FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from to .
---- ----
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1214948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
375 Saxonburg Boulevard
Saxonburg, PA 16056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 724-352-4455
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
At May 10, 2002, 14,017,170 shares of Common Stock, no par value,
of the registrant were outstanding.
II-VI INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2002 and June 30, 2001. . . . . . . . . . . . . .3
Condensed Consolidated Statements of Earnings -
Three and Nine months ended March 31, 2002 and 2001. . . . 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2002 and 2001. . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . .7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .13
Item 3. Quantitative and Qualitative Disclosures about Market
Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 17
- 2 -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
March 31, June 30,
Assets 2002 2001
-------- --------
Current Assets
Cash and cash equivalents $ 9,627 $ 8,093
Accounts receivable, net 19,976 21,884
Inventories 18,887 20,782
Deferred income taxes 3,672 3,304
Other current assets 1,861 1,644
-------- --------
Total Current Assets 54,023 55,707
Property, Plant and Equipment, net 61,095 58,031
Goodwill, net 28,758 29,236
Other Intangible Assets, net 3,822 4,086
Other Assets 3,018 1,113
-------- --------
$150,716 $148,173
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 5,214 $ 5,714
Accrued salaries, wages and bonuses 4,048 7,086
Income taxes payable 1,391 2,158
Accrued profit sharing contribution 513 1,122
Other current liabilities 1,954 1,817
Current portion of long-term debt 5,070 3,834
-------- --------
Total Current Liabilities 18,190 21,731
Long-Term Debt--less current portion 32,235 33,172
Other Liabilities, primarily deferred
income taxes 4,844 3,857
Shareholders' Equity
Preferred stock, no par value; authorized -
5,000,000 shares; unissued - -
Common stock, no par value;
authorized - 30,000,000 shares;
issued - 15,066,437 shares at
March 31, 2002; 14,981,163
shares at June 30, 2001 37,682 37,045
Accumulated other comprehensive income 240 91
Retained earnings 59,435 54,187
-------- --------
97,357 91,323
Less treasury stock, at cost - 1,068,880 shares 1,910 1,910
-------- --------
95,447 89,413
-------- --------
$150,716 $148,173
======== ========
- -See notes to condensed consolidated financial statements.
- 3 -
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
Three Months Ended
March 31,
2002 2001
-------- --------
Revenues
Net sales:
Domestic $ 13,406 $ 19,335
International 12,750 11,778
-------- --------
26,156 31,113
Contract research and development 1,285 1,418
-------- --------
27,441 32,531
-------- --------
Costs, Expenses & Other Income
Cost of goods sold 18,122 19,814
Contract research and development 1,726 1,033
Internal research and development 1,153 1,088
Selling, general and administrative 4,824 6,083
Interest expense 313 657
Other expense (income), net (353) 180
-------- --------
25,785 28,855
-------- --------
Earnings Before Income Taxes 1,656 3,676
Income Taxes 492 1,241
-------- --------
Net Earnings $ 1,164 $ 2,435
======== ========
Basic Earnings Per Share $ 0.08 $ 0.18
======== ========
Diluted Earnings Per Share $ 0.08 $ 0.17
======== ========
- -See notes to condensed consolidated financial statements.
- 4 -
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
Nine Months Ended
March 31,
2002 2001
-------- --------
Revenues
Net sales:
Domestic $ 41,829 $ 53,673
International 36,284 33,462
-------- --------
78,113 87,135
Contract research and development 5,467 3,847
-------- --------
83,580 90,982
-------- --------
Costs, Expenses & Other Income
Cost of goods sold 52,475 53,984
Contract research and development 4,603 2,407
Internal research and development 3,488 3,246
Selling, general and administrative 15,345 18,590
Interest expense 1,213 1,831
Other expense (income) - net (1,013) 790
-------- --------
76,111 80,848
-------- --------
Earnings Before Income Taxes 7,469 10,134
Income Taxes 2,221 3,396
Net Earnings $ 5,248 $ 6,738
======== ========
Basic Earnings Per Share $ 0.38 $ 0.49
======== ========
Diluted Earnings Per Share $ 0.37 $ 0.48
======== ========
- -See notes to condensed consolidated financial statements.
- 5 -
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
Nine Months Ended
March 31,
2002 2001
-------- --------
Cash Flows from Operating Activities
Net earnings $ 5,248 $ 6,738
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 6,513 6,281
(Gain) loss on foreign currency transactions (185) 1,001
Deferred income taxes (544) (146)
Increase (decrease) in cash from changes in:
Accounts receivable 2,263 (4,172)
Inventories 2,124 (1,299)
Accounts payable (457) 1,688
Other operating net assets (3,321) (1,031)
-------- --------
Net cash provided by operating activities 11,641 9,060
-------- --------
Cash Flows from Investing Activities
Purchases of businesses (2,172) (27,726)
Investment in unconsolidated businesses (1,541) -
Additions to property, plant and equipment (6,938) (10,983)
Disposals of other assets 121 132
-------- --------
Net cash used in investing activities (10,530) (38,577)
-------- --------
Cash Flows from Financing Activities
Proceeds from short-term borrowings, net 3,000 3,473
Increase in long-term borrowings - 25,000
Payments on long-term borrowings (2,567) (32)
Proceeds from sale of common stock 279 413
-------- --------
Net cash provided by financing activities 712 28,854
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (289) (289)
Net increase (decrease) in cash
and cash equivalents 1,534 (952)
Cash and Cash Equivalents at Beginning of Period 8,093 6,330
-------- --------
Cash and Cash Equivalents at End of Period $ 9,627 $ 5,378
======== ========
Cash paid for interest $ 1,231 $ 1,459
Cash paid for taxes $ 724 $ 1,492
Non-cash transactions:
Net assets acquired for fair value
of common stock $ - $ 15,469
Net assets acquired under purchase commitment $ 366 $ -
- -See notes to condensed consolidated financial statements.
- 6 -
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A - Basis of Presentation
---------------------
The condensed consolidated financial statements for the three and nine
month periods ended March 31, 2002 and 2001 are unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation for the periods
presented have been included. These interim statements should be read
in conjunction with the audited consolidated financial statements and
footnotes thereto contained in the Company's 2001 Annual Report to
shareholders. The consolidated results of operations for the three and
nine month periods ended March 31, 2002 and 2001 are not necessarily
indicative of the results to be expected for the full year. The results
for the nine month period ended March 31, 2001 include eight months
of operations of Laser Power Corporation.
Note B - Inventories
-----------
The components of inventories are as follows ($000):
March 31, June 30,
2002 2001
--------- --------
Raw materials $ 5,481 $ 6,173
Work in progress 7,750 8,680
Finished goods 5,656 5,929
--------- --------
$ 18,887 $ 20,782
========= ========
Note C - Property, Plant and Equipment
-----------------------------
Property, plant and equipment (at cost or valuation) consist
of the following ($000):
March 31, June 30,
2002 2001
--------- --------
Land and land improvements $ 1,715 $ 1,715
Buildings and improvements 25,322 24,426
Machinery and equipment 76,589 68,217
--------- --------
103,626 94,358
Less accumulated depreciation 42,531 36,327
--------- --------
$ 61,095 $ 58,031
Note D - Debt
----
The Company has a $45.0 million secured credit agreement. This facility
has a five-year life and contains term and line of credit borrowing
options. This facility is secured by certain assets of the Company and
is subject to certain restrictive covenants, including those related to
minimum net worth, leverage and interest coverage. This facility has an
interest rate range of LIBOR plus 0.88% to LIBOR plus 1.50%. The
average interest rate in effect as of March 31, 2002 was 3.11%. As of
March 31, 2002, the total borrowings under this facility of $35.0
million consisted of $22.5 million under the term loan option and $12.5
million under the line of credit option.
- 7 -
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note E - Earnings Per Share
------------------
The following table sets forth the computation of earnings per share for
the periods indicated:
Three Months Ended Nine Months Ended
March 31, March 31,
(000 except per share data) 2002 2001 2002 2001
- ----------------------------- --------- --------- --------- ----------
<s> <c> <c> <c> <c>
Net earnings $ 1,164 $ 2,435 $ 5,248 $ 6,738
Divided by:
Weighted average shares 13,983 13,886 13,945 13,684
- ----------------------------- --------- --------- --------- ----------
Basic earnings per share $ 0.08 $ 0.18 $ 0.38 $ 0.49
- ----------------------------- --------- --------- --------- ----------
Net earnings $ 1,164 $ 2,435 $ 5,248 $ 6,738
Divided by:
Weighted average shares 13,983 13,886 13,945 13,684
Dilutive effect of
common stock equivalents 391 382 392 447
- ----------------------------- --------- --------- --------- ----------
Diluted weighted average
common shares 14,374 14,268 14,337 14,131
Diluted earnings per share $ 0.08 $ 0.17 $ 0.37 $ 0.48
- ----------------------------- --------- --------- --------- ----------
Note F - Comprehensive Income
--------------------
The components of comprehensive income were as follows for the periods
indicated ($000):
Three Months Ended Nine Months Ended
March 31, March 31,
(000 except per share data) 2002 2001 2002 2001
- ----------------------------- --------- --------- --------- ----------
<s> <c> <c> <c> <c>
Net income $ 1,164 $ 2,435 $ 5,248 $ 6,738
Foreign currency
translation adjustments (48) (222) 149 (215)
- ----------------------------- --------- --------- --------- ----------
Comprehensive income $ 1,116 $ 2,213 $ 5,397 $ 6,523
- ----------------------------- --------- --------- --------- ----------
Note G - Segment Reporting
-----------------
The Company has three reportable segments: Optical Components, which is
an aggregation of the Company's II-VI infrared optics and material
products business and the Company's VLOC subsidiary; Radiation Detectors,
which is the Company's eV PRODUCTS division; and the Company's Laser
Power Corporation subsidiary.
The accounting policies of the segments are the same as those of the
Company. Substantially all of the Company's corporate expenses are
allocated to the segments. The Company evaluates segment performance
based upon reported segment profit or loss from operations. Inter-
segment sales and transfers have been eliminated.
- 8 -
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note G - Segment Reporting - Continued
-----------------------------
The following table summarizes selected financial information of the
Company's operations by segment ($000's):
Three Months Ended March 31, 2002
--------------------------------------------------------
Optical Radiation Laser Power
Components Detectors Corporation Totals
- ----------------------------- ---------- --------- ----------- ------
<s> <c> <c> <c> <c>
Net revenues $ 18,550 $ 1,521 $ 7,370 $ 27,441
Income (loss) from operations 2,507 (472) (419) 1,616
Interest expense - - - 313
Other (income), net - - - (353)
Earnings before income taxes - - - 1,656
Depreciation and amortization 1,494 183 473 2,150
Capital expenditures 1,233 262 216 1,711
Goodwill, net 1,698 - 27,060 28,758
Segment assets 87,609 9,314 53,793 150,716
Three Months Ended March 31, 2001
--------------------------------------------------------
Optical Radiation Laser Power
Components Detectors Corporation Totals
- ----------------------------- ---------- --------- ----------- ------
<s> <c> <c> <c> <c>
Net revenues $ 21,561 $ 2,541 $ 8,429 $ 32,531
Income (loss) from operations 3,587 (169) 1,095 4,513
Interest expense - - - 657
Other expense, net - - - 180
Earnings before income taxes - - - 3,676
Depreciation and amortization 1,592 181 804 2,577
Capital expenditures 3,757 169 262 4,188
Goodwill, net 1,726 - 32,028 33,754
Segment assets 82,922 7,958 56,112 146,992
Nine Months Ended March 31, 2002
--------------------------------------------------------
Optical Radiation Laser Power
Components Detectors Corporation Totals
- ----------------------------- ---------- --------- ----------- ------
<s> <c> <c> <c> <c>
Net revenues $ 54,763 $ 5,076 $ 23,741 $ 83,580
Income (loss) from operations 8,569 (975) 75 7,669
Interest expense - - - 1,213
Other (income), net - - - (1,013)
Earnings before income taxes - - - 7,469
Depreciation and amortization 4,484 541 1,488 6,513
Capital expenditures 5,179 853 906 6,938
- 9 -
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note G - Segment Reporting - Continued
-----------------------------
Nine Months Ended March 31, 2001
--------------------------------------------------------
Optical Radiation Laser Power
Components Detectors Corporation Totals
- ----------------------------- ---------- --------- ----------- ------
<s> <c> <c> <c> <c>
Net revenues $ 62,048 $ 6,402 $ 22,532 $ 90,982
Income (loss) from operations 11,152 (1,011) 2,614 12,755
Interest expense - - - 1,831
Other expense, net - - - 790
Earnings before income taxes - - - 10,134
Depreciation and amortization 3,776 518 1,987 6,281
Capital expenditures 9,882 289 811 10,982
Note H - Derivative Instruments
----------------------
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value.
The Company from time to time purchases foreign currency forward exchange
contracts, in Japanese Yen, that permit it to sell specified amounts of
these foreign currencies expected to be received from its export sales
for pre-established U.S. dollar amounts at specified dates. These
contracts are entered into to limit transactional exposure to changes in
currency exchange rates of export sales transactions in which settlement
will occur in future periods and which otherwise would expose the
Company, on the basis of its aggregate net cash flows in respective
currencies, to foreign currency risk.
The Company recorded the fair value of contracts with a notional amount
of approximately $2.0 million as of March 31, 2002 on the statement of
financial position. The Company has elected not to account for these
contracts as hedges as defined by SFAS No. 133, and records the change
in the fair value of these contracts in the results of operations as they
occur. For the three and nine months ended March 31, 2002 and 2001, the
change in the fair value of these contracts increased net earnings by
$11,000 and $50,000, respectively. For the nine months ended
March 31, 2002 and 2001, the change in the fair value of these contracts
(decreased) increased net earnings by $(10,000) and $89,000, respectively.
To satisfy certain provisions of its line of credit facility, on
March 6, 2002 the Company entered into a one-year interest rate cap
expiring March 6, 2003, with a notional amount of $12.5 million replacing
an interest rate collar that expired on March 5, 2002. These agreements
were entered into to limit interest rate exposure on one-half of the $25
million term loan. The floating rate option for the cap agreement is the
one-month LIBOR rate with a cap strike rate of 3.00%. At March 31, 2002
the one-month LIBOR rate was 1.87%. The Company has elected not to
account for these agreements as hedges as defined by SFAS No. 133, and
recorded the unrealized change in the fair value of these agreements as
an increase or decrease to interest expense in the results of operations.
The combined effect of these instruments increased net earnings for the
three and nine months ended March 31, 2002 by approximately $71,000 and
$42,000 respectively. The effect of the interest rate collar on net
earnings for the quarter ended March 31, 2001 was immaterial.
- 10 -
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note I - New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations", was effective for the Company as of
July 1, 2001. SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The statement requires the initial
recognition and measurement of goodwill and that certain acquired
intangible assets in a business combination be recognized as assets
apart from goodwill. The adoption of SFAS 141 had no financial impact
on the financial statements of the Company for the three and nine months
ended March 31, 2002.
SFAS 142 "Goodwill and Other Intangible Assets", was adopted by the
Company as of July 1, 2001. SFAS 142 requires that goodwill no longer
be amortized, but instead be tested for impairment at least annually.
SFAS 142 also requires recognized intangible assets be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". Any recognized
intangible asset determined to have an indefinite useful life will not
be amortized, but instead tested for impairment in accordance with the
Standard until its life is determined to no longer be indefinite. As of
March 31, 2002 and 2001, the Company had goodwill, net of accumulated
amortization, of $28,758,000 and $33,754,000, respectively, which is
subject to the transitional assessment provisions of SFAS 142. The
Company completed its initial step of the transition impairment test
prior to December 31, 2001. The results of this test indicated that
the Company's goodwill was not impaired as of June 30, 2001, therefore,
no impairment loss was recorded.
During the third quarter of fiscal 2002, the Company reduced the goodwill
associated with its acquisition of Laser Power Corporation by $478,000.
The reduction in goodwill resulted from the benefits associated with
costs incurred in connection with the acquisition.
In accordance with SFAS 142, the Company discontinued the amortization of
goodwill effective July 1, 2001. The following fiscal 2001 pro forma
information adjusts previously reported net earnings, basic earnings per
share and diluted earnings per share to exclude goodwill amortization:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------
(000 except per share data) 2002 2001 2002 2001
- --------------------------- ------ ------ ------ ------
Net earnings $1,164 $2,435 $5,248 $6,738
Add: Goodwill amortization - 439 - 1,151
- --------------------------- ------ ------ ------ ------
Adjusted net income $1,164 $2,874 $5,248 $7,889
====== ====== ====== ======
Basic earnings per share $0.08 $0.18 $0.38 $0.49
Add: Goodwill amortization - 0.03 - 0.08
- --------------------------- ------ ------ ------ ------
Adjusted basic earnings per share $0.08 $0.21 $0.38 $0.57
====== ====== ====== ======
Diluted earnings per share $0.08 $0.17 $0.37 $0.48
Add: Goodwill amortization - 0.03 - 0.08
- --------------------------- ------ ------ ------ ------
Adjusted diluted earnings per share $0.08 $0.20 $0.37 $0.56
====== ====== ====== ======
- 11 -
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note I - New Accounting Pronouncements - Continued
-----------------------------------------
SFAS 143, "Accounting for Asset Retirement Obligations" requires that
the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of the fair value can be made. The Statement is effective for
financial statements issued for fiscal years beginning after une 15, 2002.
The Company is currently evaluating the impact that this Statement will
have on the Company's financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which
provides guidance that will eliminate inconsistencies in the accounting
for the impairment or disposal of long-lived assets under existing
accounting pronouncements. The Company will apply the provisions of the
pronouncement prospectively beginning July 1, 2002. The Company does
not expect the adoption of this pronouncement to have a material impact
on its financial position or results of operations.
Note J - Acquisition of Litton Systems, Inc. Silicon Carbide Group
---------------------------------------------------------
On October 19, 2001, the Company acquired the Litton Systems, Inc.
Silicon Carbide (SiC) Group for approximately $2.2 million in cash.
The acquired group, located in New Jersey, concentrates their efforts
on research and development of SiC and will complement the Company's
Pennsylvania-based SiC research and development activities that have
been ongoing since 1998.
- 13 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net earnings for the third quarter of fiscal 2002 were $1,164,000 ($0.08
per share-diluted) on revenues of $27,441,000. This compares to net
earnings of $2,435,000 ($0.17 per share-diluted) on revenues of
$32,531,000 in the third quarter of fiscal 2001. For the nine months
ended March 31, 2002, net earnings were $5,248,000 ($0.37 per share-
diluted) on revenues of $83,580,000. This compares with net earnings of
$6,738,000 ($0.48 per share-diluted) on revenues of $90,982,000 for the
same period last fiscal year. On July 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets", which requires that goodwill no longer be amortized,
but instead be tested annually for impairment. Comparable results for
the quarter and nine months ended March 31, 2001, excluding the
amortization of goodwill, were net earnings of $2,874,000 ($0.20 per
share-diluted) and $7,889,000 ($0.56 per share-diluted), respectively.
See Note I of the Notes to the Condensed Consolidated Financial
Statements.
Order bookings for the third quarter of fiscal 2002 were $36,467,000
compared to $33,385,000 for the same period last fiscal year, an
increase of 9%. Bookings for contract research and development for the
third quarter of fiscal year 2002 were $2,236,000 compared to $497,000
for the same period last fiscal year. For the quarter, bookings for
laser optics and component products decreased approximately 5%, bookings
for the eV PRODUCTS division increased approximately 30% and bookings
for Laser Power Corporation increased approximately 15%. The overall
increase in order bookings for the third quarter of fiscal 2002 as
compared to the prior period was driven by several one-year blanket
orders recorded by the eV PRODUCTS division, significant military orders
booked at Laser Power Corporation and contract bookings for the
development of Silicon Carbide.
Order bookings for the nine months ended March 31, 2002 were $89,453,000
compared to $100,826,000 for the same period last fiscal year, a decrease
of 11%. Bookings for contract research and development for the nine
months ended March 31, 2002 were $8,706,000 compared to $3,326,000 for
the same period last fiscal year. For the nine months ended
March 31, 2002, bookings for laser optics and component products
decreased approximately 15%, bookings for the eV PRODUCTS division
decreased approximately 15%, and bookings for Laser Power Corporation
were approximately $29,124,000 for the nine months ended March 31, 2002
compared to approximately $31,095,000 for eight months of the same
period of the prior fiscal year. The overall decrease in order bookings
for the nine months ended March 31, 2002 as compared to the same period
last fiscal year was driven by the weak worldwide economy and industrial
demand.
Revenues for the third quarter of fiscal 2002 decreased 16% to
$27,441,000 compared to $32,531,000 for the same period last fiscal year.
For the quarter, revenues from laser optics and component products
decreased by approximately 15%, revenues from the eV PRODUCTS division
decreased by approximately 40% and revenues from Laser Power Corporation
decreased approximately 15%. The overall decrease in revenues for the
third quarter of fiscal 2002 as compared to the prior period was due to
the weak worldwide economy and, more specifically, lower industrial
demand, which also impacted the Company's bookings. Lower industrial
capital spending and lower industrial production has decreased the
demand for the Company's laser optics and component products.
Revenues for the nine months ended March 31, 2002 decreased 8% to
$83,580,000 from $90,982,000 for the same period last fiscal year.
Revenues from laser optics and component products decreased
approximately 10%, revenues from the eV PRODUCTS division decreased
approximately 20% and revenues from Laser Power Corporation were
approximately $23,741,000 for the nine months ended March 31, 2002
compared to approximately $22,532,000 for eight months of the same
period of the prior fiscal year. The overall decrease in revenues
for the third quarter of fiscal 2002 as compared to the prior period
was due to the weak worldwide economy and, more specifically, lower
industrial demand, which also impacted the Company's bookings. Lower
industrial capital spending and lower industrial production
has decreased the demand for the Company's laser optics and component
products.
Manufacturing gross margin for the third quarter of fiscal 2002 was
$8,034,000 or 31% of revenues compared to $11,299,000 or 36% of revenues
for the same period last fiscal year. For the nine months ended
March 31, 2002, manufacturing gross margin was $25,638,000 or 33% of
revenues compared to $33,151,000 or 38% of revenues for the same period
last fiscal year. The reduction in gross margin percentage for the
quarter and nine month periods is a result of lower sales volume and
lower gross margins at the Company's Laser Power Corporation and VLOC
subsidiaries.
- 13 -
Additionally, due to the weak worldwide economy causing a slowdown in
the industrial business, the Company has been using its capacity to take
on more military business which is, in general, lower margin and more
technically challenging work. The lower gross margins at Laser Power
Corporation were due to production issues related to certain development
projects. The lower gross margins at the VLOC subsidiary were due to
non-recurring production issues encountered primarily in the first
fiscal quarter.
Company-funded internal research and development expenses for the third
quarter of fiscal 2002 were $1,153,000 or 4% of revenues compared to
$1,088,000 or 3% of revenues for the same period last fiscal year. For
the nine months ended March 31, 2002, internal research and development
expenses were $3,488,000 or 4% of revenues compared to $3,246,000 or 4%
of revenues for the same period last fiscal year. These expenditures
for the quarter and nine month periods reflect an accelerated pace of
silicon carbide crystal growth technology development and an increase in
near-term research and development costs as a result of the acquisition
of the Litton Systems, Inc. Silicon Carbide Group. These expenditures
also include corporate research and development activities in addition
to the research and development activities of eV PRODUCTS.
Selling, general and administrative expenses for the third quarter of
fiscal 2002 were $4,824,000 or 18% of revenues compared to $6,083,000 or
19% of revenues for the same period last fiscal year. For the nine
months ended March 31, 2002, selling, general and administrative expenses
were $15,345,000 or 18% of revenues compared to $18,590,000 or 20% of
revenues for the same period last fiscal year. The dollar and percentage
decreases for the current quarter and nine month period as compared to
the same periods last fiscal year reflect the addition of Laser Power
Corporation and the elimination of certain redundant expenses, as well
as expense and manpower reductions in these areas.
Interest expense for the third quarter of fiscal 2002 was $313,000
compared to $657,000 for the same period last fiscal year. For the
nine months ended March 31, 2002, interest expense was $1,213,000
compared to $1,831,000 for the same period last fiscal year. The
decrease in interest expense reflects the combination of a decrease in
interest rates for the current quarter and nine month period and the
favorable recording of the unrealized change in the fair value of the
Company's interest rate protection agreements for the March 31, 2002
quarter as compared to the same periods last fiscal year.
Other income for the third quarter of fiscal 2002 of $353,000 compared to
other expense of $180,000 for the same period last fiscal year. For the
nine months ended March 31, 2002, other income was $1,013,000 compared
to other expense of $790,000 for the same period last fiscal year. The
change for the current quarter and nine month period was primarily due
to net foreign currency gains as a result of the dollar's performance
relative to other currencies compared to foreign currency losses in the
same periods of the prior fiscal year. Other income for the quarter
includes approximately $366,000 of income derived from the transfer of
crystal growth assets as settlement of a customer's inability to fulfill
its purchase requirements to the Company. The balance of the other
income for the current quarter and nine month period was derived from
royalty income and interest income.
For fiscal 2002, the Company's year-to-date effective income tax rate is
30% compared to an effective income tax rate of 33% for the same period
last fiscal year. The income tax rate primarily reflects the continued
benefit from international related tax opportunities from the Company's
Asian operations.
For the fourth quarter of fiscal 2002, the Company is currently
forecasting revenues and income from operations to be consistent with the
just completed third quarter of fiscal 2002 and earnings per share to
range from $0.07 to $0.11. The Company currently expects revenues and
income from operations for fiscal 2002 to be lower than the prior fiscal
year by approximately 10% and 25%, respectively. Actual results may
differ from these forecasts due to factors such as changes in product
demand, competition and general economic conditions.
Liquidity and Capital Resources
- -------------------------------
In the first nine months of fiscal 2002, cash generated from operations
of $11.6 million and proceeds from an increase in borrowings of $3.0
million were used primarily to fund an investment of $6.9 million in
property, plant and equipment, to finance a $1.5 million investment for
a 33% ownership of a key supplier to the Company, to acquire for $2.2
million the Litton Systems, Inc. Silicon Carbide Group and to pay down
$2.6 million due on the term loan. Cash transactions for the first
nine months of fiscal 2002 plus cash on hand at the beginning of the
fiscal year resulted in a cash position of $9.6 million at
March 31, 2002.
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The Company believes internally generated funds, existing cash reserves
and available borrowing capacity will be sufficient to fund its working
capital needs, capital expenditures and scheduled debt payments for
fiscal 2002.
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 the 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 Form 10-K as filed with the Securities and Exchange Commission on
September 27, 2001.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Market Risks
- ------------
The Company is exposed to market risks arising from adverse changes in
interest rates and foreign currency exchange rates. In the normal course
of business, the Company uses a variety of techniques and instruments as
part of its overall risk management strategy.
For the quarter ended March 31, 2002, the Company decreased its borrowings
by $1.7 million. As of March 31, 2002, the total borrowings of $37.3
million primarily include $22.5 million under the term loan option and
$12.5 million under the line of credit option. As such, the Company is
exposed to changes in interest rates. A change in the interest rate of
1% would have changed the interest expense by approximately $95,000 and
$286,000 for the three and nine month periods ended March 31, 2002,
respectively.
To satisfy certain provisions of its line of credit facility relating to
mitigating interest rate risk, on March 6, 2002 the Company entered into
an interest rate cap for a one-year period with a notional amount of
$12.5 million. See Note H of the Notes to Condensed Consolidated
Financial Statements.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
II-VI INCORPORATED
(Registrant)
Date: May 14, 2002 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
Date: May 14, 2002 By: /s/ Craig A. Creaturo
Craig A. Creaturo
Treasurer
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