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II-VI INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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. 29-------------------------------------------------------------------------------- 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. 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. 30 -------------------------------------------------------------------------------- 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 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. 31 -------------------------------------------------------------------------------- The Company prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on these judgments and interpretations. In the normal course of business, the Company's tax returns are subject to examination by various taxing authorities, which may result in future tax, interest and penalty assessments by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation and/or as concluded through the various jurisdictions' tax court systems. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company has recorded valuation allowances against certain of its deferred tax assets, primarily those that have been generated from net operating losses in certain foreign taxing jurisdictions. In evaluating whether the Company would more likely than not recover these deferred tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carry-forwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense. In accordance with U.S. GAAP, the Company recognizes share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense using assumptions such as the risk-free interest rate, expected stock price volatility, expected stock option life and expected dividend yield. The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect at the time of grant related to the expected life of the options. Expected volatility is based on the historical volatility of the Company's Common Stock over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield is zero, based on the fact the Company has never paid cash dividends and has no current intention to pay cash dividends in the future. Fiscal Year 2014 Compared to Fiscal Year 2013 Year Ended Year Ended June 30, 2014 June 30, 2013 Bookings $ 691.3 $ 521.1 % of % of Revenues Revenues Total Revenues $ 683.3 100.0 % $ 551.1 100.0 % Cost of goods sold 456.5 66.8 347.6 63.1 Gross margin 226.7 33.2 203.5 36.9 Operating Expenses: Internal research and development 42.5 6.2 22.7 4.1 Selling, general and administrative 137.7 20.2 109.3 19.8 Interest and other, net 0.8 0.1 (6.0 ) (1.1 ) Earnings from continuing operations before income tax 45.6 6.7 77.5 14.1 Income taxes 7.3 1.1 18.8 3.4 Net earnings from continuing operations 38.3 5.6 58.7 10.7 Earnings (loss) from Discontinued Operation, net of income taxes 0.1 - (6.8 ) (1.2 ) Net Earnings 38.4 5.6 51.9 9.4 Net earnings attributable to noncontrolling interest - - 1.1 0.2 Net earnings attributable to II-VI Incorporated $ 38.4 5.6 $ 50.8 9.2 Diluted earnings per-share from continuing operations $ 0.60 $ 0.90 32 -------------------------------------------------------------------------------- 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. 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. 33 -------------------------------------------------------------------------------- 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 $ 1.8 $ 7.3 $ 18.2 Earnings (loss) from discontinued operation before income taxes 0.1 (6.8 ) (9.6 ) Income tax benefit - - 0.1 Earnings (loss) from discontinued operation net income taxes $ 0.1 $ (6.8 ) $ (9.4 ) 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. 34-------------------------------------------------------------------------------- Infrared Optics (millions) % Year Ended Increase June 30, (Decrease) 2014 2013 Bookings $ 220.1 $ 200.7 9 % Revenues $ 209.7 $ 203.3 3 % Segment earnings $ 40.7 $ 49.5 (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) Year Ended % June 30, (Decrease) 2014 2013 Bookings $ 144.2 $ 145.7 (1 %) Revenues $ 144.7 $ 154.9 (7 %) Segment earnings $ 9.8 $ 19.6 (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. 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. 35 -------------------------------------------------------------------------------- Military & Materials (millions) Year Ended % June 30, Increase 2014 2013 Bookings $ 88.3 $ 88.0 - % Revenues $ 98.3 $ 97.1 1 % Segment earnings $ 12.9 $ 0.7 1,743 % 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. Year Ended % June 30, Increase 2014 2013 Bookings $ 121.3 $ 86.7 40 % Revenues $ 115.4 $ 95.8 20 % Segment earnings $ 9.4 $ 1.7 453 % 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 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. 36 -------------------------------------------------------------------------------- Active Optical Products (millions) Year Ended June 30, 2014 2013 Bookings $ 117.4 - Revenues $ 115.2 - Segment loss $ (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. Year Ended Year Ended June 30, 2013 June 30, 2012 Bookings $ 521.1 $ 534.9 % of % of Revenues Revenues Total Revenues $ 551.1 100.0 % $ 516.4 100.0 % Cost of goods sold 347.6 63.1 315.1 61.0 Gross margin 203.5 36.9 201.3 39.0 Operating Expenses: Internal research and development 22.7 4.1 21.4 4.1 Selling, general and administrative 109.3 19.8 98.4 19.1 Interest and other, net (6.0 ) (1.1 ) (7.0 ) (1.4 ) Earnings from continuing operations before income tax 77.5 14.1 88.5 17.1 Income taxes 18.8 3.4 17.8 3.4 Net earnings from continuing operations 58.7 10.7 70.7 13.7 Loss from Discontinued Operation, net of income taxes (6.8 ) (1.2 ) (9.4 ) (1.8 ) Net Earnings 51.9 9.4 61.3 11.9 Net earnings attributable to noncontrolling interest 1.1 0.2 1.0 0.2 Net earnings attributable to II-VI Incorporated $ 50.8 9.2 $ 60.3 11.7 Diluted earnings per-share from continuing operations $ 0.90 $ 1.08 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 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. 37 -------------------------------------------------------------------------------- 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. Infrared Optics (millions) % Year Ended Increase June 30, (Decrease) 2013 2012 Bookings $ 200.7 $ 206.1 (3 )% Revenues $ 203.3 $ 201.6 1 % Segment earnings $ 49.5 $ 51.1 (3 )% 38 -------------------------------------------------------------------------------- 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) % Year Ended Increase June 30, (Decrease) 2013 2012 Bookings $ 145.7 $ 155.1 (6 )% Revenues $ 154.9 $ 140.0 11 % Segment earnings $ 19.6 $ 14.1 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. Military & Materials (millions) % Year Ended Increase June 30, (Decrease) 2013 2012 Bookings $ 88.0 $ 99.2 (11 %) Revenues $ 97.1 $ 100.3 (3 %) Segment earnings $ 0.7 $ 7.9 (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 39 -------------------------------------------------------------------------------- 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) % Year Ended Increase June 30, (Decrease) 2013 2012 Bookings $ 86.7 $ 67.4 29 % Revenues $ 95.8 $ 74.6 28 % Segment earnings $ 1.7 $ 8.4 (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. 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: 40 -------------------------------------------------------------------------------- Sources (uses) of Cash (millions): Year Ended June 30, 2014 2013 2012 Net cash provided by operating activities $ 95.5 $ 107.6 $ 88.1 Purchases of businesses, net of cash acquired (177.7 ) (126.2 ) (46.1 ) Additions to property, plant and equipment (29.2 ) (25.3 ) (42.8 ) Net proceeds (payments) on long-term borrowings 128.0 102.0 (7.3 ) Proceeds from exercises of stock options 4.4 4.1 2.7 Purchases of treasury stock (20.0 ) (20.0 ) (5.0 ) Payment of redeemable noncontrolling interest (8.8 ) - - Payments on cash earnout arrangement (3.0 ) - (6.0 ) Proceeds received from contractual settlement from Thailand flooding - 4.8 - Proceeds from sale of equity method investment - 2.1 3.5 Other (0.0 ) 1.4 (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. 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. 41 -------------------------------------------------------------------------------- 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. 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): June 30, June 30, 2014 2013 Cash and cash equivalents $ 174.7 $ 185.4 Available borrowing capacity 71.0 29.8 Total debt obligation 242.0 114.0 42 -------------------------------------------------------------------------------- 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. Tabular Disclosure of Contractual Obligations Payments Due By Period Less Than 1-3 3-5 More Than Contractual Obligations Total 1 Year Years Years 5 Years ($000) Long-term debt obligations $ 241,960 $ 20,000 $ 42,960 $ 179,000 $ - Interest payments(1) 21,866 4,793 8,431 5,521 3,121 Capital lease obligation(2) 11,636 453 982 1,094 9,107 Operating lease obligations(3) 56,488 13,298 17,247 7,148 18,795 Purchase obligations(4)(5) 16,883 15,906 977 - - Other long-term liabilities reflected on the registrant's balance sheet - - - - - Total $ 348,833 $ 54,450 $ 70,597 $ 192,763 $ 31,023 (1) Variable rate interest obligations are based on the interest rate 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 the current capital lease obligation will not be paid in future years. (3) 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. (5) Includes $10.0 million of holdback payments associated with the acquisitions of Laser Enterprise and Network Solutions. 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. 43-------------------------------------------------------------------------------- |