870
102,839
1,586
$ 172,800 $
(14,474 ) $
(1,037 )
(19,448 )
(1,437 )
39,659 $
17,855
52,614
1,580
(36,396 ) $ 136,404 $ 111,708 $
36,031 $
16,833
83,391
149
(10,455 ) $ 29,204
(963 ) 16,892
(12,189 ) 40,425
180
(25,007 ) $ 86,701
(1,400 )
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2014, 2013 and 2012 was $11.3 million,
$6.7 million, and $4.5 million, respectively. The technology and patents are being amortized over a range of 60 to 240 months with a
weighted-average remaining life of approximately 118 months. The customer lists are being amortized over 120 to 192 months with a
weighted-average remaining life of approximately 150 months. As a result of the completion of the valuations of our recent
acquisitions of Laser Enterprise and Network Solutions, the Company recorded $10.8 million of technology and patents and $50.1
million of customer lists.
In connection with past acquisitions, the Company acquired tradenames with indefinite lives. The carrying amount of these
tradenames of $16.4 million is not amortized but tested annually for impairment. The Company completed its impairment test of these
tradenames with indefinite lives in the fourth quarter of fiscal years 2014 and 2013. Based on the results of these tests, the tradenames
were not impaired at June 30, 2014 or 2013.
Included in the gross carrying amount and accumulated amortization of the Company’s patents, customer list and other component of
intangible assets and goodwill is the effect of the foreign currency translation of the portion relating to the Company’s German
subsidiaries, Photop and AOFR. The estimated amortization expense for existing intangible assets for each of the five succeeding
years is as follows:
Year Ending June 30,
2015
2016
2017
2018
2019
$
11,716
11,619
11,609
11,140
10,715
Note 7.
Debt
The components of debt were as follows ($000):
June 30,
Line of credit, interest at LIBOR, as defined, plus 1.75% and
1.25%, respectively
Term loan, interest at LIBOR, as defined, plus 1.25%
Yen denominated line of credit, interest at LIBOR, as defined,
plus 0.625%
Total debt
Current portion of long-term debt
Long-term debt, less current portion
2014
2013
$
$
154,000 $
85,000
111,000
-
2,960
241,960
(20,000 )
221,960 $
3,036
114,036
-
114,036
$
63
In September 2013, the Company amended and restated its existing credit agreement. The Second Amended and Restated Credit
Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $225 million (increased from $140 million), as
well as a $100 million Term Loan. The Term Loan shall be re-paid in consecutive quarterly principal payments on the first business
day of each January, April, July and October, with the first payment commencing on October 1, 2013, as follows: (i) twenty
consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity
date. The Amended Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-
owned domestic subsidiary of the Company. The Company has the option to request an increase to the size of the Amended Credit
Facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through
September 2018 and has an interest rate of LIBOR, as defined in the agreement, plus 0.75% to 1.75% based on the Company’s ratio of
consolidated indebtedness to consolidated EBITDA. Additionally, the facility is subject to certain covenants, including those relating
to minimum interest coverage and maximum leverage ratios. As of June 30, 2014, the Company was in compliance with all financial
covenants under its Amended Credit Facility.
In conjunction with entering into the Amended Credit Facility, the Company incurred approximately $1.0 million of deferred
financing costs which are being amortized over the term of the agreement. As a result of the overall increase in borrowing capacity,
existing deferred financing costs at the time of the amendment of $0.5 million are also being amortized over the term of the Amended
Credit Facility.
The Company’s Yen denominated line of credit is a 500 million Yen facility that has a five-year term through June 2016 and has an
interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.50%. Additionally, the facility is subject to certain
covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2014, the Company
was in compliance with all covenants under the Yen facility.
The Company had aggregate availability of $71.0 million and $29.8 million under its lines of credit as of June 30, 2014 and 2013,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30,
2014 and 2013, total outstanding letters of credit supported by the credit facilities were $1.9 million and $1.3 million, respectively.
The weighted-average interest rate of total borrowings for the years ended June 30, 2014 and 2013 was 1.8% and 1.4%, respectively.
The weighted-average of total borrowings for the fiscal years ended June 30, 2014 and 2013 was $222.6 million and $82.5 million,
respectively.
The Company has a line of credit facility with a Singapore bank which permits maximum borrowings in the local currency of
approximately $0.3 million and $0.4 million for the fiscal years ended June 30, 2014 and 2013. Borrowings are payable upon demand
with interest charged at the rate of 1.00% above the bank’s prevailing prime lending rate. The interest rate was 5.25% at June 30, 2014
and June 30, 2013. At June 30, 2014 and 2013, there were no outstanding borrowings under this facility.
There are no interim maturities or minimum payment requirements related to the credit facilities before their respective expiration
dates. Interest and commitment fees paid during the fiscal year ended June 30, 2014 and 2013 was $4.2 million and $1.1 million,
respectively, and was immaterial for fiscal year 2012.
Note 8.
Income Taxes
The components of income (loss) from continuing operations before income taxes were as follows:
Year Ended June 30,
($000)
U.S. income (loss)
Non-U.S. income
Total Earnings Before Tax
2014
2013
2012
$
$
(2,863 ) $
48,504
45,641 $
19,253 $
58,233
77,486 $
16,025
72,453
88,478
64
The components of income tax expense (benefit) from continuing operations were as follows:
Year Ended June 30,
($000)
Current:
Federal
State
Foreign
Total Current
Deferred:
Federal
State
Foreign
Total Deferred
Total Income Tax Expense
Principal items comprising deferred income taxes were as follows:
June 30,
($000)
Deferred income tax assets
Inventory capitalization
Non-deductible accruals
Accrued employee benefits
Net-operating loss and credit carryforwards
Share-based compensation expense
Other
Valuation allowances
Total deferred income tax assets
Deferred income tax liabilities
Tax over book accumulated depreciation
Intangible assets
Other
Total deferred income tax liabilities
Net deferred income taxes
2014
2013
2012
152
(1,067 ) $ 2,759 $
68
12,675 13,977
11,760 $ 16,804 $
(16 ) $ 1,721 $
113
148
(4,567 )
128
(4,435 ) $ 1,962 $
7,325 $ 18,766 $
283
227
16,673
17,183
3,409
(356 )
(2,476 )
577
17,760
$
$
$
2014
2013
$
$
$
$
5,402 $
1,926
9,226
21,976
16,005
577
(2,212 )
52,900 $
(17,625 ) $
(25,505 )
(2,786 )
(45,916 ) $
6,984 $
6,333
1,930
6,790
22,849
15,021
205
(2,885 )
50,243
(16,988 )
(21,561 )
(2,409 )
(40,958 )
9,285
The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:
Year Ended June 30,
($000)
Taxes at statutory rate
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit
Taxes on non U.S. earnings
Settlement of unrecognized tax benefits
Research and manufacturing incentive deductions
Other
2014
%
2013
%
2012
%
$ 15,974
35 $ 27,120
35 $ 30,967
35
254
(6,672 )
-
(2,190 )
(41 )
7,325
$
1
(15 )
-
(5 )
-
168
(6,991 )
-
(1,458 )
(73 )
16 $ 18,766
-
(9 )
-
(2 )
-
(187 )
(9,841 )
(842 )
(2,079 )
(258 )
24 $ 17,760
-
(11 )
(1 )
(3 )
-
20
During the fiscal years ended June 30, 2014, 2013, and 2012, net cash paid by the Company for income taxes was $17.2 million, $11.9
million, and $13.2 million, respectively.
65
The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was
approximately $366 million at June 30, 2014. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an
additional deferred tax liability of approximately $74 million would have been required as of June 30, 2014. It is the Company’s
intention to permanently reinvest undistributed earnings of its foreign subsidiaries; therefore, no provision has been made for future
income taxes on the undistributed earnings of foreign subsidiaries, as they are considered indefinitely reinvested.
The sources of differences resulting in deferred income tax expense (benefit) from continuing operations and the related tax effect of
each were as follows:
Year Ended June 30,
($000)
Depreciation and amortization
Inventory capitalization
Net operating loss and credit carryforwards net of valuation
allowances
Share-based compensation expense
Other
2014
2013
2012
$
(3,581 ) $
646
(2,825 ) $
84
38
(1,947 )
533
(984 )
(1,049 )
(4,435 ) $
4,786
(3,487 )
3,404
1,962 $
1,859
(2,442 )
3,069
577
$
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2014:
Type
($000)
Tax credit carryforwards:
Federal research and development credits
State tax credits
Operating loss carryforwards:
Loss carryforwards - federal
Loss carryforwards - state
Loss carryforwards - foreign
Amount
Expiration Date
$
$
4,117 June 2019-June 2034
2,827 June 2014-June 2029
36,124 June 2022-June 2029
25,116 June 2014-June 2034
9,427 June 2016-June 2022
The Company has recorded a valuation allowance against the majority of the foreign loss carryforwards and select state tax credit
carryforwards. The Company’s federal loss carryforwards, federal research and development credit carryforwards, and certain state
tax credits resulted from the Company’s acquisitions of Photop Aegis and M Cubed and are subject to various annual limitations under
Section 382 of the Internal Revenue Code.
Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2014, 2013 and 2012 were as follows:
($000)
Balance at Beginning of Year
Increases in current year tax positions
Increases in prior year tax positions
Decreases in prior year tax positions
Settlements
Expiration of statute of limitations
Balance at End of Year
2014
2013
2012
$
$
3,181 $
298
2
-
-
(706 )
2,775 $
2,850 $
338
-
(7 )
-
-
3,181 $
4,744
738
-
(41 )
(1,788 )
(803 )
2,850
66
The Company classifies all estimated and actual interest and penalties as income tax expense. There was no interest and penalties
within income tax expense for fiscal year 2014. During the fiscal years ended June 30, 2013 and 2012, the Company recognized $0.1
million of expense and $0.2 million of benefit, respectively, of interest and penalties within income tax expense. The Company had
$0.2 million, $0.2 million, and $0.1 million of interest and penalties accrued at June 30, 2014, 2013, and 2012, respectively. The
Company has classified the uncertain tax positions as non-current income tax liabilities as the amounts are not expected to be paid
within one year. Including tax positions for which the Company determined that the tax position would not meet the more likely than
not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated
unrecognized tax benefit that, if recognized, would affect our effective tax rate was approximately $2.8 million and $3.2 million at
June 30, 2014 and 2013, respectively. The Company expects a decrease of $1.4 million of unrecognized tax benefits during the next
twelve months due to the expiration of statutes of limitation.
In December 2011, the Internal Revenue Service completed its examination of the Company’s federal income tax return for fiscal year
2009 with no significant findings. As a result, during the fiscal year ended June 30, 2012, the Company reversed certain unrecognized
tax benefits from fiscal year 2009 and recognized an income tax benefit of approximately $0.8 million.
Fiscal years 2011 to 2014 remain open to examination by the Internal Revenue Service, fiscal years 2010 to 2014 remain open to
examination by certain state jurisdictions, and fiscal years 2007 to 2014 remain open to examination by certain foreign taxing
jurisdictions. The Company’s fiscal years 2011 and 2012 California state income tax returns are currently under examination by the
State of California’s Franchise Tax Board. The Company’s fiscal year 2011 Italian income tax return is currently under examination.
67
Note 9. Earnings Per Share
The following table sets forth the computation of earnings per share for the periods indicated. Weighted-average shares issuable upon
the exercise of stock options that were not included in the calculation were 507,000, 470,000 and 220,000 for the fiscal years ended
June 30, 2014, 2013 and 2012, respectively, because they were anti-dilutive.
Year Ended June 30,
($000 except per share)
Earnings from continuing operations attributable to
II-VI Incorporated
Earnings (loss) from discontinued operation
Net Earnings from continuing operations attributable to
II-VI Incorporated
Divided by:
Weighted average shares
Basic earnings (loss) attributable to II-VI Incorporated
per common share:
Continuing operations
Discontinued operation
Consolidated
Earnings from continuing operations attributable to
II-VI Incorporated
Earnings (loss) from discontinued operation
Net Earnings from continuing operations attributable to
II-VI Incorporated
Divided by:
Weighted average shares
Diluted effect of common stock equivalents
Diluted weighted average common shares
Diluted earnings (loss) attributable to II-VI Incorporated
per common share:
Continuing operations
Discontinued operation
Consolidated
2014
2013
2012
$
$
$
38,316 $ 57,602 $ 69,749
(9,443 )
(6,789 )
133
38,449 $ 50,813 $ 60,306
62,248
62,411
62,823
$
$
$
0.62 $
- $
0.62 $
0.92 $
(0.11 ) $
0.81 $
1.10
(0.15 )
0.96
$
$
$
38,316 $ 57,602 $ 69,749
(9,443 )
(6,789 )
133
38,449 $ 50,813 $ 60,306
62,248
1,438
63,686
62,411
1,473
63,884
62,823
1,562
64,385
$
$
$
0.60 $
- $
0.60 $
0.90 $
(0.11 ) $
0.80 $
1.08
(0.15 )
0.94
Note 10. Operating Leases
The Company leases certain property under operating leases that expire at various dates through the year ending July 2061. Future
rental commitments applicable to the operating leases at June 30, 2014 are as follows:
Year Ending June 30,
($000)
2015
2016
2017
2018
2019
Thereafter
$
13,298
10,056
7,191
5,158
1,990
18,795
68
Rent expense was approximately $13.6 million, $9.8 million, and $7.6 million for the fiscal years ended June 30, 2014, 2013 and
2012, respectively.
Note 11.
Share-Based Compensation Plans
The Company’s Board of Directors adopted the II-VI Incorporated 2012 Omnibus Incentive Plan (the “Plan”) which was approved by
the shareholders at the Annual Meeting in November 2012. The Plan provides for the grant of non-qualified stock options, stock
appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to
employees, officers and directors of the Company. The maximum number of shares of the Company’s Common Stock authorized for
issuance under the Plan shall not in the aggregate exceed 1,900,000 shares of Common Stock, not including any remaining shares
forfeited under the predecessor plan that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death,
retirement or disability of the grantee. As of June 30, 2014, there were approximately 1,242,317 shares available to be issued under the
Plan, including forfeited shares from predecessor plans.
The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, which requires the
recognition of the fair value of share-based compensation in net earnings. The Company recognizes the share-based compensation
expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts
for cash-based stock appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as
liability awards, in accordance with applicable accounting standards.
Share-based compensation expense for the fiscal years ended June 30, 2014, 2013 and 2012 is as follows ($000):
Year Ended
June 30,
2014
Year Ended Year Ended
June 30,
2013
June 30,
2012
Stock Options and Cash-Based Stock Appreciation Rights
5,818
$
5,046 $
6,025
Restricted Share Awards and Cash-Based Restricted Share
Unit Awards
4,868
4,411
2,945
Performance Share Awards and Cash-Based Performance Share
Unit Awards
2,311
3,200
2,614
$
12,997
$
12,657 $
11,584
The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and
administrative expense in the Consolidated Statements of Earnings, based on the employee classification of the grantees. Share-based
compensation expense associated with liability awards was $0.7 million in fiscal years 2014 and 2013, respectively, and was not
significant in fiscal year 2012.
Stock Options and Cash-Based Stock Appreciation Rights:
The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense. During the fiscal years
ended June 30, 2014, 2013 and 2012, the weighted-average fair value of options granted under the stock option plan was $8.21, $8.37
and $9.32, respectively, per option using the following assumptions:
Year Ended June 30,
Risk-free interest rate
Expected volatility
Expected life of options
Dividend yield
69
2014
2013
2012
1.71 %
47 %
0.98 %
49 %
1.05 %
59 %
5.56 years 5.66 years 5.47 years
None
None
None
The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect
at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted average rate for
all options granted during the fiscal year. Expected volatility is based on the historical volatility of the Company’s Common Stock
over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to
post-vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no current intention to pay cash dividends in the future. The estimated annualized forfeitures are
based on the Company’s historical experience of option pre-vesting cancellations and are estimated at a rate of 16%. The Company
will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future
periods if the actual forfeitures are higher than estimated.
Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2014 was as follows:
Stock Options
Cash-Based Stock
Appreciation Rights
Number of
Weighted
Average
Number of
Weighted
Average
Exercise
Price
Outstanding - July 1, 2013
Granted
Exercised
Forfeited and Expired
Outstanding - June 30, 2014
Exercisable - June 30, 2014
Shares
4,670,011 $
612,180 $
(438,449 ) $
(139,188 ) $
4,704,554 $
3,025,156 $
Exercise Price
15.59
18.38
10.22
18.51
16.37
15.48
Rights
60,820 $
58,470 $
(460 ) $
(10,112 ) $
108,718 $
10,574 $
18.78
17.88
18.93
18.94
18.28
18.79
As of June 30, 2014, 2013 and 2012, the aggregate intrinsic value of stock options and cash-based stock appreciation rights
outstanding and exercisable was $5.2 million, $9.7 million and $14.6 million, respectively. Aggregate intrinsic value represents the
total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended
June 30, 2014, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by
the option holders had all option holders exercised their options on June 30, 2014. This amount varies based on the fair market value
of the Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal
years ended June 30, 2014, 2013, and 2012 was $3.1 million, $2.9 million, and $4.5 million, respectively. As of June 30, 2014, total
unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $9.4 million. This
cost is expected to be recognized over a weighted-average period of approximately three years. Outstanding and exercisable stock
options at June 30, 2014 were as follows:
Stock Options and Cash-Based Stock
Appreciation Rights Outstanding
Stock Options and Cash-Based Stock
Appreciation Rights Exercisable
Range of
Exercise Prices
$8.44-$12.80
$13.17-$20.26
$20.47-$27.18
Weighted
Weighted
Number of Average Remaining Average
Exercise
Shares or Contractual Term
Rights
1,331,888
2,831,846
649,538
4,813,272
3.05 $
7.00 $
4.37 $
5.52 $
(Years)
Price
Number of Average Remaining
Shares or Contractual Term
Rights
10.70 1,233,668
17.45 1,196,748
23.52 605,314
16.42 3,035,730
(Years)
2.88
5.44
4.18
4.14
Weighted
Weighted
Average
Exercise
Price
10.59
16.47
23.49
15.49
Restricted Share Awards and Cash-Based Restricted Share Unit Awards:
Restricted share awards and cash-based restricted share unit awards compensation expense was calculated based on the number of
shares or units expected to be earned by the grantee multiplied by the stock price at the date of grant, and is being recognized over the
vesting period. Generally, the restricted share awards and restricted share unit awards have a three year cliff-vesting provision and an
estimated forfeiture rate of 7.5%.
70
Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2014, was as follows:
Nonvested - June 30, 2013
Granted
Vested
Forfeited
Nonvested - June 30, 2014
Cash-Based Restricted Share Units
Number of Weighted Average
Grant Date Fair Value Units
Restricted Share Awards
Number of Weighted Average
Shares
798,624 $
223,760 $
(195,707 ) $
(42,642 ) $
784,035 $
18.18
17.26
19.19
18.29
17.66
Grant Date Fair Value
18.78
17.05
-
18.63
17.72
30,270 $
39,880 $
- $
(5,840 ) $
64,310 $
As of June 30, 2014, total unrecognized compensation cost related to non-vested restricted share and cash-based restricted share unit
awards was $5.7 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The
restricted share compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock
price at the date of grant and is being recognized over the vesting period. The cash-based restricted share unit compensation expense
was calculated based on the number of shares expected to be earned multiplied by the stock price at the period-end date and is being
recognized over the vesting period. The total fair value of the restricted share and cash-based restricted share unit awards granted
during the years ended June 30, 2014, 2013 and 2012, was $4.5 million, $7.0 million and $5.5 million, respectively. The total fair
value of restricted shares vested was $3.8 million and $0.7 million during fiscal years 2014 and 2013, respectively, and was not
significant during fiscal year 2012.
Performance Share Awards and Cash-Based Performance Share Unit Awards:
The Compensation Committee of the Board of Directors of the Company granted certain executive officers and employees
performance share awards and performance share unit awards under the Plan. As of June 30, 2014, the Company had outstanding
grants covering performance periods ranging from 24 to 48 months. These awards are intended to provide continuing emphasis on
specified financial performance goals that the Company considers important contributors to the creation of long-term shareholder
value. These awards are payable only if the Company achieves specified levels of financial performance during the performance
periods.
The performance share compensation expense was calculated based on the number of shares expected to be earned multiplied by the
stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation
expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the period-end date, and
is being recognized over the vesting period. Performance share and cash-based performance share unit award activity relating to the
plan during the year ended June 30, 2014, was as follows:
Performance Share Awards
Number of Weighted Average
Cash-Based Performance Share Units
Number of Weighted Average
Shares
Grant Date Fair Value Units
Nonvested - June 30, 2013
Granted
Vested
Forfeited
Nonvested - June 30, 2014
359,754 $
105,900 $
(77,656 ) $
(55,818 ) $
332,180 $
17.85
19.37
17.53
17.56
18.46
Grant Date Fair Value
18.93
19.37
-
18.93
18.94
107,096 $
2,150 $
- $
(10,102 ) $
99,144 $
As of June 30, 2014, total unrecognized compensation cost related to non-vested performance share and cash-based performance share
unit awards was $3.3 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The
total fair value of the performance share and cash-based performance share unit awards granted during the fiscal years ended June 30,
2014, 2013 and 2012 was $2.1 million, $5.9 million and $3.3 million, respectively. The total fair value of performance shares vested
during the fiscal years ended June 30, 2014, 2013 and 2012 was $1.3 million, $2.6 million and $1.6 million, respectively.
71
Note 12.
Segment and Geographic Reporting
The Company reports its business segments using the “management approach” model for segment reporting. The Company
determines its reportable business segments based on the way the chief operating decision maker organizes business segments within
the Company for making operating decisions and assessing performance.
In conjunction with the acquisitions of Laser Enterprise on September 12, 2013 and Network Solutions on November 1, 2013, the
Company has established a new reporting segment “Active Optical Products” which reports the operating results of the Company’s
recently acquired businesses.
The Company has five reportable segments as of June 30, 2014. The Company’s chief operating decision maker receives and reviews
financial information in this format. The Company evaluates business segment performance based upon reported business segment
earnings, which is defined as earnings from continuing operations before income taxes, interest and other income or expense. The
segments are managed separately due to the production requirements and facilities unique to each segment. The Company has the
following reportable segments at June 30, 2014: (i) Infrared Optics, which consists of the Company’s infrared optics and material
products businesses, HIGHYAG Lasertechnologies, GmbH (“HIGHYAG”) and certain remaining corporate activities, primarily
corporate assets and capital expenditures; (ii) Near-Infrared Optics, which consists of Photop, Photop Aegis, Inc. (“Photop Aeigs”)
and Photop AOFR; (iii) Military & Materials, which consists of the Company’s LightWorks Optical Systems (formerly the
Company’s EEO and LightWorks Optical Systems subsidiaries, “LWOS”), VLOC Incorporated (“VLOC”), Max Levy Autograph,
Inc. (“MLA”) and PRM; (iv) Advanced Products Group, which is comprised of the Company’s Marlow Industries, Inc. (“Marlow”),
M Cubed, the Wide Bandgap Materials Group (“WBG”) and the Worldwide Materials Group (“WMG”), which is responsible for
corporate research and development activities; and (v) Active Optical Products which consists of Laser Enterprise and Network
Solutions.
During December 2013, the Company completed the discontinuance of its tellurium product line by exiting all business activities
associated with this product. This product line was previously serviced by PRM and was included as part of the Military & Materials
segment. Segment information for all periods presented has been adjusted to properly reflect the tellurium product as a discontinued
operation.
The Infrared Optics segment is divided into geographic locations in the U.S., Singapore, China, Germany, Switzerland, Japan,
Belgium, the U.K. and Italy. The Infrared Optics segment is directed by a general manager, while each geographic location is also
directed by a general manager, and is further divided into production and administrative units that are directed by managers. The
Infrared Optics segment designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI
brand name and used primarily in high-power CO2 lasers. The Infrared Optics segment also manufactures fiber-delivered beam
delivery systems and processing tools for industrial lasers sold under the HIGHYAG brand name.
The Near-Infrared Optics segment is located in the U.S., China, Vietnam, Australia, Germany, Japan, the U.K., Italy and Hong Kong.
The Near-Infrared Optics segment is directed by the Corporate Chief Operating Officer and is further divided into production and
administrative units that are directed by managers. The Near-Infrared Optics segment manufactures crystal materials, optics,
microchip lasers and opto-electronic modules for use in optical communication networks and other diverse consumer and commercial
applications sold under the Photop brand name and manufactures tunable optical devices and couplers and combiners required for high
speed optical networks sold under the Photop Aegis and Photop AOFR brand names, respectively.
The Military & Materials segment is located in the U.S. and the Philippines. The Military & Materials segment is directed by the
Corporate Chief Operating Officer, while each geographic location is directed by a general manager. The Military & Materials
segment is further divided into production and administrative units that are directed by managers. The Military & Materials segment
designs, manufactures and markets ultra-violet to infrared optical components and high-precision optical assemblies for military,
medical and commercial laser and imaging applications under the LWOS and VLOC brand names and manufactures and markets
micro-fine conductive mesh patterns for optical, mechanical, and ceramic components for applications under the MLA brand name.
The segment also refines selenium metals for internal consumption and a rare earth element under the PRM brand name.
The Advanced Products Group is located in the U.S., Vietnam, Japan, China and Germany and is directed by the Corporate Chief
Operating Officer. In the Advanced Products Group segment, Marlow designs and manufactures thermoelectric cooling and power
generation solutions for use in defense and space, optical communications, medical, consumer and industrial markets. M Cubed
develops advanced ceramic materials and precision motion control products addressing the semiconductor, display, industrial and
defense markets. WBG manufactures and markets single crystal silicon carbide substrates for use in solid-state lighting, wireless
infrastructure, radio frequency (“RF”) electronics and power switching industries. WMG directs the corporate research and
development initiatives.
72
The Active Optical Products segment is located in Switzerland, China, the U.S., Italy, Japan, Thailand, Hong Kong and the U.K. The
Active Optical Products segment is directed by the Corporate Chief Operating Officer. Laser Enterprise manufactures high-power
semiconductor laser components enabling fiber and direct diode laser systems for material processing, medical, consumer and printing
applications. In addition, Laser Enterprise manufactures pump lasers for optical amplifiers for both terrestrial and submarine
applications and VCSELS for optical navigation, optical interconnects and optical sensing applications. Network Solutions
manufactures optical amplifiers and micro-optics for both terrestrial and submarine applications within the optical communications
market.
The accounting policies of the segments are the same as those of the Company. All of the Company’s corporate expenses are allocated
to the segments. The Company evaluates segment performance based upon reported segment earnings, which is defined as earnings
from continuing operations before income taxes, interest and other income or expense. Inter-segment sales and transfers have been
eliminated.
The following tables summarize selected financial information of the Company’s operations by segment:
Near-
Infrared Infrared &
Optics Optics Materials Group
Military Advanced Active
Products Optical
Products Eliminations Total
($000)
2014
Revenues
Inter-segment revenues
Segment earnings (loss)
Interest expense
Other income, net
Income taxes
Earnings from discontinued operation
Net earnings
Depreciation and amortization
Segment assets
Expenditures for property, plant and equipment
Equity investment
Goodwill
($000)
2013
Revenues
Inter-segment revenues
Segment earnings
Interest expense
Other income, net
Income taxes
Loss from discontinued operation
Net earnings
Depreciation and amortization
Segment assets
Expenditures for property, plant and equipment
Equity investment
Goodwill
1,608
40,736
-
-
-
-
-
-
-
-
-
-
9,174 16,764
2,406
6,514
9,814 12,851
-
-
-
-
-
8,111
$ 209,658 $ 144,677 $ 98,324 $ 115,394 $ 115,208 $
6,388
563
9,419 (26,334 )
-
-
-
-
-
9,102
231,874 295,953 117,730 175,986 250,383
2,266
-
9,754 60,408 30,712 22,178 73,093
-
-
-
-
-
9,947
3,525
- 11,589
9,719
-
8,171
-
5,539
- $ 683,261
-
(17,479 )
46,486
-
(4,479 )
-
3,634
-
(7,325 )
-
133
-
38,449
-
-
53,098
- 1,071,926
29,220
-
11,589
-
- 196,145
Near-
Military Advanced
Products
&
Infrared Infrared
Optics
Optics
Materials Group
Eliminations Total
2,618
-
-
-
-
-
$ 203,319 $ 154,852 $ 97,116 $ 95,788 $
5,311
1,750
896
49,457 19,628
-
-
-
-
-
8,423 17,286
-
-
-
-
-
8,060
238,700 307,431 139,923 177,748
6,314
- 11,203
9,677 60,269 30,712 22,694
4,853
656
-
-
-
-
-
7,023
5,812
-
9,170
-
3,909
(13,678 )
- $ 551,075
-
71,491
(1,160 )
-
7,155
-
- (18,766 )
-
(6,789 )
- 51,931
- 40,792
- 863,802
- 25,205
- 11,203
- 123,352
73
Near-
Military Advanced
Products
&
Infrared Infrared
Optics
Optics
Materials Group
Eliminations Total
($000)
2012
Revenues
Inter-segment revenues
Segment earnings
Interest expense
Other income, net
Income taxes
Loss from discontinued operation
Net earnings
Depreciation and amortization
Expenditures for property, plant and equipment
3,174
$ 201,611 $ 140,001 $ 100,235 $ 74,556 $
4,295
8,442
2,135
51,095 14,060
-
-
-
-
-
-
-
-
-
-
4,283
8,480 15,803
8,072 12,249 11,983 10,493
7,589
7,925
-
-
-
-
-
5,957
-
-
-
-
-
(17,193 )
- $ 516,403
-
81,522
-
(212 )
7,168
-
- (17,760 )
-
(9,443 )
- 61,275
- 34,523
- 42,797
Geographic information for revenues from the country of origin, and long-lived assets from the country of origin, which include
property, plant and equipment, net of related depreciation, and certain other long-term assets, is as follows:
Year-Ended June 30,
($000)
United States
Non-United States
China
Switzerland
Germany
Hong Kong
Japan
Vietnam
Philippines
Italy
Singapore
United Kingdom
Belgium
Australia
Total Non-United
States
2014
Revenues
2013
2012
$
263,493 $
251,735 $
204,706
114,247
70,260
69,983
54,602
38,110
23,141
14,959
8,897
8,273
7,148
6,578
3,570
123,306
10,268
59,628
-
29,462
29,425
17,400
7,593
6,280
6,865
5,821
3,292
123,348
11,714
51,962
-
35,915
31,500
26,185
7,214
7,238
6,026
6,010
4,585
419,768
683,261 $
299,340
551,075 $
311,697
516,403
$
74
June 30,
($000)
United States
Non-United States
China
Switzerland
Germany
Vietnam
Philippines
Hong Kong
Other
Total Non-United States
$
Long-Lived Assets
2014
2013
2012
$
109,138 $
110,337 $
85,709
45,667
22,524
16,129
9,107
6,205
5,111
2,218
106,961
216,099 $
43,139
5
2,107
10,081
7,207
-
3,244
65,783
176,120 $
45,412
10
1,581
10,278
8,692
-
4,143
70,116
155,825
Note 13. Fair Value of Financial Instruments
The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the
measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in
accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the
measurement date as follows:
Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are
observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurements.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the
measurement. At June 30, 2014, the Company had foreign currency forward contracts recorded at fair value. The fair values of these
instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and
are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the
contracts. During fiscal year 2014, the Company settled a contingent earnout arrangement related to the acquisition of LightWorks in
the amount of $3.0 million. The LightWorks earnout arrangement provided up to a maximum of $4.2 million of additional cash
payments to the former shareholders based upon LightWorks achieving certain agreed upon financial targets for revenues and
customer orders in calendar year 2013. The fair value of the earnout arrangement was based on significant inputs not observable in the
market and represented a Level 3 measurement. Included in Other expense (income), net for the year ended June 30, 2014 is a $0.3
million unrealized gain due to a fair value remeasurement that reduced the earnout liability. The following table provides a summary
by level of the fair value of financial instruments that are measured on a recurring basis as of June 30, 2014 ($000):
75
Fair Value Measurements at June 30, 2014 Using:
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
June 30,2014
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
Contingent Earnout Arrangement
Foreign currency forward contracts
$
$
- $
54 $
- $
- $
- $
54 $
-
-
Fair Value Measurements at June 30, 2013 Using:
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
June
30,2013
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
Contingent Earnout Arrangement
Foreign currency forward contracts
$
$
3,300 $
23 $
- $
- $
- $
23 $
3,300
-
The Company’s policy is to report transfers into and out of Levels 1 and 2 of the fair value hierarchy at fair values as of the beginning
of the period in which the transfers occur. There were no transfers in and out of Levels 1 and 2 of the fair value hierarchy during fiscal
years 2014 and 2013.
The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s Level 3
contingent earnout arrangement related to the acquisition of LightWorks:
Balance at June 30, 2013
Payment of earnout arrangement
Changes in fair value
Balance at June 30, 2014
Significant Other
Unobservable Inputs
(Level 3)
$
$
3,300
(3,000 )
(300 )
-
The carrying value of cash and cash equivalents, accounts receivable and accounts payable are considered Level 1 among the fair
value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings are
considered Level 2 among the fair value hierarchy and are variable interest rates and accordingly their carrying amounts approximate
fair value.
76
Note 14. Derivative Instruments
The Company, from time to time, purchases foreign currency forward exchange contracts, primarily in Japanese Yen, that permit it to
sell specified amounts of these foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts
at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export
sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its
aggregate net cash flows in respective currencies, to foreign currency risk.
The Company has recorded the fair market value of these contracts in the Company’s financial statements. These contracts had a total
notional amount of $7.4 million and $4.7 million at June 30, 2014 and June 30, 2013, respectively. As of June 30, 2014, these forward
contracts had expiration dates ranging from August 2014 through October 2014, with Japanese Yen denominations individually at
250 million Yen. The Company does not account for these contracts as hedges as defined by U.S. GAAP and records the change in the
fair value of these contracts in Other expense (income), net in the Consolidated Statements of Earnings as they occur. The fair value
measurement takes into consideration foreign currency rates and the current creditworthiness of the counterparties to these contracts,
as applicable, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for
the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments and thus represents a Level
2 measurement. These contracts are recorded in other accrued liabilities in the Company’s Consolidated Balance Sheets. The change
in the fair value of these contracts for the fiscal years ended June 30, 2014, 2013 and 2012 was insignificant.
Note 15. Employee Benefit Plans
Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at
the discretion of the Company’s board of directors and were $2.5 million, $2.2 million, and $2.8 million for the years ended June 30,
2014, 2013 and 2012, respectively.
The Company has an employee stock purchase plan available for employees who have completed six months of continuous
employment with the Company. The employee may purchase the Company’s Common Stock at 5% below the prevailing market price.
The amount of shares which may be bought by an employee during each fiscal year is limited to 10% of the employee’s base pay. This
plan, as amended, limits the number of shares of Common Stock available for purchase to 1,600,000 shares. There were 543,234 and
560,034 shares of Common Stock available for purchase under the plan at June 30, 2014 and 2013, respectively.
Switzerland Defined Benefit Plan
In conjunction with the acquisition of the Oclaro’s Switzerland-Based Semiconductor Laser Business we assumed a pension plan
covering employees of our Swiss subsidiary (Swiss Plan). Employer and employee contributions are made to the Swiss plan based on
various percentages of salary and wages that vary according to employee age and other factors. Employer contributions to the Swiss
Plan for year ended June 30, 2014 were $2.3 million. Expected employer contributions in fiscal year 2015 are $2.1 million.
77
The funded status of the Swiss Plan in the fiscal year ended June 30, 2014 was as follows:
Change in projected benefit obligation:
Projected benefit obligation, date of acquisition
Service cost
Interest cost
Plan amendments
Participant contributions
Benefits (paid) received
Actuarial (gain) loss on obligation
Currency translation adjustment
Projected benefit obligation, end of period
Change in plan assets:
Plan assets at fair value, date of acquisition
Actual return on plan assets
Employer contributions
Participant contributions
Benefits (paid) received
Currency translation adjustment
Plan assets at fair value, end of period
Amounts recognized in consolidated balance sheets:
Other non-current assets:
Deferred tax asset
Other non-current liabilities:
Underfunded pension liability
Amounts recognized in accumulated other comprehensive
income, net of tax:
Pension adjustment
Accumulated benefit obligation, end of period
Year Ended
June 30, 2014
$
$
$
$
$
$
$
38,748
3,375
812
(1,661 )
1,110
(3,959 )
(867 )
1,832
39,390
30,167
776
2,253
1,110
(3,959 )
1,617
31,965
1,570
7,425
1,443
35,581
Net periodic pension cost associated with the Swiss Plan in the fiscal year ended June 30, 2014 included the following components:
Service cost
Interest cost
Expected return on plan assets
Net amortization
Net period pension cost
Year Ended
June 30, 2014
3,375
812
(1,338 )
-
2,849
$
$
The Company expects to recognize approximately $0.3 million as a component of net periodic benefit cost in fiscal 2015 as a result of
amortization from accumulated other comprehensive income.
78
The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 2014 using the following
assumptions:
Discount rate
Salary increase rate
Expected return on plan assets
Expected average remaining working life (in years)
Year Ended
June 30, 2014
2.0 %
2.0 %
3.5 %
13.1
The discount rate is based on assumed pension benefit maturity and estimates developed using the rate of return and yield curves for
high quality Swiss corporate and government bonds. The salary increase rate is based on our best assessment for on-going increases
over time. The expected long-term rate of return on plan assets is based on the expected asset allocation and taking into consideration
historical long-term rates of return for the relevant asset categories.
The Swiss Plan is legally separate from II-VI, as are the assets of the plan. As of June 30, 2014, the Swiss Plan’s asset allocation was
as follows:
Fixed income investments
Equity investments
Real estate
Cash
Alternative investments
Year Ended
June 30, 2014
22.0 %
54.0 %
14.0 %
8.0 %
2.0 %
100.0 %
The Swiss Plan assets are measured at fair value and are classified into two distinct levels of the fair value hierarchy. The Swiss Plan
assets are comprised of Level 1 assets, which include cash, equity investments and fixed income investments, and Level 3 assets,
which include real estate and alternative investments. The investment strategy of the Swiss Plan is to achieve a consistent long-term
return which will provide sufficient funding for future pension obligations while limiting risk. The investment strategy is reviewed
regularly.
Estimated future benefit payments under the Swiss Plan are estimated to be $1.3 million in fiscal year 2015, $1.1 million in fiscal year
2016, $1.6 million in fiscal year 2017, $0.7 million in fiscal year 2018, $3.1 million in fiscal year 2019 and $10.7 million thereafter.
These benefits will be paid out of the assets of the Swiss Plan and not by the Company.
PRM Defined Benefit Plan
As a requirement of a collective bargaining agreement, PRM maintains a defined benefit plan for substantially all of its employees.
The plan provides for retirement benefits based on a certain percentage of the latest monthly salary of an employee per year of service.
The pension liability was $0.6 million and $1.1 million at June 30, 2014 and June 30, 2013, respectively. The PRM Plan is an
unfunded pension plan under which the Company makes payments directly to employees. As these payments are made directly by the
Company, there are no separate assets utilized to fund this plan.
The Company has no program for post-retirement health and welfare benefits.
The II-VI Incorporated Deferred Compensation Plan (the “Compensation Plan”) is designed to allow officers and key employees of
the Company to defer receipt of compensation into a trust fund for retirement purposes. Under the Compensation Plan, eligible
participants can elect to defer up to 100% of discretionary incentive compensation, performance share awards and restricted share
awards into the Compensation Plan. The Compensation Plan is a nonqualified, defined contribution employees’ retirement plan. At the
Company’s discretion, the Compensation Plan may be funded by the Company making contributions based on compensation deferrals,
matching contributions and discretionary contributions. Compensation deferrals will be based on an election by the participant to defer
a percentage of compensation under the Compensation Plan. All assets in the Compensation Plan are subject to claims of the
Company’s creditors until such amounts are paid to the Compensation Plan participants. Employees of the Company made
contributions to the Compensation Plan in the amounts of approximately $1.9 million, $1.8 million, and $1.4 million for the fiscal
years ended June 30, 2014, 2013, and 2012, respectively. There were no employer contributions made to the Compensation Plan for
the fiscal years ended June 30, 2014, 2013 and 2012.
79
Note 16. Other Accrued Liabilities
The components of other accrued liabilities were as follows:
June 30,
($000)
Acquisition holdbacks
Redeemable noncontrolling interest liability
Earnout arrangement
Warranty reserve
Other accrued liabilities
2014
2013
$
$
10,000 $
-
-
2,859
18,662
31,521 $
-
8,568
3,300
1,661
21,166
34,695
In June 2013, the Company received notice from the noncontrolling interest holder of HIGHYAG of the intention to exercise the put
option. The value of the put option was calculated using a formulaic model based upon earnings before interest, income taxes,
depreciation and amortization (EBITDA), revenue growth and other variables. The price for the 25.07% noncontrolling interest the
Company did not already own was $7.6 million; in addition a dividend of $1.0 million also was declared and was paid to the
noncontrolling interest holder in fiscal year 2014. Both of these amounts are included in the Consolidated Balance Sheet as of June 30,
2013 as a current liability within Other accrued liabilities as these amounts were paid in August 2013.
Changes in the carrying amount of our redeemable noncontrolling interest were as follows:
Year Ended June 30,
($000)
Balance at Beginning of Year
Net earnings attributable to redeemable noncontrolling interest
Other changes
Redemption value adjustment to redeemable noncontrolling interest
Reclassification of redeemable noncontrolling interest to Other
accrued liabilities
Balance at End of Year
2014
2013
2012
$
$
- $ 5,160 $ 1,828
-
969
(267 )
-
2,630
-
1,118
(585 )
2,875
-
- $
(8,568 )
-
- $ 5,160
The following table summarizes the change in the carrying value of the company’s warranty reserve included in Other Accrued
Liabilities as of and for the year ended June 30, 2014.
Year Ended June 30,
($000)
Balance-Beginning of Year
Settlements during the period
Additional warranty liability recorded
Warranty liability assumed through acquisitions
Balance-End of Year
2014
$
$
1,661
(1,843 )
1,868
1,173
2,859
Note 17. Commitments and Contingencies
The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the
commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase
commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature
of some of the Company’s materials and processes, certain contracts may contain penalty provisions for early termination. The
Company does not believe that a significant amount of penalties is reasonably likely to be incurred under these commitments based
upon historical experience and current expectation. Total future commitments are as follows:
80
Year Ending June 30,
($000)
2015
2016
2017
2018
2019
2014
15,906
489
488
-
-
$
$
Note 18. Capital Lease
In December 2013, the Company's HIGHYAG subsidiary entered into a capital lease related to a building in Germany. The following
table shows the future minimum lease payments due under the non-cancelable capital lease ($000):
Fiscal Year Ending:
Amount
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of capitalized payments
Less: current portion
$
1,071
1,071
1,071
1,071
1,071
12,228
17,583
5,947
11,636
453
Long-term portion
$
11,183
The current and long-term portion of the capital lease obligation was recorded in Other accrued liabilities and Other liabilities,
respectively, in the Company’s Condensed Consolidated Balance Sheets as of June 30, 2014. The present value of the capitalized
payments of $11.6 million was recorded in Property, plant & equipment, net, in the Company’s Condensed Consolidated Balance
Sheets as of June 30, 2014, with associated depreciation expense being recorded over the 17 year life of the lease.
In August 2014, the Company exited its capital lease obligation by purchasing the existing manufacturing facility in Berlin, Germany
utilized by the Company’s HIGHYAG business. The total cash paid for this purchase was approximately $13.4 million and was
financed through existing cash balances at June 30, 2014.
Note 19.
Share Repurchase Programs
In February 2014 and May 2012, the Board of Directors authorized the Company to purchase up to $20 million and $25 million,
respectively, of its Common Stock. The repurchase programs called for shares to be purchased in the open market or in private
transactions from time to time. Shares purchased by the Company are retained as treasury stock and available for general corporate
purposes. During the fiscal years ended June 30, 2014, 2013 and 2012, the Company purchased 1,333,355 shares, 1,141,022 shares,
301,716 shares of its Common Stock for $20.0 million, $20.0 million, and $5.0 million, respectively, under the repurchase programs.
In August 2014, the Board of Directors authorized the Company to purchase up to $50.0 million of its Common Stock. The repurchase
program has no expiration and calls for shares to be purchased in the open market or in private transactions from time to time. Shares
purchased by the Company will be retained as treasury stock and available for general corporate purposes. During August 2014, the
Company purchased 180,000 shares of its Common Stock for $2.5 million under this new repurchase program.
81
Quarterly Financial Data (unaudited)
Fiscal 2014
September 30, December 31, March 31,
2013
2014
2013
June 30,
2014
150,020 $
93,709
7,747
35,093
483
53
12,935
3,243
9,692 $
2 $
9,694 $
171,765 $ 173,555 $
118,865
118,371
12,099
11,355
33,848
32,471
1,412
1,169
(1,694 )
(1,125 )
9,025
9,524
494
2,086
8,531 $
7,438 $
- $
131 $
8,531 $
7,569 $
187,921
125,600
11,322
36,295
1,415
(868 )
14,157
1,502
12,655
-
12,655
0.16 $
0.00 $
0.16 $
0.12 $
- $
0.12 $
0.14 $
- $
0.14 $
0.21
-
0.21
0.15 $
0.00 $
0.15 $
0.12 $
- $
0.12 $
0.13 $ 0.20
-
0.20
- $
0.13 $
Quarter Ended
($000)
2014
Net revenues
Cost of goods sold
Internal research and development
Selling, general and administrative
Interest expense
Other expense (income) - net
Earnings from continuing operations before income taxes
Income taxes
Earnings from continuing operations
Earnings (loss) from discontinued operations, net of income taxes
Net Earnings Attributable to II-VI Incorporated
Net Earnings Attributable to II-VI Incorporated: Basic earnings
per share:
$
$
Continuing operations
Discontinued operation
Consolidated
Net Earnings Attributable to II-VI Incorporated: Diluted
earnings
per share:
Continuing operations
Discontinued operation
Consolidated
$
$
$
$
$
$
82
Fiscal 2013
September 30, December 31, March 31,
2012
2012
2013
June 30,
2013
127,998 $
77,599
5,585
26,356
36
(761 )
19,183
4,262
14,921 $
(1,789 ) $
13,132 $
414 $
12,718 $
125,107 $ 143,940 $
92,986
77,839
5,781
5,626
27,004
26,174
449
223
(1,401 )
(4,551 )
19,121
19,796
2,861
6,721
16,260 $
13,075 $
(166 ) $
(608 ) $
16,094 $
12,467 $
225 $
267 $
15,869 $
12,200 $
154,030
99,134
5,697
29,803
452
(442 )
19,386
4,922
14,464
(4,226 )
10,238
212
10,026
0.23 $
(0.03 ) $
0.20 $
0.20 $
(0.01 ) $
0.19 $
0.26 $
(0.00 ) $
0.26 $
0.23
(0.07 )
0.16
0.23 $
(0.03 ) $
0.20 $
0.20 $
(0.01 ) $
0.19 $
0.25 $ 0.22
(0.07 )
(0.00 ) $
0.16
0.25 $
Quarter Ended
($000)
2013
Net revenues
Cost of goods sold
Internal research and development
Selling, general and administrative
Interest expense
Other expense (income) - net
Earnings from continuing operations before income taxes
Income taxes
Earnings from continuing operations
Earnings (loss) from discontinued operations, net of income taxes
Net Earnings
Net Earnings Attributable to Noncontrolling Interest
Net Earnings Attributable to II-VI Incorporated
Net Earnings Attributable to II-VI Incorporated: Basic earnings
per share:
$
$
Continuing operations
Discontinued operation
Consolidated
Net Earnings Attributable to II-VI Incorporated: Diluted
earnings
per share:
Continuing operations
Discontinued operation
Consolidated
$
$
$
$
$
$
83
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2014, 2013, AND 2012
(IN THOUSANDS OF DOLLARS)
Additions
Balance at Charged Charged Deduction Balance
at End
Beginning
Expense Accounts Reserves of Year
to Other
of Year
from
to
YEAR ENDED JUNE 30, 2014:
Allowance for doubtful accounts
Warranty reserves
YEAR ENDED JUNE 30, 2013:
Allowance for doubtful accounts
Warranty reserves
YEAR ENDED JUNE 30, 2012:
Allowance for doubtful accounts
Warranty reserves
$
$
$
$
$
$
1,479 $
1,661 $
993 $
1,868 $
- $
1,173 (1 ) $
(620 ) (3 ) $ 1,852
(1,843 ) $ 2,859
1,536 $
1,247 $
(92 ) $
1,851 $
179 (2 ) $
- $
(144 ) (3 ) $ 1,479
(1,437 ) $ 1,661
766 $
1,187 $
940 $
1,710 $
(18 ) $
- $
(152 ) (3 ) $ 1,536
(1,650 ) $ 1,247
(1) Relates to the warranty reserve acquired from the acquisitions.
(2)
(3)
Primarily relates to allowance for doubtful accounts from the acquisitions.
Primarily relates to write-offs of accounts receivable.
84
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Item 9.
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of Francis J. Kramer, the Company’s President and Chief Executive
Officer and Mary Jane Raymond, the Company’s Chief Financial Officer and Treasurer, the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this Annual Report on Form 10-K. The Company’s disclosure controls were designed to provide
reasonable assurance that information required to be disclosed in reports that we file or submit under the 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, Mr. Kramer and Ms. Raymond concluded that, as of June 30, 2014, the
Company’s disclosure controls and procedures are effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the “Internal Control-Integrated Framework” issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Management excluded from the scope of its
assessment of internal control over financial reporting the operations and related assets of II-VI Laser Enterprise which was acquired
on September 12, 2013, and II-VI Network Solutions Division which was acquired on November 1, 2013. The recent acquisitions
excluded from management’s assessment of internal controls over financial reporting represented approximately $250.4 million and
$152.5 million of total assets and net assets as of June 30, 2014 and approximately $115.2 million and $(20.0) million of total
revenues and net income for the fiscal year then ended. See the “Report of Management” which is set forth under Item 8 of this
Annual Report on Form 10-K and is incorporated herein by reference.
Report of the Registered Public Accounting Firm
The report of Ernst & Young LLP, an independent registered public accounting firm, with respect to our internal control over financial
reporting is included in Item 8 of this Annual Report on Form 10-K and incorporated herein by reference.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during our most recent quarter
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
85
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth above in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant”
is incorporated herein by reference. The other information required by this item is incorporated herein by reference to the information
set forth under the captions “Election of Directors,” “Other Information – Section 16(a) Beneficial Ownership Reporting Compliance”
in the Company’s definitive proxy statement for the 2014 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A of
the Exchange Act (the “Proxy Statement”).
Audit Committee Financial Expert
The information as to the Audit Committee and the Audit Committee Financial Expert is incorporated herein by reference to the
information set forth under the caption “Meetings and Committees of the Board of Directors – Audit Committee” in the Company’s
Proxy Statement.
Code of Ethics
The Company has adopted its Code of Business Conduct and Ethics for all of its employees and its Code of Ethics for Senior
Financial Officers including the principal executive officer and principal financial officer. The Code of Business Conduct and Ethics
and Code of Ethics for Senior Financial Officers can be found on the Company’s Internet web site at www.ii-vi.com under “Investors
Information – Corporate Governance Documents.” The Company will promptly disclose on its web site (i) any amendments or
waivers with respect to a director’s or executive officer’s compliance with the Code of Business Conducts and Ethics and (ii) any
amendments or waivers with respect to any provision of the Code of Ethics for Senior Financial Officers. Any person may also obtain
a copy of the Code of Business Conduct and/or the Code of Ethics for Senior Financial Officer without charge by submitting their
request to the Chief Financial Officer and Treasurer of II-VI Incorporated, 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056
or by calling (724) 352-4455.
The web site and information contained on it or incorporated in it are not intended to be incorporated in this Annual Report on Form
10-K or other filings with the Securities and Exchange Commission.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the information set forth under the caption “Director
Compensation,” “Executive Compensation,” “Compensation Committee Report” and “Compensation and Risk” in the Company’s
Proxy Statement.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTER
The information required by this item is incorporated herein by reference to the information set forth under the captions “Equity
Compensation Plan Information” and “Principal Shareholders” in the Company’s Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the information set forth under the caption “Director
Independence and Corporate Governance” in the Company’s Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information set forth under the caption “Ratification of
Selection of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement.
86
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) Financial Statements
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K.
(2) Schedules
Schedule II – Valuation and Qualifying Accounts for each of the three fiscal years in the period ended June 30, 2014
is set forth under Item 8 of this Annual Report on Form 10-K.
Financial statements, financial statement schedules and exhibits not listed have been omitted where the required information is
included in the consolidated financial statements or notes thereto, or is not applicable or required.
(3) Exhibits.
Exhibit
Number
2.01
2.02
2.03
2.04
Description of Exhibit
Merger Agreement by and among II-VI Incorporated, II-VI Holdings
B.V., II-VI Cayman, Inc. Photop Technologies, Inc. and the
Shareholder Representative named Therein, dated as of December
28, 2009
Merger Agreement, dated as of November 1, 2012, by and among II-
VI Incorporated, Monarch Acquisition Co., M Cubed Technologies,
Inc. and MMMT Representative, LLC, as the stockholder
representative
Share and Asset Purchase Agreement dated as of September 12,
2013, between II-VI Holdings B.V., a Netherland corporation, and
Oclaro Technology LTD., a company incorporated under the laws of
England and Wales (the “Purchase Agreement”). Schedules to the
Purchase Agreement identified in the Table of Contents to the
Purchase Agreement are not being filed but will be furnished
supplementally to the Securities and Exchange Commission upon
request.
Asset Purchase Agreement dated as of October 10, 2013, between II-
VI Incorporated, a Pennsylvania corporation, and Oclaro Technology
Limited, a company incorporated under the laws of England and
Wales (the “Purchase Agreement”). Schedules to the Purchase
Agreement identified in the Purchase Agreement are not being filed
but will be furnished supplementally to the Securities and Exchange
Commission upon request.
3.01
Amended and Restated Articles of Incorporation of II-VI
Incorporated
3.02
Amended and Restated By-Laws of II-VI Incorporated
10.01
10.02
II-VI Incorporated Amended and Restated Employees’ Stock
Purchase Plan
First Amendment to the II-VI Incorporated Amended and Restated
Employees’ Stock Purchase Plan
Incorporated herein by reference is Exhibit 2.1
to II-VI’s Current Report on Form 8-K (File No.
000-16195) filed on January 4, 2010.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on November 1, 2012.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on September 12, 2013.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on October 11, 2013.
Incorporated herein by reference is Exhibit 3.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 8, 2011.
Incorporated herein by reference is Exhibit 3.2 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 8, 2011.
Incorporated herein by reference is Exhibit 10.04 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Quarterly Report on Form 10-Q (File No.
000-16195) for the Quarter Ended March 31, 1996.
87
Exhibit
Number
10.03
Description of Exhibit
II-VI Incorporated Amended and Restated Employees’ Profit-
Sharing Plan and Trust Agreement, as amended
10.04
Form of Representative Agreement between II-VI and its foreign
representatives
10.05
Form of Employment Agreement*
10.06
Description of Management-By- Objective Plan*
10.07
Trust Under the II-VI Incorporated Deferred Compensation Plan*
10.08
Description of Bonus Incentive Plan*
10.09
Amended and Restated II-VI Incorporated Deferred Compensation
Plan*
10.10
II-VI Incorporated Arrangement for Director Compensation*
10.11
II-VI Incorporated 2005 Omnibus Incentive Plan*
Form of Nonqualified Stock Option under the II-VI Incorporated
2005 Omnibus Incentive Plan*
300,000,000 Japanese Yen Term Loan Second Amendment to
Second Amended and Restated Letter Agreement by and among II-
VI Japan Incorporated and PNC Bank, National Association dated
October 23, 2006.
Incorporated herein by reference is Exhibit 10.05 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.15 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.16 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.09 to
II-VI’s Annual Report on Form 10-K (File No.
000-16195) for the fiscal year ended June 30, 1993.
Incorporated herein by reference is Exhibit 10.13 to
II-VI’s Annual Report on Form 10-K (File No.
000-16195) for the fiscal year ended June 30, 1996.
Incorporated herein by reference is Exhibit 10.14 to
II-VI’s Annual Report on Form 10-K (File No.
000-16195) for the fiscal year ended June 30, 1996.
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Quarterly Report on Form 10-Q (File No.
000-16195) for the Quarter Ended December 31,
1996.
Incorporated herein by reference is Exhibit 10.12 to
II-VI’s Annual report on Form 10-K (File No. 000-
16195) for the fiscal year Ended June 30, 2009.
Incorporated herein by reference is Exhibit A
to II-VI’s Definitive Proxy Statement on Schedule
14A (File No. 000-16195) filed on September 26,
2005.
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Quarterly Report on Form 10-Q (File No.
16195) for the Quarter Ended December 31, 2005.
Incorporated herein by reference is Exhibit 10.2 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on October 26, 2006.
Second Allonge to Rate Protection Term
Note by and among II-VI Japan Incorporated in favor of PNC Bank,
National Association dated October 23, 2006.
Incorporated here by reference is Exhibit 10.3 to II-
VI’s Current Report on Form 8-K (File No. 000-
16195) filed on October 26, 2006.
Amended and Restated Employment
Agreement by and between II-VI and
Francis J. Kramer
Amended and Restated Employment Agreement by and between II-
VI and Vincent D. Mattera, Jr.
10.17
Description of Discretionary Incentive Plan*
88
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 24, 2008.
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 24, 2008.
Incorporated herein by reference is Exhibit 10.27 to
II-VI’s Annual Report on Form 10-K (File No.
000-16195) for the fiscal year ended June 30, 2009.
10.12
10.13
10.14
10.15
10.16
Exhibit
Number
Description of Exhibit
10.18
II-VI Incorporated 2009 Omnibus Incentive Plan*
$50,000,000 Revolving Credit Facility, Credit Agreement by and
among II-VI Incorporated and The Guarantors Party thereto and The
Banks Party thereto and PNC Bank, National Association, As Agent
Dated as of June 15, 2011.
Form of Nonqualified Stock Option under the II-VI Incorporated
2009 Omnibus Incentive Plan*
Form of Restricted Share Award under the II-VI Incorporated 2009
Omnibus Incentive Plan*
Form of Performance Share Award under the II-VI Incorporated
2009 Omnibus Incentive Plan*
Form of Stock Appreciation Rights under the II-VI Incorporated
2009 Omnibus Incentive Plan*
Form of Performance Share Unit under the II-VI Incorporated 2009
Omnibus Incentive Plan*
Form of Restricted Share Unit under the II-VI Incorporated 2009
Omnibus Incentive Plan*
Merger Agreement, dated as of November 1, 2012, by and among II-
VI Incorporated, Monarch Acquisition Co., M Cubed Technologies,
Inc. and MMMT Representative, LLC, as the stockholder
representative.
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Incorporated herein by reference is Exhibit A to II-
VI’s Definitive Proxy Statement on Schedule 14A
(File No. 000-16195) filed on September 25, 2009.
Incorporated herein by reference is Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on June 17, 2011.
Incorporated herein by reference is Exhibit 10.27 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on February 8, 2012.
Incorporated herein by reference is Exhibit 10.28 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on February 8, 2012.
Incorporated herein by reference is Exhibit 10.29 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on February 8, 2012.
Incorporated herein by reference is Exhibit 10.30 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on February 8, 2012.
Incorporated herein by reference is Exhibit 10.31 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on May 9, 2012.
Incorporated herein by reference is Exhibit 10.32 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on May 9, 2012.
Incorporated herein by reference to Exhibit 2.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 1, 2012.
First Amended and Restated Revolving Credit Note by and among
II-VI Incorporated and the Guarantors Party thereto and PNC Bank,
National Association, as Agent dated as of October 31, 2012.
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 1, 2012.
10.28
II-VI Incorporated 2012 Omnibus Incentive Plan*
10.29
$140,000,000 Revolving Credit Facility, First Amended and
Restated Credit Agreement by and among II-VI Incorporated and
The Guarantors Party Thereto and The Banks Party Thereto and
PNC Bank, National Association, as Administrative Agent, dated as
of November 16, 2012.
10.30
Form of Nonqualified Stock Option under the II-VI Incorporated
2012 Omnibus Incentive Plan*
10.31
10.32
Form of Restricted Share Award under the II-VI Incorporated 2012
Omnibus Incentive Plan*
Form of Performance Share Award under the II-VI Incorporated
2012 Omnibus Incentive Plan*
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 5, 2012.
Incorporated herein by reference is Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 21, 2012.
Incorporated herein by reference to Exhibit 10.30
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) filed on August 28, 2013.
89
Exhibit
Number
10.33
Description of Exhibit
Form of Stock Appreciation Rights under the II-VI Incorporated
2012 Omnibus Incentive Plan*
10.34
10.35
10.36
10.37
10.38
10.39
21.01
23.01
31.01
31.02
32.01
32.02
Form of Performance Share Unit under the II-VI Incorporated 2012
Omnibus Incentive Plan*
Form of Restricted Share Unit under the II-VI Incorporated 2012
Omnibus Incentive Plan*
$225,000,000 Revolving Credit Facility $100,000,000 Term Loan
Facility Second Amended and Restated Credit Agreement by and
among II-VI Incorporated and the Guarantors Party Thereto and The
Banks Party Thereto and PNC Bank, National Association, as Agent
dated as of September 10, 2013.
Employment Agreement by and between II-VI Incorporated and
Mary Jane Raymond.
Form of Relative Total Shareholder Return Performance Share
Award under the II-VI Incorporated 2012 Omnibus Incentive Plan*
Form of Relative Total Shareholder Return Performance Share Unit
under the II-VI Incorporated 2012 Omnibus Incentive Plan*
List of Subsidiaries of II-VI Incorporated
Consent of Ernst & Young LLP
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
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
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
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
Incorporated herein by reference to Exhibit 10.30
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) filed on August 28, 2013.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on September 12, 2013.
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on May 12, 2014.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
Furnished herewith.
101
Interactive Data File
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
Filed herewith.
Filed herewith.
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith.
(101.DEF)
XBRL Taxonomy Definition Linkbase
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
Filed herewith.
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith.
*
Denotes management contract or compensatory plan, contract or arrangement.
90
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance
of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: August 28, 2014
II-VI INCORPORATED
By:
/s/ Francis J. Kramer
Francis J. Kramer
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
91
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Date: August 28, 2014
Principal Executive Officer:
By:
/s/ Francis J. Kramer
Francis J. Kramer
President, Chief Executive Officer and Director
Principal Financial and Accounting Officer:
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
/s/ Carl J. Johnson
Carl J. Johnson
Director
/s/ Joseph J. Corasanti
Joseph J. Corasanti
Director
/s/ Wendy F. DiCicco
Wendy F. DiCicco
Director
/s/ Thomas E. Mistler
Thomas E. Mistler
Director
/s/ RADM Marc Y. E. Pelaez (retired)
RADM Marc Y. E. Pelaez (retired)
Director
/s/ Peter W. Sognefest
Peter W. Sognefest
Director
/s/ Howard H. Xia
Howard H. Xia
Director
/s/ Vincent D. Mattera, Jr.
Vincent D. Mattera, Jr.
Chief Operating Officer and Director
92
2.01
2.02
2.03
2.04
EXHIBIT INDEX
Merger Agreement by and among II-VI Incorporated, II-VI Holdings
B.V., II-VI Cayman, Inc. Photop Technologies, Inc. and the
Shareholder Representative named Therein, dated as of
December 28, 2009
Merger Agreement, dated as of November 1, 2012, by and among II-
VI Incorporated, Monarch Acquisition Co., M Cubed Technologies,
Inc. and MMMT Representative, LLC, as the stockholder
representative
Share and Asset Purchase Agreement dated as of September 12,
2013, between II-VI Holdings B.V., a Netherland corporation, and
Oclaro Technology LTD., a company incorporated under the laws of
England and Wales (the “Purchase Agreement”). Schedules to the
Purchase Agreement identified in the Table of Contents to the
Purchase Agreement are not being filed but will be furnished
supplementally to the Securities and Exchange Commission upon
request.
Asset Purchase Agreement dated as of October 10, 2013, between II-
VI Incorporated, a Pennsylvania corporation, and Oclaro Technology
Limited, a company incorporated under the laws of England and
Wales (the “Purchase Agreement”). Schedules to the Purchase
Agreement identified in the Purchase Agreement are not being filed
but will be furnished supplementally to the Securities and Exchange
Commission upon request.
3.01
Amended and Restated Articles of Incorporation of II-VI
Incorporated
3.02
Amended and Restated By-Laws of II-VI Incorporated
10.01
II-VI Incorporated Amended and Restated Employees’ Stock
Purchase Plan
10.02
First Amendment to the II-VI Incorporated Amended and Restated
Employees’ Stock Purchase Plan
10.03
II-VI Incorporated Amended and Restated Employees’ Profit-
Sharing Plan and Trust Agreement, as amended
10.04
Form of Representative Agreement between II-VI and its foreign
representatives
10.05
Form of Employment Agreement*
10.06
Description of Management-By-Objective Plan*
10.07
Trust Under the II-VI Incorporated Deferred Compensation Plan*
Incorporated herein by reference is Exhibit 2.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on January 4, 2010.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on November 1, 2012.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on September 12, 2013.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on October 11, 2013.
Incorporated herein by reference is Exhibit 3.1to II-
VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 8, 2011.
Incorporated herein by reference is Exhibit 3.2 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 8, 2011.
Incorporated herein by reference is Exhibit 10.04 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Quarterly Report on Form 10-Q (File No.
000-16195) for the Quarter Ended March 31, 1996.
Incorporated herein by reference is Exhibit 10.05 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.15 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.16 to
II-VI’s Registration Statement No. 33-16389 on
Form S-1.
Incorporated herein by reference is Exhibit 10.09 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) for the fiscal year ended June 30, 1993.
Incorporated herein by reference is Exhibit 10.13 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) for the fiscal year ended June 30, 1996.
93
10.08
Description of Bonus Incentive Plan*
10.09
Amended and Restated II-VI Incorporated Deferred Compensation
Plan*
10.10
II-VI Incorporated Arrangement for Director Compensation*]
10.11
II-VI Incorporated 2005 Omnibus Incentive Plan*
10.12
Form of Nonqualified Stock Option under the II-VI Incorporated
2005 Omnibus Incentive Plan*
Incorporated herein by reference is Exhibit 10.14 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) for the fiscal year ended June 30, 1996.
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Quarterly Report on Form 10-Q (File No.
000-16195) for the Quarter Ended December 31,
1996.
Incorporated herein by reference is Exhibit 10.12 to
II-VI’s Annual report on Form 10-K (File No. 000-
16195) for the fiscal year Ended June 30, 2009.
Incorporated herein by reference is Exhibit A to II-
VI’s Definitive Proxy Statement on Schedule 14A
(File No. 000-16195) filed on September 26, 2005.
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Quarterly Report on Form 10-Q (File
No.16195) for the Quarter Ended December 31,
2005.
Incorporated herein by reference is Exhibit 10.2 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on October 26, 2006.
300,000,000 Japanese Yen Term Loan Second Amendment to
Second Amended and Restated Letter Agreement by and among II-
VI Japan Incorporated and PNC Bank, National Association dated
October 23, 2006.
10.13
10.14
Second Allonge to Rate Protection Term Note by and among II-VI
Japan Incorporated in favor of PNC Bank, National Association
dated October 23, 2006.
Incorporated here by reference is Exhibit 10.3 to II-
VI’s Current Report on Form 8-K (File No. 000-
16195) filed on October 26, 2006.
10.15
Amended and Restated Employment Agreement by and between II-
VI and Francis J. Kramer
10.16
Amended and Restated Employment Agreement by and between II-
VI and Vincent D. Mattera, Jr.
10.17
Description of Discretionary Incentive Plan*
10.18
II-VI Incorporated 2009 Omnibus Incentive Plan*
10.19
$50,000,000 Revolving Credit Facility, Credit Agreement by and
among II-VI Incorporated and The Guarantors Party thereto and The
Banks Party thereto and PNC Bank, National Association, As Agent
Dated as of June 15, 2011.
10.20
Form of Nonqualified Stock Option under the II-VI Incorporated
2009 Omnibus Incentive Plan*
10.21
Form of Restricted Share Award under the II-VI Incorporated 2009
Omnibus Incentive Plan*
10.22
Form of Performance Share Award under the II-VI Incorporated
2009 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 24, 2008.
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 24, 2008.
Incorporated herein by reference is Exhibit 10.27 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) for the fiscal year ended June 30, 2009.
Incorporated herein by reference is Exhibit A to II-
VI’s Definitive Proxy Statement on Schedule 14A
(File No. 000-16195) filed on September 25, 2009.
Incorporated herein by reference is Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on June 17, 2011.
Incorporated herein by reference is Exhibit 10.27 to
II-VI’s Current Report on Form 10-Q
(File No. 000-16195) filed on February 8, 2012.
Incorporated herein by reference is Exhibit 10.28 to
II-VI’s Current Report on Form 10-Q
(File No. 000-16195) filed on February 8, 2012.
Incorporated herein by reference is Exhibit 10.29 to
II-VI’s Current Report on Form 10-Q
(File No. 000-16195) filed on February 8, 2012.
94
10.23
Form of Stock Appreciation Rights under the II-VI Incorporated
2009 Omnibus Incentive Plan*
10.24
Form of Performance Share Unit under the II-VI Incorporated 2009
Omnibus Incentive Plan*
10.25
Form of Restricted Share Unit under the II-VI Incorporated 2009
Omnibus Incentive Plan*
Merger Agreement, dated as of November 1, 2012, by and among II-
VI Incorporated, Monarch Acquisition Co., M Cubed Technologies,
Inc. and MMMT Representative, LLC, as the stockholder
representative.
10.26
10.27
Incorporated herein by reference is Exhibit 10.30 to
II-VI’s Current Report on Form 10-Q
(File No. 000-16195) filed on February 8, 2012.
Incorporated herein by reference is Exhibit 10.31 to
II-VI’s Current Report on Form 10-Q
(File No. 000-16195) filed on May 9, 2012.
Incorporated herein by reference is Exhibit 10.32 to
II-VI’s Current Report on Form 10-Q
(File No. 000-16195) filed on May 9, 2012.
Incorporated herein by reference to Exhibit 2.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 1, 2012.
First Amended and Restated Revolving Credit Note by and among II-
VI Incorporated and the Guarantors Party thereto and PNC Bank,
National Association, as Agent dated as of October 31, 2012.
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 1, 2012.
10.28
II-VI Incorporated 2012 Omnibus Incentive Plan*
10.29
$140,000,000 Revolving Credit Facility, First Amended and Restated
Credit Agreement by and among II-VI Incorporated and The
Guarantors Party Thereto and The Banks Party Thereto and PNC
Bank, National Association, as Administrative Agent, dated as of
November 16, 2012.
10.30
Form of Nonqualified Stock Option under the II-VI Incorporated
2012 Omnibus Incentive Plan*
10.31
Form of Restricted Share Award under the II-VI Incorporated 2012
Omnibus Incentive Plan*
10.32
Form of Performance Share Award under the II-VI Incorporated
2012 Omnibus Incentive Plan*
10.33
Form of Stock Appreciation Rights under the II-VI Incorporated
2012 Omnibus Incentive Plan*
10.34
Form of Performance Share Unit under the II-VI Incorporated 2012
Omnibus Incentive Plan*
10.35
10.36
10.37
Form of Restricted Share Unit under the II-VI Incorporated 2012
Omnibus Incentive Plan*
$225,000,000 Revolving Credit Facility $100,000,000 Term Loan
Facility Second Amended and Restated Credit Agreement by and
among II-VI Incorporated and the Guarantors Party Thereto and The
Banks Party Thereto and PNC Bank, National Association, as Agent
dated as of September 10, 2013.
Employment Agreement by and between II-VI Incorporated and
Mary Jane Raymond.
Incorporated herein by reference is Exhibit 10.01 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 5, 2012.
Incorporated herein by reference is Exhibit 10.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on November 21, 2012.
Incorporated herein by reference to Exhibit 10.30 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) filed on August 28, 2013.
Incorporated herein by reference to Exhibit 10.30 to
II-VI’s Annual Report on Form 10-K (File No. 000-
16195) filed on August 28, 2013.
Incorporated by reference is Exhibit 2.1 to II-VI’s
Current Report on Form 8-K (File No. 000-16195)
filed on September 12, 2013.
Incorporated herein by reference to Exhibit 10.1 to
II-VI’s Current Report on Form 10-Q (File No.
000-16195) filed on May 12, 2014.
95
10.38
10.39
Form of Relative Total Shareholder Return Performance Share
Award under the II-VI Incorporated 2012 Omnibus Incentive Plan*
Form of Relative Total Shareholder Return Performance Share Unit
under the II-VI Incorporated 2012 Omnibus Incentive Plan*
Filed herewith.
Filed herewith.
21.01
List of Subsidiaries of II-VI Incorporated
23.01
Consent of Ernst & Young LLP
31.01
31.02
32.01
32.02
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
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
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
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
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
Furnished herewith.
101
Interactive Data File
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
Filed herewith.
Filed herewith.
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith.
(101.DEF)
XBRL Taxonomy Definition Linkbase
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
Filed herewith.
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith.
*
Denotes management contract or compensatory plan, contract or arrangement.
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance
of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.
96
Exhibit 31.01
I, Francis J. Kramer, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of II-VI Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
c)
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
August 28, 2014
By:
/s/ Francis J. Kramer
Francis J. Kramer
President and Chief Executive Officer
97
Exhibit 31.02
I, Mary Jane Raymond, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of II-VI Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
c)
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
August 28, 2014
By:
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
98
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.01
In connection with the Annual Report of II-VI Incorporated (the “Corporation”) on Form 10-K for the year ended June 30, 2014
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Corporation
certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Corporation.
Date: August 28, 2014
/s/ Francis J. Kramer
Francis J. Kramer
President and Chief Executive Officer
*
This certification is made solely for purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein,
and not for any other purpose.
99
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.02
In connection with the Annual Report of II-VI Incorporated (the “Corporation”) on Form 10-K for the year ended June 30, 2014
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Corporation
certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Corporation.
Date: August 28, 2014
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
*
This certification is made solely for purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein,
and not for any other purpose.
100
Corporate Information
Board of Directors
Joseph J. Corasanti
Retired President, CEO and Director
CONMED Corporation
Wendy F. DiCicco
Vice President, Chief Financial Officer
and Treasurer
Nuron Biotech, Inc.
Carl J. Johnson
Co-founder and Chairman of the Board
II-VI Incorporated
Francis J. Kramer
President and Chief Executive Officer
II-VI Incorporated
Vincent D. Mattera, Jr.
Chief Operating Officer
II-VI Incorporated
Thomas E. Mistler
Retired Executive
Westinghouse Electric Corporation
Marc Y. E. Pelaez
Rear Admiral
United States Navy (retired)
Peter W. Sognefest
President, Chief Executive Officer and Chairman
Seamoc, Inc.
Howard H. Xia
General Manager
Vodafone China Limited
Executive Officers
Francis J. Kramer
President and Chief Executive Officer
Vincent D. Mattera, Jr.
Chief Operating Officer
Mary Jane Raymond
Chief Financial Officer
James Martinelli
Vice President – Strategic Resources Group
Annual Meeting
Friday, November 7, 2014
At 1:30 PM EST
II-VI Incorporated
375 Saxonburg Boulevard
Saxonburg, PA 16056
Stock Listing
The common stock of II-VI Incorporated
is traded on Nasdaq under the trading
symbol “IIVI.”
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Ave, 3rd Floor
Brooklyn, NY 11219
1.800.937.5449
Independent Registered
Public Accountants
Ernst & Young LLP
2100 One PPG Place
Pittsburgh, PA 15222
Corporate Counsel
Sherrard, German & Kelly, P.C.
535 Smithfield Street, Ste. 300
Pittsburgh, PA 15222
Securities Counsel
Buchanan Ingersoll & Rooney PC
One Oxford Centre
301 Grant Street, 20th Floor
Pittsburgh, PA 15219
II-VI Incorporated is an Equal Opportunity Employer. As such, it is the Company’s policy to promote equal employment opportunities and to prohibit discrimination
on the basis of race, color, religion, sex, age, national origin, disability or status as a veteran in all aspects of employment, including recruiting, hiring, training and
promoting personnel. In fulfilling this commitment, the Company shall comply with the letter and spirit of the laws, regulations and Executive Orders governing
equal opportunity in employment, including the Civil Rights Act of 1964, Executive Order 11246, Revised Order Number 4, and amendments thereto.
II-VI Incorporated
375 Saxonburg Boulevard, Saxonburg, PA 16056
724.352.4455
www.ii-vi.com