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 September 30, 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 November 8, 2002, 14,035,774 shares of Common Stock, no par value,
of the registrant were outstanding.
II-VI INCORPORATED
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2002 and June 30, 2002.......................3
Condensed Consolidated Statements of Earnings -
Three months ended September 30, 2002 and 2001.............4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2002 and 2001.............5
Notes to Condensed Consolidated Financial
Statements.................................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.........................................16
Item 4. Controls and Procedures...................................16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
September 30, June 30,
Assets 2002 2002
-------- --------
Current Assets
Cash and cash equivalents $ 9,375 $ 9,610
Accounts receivable, net 21,330 21,541
Inventories 20,488 19,741
Deferred income taxes 2,903 3,457
Other current assets 2,205 1,488
-------- --------
Total Current Assets 56,301 55,837
Property, Plant & Equipment, net 59,401 60,711
Goodwill, net 28,987 28,987
Intangible Assets, net 4,841 3,233
Investments 1,822 1,850
Other Assets 1,636 1,283
-------- --------
$152,988 $151,901
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 5,225 $ 3,970
Accrued salaries, wages and bonuses 5,129 4,976
Income taxes payable 1,076 1,012
Accrued profit sharing contribution 143 736
Current portion of long-term debt 5,058 5,068
Other current liabilities 3,757 4,329
-------- --------
Total Current Liabilities 20,388 20,091
Long-Term Debt--less current portion 28,175 29,435
Other Liabilities,
primarily deferred income taxes 4,692 4,715
Shareholders' Equity
Preferred stock, no par value;
authorized - 5,000,000 shares;
unissued Common stock, no par value;
authorized - 30,000,000 shares;
issued - 15,104,654 shares
at September 30, 2002;
15,101,450 shares at June 30, 2002 37,851 37,840
Accumulated other comprehensive income 135 279
Retained earnings 63,657 61,451
-------- --------
101,643 99,570
Less treasury stock, at cost
- - 1,068,880 shares 1,910 1,910
-------- --------
99,733 97,660
-------- --------
$152,988 $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
September 30,
2002 2001
-------- --------
Revenues
Net sales:
Domestic $14,154 $15,168
International 15,055 12,093
------- -------
29,209 27,261
Contract research and development 2,362 1,432
------- -------
31,571 28,693
------- -------
Costs, Expenses & Other Income
Cost of goods sold 18,087 17,627
Contract research and development 2,244 963
Internal research and development 959 990
Selling, general and administrative 7,195 5,645
Interest expense 278 542
Other income, net (114) (565)
------- -------
28,649 25,202
------- -------
Earnings Before Income Taxes 2,922 3,491
Income Taxes 716 1,152
------- -------
Net Earnings $ 2,206 $ 2,339
======= =======
Basic Earnings Per Share $ 0.16 $ 0.17
======= =======
Diluted Earnings Per Share $ 0.15 $ 0.16
======= =======
- - See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
Three Months Ended
September 30,
2002 2001
-------- --------
Cash Flows from Operating Activities
Net earnings $2,206 $2,339
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation 2,336 2,110
Amortization 85 107
Gain on foreign currency transactions (128) (354)
Net loss on disposal or writedown of assets 49 -
Deferred income taxes 590 431
Increase (decrease) in cash from changes in:
Accounts receivable 528 1,609
Inventories (336) 6
Accounts payable 934 (175)
Other operating net assets (1,098) (3,206)
-------- --------
Net cash provided by operating activities 5,166 2,867
-------- --------
Cash Flows from Investing Activities
Additions to property, plant and equipment (1,766) (3,081)
Purchase of business (3,205) -
Dividend from (investment in) unconsolidated business 9 (1,500)
Proceeds from sale of assets 574 6
------- -------
Net cash used in investing activities (4,388) (4,575)
------- -------
Cash Flows from Financing Activities
Proceeds (payments) on short-term borrowings (500) 1,500
Proceeds from long-term borrowings 431 -
Payments on long-term borrowings (1,267) (26)
Proceeds from sale of common stock 11 67
-------- --------
Net cash (used in) provided by financing activities (1,325) 1,541
-------- --------
Effect of exchange rate changes
on cash and cash equivalents 312 (169)
Net decrease in cash and cash equivalents (235) (336)
Cash and Cash Equivalents at Beginning of Period 9,610 8,093
------- -------
Cash and Cash Equivalents at End of Period $9,375 $7,757
======= =======
Cash paid for interest $ 373 $ 349
======= =======
Cash paid for income taxes $ 76 $ 264
======= =======
- - 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 month
periods ended September 30, 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 2002 Annual Report to
shareholders. The consolidated results of operations for the three
month periods ended September 30, 2002 and 2001 are not necessarily
indicative of the results to be expected for the full year.
Note B - Inventories
-----------
The components of inventories are as follows ($000):
September 30, June 30,
2002 2002
------- -------
Raw materials $ 4,606 $ 4,638
Work in progress 8,896 8,958
Finished goods 6,986 6,145
------- -------
$20,488 $19,741
======= =======
Note C - Property, Plant and Equipment
-----------------------------
Property, plant and equipment (at cost/valuation) consist of the
following ($000):
September 30, June 30,
2002 2002
------- -------
Land and land improvements $ 1,577 $ 1,551
Buildings and improvements 29,810 30,008
Machinery and equipment 73,828 73,041
------- -------
105,215 104,600
Less accumulated depreciation 45,814 43,889
------- -------
$ 59,401 $ 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 is a component of
accounts receivable, net of allowance for doubtful accounts, are as
follows ($000):
September 30, June 30,
2002 2002
------- -------
Billed
Completed Contracts $ 5 $ 5
Contracts in Progress 1,384 1,978
------- -------
1,389 1,983
Unbilled 1,928 1,598
------- -------
$ 3,317 $ 3,581
======= =======
Note E - Debt
----
The Company has a $45.0 million secured credit agreement, which it
obtained in connection with the Company's acquisition of Laser Power
Corporation. The facility has a five-year life effective August 14,
2000 and contains term and line of credit borrowing options. The
facility is collateralized by the Company's accounts receivables 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 in effect as of
September 30, 2002 was 3.19%. As of September 30, 2002, the total
borrowings of $30.3 million under this facility consisted of $20.0
million under the term loan option and $10.3 million under the line of
credit option.
In September 2002, the Company replaced its 237 million Yen loan with a
300 million Yen loan with the same bank. 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 September 30,
2002, 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 Share
------------------
The following table sets forth the computation of earnings per share
for the periods indicated:
Three Months Ended
September 30,
------------------------
(000 except per share data) 2002 2001
- -----------------------------------------------------------------
Net earnings $ 2,206 $ 2,339
Divided by:
Weighted average shares 14,034 13,914
- -----------------------------------------------------------------
Basic earnings per share $ 0.16 $ 0.17
Net earnings $ 2,206 $ 2,339
Divided by:
Weighted average shares 14,034 13,914
Dilutive effect of common
stock equivalents 337 398
- -----------------------------------------------------------------
Diluted weighted average
common shares 14,371 14,312
- -----------------------------------------------------------------
Diluted earnings per share $ 0.15 $ 0.16
- -----------------------------------------------------------------
Weighted average shares issuable upon the exercise of stock options
that were not included in the calculation because they were
antidilutive, were immaterial for the three months ended
September 30, 2002 and 2001, respectively.
Note G - Comprehensive Income
--------------------
The components of comprehensive income were as follows for the
periods indicated ($000):
Three Months Ended
September 30,
------------------------
2002 2001
- -----------------------------------------------------------------
Net earnings $ 2,206 $ 2,339
Foreign currency translation
adjustments, net of tax (144) 209
- -----------------------------------------------------------------
Comprehensive income $ 2,062 $ 2,548
- -----------------------------------------------------------------
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note H - Segment Reporting
-----------------
The Company has three reportable segments: Infrared Optics, which is
primarily the Company's II-VI and Laser Power Optics 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
Company's Other segment is primarily the aggregation of the Company's
eV PRODUCTS division, the Company's Wide Band Gap (WBG) Silicon Carbide
development group, and the Company's corporate research and development
group.
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.
Effective July 1, 2002, the Company changed its segment reporting to
better reflect how the Company manages its businesses. Prior period
segment information has been restated.
The following table summarizes selected financial information of the
Company's operations by segment ($000's):
Three Months Ended September 30, 2002
-----------------------------------------------------------
Military
Infrared Near-Infrared Infrared
Optics Optics Optics Other Totals
- -----------------------------------------------------------------------------------------------
Net revenues $18,354 $5,467 $5,794 $ 1,956 $ 31,571
Income (loss) from operations 4,231 362 257 (1,764) 3,086
Interest expense - - - - (278)
Other income, net - - - - 114
Earnings before income taxes - - - - 2,922
Depreciation and amortization 1,056 552 424 389 2,421
Capital expenditures 652 185 394 535 1,766
Goodwill, net 5,516 1,927 21,544 - 28,987
Segment assets 63,121 25,436 38,033 26,398 152,988
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note H - Segment Reporting, Cont'd.
--------------------------
Three Months Ended September 30, 2002
-----------------------------------------------------------
Military
Infrared Near-Infrared Infrared
Optics Optics Optics Other Totals
- -----------------------------------------------------------------------------------------------
Net revenues $16,164 $ 5,441 $ 5,216 $ 1,872 $ 28,693
Income (loss) from operations 2,876 226 867 (501) 3,468
Interest expense - - - - (542)
Other income, net - - - - 565
Earnings before income taxes - - - - 3,491
Depreciation and amortization 990 571 422 234 2,217
Capital expenditures 2,246 518 114 203 3,081
Goodwill, net 5,516 1,698 22,022 - 29,236
Segment assets 57,934 27,585 43,429 20,528 149,476
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
statement of financial position 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 $2.1 million as of September 30, 2002 on the statement
of financial position. 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
(decreased) net earnings by $65,000 and $(44,000) for the three months
ended September 30, 2002 and 2001, respectively.
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note I - Derivative Instruments, Cont'd.
-------------------------------
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%. The one-
month LIBOR rate was 1.84% and 1.81% on June 30, 2002 and September 30,
2002, respectively. 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 months ended September
30, 2002 was immaterial.
Note J - New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
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 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
financial position or results of operations for the three months ended
September 30, 2002.
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 adoption of SFAS 144 had no financial impact on
the financial position or results of operations for the three months
ended September 30, 2002.
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note J - New Accounting Pronouncements, Cont'd.
--------------------------------------
In June 2002, the FASB issued Statement of Financial Accounting
Standards 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 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.
Note K - 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 joint venture to
distribute II-VI Incorporated and Laser Power Corporation products in
Germany. Prior to this acquisition, the distribution of 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. Approximately 10% of the Company's total sales
are in Germany. The Company purchased a 75% controlling interest in
II-VI/L.O.T., for approximately $2.8 million, net of value added taxes
already or to be refunded to the Company that approximate $.5 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
successfully 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. for the three months ended September 30, 2002 are included
in the Company's consolidated financial statements for the quarter
ended September 30, 2002.
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
formula, primarily related to the average sales of II-VI/L.O.T. for the
three fiscal years prior to the exercise of the option.
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
- ----------------------------
Our significant accounting policies are described in Note A of the
Consolidated Financial Statements for the year ended June 30, 2002 as
filed in Form 10-K/A, which were prepared in accordance with accounting
principles generally accepted in the United States of America. In
preparing our financial statements, we made estimates and judgments
which affect the results of our operations and the value of assets and
liabilities we report. Our actual results may differ from these
estimates.
We believe that the following summarizes critical accounting policies
which require significant judgments and estimates in our preparation of
our consolidated financial statements.
The Company records revenue, other than on long-term contracts, when a
product is shipped. Revenue on long-term contracts is accounted for
using the percentage-of-completion method, whereby revenue and profits
are recognized throughout the performance period of the contract.
Percentage-of-completion is determined by relating the actual cost of
work performed to date to the estimated total cost for each contract.
Losses on contracts are recorded in full when identified.
The Company records an allowance for doubtful accounts receivable
including warranty reserves as a charge against earnings based on a
percentage of actual historical product returns over the past twelve
months. Additional reserve is estimated for potential non-collection
of the receivable based on historical results. The Company has not
experienced a non-collection of accounts receivable materially
affecting its financial position or results of operations over the
last twelve months.
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.
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 tax liability to recognize the amount
of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. Judgment is required in estimating the future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns.
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.
Results of Operations
- ---------------------
Overview
Net earnings for the first quarter of fiscal 2003 were $2,206,000
($0.15 per share-diluted) on revenues of $31,571,000. This compares to
net earnings of $2,339,000 ($0.16 per share-diluted) on revenues of
$28,693,000 in the first quarter of fiscal 2002. Order bookings for
the first quarter of fiscal 2003 were $34,873,000 compared to
$27,801,000 for the same period last fiscal year, an increase of 25%.
Bookings for contract research and development for the first quarter of
fiscal year 2003 were $5,390,000 compared to $5,153,000 for the same
period last fiscal year. Revenues for the first quarter of fiscal 2003
increased 10% to $31,571,000 compared to $28,693,000 for the same
period last fiscal year primarily due to higher shipments of infrared
optics. Operating profit for the first quarter of fiscal 2003
decreased 11% to $3,086,000 compared to $3,468,000 for the same period
last fiscal year primarily due to lower margins in the military
infrared optics and lower sales volume from the Company's eV PRODUCTS
division. This decrease was partially offset by an increase in
shipments and gross margins of infrared optics.
Relating to the Company's optics segments, the Company currently
expects a steady strengthening in the industrial aftermarket activity.
Uncertainties of the past few quarters are still present; however, the
industrial, scientific and medical market segments have shown an
increase in order activity. The demand for military IR Optics is
continuing to remain strong. The Company currently expects revenues
and income from operations for the fiscal year ending June 30, 2003 to
increase approximately 10% from the previous fiscal year.
Bookings, revenues and operating profit (loss) for the Company's
reportable segments are discussed below. Certain amounts from prior
years have been reclassified to conform with the fiscal 2003
presentation.
Infrared Optics
Bookings for the quarter for Infrared Optics increased 56% to
$20,768,000 from $13,337,000 in the first quarter of last fiscal year.
This increase was attributable to the receipt of orders from several of
the Company's original equipment manufacturer (OEM) customers.
Specifically, the Company received two major blanket orders in the
current fiscal quarter from two large European customers for
approximately $5.5 million.
Revenues for the current fiscal quarter for Infrared Optics increased
14% to $18,354,000 from $16,164,000 in the first quarter of last fiscal
year. This increase was attributable to increased shipments to several
of the Company's OEM customers.
Income from operations for the quarter increased to $4,231,000 from
$2,876,000 in the first quarter of last fiscal year. The improvement
in operating profit for the current fiscal quarter as compared to the
same quarter of last fiscal year was due to a combination of increased
sales volume, facility consolidation and the acquisition of a majority
interest in a distributor in Germany, which is described in Note L of
the accompanying Condensed Consolidated Financial Statements.
Near-Infrared Optics
Bookings for the quarter for Near-Infrared Optics decreased 20% to
$6,900,000 from $8,584,000 in the first quarter of last fiscal year. A
shift in order mix showed a strengthening in the Yttrium Aluminum
Garnet (YAG) bookings for the current fiscal quarter, but this was
offset by reduced contract research bookings as compared to the same
quarter for the prior fiscal year.
Revenues for the quarter for Near-Infrared Optics were $5,467,000
compared to $5,441,000 in the first quarter of last fiscal year.
Contract research revenue in this quarter increased as compared to the
same quarter last fiscal year, while product sales, primarily in the
optics and telecommunications product lines, decreased as compared to
the same quarter last fiscal year.
Income from operations for the quarter increased to $362,000 from
$226,000 in the first quarter of last fiscal year. The improved
operating profit reflected stronger operations in the YAG product line
due to improved performance yields.
Military Infrared Optics
Bookings for the quarter for Military Infrared Optics were $4,576,000
as compared to $4,624,000 in the first quarter of last fiscal year.
The bookings results reflect an addition of new sapphire based orders
in the current quarter.
Revenues for the quarter for Military Infrared Optics increased 11% to
$5,794,000 compared to $5,216,000 in the first quarter of the last
fiscal year. The increase in revenue was primarily due to the market
acceptance of a new sapphire based products.
Income from operations for the quarter decreased to $257,000 from
$867,000 in the first quarter of the prior fiscal year. Decreased
gross margins in the current quarter contributed to the lower operating
profit. The consolidation of the commercial operations in the fourth
quarter of FY02 from Laser Power Corporation to other II-VI facilities
decreased gross margins in the remaining military focused business due
to the absorption of costs previously allocated to the commercial
Infrared Optics business. Higher than expected costs negatively
impacted operating profit in the current quarter relating to certain
fixed-price government contracts that were absent in the same quarter
of the prior fiscal year.
Other
Other bookings, revenues and operating profits (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 quarter for eV PRODUCTS division and silicon
carbide group more than doubled to $2,629,000 as compared to $1,256,000
in the first quarter of last fiscal year. The increase in the current
quarter was due to the receipt of a research and development government
contract awarded to the silicon carbide group partially offset by a
customer order cancellation for the eV PRODUCTS division.
Revenues for the quarter from these operations increased 4% to
$1,956,000 compared to $1,872,000 in the first quarter of the last
fiscal year.
Operating loss for the quarter of $1,764,000 was higher than the
operating loss of $501,000 in the first quarter of the prior fiscal
year. The higher loss was attributable to lower sales volume for the
eV PRODUCTS division and additional research and development costs for
the WBG group associated with the Litton Systems, Inc. Silicon Carbide
Group acquired in the second quarter of the last fiscal year.
Overall
Manufacturing gross margin for the first quarter of fiscal 2003 was
$11,122,000 or 38% of revenues compared to $9,634,000 or 35% of
revenues for the same period last fiscal year. The increased sales
volume for the quarter as compared to the prior year, the recently
completed facility consolidation for the Infrared Optics commercial
business and the acquisition of a majority interest in a distributor in
Germany all contributed to the increased gross margin.
Company-funded internal research and development expenses for the first
quarter of fiscal 2003 were $959,000 or 3% of revenues compared to
$990,000 or 3% of revenues for the same period last fiscal year. These
expenditures for the quarter 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 first quarter of
fiscal 2003 were $7,195,000 or 23% of revenues compared to $5,645,000
or 20% of revenues for the same period last fiscal year. The dollar
and percentage increases for the quarter as compared to the same period
last fiscal year reflect costs associated with the acquisition of a
majority interest in a distributor in Germany. In addition, 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 first quarter of fiscal 2003 was $278,000
compared to $542,000 for the same period last fiscal year. The
decrease in interest expense reflects lower LIBOR based interest rates
and approximately a $5.0 million reduction in debt outstanding for the
quarter as compared to the first quarter of last fiscal year.
Other income for the first quarter of fiscal 2003 of $114,000 compared
to $565,000 for the same period last fiscal year. The change was
primarily due to lower foreign currency gains as a result of the U.S.
dollar's performance relative to other currencies compared to the same
quarter of the prior fiscal year. The balance of the other income in
both fiscal quarters was derived from royalty income and interest
income.
The Company's effective income tax rate for the first quarter of fiscal
2003 is 25% compared to an effective income tax rate of 33% 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 three months of fiscal 2003, cash generated from
operations of $5.2 million and proceeds from sale of assets of $0.6
million were used primarily to fund an investment of $1.8 million in
property, plant and equipment, to finance a $3.2 million investment for
a 75% majority ownership of a distributor in Germany and to pay down
$1.3 million of debt. Cash transactions for the first three months of
fiscal 2003 plus cash on hand at the beginning of the fiscal year
resulted in a cash position of $9.4 million at September 30, 2002.
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.
For the quarter ended September 30, 2002, the Company decreased its
borrowings by $1.3 million. As of September 30, 2002, the total
borrowings of $33.2 million primarily include $20.0 million under the
term loan option and $10.3 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 $83,000 for the three month period ended September 30,
2002.
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 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 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.
--------
10.01 Second Amended Filed herewith.
and Restated Letter
Agreement by and among
II-VI Japan and PNC Bank,
National Association
dated as of
September 25, 2002
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 for Craig A. Creaturo
(b) Reports on Form 8-K.
-------------------
None.
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: November 14, 2002 By: /s/ CARL J. JOHNSON
---------------------------------
Carl J. Johnson
Chairman and Chief Executive Officer
Date: November 14, 2002 By: /s/ CRAIG A. CREATURO
---------------------------------
Craig A. Creaturo
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 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.
November 14, 2002 By: /s/ CARL J. JOHNSON
------------------------------
Carl J. Johnson
Chairman, Chief Executive Officer
and Director
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 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.
November 14, 2002 By: /s/ CRAIG A. CREATURO
------------------------------------
Craig A. Creaturo
Treasurer (principal financial officer)
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.01 Second Amended and Restated Letter Filed herewith.
Agreement by and among II-VI
Japan and PNC Bank, National
Association dated as of
September 25, 2002
99.01 Certification Pursuant to 18 U.S.C. Filed herewith.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 for Carl J. Johnson
99.02 Certification Pursuant to 18 U.S.C. Filed herewith.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 for Craig A. Creaturo