TMCnet News
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. 21 -------------------------------------------------------------------------------- Table of Contents 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 22 -------------------------------------------------------------------------------- Table of Contents 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 23 -------------------------------------------------------------------------------- Table of Contents 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 24 -------------------------------------------------------------------------------- Table of Contents 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. 25-------------------------------------------------------------------------------- Table of Contents 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. 26-------------------------------------------------------------------------------- Table of Contents 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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. |