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 December 31, 2002
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to .
------ -----
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1214948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
375 Saxonburg Boulevard
Saxonburg, PA 16056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 724-352-4455
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 February 7, 2003, 14,055,054 shares of Common Stock, no par value,
of the registrant were outstanding.
2
II-VI INCORPORATED
INDEX
Page No.
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
December 31, 2002 and June 30, 2002 . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Earnings -
Three and Six months ended December 31, 2002 and 2001 . . . . .4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 2002 and 2001 . . . . . . . . . .6
Notes to Condensed Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4. Controls and Procedures . . . . . . . . . . . . . . . 23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . .24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . .24
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
December 31, June 30,
Assets 2002 2002
----------- --------
Current Assets
Cash and cash equivalents $ 12,801 $ 9,610
Accounts receivable, net 20,415 21,541
Inventories 22,388 19,741
Deferred income taxes 3,484 3,457
Other current assets 1,766 1,488
----------- --------
Total Current Assets 60,854 55,837
Property, Plant & Equipment, net 58,281 60,711
Goodwill, net 28,987 28,987
Intangible Assets, net 4,642 3,233
Investments 1,759 1,850
Other Assets 1,604 1,283
----------- --------
$156,127 $151,901
=========== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 4,505 $ 3,970
Accrued salaries, wages and bonuses 6,317 4,976
Income taxes payable 2,229 1,012
Accrued profit sharing contribution 530 736
Current portion of long-term debt 5,680 5,068
Other current liabilities 4,190 4,329
----------- --------
Total Current Liabilities 23,451 20,091
Long-Term Debt--less current portion 25,084 29,435
Other Liabilities, primarily
deferred income taxes 4,907 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 - 15,111,334
shares at December 31, 2002;
15,101,450 shares at June 30, 2002 37,913 37,840
Accumulated other comprehensive income 256 279
Retained earnings 66,426 61,451
----------- --------
104,595 99,570
Less treasury stock, at cost -
1,068,880 shares 1,910 1,910
----------- --------
102,685 97,660
----------- --------
$156,127 $151,901
=========== ========
- - See notes to condensed consolidated financial statements.
4
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
Three Months Ended
December 31,
2002 2001
-------- --------
Revenues
Net sales:
Domestic $15,233 $13,255
International 13,665 11,441
-------- --------
28,898 24,696
Contract research and development 2,533 2,750
-------- --------
31,431 27,446
-------- --------
Costs, Expenses & Other Income
Cost of goods sold 17,540 16,726
Contract research and development 2,132 1,914
Internal research and development 552 1,345
Selling, general and administrative 6,692 4,876
Interest expense 247 358
Other expense (income), net 601 (95)
-------- --------
27,764 25,124
-------- --------
Earnings Before Income Taxes 3,667 2,322
Income Taxes 898 577
-------- --------
Net Earnings $ 2,769 $ 1,745
======== ========
Basic Earnings Per Common Share $ 0.20 $ 0.13
======== ========
Diluted Earnings Per Common Share $ 0.19 $ 0.12
======== ========
- - See notes to condensed consolidated financial statements.
5
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
Six Months Ended
December 31,
2002 2001
-------- --------
Revenues
Net sales:
Domestic $29,387 $28,423
International 28,720 23,534
-------- --------
58,107 51,957
Contract research and development 4,895 4,182
-------- --------
63,002 56,139
-------- --------
Costs, Expenses & Other Income
Cost of goods sold 35,627 34,353
Contract research and development 4,376 2,877
Internal research and development 1,511 2,335
Selling, general and administrative 13,887 10,521
Interest expense 525 900
Other expense (income), net 487 (660)
-------- --------
56,413 50,326
-------- --------
Earnings Before Income Taxes 6,589 5,813
Income Taxes 1,614 1,729
Net Earnings $ 4,975 $ 4,084
======== ========
Basic Earnings Per Common Share $ 0.35 $ 0.29
======== ========
Diluted Earnings Per Common Share $ 0.35 $ 0.29
======== ========
- - See notes to condensed consolidated financial statements.
6
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
Six Months Ended
December 31,
2002 2001
-------- --------
Cash Flows from Operating Activities
Net earnings $ 4,975 $ 4,084
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 4,628 4,146
Amortization 255 217
Loss (gain) on foreign currency remeasurement 138 (250)
Net loss on disposal or writedown of assets 50 -
Deferred income taxes 36 1,188
Increase (decrease) in cash from changes in:
Accounts receivable 884 3,749
Inventories (1,881) 335
Accounts payable 471 (1,244)
Other operating net assets 2,089 (4,690)
-------- --------
Net cash provided by operating activities 11,645 7,535
Cash Flows from Investing Activities
Additions to property, plant and equipment (2,852) (5,227)
Purchase of business (2,755) (2,172)
Dividend from (investment in)
unconsolidated business 9 (1,500)
Proceeds from sale of fixed assets 574 15
-------- --------
Net cash used in investing activities (5,024) (8,884)
-------- --------
Cash Flows from Financing Activities
Proceeds (payments) on short-term borrowings (1,319) 3,250
Payments on long-term borrowings (2,534) (1,301)
Proceeds from sale of common stock 44 228
-------- --------
Net cash (used in) provided by
financing activities (3,809) 2,177
Effect of exchange rate changes on
cash and cash equivalents 379 (150)
-------- --------
Net increase in cash and cash equivalents 3,191 678
Cash and Cash Equivalents at Beginning of Period 9,610 8,093
-------- --------
Cash and Cash Equivalents at End of Period $ 12,801 $ 8,771
======== ========
Cash paid for interest $ 638 $ 897
======== ========
Cash paid for income taxes $ 436 $ 721
======== ========
- - See notes to condensed consolidated financial statements.
7
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 six
month periods ended December 31, 2002 and 2001 are unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation for the periods
presented have been included. These interim statements should be read
in conjunction with the audited consolidated financial statements and
footnotes thereto contained in the Company's 2002 Annual Report to
shareholders. The consolidated results of operations for the three and
six month periods ended December 31, 2002 and 2001 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):
December 31, June 30,
2002 2002
----------- -------
Raw materials $ 4,160 $ 4,638
Work in progress 9,737 8,958
Finished goods 8,491 6,145
----------- -------
$22,388 $19,741
=========== =======
Note C - Property, Plant and Equipment
-----------------------------
Property, plant and equipment (at cost/valuation) consist of the
following ($000):
December 31, June 30,
2002 2002
----------- -------
Land and land improvements $ 1,453 $ 1,551
Buildings and improvements 31,411 30,008
Machinery and equipment 72,411 73,041
----------- -------
105,275 104,600
Less accumulated depreciation 46,994 43,889
----------- -------
$58,281 $60,711
=========== =======
8
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):
December 31, June 30,
2002 2002
----------- -------
Billed
Completed Contracts $ 19 $ 5
Contracts in Progress 986 1,978
----------- -------
1,005 1,983
Unbilled 2,246 1,598
----------- -------
$ 3,251 $ 3,581
=========== =======
Note E - Debt
----
The Company has a $45.0 million secured credit facility. The facility
has a five-year life which expires on August 14, 2005 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 as of December 31, 2002 was 2.77%. As of
December 31, 2002, the total borrowings of $27.8 million under this
facility consisted of $18.8 million under the term loan option and
$9.0 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 December 31, 2002, the
Japanese Yen base rate was 0.07% resulting in a total interest rate of 1.56%.
9
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 Six Months Ended
December 31, December 31,
(000 except per share data) 2002 2001 2002 2001
- --------------------------- ------- ------- ------- -------
Net earnings $ 2,769 $ 1,745 $ 4,975 $ 4,084
Divided by:
Weighted average shares 14,039 13,938 14,036 13,926
- --------------------------- ------- ------- ------- -------
Basic earnings per share $0.20 $0.13 $0.35 $0.29
- --------------------------- ------- ------- ------- -------
Net earnings $ 2,769 $ 1,745 $ 4,975 $ 4,084
Divided by:
Weighted average shares 14,039 13,938 14,036 13,926
Dilutive effect of common
stock equivalents 369 378 352 379
- --------------------------- ------- ------- ------- -------
Diluted weighted average
common shares 14,408 14,316 14,388 14,305
- --------------------------- ------- ------- ------- -------
Diluted earnings per share $0.19 $0.12 $0.35 $0.29
- --------------------------- ------- ------- ------- -------
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 and six months ended December 31, 2002 and 2001,
respectively.
Note G - Comprehensive Income
--------------------
The components of comprehensive income were as follows for the periods
indicated ($000):
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
-------------------- ------------------
Net earnings $2,769 $1,745 $4,975 $4,084
Foreign currency
translation adjustments 121 (12) (23) 197
-------------------- ------------------
Comprehensive income,
net of tax $2,890 $1,733 $4,952 $4,281
-------------------- ------------------
10
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note H - Segment Reporting
-----------------
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 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.
Effective July 1, 2002, the Company changed its segment reporting to
better reflect recent operational changes and to 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 December 31, 2002
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
Net revenues $17,572 $5,679 $5,799 $2,381 $31,431
Income (loss) from operations 4,416 396 234 (531) 4,515
Interest expense - - - - (247)
Other expense, net - - - - (601)
Earnings before income taxes - - - - 3,667
Depreciation and amortization 1,139 553 415 355 2,462
Capital expenditures 466 135 256 229 1,086
Goodwill, net 5,516 1,927 21,544 - 28,987
Segment assets 64,683 24,808 37,671 28,965 156,127
Three Months Ended December 31, 2001
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
Net revenues $14,300 $5,819 $5,641 $1,686 $27,446
Income (loss) from operations 3,050 320 256 (1,041) 2,585
Interest expense - - - - (358)
Other income, net - - - - 95
Earnings before income taxes - - - - 2,322
Depreciation and amortization 967 530 413 236 2,146
Capital expenditures 1,100 43 513 490 2,146
Goodwill, net 5,516 1,698 22,022 - 29,236
Segment assets 57,271 27,772 39,780 25,068 149,891
11
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note H - Segment Reporting, Cont'd.
--------------------------
Six Months Ended December 31, 2002
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
Net revenues $35,926 $11,146 $11,593 $4,337 $63,002
Income (loss) from operations 8,647 758 491 (2,295) 7,601
Interest expense - - - - (525)
Other expense, net - - - - (487)
Earnings before income taxes - - - - 6,589
Depreciation and amortization 2,195 1,105 839 744 4,883
Capital expenditures 1,118 320 650 764 2,852
Six Months Ended December 31, 2001
-----------------------------------------------------------
Near- Military
Infrared Infrared Infrared
Optics Optics Optics Other Totals
-----------------------------------------------------------
Net revenues $30,464 $11,260 $10,857 $3,558 $56,139
Income (loss) from operations 5,926 546 1,123 (1,542) 6,053
Interest expense - - - - (900)
Other income, net - - - - 660
Earnings before income taxes - - - - 5,813
Depreciation and amortization 1,958 1,101 834 470 4,363
Capital expenditures 3,346 561 627 693 5,227
12
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 $2.5 million as of December 31, 2002. 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 decreased net earnings by $80,000 for the three months
ended December 31, 2002 and increased net earnings by $25,000 for the
three months ended December 31, 2001. The change in the fair value of
these contracts decreased net earnings by $16,000 and $20,000 for the
six months ended December 31, 2002 and 2001, respectively.
To satisfy certain provisions of its credit facility (See Note E), 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 1.38% on June 30, 2002 and
December 31, 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 and six months ended
December 31, 2002 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 six month periods ended
December 31, 2002 are included in the Company's consolidated financial
statements for the three and six month periods ended December 31, 2002,
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.
13
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 123's fair value method of
accounting for stock-based employee compensation should a company elect
this valuation method. SFAS 148 also amends the disclosure provisions
of SFAS 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 148 does not amend SFAS 123 to require
companies to account for employee stock options using the fair value
method, the disclosure provisions of SFAS 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
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 certain 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 148 had no financial impact on the
financial position or results of operations for the three and six months
ended December 31, 2002.
In accordance with the disclosure requirements of SFAS 148, the following
pro forma information adjusts previously reported net earnings, basic
earnings per share and diluted earnings per share to reflect the fair
value recognition provisions of SFAS 123, "Accounting for Stock-Based
Compensation."
Three Months Ended Three Months Ended
December 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Net Per Per Net Per Per
(000 except per share data) Earnings Share Share Earnings Share Share
- --------------------------- --------------------------------- -------------------------------
Net earnings and earnings
per share, as reported $2,769 $0.20 $0.19 $1,745 $0.13 $0.12
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 tax effects, that
would have been included in
the determination of net
earnings if the fair value
method had been applied to
all awards (143) (0.01) (0.01) (158) (0.01) (0.01)
------- ------ ------ ------- ------ ------
Pro forma net earnings and
earnings per share $2,626 $0.19 $0.18 $1,587 $0.12 $0.11
====== ===== ====== ======= ===== ======
14
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note K - Stock-Based Compensation, Cont'd.
---------------------------------
Six Months Ended Six Months Ended
December 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Net Per Per Net Per Per
(000 except per share data) Earnings Share Share Earnings Share Share
- --------------------------- --------------------------------- -------------------------------
Net earnings and earnings
per share, as reported $4,975 $0.35 $0.35 $4,084 $0.29 $0.29
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 tax effects, that
would have been included in
the determination of net
earnings if the fair value
method had been applied to
all awards (281) (0.02) (0.02) (316) (0.02) (0.02)
------- ------ ------ ------- ------ ------
Pro forma net earnings and
earnings per share $4,694 $0.33 $0.33 $3,768 $0.27 $0.27
====== ===== ====== ======= ===== ======
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 December 31, 2002.
As part of the acquisition of II-VI/L.O.T. (See Note J) identifiable
intangible assets (customer lists and related information) of
approximately $1,589,000 were recorded July 1, 2002.
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill as of December 31, 2002 and
June 30, 2002, are as follows ($000):
December 31, 2002 June 30, 2002
------------------------------- --------------------------------
Gross Net Gross Net
Carrying Accumulative Book Carrying Accumulative Book
Amount Amortization Value Amount Amortization Value
-------- ------------ ----- -------- ------------ -----
Patents $1,867 $ (425) $1,442 $1,793 $ (357) $1,436
Trademark 1,491 (181) 1,310 1,491 (143) 1,348
Customer Lists 2,839 (950) 1,889 1,250 (801) 449
-------- ----------- ----- -------- ----------- -----
Total $6,197 $(1,556) $4,641 $4,534 $(1,301) $3,233
======== =========== ====== ======== =========== ======
15
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 six months ended December 31, 2002, was $169,000 and $ 255,000,
respectively, and $103,000 and $217,000, respectively for the three
and six months ended December 31, 2001. At December 31, 2002,
estimated future amortization expense for existing intangible assets
for each of the five succeeding fiscal years is as follows:
Year Ended June 30,
- -----------------------------------------------
($000)
Remaining fiscal 2003 $249,000
2004 498,000
2005 498,000
2006 446,000
2007 347,000
2008 338,000
===============================================
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 six months ended December 31,
2002, 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 six months ended December 31, 2002.
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 six months ended
December 31, 2002.
16
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited),
Continued
Note M - New Accounting Pronouncements, Cont'd.
--------------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure." The Company elected to
early adopt this standard (See Note K).
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 actual historical product returns over the
past 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 periods ended December 31,
2002.
June 30, 2002 December 31, 2002
Balance Expense Other Writeoffs Balance
------------- ------- ------- --------- -----------------
Consolidated:
Warranty Reserve $419 $68 - - $487
June 30, 2001 June, 2002
Balance Expense Other 1 Writeoffs Balance
------------- ------- ------- --------- -----------------
Consolidated:
Warranty Reserve $334 $(3) $88 - $419
1 Reclassification of the Laser Power Corporation warranty reserve from
Other current liabilities.
17
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."
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 as a
charge against earnings. The allowance is an estimate 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
as of and for the period ended December 31, 2002. If the financial
condition of the Company's
18
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 actual historical product returns over the
past 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 records goodwill and other intangible assets, net of
accumulated amortization that are subject to annual reviews for
impairment. The determination of related estimated useful lives and
whether these assets are 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
December 31, 2002 that would give management an indication that an
impairment charge was necessary that would adversely affect the
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 tax liability to recognize the amount
of 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 tax
consequences of events that have been recognized in the Company's
financial statements on 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 certain 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
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.
Results of Operations
- ---------------------
Overview
Net earnings for the second quarter of fiscal 2003 were $2,769,000 ($0.19
per share-diluted) on revenues of $31,431,000. This compares to net
earnings of $1,745,000 ($0.12 per share-diluted) on revenues of $27,446,000
in the second quarter of fiscal 2002. For the six months ended December
31, 2002, net earnings were $4,975,000 ($0.35 per share-diluted) on
revenues of $63,002,000. This compares to net earnings of $4,084,000
($0.29 per share-diluted) on revenues of $56,139,000 for the same period
last fiscal year. Stronger results in revenues were realized in the
majority of the Company's reporting segments. The increase of 15% in
revenues
19
for the second quarter of fiscal 2003 compared to the same period last
fiscal year is primarily due to stronger shipments of commercial infrared
optics to both the OEM and aftermarket customers and the integration of
the Company's sales and marketing distribution activity in Germany.
Bookings for the second quarter of fiscal 2003 increased 27% to
$32,033,000 compared to $25,185,000 for the same period last fiscal
year. The increase was primarily attributable to stronger market demand
from OEM customers in the industrial carbon dioxide (CO2) laser optics
market. Bookings for contract research and development for the second
quarter of fiscal year 2003 were $502,000 compared to $1,317,000 for the
same period last fiscal year. Order bookings for the six months ended
December 31, 2002 increased 26% to $66,906,000 as compared to $52,986,000
for the same period last fiscal year. The Company has experienced two
consecutive quarters of strong bookings for our CO2 laser optics and our
near-infrared optics and waveplates product lines. Bookings for contract
research and development for the six months ended December 31, 2002 were
$5,892,000 compared to $6,470,000 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 booking 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 net earnings before income
taxes, interest and other income or expense, for the second quarter of
fiscal 2003 increased 75% to $4,515,000 compared to $2,585,000 for the
same period last fiscal year primarily due to higher gross margins from
improved manufacturing synergies and cost controls in the commercial
infrared optics area and higher sales volume from the majority of the
Company's reporting segments. Income from operations for the six months
ended December 31, 2002 increased 26% to $7,601,000 compared to
$6,053,000 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 optics
segment and in the combined results of the Company's eV PRODUCTS and
Wide Band Gap operations.
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.
Infrared Optics
Bookings for the second quarter for Infrared Optics increased 49% to
$18,375,000 from $12,358,000 in the second quarter of last fiscal year.
This increase was attributable in part to the receipt of approximately
$4.0 million in blanket orders received in the current fiscal quarter from
two large European OEM customers. Bookings for the six months ended
December 31, 2002 increased 52% to $39,143,000 from $25,695,000 for the
same period last fiscal year. The Company's commercial infrared optics,
particularly in the industrial sector, has had two consecutive quarters
of strong bookings levels for the CO2 laser optics. The OEM customers
continue to request 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 23%
to $17,572,000 from $14,300,000 in the second quarter of last fiscal
year. This increase was primarily attributable to increased shipments to
several of the Company's OEM customers. Revenues for the six months
ended December 31, 2002 increased 18% to $35,926,000 from $30,464,000
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 second quarter increased 45% to $4,416,000
from $3,050,000 in the second quarter of last fiscal year. Income
from operations for the six months ended December 31, 2002 increased
46% to $8,647,000 compared to $5,926,000 for the same period last fiscal
year. The improvement in income from operations for the current fiscal
three and six 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
20
majority interest in a distributor in Germany, which is described in
Note J of the accompanying Condensed Consolidated Financial Statements.
Near-Infrared Optics
Bookings for the second quarter for Near-Infrared Optics increased 4% to
$4,950,000 from $4,763,000 in the second quarter of last fiscal year.
The increase was primarily due to stronger demand in commercial bookings
in the optics and waveplates product lines used in defense applications,
as well as increased demand for customer inventory replenishment.
Bookings for the six months ended December 31, 2002 decreased 11% to
$11,850,000 as compared to $13,347,000 for the same period last fiscal
year. The decrease in bookings for the six months ended December 31,
2002 as compared to the same period of the last fiscal year was primarily
due to the weaker telecommunications market and lower research and
development contract bookings.
Revenues for the second quarter for Near-Infrared Optics were $5,679,000
compared to $5,819,000 in the second quarter of last fiscal year.
Yttrium Aluminum Garnet (YAG) revenues were stronger than the same
quarter last fiscal year due to increased market demand but were more
than offset by decreased market demand for telecommunication and
contract research and development revenues. Revenues for the six months
ended December 31, 2002 were essentially flat at $11,146,000 compared
to $11,260,000 for the same period last fiscal year.
Income from operations for the second quarter increased to $396,000
from $320,000 in the second quarter of last fiscal year. This
improvement reflected stronger gross margins in the majority of product
lines and improved product yields in certain areas. Income from
operations for the six months ended December 31, 2002 increased 39% to
$758,000 compared to $546,000 for the same period last fiscal year.
Cost reductions were sufficient to increase gross margins despite the
essentially flat revenues for the comparable six month periods.
Military Infrared Optics
Bookings for the quarter for Military Infrared Optics were $6,727,000 as
compared to $7,608,000 in the second quarter of last fiscal year. The
12% reduction in bookings primarily represents the irregular timing of
order bookings in the Large Optics Coating area where orders are
recorded with large military contractors participating in defense
department projects such as the Airborne Laser. Bookings for the six
months ended December 31, 2002 were $11,303,000 compared to $12,232,000
for the same period last fiscal year, a decrease, of 8%. The reduction
in orders as compared to the same period last fiscal year is primarily
in the windows and domes military optics area partially offset by growth
in the sapphire product line area.
Revenues for the quarter for Military Infrared Optics increased 3% to
$5,799,000 compared to $5,641,000 in the second quarter of the last
fiscal year. Revenues for the six months ended December 31, 2002
increased 7% to $11,593,000 from $10,856,000 for the same period last
fiscal year. Revenues from windows and domes were the major
contributors to the increase as compared to the same periods of the
last fiscal year.
Income from operations for the second quarter decreased slightly to
$234,000 from $256,000 in the second quarter of the prior fiscal
year. Decreased gross margins in the current quarter contributed to
the lower income from operations. Income from operations for the
six months ended December 31, 2002 decreased to $491,000 from
$1,123,000 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 due to the
absorption of costs previously allocated to the commercial Infrared
Optics business. Higher costs negatively impacted income from
operations in the current quarter and six month periods relating to
estimated costs to complete certain fixed-price government contracts.
21
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 second quarter for eV PRODUCTS division and
the WBG group significantly increased to $1,981,000 as compared to
$456,000 in the second quarter of last fiscal year. The increase in
the current quarter was due to the receipt of a $1.1 million contract
to support or develop nuclear material detection by producing a device
for the U.S. Army. Additional bookings related to a research and
development government contract awarded to our WBG group also
contributed to the stronger bookings level. Bookings for the six
months ended December 31, 2002 for these groups increased to
$4,610,000 compared to $1,712,000 for the same period last fiscal
year primarily due to the several large orders received by both
groups during the current six month fiscal period that were absent
in the same period last fiscal year.
Revenues for the second quarter from these operations increased 41%
to $2,381,000 compared to $1,686,000 in the second quarter of the
last fiscal year. Revenues for the six months ended December 31, 2002
for these operations increased 22% to $4,337,000 as compared to
$3,558,000 for the same period last fiscal year. The higher revenues
are a direct result of the higher bookings, particularly in the
contract research and development area of our WBG group, during this
fiscal period that were not in the same period of last fiscal year.
The loss from operations for the second quarter of $531,000 decreased
from the operating loss of $1,041,000 in the second 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 WBG for this
activity. In the same period of the prior year, the research and
development costs for WBG had to be absorbed during the integration
of the Litton Systems, Inc. Silicon Carbide Group acquired in the
second quarter of the last fiscal year.
The loss from operations for the six months ended December 31, 2002
for these operations increased to $2,295,000 as compared to $1,542,000
for the same period last fiscal year. The increase in the loss was
due to lower first quarter revenues, a full six months of operations
of the former Litton Systems, Inc. Silicon Carbide Group for the period
ended December 31, 2002 and unallocated corporate costs absorbed and
reported in this segment.
Overall
Manufacturing gross margin, which is defined as gross margin not
including contract research and development revenues or expenses, for
the second quarter of fiscal 2003 was $11,358,000 or 39% of revenues
compared to $7,970,000 or 32% of revenues for the same period last
fiscal year. Manufacturing gross margin for the six months ended
December 31, 2002 was $22,480,000 or 39% of revenues compared to
$17,604,000 or 34% of revenues for the same period last fiscal year.
The increased sales volume for the three and six month periods as
compared to the same periods last fiscal 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
second quarter of fiscal 2003 were $552,000 or 2% of revenues compared to
$1,345,000 or 5% of revenues for the same period last fiscal year. The
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 second
quarter, the Company had just completed the acquisition of the former
Litton Systems, Inc. Silicon Carbide Group, but had no contract revenues
to offset these additional costs. Contract revenue for silicon carbide
is now approximately $1.0 million per quarter. Company-funded internal
research and development expenses for the six months ended December 31,
2002 were $1,511,000 or 2% of revenues compared to $2,335,000 or 4% of
22
revenues. These expenditures for the three and six 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 second quarter of
fiscal 2003 were $6,692,000 or 21% of revenues compared to $4,876,000
or 18% of revenues for the same period last fiscal year. Selling,
eneral and administrative expenses for the six months ended December
31, 2002 were $13,887,000 or 22% of revenues compared to $10,521,000
or 19% of revenues for the same period last fiscal year. The dollar
and percentage increases for the quarter and six 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. While this
acquisition has increased the Company's direct selling expense for
the quarter by approximately 1.5% 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 second quarter of fiscal 2003 was $247,000
compared to $358,000 for the same period last fiscal year. For the
six months ended December 31, 2002, interest expense was $525,000
compared to $900,000 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 September 30,
2002 and December 31, 2002 as compared to the same periods last fiscal
year.
Other expense for the second quarter of fiscal 2003 was $601,000
compared to other income of $95,000 for the same period last fiscal
year. These expenses included foreign currency losses, the minority
interest in II-VI/L.O.T., the write-off of an investment and other
expense items. Other expense for the six months ended December 31,
2002 of $487,000 compared to other income of $660,000 for the same
period last fiscal year. The six month change was primarily due to
the specific items mentioned above for the quarter ended December 31,
2002 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 six months of fiscal 2003, net cash provided by operating
activities of $11.6 million and proceeds from sale of assets of $0.6
million were used primarily to fund an investment of $2.9 million in
property, plant and equipment, to finance a $2.8 million investment
for a 75% majority ownership of II-VI/L.O.T. and to pay down $3.8
million of debt. Cash transactions for the first six months of fiscal
2003 plus cash on hand at the beginning of the fiscal year resulted
in a cash position of $12.8 million at December 31, 2002.
The Company had available $11.0 million and $9.3 million under its
line of credit option of the credit facility as of December 31, 2002
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).
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.
23
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. No
significant changes have occurred in the techniques and instruments
used other than those described below.
The Company has transactions denominated in Pounds Sterling and Euros.
Changes in the foreign currency exchange rates were not material to
the results of operations for the period ended December 31, 2002.
For the quarter ended December 31, 2002, the Company decreased its
borrowings by $2.6 million. As of December 31, 2002, the total
borrowings of $30.8 million include $18.8 million under the term loan
option, $9.0 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 $80,000 and $164,000 for
the three and six month periods ended December 31, 2002.
To satisfy certain provisions of its term loan option of the 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.
24
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 1, 2002, the Company held its annual meeting of shareholders.
The four matters voted upon at the annual meeting were (1) the election
of one director for a term to expire in 2003, (2) the election of three
directors for terms to expire in 2005, (3) the ratification of the Board
of Directors' selection of Deloitte & Touche LLP as auditors for the
fiscal year ending June 30, 2003 and (4) a shareholder proposal
regarding the Company's Shareholder Rights Plan.
Each of the Company's nominees for director were elected or reelected at
the annual meeting. The following is a separate tabulation with respect
to each director:
Term Votes Votes Total
Expires For Withheld Votes
------- ---------- -------- ----------
Marc Y.E. Pelaez 2003 12,234,273 904,041 13,138,314
Joseph J. Corasanti 2005 12,154,820 906,466 13,061,286
Carl J. Johnson 2005 12,231,050 907,264 13,138,314
Thomas E. Mistler 2005 12,104,020 957,266 13,061,286
The total number of votes cast on the ratification of the appointment of
Deloitte & Touche LLP as auditors for the year ending June 30, 2003 was
13,138,314 with 12,778,900 votes for, 341,362 votes against and 18,052
votes abstaining.
The total number of votes cast on a shareholder proposal regarding the
Company's Shareholder Rights Plan was 9,948,201 with 3,369,388 votes for,
6,333,067 votes against and 245,746 votes abstaining.
There were no broker non-votes on these matters.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
--------
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.
-------------------
On November 4, 2002, the registrant filed a report on Form
8-K for the events dated November 1, 2002, covering Item 5
thereof.
25
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: February 13, 2003 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
Date: February 13, 2003 By: /s/ Craig A. Creaturo
Craig A. Creaturo
Treasurer (principal financial officer)
26
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.
February 13, 2003 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman, Chief Executive Officer
and Director
27
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.
February 13, 2003 By: /s/ Craig A. Creaturo
Craig A. Creaturo
Treasurer (principal financial officer)
28
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
99.01 Certification Pursuant to Filed herewith.
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 to Filed herewith.
18 U.S.C. Section 1350, as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 for Craig A. Creaturo