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II-VI INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
This Management's Discussion and Analysis contains forward-looking statements as
defined by Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding projected growth rates, markets, product
development, financial position, capital expenditures and foreign currency
exposure. Forward-looking statements are also identified by words such as
"expects," "anticipates," "intends," "plans," "projects" or similar expressions.
Actual results could materially differ from such statements due to the following
factors: materially adverse changes in economic or industry conditions generally
(including capital markets) or in the markets served by the Company, the
development and use of new technology and the actions of competitors. There are
additional risk factors that could affect the Company's business, results of
operations or financial condition. Investors are encouraged to review the risk
factors set forth in the Company's most recent Annual Report as filed with the
Securities and Exchange Commission on August 28, 2012, and set forth herein.
Introduction
II-VI Incorporated ("II-VI," the "Company," "we," "us" or "our"), the worldwide
leader in engineered materials and opto-electronic components, is a
vertically-integrated manufacturing company that creates and markets products
for diversified markets including industrial manufacturing, military and
aerospace, high-power electronics, optical communications, medical and
thermoelectronics applications.
The Company generates revenues, earnings and cash flows from developing,
manufacturing and marketing engineered materials and opto-electronic components
for precision use in industrial, military, optical communications, photovoltaic,
medical, semiconductor 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 original equipment manufacturers ("OEMs"), laser end
users, system integrators of high-power lasers, manufacturers of equipment and
devices for industrial, optical communications, security and monitoring
applications, U.S. government prime contractors, various U.S. government
agencies and thermoelectric solutions suppliers.
Effective July 1, 2012, the Company changed its reportable segments in
accordance with how the Company's chief operating decision maker receives and
reviews financial information. Effective July 1, 2012, VLOC has been included in
the Military & Materials operating segment for financial reporting purposes.
Prior to July 1, 2012, the Company's VLOC business unit was included in the
Near-Infrared Optics operating segment. The Company has revised the consolidated
segment information for all periods presented in this Quarterly Report on Form
10-Q to reflect this reclassification.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
and the Company's discussion and analysis of its financial condition and results
of operations require the Company's management to make judgments, assumptions
and estimates that affect the amounts reported in its condensed consolidated
financial statements and accompanying notes. Note 1 of the Notes to Consolidated
Financial Statements in the Company's most recent Annual Report describes the
significant accounting policies and 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, 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 payments.
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.
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 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. 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 that are covered by our warranty
policy.
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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.
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 December 31, 2012 were $1.5 million and $1.2
million, respectively. Our reserve estimates have historically been proven to be
materially correct based upon actual charges incurred. The Company had one
customer that represented 11% and 12%, respectively, of total accounts
receivable as of December 31, 2012 and June 30, 2012.
New Accounting Standards
See "Note 2. Recent Accounting Pronouncements," to our unaudited financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a
description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects, if any, on our consolidated financial
statements.
Results of Operations (millions except per-share data)
The following tables set forth bookings and select items from our Condensed
Consolidated Statements of Earnings for the three and six months ended
December 31, 2012 and 2011, respectively:
Three Months Ended Three Months Ended
December 31, 2012 December 31, 2011
Bookings $ 127.1 $ 116.9
% of % of
Revenues Revenues
Total Revenues $ 125.9 100.0 % $ 126.8 100.0 %
Cost of goods sold 79.0 62.7 83.3 65.7
Gross margin 46.9 37.3 43.5 34.3
Operating Expenses:
Internal research and development 5.6 4.4 5.0 3.9
Selling, general and administrative 26.3 20.9 24.2 19.1
Interest and other, net (4.3 ) (3.4 ) (1.4 ) (1.1 )
Earnings before income tax 19.3 15.3 15.7 12.4
Income taxes 6.8 5.4 2.2 1.7
Net earnings 12.5 9.9 13.5 10.6
Net earnings attributable to
noncontrolling interests 0.3 - 0.2 -
Net earnings attributable to II-VI
Incorporated $ 12.2 9.7 % $ 13.3 10.5 %
Diluted earnings per share $ 0.19 $ 0.21
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Six Months Ended Six Months Ended
December 31, 2012 December 31, 2011
Bookings $ 241.5 $ 247.1
% of % of
Revenues Revenues
Total Revenues $ 258.2 100.0 % $ 265.1 100.0 %
Cost of goods sold 162.5 62.9 166.7 62.9
Gross margin 95.7 37.1 98.5 37.1
Operating Expenses:
Internal research and development 11.2 4.3 10.2 3.8
Selling, general and administrative 53.0 20.5 51.0 19.2
Interest and other, net (5.1 ) (2.0 ) (3.0 ) (1.1 )
Earnings before income tax 36.6 14.2 40.3 15.2
Income taxes 11.0 4.3 8.0 3.0
Net earnings 25.6 9.9 32.2 12.1
Net earnings attributable to
noncontrolling interests 0.7 - 0.4 -
Net earnings attributable to II-VI
Incorporated $ 24.9 9.6 % $ 31.9 12.0 %
Diluted earnings per share $ 0.39 $ 0.50
Executive Summary
Worldwide economic uncertainty remained prevalent as further fiscal and
political uneasiness in the U.S. and abroad contributed to a cautious customer
base across most markets. The Company remained focused on its long-term growth
initiatives, completing three acquisitions during the three months ended
December 31, 2012. We believe these acquisitions will provide long-term growth
prospects and the potential for broadening current product offerings while
realizing synergies and providing the Company an opportunity to enter new
markets. Net earnings attributable to II-VI Incorporated for the three months
ended December 31, 2012 decreased to $12.2 million ($0.19 per-share diluted)
compared to $13.3 million ($0.21 per-share diluted) for the same period last
fiscal year. Net earnings attributable to II-VI Incorporated for the six months
ended December 31, 2012 decreased to $24.9 million ($0.39 per-share diluted)
compared to $31.9 million ($0.50 per-share diluted) for the same period last
fiscal year. During the three and six months ended December 31, 2012, the
Company realized higher revenues and gross margins at Photop and Photop Aegis as
well as income of $5.2 million from a contractual settlement with a former
contract manufacturer related to the October 2011 flooding in Thailand. These
favorable operating results were offset by low gross margins at PRM caused by
reduced revenues and selling prices of selenium and tellurium, transaction costs
incurred related to the three recently completed acquisitions as well as high
worldwide tax expense related to interim tax adjustments that were recorded in
accordance with current accounting standards.
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 three months ended December 31,
2012 increased 9% to $127.1 million, compared to $116.9 million for the same
period last fiscal year. Excluding bookings from the current quarter
acquisitions, the increase in overall bookings during the three months ended
December 31, 2012 compared to the same period last fiscal year was mostly the
result of increased demand for Photop products as well as higher order volume
within the core Infrared Optics business, particularly in North America. These
increases were somewhat offset by reduced bookings at PRM caused by lower
pricing and order volumes of selenium and tellurium, a $2.2 million order
cancellation at WBG from a customer who ceased operations and reduced demand at
HIGHYAG. Bookings for the six months ended December 31, 2012 decreased 2% to
$241.5 million, compared to $247.1 million for the same period last fiscal year.
Excluding bookings from the current quarter acquisitions, the decrease in
overall bookings was mostly attributable to PRM and VLOC within the Company's
Military & Materials operating segment as well as reduced orders at Marlow and
WBG within the Company's Advanced Products operating segment. PRM experienced
lower bookings as a result of reduced orders and pricing for selenium and
tellurium while bookings at VLOC were unfavorably impacted by reduced demand for
military products, mostly as a result of the federal budget uncertainty and
potential sequestration. Within the Advanced Products Group segment, the
previously referenced order cancellation at WBG as well as reduced end user
demand for Marlow's gesture recognition product line put additional downward
pressure on bookings. These
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decreases were offset somewhat by booking increases at Photop for its green
laser device products within the Company's Near-Infrared Optics segment.
Revenues. Revenues for the three months ended December 31, 2012 decreased 1% to
$125.9 million, compared to $126.8 million for the same period last fiscal year.
Revenues for the six months ended December 31, 2012 decreased 3% to $258.2
million, compared to $265.1 million for the same period last fiscal year.
Excluding revenues from the recently completed acquisitions, the decrease in
revenues for the three and six months ended December 31, 2012 compared to the
same periods last fiscal year was attributable to PRM and VLOC within the
Military & Materials segment and Marlow within the Advanced Products Group
segment. These decreases in revenue were somewhat offset by higher revenue at
Photop and Photop Aegis within the Near-Infrared Optics segment. PRM revenue
decreased as a result of lower shipment volumes and selling prices to customers
for both selenium and tellurium while revenue at VLOC decreased as a result of
lower product demand for military applications. Marlow experienced lower
shipment volume of gesture recognition product as a result of decreased demand,
while higher revenue levels at Photop and Photop Aegis were the result of
increased sales volumes related to their optical communication product
portfolios.
Gross margin. Gross margin for the three months ended December 31, 2012 was
$46.9 million or 37.3% of total revenues, compared to $43.5 million or 34.3% of
total revenues, for the same period last fiscal year. The increase in gross
margin was mostly attributable to Photop and Photop Aegis, which realized higher
margins from increased revenues and a larger concentration of high-margin
optical communication products. In addition, Photop and Photop Aegis benefited
from increased operating efficiency which allowed the businesses to realize
favorable absorption of manufacturing overhead costs when compared to the prior
year period, which was severely impacted by the October 2011 Thailand flood.
Furthermore, Photop Aegis realized a favorable cost of sales adjustment of $0.8
million related to proceeds received from the contractual settlement with its
former contract manufacturer relating to the October 2011 Thailand flood,
specifically, recovery of previously impaired equipment and inventory that was
damaged during the flood. Somewhat offsetting the favorable margin at Photop and
Photop Aegis were lower gross margins within the Company's Infrared Optics
segment, which was impacted by higher input prices of raw materials used in
production. In addition, the Company's Marlow business unit realized lower gross
margins as a result of declining sales of its gesture recognition product line
which had historically yielded a high gross margin. Gross margin for the six
months ended December 31, 2012 was $95.7 million or 37.1% of total revenues,
compared to $98.5 million or 37.1% of total revenues, for the same period last
fiscal year.
Internal research and development. Company-funded internal research and
development expenses for the three months ended December 31, 2012 were $5.6
million or 4.4% of revenues, compared to $5.0 million or 3.9% of revenues, for
the same period last fiscal year. Company-funded internal research and
development expenses for the six months ended December 31, 2012 were $11.2
million, or 4.3% of revenues, compared to $10.2 million, or 3.8% of revenues,
for the same period last fiscal year. This increase in Company-funded internal
research and development expenses was primarily the result of ongoing research
and development investment at Photop and Photop Aegis within the Near-Infrared
Optics segment. Photop is focusing research and development efforts on high-end
components and module products to satisfy future high-speed network
requirements. Photop Aegis continues to invest in new product development of
high performance flexible bandwidth optical channel monitors and high-power
fiber laser couplers and combiners. In addition, the acquisition of M Cubed
contributed to the increase in internal research and development expense for the
three and six months ended December 31, 2012.
Selling, general and administrative. Selling, general and administrative
expenses for the three months ended December 31, 2012 were $26.3 million or
20.9% of revenues, compared to $24.2 million or 19.1% of revenues, for the same
period last fiscal year. Selling, general and administrative expenses for the
six months ended December 31, 2012 were $53.0 million or 20.5% of revenues,
compared to $51.0 million or 19.2% of revenues, for the same period last fiscal
year. Selling, general and administrative expense as a percentage of revenues
increased during the three and six months ended December 31, 2012 compared to
the same periods last fiscal year, mostly as a result of pre-tax transaction
expenses of $0.8 million and $1.1 million, respectively, incurred related to the
three acquisitions that were completed during the quarter ended December 31,
2012.
Interest and other, net. Interest and other, net for the three and six months
ended December 31, 2012 was income of $4.3 million and $5.1 million,
respectively. Included in interest and other, net for the three and six months
ended December 31, 2012 are earnings from the Company's equity investment in
Fuxin, interest income on excess cash reserves, gains on the deferred
compensation plan and net foreign currency losses. As these items were mostly
offsetting, the majority of interest and other, net for the three and six months
ended December 31, 2012 was the result of $4.4 million of other income related
to the contractual settlement related to the Thailand flooding that occurred in
October 2011. Interest and other, net for the three and six months ended
December 31, 2011 was income of $1.4 million and $3.0 million, respectively. The
majority of interest and other, net for the three months ended December 31, 2011
was the result of foreign currency gains of approximately $0.9 million. The
majority of interest and other, net for the six months ended December 31, 2011
was the result of foreign currency gains of approximately $0.6 million as well
as a $1.4 million gain related to the sale of precious metals inventory used in
the production process. In addition, the Company benefited from earnings of
equity investments, gains on the deferred compensation plan and interest income
on excess cash reserves during the three and six months ended December 31, 2011.
Income taxes. The Company's year-to-date effective income tax rate at
December 31, 2012 and 2011 was 30.0% and 20.0%, 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
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pretax income from these various tax jurisdictions could have a material impact
on the Company's effective tax rate. During the six months ended December 31,
2012, the Company recorded certain interim tax adjustments in accordance with
current accounting standards. As a result, the Company recorded additional
income tax expense of $1.2 million during the three months ended December 31,
2012. In addition, the Company experienced a shift in earnings to higher tax
jurisdictions resulting in a higher effective tax rate for the period. During
the three months ended December 31, 2011, certain of the Company's Photop
subsidiaries received notification of approval of high-technology status in
China. As a result, these subsidiaries benefited from a preferential tax rate of
15% which resulted in an income tax benefit of $1.3 million, which was recorded
during the three months ended December 31, 2011. In addition, the Company
recorded an income tax benefit of $0.7 million during the three months ended
December 31, 2011, from the reversal of a tax liability related to an uncertain
tax position as a result of the completion of an examination by the United
States Internal Revenue Service.
Segment Reporting
Effective July 1, 2012, the Company's VLOC business unit has been included in
the Military & Materials operating segment for financial reporting purposes in
accordance with how the Company's chief operating decision maker receives and
reviews financial information. Prior to July 1, 2012, VLOC was included in the
Near-Infrared Optics operating segment. The Company has revised the consolidated
segment information to reflect this reclassification for all periods presented
in Part I, Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations in this Quarterly Report on Form 10-Q.
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 11. Segment Reporting," to our unaudited financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further
information on the Company's reportable segments and for the reconciliation of
segment earnings to net earnings.
Infrared Optics (millions)
Three Months Ended % Six Months Ended
December 31, Increase December 31, %
2012 2011 (Decrease) 2012 2011 (Decrease)
Bookings $ 44.6 $ 43.8 2 % $ 92.1 $ 94.9 (3 )%
Revenues $ 45.4 $ 46.8 (3 )% $ 97.0 $ 97.6 (1 )%
Segment earnings $ 10.5 $ 11.5 (8 )% $ 22.4 $ 23.8 (6 )%
The Company's Infrared Optics segment includes the combined operations of
Infrared Optics and HIGHYAG.
Bookings for the three months ended December 31, 2012 for Infrared Optics
increased 2% to $44.6 million, compared to $43.8 million for the same period
last fiscal year. Bookings for the six months ended December 31, 2012 for
Infrared Optics decreased 3% to $92.1 million, compared to $94.9 million for the
same period last fiscal year. The relatively consistent bookings for the three
and six months ended December 31, 2012 compared to the same periods last fiscal
year was primarily driven by stagnant world-wide component optics demand from
OEMs for new high-power CO2 laser systems as well as decreased laser utilization
in North America. Economic uncertainty in Japan and Europe combined with fiscal
uncertainty in the U.S. resulted in a cautious customer base across industrial
markets.
Revenues for the three months ended December 31, 2012 for Infrared Optics
decreased 3% to $45.4 million, compared to $46.8 million for the same period
last fiscal year. Revenues for the six months ended December 31, 2012 for
Infrared Optics decreased 1% to $97.0 million, compared to $97.6 million for the
same period last fiscal year. These decreases in revenue for the three and six
months ended December 31, 2012 compared to the same periods last fiscal year
were a reflection of cautious buying patterns from customers in Asia and Europe.
Segment earnings for the three months ended December 31, 2012 for Infrared
Optics decreased 8% to $10.5 million, compared to $11.5 million for the same
period last fiscal year. Segment earnings for the six months ended December 31,
2012 for Infrared Optics decreased 6% to $22.4 million, compared to $23.8
million for the same period last fiscal year. These decreases in segment
earnings for the three and six months ended December 31, 2012 compared to the
same periods last fiscal year are the result of reduced gross margins caused by
higher raw material input prices, lower revenue volume and a higher level of
allocated corporate expenses related to the transaction costs incurred by the
Company associated with its recently completed acquisitions.
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Near-Infrared Optics (millions)
Three Months Ended Six Months Ended
December 31, % December 31, %
2012 2011 Increase 2012 2011 Increase
Bookings $ 35.7 $ 30.0 19 % $ 70.8 $ 61.8 15 %
Revenues $ 37.0 $ 32.5 14 % $ 77.6 $ 63.5 22 %
Segment earnings $ 5.1 $ 2.4 115 % $ 12.9 $ 4.9 160 %
The Company's Near-Infrared Optics segment includes the combined operations of
Photop, Photop Aegis and Photop AOFR. The above results include the operating
results of the Oclaro business and interleaver product line since the December
2012 date of acquisition for the three and six months ended December 31, 2012.
Bookings for the three months ended December 31, 2012 for Near-Infrared Optics
increased 19% to $35.7 million, compared to $30.0 million for the same period
last fiscal year. Bookings for the six months ended December 31, 2012 for
Near-Infrared Optics increased 15% to $70.8 million, compared to $61.8 million
for the same period last fiscal year. The increase in bookings for the three and
six months ended December 31, 2012 compared to the same periods last fiscal year
was primarily driven by increased demand for Photop's green laser devices.
Revenues for the three months ended December 31, 2012 for Near-Infrared Optics
increased 14% to $37.0 million, compared to $32.5 million for the same period
last fiscal year. Revenues for the six months ended December 31, 2012 for
Near-Infrared Optics increased 22% to $77.6 million, compared to $63.5 million
for the same period last fiscal year. The increase in revenues for the three and
six months ended December 31, 2012 compared to the same periods last fiscal year
was primarily driven by higher shipment volumes at both Photop and Photop Aegis
which was pervasive across the majority of their product lines. In addition,
Photop Aegis realized increased shipment volume as they were successful in
re-establishing their manufacturing capabilities which were severely constrained
during the prior year due to the October 2011 flooding in Thailand.
Segment earnings for the three months ended December 31, 2012 for Near-Infrared
Optics increased 115% to $5.1 million, compared to $2.4 million for the same
period last fiscal year. Segment earnings for the six months ended December 31,
2012 for Near-Infrared Optics increased 160% to $12.9 million, compared to $4.9
million for the same period last fiscal year. The increase in segment earnings
for the three and six months ended December 31, 2012 compared to the same
periods last fiscal year was driven by higher sales volumes at both Photop and
Photop Aegis as well as production and operational efficiencies realized in
recovering from the Thailand flood that occurred in October 2011.
Military & Materials (millions)
Three Months Ended % Six Months Ended
December 31, Increase December 31, %
2012 2011 (Decrease) 2012 2011 (Decrease)
Bookings $ 27.5 $ 31.5 (13 )% $ 45.2 $ 57.9 (22 )%
Revenues $ 21.4 $ 30.6 (30 )% $ 45.3 $ 61.4 (26 )%
Segment earnings (loss) $ (1.1 ) $ (1.1 ) 1 % $ (3.2 ) $ 1.0 (415 )%
The Company's Military & Materials segment includes the combined operations of
EEO, PRM, VLOC, MLA and LightWorks. LightWorks was acquired near the end of the
quarter ended December 31, 2012 and had no contribution to the segment's
operating results during the three and six months ended December 31, 2012.
Bookings for the three months ended December 31, 2012 for Military & Materials
decreased 13% to $27.5 million, compared to $31.5 million for the same period
last fiscal year. The decrease in bookings for the three months ended
December 31, 2012 compared to the same period last fiscal year was primarily
driven by reduced orders for selenium and tellurium at PRM as well as lower
index pricing of these materials. Bookings for the six months ended December 31,
2012 for Military & Materials decreased 22% to $45.2 million, compared to $57.9
million for the same period last fiscal year. The decrease in bookings for the
six months ended December 31, 2012 compared to the same period last fiscal year
is attributable to the aforementioned demand weakness at PRM.
Revenues for the three months ended December 31, 2012 for Military & Materials
decreased 30% to $21.4 million, compared to $30.6 million for the same period
last fiscal year. Revenues for the six months ended December 31, 2012 for
Military & Materials decreased 26% to $45.3 million, compared to $61.4 million
for the same period last fiscal year. The decrease in revenues for the three and
six months ended December 31, 2012 compared to the same periods last fiscal year
was primarily due to lower product demand for both tellurium and selenium at PRM
as well as lower shipments at VLOC resulting from reduced military orders.
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Segment earnings (loss) for the three months ended December 31, 2012 for
Military & Materials was a segment loss of $1.1 million, and was consistent with
the same period last fiscal year. Segment earnings (loss) for the six months
ended December 31, 2012 for Military & Materials was a segment loss of $3.2
million, compared to segment earnings of $1.0 million for the same period last
fiscal year. The unfavorable change in segment earnings (loss) for the six
months ended December 31, 2012 was mostly due to the reduced revenues and gross
margins at PRM and VLOC. The unfavorable gross margin at PRM was negatively
impacted by lower selling prices of selenium and tellurium to customers driven
by lower index prices of these materials and VLOC's gross margin was negatively
impacted due to unfavorable absorption of manufacturing overhead costs.
Advanced Products Group (millions)
Three Months Ended % Six Months Ended %
December 31, Increase December 31, Increase
2012 2011 (Decrease) 2012 2011 (Decrease)
Bookings $ 19.4 $ 11.6 67 % $ 33.4 $ 32.6 3 %
Revenues $ 22.1 $ 16.8 31 % $ 38.3 $ 42.6 (10 )%
Segment earnings (loss) $ 0.3 $ 1.5 (77 )% $ (0.5 ) $ 7.5 (106 )%
The Company's Advanced Products Group includes the combined operations of
Marlow, WBG, WMG and M Cubed. The above results include the operating results of
M Cubed since the November 2012 date of acquisition in the three and six months
ended December 31, 2012.
Bookings for the three months ended December 31, 2012 for the Advanced Products
Group increased 67% to $19.4 million, compared to $11.6 million for the same
period last fiscal year. The increase in bookings for the three months ended
December 31, 2012 compared to the same period last fiscal year was primarily due
to the additional bookings of M Cubed. Bookings for the six months ended
December 31, 2012 for the Advanced Products Group increased 3% to $33.4 million,
compared to $32.6 million for the same period last fiscal year. Excluding M
Cubed, bookings decreased $6.1 million for the six month period as the Company's
Marlow business unit experienced reduced orders due to a significant reduction
in demand for the gesture recognition product line. Furthermore, the Company's
WBG business unit was impacted by a $2.2 million order cancellation from one of
its customers who recently announced that it would cease operations.
Revenues for the three months ended December 31, 2012 for the Advanced Products
Group increased 31% to $22.1 million, compared to $16.8 million for the same
period last fiscal year. Revenues for the six months ended December 31, 2012 for
the Advanced Products Group decreased 10% to $38.3 million, compared to $42.6
million for the same period last fiscal year. Excluding M Cubed, revenues
decreased $2.0 million and $11.7 million, respectively, for the three and six
months ended December 31, 2012, primarily due to lower shipment volumes of
gesture recognition and telecommunication products at Marlow. In addition, WBG
experienced lower shipments of semi-insulating silicon carbide substrates used
for radio frequency applications due to reduced customer demand in the wireless
infrastructure market and the defense sector.
Segment earnings for the three months ended December 31, 2012 decreased 77% to
$0.3 million, compared to segment earnings of $1.5 million for the same period
last fiscal year. Segment (loss) earnings for the six months ended December 31,
2012 decreased 106% to a segment loss of $0.5 million, compared to segment
earnings of $7.5 million for the same period last fiscal year. The unfavorable
change in segment earnings for the three and six months ended December 31, 2012
compared to the same periods last fiscal year was primarily due to the lower
revenues as well as declining gross margin at Marlow resulting from unfavorable
product mix as higher margin gesture recognition sales have declined.
Liquidity and Capital Resources
Historically, our primary source of cash has been provided through operations.
Other sources of cash include proceeds received from the exercises of stock
options and long-term borrowings. Our historical uses of cash have been for
capital expenditures, purchases of businesses, payment of principal and interest
on outstanding debt obligations and purchases of treasury stock. Supplemental
information pertaining to our sources and uses of cash for the periods indicated
is presented as follows:
27
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Table of Contents
Sources (uses) of Cash (millions):
Six Months Ended
December 31,
2012 2011
Net cash provided by operating activities $ 61.0 $ 42.9
Net proceeds on long-term borrowings 112.0 0.7
Proceeds received on contractual settlement 2.4 -
Proceeds from exercises of stock options 1.6 0.5
Proceeds from the collection of note receivable 1.4 -
Purchase of business, net of cash acquired (126.4 ) (46.1 )
Additions to property, plant and equipment (13.2 ) (23.1 )
Purchases of treasury shares (10.8 ) -
Other (0.1 ) (0.5 )
Cash provided by operating activities was $61.0 million for the six months ended
December 31, 2012, compared to cash provided by operating activities of $42.9
million for the same period last fiscal year. The increase in cash provided by
operating activities was the result of stronger working capital management,
specifically in the areas of accounts receivable and inventory.
Net cash used in investing activities was $135.7 million for the six months
ended December 31, 2012, compared to net cash used of $69.2 million for the same
period last fiscal year. The majority of the change in net cash used in
investing activities was the result of increased spending on current year
acquisitions partially offset by reduced capital spending.
Net cash provided by financing activities for the six months ended December 31,
2012 consisted mostly of $112.0 million of net borrowings on long-term debt
offset somewhat by cash used to repurchase Company stock under the approved
share repurchase program. Net cash provided by financing activities during the
six months ended December 31, 2011 consisted mostly of net proceeds on long-term
borrowings of $0.7 million and proceeds from the exercise of stock options of
$0.5 million.
In October 2012, the Company exercised the accordion feature of its $50 million
unsecured credit facility to increase the size of its credit facility from $50
million to $80 million. Except for the increase in size, the credit facility
continued pursuant to its existing terms and conditions. The Company used a
portion of its increased available credit facility to finance the acquisition of
M Cubed.
In November 2012, the Company entered into a new credit agreement. The Company's
new credit facility is a $140 million unsecured line of credit which under
certain conditions may be expanded by an additional $35 million. The revolving
credit facility has an expiration date of November 2017 and has interest rates
of LIBOR, as defined in the agreement, plus 0.75% to LIBOR plus 1.75% based on
the Company's ratio of consolidated indebtedness to consolidated EBITDA; however
until the date when the Company submits its compliance certificate for the
period ending June 30, 2013, interest accrues at LIBOR plus 1.25%. The
December 31, 2012 interest rate was 1.46% on the outstanding borrowings.
Additionally, the facility is subject to certain covenants, including those
relating to minimum interest coverage and maximum leverage ratios. As of
December 31, 2012, the Company was in compliance with all covenants.
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 December 31, 2012, the
Company was in compliance with all covenants.
The Company had aggregate availability of $20.2 million and $42.3 million under
its lines of credit as of December 31, 2012 and June 30, 2012, respectively. The
amounts available under the Company's lines of credit are reduced by outstanding
letters of credit. As of December 31, 2012 and June 30, 2012, total outstanding
letters of credit supported by the credit facilities were $1.1 million and $0.9
million, respectively.
The weighted average interest rate of total borrowings was 1.2% for the three
and six months ended December 31, 2012 and was 1.0% for the three and six months
ended December 31, 2011.
The Company's cash position, borrowing capacity and debt obligations for the
periods indicated were as follows ($000's):
December 31, June 30,
2012 2012
Cash and cash equivalents $ 162.8 $ 134.9
Available borrowing capacity 20.2 42.3
Total debt obligations 124.5 12.8
28
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Table of Contents
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 objectives for the
next twelve months. The Company's cash and cash equivalent balances are
generated and held in numerous locations throughout the world, including amounts
held outside the United States. As of December 31, 2012 and June 30, 2012, the
Company held approximately $119 million and $97 million, respectively, of cash
and cash equivalents outside of the United States. Cash balances held outside
the United States could be repatriated to the United States, but, under current
law, would potentially be subject to United States federal income taxes, less
applicable foreign tax credits. The Company has not recorded deferred income
taxes related to undistributed earnings outside of the United States as the
earnings of the Company's foreign subsidiaries are indefinitely reinvested.
Contractual Obligations
The following table presents information about our contractual obligations and
commitments as of December 31, 2012.
Tabular-Disclosure of Contractual Obligations
Payments Due By Period
Less Than 1 1-3 3-5 More Than 5
Contractual Obligations Total Year Years Years Years
($000)
Long-term debt obligations $ 124,482 $ - $ - $ 124,482 $ -
Interest payments(1) 8,019 894 3,566 3,559 -
Capital lease obligations - - - - -
Operating lease obligations(2) 70,186 10,175 16,681 9,262 34,068
Purchase obligations(3) 20,448 15,241 4,989 218 -
Other long-term liabilities reflected
on the registrant's balance sheet - - - - -
Total $ 223,135 $ 26,310 $ 25,236 $ 137,521 $ 34,068
(1) Variable rate interest obligations are based on the interest rate in place at
December 31, 2012.
(2) Includes an obligation for the use of two parcels of land related to PRM. The
lease obligation extends through the years 2039 and 2056.
(3) A purchase obligation is defined as an agreement to purchase goods or
services that is enforceable and legally binding on the Company and that
specifies all significant terms, including fixed or minimum quantities to be
purchased; minimum or variable price provisions, and the approximate timing
of the transaction. These amounts are primarily comprised of open purchase
order commitments to vendors for the purchase of supplies and materials, and
unpaid purchase prices for the Company's acquisition of LightWorks.
The $3.1 million gross unrecognized income tax benefit at December 31, 2012 is
excluded from the table above. 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 year.
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