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, 2003
[ ] 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
N/A
(Former name, former address and former fiscal year, if changed since
last report)
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
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 7, 2003, 14,133,276 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, 2003 and June 30, 2002 . . . . . . . . . . . . .3
Condensed Consolidated Statements of Earnings -
Three and Nine months ended March 31, 2003
and 2002 . . . . . . . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2003 and 2002 . . . . . . . . 6
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . .17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . .24
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . .24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
March 31, June 30,
2003 2002
--------- --------
Assets
Current Assets
Cash and cash equivalents $ 13,196 $ 9,610
Accounts receivable, net 21,811 21,541
Inventories 23,673 19,741
Deferred income taxes 3,589 3,457
Other current assets 1,974 1,488
--------- --------
Total Current Assets 64,243 55,837
Property, Plant & Equipment, net 57,315 60,711
Goodwill, net 28,987 28,987
Intangible Assets, net 4,514 3,233
Investments 1,781 1,850
Other Assets 1,368 1,283
--------- --------
$158,208 $151,901
========= ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 5,564 $ 3,970
Accrued salaries, wages and bonuses 7,840 4,976
Income taxes payable 2,224 1,012
Accrued profit sharing contribution 831 736
Current portion of long-term debt 6,300 5,068
Other current liabilities 4,008 4,329
--------- --------
Total Current Liabilities 26,767 20,091
Long-Term Debt--less current portion 19,448 29,435
Deferred Income Taxes 4,579 3,881
Other Liabilities 1,041 834
Shareholders' Equity
Preferred stock, no par value; authorized -
5,000,000 shares; unissued - -
Common stock, no par value; authorized
- 30,000,000 shares;
issued - 15,194,138 shares at
March 31, 2003; 15,101,450
shares at June 30, 2002 38,552 37,840
Accumulated other comprehensive income 286 279
Retained earnings 69,445 61,451
--------- --------
108,283 99,570
Less treasury stock, at cost
- 1,068,880 shares 1,910 1,910
--------- --------
106,373 97,660
--------- --------
$158,208 $151,901
========= ========
- - See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
Three Months Ended
March 31,
2003 2002
-------- --------
Revenues
Net sales:
Domestic $12,493 $13,406
International 16,812 12,750
-------- --------
29,305 26,156
Contract research and development 3,051 1,285
-------- --------
32,356 27,441
-------- --------
Costs, Expenses & Other Income
Cost of goods sold 17,238 18,122
Contract research and development 2,826 1,726
Internal research and development 435 1,153
Selling, general and administrative 7,664 4,824
Interest expense 174 313
Other income, net (93) (353)
-------- --------
28,244 25,785
-------- --------
Earnings Before Income Taxes 4,112 1,656
Income Taxes 1,093 492
-------- --------
Net Earnings $ 3,019 $ 1,164
======== ========
Basic Earnings Per Common Share $ 0.21 $ 0.08
======== ========
Diluted Earnings Per Common Share $ 0.21 $ 0.08
======== ========
- - See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
Nine Months Ended
March 31,
2003 2002
-------- --------
Revenues
Net sales:
Domestic $41,880 $41,829
International 45,532 36,284
-------- --------
87,412 78,113
Contract research and development 7,946 5,467
-------- --------
95,358 83,580
-------- --------
Costs, Expenses & Other Income
Cost of goods sold 52,865 52,475
Contract research and development 7,202 4,603
Internal research and development 1,946 3,488
Selling, general and administrative 21,551 15,345
Interest expense 699 1,213
Other expense (income), net 394 (1,013)
-------- --------
84,657 76,111
-------- --------
Earnings Before Income Taxes 10,701 7,469
Income Taxes 2,707 2,221
-------- --------
Net Earnings $ 7,994 $ 5,248
======== ========
Basic Earnings Per Common Share $ 0.57 $ 0.38
======== ========
Diluted Earnings Per Common Share $ 0.56 $ 0.37
======== ========
- - See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
Nine Months Ended
March 31,
2003 2002
-------- --------
Cash Flows from Operating Activities
Net earnings $ 7,994 $ 5,248
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 6,869 6,201
Amortization 382 312
Loss (gain) on foreign currency remeasurement 137 (185)
Net loss on disposal or sale of Property,
Plant and Equipment 137 -
Deferred income taxes 567 (544)
Increase (decrease) in cash from changes in:
Accounts receivable (462) 2,263
Inventories (3,052) 2,124
Accounts payable 1,764 (457)
Other operating net assets 4,331 (3,321)
-------- --------
Net cash provided by operating activities 18,667 11,641
-------- --------
Cash Flows from Investing Activities
Additions to property, plant and equipment (4,053) (6,938)
Purchase of business (2,755) (2,172)
Dividend from (investment in)
unconsolidated business 9 (1,541)
Proceeds from sale of Property, Plant
and Equipment 617 121
-------- --------
Net cash used in financing activities (6,182) (10,530)
-------- --------
Cash Flows from Financing Activities
(Payments of) proceeds from short-term
borrowings - net (5,069) 3,000
Payments on long-term borrowings (3,802) (2,567)
Proceeds from sale of common stock 340 279
-------- --------
Net cash (used in) provided by
financing activities (8,531) 712
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (368) (289)
Net increase in cash and cash equivalents 3,586 1,534
Cash and Cash Equivalents at Beginning of Period 9,610 8,093
-------- --------
Cash and Cash Equivalents at End of Period $13,196 $ 9,627
======== ========
Cash paid for interest $ 779 $ 1,231
Cash paid for income taxes $ 905 $ 724
- -See notes to condensed consolidated financial statements.
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, 2003 and 2002 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 2002 Annual Report to Shareholders. The
consolidated results of operations for the three and nine month
periods ended March 31, 2003 and 2002 are not necessarily indicative
of the results to be expected for the full year.
Certain amounts from the prior period financial statements have
been reclassified to conform with current period presentation.
Note B - Inventories
-----------
The components of inventories are as follows ($000):
March 31, June 30,
2003 2002
-------- -------
Raw materials $ 4,121 $ 4,638
Work in progress 10,934 8,958
Finished goods 8,618 6,145
-------- -------
$23,673 $19,741
======== =======
Note C - Property, Plant and Equipment
-----------------------------
Property, plant and equipment (at cost/valuation) consist of
the following ($000):
March 31, June 30,
2003 2002
-------- --------
Land and land improvements $ 1,453 $ 1,551
Buildings and improvements 31,359 30,008
Machinery and equipment 71,709 73,041
-------- --------
104,521 104,600
Less accumulated depreciation 47,206 43,889
-------- --------
$ 57,315 $ 60,711
======== ========
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note D - Contract Receivables
--------------------
The components of contract receivables, which are a component of
accounts receivable, net, are as follows ($000):
March 31, June 30,
2003 2002
-------- -------
Billed
Completed Contracts $ 10 $ 5
Contracts in Progress 872 1,978
-------- -------
882 1,983
Unbilled 2,745 1,598
-------- -------
$ 3,627 $ 3,581
Note E - Debt
----
The Company has a $45.0 million secured credit facility. The facility
has a five-year term which expires on August 14, 2005 and contains term
and line of credit borrowing options. The facility is collateralized
by the Company's accounts receivable and inventory, a pledge of all of
the capital stock of each of the Company's existing direct and indirect
domestic subsidiaries, and a pledge of 65% of the stock of the
Company's foreign subsidiaries. Additionally, the facility 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 as of March 31, 2003 was 2.61%. As of March 31,
2003, the total borrowings of $22.8 million under this facility
consisted of $17.5 million under the term loan option and $5.3 million
under the line of credit option.
In September 2002, the Company replaced its 237 million Yen loan with a
300 million Yen loan. The loan matures on September 25, 2007.
Interest is at a rate equal to the Japanese Yen base rate, as defined
in the loan agreement, plus 1.49%. As of March 31, 2003, the Japanese
Yen base rate was 0.07% resulting in a total interest rate of 1.56%.
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note F - Earnings Per Common 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) 2003 2002 2003 2002
- -------------------------------------- -------- -------- ------- -------
<s> <c> <c> <c> <c>
Net earnings $ 3,019 $ 1,164 $ 7,994 $ 5,248
Divided by:
Weighted average shares outstanding 14,090 13,983 14,054 13,945
- -------------------------------------- -------- -------- ------- -------
Basic earnings per common share $0.21 $0.08 $0.57 $0.38
- -------------------------------------- -------- -------- ------- -------
Net earnings $ 3,019 $ 1,164 $ 7,994 $ 5,248
Divided by:
Weighted average shares outstanding 14,090 13,983 14,054 13,945
Dilutive effect of common stock equivalents 370 391 328 392
- -------------------------------------- -------- -------- ------- -------
Diluted weighted average common shares 14,460 14,374 14,382 14,337
- -------------------------------------- -------- -------- ------- -------
Diluted earnings per common share $0.21 $0.08 $0.56 $0.37
- -------------------------------------- -------- -------- ------- -------
Common shares issuable upon the exercise of stock options that were
not included in the calculation because they were antidilutive, were
immaterial for the three and nine months ended March 31, 2003 and
2002.
Note G - 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,
2003 2002 2003 2002
- -------------------------------------- -------- -------- ------- -------
<s> <c> <c> <c> <c>
Net earnings $3,019 $1,164 $7,994 $5,248
Foreign currency translation adjustments, net of tax 30 (48) 7 149
- -------------------------------------- -------- -------- ------- -------
Comprehensive income $3,049 $1,116 $8,001 $5,397
- -------------------------------------- -------- -------- ------- -------
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note H - Segment Reporting
-----------------
Effective July 1, 2002, the Company changed its segment reporting to
reflect certain operational changes and to better reflect how the
Company manages its businesses. Prior period segment information has
been restated.
The Company has the following reportable segments: Infrared Optics,
which is primarily the Company's II-VI and Laser Power infrared optics
and material products businesses; Near-Infrared Optics, which is
primarily the Company's VLOC subsidiary; and Military Infrared Optics,
which is primarily the Company's Exotic Electro-Optics subsidiary. The
"Other" category is primarily the aggregation of the Company's eV
PRODUCTS division, the Company's Wide Band Gap (WBG) Silicon Carbide
development group, the Company's corporate research and development
group and certain other remaining corporate activities.
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.
Intersegment sales and transfers have been eliminated.
The following table summarizes selected financial information of the
Company's operations by segment ($000's):
Three Months Ended March 31, 2003
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Net revenues $19,715 $ 5,647 $ 4,788 $ 2,206 $ 32,356
Income (loss) from operations 5,462 393 (453) (1,209) 4,193
Interest expense - - - - (174)
Other income, net - - - - 93
Earnings before income taxes - - - - 4,112
Depreciation and amortization 1,084 512 418 354 2,368
Capital expenditures 629 48 271 253 1,201
Goodwill 5,516 1,927 21,544 - 28,987
Segment assets 67,188 23,543 38,125 29,352 158,208
Three Months Ended March 31, 2002
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Net revenues $15,061 $ 5,612 $ 5,170 $ 1,598 $ 27,441
Income (loss) from operations 2,928 155 (192) (1,275) 1,616
Interest expense - - - - (313)
Other income, net - - - - 353
Earnings before income taxes - - - - 1,656
Depreciation and amortization 936 532 382 300 2,150
Capital expenditures 868 83 56 704 1,711
Goodwill 5,516 1,698 21,544 - 28,758
Segment assets 57,367 27,539 38,731 27,079 150,716
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note H - Segment Reporting, Cont'd.
--------------------------
Nine Months Ended March 31, 2003
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Net revenues $55,641 $16,793 $16,381 $6,543 $95,358
Income (loss) from operations 14,109 1,151 38 (3,504) 11,794
Interest expense - - - - (699)
Other expense, net - - - - (394)
Earnings before income taxes - - - - 10,701
Depreciation and amortization 3,279 1,617 1,257 1,098 7,251
Capital expenditures 1,747 368 921 1,017 4,053
Nine Months Ended March 31, 2002
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Net revenues $45,525 $16,872 $16,027 $5,156 $83,580
Income (loss) from operations 8,854 701 931 (2,817) 7,669
Interest expense - - - - (1,213)
Other income, net - - - - 1,013
Earnings before income taxes - - - - 7,469
Depreciation and amortization 2,894 1,633 1,216 770 6,513
Capital expenditures 4,214 644 683 1,397 6,938
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note I - 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
consolidated balance sheets and measure those instruments at fair
value.
The Company from time to time purchases foreign currency forward
exchange contracts, primarily in Japanese Yen, that permit it to sell
specified amounts of these foreign currencies expected to be received
from its export sales for pre-established U.S. dollar amounts at
specified dates. These contracts are entered into to limit
transactional exposure to changes in currency exchange rates of export
sales transactions in which settlement will occur in future periods and
which otherwise would expose the Company, on a 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 $2.8 million as of March 31, 2003. The Company does
not 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. The change in the fair value of
these contracts increased net earnings by $40,000 and $11,000 for the
three months ended March 31, 2003 and 2002, respectively. The change in
the fair value of these contracts increased net earnings by $25,000 and
decreased net earnings by $10,000 for the nine months ended March 31,
2003 and 2002, respectively.
To satisfy certain provisions of its credit facility (See Note E), on
March 6, 2003 the Company entered into a one-year interest rate cap
expiring March 6, 2004, with a notional amount of $8.8 million
replacing an interest rate cap with a notional amount of $12.5 million
that expired on March 5, 2003. These agreements were entered into to
limit interest rate exposure on one-half of the outstanding balance of
the term loan, currently at $17.5 million. The floating rate option
for the cap agreement is the one-month LIBOR rate with a cap strike
rate of 3.00%. The one-month LIBOR rate was 1.30% on March 31, 2003.
The Company has elected not to account for this agreement as a hedge as
defined by SFAS No. 133, and recorded the unrealized change in the fair
value of this agreement as an increase or decrease to interest expense
in the results of operations. The effect of this instrument on net
earnings for the three and nine months ended March 31, 2003 was
immaterial.
Note J - Acquisition of II-VI/L.O.T.
---------------------------
During the quarter ended September 30, 2002, the Company reached an
agreement with L.O.T. - Oriel Laser Optik Technologies Holding GmbH and
L.O.T. - Oriel Laser Optik GmbH & Co. KG of Darmstadt, Germany
(collectively L.O.T.) to establish a new European entity to distribute
II-VI Incorporated and Laser Power Corporation products in Germany.
Approximately 10% of the Company's total sales are in Germany. Prior
to this acquisition, the distribution of the Company's products in
Germany was handled by L.O.T. for over 25 years. II-VI and L.O.T.
created II-VI/L.O.T. GmbH (II-VI/L.O.T.) to better service the needs of
customers in Germany. The Company purchased a 75% controlling interest
in II-VI/L.O.T. for approximately $2.8 million. The major assets
acquired were inventory of approximately $1.2 million and intangible
assets (customer lists and related information) of approximately $1.6
million that are being amortized over a ten-year useful life.
II-VI/L.O.T. is based in Darmstadt, Germany and will provide
distribution, marketing and laser specific know-how needed to sell both
II-VI Incorporated and Laser Power Corporation products in Germany to
OEM and aftermarket customers. The results of II-VI/L.O.T., net of
minority interest, for the three and nine month periods ended March 31,
2003 are included in the Company's consolidated financial statements
for the three and nine month periods ended March 31, 2003, and are
included in the infrared optics segment.
At any time after July 1, 2005, the Company has a call option to
purchase the remaining interest in II-VI/L.O.T. and L.O.T. has a put
option to the Company to require the purchase of the remaining interest
in II-VI/L.O.T. The price of the remaining interest is based upon a
fixed formula based on the average sales of II-VI/L.O.T. for the three
fiscal years prior to the exercise of the option.
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note K - Stock-Based Compensation
------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to SFAS No. 123's fair value method
of accounting for stock-based employee compensation should a company
elect this accounting method. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and Accounting Principles Board (APB)
Opinion No. 28, "Interim Financial Reporting," to require disclosure in
the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual
and interim financial statements. While SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148
are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair
value method of SFAS No. 123 or the intrinsic value method specified in
APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company continues to use the intrinsic value approach of APB
Opinion No. 25 for stock options granted to officers and key employees.
All options granted under the plan had an exercise price equal to the
fair market value of the underlying common stock on the date of grant.
Therefore, compliance with SFAS No. 123, as amended by SFAS No. 148 had
no financial impact on the financial position or results of operations
for the three and nine months ended March 31, 2003.
In accordance with the disclosure requirements of SFAS No. 148, the
following pro forma information adjusts previously reported net
earnings, basic earnings per common share and diluted earnings per
common share to reflect the fair value recognition provisions of SFAS
No. 123.
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
--------------------------------- ---------------------------------
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Net Per Common Per Common Net Per Common Per Common
(000 except per share data) Earnings Share Share Earnings Share Share
- --------------------------- --------------------------------- -------------------------------
<s> <c> <c> <c> <c> <c> <c>
Net earnings and earnings
per common share, as reported $ 3,019 $ 0.21 $ 0.21 $ 1,164 $0.08 $0.08
Add: Stock-based employee
compensation cost, net of
related tax effects, recorded
in the financial statements 0 0.00 0.00 0 0.00 0.00
Deduct: Stock-based employee
compensation cost, net of
related income tax effects,
that would have been included
in the determination of net
earnings if the fair value
method had been applied to
all awards (145) (0.01) (0.01) (158) (0.01) (0.01)
- --------------------------- --------- ------ -------- -------- ------ -------
Pro forma net earnings and
earnings per common share $ 2,874 $ 0.20 $ 0.20 $ 1,006 $0.07 $0.07
========= ====== ======== ======== ====== =======
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note K - Stock-Based Compensation, Cont'd.
---------------------------------
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
--------------------------------- ---------------------------------
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Net Per Common Per Common Net Per Common Per Common
(000 except per share data) Earnings Share Share Earnings Share Share
- --------------------------- --------------------------------- -------------------------------
<s> <c> <c> <c> <c> <c> <c>
Net earnings and earnings
per common share, as reported $ 7,994 $ 0.57 $ 0.56 $ 5,248 $ 0.38 $ 0.37
Add: Stock-based employee
compensation cost, net of
related tax effects, recorded
in the financial statements 0 0.00 0.00 0 0.00 0.00
Deduct: Stock-based employee
compensation cost, net of
related income tax effects,
that would have been included
in the determination of net
earnings if the fair value
method had been applied to
applied to all awards (426) (0.03) (0.03) (474) (0.04) (0.04)
- --------------------------- --------- ------ -------- -------- ------ -------
Pro forma net earnings and
earnings per common share $ 7,568 $ 0.54 $ 0.53 $ 4,774 $ 0.34 $ 0.33
========= ======= ======== ======== ====== =======
Note L - Goodwill and Other Intangible Assets
------------------------------------
The Company is currently amortizing its acquired intangible assets with
definite lives over periods ranging from 5 to 20 years. The Company
ceased amortization of goodwill at the beginning of fiscal 2002 when it
adopted SFAS No. 142, "Goodwill and Other Intangible Assets." The
Company evaluates its goodwill on an annual basis. The Company
completed a discounted cash flow and comparable market capitalization
analysis by identified reporting units of the Company which have
recorded goodwill as of June 30, 2002. Based on the results of this
analysis, the Company's goodwill was not impaired as of June 30, 2002.
There were no changes in the carrying value of goodwill as of and for
the periods ended March 31, 2003.
As part of the acquisition of II-VI/L.O.T. (See Note J) identifiable
intangible assets (customer lists and related information) of
approximately $1.6 million were recorded July 1, 2002.
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill, as of March 31, 2003 and June
30, 2002, are as follows ($000):
March 31, 2003 June 30, 2002
------------------------------- --------------------------------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
-------- ------------ ----- -------- ------------ -------
<s> <c> <c> <c> <c> <c> <c>
Patents $1,867 $ (460) 1,407 $1,793 $ (357) $1,436
Trademark 1,491 (199) 1,292 1,491 (143) 1,348
Customer Lists 2,839 (1,024) 1,815 1,250 (801) 449
-------- ------------ ------ -------- ------------ -------
Total $6,197 $(1,683) $4,514 $4,534 $(1,301) $3,233
======== ============ ====== ======== ============ =======
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note L - Goodwill and Other Intangible Assets, Cont'd.
---------------------------------------------
Amortization expense recorded on the intangible assets for the three
and nine months ended March 31, 2003, was $127,000 and $382,000,
respectively, and $95,000 and $312,000, respectively for the three and
nine months ended March 31, 2002. At March 31, 2003, estimated future
amortization expense for existing intangible assets for each of the
five succeeding fiscal years is as follows ($000):
Year Ended June 30,
- --------------------------------------
($000)
Remaining fiscal 2003 $122
2004 498
2005 498
2006 446
2007 347
2008 302
Note M - New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations." SFAS 143 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 June 15,
2002. The Company evaluated its existing leased and owned properties
for potential asset retirement obligations under SFAS 143. Based on
this review, the Company identified obligations primarily related to
disposal of certain materials utilized in its manufacturing process.
The adoption of SFAS 143 did not have a material effect on the
Company's financial position or results of operations for the three and
nine months ended March 31, 2003, respectively.
In October 2001, the FASB issued SFAS No. 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 provisions of this standard must be applied for
fiscal periods beginning after December 15, 2001. The Company adopted
SFAS 144 in the first quarter of fiscal 2003. The adoption of SFAS 144
had no financial impact on the financial position or results of
operations for the three and nine months ended March 31, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," SFAS 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullified Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." The principal difference between SFAS
146 and Issue 94-3 relates to SFAS 146 requirements for recognition of
a liability for a cost associated with an exit or disposal activity.
SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an
exit plan. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The
Company did not have any exit or disposal activities which would
require the application of the requirements of this standard,
therefore, the adoption of this standard had no financial impact on the
financial position or results of operations for the three and nine
months ended March 31, 2003.
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note M - New Accounting Pronouncements, Cont'd.
--------------------------------------
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," requiring increased
disclosures regarding certain guarantees and requiring the recognition
at fair value in the balance sheet of certain guarantees.
Interpretation No. 45 is required to be adopted for interim financial
statements ending after December 15, 2002.
The Company records a warranty reserve as a charge against earnings
based on a percentage of sales utilizing actual returns over the last
twelve months. If actual returns are not consistent with the
historical data used to calculate these estimates, net sales could
either be understated or overstated.
The following table summarizes the change in the carrying value of the
Company's warranty reserve as of and for the nine months ended March
31, 2003 and as of and for the year ended June 30, 2002 ($000).
June 30, 2002 March 31, 2003
Balance Expense Other Writeoffs Balance
------------- ------- ------- --------- -----------------
<s> <c> <c> <c> <c> <c>
Consolidated:
Warranty Reserve $419 $107 - - $526
June 30, 2001 June 30, 2002
Balance Expense Other(1) Writeoffs Balance
------------- ------- ------- --------- -----------------
<s> <c> <c> <c> <c> <c>
Consolidated:
Warranty Reserve $334 $(3) $88 - $419
(1) Reclassification of the Laser Power Corporation warranty
reserve from other current liabilities.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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/A as filed with the Securities and Exchange
Commission on September 27, 2002.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements and related disclosures in
conformity with generally accepted accounting principles 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
A of the notes to consolidated financial statements in the Company's
2002 Form 10-K/A 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 policies are
those related to revenue recognition, allowance for doubtful accounts,
warranty reserves, inventory valuation, valuation of long-lived assets
including acquired intangibles, accrual of bonus and profit sharing
estimates and accrual of income tax liability estimates. Management
believes these policies to be critical because they are both important
to the portrayal of the Company's financial condition and results of
operation, and they require management to make judgments and estimates
about matters that are inherently uncertain. Additional information
about these critical accounting policies may be found in the Company's
2002 Form 10-K/A in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," under the heading
"Critical Accounting Policies."
We recognize revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the price is established or determinable and
collectibility is probable.
Revenue, other than for contract research and development, for all
business segments is recognized from the sale of products at the point
of passage of title, which is at the time of shipment.
We follow the guidelines of Statement of Position 81-1 "Accounting
for Performance of Construction - Type and Certain Production-Type
Contracts" for our long-term contracts related to research and
development. Revenue and profits on each long-term contract are
accounted for using the percentage-of-completion method of accounting,
whereby revenue and profits are recognized throughout the performance
period of the contract. Percentage-of-contract is determined by
relating the actual cost of work performed to date to the estimated
total cost for each contract. The estimated total cost for each
contract is periodically reevaluated and revised, when necessary,
throughout the life of the contract. Losses on contracts are recorded
in full when identified.
The Company records an allowance for doubtful accounts receivable as a
charge against earnings. The allowance 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 period ended March 31, 2003. 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 may
be required in future periods.
The Company records a warranty reserve as a charge against earnings
based on a percentage of sales utilizing actual returns over the last
twelve months. If actual returns are not consistent with the
historical data used to calculate these estimates, net sales could
either be understated or overstated.
The Company records a slow moving inventory reserve as a charge against
earnings for all products on hand that have not been sold to customers
in the past twelve months. An additional reserve is recorded for
product on hand that is in excess of product sold to customers over the
past twelve months. If actual market conditions are less favorable
than projected, additional inventory reserves may be required.
The Company tests goodwill on at least an annual basis for impairment.
Other intangible assets are amortized over their estimated useful
lives. The determination of related estimated useful lives of other
intangible assets and whether goodwill is impaired involves judgments
based upon long-term projections of future performance. A discounted
cash flow model is used to determine the fair value of the reporting
units for purposes of testing goodwill for impairment. Based on the
results of the most recently completed analysis, the Company's goodwill
was not impaired as of June 30, 2002. No event has occurred as of or
for the period ended March 31, 2003 that would give management an
indication that an impairment charge was necessary that would adversely
affect the Company's financial position or results of operations.
The Company records bonus and profit sharing estimates as a charge
against earnings based on a percentage of operating income. These
estimates are adjusted to actual based on final results of operations
achieved during the fiscal year. Certain bonuses are paid quarterly at
a level of 75% of the current year to date operating income with final
payment in August of the subsequent fiscal year. Other bonuses and
profit sharing are paid annually in August of the subsequent fiscal
year.
The Company records an estimated income tax liability to recognize the
amount of income taxes payable or refundable for the current year and
deferred income tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's
financial statements or income tax returns. Judgment is required in
estimating the future income tax consequences of events that have been
recognized in the Company's financial statements or the income tax
returns.
The Company uses the intrinsic value approach specified in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," for stock options granted to officers and key employees,
and therefore does not record compensation costs based upon the fair
value of options at the date of grant. See Note K of the notes to
condensed consolidated financial statements.
From time to time, estimated accruals are recorded as a charge against
earnings based on known circumstances where it is probable that a
liability has been incurred or is expected to be incurred and the
amount can reasonably be estimated.
New Accounting Pronouncements
- -----------------------------
See Note M of the notes to condensed consolidated financial statements
for information regarding new accounting pronouncements.
Results of Operations
- ---------------------
Overview
Net earnings for the third quarter of fiscal 2003 were $3,019,000
($0.21 per share-diluted) on revenues of $32,356,000. This compares to
net earnings of $1,164,000 ($0.08 per share-diluted) on revenues of
$27,441,000 in the third quarter of fiscal 2002. For the nine months
ended March 31, 2003, net earnings were $7,994,000 ($0.57 per share-
diluted) on revenues of $95,358,000. This compares to net earnings of
$5,248,000 ($0.37 per share-diluted) on revenues of $83,580,000 for the
same period last fiscal year. The increase of 18% in revenues for the
third quarter of fiscal 2003 compared to the same period last fiscal
year is primarily due to stronger shipments of commercial infrared
optics to both OEM and aftermarket customers and the integration of the
Company's sales and marketing distribution activity in Germany through
a new consolidated subsidiary, II-VI/L.O.T., (See Note J of the notes
to the condensed consolidated financial statements).
Bookings for the third quarter of fiscal 2003 increased 2% to
$37,072,000 compared to $36,467,000 for the same period last fiscal
year. The increase for the three month and nine month periods was
primarily attributable to stronger market demand in the infrared optics
market. Bookings for contract research and development for the third
quarter of fiscal year 2003 were $2,414,000 compared to $2,236,000 for
the same period last fiscal year. Order bookings for the nine months
ended March 31, 2003 increased 16% to $103,978,000 as compared to
$89,453,000 for the same period last fiscal year. The increase for the
three month and nine month periods was primarily attributable to
stronger market demand in the infrared optics market. Bookings for
contract research and development for the nine months ended March 31,
2003 were $8,306,000 compared to $8,706,000 for the same period last
fiscal year. Bookings are defined as customer orders received that are
expected to be converted to sales revenue over the next 12 months. For
long-term customer orders, the Company takes the view of not including
in bookings the portion of the customer order that is beyond 12 months
due to the inherent uncertainty of an order that far out in the future.
Income from operations, which is defined as earnings before income
taxes, interest and other income or expense, for the third quarter of
fiscal 2003 increased 159% to $4,193,000 compared to $1,616,000 for the
same period last fiscal year primarily due to higher gross margins from
improved manufacturing synergies and cost controls in the Infrared
Optics segment and higher sales volume from all segments with the
exception of the Military Infrared Optics segment. Income from
operations for the nine months ended March 31, 2003 increased 54% to
$11,794,000 compared to $7,669,000 for the same period last fiscal
year. Improvement was experienced in the Infrared and Near-Infrared
Optics segments which was partially offset by lower income from
operations in the Military Infrared Optics segment and the Company's
Other category.
Bookings, revenues and income or (loss) from operations for the
Company's reportable segments are discussed below. Certain amounts
from prior years have been reclassified to conform with the segment
reporting presentation adopted in fiscal 2003. See also the segment
reporting discussion in Note H of the notes to condensed consolidated
financial statements.
Infrared Optics
Bookings for the third quarter of fiscal 2003 for Infrared Optics
increased 48% to $22,083,000 from $14,951,000 in the third quarter of
last fiscal year. This increase was attributable in part to the
receipt of approximately $3.5 million in blanket orders received from
one domestic OEM customer and two OEM customers in Europe and China.
The remaining quarter over quarter improvement was due to overall
increases in order volume from OEM and aftermarket customers worldwide.
Bookings for the nine months ended March 31, 2003 increased 51% to
$61,226,000 from $40,646,000 for the same period last fiscal year.
During the quarter, the OEM manufacturers of both high-power, multi-
kilowatt lasers for cutting, welding, drilling and heat treating
applications and lower-power lasers for engraving and marking requested
products at a rate more consistent with fiscal year 2001 business
levels explaining the increase in order bookings over the same period
last fiscal year.
Revenues for the current fiscal quarter for Infrared Optics increased
31% to $19,715,000 from $15,061,000 in the third quarter of last fiscal
year. This increase was primarily attributable to increased shipments
to several of the Company's international OEM customers. Revenues for
the nine months ended March 31, 2003 increased 22% to $55,641,000 from
$45,525,000 for the same period last fiscal year as the stronger order
intake has translated into stronger revenues for the current period as
compared to the same period of the prior fiscal year.
Income from operations for the third quarter increased 87% to
$5,462,000 from $2,928,000 in the third quarter of last fiscal year.
Income from operations for the nine months ended March 31, 2003
increased 59% to $14,109,000 compared to $8,854,000 for the same period
last fiscal year. The improvement in income from operations for the
current fiscal three and nine month periods as compared to the same
periods of the last fiscal year was due to a combination of increased
sales volume, operational consolidation and the acquisition of a
majority interest in a distributor in Germany, which is described in
Note J of the notes to condensed consolidated financial statements.
Near-Infrared Optics
Bookings for the third quarter of fiscal 2003 for Near-Infrared Optics
increased 52% to $6,839,000 from $4,513,000 in the third quarter of
last fiscal year. The increase was primarily due to stronger demand in
commercial bookings in the product lines used in defense applications,
and the receipt of $1.5 million in contract bookings in the current
quarter. Bookings for the nine months ended March 31, 2003 increased
5% to $18,689,000 as compared to $17,860,000 for the same period last
fiscal year. The increase in bookings for the nine months ended March
31, 2003 as compared to the same period of the last fiscal year was
primarily due to stronger demand in commercial bookings in product
lines used in defense applications.
Revenues for the third quarter for Near-Infrared Optics were $5,647,000
compared to $5,612,000 in the third quarter of last fiscal year.
Revenues for the nine months ended March 31, 2003 were $16,793,000
compared to $16,872,000 for the same period last fiscal year.
Income from operations for the third quarter of fiscal 2003 more than
doubled to $393,000 from $155,000 in the third quarter of last fiscal
year. This improvement reflected overall stronger gross margins and
improved product yields. Income from operations for the nine months
ended March 31, 2003 increased 64% to $1,151,000 compared to $701,000
for the same period last fiscal year. Cost reductions particularly in
the materials area as a result of yield improvements were sufficient to
increase gross margins despite the essentially flat revenues for the
comparable nine month periods.
Military Infrared Optics
Bookings for the third quarter of fiscal 2003 for Military Infrared
Optics were $7,300,000 as compared to $11,019,000 in the third quarter
of last fiscal year. The 34% reduction in bookings is due to a large
initial order in the third quarter of last fiscal year for the Northrop
Grumman IFTS program focused on sapphire window assemblies that did not
occur in fiscal 2003 and a twelve month order from Lockheed Martin for
Javelin missile domes in the third quarter of fiscal 2002 as compared
to a six month order during the third quarter of the current fiscal
year. Bookings for the nine months ended March 31, 2003 were
$18,603,000 compared to $23,251,000 for the same period last fiscal
year, a decrease of 20%. The reduction in orders as compared to the
same period last fiscal year is primarily due to the quarterly changes
described above.
Revenues for the third quarter of fiscal 2003 for Military Infrared
Optics decreased 7% to $4,788,000 compared to $5,170,000 in the third
quarter of the last fiscal year. A missile domes program in the third
quarter of the prior fiscal year is no longer active for the third
quarter of the current fiscal year. Revenues for the nine months ended
March 31, 2003 increased 2% to $16,381,000 from $16,027,000 for the
same period last fiscal year. Revenues from the Air Borne Laser (ABL)
contract were the major contributor to the increase as compared to the
same period of the last fiscal year which was partially offset by
decreases in revenues from core military products.
During the third quarter, Military Infrared Optics experienced a
$453,000 loss from operations compared to a loss from operations of
$192,000 in the third quarter of the last fiscal year. Deteriorating
gross margins in the current quarter relating to contract execution
contributed to the loss from operations. Income from operations for
the nine months ended March 31, 2003 decreased to $38,000 from $931,000
for the same period last fiscal year. The consolidation of the
commercial operations in the fourth quarter of fiscal year 2002 from
Laser Power Corporation to other II-VI facilities decreased gross
margins in the remaining military focused business segment due to the
absorption of costs previously allocated to the Infrared Optics
segment. Higher costs negatively impacted income from operations in
the current quarter and nine month periods relating to revisions in
estimated costs to complete certain fixed price government contracts.
Other
Other bookings, revenues and operating losses primarily includes the
combined operations of the Company's eV PRODUCTS division, the
Company's Wide Band Gap (WBG) Silicon Carbide operations and the
Company's corporate research and development group.
Combined bookings for the third quarter of fiscal 2003 for eV PRODUCTS
division and the WBG group decreased to $850,000 as compared to
$5,984,000 in the third quarter of last fiscal year. The decrease in
the current quarter was due to eV PRODUCTS division booking several
large blanket orders during the same quarter a year ago. Bookings for
the nine months ended March 31, 2003 for these groups decreased to
$5,460,000 compared to $7,696,000 for the same period last fiscal year
primarily due to the several large orders received by both groups
during the prior nine month fiscal period that were absent in the same
period this fiscal year.
Revenues for the third quarter from these operations increased 38% to
$2,206,000 compared to $1,598,000 in the third quarter of the last
fiscal year. Revenues for the nine months ended March 31, 2003 for
these operations increased 27% to $6,543,000 as compared to $5,156,000
for the same period last fiscal year. The higher revenues are a direct
result of the higher contract billings, particularly in the contract
research and development area of the WBG group, during this fiscal
period that were not in last fiscal year.
The loss from operations for the third quarter of fiscal 2003 of
$1,209,000 decreased from the operating loss of $1,275,000 in the third
quarter of the prior fiscal year. The decrease in the loss was
attributable to more external contract support of the Company's efforts
in silicon carbide, which offsets the funding needed to be provided by
the Company for this activity.
The loss from operations for the nine months ended March 31, 2003 for
these operations increased to $3,504,000 as compared to $2,817,000 for
the same period last fiscal year. The increase in the loss was due to
lower revenues and gross margin for the eV PRODUCTS division and
unallocated corporate costs absorbed and reported in this segment
primarily related to internal research and development.
Overall
Manufacturing gross margin, which is defined as net sales less cost of
goods sold, for the third quarter of fiscal 2003 was $12,067,000 or 41%
of revenues compared to $8,034,000 or 31% of revenues for the same
period last fiscal year. Manufacturing gross margin for the nine
months ended March 31, 2003 was $34,547,000 or 40% of revenues compared
to $25,638,000 or 33% of revenues for the same period last fiscal year.
The increased sales volume for the three and nine month periods as
compared to the same periods last fiscal year, the operational
consolidation in the infrared optics commercial business, the
acquisition of a majority interest in a distributor in Germany and
lower material costs as a result of yield improvements all contributed
to the increased gross margin.
Contract research and development gross margin, which is calculated as
contract research and development revenues less expenses, for the third
quarter of fiscal 2003 was $225,000 or 7% of research and development
revenues compared to a gross margin loss of $441,000 or 34% of research
and development revenues for the same period last fiscal year.
Contract research and development gross margin for the nine months
ended March 31, 2003 was $744,000 or 9% of research and development
revenues compared to $864,000 or 16% of research and development
revenues for the same period last fiscal year. The contract research
and development revenues and costs are a result of development efforts
in the Near-Infrared Optics and the Military Infrared Optics segments
as well as activities in the eV PRODUCTS division and the WBG group for
the current quarter and nine month periods ended March 31, 2003. The
increased revenues level for the three and nine month periods as
compared to the same periods last fiscal year is primarily due to
revenues from a new development contract in the WBG group during the
current fiscal year. Contract research and development gross margin is
a result of a blend of cost plus fixed fee, cost reimbursement and
percentage of completion contract activities. The negative gross
margin in the third quarter of the prior fiscal year was due to losses
recognized from activities performed on a fixed price percentage of
completion contract in the Military Infrared Optics segment.
Company-funded internal research and development expenses for the third
quarter of fiscal 2003 were $435,000 or 1% of revenues compared to
$1,153,000 or 4% of revenues for the same period last fiscal year. The
significantly lower expense is a direct result of more external
contract support of the Company's efforts in silicon carbide, which
offsets the funding needed to be provided by the Company for this
activity. In last year's third quarter, the Company had reported its
first full quarter of results that included all the costs of the former
Litton Systems, Inc. Silicon Carbide Group, acquired in the second
quarter of last fiscal year, but the Company did not have contract
revenues to offset these additional costs. In contrast, contract
revenue for silicon carbide is now approximately $1.0 million per
quarter. Company-funded internal research and development expenses for
the nine months ended March 31, 2003 were $1,946,000 or 2% of revenues
compared to $3,488,000 or 4% of revenues for the same period last
fiscal year. These expenditures for the three and nine month periods
reflect continued silicon carbide crystal growth technology and
processing development. These expenditures also include corporate
research and development activities in addition to the research and
development activities of the eV PRODUCTS division.
Selling, general and administrative expenses for the third quarter of
fiscal 2003 were $7,664,000 or 24% of revenues compared to $4,824,000
or 18% of revenues for the same period last fiscal year. Selling,
general and administrative expenses for the nine months ended March 31,
2003 were $21,551,000 or 23% of revenues compared to $15,345,000 or 18%
of revenues for the same period last fiscal year. The dollar and
percentage increases for the quarter and nine month periods as compared
to the same periods last fiscal year reflect costs associated with the
acquisition, during the first quarter of this fiscal year, of a
majority interest in a distributor in Germany (See Note J of the notes
to the condensed consolidated financial statements). While this
acquisition has increased the Company's direct selling expense for the
quarter and nine months by approximately 2% of sales as compared to the
prior year, this expense increase has been offset by the additional
gross margin on sales to end customers in Germany. In addition to the
acquisition of II-VI/L.O.T., the Company recorded higher salary
expenses as compared to the same quarter last fiscal year for its
world-wide profit driven bonus program.
Interest expense for the third quarter of fiscal 2003 was $174,000
compared to $313,000 for the same period last fiscal year. For the
nine months ended March 31, 2003, interest expense was $699,000
compared to $1,213,000 for the same period last fiscal year. The
decrease in interest expense reflects lower LIBOR based interest rates,
as well as lower overall debt levels of the Company at March 31, 2003
as compared to the same period last fiscal year.
Other income for the third quarter of fiscal 2003 was $93,000 compared
to other income of $353,000 for the same period last fiscal year.
These income items included foreign currency gains, interest income,
royalty income and other income items. Other income was partially
offset by the minority interest in II-VI/L.O.T. and other expense
items. Other expense for the nine months ended March 31, 2003 of
$394,000 compared to other income of $1,013,000 for the same period
last fiscal year. The nine month change in 2003 was primarily due to
the minority interest in II-VI/L.O.T., the write-off of an investment
in the second quarter of the current fiscal year and foreign currency
losses as a result of the U.S. dollar's performance relative to other
currencies in the current fiscal year as compared to foreign currency
gains in the same period last fiscal year.
The Company's year-to-date effective income tax rate is 25% compared to
an effective income tax rate of 30% for the same period in fiscal 2002.
The income tax rate reflects the Company's continued benefit from lower
tax rates on its Singapore and China operations and a favorable mix of
U.S. and foreign income.
Liquidity and Capital Resources
- -------------------------------
In the first nine months of fiscal 2003, net cash provided by operating
activities of $18.7 million and proceeds from sale of fixed assets of
$0.6 million were used primarily to fund an investment of $4.2 million
in property, plant and equipment, to finance a $2.8 million acquisition
for a 75% majority ownership of II-VI/L.O.T. and to pay down $8.9
million of debt. Cash transactions for the first nine months of fiscal
2003 plus cash on hand at the beginning of the fiscal year resulted in
a cash position of $13.2 million at March 31, 2003.
The Company had available $14.8 million and $9.3 million under its line
of credit option of the credit facility as of March 31, 2003 and June
30, 2002, respectively. The Company is obligated on the first day of
each fiscal quarter to pay $1.25 million against its term loan option
through July 1, 2003 and $1.88 million on the first day of each fiscal
quarter thereafter until the term loan is repaid (See Note E to the
notes to condensed consolidated financial statements).
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 2003.
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 primarily
focused on its exposure to the Japanese Yen. No significant changes
have occurred in the techniques and instruments used other than those
described below.
The Company has transactions denominated in Euros and Pounds Sterling.
Changes in the foreign currency exchange rates did not have a material
impact to the results of operations for the period ended March 31,
2003.
For the quarter ended March 31, 2003, the Company decreased its
borrowings by $5.0 million. As of March 31, 2003, the total borrowings
of $25.8 million include $17.5 million under the term loan option, $5.3
million under the line of credit option, $2.5 million Japanese Yen loan
and a $0.5 million Pennsylvania Industrial Development Authority (PIDA)
term note. 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 $71,000 and $227,000 for the three
and nine month periods ended March 31, 2003.
To satisfy certain provisions of its term loan option of the credit
facility relating to mitigating interest rate risk, on March 6, 2003
the Company entered into an interest rate cap for a one-year period
with a notional amount of $8.8 million. See Note I of the notes to
condensed consolidated financial statements.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
----------------------------------
Within 90 days before filing this report, we evaluated
the effectiveness of the design and operation of our
disclosure controls and procedures. Carl J. Johnson, the
Company's Chairman and Chief Executive Officer and Craig
A. Creaturo, the Company's Chief Accounting Officer and
Treasurer (and principal financial officer), reviewed and
participated in this evaluation. Based on this
evaluation, Messrs. Johnson and Creaturo concluded that,
as of the date of their evaluation, the Company's
disclosure controls were effective.
(b) Internal Controls.
Since the date of the evaluation described above, there
have not been any significant changes in the Company's
internal accounting controls or in other factors that
could significantly affect those controls.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
--------
99.01 Certification Filed herewith.
Pursuant to 18 U.S.C.
Section 1350, as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 for
Carl J. Johnson
99.02 Certification Filed herewith.
Pursuant to 18 U.S.C.
Section 1350, as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 for
Craig A. Creaturo
(b) Reports on Form 8-K.
On April 23, 2003, the registrant filed a report
on Form 8-K for the events dated April 23, 2003,
covering Item 9 thereof.
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, 2003 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive
Officer
Date: May 14, 2003 By: /s/ Craig A. Creaturo
Craig A. Creaturo
Chief Accounting Officer
and Treasurer
CERTIFICATIONS
I, Carl J. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
II-VI Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 14, 2003 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
I, Craig A. Creaturo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
II-VI Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 14, 2003 By: /s/ Craig A. Creaturo
Craig A. Creaturo
Chief Accounting Officer and Treasurer
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
- -------------- ----------------------
99.01 Certification Pursuant Filed herewith.
to 18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
for Carl J. Johnson
99.02 Certification Pursuant Filed herewith.
to 18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
of 2002 for Craig A. Creaturo