FORM 10-K
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the fiscal year ended June 30, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
---------- to ---------- .
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1214948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
375 Saxonburg Boulevard
Saxonburg, PA 16056
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 724-352-4455
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
Preferred Stock Purchase Rights
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Aggregate market value of outstanding Common Stock, no par value, held
by non-affiliates of the Registrant at September 10, 2003, was
approximately $243,690,000 based on the closing sale price reported on
the Nasdaq National Market for September 10, 2003. For purposes of
this calculation only, directors and executive officers of the
Registrant and their spouses are deemed to be affiliates of the
Registrant.
Number of outstanding shares of Common Stock, no par value, at
September 10, 2003, was 14,259,161. All share and per share
information included in this Form 10-K reflects the two-for-one stock
split effected on September 20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be
issued in connection with the 2003 Annual Meeting of Shareholders, are
incorporated by reference into Part III of this annual report on Form
10-K.
Forward-Looking Statements
This annual report on Form 10-K (including certain information
incorporated herein by reference) 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 hedging. 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. Other important factors and uncertainties
include, but are not limited to the Risk Factors set forth in Item 7.
2
PART I
ITEM 1. BUSINESS
Introduction
II-VI Incorporated ("II-VI" or the "Company") was incorporated in
Pennsylvania in 1971. Our executive offices are located at 375
Saxonburg Boulevard, Saxonburg, Pennsylvania 16056. Our telephone
number is 724-352-4455. Reference to the "Company" or "II-VI" in this
Form 10-K, unless the context requires otherwise, refers to II-VI
Incorporated and its wholly- and majority-owned subsidiaries: eV
PRODUCTS operates as a division of II-VI Incorporated and Wide Band Gap
Materials operates as a development group of II-VI Incorporated. The
Company's name is pronounced "Two-Six Incorporated." The majority of
our revenues are attributable to the sale of optical components for the
industrial laser processing industry.
Information Regarding Market Segments and Foreign Operations
Financial data regarding our revenues, results of operations, industry
segments and international sales for the three years ended June 30,
2003 is set forth in the consolidated statements of earnings and in
Note L to the Company's consolidated financial statements included in
this Form 10-K.
General Description of Business
We develop, manufacture and market high technology materials and
derivative products for precision use in industrial, medical, military
and aerospace applications. We use advanced material growth
technologies coupled with proprietary high precision fabrication,
micro-assembly, and thin-film coating production processes. The
resulting optical and optoelectronic devices are supplied to
manufacturers and users of a wide variety of laser, detection and
military components and systems. A key strategy is to develop and
manufacture complex materials from elements of chemistry's periodic
table. We focus on providing critical components to the heart of our
customer's assembly lines for products such as high power laser
material processing systems, military fire control and missile guidance
devices and advanced medical and security scanning systems. We believe
we are a market leader for high power CO2 and YAG laser optical
elements, military infrared optical components, and x-ray and gamma ray
detectors for both the medical and nuclear radiation industries.
Our United States production operations are located in Pennsylvania,
Florida, California and New Jersey and our international production
operations are based in Singapore, China and Belgium. In addition to
sales offices at each of our manufacturing sites we have sales and
marketing subsidiaries in Germany, Japan and the United Kingdom.
Approximately 41% of our revenues are for product sales outside of the
United States.
Our primary products are optical and optoelectronic components used in
the laser, military and nuclear radiation detection industries.
- Our laser-related products include laser gain materials for
solid-state lasers and many of the high precision optical
elements used to focus and direct laser beams to target or work
surfaces. The majority of our laser products require advanced
optical materials that are internally produced. Our vertical
integration from material growth through fabrication and thin-
film coating provides us with a significant competitive
advantage.
- Our military infrared products include targeting and navigation
systems that utilize advanced optical materials. The vertical
integration of our manufacturing processes for these military
applications provides us with a significant competitive
advantage.
- Our nuclear radiation detector products are based on the
semiconductor material Cadmium Zinc Telluride (CdZnTe). These
detectors are attractive to customers due to the increased
performance, reduced size, improved ruggedness and lower voltage
requirements as compared to traditional technologies.
We are at the forefront of advanced material growth research,
development and high volume production. Over the past six years we
have expanded our material growth development to include single crystal
SiC for use in solid-state lighting, wireless infrastructure, RF
electronics and power switching industries.
3
Our Markets
Our business is comprised of five primary markets:
1) Design, manufacture and marketing of optical and electro-optical
components, devices and materials for infrared lasers and
instrumentation by our II-VI business units and sold under the
II-VI and Laser Power brand names.
2) Design, manufacture and marketing of near-infrared and visible-
light laser products for industrial, scientific and medical
instruments and laser gain material and products for solid-state
YAG and YLF lasers by our VLOC subsidiary.
3) Design, manufacture and marketing of infrared products for
military applications by our Exotic Electro-Optics subsidiary.
4) Design, manufacture and marketing of x-ray and gamma-ray solid-
state radiation detectors and components for medical, security,
industrial, environmental and scientific instruments by our eV
PRODUCTS division.
5) Development of single crystal SiC substrates for use in solid-
state lighting, wireless infrastructure, RF electronics and power
switching industries by our Wide Band Gap (WBG) group.
Infrared and Near-Infrared Markets. In recent years, increases in
laser component consumption have been driven by continued worldwide
proliferation of laser processing applications. Manufacturers are
seeking solutions to increasingly complex demands for quality,
precision, speed, throughput, flexibility, automation and cost control.
High power CO2 and YAG lasers provide these benefits in a wide variety
of cutting, welding, drilling, ablation, balancing, cladding, heat
treating, and marking applications. For example, automobile
manufacturers use lasers to facilitate rapid prototyping, production
simplification, efficient sequencing, and computer control on high
throughput production lines. Manufacturers of recreation vehicles,
motorcycles, lawn mowers and garden tractors cut, trim and weld metal
parts with lasers to achieve flexibility, high consistency, reduced
post processing and lower costs. Furniture manufacturers utilize
lasers to provide easily reconfigurable, low-distortion, low-cost
prototyping and production capabilities that facilitate the
manufacturing of customer specified designs. On high-speed processing
lines, laser marking provides automated date coding for food packaging
and computer driven container identification for pharmaceuticals.
We provide optical elements and components for both CO2 and YAG laser
systems. In addition to use by original equipment manufacturers
(OEMs), a replacement part aftermarket exists in support of an
estimated current worldwide installed base of over 100,000 YAG and CO2
lasers.
Military Infrared Optics Market. Several key optical components such
as windows, domes and related assemblies are core products offered to
the military market for infrared applications in night vision,
targeting and navigation systems. Infrared windows and window
assemblies are employed on helicopter, fixed-wing aircraft, and ground
vehicles to provide advanced targeting and navigation capabilities.
Infrared domes are often used on missiles with infrared guidance
systems ranging from small, man portable designs to larger designs
mounted on helicopters, fixed-wing aircraft and ground vehicles. High-
precision domes are an integral component of the missile's targeting
system providing efficient tactical capability while serving as a
protective cover to its internal components. Our infrared optical
products are sold primarily to the U.S. government and its prime
contractors.
The current demand for infrared optical components is being driven by
the replacement and repair of hardware used in combat in Iraq and the
desire to upgrade the current capabilities of weapons, aircraft and
ground vehicles. Germanium windows used in night vision and targeting
systems on vehicles such as the Abrams M-1 Tank and Bradley Fighting
Vehicle have been returned for refurbishment and/or replacement. The
desire to provide the war fighter with increased capabilities has
driven upgrades to navigation and targeting systems for aircraft such
as the Apache attack helicopter and the F-16 fighter jet. These
upgrades require more advanced optical components in order to meet
today's more demanding performance requirements.
Solid-State Radiation Detection Market. Solid-state radiation
detectors and components are sold primarily to companies engaged in the
manufacture of medical diagnostic, medical imaging or industrial
gauging/inspection, security and monitoring equipment. In an
increasing number of applications, the use of gamma- or x-ray radiation
enables more rapid and accurate measurement of medical conditions,
industrial quality and early detection and identification of nuclear
materials and threatening objects. Solid-state detectors based on
CdZnTe are making inroads against older, more established technologies
such as cryogenically cooled germanium detectors or sodium iodide
scintillators coupled to photomultiplier tubes. CdZnTe detectors have
4
already been substituted for these older technologies in applications
where increased accuracy, simpler operation, portability and lower cost
are required. CdZnTe is beginning to enable new medical, industrial
and security/monitoring applications not feasible with the older
technologies and is used routinely in cancer probes, bone densitometry
systems and process control systems.
We believe the annual worldwide market for all solid-state radiation
detectors is currently over $250 million and growing at 10% per year.
Digital radiography (the recording of digital x-ray images) represents
the largest market segment followed in order by nuclear medicine (the
detection or imaging of radioactively tagged materials in the body),
industrial gauging, radiation monitoring, security scanning, including
baggage inspection and nuclear safeguards/non-proliferation.
Presently, we believe that the addressable CdZnTe market has grown to
represent $50 million of the worldwide solid-state radiation detector
market.
During the next several years, we believe the performance of CdZnTe,
and other solid-state detectors will be improved through additional
research and development, creating the potential for digital imaging to
replace x-ray film in a myriad of traditional radiography applications.
We believe that the market for CdZnTe detectors and imagers will grow
faster than the overall market rate of 10% because of several factors,
including:
- the strong migration toward ''film-less'' detection methods that
enable the direct recording of digital images or videos which can
be stored, recalled and transmitted via the Internet;
- the desire for lower radiation dosage;
- the desire for simpler and safer operation at room temperature;
- the increasing requirement that equipment be ''intrinsically
safe'' in environments where a spark might start a fire;
- the general trend towards equipment miniaturization; and
- the need to inspect, document and control quality at additional
points within the manufacturing process in a wide range of
industries; for example, the measurement and control of film
thickness during the painting of automobile bodies.
Equipment manufacturers increasingly desire to procure fully tested,
packaged components rather than devices that must be qualified and
assembled. We believe that this trend will require leading suppliers
to provide products containing ever-higher levels of signal processing
and, as a result, the market will place high value on suppliers having
strong applications engineering capabilities and a focus on customer
relationships.
Silicon Carbide Materials Market. Silicon Carbide (SiC) is a wide band
gap semiconductor material that offers high-temperature, high-power and
high-frequency capabilities as a substrate for applications that are
rapidly emerging at the high-performance end of the optoelectronic,
telecommunication, power distribution and transportation markets. SiC
has certain inherent physical and electronic advantages over competing
semiconductor materials such as silicon and gallium arsenide. For
example the high thermal conductivity of silicon carbide enables SiC-
and Gallium Nitride- (GaN) based devices to operate at high power
levels and still dissipate the excess heat generated. Other intrinsic
properties allow SiC-based devices to operate at high temperatures
above 400 degrees Centigrade (750 degrees Fahrenheit). Typically,
either SiC or GaN layers are deposited on a SiC substrate and the
desired optoelectronic or electronic devices are fabricated in the
resulting material structure. SiC- and GaN-based structures are being
developed and deployed for the manufacture of a wide variety of
microwave and power switching devices while GaN-based structures are
already standard for the manufacture of blue and green light emitting
diodes and blue laser diodes.
We believe that wide band gap semiconductor devices incorporating SiC
materials technology will penetrate a wide range of applications in the
optoelectronic, telecommunication, power distribution, transportation
and defense markets during the next decade. For instance, blue and
green LEDs built on SiC substrates offer the promise of higher output
power than devices currently built on less expensive but less thermally
conducting sapphire substrates. The realization of this promise will
establish SiC- and GaN-based substrates as an important building block
in high brightness computer driven signs or displays, in high
brightness automotive lighting and in the replacement of incandescent
and eventually fluorescent lighting by high power, high efficiency
solid-state lamps. High power, high frequency SiC based microwave
devices promise to rival gallium arsenide devices in telecommunication
base station transmitters and silicon devices in both commercial and
5
military air traffic radar applications. SiC high power, high-speed
switching devices promise to improve the performance and reliability of
utility transmission and distribution systems and for motor controls in
a wide variety of applications.
Our Strategy
Our strategy is to build businesses with world-class, high technology
materials capabilities at their core. The following current business
activities follow this model: Infrared optics based on Zinc Selenide
(ZnSe) and Zinc Sulfide (ZnS), near infrared optics based on YAG and
YLF, solid-state radiation detectors based on CdZnTe, and
optoelectronic and electronic substrates based on SiC. In each case
we subsequently manufacture precision parts and components from these
materials using established but evolving expertise in low damage
surfacing and micro fabrication, thin-film coating and exacting
metrology. A substantial portion of our business is based on
long-term contracts with market leaders, which enables substantial
forward planning and production efficiencies. In addition, industry
leading product quality and delivery performance allows us to achieve
comparatively high operating margins in major segments of our business.
We intend to capitalize on the execution of this proven model and
continually gain market share for infrared and near-infrared optics,
military infrared optics, solid-state radiation detectors and
optoelectronic/electronic materials and substrates.
Our specific strategies are as follows:
- Continue Investment to Gain CO2 and YAG Market Share Worldwide.
We continually invest in our infrared and near-infrared
manufacturing operations worldwide to increase production capacity
and capabilities.
- Enhance Our Reputation as a Worldwide Quality and Customer
Service Leader. We are committed to understanding our customers'
needs and exceeding their expectations. We have established
ourselves as a consistent high quality supplier of components into
our customers' assembly lines. In many cases we deliver on a just
in time (JIT) basis. We believe our on-time delivery record and
product return rates are the best in the industries we serve. Our
quality mission statement is, ''We pledge to exceed our internal
and external customer requirements through employee dedication to
continuous improvement.''
- Pursue Strategic Acquisitions and Alliances. Some of the markets
we participate in remain fragmented and we expect consolidation to
occur over the next several years. We will pursue strategic
acquisitions and alliances with companies whose products or
technologies compliment our current products, expand our market
coverage, increase our addressed market or create synergies with
our current capabilities. We intend to identify acquisition
opportunities that accelerate our access to emerging high growth
segments of the markets we serve.
- Pursue Military Infrared Systems Programs. Our Exotic Electro-
Optics subsidiary is a leading supplier of optics for military
infrared systems and is committed to capturing new military
contracts and expanding existing business base with every major
defense prime contractor. Exotic Electro-Optics is supplying
large area sapphire windows to the defense industry providing
enabling technologies that are critical to the advanced targeting
systems currently available to the war fighter. Exotic Electro-
Optics is actively engaged with the major defense contractors
during the initial product development phase in order to
incorporate our products into our customers' systems. Early
participation in long-term programs has proven to be a successful
strategy and ultimately a competitive advantage in addressing the
military market. An example of the success of this approach is a
recent award for a prototype sapphire window set for the Joint
Strike Fighter program.
- Continue Extension of Technology Leadership in the Gamma- and X-
ray Detector Field. We believe our eV PRODUCTS division is the
leader in the manufacture of solid-state gamma- and x-ray detector
devices and components. CdZnTe handheld probes in the medical
field allow the introduction of new cancer location techniques.
CdZnTe based imaging arrays are being introduced in nuclear
medicine. CdZnTe is being developed for real time x-ray
radiography, which will allow a physician to view relevant parts
of the body in real time using a fraction of the x-ray dose
required with film. In addition, CdZnTe is drawing attention from
the Transportation Safety Administration (TSA) for use in baggage
and package inspection systems. Our eV PRODUCTS division is
working on these medical, industrial and security applications
with market leaders worldwide. The high pressure Bridgman growth
process for producing CdZnTe is a materials expertise unique to
the Company.
- Utilize Proven Materials Growth Expertise to Perfect Silicon
Carbide (SiC). We are a proven provider of hard to grow materials
and opto-electronic crystals. We intend to leverage our skills
and experiences in commercially producing ZnSe, ZnS, CdZnTe, YAG
and YLF to move rapidly forward with our SiC development program.
We intend to gain market share and become a leading volume
supplier of affordable, high performance wide bandgap
6
semiconductor materials, that includes silicon carbide, through
new process developments, acquisitions and strategic customer
alliances.
Our Products
Our products include optical, optoelectronic and electronic materials,
devices and components for use in laser, detection, military, security
scanning and advanced electronic and optoelectronic applications.
These products are sold to laser system manufacturers and end-users,
military laser system and defense suppliers, manufacturers of nuclear
radiation detection systems and component suppliers to the
optoelectronic and electronic industries.
Infrared and Near-Infrared Optics. We supply a broad line of precision
infrared optical components such as lenses, waveplates, and mirrors to
the CO2 laser market. CO2 lasers are used in a wide variety of
industrial processes including cutting, welding, drilling, marking and
heat treating of materials such as steel alloys, non-ferrous metals,
plastics, wood, paper, fiberboard, ceramics and composites. CO2 lasers
are also used in cosmetic and invasive medical surgery. Our precision
optical components are used to regulate the amount of laser energy,
enhance the properties of the laser beam, and focus and direct laser
beams to a target work surface. The optical components include both
reflective and transmissive optics and are made from materials such as
zinc selenide (ZnSe), copper, silicon and germanium. Transmissive
optics used with CO2 lasers are predominately made from ZnSe. We are
the largest manufacturer in the world of ZnSe providing us with a
significant cost advantage. We believe our ZnSe production capability,
high precision fabrication operations and proprietary thin-film coating
technology has earned us a reputation as the quality leader in this
world market.
Additionally, we supply replacement optics to end users of CO2 lasers.
Over time optics may become contaminated and must be replaced to
maintain efficient laser operations. This aftermarket portion of our
business continues to grow as laser applications proliferate worldwide
and the installed base of serviceable laser systems increases each
year.
Key materials and precision optical components for YAG and other solid-
state laser systems are part of our near-infrared optics product
offering. The increasing power levels and reduced operating costs of
evolving YAG laser systems are enabling this technology to address new
applications. YAG lasers are used in high power application such as
cutting, welding, marking and date coding. Additionally, YAG laser
energy can be delivered through optical fibers, which provides high
flexibility beam delivery systems.
We supply a family of standard and custom laser gain materials and
optics for industrial, medical, scientific and research YAG lasers.
Our YAG laser gain materials are produced to stringent industry
specifications and precisely fabricated into rods or slabs.
Additionally, we offer waveplates, polarizers, lenses, prisms and
mirrors for visible and near-infrared applications which are used to
control or alter visible or near-infrared energy and its polarization.
Military Infrared Optics. Exotic Electro-Optics produces optics and
optical assemblies for military infrared systems including thermal
imaging, night vision, targeting and navigation systems. Our product
offering is comprised of missile domes, electro-optical windows and
assemblies, imaging lenses and other components. Our precision optical
products utilize infrared optical materials such as sapphire, zinc
selenide, zinc sulfide, germanium, silicon, and ALON. In addition,
our products also include visible materials and fused silica as well.
The vertical integration of our manufacturing processes gives us a
unique capability to design, fabricate, coat and assemble complex
optical products. Our products are currently utilized on the Abrams M-
1 tank, Apache Helicopter, F-14 and F-16 military aircraft and other
platforms, as well as future production programs such as the Joint
Strike Fighter.
Solid-State Radiation Detectors. We design, manufacture and market
CdZnTe room temperature, solid-state radiation detectors combined with
custom-designed low noise electronics and imbedded systems. New and
expanding applications in industry, medicine, security and research are
fueling increased demand for our products. Our solid-state CdZnTe
nuclear radiation detectors are attractive because of their reduced
size, improved ruggedness, and lower voltage requirements as compared
to traditional detectors based on scintillator/photomultiplier or
cooled germanium technologies.
CdZnTe-based imaging arrays can be used in both nuclear medicine
(internally emitted gamma-rays) and radiography (x-rays from an
external source). In security applications, the unique properties of
CdZnTe can provide additional information during a normal baggage scan
that allow the system to not only show the image of a suspicious
object, but more importantly, tell the operator the material or
chemical composition of the item. In nuclear medicine, CdZnTe makes
feasible a new generation of gamma cameras, offering much improved
position sensitivity and the ability to produce images using lower
doses of injected radioactivity. In radiography, higher density CdZnTe
can provide much improved sensitivity to the higher x-ray energies used
in some of the newer diagnostic techniques. Direct-read digital
7
radiography cameras are being developed which, if successful, will
allow the physician to view the relevant part of the body in real time,
reducing the time required for diagnosis.
Silicon Carbide Substrates. During the year ended June 30, 2003, we
began selling single crystal SiC substrates. Our current SiC product
offering is focused on two-inch diameter with expansion into three- and
four-inch substrates in the near future. Initial product acceptance of
our SiC products has been very good.
Research, Development and Engineering
Our research and development effort calls for the pursuit of a program
of internally and externally funded research and development totaling
between 5 and 10 percent of product sales. From time to time the ratio
of contract to internally funded activity varies significantly due to
the unevenness and uncertainty associated with most government research
programs. We are committed to accepting only funded research that ties
closely to our growth plans.
We devote significant resources to research, development and
engineering programs directed at the continuous improvement of existing
products and processes and to the timely development of new
technologies, materials and products. We believe that our research,
development and engineering activities are essential to our ability to
establish and maintain a leadership position in each of the markets
that we serve. As of June 30, 2003, we employed 144 people in
research, development and engineering functions, 112 of which are
engineers or scientists. In addition, manufacturing personnel support
or participate in research and development on an ongoing basis.
Interaction between the development and manufacturing functions
enhances the direction of projects, reduces costs and accelerates
technology transfers.
During the past year, we have made focused research and development
investments in:
- Silicon Carbide Substrate Technology: In fiscal 2002, we acquired
the Litton Systems Inc. Silicon Carbide Group to complement the
Company's SiC development activities. We presently have crystal
growth, fabrication and polishing facilities for producing silicon
carbide at both our Pennsylvania and New Jersey manufacturing
sites.
- Yttrium Vanadate Manufacturing: Our research and development
activities in this area involve the crystal growth of neodymium
(Nd) activated yttrium vanadate (YVO4). These efforts are focused
on the development of more robust laser systems utilizing Nd:YVO4
in diode-pumped laser housings used in next-generation sensor
technologies. Efforts at VLOC, our manufacturing site in Florida
and our research facility in Pennsylvania have teamed to
coordinate the achievement of this technological advancement.
- Large Diameter YAG Manufacturing: Our research and development
activities in this area are focused on producing large diameter
materials that will accelerate the evolution of kilowatt-class YAG
lasers. Achievements in process control and reliability are
rapidly transferred into production at our Florida manufacturing
facility, largely due to effective teamwork and crossover between
our development and manufacturing personnel.
- High Performance CdZnTe Materials: The marketplace success of eV
PRODUCTS division depends on our capability and capacity to
produce radiation detectors with ever-higher sensitivity,
resolution and efficiency at lower cost. Key advancements have
been achieved and will continue to be sought in the production of
larger crystal ingots as well as in the fabrication techniques for
the manufacture of monolithic arrays of closely spaced detectors.
As improved performance is indicated, new applications and market
potential are opened to CdZnTe products.
The development of our products and processes is largely based on
proprietary technical know-how and expertise. We rely on a combination
of contract provisions and trade secret laws to protect our proprietary
rights. When faced with potential infringement, we have in the past
and will continue to protect our rights.
Internal and external research, development and engineering
expenditures were $13.1 million, $11.3 million and $8.1 million for the
fiscal years ended June 30, 2003, 2002 and 2001, respectively. For
these same periods, the external customer and government funded
portions of these expenditures (i.e. contract research and development
revenue) were $11.0 million, $7.6 million and $5.1 million.
Marketing and Sales
We market our products through a direct sales force in North America,
Germany, Japan, Southeast Asia, Belgium and the UK, and through
representatives and distributors elsewhere in Europe, Asia, and South
America. Our market strategy is focused on building market awareness
8
and acceptance of our products. New products are constantly being
produced and sold to our established customers in the laser component
market places.
Each of our product lines is responsible for their own worldwide
marketing and sales functions, as follows:
1) The infrared optics marketing and sales initiative is handled
through a direct sales force in the U.S. and sells through our
subsidiaries II-VI Japan Incorporated and II-VI U.K. Limited as
well as through a common distributor in most of Europe. In
Germany, during fiscal year 2003, we established a new joint
venture with L.O.T.-Oriel Laser Optik Technologie Holding GmbH and
L.O.T. - Oriel Laser Optik GmbH & Co. KG of Darmstadt, Germany
(collectively L.O.T.) to distribute infrared optics in Germany
(See Note B to the Company's consolidated financial statements.)
2) The near-infrared optics marketing and sales initiative is handled
through a direct sales force in the U.S. as well as distributors
throughout the rest of the world. In addition, whenever possible
the near-infrared optics business uses the subsidiaries of the
infrared optics business around the world.
3) The military infrared optics marketing and sales initiative is
handled through a direct sales force in the U.S.
4) The solid-state radiation detectors marketing and sales
initiative is handled through a direct sales force in the U.S.
coupled with manufacturers' representatives. An array of
distributors and representatives are used throughout the rest of
the world.
5) The SiC marketing and sales initiative is handled through a
direct sales force in the U.S.
Our sales force develops close relationships with our OEM and end-user
customers worldwide. All divisions actively market their products
through targeted mailings, telemarketing, select advertising and
attendance at trade shows. Our sales force includes a highly trained
team of application engineers to assist customers in designing, testing
and qualifying our parts as key components of our customers' systems.
As of June 30, 2003, we employed 72 individuals in sales, marketing and
support.
Manufacturing Technology and Processes
A majority of the products we produce depend on our ability to
manufacture difficult materials. The table below shows these key
materials and the processes used to produce them.
Materials
Product Line Produced Growth Process Utilized
- ------------ --------- -----------------------
- - Infrared Laser Components ZnSe and ZnS Chemical Vapor Deposition
- - Near-Infrared YAG and YLF Czochralski
Laser Components
- - Solid-State Detectors CdZnTe High Pressure Bridgman and
Conventional Bridgman
- - SiC Substrates SiC Physical Vapor Transport
and Axial Gradient
Transport
The ability to produce these difficult materials and to control the
quality and yields is an expertise of the Company. Processing of these
materials into finished products is difficult to accomplish; yet the
quality and reproducibility of these products are critical to the
performance of our customer's instruments and systems. In the markets
we serve there are a limited number of suppliers of many of the
components we manufacture.
The network of our worldwide manufacturing sites allows products to be
produced in regions that provide cost-effective advantages. We believe
our cost to produce our infrared and near-infrared components are the
lowest among all competitors. We employ numerous advanced
manufacturing technologies and systems in all product-manufacturing
facilities. These include automated CNC optical fabrication, high
throughput thin-film coaters, micro precision metrology and custom-
engineered automated furnace controls for the crystal growth processes.
Producing products for use across the electromagnetic spectrum requires
the capabilities to repeatedly produce products with high yields to
tolerances in the nanometer range. We embody a technology and quality
mindset that gives our customers the confidence to utilize our products
in a just in time basis straight into the heart of their production
lines.
9
Sources of Supply
The major raw materials we use are Zinc, Selenium, Hydrogen Selenide,
Hydrogen Sulfide, Cadmium, Tellurium, Yttrium Oxide, Aluminum Oxide and
Iridium. We produce virtually all of our Zinc Selenide and Zinc
Sulfide requirements internally and also produce a portion of our
Hydrogen Selenide and Thorium Fluoride requirements. We also purchase
Zinc Sulfide, Gallium Arsenide, Copper, Silicon, Germanium, Quartz,
optical glass and small quantities of other materials for use as base
materials for laser optics from outside vendors. We purchase Thorium
Fluoride and other materials for use in optical fabrication and coating
processes. Excluding our own production, there are more than two
external suppliers for all of the above materials except for Zinc
Selenide, Zinc Sulfide, Hydrogen Selenide and Thorium Fluoride, for
each of which there is one proven source of merchant supply. For most
materials, we have entered into annual purchase arrangements whereby
suppliers provide discounts for annual volume purchases in excess of
specified amounts.
The continued high quality of these materials is critical to the
stability of our manufacturing yields. We conduct testing of materials
at the onset of the production process to meet evolving customer
requirements. Additional research may be needed to better define
future starting material specifications. We have not experienced
significant production delays due to shortages of materials. However,
we do occasionally experience problems associated with vendor supplied
materials not meeting contract specifications for quality or purity. A
significant failure of our suppliers to deliver sufficient quantities
of necessary high-quality materials on a timely basis could have a
materially adverse effect on our results of operations.
Customers
Our customer base for our laser component products consists of over
5,000 customers worldwide.
The three main groups of customers for our infrared and near-infrared
optics are as follows:
- Leading original equipment manufactures and system integrators of
high power industrial, medical and military laser systems,
- Laser end users who require replacement optics for their existing
laser systems, and
- Scientific and military customers, including the U.S. military and
its allies, for use in advanced targeting, navigation and infrared
imaging systems.
For our solid-state radiation detector products, our customers are
manufacturers of equipment and devices for industrial process control,
security monitoring, nuclear medicine, x-ray imaging, environmental
monitoring, nuclear safeguards and nonproliferation, and health
physics. We are currently dependent on a limited number of key
customers for this product line.
Our silicon carbide electronic materials product sales to date have
been limited and we do not have an established customer base for this
product line.
Competition
We believe that we are a leading producer of products and services in
our addressed markets. In the area of commercial infrared laser optics
and materials, we believe we are an industry leader. We are a
significant supplier of YAG rods and YAG laser optics to the worldwide
markets of scientific, research, medical and industrial laser
manufacturers. We are a leading supplier of infrared optics used in
complex military assemblies for targeting, navigation and thermal
imaging systems to every major military prime contractor. We are a
leading supplier of CdZnTe substrates and devices for x-ray and gamma-
ray detectors and components.
We compete on the basis of product quality, delivery time, strong
technical support and pricing. Management believes that we compete
favorably with respect to these factors and that our vertical
integration, manufacturing facilities and equipment, experienced
technical and manufacturing employees, and worldwide marketing and
distribution provide competitive advantages.
We have a number of present and potential competitors, many of which
have greater financial, selling, marketing or technical resources. A
competitor of our production of ZnSe is a division of Rohm and Haas
Company. The competitors producing infrared and CO2 laser optics
include Sumitomo in Japan and Ophir Optronics in Israel as well as
10
several companies producing limited quantities of infrared and CO2
laser optics. Competing producers of YAG materials and optics include
a division of Northrop Grumman Corporation and a division of Saint-
Gobain. Competing producers of infrared optics for military
applications are in-house fabrication and thin film coating
capabilities of major military prime contractors, such as Raytheon
Corporation. Competing producers of CdZnTe and CdZnTe detectors
include Acrorad in Japan and Imarad in Israel.
In addition to competitors who manufacture products similar to those we
produce, there are other technologies or materials that may compete
with our products.
Bookings and Backlog
We define our bookings as customer orders received that are expected to
be converted to revenues over the next 12 months. For long-term
customer orders, the Company takes the view of not including in
bookings the portion of the customer order that is beyond 12 months due
to the inherent uncertainty of an order that far out in the future.
For the year ended June 30, 2003, our bookings were $136.3 million
compared to bookings of $117.0 million for the year ended June 30,
2002. We believe that the increase in bookings was primarily
attributable to stronger market demand in the commercial industrial
infrared optics market. Many large single- and multi-year orders
delayed in the prior fiscal year were received with increased order
quantities due to the strengthened industrial demand.
We define our backlog as customer orders available for shipment in the
next twelve months as of the end of the fiscal period. As of June 30,
2003, our backlog was $57.5 million compared to $48.0 million at June
30, 2002. The increase in backlog is primarily reflective of strong
bookings in the commercial infrared optics business, including the
addition of the backlog acquired with our majority-owned German
distributor during the year ended June 30, 2003, improved bookings in
the near-infrared military, semi-conductor and medical markets and
contract bookings for the development of silicon carbide.
Employees
As of June 30, 2003, we employed 1,094 persons worldwide. Of these
employees, 144 were engaged in research, development and engineering,
731 in direct production and the balance in sales and marketing,
administration, finance and support services. Our production staff
includes highly skilled optical craftsmen. None of our employees are
covered by a collective bargaining agreement and we have never
experienced any work stoppages. We have a long-standing policy of
encouraging active employee participation in selected areas of
operations management. We believe our relations with our employees to
be good. We reward our employees with incentive compensation based on
achievement of performance goals.
Patents, Trade Secrets and Trademarks
We rely on our trade secrets and proprietary know-how to develop and
maintain our competitive position. We have not pursued process patents
due to the disclosures required in the patent process and the relative
difficulties in successfully litigating process-type patents. We have
confidentiality and noncompetition agreements with our executive
officers and certain other personnel.
The processes and specialized equipment utilized in crystal growth,
infrared materials fabrication and infrared optical coatings as
developed by us are complex and difficult to duplicate. However, there
can be no assurance that others will not develop or patent similar
technology or that all aspects of our proprietary technology will be
protected. Others have obtained patents covering a variety of infrared
optical configurations and processes, and others could obtain patents
covering technology similar to our technology. We may be required to
obtain licenses under such patents, and there can be no assurance that
we would be able to obtain such licenses, if required, on commercially
reasonable terms, or that claims regarding rights to technology will
not be asserted which may adversely affect our results of operations.
In addition, our research and development contracts with agencies of
the U.S. Government present a risk that project-specific technology
could be disclosed to competitors as contract reporting requirements
are fulfilled.
We hold six registered trademarks: the II-VI INCORPORATED(TM) name;
INFRAREADY OPTICS(TM) for replacement optics for industrial CO2 lasers;
EPIREADY(TM) for low surface damage substrates for Mercury Cadmium
Telluride epitaxy; eV PRODUCTS(TM) for products manufactured by our eV
PRODUCTS division; LASER POWER CORPORATION(TM) name; and MP-5(TM) for low
absorption coating technology. The trademarks are registered with the
U.S. Patent and Trademark Office but not with any states. We are not
aware of any interference or opposition to these trademarks in any
jurisdiction.
11
Available Information
The Company maintains an investor relations page on its Internet
website at http://www.ii-vi.com. The Company makes its annual,
quarterly and current reports filed or furnished with the Securities
and Exchange Commission available as soon as reasonably practicable on
the website. Such reports may be viewed or downloaded free of charge.
ITEM 2. PROPERTIES
Information regarding our principal properties at June 30, 2003 is set
forth below:
Location Use Square Footage Ownership
-------- --- -------------- ---------
United States:
Saxonburg, PA Manufacturing and 171,000 Owned
Corporate Headquarters
New Port Richey, FL Manufacturing 45,000 Owned
Port Richey, FL Manufacturing 20,000 Owned
Temecula, CA Manufacturing 66,000 Leased
Pine Brook, NJ Manufacturing 13,000 Leased
Foreign Locations:
Singapore Manufacturing 24,200 Leased
China Manufacturing 33,000 Leased
Germany Distribution 2,000 Leased
Japan Distribution 1,200 Leased
United Kingdom Distribution 1,100 Leased
Belgium Distribution and 5,000 Leased
Manufacturing
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and
positions are as follows:
Name Age Position
- ---- --- --------
Carl J. Johnson 61 Chairman, Chief Executive Officer
and Director
Francis J. Kramer 54 President, Chief Operating Officer
and Director
Herman E. Reedy 60 Executive Vice President
- Infrared Optics
James Martinelli 45 Vice President - Government and
Military Businesses
Craig A. Creaturo 33 Chief Accounting Officer and
Treasurer
Carl J. Johnson, a co-founder of the Company in 1971, serves as
Chairman, Chief Executive Officer, and Director of the Company. He
served as President of the Company from 1971 until 1985 and has been a
Director since 1971 and Chairman since 1985. From 1966 to 1971, Dr.
Johnson was Director of Research & Development for Essex International,
Inc., an automotive electrical and power distribution products
manufacturer. From 1964 to 1966, Dr. Johnson worked at Bell Telephone
Laboratories as a member of the technical staff. Dr. Johnson completed
his Ph.D. in Electrical Engineering at the University of Illinois. He
holds B.S. and M.S. degrees in Electrical Engineering from Purdue
University and Massachusetts Institute of Technology (MIT),
respectively. Dr. Johnson serves as a director of Armstrong Laser
Technology, Inc.
12
Francis J. Kramer has been employed by the Company since 1983 and
has been its President and Chief Operating Officer since 1985. Mr.
Kramer has served as a Director of the Company since 1989. Mr. Kramer
joined the Company as Vice President and General Manager of
Manufacturing and was named Executive Vice President and General
Manager of Manufacturing in 1984. Prior to his employment by the
Company, Mr. Kramer was the Director of Operations for the Utility
Communications Systems Group of Rockwell International Corp. Mr.
Kramer graduated from the University of Pittsburgh with a B.S. degree
in Industrial Engineering and from Purdue University with an M.S.
degree in Industrial Administration.
Herman E. Reedy has been employed by the Company since 1977 and
has been Executive Vice President - Infrared Optics since February
2003. Previously, Mr. Reedy held positions at the Company as Vice
President and General Manager of Quality and Engineering, Manager of
Quality and Manager of Components. Prior to his employment by the
Company, Mr. Reedy was employed by Essex International, Inc., serving
last as Manager, MOS Wafer Process Engineering. Prior to 1973, he was
employed by Carnegie Mellon University and previously held positions
with SemiElements, Inc. and Westinghouse Electric Corporation. Mr.
Reedy is a graduate of the University of Pittsburgh with a B.S. degree
in Electrical Engineering.
James Martinelli has been employed by the Company since 1986 and
has been Vice President - Government and Military Businesses since
February 2003. Previously, Mr. Martinelli served as General Manager of
Laser Power Corporation since 2000 and Chief Financial Officer of II-VI
Incorporated since 1994. Mr. Martinelli joined the Company as
Accounting Manager, was named Corporate Controller in 1990 and named
Chief Financial Officer and Treasurer in 1994. Prior to his employment
by the Company, Mr. Martinelli was Accounting Manager at Tippins
Incorporated and Pennsylvania Engineering Corporation from 1980 to
1985. Mr. Martinelli graduated from Indiana University of Pennsylvania
with a B.S. degree in Accounting and is a member of the Pennsylvania
Institute of Certified Public Accountants.
Craig A. Creaturo has been employed by the Company since 1998 and
has been Chief Accounting Officer since February 2003. Mr. Creaturo
has served as Treasurer since 2000. Previously, Mr. Creaturo served as
Director of Finance, Accounting and Information Systems since 2000 and
initially joined the Company as Corporate Controller. Prior to his
employment by the Company, Mr. Creaturo was employed by the Pittsburgh,
Pennsylvania office of Arthur Andersen LLP from 1992 to 1998 and served
in the audit and attestation division with a final position as Audit
Manager. Mr. Creaturo graduated from Grove City College with a B.S.
degree in Accounting. Mr. Creaturo is a Certified Public Accountant in
the Commonwealth of Pennsylvania and is a member of the American
Institute of Certified Public Accountants and the Pennsylvania
Institute of Certified Public Accountants.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "IIVI." The following table sets forth the range of
high and low closing sale prices per share of the Company's Common
Stock for the fiscal periods indicated, as reported by Nasdaq.
High Low
---- ---
Fiscal 2002
First Quarter $17.25 $12.67
Second Quarter $18.05 $11.90
Third Quarter $19.10 $13.95
Fourth Quarter $15.78 $11.98
Fiscal 2003
First Quarter $14.30 $11.34
Second Quarter $17.10 $13.00
Third Quarter $18.49 $14.38
Fourth Quarter $23.78 $16.55
On September 10, 2003, the last reported sale price for the Common
Stock was $21.90 per share. As of such date, there were approximately
780 holders of record of the Common Stock. The Company historically
has not paid cash dividends and does not anticipate paying cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
Year Ended June 30, 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------
(000 except per share data)
Statement of Earnings
Net revenues $128,210 $113,688 $123,334 $74,092 $62,014
Net earnings $ 11,620 $ 7,264 $ 9,491 $ 7,311 $ 5,463
Basic earnings per share $ 0.83 $ 0.52 $ 0.69 $ 0.57 $ 0.43
Diluted earnings per share $ 0.81 $ 0.51 $ 0.67 $ 0.55 $ 0.42
Diluted weighted average
shares outstanding 14,390 14,314 14,160 13,176 12,980
================================================================================
Share and per share data for 2000 and 1999 were adjusted to reflect the
two-for-one stock split in fiscal 2001.
June 30, 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------
($000)
Balance Sheet
Working capital $ 40,200 $ 35,746 $ 33,976 $24,335 $17,590
Total assets 162,793 151,901 148,173 84,102 70,843
Total debt 23,705 34,503 37,006 5,585 6,674
Retained earnings 73,071 61,451 54,187 44,696 37,385
Shareholders' equity 111,521 97,660 89,413 63,426 54,493
================================================================================
For the five-year period ended June 30, 2003, no cash dividends were
declared.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are forward-
looking statements. Forward-looking statements are also identified by
words such as "expects," "anticipates," "believes," "intends," "plans,
"projects," or similar expressions. Actual results could differ
materially from those anticipated in these forward-looking statements
for many reasons, including risk factors described in the Risk Factors
set forth in Item 7.
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 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 and goodwill, accrual of bonus and
profit sharing estimates, accrual of income tax liability estimates and
accounting for stock-based compensation. Management believes these
policies to be critical because they are both important to the
portrayal of the Company's financial condition and results of
operations, and they require management to make judgments and estimates
about matters that are inherently uncertain.
We recognize revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the price is established or determinable and
collectibility is probable.
Revenue, other than for contract research and development, for all
business segments is recognized from the sale of products at the point
of passage of title, which is at the time of shipment.
The Company performs research and development under contract agreements
with customers based on cost plus fixed fee, cost reimbursable or fixed
fee terms. These contracts generally require the Company to produce
and provide developmental materials and/or products to those customers.
Revenues from cost plus fixed fee and cost reimbursable contracts are
recognized as costs are incurred.
We follow the guidelines of Statement of Position 81-1 "Accounting for
Performance of Construction - Type and Certain Production-Type
Contracts" for our fixed fee contracts. Revenue and profits on each
fixed fee contract are accounted for using the percentage-of-completion
method of accounting, whereby revenue and profits are recognized
throughout the performance period of the contract. Percentage-of-
completion is determined by relating the actual cost of work performed
to date to the estimated total cost for each contract. The estimated
total cost for each contract is periodically reevaluated and revised,
when necessary, throughout the life of the contract. Losses on
contracts are recorded in full when identified.
We establish an allowance for doubtful accounts and a warranty reserve
based on historical experience and believe the collection of revenues,
net of these reserves, is reasonably assured. The allowance is an
estimate for potential non-collection of accounts receivable based on
historical experience. The Company has not experienced a non-
collection of accounts receivable materially affecting its financial
position or results of operations as of and for the fiscal years ended
June 30, 2003, 2002 and 2001, respectively. If the financial condition
of the Company's customers were to deteriorate causing an impairment of
their ability to make payments, additional provisions for bad debts may
be required in future periods.
The Company records a warranty reserve as a charge against earnings
based on a percentage of revenues utilizing actual returns over the
last twelve months. If actual returns are not consistent with the
historical data used to calculate these estimates, net revenues and
accounts receivable could be misstated.
15
The Company records a slow moving inventory reserve as a charge against
earnings for all products on hand that have not been sold to customers
in the past twelve months. An additional reserve is recorded for
product on hand that is in excess of product sold to customers over the
past twelve months. If actual market conditions are less favorable
than projected, additional inventory reserves may be required.
The Company tests goodwill on at least an annual basis for impairment.
Other intangible assets are amortized over their estimated useful
lives. The determination of related estimated useful lives of other
intangible assets and whether goodwill is impaired involves judgments
based upon long-term projections of future performance. A discounted
cash flow model is used to determine the fair value of the reporting
units for purposes of testing goodwill for impairment. Based on the
results of the most recently completed analysis, the Company's goodwill
was not impaired as of June 30, 2003. No event has occurred as of or
for the period ended June 30, 2003 that would give management an
indication that an impairment charge was necessary that would adversely
affect the Company's financial position or results of operations.
The Company records bonus and profit sharing estimates as a charge
against earnings based on a formula percentage of the Company's
operating income. These estimates are adjusted to actual based on
final results of operations achieved during the fiscal year. Partial
bonus amounts are paid quarterly based on interim Company performance,
and the remainder is paid after fiscal year end and final determination
of the applicable percentage. Other bonuses and profit sharing are
paid annually.
The Company records an estimated income tax liability to recognize the
amount of income taxes payable or refundable for the current year and
deferred income tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's
financial statements or income tax returns. Judgment is required in
estimating the future income tax consequences of events that have been
recognized in the Company's financial statements or the income tax
returns.
The Company uses the intrinsic value approach specified in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," for stock options granted to officers and key employees,
and therefore does not record compensation costs based upon the fair
value of options at the date of grant. See Notes A and K to the
Company's 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
Fiscal 2003 Compared to Fiscal 2002
NET EARNINGS Net earnings increased 60% in fiscal 2003 to $11.6
million ($0.81 per share-diluted) from $7.3 million ($0.51 per share-
diluted) in fiscal 2002. The major contributor to the net earnings
increase was the strong worldwide demand for commercial infrared optics
and component products in the industrial sector. Earnings increases
also resulted from a variety of factors, including improved production
efficiencies, savings achieved through the consolidation of infrared
optics operations, increased external research and development funding
and reduced interest expense.
BOOKINGS Bookings increased 16% to $136.3 million in fiscal 2003
compared to $117.0 million in fiscal 2002. Order backlog increased 20%
to $57.5 million at June 30, 2003 from $48.0 million at June 30, 2002
as a result of bookings outpacing shipments in fiscal 2003.
Manufacturing orders comprised approximately 93% of the backlog at June
30, 2003. Manufacturing bookings increased by approximately $18.5
million while contract research and development bookings increased by
approximately $0.8 million. The bookings growth was primarily
attributable to stronger market demand in the infrared optics market
and higher external research and development funding for single crystal
SiC development efforts. Bookings are defined as customer orders
received that are expected to be converted to revenues over the next 12
months. For long-term customer orders, the Company does not include in
bookings the portion of the customer order that is beyond 12 months due
to the inherent uncertainty of an order that far out in the future.
REVENUES Revenues increased 13% to $128.2 million in fiscal 2003
compared to $113.7 million last fiscal year. The revenue growth
reflects the general strength of our product offering and, more
specifically, strong demand in our infrared optics business. The
increase in revenues for fiscal 2003 compared to the same period last
fiscal year is primarily due to stronger shipments of commercial
infrared optics to both OEM and aftermarket customers and the
integration of the Company's sales and marketing distribution activity
in Germany through a new consolidated subsidiary, II-VI/L.O.T., (See
Note B of the Company's consolidated financial statements).
16
SEGMENT EARNINGS Segment earnings, which is defined as
earnings before income taxes, interest and other income or expense, for
fiscal 2003 increased 51% to $17.2 million compared to $11.4 million
for the same period last fiscal year primarily due to higher gross
margins from improved manufacturing efficiencies and cost controls in
the infrared optics segment and higher sales volume from all businesses
with the exception of the eV PRODUCTS division. Improvement in segment
earnings was experienced in the infrared and near-infrared
optics segments which was partially offset by lower segment
earnings in the military infrared optics segment and the Company's
Other category primarily comprised of our eV PRODUCTS division and Wide
Band Gap (WBG) group.
Segment earnings is a non-GAAP financial measure and differs from income
from operations in that segment earnings excludes certain operational
expenses included in other expense - net as reported. Management
believes segment earnings to be a useful measure because it reflects the
results of segment performance over which management has direct control.
Bookings, revenues and segment earnings or (loss) for the
Company's reportable segments are discussed below. Certain amounts
from prior years have been reclassified to conform with the segment
reporting presentation adopted in fiscal 2003. See also Note L to the
Company's consolidated financial statements.
Infrared Optics
Bookings for fiscal 2003 for Infrared Optics increased 42% to $79.3
million from $55.7 million compared to last fiscal year. The
improvement was due to overall increases in order volume from OEM and
aftermarket customers worldwide. The bookings growth was also
attributable to the receipt of single- and multi-year orders from
domestic and international OEM customers that had been delayed from the
prior fiscal year. During fiscal 2003, the OEM manufacturers of both
high-power, multi-kilowatt lasers for cutting, welding, drilling and
heat treating applications and lower-power lasers for engraving and
marking requested products at a rate more consistent with fiscal 2001
business levels explaining the increase in order bookings over the same
period last fiscal year.
Revenues for fiscal 2003 for Infrared Optics increased 19% to $73.6
million from $61.8 million compared to last fiscal year. This increase
was primarily attributable to increased shipments to several of the
Company's domestic and international OEM customers, as well as,
increased shipments to aftermarket customers. Stronger order intake
has translated into stronger revenues for the current fiscal year as
compared to the prior fiscal year.
Segment earnings for fiscal 2003 increased 57% to $20.0 million
compared to $12.7 million for the same period last fiscal year. The
improvement in segment earnings for the current fiscal year as
compared to the last fiscal year was due to a combination of increased
sales volume, a full year impact of operational consolidation of the
commercial infrared optics operations from Laser Power Corporation and
the acquisition of a majority interest in a distributor in Germany.
Near-Infrared Optics
Bookings for fiscal 2003 for Near-Infrared Optics increased 6% to $24.8
million from $23.4 million compared to last fiscal year. The increase
in bookings for fiscal 2003 as compared to the last fiscal year was
primarily due to stronger demand in commercial bookings in the optics
and crystal product lines used in defense and medical applications.
Revenues for fiscal 2003 for Near-Infrared Optics were $22.8 million
compared to $22.7 million last fiscal year. Commercial revenues
increased as compared to the prior fiscal year, primarily in the optics
and crystal product lines offset by a decrease in contract revenues
from the winding down of the multi-year yttrium aluminum garnet (YAG)
contract.
Segment earnings for fiscal 2003 increased 31% to $1.7 million
from $1.3 million compared to last fiscal year. This improvement
reflected overall stronger gross margins and improved product yields.
Cost reductions particularly in the materials area as a result of yield
improvements were sufficient to increase gross margins despite the
essentially flat revenues for fiscal 2003 compared to fiscal 2002.
Military Infrared Optics
Bookings for fiscal 2003 for Military Infrared Optics decreased 21% to
$23.1 million from $29.3 million last fiscal year. The reduction in
bookings is primarily due to the delay of the production portion of a
customer order for sapphire based products and the receipt of a six
month order for Javelin missile domes in fiscal 2003 as compared to a
twelve month order received in the previous fiscal year.
Revenues for fiscal 2003 for Military Infrared Optics increased 5% to
$23.0 million compared to $22.0 million last fiscal year. Revenues
from a contract for the Air Borne Laser (ABL) and increased shipments
of sapphire based products were the major contributors to the increase
as compared to the last fiscal year.
17
Military Infrared Optics experienced a $0.1 million segment loss in
fiscal year 2003 compared to segment earnings of $1.6 million
last fiscal year. During the fiscal year changes in contract estimated
costs to complete relating primarily to a development contract resulted
in $1.2 million of additional expenses. Additionally, 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 Infrared Optics
business segment due to the absorption of costs previously allocated to
the Infrared Optics segment.
Other
The Company's Other segment includes the combined operations of the
Company's eV PRODUCTS division and WBG group and the Company's
corporate research and development group.
Combined bookings for fiscal 2003 for eV PRODUCTS division and WBG
group increased 7% to $9.2 million as compared to $8.6 million last
fiscal year. The increase was due to the receipt of more externally
funded contract support for WBG's efforts in Silicon Carbide (SiC)
development and the initial customer orders for SiC substrates. This
increase in bookings for WBG group was partially offset by a decrease
in bookings for eV PRODUCTS division due to slow development and
deployment of new products by existing and target customers for medical
and industrial applications.
Revenues for fiscal 2003 from these operations increased 23% to $8.7
million compared to $7.1 million last fiscal year. The higher revenues
are a direct result of the higher contract billings, particularly
contract research and development of the WBG group.
The segment loss for fiscal 2003 of $4.4 million increased 7% from the
segment loss of $4.1 million in the prior fiscal year. The increase in
the segment loss was primarily attributable to weakness in demand for
products from eV PRODUCTS division. This loss was partially offset by
more external contract support of the Company's efforts in SiC, which
offsets the funding needed to be provided by the Company for this
activity.
Costs and Expenses
Manufacturing gross margin, which is defined as net sales less cost of
goods sold, for fiscal 2003 was $47.8 million or 41% of revenues
compared to $36.3 million or 34% of revenues last fiscal year. The
increased sales volume for fiscal year 2003 as compared to last fiscal
year, the operational consolidation late last fiscal year of the
infrared optics commercial manufacturing that was previously done at
Laser Power Corporation in California to other worldwide manufacturing
sites, the acquisition of a majority interest in a distributor in
Germany, II-VI/L.O.T. GmbH and lower material costs as a result of
yield improvements all contributed to the increased gross margin.
Contract research and development gross margin, which is calculated as
contract research and development revenues less expenses, for fiscal
2003 was $0.6 million (5% of research and development revenues),
compared to a gross margin of $0.7 million (9% of research and
development revenues), for the same period last fiscal year. The
contract research and development revenues and costs are a result of
development efforts in the Near-Infrared Optics and the Military
Infrared Optics segments as well as activities in the eV PRODUCTS
division and the WBG group for the fiscal year ended June 30, 2003.
The increased revenues level for fiscal 2003 as compared to last fiscal
year is primarily due to revenues from a new SiC development contract.
Contract research and development gross margin is a result of a blend
of cost plus fixed fee, cost reimbursement and fixed fee contract
activities. The reduced gross margin for fiscal 2003 was due primarily
to losses of approximately $1.2 million recognized from activities
performed on a fixed price percentage of completion development
contract in the Military Infrared Optics segment.
Company-funded internal research and development expenses for fiscal
2003 were $2.7 million or 2% of revenues compared to $4.4 million or 4%
of revenues, for last fiscal year. The lower expense is a direct
result of more external contract support of the Company's WBG group's
efforts in SiC crystal growth technology and processing development
which offsets the funding needed to be provided by the Company for this
activity. Fiscal 2002 included the results of the former Litton
Systems, Inc. Silicon Carbide Group from the acquisition date; however
the Company did not have a commensurate level of contract revenues in
fiscal 2002 to offset the WBG group's additional costs associated with
this business. Company-funded internal research and development
expenses 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 fiscal 2003 were $28.5
million or 22% of revenues compared to $21.2 million or 19% of revenues
for last fiscal year. The dollar and percentage increases for fiscal
year 2003 as compared to last fiscal year reflect costs associated with
the acquisition of a majority interest in a distributor in Germany,
18
II-VI/L.O.T. GmbH during the first quarter of this fiscal year (See
Note B to the Company's consolidated financial statements). While this
acquisition has increased the Company's direct selling expense by
approximately 2% of sales as compared to the prior year, this expense
increase has been offset by the additional gross margin on sales to end
customers in Germany. In addition to this acquisition of II-VI/L.O.T.,
the Company recorded higher salary expenses as compared to last fiscal
year for its world-wide profit driven bonus program.
Interest expense for fiscal 2003 was $0.8 million compared to $1.4
million for last fiscal year. The decrease in interest expense
reflects lower LIBOR based interest rates, as well as a 31% reduction
in debt levels of the Company at June 30, 2003 as compared to the same
period last fiscal year.
Other expense for fiscal 2003 was $0.3 million compared to $0.4 million
for last fiscal year. Other expense in 2003 was primarily due to the
minority interest in II-VI/L.O.T., the $0.1 million write-off of an
investment in the second quarter of the current fiscal year and foreign
currency losses as a result of the U.S. dollar's performance relative
to other currencies in the current fiscal year offset by royalty income
and interest income. Other expense in fiscal 2002 related to the
closing of operations of Laser Power Corporation in Mexico of $0.4
million, costs related to consolidating several of the Company's
European distribution arrangements of $0.4 million, and the write-off
of certain crystal growth equipment and technology of $0.7 million
offset by foreign currency gains, royalty income and interest income.
The Company's effective income tax rate for fiscal 2003 was 28%
compared to an effective income tax rate of 24% for fiscal 2002. The
increase in the effective tax rate reflects the completion of an annual
external transfer pricing study and the resulting finalization of the
allocation of profits around the world. The Company's effective 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.
Fiscal 2002 Compared to Fiscal 2001
NET EARNINGS Net earnings decreased 23% in fiscal 2002 to $7.3 million
($0.51 per share-diluted) from $9.5 million ($0.67 per share-diluted)
in fiscal 2001. The major contributor to the net earnings decrease was
the general softening of demand for infrared laser optics and component
products and solid-state x-ray and gamma-ray detection materials and
products in the industrial sector impacted by the weak worldwide
economy.
BOOKINGS Bookings decreased 12% to $117.0 million in fiscal 2002
compared to $132.7 million in fiscal 2001. Order backlog increased 7%
to $48.0 million at June 30, 2002 from $44.7 million at June 30, 2001
as a result of bookings outpacing shipments in fiscal 2002. The
increase in backlog is primarily due to strong second half bookings,
more specifically large orders recorded by significant military orders
booked at Laser Power Corporation, blanket orders recorded by eV
PRODUCTS division and contract bookings for the development of Silicon
Carbide. Manufacturing orders comprised 93% of the backlog at June 30,
2002. Manufacturing bookings decreased by approximately $16.1 million
while contract research and development bookings increased by
approximately $0.1 million. The bookings decrease was primarily a
result of order delays caused by a slowdown in the industrial sector.
REVENUES Revenues decreased 8% to $113.7 million in fiscal 2002
compared to $123.3 million last fiscal year. Revenues decreased due to
lower shipments compared to the same period last fiscal year of
industrial laser OEM and aftermarket sales from sluggish industrial
worldwide demand and from the absence in sales of radiation detection
materials and products to replace the fiscal year 2001 sales volume
primarily in the medical sector.
SEGMENT EARNINGS Segment earnings, which is defined as
earnings before income taxes, interest and other income or expense, for
fiscal 2002 decreased 38% to $11.4 million compared to $18.3 million
for the same period last fiscal year primarily due to lower gross
margins from lower sales volume from the majority of our businesses.
The decrease in segment earnings was also caused by a shift in
the product mix away from the slowed industrial business and towards
the military business which historically has lower margins.
Bookings, revenues and segment earnings or (loss) for the Company's
reportable segments are discussed below. Certain amounts from prior
years have been reclassified to conform with the segment reporting
presentation adopted in fiscal 2003. See Note L to the Company's
consolidated financial statements.
19
Infrared Optics
Bookings for fiscal 2002 for Infrared Optics decreased 18% to $55.7
million from $68.2 million compared to last fiscal year. The decrease
was primarily driven by delays in OEM and aftermarket orders caused by
a slowdown in the industrial sector.
Revenues for fiscal 2002 for Infrared Optics decreased 12% to $61.8
million from $69.9 million compared to last fiscal year. This decrease
was primarily attributable to decreased shipments to several of the
Company's domestic and international OEM customers, as well as,
decreased shipments to aftermarket customers.
Segment earnings for fiscal 2002 increased 7% to $12.7 million
compared to $13.7 million for the same period last fiscal year. The
reduction in Segment earnings for the current fiscal year as
compared to the last fiscal year was due to a decrease in sales volume
from softer demand for infrared optics, particularly in the industrial
sector.
Near-Infrared Optics
Bookings for fiscal 2002 for Near-Infrared Optics decreased 9% to $23.4
million from $25.8 million compared to last fiscal year. The decrease
in bookings for fiscal 2002 as compared to the last fiscal year was
primarily due to weaker demand in commercial bookings in the optics and
telecommunications product lines partially offset by an increase in
contract research and development bookings.
Revenues for fiscal 2002 for Near-Infrared Optics decreased 10% to
$22.7 million compared to $25.1 million last fiscal year. Commercial
revenues decreased as compared to the prior fiscal year, primarily in
the optics and telecommunications product lines.
Segment earnings for fiscal 2002 decreased 62% to $1.3 million
from $3.4 million compared to last fiscal year. This reduction
reflected decreased gross margins, lower sales volume and reduced
product yields as a result of certain production related issues in our
YAG growth and development area.
Military Infrared Optics
Bookings for fiscal 2002 for Military Infrared Optics were $29.3
million compared to $29.4 million for eleven months ended June 30, 2001
during which period this segment of our business was owned by the
Company. Military bookings in the infrared crystals and optical
components area were softer as compared to fiscal year 2001, but were
offset by stronger bookings of military contracts including the Javelin
Antitank Weapon System, the IFTS and Air Borne Laser programs.
Revenues for fiscal 2002 for Military Infrared Optics were $22.0
million compared to $19.0 million for the eleven months ended June 30,
2001. Even on an annualized basis, the Exotic Electro-Optics business
was the only business resulting in an increase to sales for the year.
Segment earnings decreased 56% to $1.6 million from $3.6 million
compared to last fiscal year. The reduction in segment earnings
primarily related to major military contracts where technical
challenges caused cost overruns eroding gross margins. Gross margins
on military business, even absent of these cost overruns have
historically lower margins as compared to our non-military businesses.
Other
Combined bookings for fiscal 2002 for eV PRODUCTS division and WBG
group decreased 8% to $8.6 million as compared to $9.3 million last
fiscal year. The decrease was due to the lower order intake by the
Company's eV PRODUCTS division.
Revenues for fiscal 2002 from these operations decreased 24% to $7.1
million compared to $9.3 million last fiscal year. The lower revenues
are the result of the absence in replacement revenues for eV PRODUCTS
division's high-volume fiscal year 2001 order relating to the NASA
Swift Telescope Program.
The segment loss for fiscal 2002 of $4.1 million increased 71% from the
segment loss of $2.4 million in the prior fiscal year. The increase in
the segment loss was attributable to weakness in demand for products
from the eV PRODUCTS division resulting in lower sales volume and
significant increase in internal research and development expense by
the WBG group. The fiscal 2002 purchase of the Litton Systems, Inc.
Silicon Carbide (SiC) group, while accelerating our efforts in single
crystal SiC growth, at the same time increased our internal research
and development expense.
20
Costs and Expenses
Manufacturing gross margin was $36.3 million or 34% of net revenues in
fiscal 2002 compared to $46.1 million or 39% of net revenues in fiscal
2001. The dollar and percentage decrease was attributable to lower
sales volume. The decrease in the gross margin percentage was also
driven by a shift in the product mix during the past few quarters. As
the industrial business has slowed, the Company has taken on more
military business which historically has lower margins.
Contract research and development gross margin was $0.7 million or 9%
of contract research and development revenues in fiscal 2002 compared
to $1.5 million or 29% of contract research and development revenues in
fiscal 2001. The gross margin was negatively impacted during the year
as Laser Power Corporation and, more specifically, the Large Optics
Coating Facility, encountered continued production issues related to
several developmental contracts.
Company-funded internal research and development remained relatively
unchanged at $4.4 million in fiscal 2002 from $4.5 million in fiscal
2001. In general, internal research and development expense reflects
increased efforts focused on Silicon Carbide crystal growth technology
and processing development, the Company's corporate research and
development activities and the research and development activities of
eV PRODUCTS division.
Selling, general and administrative expenses were $21.2 million or 19%
of revenues in fiscal 2002 compared to $24.8 million or 20% of revenues
in fiscal 2001. This dollar and percentage decrease is attributable to
the elimination of certain redundant expenses, as well as, expense and
manpower reductions due to decreased manufacturing demand during fiscal
2002.
Interest expense was $1.4 million in fiscal 2002 compared to $2.3
million in fiscal 2001. The decrease in interest expense was primarily
due to the lower borrowings and continuing decrease of the Company's
LIBOR based interest rate as compared to fiscal 2001. The Company's
weighted average interest rate was approximately 37% lower at June 30,
2002 as compared to the previous year. Scheduled quarterly payments on
the term loan component of the Company's credit agreement began in
fiscal 2002.
Other expense was $0.4 million in fiscal 2002 compared to $1.4 million
in fiscal 2001. The other expense decrease was primarily due to the
absence of approximately $1.5 million of goodwill amortization incurred
in fiscal 2001 (see Note E to the Company's consolidated financial
statements) and foreign currency gains in 2002 as compared to losses in
fiscal 2001. The overall decrease was partially offset by fiscal 2002
charges related to the closing of operations of Laser Power Corporation
in Mexico of $0.4 million, costs related to consolidating several of
the Company's European distribution arrangements of $0.4 million, and
the write-off of certain crystal growth equipment and technology of
$0.7 million.
The effective corporate income tax rate was 24% in fiscal 2002 compared
to 35% in fiscal 2001. The decrease in the effective income tax rate
reflects the favorable mix of worldwide earnings from the Company's
focus on increased manufacturing in China and Singapore where tax rates
are lower than the United States.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 2003, cash generated from operations was $25.6 million.
Proceeds from exercise of common stock options and fixed assets of $0.5
million each, in addition to the cash generated from operations, were
used primarily to fund an investment of $7.0 million in property, plant
and equipment, to finance a $2.8 million acquisition for a 75% majority
ownership of II-VI/L.O.T. and to pay down $10.9 million of debt. Cash
transactions for fiscal 2003 plus cash on hand at the beginning of the
fiscal year resulted in a cash position of $15.6 million at June 30,
2003.
The largest sources of the $25.6 million in cash generated from
operations in fiscal 2003 were $20.9 million in net earnings before
depreciation and amortization, an increase in deferred income taxes of
$1.4 million, an increase in accounts payable of $2.1 million and a
decrease in other operating net assets of $4.8 million. These sources
of cash were partially offset by an increase in accounts receivable and
inventories of $4.2 million.
The impact of inflation on the Company's business has not been
material.
The Company had available $15.5 million and $9.3 million under its line
of credit as of June 30, 2003 and 2002, respectively.
The Company believes cash flow from operations, existing cash reserves
and available borrowing capacity will be sufficient to fund its working
capital needs, capital expenditures, scheduled debt payments and
internal growth. During fiscal 2003, the Company reinvested $7.0
million into capital projects.
21
OFF-BALANCE SHEETS ARRANGEMENTS
None.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Payments Due By Period
------------------------------------------------
Less Than 1-3 3-5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
- ------------------------------------------------------------------------------
($000's)
Long-Term Debt Obligations $23,705 $6,923 $13,976 $2,613 $193
Capital Lease Obligations - - - - -
Operating Lease Obligations 2,913 1,097 1,555 261 -
Purchase Obligations 3,019 309 1,275 1,435 -
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP - - - - -
- -----------------------------------------------------------------------------
Total $29,637 $8,329 $16,806 $4,309 $193
RISK FACTORS
We Depend on Highly Complex Manufacturing Processes Which Require
Products from Limited Sources of Supply
We utilize high quality, optical grade ZnSe in the production of a
majority of our products. We are a leading producer of ZnSe for our
internal use and for external sale. The production of ZnSe is a
complex process requiring production in a highly controlled
environment. A number of factors, including defective or contaminated
materials, could adversely affect our ability to achieve acceptable
manufacturing yields of high quality ZnSe. ZnSe is available from only
one outside source where quantity and qualities may be limited. The
unavailability of necessary amounts of high quality ZnSe would have a
material adverse effect upon us. There can be no assurance that we
will not experience manufacturing yield inefficiencies which could have
a material adverse effect on our business, results of operations or
financial condition.
We produce Hydrogen Selenide gas which is used in our production
of ZnSe. There are risks inherent in the production and handling of
such material. Our inability to effectively handle Hydrogen Selenide
could require us to curtail our production of Hydrogen Selenide.
Hydrogen Selenide can be obtained from one outside source. The cost of
purchasing such material is significantly greater than the cost of
internal production. As a result, purchasing a substantial portion of
such material from the outside source would significantly increase our
production costs of ZnSe. Therefore, our inability to internally
produce Hydrogen Selenide could have a material adverse effect on our
business, results of operations or financial condition.
In addition, we utilize other high purity, relatively uncommon
materials and compounds to manufacture our products. Failure of our
suppliers to deliver sufficient quantities of these necessary materials
on a timely basis could have a material adverse effect on our business,
results of operations or financial condition.
Our Business is Dependent on Other Cyclical Industries
Our business is significantly dependent on the demand for products
produced by end users of industrial lasers. Many of these end users
are in industries that historically have experienced a highly cyclical
demand for their products. Therefore, as a result, demand for our
products and our results of operations are subject to cyclical
fluctuations.
Our Revenues are Subject to Potential Seasonal Fluctuations
Due to our customers' buying patterns, particularly in Europe, revenues
for our first fiscal quarter ending in September could be below those
in the preceding quarter. Our first fiscal quarter results often are
dependent upon the sales made in the last month of the quarter.
22
We May Encounter Substantial Competition
We may encounter substantial competition from other companies in the
same market, including established companies with substantial
resources. Some of our competitors may have financial, technical,
marketing or other capabilities more extensive than ours and may be
able to respond more quickly than we can to new or emerging
technologies and other competitive pressures. We may not be able to
compete successfully against our present or future competitors, and
competition may adversely affect our business, financial condition or
operating results.
International Sales Account for a Significant Portion of Our Revenues
Sales to customers in countries other than the United States accounted
for approximately 41%, 39% and 37% of revenues during the years ended
June 30, 2003, 2002 and 2001, respectively. We anticipate that
international sales will continue to account for a significant portion
of our revenues for the foreseeable future. In addition, we
manufacture products in Singapore and China and maintain direct sales
offices in Germany, Japan, the UK and Belgium. Sales and operations
outside of the United States are subject to certain inherent risks,
including fluctuations in the value of the U.S. dollar relative to
foreign currencies, tariffs, quotas, taxes and other market barriers,
political and economic instability, restrictions on the export or
import of technology, potentially limited intellectual property
protection, difficulties in staffing and managing international
operations and potentially adverse tax consequences. There can be no
assurance that any of these factors will not have a material adverse
effect on our business, financial condition or results of operations.
In particular, although our international sales, other than in Germany,
Japan, Belgium and the UK, are denominated in U.S. dollars, currency
exchange fluctuations in countries where we do business could have a
material adverse affect on our business, financial condition or results
of operations, by rendering us less price-competitive than foreign
manufacturers. Our sales in Japan are denominated in yen and,
accordingly, are affected by fluctuations in the dollar/yen currency
exchange rates. We generally reduce our exposure to such fluctuations
through forward exchange agreements hedging approximately 75% of our
sales in Japan. We do not engage in the speculative trading of
financial derivatives. There can be no assurance, however, that our
practices will reduce or eliminate the risk of fluctuation in the
dollar/yen currency exchange rate.
Our Revenues May Suffer if General Economic Conditions Worsen
Our revenues and earnings may be affected by general economic factors,
such as excessive inflation, currency fluctuations and employment
levels, resulting in a temporary or longer-term overall decline in
demand for our products. Therefore, any significant downturn or
recession in the United States or other countries could have a material
adverse effect on our business, financial condition and results of
operations.
We May Expand Product Lines and Markets by Acquiring Other Businesses
Our business strategy includes expanding our product lines and markets
through internal product development and acquisitions. Any acquisition
may result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities, and amortization expense
related to intangible assets acquired, any of which could have a
material adverse affect on our business, financial condition or results
of operations. In addition, acquired businesses may be experiencing
operating losses. Any acquisition will involve numerous risks,
including difficulties in the assimilation of the acquired company's
operations and products, uncertainties associated with operating in new
markets and working with new customers, and the potential loss of the
acquired company's key employees. In fiscal 1995, we acquired the
Virgo Optics Division of Sandoz Chemicals Corporation. In fiscal 1996,
we acquired Lightening Optical Corporation. Subsequently, these
acquisitions were combined to form our VLOC subsidiary. In fiscal
2001, we acquired Laser Power Corporation. In fiscal 2002, we
acquired the Litton System, Inc. Silicon Carbide Group.
Our Success Depends on New Products and Processes
In order to meet our strategic objectives, we must continue to develop,
manufacture and market new products, develop new processes and improve
existing processes. As a result, we expect to continue to make
significant investments in research and development and to continue to
consider from time to time the strategic acquisition of businesses,
products, or technologies complementary to our business. Our success
in developing, introducing and selling new and enhanced products
depends upon a variety of factors including product selection, timely
and efficient completion of product design and development, timely and
efficient implementation of manufacturing and assembly processes,
effective sales and marketing, and product performance in the field.
There can be no assurance that we will be able to develop and introduce
new products or enhancements to our existing products and processes in
a manner which satisfies customer needs or achieves market acceptance.
The failure to do so could have a material adverse affect on our
ability to grow our business.
23
Failure to Keep Pace with Industry Developments May Adversely Affect
Our Operations
We are engaged in industries which will be affected by future
developments. The introduction of products or processes utilizing new
developments could render existing products or processes obsolete or
unmarketable. Our continued success will depend upon our ability to
develop and introduce on a timely and cost-effective basis new
products, processes and applications that keep pace with developments
and address increasingly sophisticated customer requirements. There
can be no assurance that we will be successful in identifying,
developing and marketing new products, applications and processes and
product or process enhancements, that we will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of product or process enhancements or new
products, applications or processes, or that our products, applications
or processes will adequately meet the requirements of the marketplace
and achieve market acceptance. Our business, results of operations and
financial condition could be materially and adversely affected if we
were to incur delays in developing new products, applications or
processes or product or process enhancements or if we did not gain
market acceptance.
Exposure to Government Markets
With the acquisition of Laser Power Corporation, specifically the
military infrared optics business of Exotic Electro-Optics, sales to
customers in the defense industry have increased. These customers in
turn generally contract with a governmental entity, typically the U.S.
government. Most governmental programs are subject to funding approval
and can be modified or terminated with no warning upon the
determination of a legislative or administrative body. The loss or
failure to obtain certain contracts or a loss of a major government
customer could have a material adverse effect on our business,
financial condition and results of operations.
Our Success Depends on the Ability to Retain Key Personnel
We are highly dependent upon the experience and continuing services of
certain scientists, engineers, production and management personnel.
Competition for the services of these personnel is intense, and there
can be no assurance that we will be able to retain or attract the
personnel necessary for our success. The loss of the services of our
key personnel could have a material adverse affect on our business,
results of operations or financial condition.
There Are Limitations on the Protection of Our Intellectual Property
We do not currently hold any material patents applicable to our
processes and rely on a combination of trade secret, copyright and
trademark laws and employee non-competition and nondisclosure
agreements to protect our intellectual property rights. There can be
no assurance that the steps taken by us will be adequate to prevent
misappropriation of our technology. Furthermore, there can be no
assurance that, in the future, third parties will not assert
infringement claims against us. Asserting our rights or defending
against third-party claims could involve substantial expense, thus
materially and adversely affecting our business, results of operations
or financial condition. In the event a third party were successful in
a claim that one of our processes infringed its proprietary rights, we
may have to pay substantial damages or royalties, or expend substantial
amounts in order to obtain a license or modify the process so that it
no longer infringes such proprietary rights, any of which could have an
adverse effect on our business, results of operations or financial
condition.
A Large Portion of Our European Sales Rely On A Single Distributor
A large portion of our European sales not made by our subsidiaries in
Germany, the UK and Belgium have been made through a European
distributor. This distributor also provides service and support to the
end users of our products. Thus, a reduction in the sales efforts of
this distributor could adversely affect our European sales and our
ability to support the end users of our products. There can be no
assurance that this distributor will continue to distribute, or to
distribute successfully, our products and, in such an event, our
business, results of operations and financial earnings could be
materially and adversely affected. We recently established controlling
interest in a new joint venture with the distributor serving the German
market. (See Note B of the Company's Consolidated Financial
Statements.)
Our Stock Price May Fluctuate
Future announcements concerning us, our competitors or customers,
quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes
in product pricing policies by us or our competitors, seasonal or other
variations in anticipated or actual results of operations, changes in
earnings estimates by analysts or reports regarding our industries in
the financial press or investment advisory publications, among other
factors, could cause the market price of our stock to fluctuate
substantially. In addition, stock prices may fluctuate widely for
24
reasons which may be unrelated to operating results. These
fluctuations, as well as general economic, political and market
conditions such as recessions, military conflicts or market or market-
sector declines, may materially and adversely affect the market price
of our common stock. In addition, any information concerning us,
including projections of future operating results, appearing in
investment advisory publications or on-line bulletin boards or
otherwise emanating from a source other than us could in the future
contribute to volatility in the market price of our common stock.
We Have Adopted Antitakeover Devices Which May Limit the Price that
Certain Investors May be Willing to Pay in the Future for Shares of Our
Common Stock
Our articles of incorporation, by-laws and shareholder rights plan
contain provisions which could make us a less attractive target for a
hostile takeover or make it more difficult or discourage a merger
proposal, a tender offer or a proxy contest. This could limit the
price that certain investors might be willing to pay in the future for
shares of our common stock. The provisions include:
- classification of the board of directors into three classes;
- a procedure which requires shareholders or the board of directors
to nominate directors in advance of a meeting to elect such
directors;
- the ability of the board of directors to issue additional shares
of common stock or preferred stock without shareholder approval;
- certain provisions requiring supermajority approval (at least two-
thirds of the votes cast by all shareholders entitled to vote
thereon, voting together as a single class); and
- a formal shareholder rights plan designed to protect all corporate
interests in the event the Company's Board of Directors and
shareholders are confronted with an abusive or unfair takeover
attempt.
In addition, the Pennsylvania Business Corporation Law contains
provisions which may have the effect of delaying or preventing a change
in our control.
We Are Subject to Stringent Environmental Regulation
We use or generate certain hazardous substances in our research and
manufacturing facilities. We believe that our handling of such
substances is in material compliance with applicable local, state and
federal environmental, safety and health regulations at each operating
location. We invest substantially in proper protective equipment,
process controls and specialized training to minimize risks to
employees, surrounding communities and the environment due to the
presence and handling of such hazardous substances. We annually
conduct employee physical examinations and workplace air monitoring
regarding such substances. When exposure problems or potential
exposure problems have been indicated, corrective actions have been
implemented and re-occurrence has been minimal or non-existent. We do
not carry environmental impairment insurance.
Relative to its generation and use of the extremely hazardous substance
Hydrogen Selenide, we have in place an emergency response plan.
Special attention has been given to all procedures pertaining to this
gaseous material to minimize the chances of its accidental release to
the atmosphere.
With respect to the production, use, storage and disposal of the low-
level radioactive material Thorium Fluoride, our facilities and
procedures have been inspected and licensed by the Nuclear Regulatory
Commission. This material is utilized in our thin-film coatings.
Thorium bearing by-products are collected and shipped as solid waste to
a government-approved low-level radioactive waste disposal site in
Clive, Utah.
The generation, use, collection, storage and disposal of all other
hazardous by-products, such as suspended solids containing heavy metals
or airborne particulates, are believed by us to be in material
compliance with regulations. We believe that all of the permits and
licenses required for operation of our business are in place. Although
we do not know of any material environmental, safety or health problems
in our properties or processes, there can be no assurance that problems
will not develop in the future which would have a materially adverse
effect on us.
25
Some Laser Systems Are Complex in Design and May Contain Defects that
Are Not Detected Until Deployed Which Could Increase Our Costs and/or
Reduce Our Revenues
Laser systems are inherently complex in design and require ongoing
regular maintenance. The manufacture of lasers, laser products and
systems involves a highly complex and precise process. As a result of
the technical complexity of our products, changes in our or our
suppliers' manufacturing processes or in the use of defective or
contaminated materials by us or our suppliers could result in a
material adverse effect on our ability to achieve acceptable
manufacturing yields and product reliability. To the extent that we do
not achieve such yields or product reliability, our business, operating
results, financial condition and customer relationships could be
adversely affected. Our customers may discover defects in our products
after the products have been fully deployed and operated under peak
stress conditions. In addition, some of our products are combined with
products from other vendors, which may contain defects. Should
problems occur, it may be difficult to identify the source of the
problem. If we are unable to fix defects or other problems, we could
experience, among other things:
- loss of customers;
- increased costs of product returns and warranty expenses;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal action by our customers.
The occurrence of any one or more of the foregoing factors could
seriously harm our business or financial condition.
Recently Issued Financial Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 requires unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership
among their owners and other parties involved. The provisions of
Interpretation No. 46 are applicable immediately to all variable
interest entities created after January 31, 2003 and variable interest
entities in which an enterprise obtains an interest in after that date,
and for variable interest entities created before this date, the
provisions are effective July 1, 2003. We are currently evaluating the
provisions of this interpretation; however, we do not believe they will
have a material impact on our accounting for existing investments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company is exposed to market risks arising from adverse changes in
foreign currency exchange rates and interest rates. In the normal
course of business, the Company uses a variety of techniques and
derivative financial instruments as part of its overall risk management
strategy primarily focused on its exposure to the Japanese Yen. No
significant changes have occurred in the techniques and instruments
used other than those described below.
The Company has transactions denominated in Euros and Pounds Sterling.
Changes in the foreign currency exchange rates of these currencies did
not have a material impact on the results of operations for fiscal year
2003.
Foreign Exchange Risks
In the normal course of business, the Company enters into foreign
currency forward exchange contracts with its banks. The purpose of
these contracts is to hedge ordinary business risks regarding foreign
currencies on product sales. Foreign currency exchange contracts are
used to limit transactional exposure to changes in currency rates. The
Company enters into foreign currency forward contracts that permit it
to sell specified amounts of foreign currencies expected to be received
from its export sales for pre-established U.S. dollar amounts at
specified dates. The forward contracts are denominated in the same
26
foreign currencies in which export sales are denominated. These
contracts provide the Company with an economic hedge in which
settlement will occur in future periods and which otherwise would
expose the Company to foreign currency risk. The Company monitors its
positions and the credit ratings of the parties to these contracts.
While the Company may be exposed to potential losses due to risk in the
event of non-performance by the counterparties to these financial
instruments, it does not anticipate such losses. The Company entered
into a low interest rate, 300 million Yen loan with PNC Bank in
September 2002 in an effort to minimize the foreign currency exposure
in Japan. A change in the interest rate of 1% for this Yen loan would
have changed the interest expense by approximately $24,000 and a 10%
change in the Yen to dollar exchange rate would have changed revenues
by approximately $1,187,000 for the year ended June 30, 2003.
For II-VI Singapore Pte., Ltd. and its subsidiaries, the functional
currency is the U.S. dollar. Gains and losses on the remeasurement of
the local currency financial statements are included in net earnings.
Foreign currency remeasurement losses were $0.2 million, $0.5 million
and $0.5 million for the years ended June 30, 2003, 2002 and 2001,
respectively.
For all other foreign subsidiaries, the functional currency is the
local currency. Assets and liabilities of those operations are
translated into U.S. dollars using period-end exchange rate; while
income and expenses are translated using the average exchange rates for
the reporting period. Translation adjustments are recorded as
accumulated other comprehensive income within shareholders' equity.
Interest Rate Risks
On March 6, 2003, the Company entered into an interest rate cap,
replacing an existing interest rate cap that matured on March 5, 2003,
with a notional amount of $8.8 million as required under the terms of
its current credit agreement in order to limit interest rate exposure
on one-half of the then outstanding balance of the term loan. In
fiscal 2003, the Company decreased its borrowings by $10.9 million. As
of June 30, 2003, the total borrowings of $23.7 million include $16.2
million under the term loan option, $4.5 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 $291,000 for fiscal year 2003.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of II-VI Incorporated and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of II-VI
Incorporated and subsidiaries (the "Company") as of June 30, 2003 and
2002, and the related consolidated statements of earnings,
shareholders' equity, comprehensive income and cash flows for each of
the three years in the period ended June 30, 2003. Our audits also
included the financial statement schedule listed in Item 15. These
consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is
to express an opinion on the consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of II-VI Incorporated
and subsidiaries as of June 30, 2003 and 2002 and the results of their
operations and their cash flows for each of the three years in the
period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for goodwill amortization in
fiscal 2002.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
September 25, 2003
28
CONSOLIDATED BALANCE SHEETS
June 30, 2003 2002
- -----------------------------------------------------------------------
($000)
Current Assets
Cash and cash equivalents $ 15,583 $ 9,610
Accounts receivable -
less allowance for doubtful accounts
and warranty returns of $1,266 at
June 30, 2003 and $847 at June 30, 2002 22,086 21,541
Inventories 24,384 19,741
Deferred income taxes 3,794 3,457
Prepaid and other current assets 1,968 1,488
- -----------------------------------------------------------------------
Total Current Assets 67,815 55,837
Property, Plant & Equipment, net 57,954 60,711
Goodwill, net 28,987 28,987
Investments 1,792 1,850
Intangible Assets, net 4,643 3,233
Other Assets 1,602 1,283
- -----------------------------------------------------------------------
$162,793 $151,901
=======================================================================
Current Liabilities
Accounts payable $ 6,115 $ 3,970
Accrued salaries and wages 2,809 2,125
Accrued bonuses 5,244 2,851
Income taxes payable 1,945 1,012
Accrued profit sharing contribution 1,263 736
Other accrued liabilities 3,316 4,329
Current portion of long-term debt 6,923 5,068
- -----------------------------------------------------------------------
Total Current Liabilities 27,615 20,091
Long-Term Debt 16,782 29,435
Deferred Income Taxes 5,579 3,881
Other Liabilities 1,296 834
- -----------------------------------------------------------------------
Total Liabilities 51,272 54,241
Commitments and Contingencies
Shareholders' Equity
Preferred stock, no par value;
authorized - 5,000,000 shares; none issued - -
Common stock, no par value; authorized -
30,000,000 shares; issued -
15,268,876 shares at June 30, 2003;
15,101,450 shares at June 30, 2002 39,430 37,840
Accumulated other comprehensive income 930 279
Retained earnings 73,071 61,451
- -----------------------------------------------------------------------
113,431 99,570
Less treasury stock at cost, 1,068,880 shares 1,910 1,910
- -----------------------------------------------------------------------
Total Shareholders' Equity 111,521 97,660
- -----------------------------------------------------------------------
$162,793 $151,901
=======================================================================
See Notes to Consolidated Financial Statements.
29
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended June 30, 2002 2001 2000
- ----------------------------------- -------- -------- --------
($000 except per share data)
Revenues
Net sales:
Domestic $ 64,740 $ 61,995 $ 73,075
International 52,470 44,066 45,176
Contract research and development 11,000 7,627 5,083
- ----------------------------------- ----------- ------------ ---------
128,210 113,688 123,334
- ----------------------------------- ----------- ------------ ---------
Costs, Expenses and Other Expense
Cost of goods sold 69,408 69,732 72,181
Contract research and development 10,436 6,905 3,619
Internal research and development 2,660 4,441 4,499
Selling, general and administrative 28,510 21,245 24,767
Interest expense 849 1,444 2,330
Other expense - net 297 411 1,382
- ----------------------------------- ----------- ------------ ---------
112,160 104,178 108,778
- ----------------------------------- ----------- ------------ ---------
Earnings Before Income Taxes 16,050 9,510 14,556
Income Taxes 4,430 2,246 5,065
- ----------------------------------- ----------- ------------ ---------
Net Earnings $ 11,620 $ 7,264 $ 9,491
- ----------------------------------- ----------- ------------ ---------
Basic Earnings Per Share $ 0.83 $ 0.52 $ 0.69
- ----------------------------------- ----------- ------------ ---------
Diluted Earnings Per Share $ 0.81 $ 0.51 $ 0.67
See Notes to Consolidated Financial Statements.
30
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Other Treasury Stock
-------------- Comprehensive Retained ----------------
Shares Amount Income Earnings Shares Amount Total
------ ------- ------ -------- ------ -------- -------
(000)
BALANCE - JULY 1, 2000 13,976 $20,454 $210 $44,696 (1,069) $(1,910) $63,450
Shares issued under
stock option plans 128 466 - - - - 466
Shares issued to acquire
Laser Power Corporation 877 15,474 - - - - 15,474
Net earnings - - - 9,491 - - 9,491
Other comprehensive loss, net of tax - - (119) - - - (119)
Income tax benefit for
options exercised - 651 - - - - 651
- ------------------------------------ ------ ------- ------ ------- ------ ------- -------
BALANCE - JUNE 30, 2001 14,981 $37,045 $ 91 $54,187 (1,069) $(1,910) $89,413
Shares issued under
stock option plans 120 370 - - - - 370
Net earnings - - - 7,264 - - 7,264
Other comprehensive income, net of tax - - 188 - - - 188
Income tax benefit for
options exercised - 425 - - - - 425
- ------------------------------------ ------ ------- ------ ------- ------ ------- -------
BALANCE - JUNE 30, 2002 15,101 $37,840 $279 $61,451 (1,069) $(1,910) $97,660
Shares issued under
stock option plans 167 542 - - - - 542
Shares issued to acquire
Laser Power Corporation 1 6 - - - - 6
Net earnings - - - 11,620 - - 11,620
Other comprehensive income, net of tax - - 651 - - - 651
Income tax benefit for
options exercised - 1,042 - - - - 1,042
- ------------------------------------ ------ ------- ------ ------- ------ ------- --------
BALANCE - JUNE 30, 2003 15,269 $39,430 $930 $73,071 (1,069) $(1,910) $111,521
==================================== ====== ======= ====== ======= ====== ======= ========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended June 30, 2003 2002 2001
- ------------------------------------------- ------- ------ ------
($000)
Net earnings $11,620 $7,264 $9,491
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income tax of $248, $58
and $(64), respectively 651 188 (119)
- ------------------------------------------- ------- ------ ------
COMPREHENSIVE INCOME $12,271 $7,452 $9,372
=========================================== ======= ====== ======
See Notes to Consolidated Financial Statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
($000) 2003 2002 2001
- ------------------------------------------------- ------- ------- -------
Cash Flows from Operating Activities
Net earnings $11,620 $ 7,264 $ 9,491
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 8,817 8,429 6,838
Amortization 510 363 1,866
Loss (gain) on foreign currency
remeasurements and transactions 159 (165) 1,445
Net loss on disposal or writedown of assets 323 335 237
Deferred income taxes 1,361 794 1,518
Other 50 (672) -
Increase (decrease) in cash from changes in:
Accounts receivable (623) 596 (3,702)
Inventories (3,549) 1,700 (1,745)
Accounts payable 2,124 (1,775) (484)
Other operating net assets 4,849 (731) 40
- ------------------------------------------------- ------- ------- -------
Net cash provided by operating activities 25,641 16,138 15,504
- ------------------------------------------------- ------- ------- -------
Cash Flows from Investing Activities
Additions to property, plant and equipment (7,017) (8,663) (16,699)
Purchases of businesses (2,755) (2,172) (27,726)
Dividends from (investment in) unconsolidated business 9 (1,698) -
Disposals of property, plant and equipment 476 317 259
- ------------------------------------------------- ------- ------- -------
Net cash used in investing activities (9,287) (12,216) (44,166)
- ------------------------------------------------- ------- ------- -------
Cash Flows from Financing Activities
(Payments) proceeds on short-term borrowings (5,819) 1,250 4,308
Proceeds from long-term borrowings - - 25,000
Payments on long-term borrowings (5,066) (3,834) (44)
Proceeds from sale of common stock 548 370 466
- ------------------------------------------------- ------- ------- -------
Net cash (used in) provided by financing activities (10,337) (2,214) 29,730
- ------------------------------------------------- ------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (44) (191) 695
- ------------------------------------------------- ------- ------- -------
Net increase in cash and cash equivalents 5,973 1,517 1,763
Cash and Cash Equivalents
Beginning of year 9,610 8,093 6,330
- ------------------------------------------------- ------- ------- -------
End of year $15,583 $ 9,610 $ 8,093
================================================= ======= ======= =======
Non-cash transactions: Increase to investments
from loan conversion $ 412 - -
Net assets acquired as
settlement on a customer
purchase commitment - $ 366 -
Net assets acquired for
fair value of common stock - - $15,474
================================================= ======= ======= =======
See Notes to Consolidated Financial Statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS The Company designs, manufactures and markets
optical and electro-optical components, devices and materials for
infrared, near-infrared, visible light, x-ray and gamma-ray
instrumentation. The Company markets its products in the United States
through its direct sales force and worldwide through its wholly- or
majority-owned subsidiaries, distributors and agents.
The Company uses certain uncommon materials and compounds to
manufacture its products. Some of these materials are available from
only one proven outside source. The continued high quality of these
materials is critical to the stability of the Company's manufacturing
yields. The Company has not experienced significant production delays
due to a shortage of materials. However, the Company does occasionally
experience problems associated with vendor supplied materials not
meeting specifications for quality or purity. A significant failure of
the Company's suppliers to deliver sufficient quantities of necessary
high-quality materials on a timely basis could have a material adverse
effect on the Company's results of operations.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include II-VI Incorporated and its wholly-owned subsidiaries: VLOC
Incorporated; Exotic Electro-Optics, Inc.; II-VI Delaware,
Incorporated; II-VI Holdings B.V.; II-VI Japan Incorporated; II-VI
Singapore Pte., Ltd.; II-VI Acquisition Corp.; II-VI Optics (Suzhou)
Co. Ltd.; II-VI International Pte., Ltd.; II-VI U.K. Limited; II-VI
Deutschland GmbH and II-VI LPE N.V., as well as its majority-owned
subsidiary, II-VI/L.O.T. GmbH (collectively the "Company"). All
intercompany transactions and balances have been eliminated.
FOREIGN CURRENCY TRANSLATION For II-VI Singapore Pte., Ltd. and its
subsidiaries, the functional currency is the U.S. dollar. Gains and
losses on the remeasurement of the local currency financial statements
are included in net earnings. Foreign currency remeasurement losses
were $0.2 million, $0.5 million and $0.5 million for the years ended
June 30, 2003, 2002 and 2001, respectively.
For all other foreign subsidiaries, the functional currency is the
local currency. Assets and liabilities of those operations are
translated into U.S. dollars using period-end exchange rates; while
income and expenses are translated using the average exchange rates for
the reporting period. Translation adjustments are recorded as
accumulated other comprehensive income within shareholders' equity in
the accompanying consolidated balance sheets.
CASH AND CASH EQUIVALENTS The Company considers highly liquid debt
instruments with an original maturity of three months or less to be
cash equivalents. The majority of cash and cash equivalents is
invested in investment grade money market type instruments. Cash of
foreign subsidiaries is on deposit at banks in Singapore, China,
Germany, Japan, Belgium, the Netherlands and the United Kingdom.
ACCOUNTS RECEIVABLE The Company establishes an allowance for doubtful
accounts based on historical experience. The Company records a warranty
reserve as a charge against earnings based on a percentage of sales
utilizing actual returns over the last twelve months.
Concentrations of credit risk with respect to accounts receivable are
limited due to the Company's large number of customers. However, a
significant portion of the accounts receivable is from a single
European distributor. At June 30, 2003 and 2002, the accounts
receivable balance from this distributor was $1.9 million and $2.4
million, respectively, or 9% or 11%, respectively, of the accounts
receivable balance. Although the Company does not currently foresee a
risk associated with these receivables, repayment is dependent upon the
financial stability of this distributor.
For cash flow purposes, the Company factored with recourse
approximately one-third of the accounts receivable due to its Japan
subsidiary during each of the years ended June 30, 2003 and 2002.
Factoring is done with large banks in Japan. As of June 30, 2003 and
2002, approximately $0.6 million and $0.4 million accounts receivable
had been factored. As of June 30, 2003 and 2002, approximately $0.6
million and $0.4 million, respectively, was included in Other Accrued
Liabilities representing the Company's obligation to the bank for these
factored receivables.
33
The following table summarizes the change in the carrying value of the
Company's warranty reserve as of and for the years ended June 30, 2003,
2002 and 2001.
Year Ended June 30, 2003 2002 2001
- --------------------------------------------------------------
($000)
Balance - Beginning of Year $419 $334 $264
Expense and writeoffs, net 85 (3) 70
Other(1) - 88 -
- --------------------------------------------------------------
Balance - End of Year $504 $419 $334
(1) Reclassification of certain warranty reserves from other current
liabilities.
INVENTORIES Inventories are valued at the lower of cost or market,
with cost determined on the first-in, first-out basis. Inventory costs
include material, labor and manufacturing overhead. 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.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are
carried at cost. Major improvements are capitalized, while maintenance
and repairs are generally expensed as incurred. The Company reviews
its property, plant and equipment and other long-lived assets for
impairment whenever events or circumstances indicate that the carrying
amounts may not be recoverable. Depreciation for financial reporting
purposes is computed primarily by the straight-line method over the
estimated useful lives of the assets. Depreciable useful lives range
from 3 to 20 years.
GOODWILL The excess purchase price over the net assets of businesses
acquired is reported as goodwill in the accompanying consolidated
balance sheets. Statement of Financial Accounting Standards (SFAS) No.
142 "Goodwill and Other Intangible Assets", was adopted by the Company
as of July 1, 2001. The Company no longer amortizes goodwill but tests
goodwill for impairment at least annually or when events or changes in
circumstances indicate that goodwill might be impaired.
INVESTMENTS During the year ended June 30, 2002, the Company acquired
for $1.7 million a 25% ownership interest in a supplier to the
Company. In July 2002, the Company increased its ownership interest to
33% as a result of a loan conversion to equity in accordance with the
original purchase agreement. This investment is accounted for under
the equity method of accounting.
At June 30, 2003 and 2002, the Company had outstanding notes receivable
of approximately $0.5 million and $0.2 million, respectively, from an
equipment and supply agreement with this supplier. Payments on these
notes are made quarterly with interest calculated at the Canadian Prime
Rate plus 1 1/2% on the unpaid balance.
For the years ended June 30, 2003 and 2002, the Company purchased $0.3
million of raw materials each year from this supplier.
The Company's pro rata share of the earnings from this investment and
the interest received from both of these agreements did not have a
material effect on the Company's results of operations in either year
ended June 30, 2003 or 2002.
INTANGIBLES Intangible assets are carried at cost. Amortization for
financial reporting purposes is computed using the straight-line method
over the estimated useful lives of the assets ranging from 5 to 20
years.
ACCRUED BONUSES AND PROFIT SHARING CONTRIBUTION The Company records
bonus and profit sharing estimates as a charge against earnings based
on a formula percentage of the Company's operating income. These
estimates are adjusted to actual based on final results of operations
achieved during the fiscal year. Partial bonus amounts are paid
quarterly based on interim Company performance, and the remainder is
paid after fiscal year end and final determination of the applicable
percentage. Other bonuses and profit sharing are paid annually.
INCOME TAXES Deferred income tax assets and liabilities are determined
based on the differences between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred income tax
assets to the amount more likely than not to be realized.
34
REVENUE RECOGNITION Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, the price is established
or determinable and collectibility is probable.
Revenue, other than for contract research and development, for all
business segments is recognized from the sale of products at the point
of passage of title, which is at the time of shipment.
The Company performs research and development under contract agreements
with customers based on cost plus fixed fee, cost reimbursable or fixed
fee terms. These contracts generally require the Company to produce
and provide developmental materials and/or products to those customers.
Revenues from cost plus fixed fee and cost reimbursable contracts are
recognized as costs are incurred.
The Company follows the guidelines of Statement of Position 81-1
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" for its fixed fee contracts. Revenue and
profits on each fixed fee contract are accounted for using the
percentage-of-completion method of accounting, whereby revenue and
profits are recognized throughout the performance period of the
contract. Percentage-of-completion is determined by relating the
actual cost of work performed to date to the estimated total cost for
each contract. The estimated total cost for each contract is
periodically reevaluated and revised, when necessary, throughout the
life of the contract. Losses on contracts are recorded in full when
identified. During fiscal year 2003, a contract of the military
infrared optics segment was adjusted reflecting a decrease in
profitability by $0.8 million, net of income tax, during the year ended
June 30, 2003 and $0.4 million, net of income tax, during the quarter
ended June 30, 2003 as a result of revisions to estimated costs to
complete the contract.
SHIPPING AND HANDLING COSTS Shipping and handling costs billed to
customers are included in revenues. Shipping and handling costs
incurred by the Company are included in selling, general and
administrative expenses in the accompanying consolidated statements of
earnings. Total shipping and handling costs included in revenues and
in selling, general and administrative expenses were $0.2 million, $0.3
million and $0.3 million for the years ended June 30, 2003, 2002 and
2001, respectively.
RESEARCH AND DEVELOPMENT Research and development costs and costs
related to customer and government funded research and development
contracts are expensed as incurred.
STOCK-BASED COMPENSATION In December 2002, the FASB issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-
Based Compensation," to provide alternative methods of transition to
SFAS No. 123's fair value method of accounting for stock-based employee
compensation should a company elect this accounting method. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and
Accounting Principles Board (APB) Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair value
method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether
they account for that compensation using the fair value method of SFAS
No. 123 or the intrinsic value method specified in APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
The Company uses the intrinsic value approach of APB Opinion No. 25 for
stock options granted to officers and key employees. All options
granted under the plan had an exercise price equal to the fair market
value of the underlying common stock on the date of grant.
In accordance with the disclosure requirements of SFAS No. 148, the
following pro forma information adjusts previously reported net
earnings, basic earnings per common share and diluted earnings per
common share to reflect the fair value recognition provisions of SFAS
No. 123.
35
Year Ended June 30 2003 2002 2001
- ------------------------ -------------------------- --------------------------- ---------------------------
($000 except per share data) Basic Diluted Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings Earnings Earnings
Per Per Per Per Per Per
Net Common Common Net Common Common Net Common Common
Earnings Share Share Earnings Share Share Earnings Share Share
-------------------------- --------------------------- ---------------------------
Net earnings and
earnings per common
share, as reported $11,620 $0.83 $0.81 $7,264 $0.52 $0.51 $9,491 $0.69 $0.67
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 0 0.00 0.00
Deduct: Stock-based
employee compensation
cost, net of related
income tax effects,
that would have been
included in the
determination of net
earnings if the fair
value method had been
applied to all awards (698) (0.05) (0.05) (632) (0.05) (0.05) (635) (0.05) (0.04)
-------- ------ ------ ------- ------ ------ ------- ------ ------
Pro forma net earnings
and earnings per
common share $10,922 $0.78 $0.76 $6,632 $0.47 $0.46 $8,856 $0.64 $0.63
======== ====== ====== ======= ====== ====== ======= ====== ======
The pro forma adjustments were calculated using the Black-Scholes
option pricing model under the following weighted-average assumptions
in each fiscal year:
Year Ended June 30, 2003 2002 2001
- ---------------------------------------------------------------------
Risk free interest rate 3.45% 3.81% 6.10%
Expected volatility 61% 47% 92%
Expected life of options 7.04 years 7.00 years 6.40 years
Expected dividends none none none
Based on the option pricing model, options granted during the years
ended June 30, 2003, 2002 and 2001 had fair values at the date of the
grant of $8.86, $8.09 and $13.81 per share, respectively.
DERIVATIVE INSTRUMENTS SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral
of the effective date of SFAS No. 133", and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities",
were effective for the Company as of July 1, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and hedging activities. It 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 was not required to record any transition
adjustments as a result of adopting these standards.
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 the basis of its aggregate
net cash flows in respective currencies, to foreign currency risk.
The Company recorded the fair value of contracts with a notional amount
of approximately $2.2 million and $1.2 million as of June 30, 2003 and
2002, respectively, 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
$69,000, $(66,000) and $165,000 for the years ended June 30, 2003, 2002
and 2001, respectively.
To satisfy certain provisions of its credit agreement (see Note G), on
March 6, 2003 the Company entered into a one-year interest rate cap
with a notional amount of $8.8 million replacing an interest rate cap
that expired on March 5, 2003. These agreements were entered into to
limit interest rate exposure on one-half of the remaining outstanding
balance of the Company's term loan under the credit agreement. The
floating rate option for the cap agreement is the one-month LIBOR rate
with a cap strike rate of 3.00%. At June 30, 2003 the one-month LIBOR
rate was 1.12%. The Company has elected not to account for these
36
agreements as hedges as defined by SFAS No. 133 but instead recorded
the unrealized change in the fair value of these agreements as an
increase or decrease to interest expense in the results of operations.
The combined effect of these instruments increased net earnings for the
year ended June 30, 2002 by approximately $88,000. The effect of these
instruments on net earnings for the years ended June 30, 2003 and 2001
was immaterial.
COMPREHENSIVE INCOME Comprehensive income is a measure of all changes
in shareholders' equity that result from transactions and other
economic events of the period other than transactions with owners.
Accumulated other comprehensive income is a component of shareholders'
equity and consists of accumulated foreign currency translation
adjustments of $0.9 million and $0.3 million, net of income taxes, as
of June 30, 2003 and 2002, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and
assumptions were used to estimate the fair value of financial
instruments:
Cash and Cash Equivalents The carrying amount approximates fair
value because of their short maturities.
Debt Obligations The fair values of debt obligations are estimated
based upon market values of similar issues. The fair values and
carrying amounts of the Company's debt obligations are approximately
equivalent.
ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In June 2001, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 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 adopted SFAS No. 143 in the first quarter of the year
ended June 30, 2003. The Company evaluated its existing leased and
owned properties for potential asset retirement obligations under SFAS
No. 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 No. 143 did not have a
material effect on the Company's financial position or results of
operations as of or for the year ended June 30, 2003.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 requires unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership
among their owners and other parties involved. The provisions of
Interpretation No. 46 are applicable immediately to all variable
interest entities created after January 31, 2003 and variable interest
entities in which an enterprise obtains an interest after that date,
and for variable interest entities created before this date, the
provisions are effective July 1, 2003. We are currently evaluating the
provisions of this interpretation; however, we do not believe they will
have a material impact on our accounting for existing investments.
RECLASSIFICATIONS Certain amounts from priors years have been
reclassified to conform with the 2003 presentation.
Note B ACQUISITIONS
II-VI/L.O.T. GmbH 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. The Company
purchased a 75% controlling interest in II-VI/L.O.T. GmbH (II-
VI/L.O.T.) for approximately $2.8 million in cash. 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. The
results of II-VI/L.O.T. for the year ended June 30, 2003 were included
in the Company's consolidated financial statements and are included in
the infrared optics segment.
37
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.
LITTON SYSTEMS, INC. SILICON CARBIDE GROUP During the quarter ended
December 31, 2001, the Company acquired the Litton Systems, Inc.
Silicon Carbide (SiC) group for approximately $2.2 million in cash.
The major assets acquired were equipment of approximately $2.0 million,
inventory of approximately $0.1 million and intangible assets of
approximately $0.1 million consisting of rights to patented technology
that are being amortized over a 5-year useful life.
Note C CONTRACT RECEIVABLES
The components of contract receivables, which are a component of
accounts receivable, net, were as follows:
June 30, 2003 2002
- ------------------------------------------------------------
($000)
Billed
Completed Contracts $ 75 $ 30
Contracts in Progress 1,526 1,953
- ------------------------------------------------------------
1,601 1,983
Unbilled 1,988 1,598
- ------------------------------------------------------------
$3,589 $3,581
============================================================
Note D INVENTORIES
The components of inventories were as follows:
June 30, 2003 2002
- ------------------------------------------------------------
($000)
Raw materials $ 5,729 $ 4,638
Work in process 11,034 8,958
Finished goods 7,621 6,145
- ------------------------------------------------------------
$24,384 $19,741
============================================================
Note E PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost consist of the following:
June 30, 2003 2002
- ------------------------------------------------------------
($000)
Land and land improvements $ 1,453 $ 1,551
Buildings and improvements 31,642 30,008
Machinery and equipment 72,424 73,041
- ------------------------------------------------------------
105,519 104,600
Less accumulated depreciation 47,565 43,889
- ------------------------------------------------------------
$ 57,954 $ 60,711
============================================================
Depreciation expense was $8.8 million, $8.4 million and $6.8 million
for the years ended June 30, 2003, 2002 and 2001, respectively.
The Company recorded an impairment charge to operations of
approximately $0.3 million, net of tax, in the year ended June 30,
2002.
38
Interest expense capitalized associated with the construction of
buildings and improvements approximated $11,000, $118,000 and $119,000
during the years ended June 30, 2003, 2002 and 2001, respectively.
Note F GOODWILL AND INTANGIBLE ASSETS
As of June 30, 2001, the Company had goodwill and other intangible
assets, net of accumulated amortization, of $33.3 million, which was
subject to the transitional assessment provisions of SFAS No. 142. A
discounted cash flow model was used to determine the fair value of the
reporting units for purposes of testing goodwill for impairment. The
discount rate used was based on a risk-adjusted weighted average cost
of capital for the Company. The Company completed its impairment test
of goodwill prior to December 31, 2001. The results of this test
indicated that the Company's goodwill was not impaired as of July 1,
2001, and, therefore, no impairment loss was recorded.
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, 2003 and 2002. Based on
the results of these analyses, the Company's goodwill was not impaired
as of June 30, 2003 or 2002.
In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill effective July 1, 2001. The following pro
forma information adjusts previously reported net earnings, basic
earnings per share and diluted earnings per share to exclude goodwill
amortization:
Year Ended June 30, 2003 2002 2001
- -----------------------------------------------------------------
($000 except per share data) $ 11,620 $ 7,264 $ 9,491
Net earnings
Add: Effect of
goodwill amortization - - 1,473
- -----------------------------------------------------------------
Adjusted net earnings $ 11,620 $ 7,264 $10,964
=================================================================
Basic earnings per share $ 0.83 $ 0.52 $ 0.69
Add: Effect of
goodwill amortization - - 0.11
- -----------------------------------------------------------------
Adjusted basic earnings
per share $ 0.83 $ 0.52 $ 0.80
=================================================================
Diluted earnings per share $ 0.81 $ 0.51 $ 0.67
Add: Effect of
goodwill amortization - - 0.10
- -----------------------------------------------------------------
Adjusted diluted earnings
per share $ 0.81 $ 0.51 $ 0.77
=================================================================
Changes in the carrying amount of goodwill are included below:
Year Ended June 30, 2003 2002
- -----------------------------------------------------------------
($000)
Balance - Beginning of Year $ 28,987 $ 29,236
Reclassification of intangible
assets into goodwill - 229
Income tax adjustments - (478)
- -----------------------------------------------------------------
Balance - End of Year $ 28,987 $ 28,987
=================================================================
The Company completed a tax project in fiscal 2002 relating to its
acquisition of Laser Power Corporation in August 2000. The result of
this tax study identified additional deferred income tax assets of $0.3
million and a reduction in current income tax payable of $0.2 million.
These income tax adjustments resulted in a reduction of goodwill of
$0.5 million during the year ended June 30, 2002.
39
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill as of June 30, 2003 and 2002 were
as follows:
June 30, 2003 June 30, 2002
-----------------------------------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
($000) Amount Amortization Value Amount Amortization Value
Patents $1,867 $ (493) $1,374 $2,193 $ (757) $1,436
Trademark 1,491 217) 1,274 1,491 (143) 1,348
Customer Lists 2,360 557) 1,803 500 (321) 179
Other 750 (558) 192 750 (480) 270
------ ------- ------ ------ ------- ------
Total $6,468 $(1,825) $4,643 $4,934 $ (1,701) $3,233
In addition to the impairment charge for property, plant and equipment
as noted in Note E, an impairment charge of approximately $0.2 million
net of income tax for related technology was charged to operations in
the year ended June 30, 2002. The Company also wrote off fully
amortized assets with an original cost and accumulated amortization of
$0.4 million in the year ended June 30, 2003.
Amortization expense recorded on the intangible assets for the years
ended June 30, 2003, 2002 and 2001 was $0.5 million, $0.4 million and
$0.4 million, respectively. The estimated amortization expense for
existing intangible assets for each of the five succeeding years is as
follows:
Year Ending June 30,
- ------------------------
($000)
2004 $499
2005 499
2006 446
2007 347
2008 339
========================
Note G DEBT
The components of debt were as follows:
June 30, 2003 2002
- ----------------------------------------------------------------------
($000)
Line of credit, interest at the
LIBOR Rate, as defined, plus 1.25%
and 1.38%, respectively $4,500 $10,750
Term loan, interest at the LIBOR Rate,
as defined, plus 1.25% and 1.38%,
respectively, payable in quarterly
installments through August 2005 16,250 21,250
Pennsylvania Industrial Development Authority
(PIDA) term note, interest at 3.00%, payable
in monthly installments through October 2011 452 499
Yen denominated term note, interest at the
Japanese Yen Base Rate, as defined, plus 1.49%,
principal payable in full in September 2007 2,503 -
Yen denominated term note, interest at the
Japanese Yen Base Rate, as defined, plus 1.49% - 1,983
Other - 21
- ----------------------------------------------------------------------
Total debt 23,705 34,503
Current portion of long-term debt (6,923) (5,068)
- ----------------------------------------------------------------------
Long-term debt $16,782 $29,435
======================================================================
The Company has a $45.0 million secured credit agreement, which it
obtained in connection with the Company's acquisition of Laser Power
Corporation in fiscal 2001. The facility has a five-year term
effective August 14, 2000 and contains term and line of credit
borrowing options. The facility is collateralized by the Company's
accounts receivables and inventories, a pledge of all of the capital
40
stock of each of the Company's 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 weighted average interest rate of borrowings under the
credit agreement was 2.62% and 3.36%, respectively, at June 30, 2003
and 2002. The average outstanding borrowings under the line of credit
were $26.5 million and $33.0 million during the years ended June 30,
2003 and 2002, respectively. The Company had available $15.5 million
and $9.3 million under its line of credit as of June 30, 2003 and 2002,
respectively.
On June 28, 2002, the Company amended the credit facility to allow for
a renewal of and an increase to the principal of the Yen denominated
term note ("Yen Loan"). The principal amount available under the Yen
loan was increased to 300 million Yen. Additionally, terms relating to
the required interest rate protection agreement and to a restrictive
covenant were amended to enhance the clarity of the agreement. All
other substantial terms and conditions of the credit facility remain
unchanged.
In September 2002, the Company replaced its 237 million Yen loan with a
300 million Yen loan. This 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%. The Japanese Yen Base Rate was
0.07% at June 30, 2003.
The Company has a line of credit facility with a Singapore bank which
permits maximum borrowings in the local currency of approximately $0.4
million for the fiscal years ended June 30, 2003 and 2002. Borrowings
are payable upon demand with interest being charged at the rate of
1.00% above the bank's prevailing prime lending rate. The interest
rate at June 30, 2003 and 2002 was 6.00%. At June 30, 2003 and 2002
there were no outstanding borrowings under this facility.
The aggregate annual amounts of principal payments required on the
long-term debt are as follows:
Year Ending June 30,
- ------------------------
($000)
2004 $6,923
2005 7,550
2006 6,426
2007 53
2008 2,560
Thereafter 193
========================
Interest and commitment fees paid during the years ended June 30, 2003,
2002 and 2001 totaled approximately $1.0 million, $1.4 million and $2.2
million, respectively.
Note H INCOME TAXES
The components of income tax expense were as follows:
Year Ended June 30, 2003 2002 2001
- ----------------------------------------------------------
($000)
Current
Federal $1,272 $ 423 $2,387
State 531 233 387
Foreign 1,266 690 939
- ----------------------------------------------------------
Total Current $3,069 $1,346 $3,713
==========================================================
Deferred:
Federal $1,070 $1,015 $1,119
State (37) 190 118
Foreign 328 (305) 115
- ----------------------------------------------------------
Total Deferred $1,361 $ 900 $1,352
==========================================================
Total Income Tax Expense $4,430 $2,246 $5,065
==========================================================
41
Principal items comprising deferred income taxes were as follows:
June 30, 2003 2002
- ------------------------------------------------- ------- -------
($000)
Deferred income tax assets - current
Prepaid taxes $ 392 $ 167
Inventory capitalization 1,103 1,004
Non-deductible accruals 1,343 1,416
Intangible assets 106 -
Net-operating loss carryforward - current portion 1,242 870
Valuation allowance (392) -
- ------------------------------------------------- ------- -------
Deferred income taxes - current $ 3,794 $ 3,457
- ------------------------------------------------- ------- -------
Deferred income tax assets and (liabilities) - long-term
Net-operating loss carryforward $ 739 $ 1,882
Other 64 -
Valuation allowance (627) (468)
- ------------------------------------------------- ------- -------
Deferred income tax asset - long-term $ 176 $ 1,414
- ------------------------------------------------- ------- -------
Tax over book accumulated depreciation $(4,723) $(4,333)
Intangible assets (1,032) (962)
- ------------------------------------------------- ------- -------
Deferred income tax liability - long-term $(5,755) $(5,295)
- ------------------------------------------------- ------- -------
Net deferred income taxes - long-term $(5,579) $(3,881)
================================================= ======= =======
The reconciliation of income tax expense at the statutory federal rate
to the reported income tax expense is as follows:
Year Ended June 30, 2003 % 2002 % 2001 %
- ---------------------------------------------- -------- -- -------- -- -------- --
($000)
Taxes at statutory rate $ 5,457 34 $ 3,234 34 $ 4,949 34
Increase (decrease) in taxes resulting from:
State income taxes - net of federal benefit 343 2 279 3 358 3
Extraterritorial Income Exclusion or (1,112) (7) (719) (7) (378) (3)
Foreign Sales Corporation income
Excludable foreign income (472) (3) (525) (6) (124) (1)
Foreign taxes - - 83 1 126 1
Non-deductible goodwill amortization - - - - 500 3
Other 214 2 (106) (1) (366) (2)
- ---------------------------------------------- -------- -- -------- -- -------- --
$ 4,430 28 $ 2,246 24 $ 5,065 35
============================================== ======== == ======== == ======== ==
During the years ended June 30, 2003, 2002, and 2001, cash paid by the
Company for income taxes was approximately $1.2 million, $1.4 million,
and $1.7 million, respectively.
Earnings before income taxes of our non-U.S. operations for June 30,
2003, 2002and 2001 was $7.9 million, $4.5 million and $3.3 million,
respectively. The Company has not recorded deferred income taxes
applicable to undistributed earnings of foreign subsidiaries that are
indefinitely reinvested outside the United States. If the earnings
of such foreign subsidiaries were not indefinitely reinvested, an
additional deferred tax liability of approximately $7.0 million and
$6.9 million would have been required as of June 30, 2003 and 2002,
respectively.
The sources of differences resulting in deferred income tax expense
(benefit) and the related tax effect of each were as follows:
Year Ended June 30, 2003 2002 2001
- ---------------------------------------- ------ ------ ------
($000)
Depreciation and amortization $ 337 $ 344 $2,232
Inventory capitalization (99) 252 (872)
Net operating loss carryforward 931 639 729
Other 192 (335) (737)
- ---------------------------------------- ------ ------ ------
$1,361 $ 900 $1,352
======================================== ====== ====== ======
42
As of June 30, 2003 and 2002, the Company had federal and state net
operating loss carryforwards of approximately $2.6 million and
$1.1 million, respectively. The net operating losses will begin
to expire in 2018 and 2009, respectively. For the year ended
June 30, 2003, the Company utilized approximately $2.0 million of net
operating losses to reduce current taxable income.
Note I EARNINGS PER SHARE
The following table sets forth the computation of earnings per share
for the periods indicated. Weighted average shares issuable upon the
exercise of stock options that were not included in the calculation
because they were antidilutive, were immaterial for all periods
presented.
Year Ended June 30, 2003 2002 2001
- ----------------------------------------------------------------------
(000 except per share data)
Net earnings $ 11,620 $ 7,264 $ 9,491
Divided by:
Weighted average common
shares outstanding 14,080 13,962 13,737
- ----------------------------------------------------------------------
Basic earnings per share $ 0.83 $ 0.52 $ 0.69
Net earnings $ 11,620 $ 7,264 $ 9,491
Divided by:
Weighted average common
shares outstanding 14,080 13,962 13,737
Dilutive effect of
stock options 310 352 423
- ----------------------------------------------------------------------
Dilutive weighted average
common shares outstanding 14,390 14,314 14,160
- ----------------------------------------------------------------------
Diluted earnings per share $ 0.81 $ 0.51 $ 0.67
======================================================================
Note J OPERATING LEASES
The Company leases certain property under operating leases that expire
at various dates through the year ending June 30, 2007. Future rental
commitments applicable to the operating leases at June 30, 2003 are as
follows:
Year Ending June 30,
- ------------------------
($000)
2004 $1,097
2005 835
2006 720
2007 261
========================
Rent expense was approximately $1.2 million, $1.1 million and $1.0
million for the years ended June 30, 2003, 2002 and 2001, respectively.
Note K STOCK OPTION PLANS
The Company has a stock option plan under which stock options have been
granted by the Board of Directors to certain officers and key
employees, with 3,870,000 shares of common stock reserved for use under
this plan. All options to purchase shares of common stock granted to
date have been at market price at the date of grant. Generally, twenty
percent of the options may be exercised one year from the date of grant
with comparable annual increases on a cumulative basis each year
thereafter. The stock option plan also has vesting provisions
predicated upon the death, retirement or disability of the optionee.
The amount available for future grants under the stock option plan was
906,277 as of June 30, 2003.
The Company has a nonemployee directors stock option plan with 240,000
shares of common stock reserved for use under this plan. The plan
provides for the automatic grant of options to purchase 30,000 shares
to each nonemployee director at the fair value on the date of
shareholder approval of the plan and a similar grant for each
nonemployee director that joined the Board prior to October 1999.
Twenty percent of the options granted may be exercised one year from
the date of grant with comparable annual increases on a cumulative
basis each year thereafter. The amount available for future grants
under the nonemployee directors stock option plan was 120,000 as of
June 30, 2003.
43
All stock options expire 10 years after the grant date.
Stock option activity relating to the plans during the years ended June
30, 2003, 2002 and 2001 were as follows:
Number of
Shares Subject Weighted Average
Options to Option Exercise Price
- --------------------------------------------------------------
Outstanding - July 1, 2000 1,106,726 $ 5.04
Granted 225,775 $ 17.27
Exercised (128,460) $ 3.63
Forfeited (29,750) $ 7.55
- --------------------------------------------------------------
Outstanding - June 30, 2001 1,174,291 $ 7.47
Granted 45,950 $ 15.10
Exercised (119,640) $ 2.96
Forfeited (39,320) $ 13.98
- --------------------------------------------------------------
Outstanding - June 30, 2002 1,061,281 $ 8.07
Granted 272,300 $ 14.04
Exercised (167,100) $ 3.24
Forfeited (56,200) $ 16.97
- --------------------------------------------------------------
Outstanding - June 30, 2003 1,110,281 $ 9.81
Exercisable - June 30, 2003 675,284 $ 7.10
Exercisable - June 30, 2002 744,620 $ 5.76
Exercisable - June 30, 2001 737,569 $ 4.41
==============================================================
Outstanding and exercisable options at June 30, 2003 were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number of Life Exercise Number of Exercise
Prices Shares in Years Price Shares Price
- --------------- ---------- ----------- --------- ------- --------
$ 1.00 - $ 2.00 183,600 1.27 $ 1.56 183,600 $ 1.56
$ 4.25 - $ 5.50 209,426 4.25 $ 5.29 180,861 $ 5.26
$ 6.09 - $10.50 192,620 4.11 $ 9.00 183,220 $ 9.14
$11.00 - $15.74 299,040 8.15 $ 13.30 64,133 $ 12.58
$16.00 - $23.00 225,595 7.91 $ 16.78 63,470 $ 16.96
- --------------- ---------- ---- ------- ------- -------
1,110,281 5.53 $ 9.81 675,284 $ 7.10
=============== ========== ==== ======= ======= =======
Note L SEGMENT AND GEOGRAPHIC REPORTING
The Company reports its segments using the "management approach" model
for segment reporting. The management approach model is based on the
way a company's management organizes segments within the company for
making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal
structure, management structure or any other manner in which management
segregates a company.
Effective July 1, 2002, the Company changed its segment reporting to
better reflect operational changes and to reflect how the Company's
management manages its businesses. Prior period segment information
has been restated.
The Company's reportable segments offer similar products to different
target markets. The segments are managed separately due to the
production requirements and facilities that are unique to each segment.
The Company has the following reportable segments: Infrared Optics,
which is the Company's II-VI and Laser Power infrared optics and
material products businesses; Near-Infrared Optics, which is the
Company's VLOC subsidiary; and Military Infrared Optics, which is the
Company's Exotic Electro-Optics subsidiary. The "Other" category is
primarily the aggregation of the Company's eV PRODUCTS division, the
44
Company's Wide Band Gap (WBG) development group, the Company's
corporate research and development group and remaining corporate
activities.
The Infrared Optics segment is divided into the geographic locations
within the United States, Singapore, China, Germany, Japan, Belgium and
the United Kingdom. Each geographic location is directed by a general
manager and is further divided into production and administrative units
that are directed by managers. The Infrared Optics segment designs,
manufactures and markets optical and electro-optical components and
materials sold under the II-VI and Laser Power brand names and used
primarily in high-power CO2 lasers.
The Near-Infrared Optics segment is located in the United States. The
Near-Infrared Optics segment is directed by a general manager. The
Near-Infrared Optics segment is further divided into production and
administrative units that are directed by managers. The Near-Infrared
Optics segment designs, manufactures and markets near-infrared and
visible-light products for industrial, scientific and medical
instruments and laser gain material and products for solid-state YAG
and YLF lasers at the Company's VLOC subsidiary.
The Military Infrared Optics segment is located in the United States.
The Military Infrared Optics segment is directed by a general manager.
The Military Infrared Optics segment is further divided into production
and administrative units that are directed by managers. The Military
Infrared Optics segment designs, manufactures and markets infrared
products for military applications under the Exotic Electro-Optics
brand name.
All entities comprised in the "Other" category are located in the
United States. The Company's eV PRODUCTS division manufactures and
markets solid-state x-ray and gamma-ray detection materials and
products for use in medical, security monitoring, industrial,
environmental and scientific applications. The Company's WBG group
manufactures and markets single crystal silicon carbide substrates for
use in solid-state lighting, wireless infrastructure, RF electronics
and power switching industries.
The accounting policies of the segments are the same as those described
in the Summary of Significant Accounting Policies (Note A).
Substantially all of the Company's corporate expenses are allocated to
the segments. The Company evaluates segment performance based upon
reported segment earnings or loss, which is defined as earnings
before income taxes, interest and other income or expense. Inter-
segment sales and transfers have been eliminated.
45
The following table summarizes selected financial information of the
Company's operations by segment:
Infrared Near-Infrared Military-Infrared
Optics Optics Optics Other Total
- -----------------------------------------------------------------------------------------------------
($000)
2003
Revenues $ 73,638 $ 22,844 $ 23,003 $ 8,725 $128,210
Segment earnings (loss) 19,965 1,698 (65) (4,402) 17,196
Interest expense - - - - (849)
Other expense, net - - - - (297)
Earnings before income taxes - - - - 16,050
Depreciation and amortization 4,170 2,053 1,662 1,442 9,327
Segment assets 69,547 23,957 39,750 29,539 162,793
Expenditures for property,
plant and equipment 3,152 558 1,403 1,904 7,017
Equity investment - - - 1,792 1,792
Goodwill 5,516 1,927 21,544 - 28,987
- ------------------------------ -------- -------- -------- -------- --------
2002
Revenues $ 61,840 $ 22,724 22,008 $ 7,116 $113,688
Segment earnings (loss) 12,650 1,276 1,574 (4,135) 11,365
Interest expense - - - - (1,444)
Other expense, net - - - - (411)
Earnings before income taxes - - - - 9,510
Depreciation and amortization 3,992 2,063 1,613 1,124 8,792
Segment assets 61,242 26,505 34,475 29,679 151,901
Expenditures for property,
plant and equipment 4,763 1,086 869 1,945 8,663
Equity investment - - - 1,751 1,751
Goodwill 5,516 1,927 21,544 - 28,987
- ------------------------------ -------- -------- -------- -------- --------
2001
Revenues $ 69,879 $ 25,125 $ 18,999 $ 9,331 $123,334
Segment earnings (loss) 13,734 3,373 3,563 (2,402) 18,268
Interest expense - - - - (2,330)
Other expense, net - - - - (1,382)
Earnings before income taxes - - - - 14,556
Depreciation and amortization 3,765 1,928 2,275 736 8,704
Segment assets 57,224 27,434 42,559 20,956 148,173
Expenditures for property,
plant and equipment 9,745 4,792 1,200 962 16,699
Goodwill 5,516 1,927 - 22,022 29,465
- ------------------------------ -------- -------- -------- -------- --------
46
Geographic information for revenues, based on country of origin, and
long-lived assets which include property, plant and equipment, goodwill
and other intangibles, net of related depreciation and amortization,
follows:
Revenues
- ------------------------------------------------------------
Year Ended June 30, 2003 2002 2001
- ------------------------------------------------------------
($000)
United States $ 83,915 $ 89,659 $ 97,753
Non-United States:
Germany 15,180 - -
Singapore 12,382 9,714 8,230
Japan 11,866 8,301 11,668
United Kingdom 2,573 1,709 2,223
Belgium 2,280 4,305 3,460
China 14 - -
- ------------------------------------------------------------
Total Non-United States 44,295 24,029 25,581
- ------------------------------------------------------------
$128,210 $113,688 $123,334
============================================================
Long-Lived Assets
- ------------------------------------------------------------
Year Ended June 30, 2003 2002 2001
- ------------------------------------------------------------
($000)
United States $85,714 $88,570 $86,606
Non-United States:
Germany 1,675 - -
Singapore 2,141 2,390 2,801
Japan 19 27 17
United Kingdom 4 7 10
Belgium 509 472 476
China 1,522 1,465 1,443
- ------------------------------------------------------------
Total Non-United States 5,870 4,361 4,747
- ------------------------------------------------------------
$91,584 $92,931 $91,353
============================================================
Note M EMPLOYEE BENEFIT PLANS
Eligible employees of the Company participate in a profit sharing
retirement plan. Contributions to the plan are made at the discretion
of the Company's board of directors and were approximately $1.3
million, $0.7 million and $1.1 million for the years ended June 30,
2003, 2002 and 2001, respectively.
The Company has an employee stock purchase plan available for employees
who have completed six months of continuous employment with the
Company. The employee may purchase the common stock at 5% below the
prevailing market price. The amount of shares which may be bought by
an employee is limited to 10% of the employee's base pay for each
fiscal year. This plan, as amended, limits the number of shares of
common stock available for purchase to 400,000 shares. There were
196,942 and 206,454 shares of common stock available for purchase under
the plan at June 30, 2003 and 2002, respectively.
The Company has no program for postretirement health and welfare and
post employment benefits.
The II-VI Incorporated Deferred Compensation Plan (the "Plan") is
designed to allow officers and key employees of the Company to defer
receipt of compensation into a trust fund for retirement purposes. The
Plan is a nonqualified, defined contribution employees' retirement
plan. At the Company's discretion, the Plan may be funded by the
Company making contributions based on compensation deferrals, matching
contributions and discretionary contributions. Compensation deferrals
will be based on an election by the participant to defer a percentage
of compensation under the Plan. All assets in the Plan are subject to
claims of the Company's creditors until such amounts are paid to the
Plan participants. Employees of the Company made contributions to the
Plan in the amount of approximately $0.4 million, $0.1 million and $0.4
million for the years ended June 30, 2003, 2002, and 2001,
respectively. Other Liabilities and Other Assets in the accompanying
consolidated balance sheets included $1.0 million and $0.8 million
related to the Plan at June 30, 2003 and 2002, respectively.
47
Note N COMMITMENTS AND CONTINGENCIES
As the result of issues generated in the course of daily business, the
Company is involved in legal proceedings. Management believes that the
final disposition of these proceedings will not have a material adverse
effect on the Company's operations, financial position, liquidity or
results of operations.
During the year ended June 30, 2003, the Company entered into a fifty-
four month purchase agreement for the supply of a raw material at fixed
prices. The agreement requires minimum amounts to be purchased on both
an annual basis and over the term of the agreement. Minimum purchase
amounts are $0.3 million, $0.6 million, $0.7 million and $1.4 million
in each of the years ending June 30, 2004, 2005, 2006 and 2007,
respectively.
The Company purchased $0.8 million of this raw material under this
agreement during the year ended June 30, 2003.
Note O SUBSEQUENT EVENT
On September 11, 2003, the Company entered into an agreement to acquire
certain assets, equipment, intellectual property and rights from
Coherent, Inc. (Coherent) relating to Coherent's business of growing
and fabricating materials used for ultra-violet (UV) filters. UV
filters assist aircraft in the early detection of missile threats.
Under the terms of this asset purchase the Company will pay $2.0
million to Coherent. The payment of the purchase price is subject to
certain terms and conditions, including delivery of the equipment and
qualification of materials. The major assets to be acquired are
equipment, inventory and a patent for crystal growth.
48
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2001, 2002 AND 2003
(IN THOUSANDS OF DOLLARS)
Additions
-----------------
Balance at Charged Charged Deduction Balance
Beginning to to Other from at End
of Year Expense Accounts (1) Reserves (2) of Year
---------- ------- -------- ---------- -------
YEAR ENDED
JUNE 30, 2001:
Allowance for
doubtful accounts
& warranty returns $ 575 $ 232 $ 94 $ 152 (2) $ 749
YEAR ENDED
JUNE 30, 2002:
Allowance for
doubtful accounts
& warranty returns $ 749 $ 158 $ 42 $ 102 (2) $ 847
Other (3) - $ 780 - $ 88 $ 692
YEAR ENDED
JUNE 30, 2003:
Allowance for
doubtful accounts
& warranty returns $ 847 $ 486 $ 79 $ 146 (2) $1,266
Other (3) $ 692 $ 182 $ (59) $ 605 $ 210
(1) Amounts primarily relate to businesses acquired, warranty returns
and the effects of foreign currency translation.
(2) Uncollectible accounts written off, net of recovery
(3) Primarily relates to the closing of manufacturing operations in
Mexico and the costs related to consolidating several of the
Company's European distribution arrangements.
49
QUARTERLY FINANCIAL DATA
FISCAL 2003
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
QUARTER ENDED 2002 2002 2003 2003
- ------------------------------------- ------------- ------------ --------- --------
($000 except per share data)
Net revenues $31,571 $31,431 $32,356 $32,852
Cost of goods sold 20,331 19,672 20,064 19,777
Internal research and development 959 552 435 714
Selling, general and administrative 7,195 6,692 7,664 6,959
Interest expense 278 247 174 150
Other expense (income) - net (114) 601 (93) (97)
- ------------------------------------- ------- -------- ------- -------
Earnings before income taxes 2,922 3,667 4,112 5,349
Income taxes 716 898 1,093 1,723
- ------------------------------------- ------- -------- ------- -------
Net earnings $ 2,206 $ 2,769 $ 3,019 $ 3,626
- ------------------------------------- ------- ------- ------- -------
Basic earnings per share $ 0.16 $ 0.20 $ 0.21 $ 0.26
- ------------------------------------- ------- ------- ------- -------
Diluted earnings per share $ 0.15 $ 0.19 $ 0.21 $ 0.25
===================================== ======= ======= ======= =======
FISCAL 2002
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
QUARTER ENDED 2001 2001 2002 2002
- ------------------------------------- ------------- ------------ --------- --------
($000 except per share data)
Net revenues $28,693 $27,446 $27,441 $30,108
Cost of goods sold 18,590 18,640 19,848 19,559
Internal research and development 990 1,345 1,153 953
Selling, general and administrative 5,645 4,876 4,824 5,900
Interest expense 542 358 313 231
Other expense (income) - net (565) (95) (353) 1,424
- ------------------------------------- ------- ------- ------- -------
Earnings before income taxes 3,491 2,322 1,656 2,041
Income taxes 1,152 577 492 25
- ------------------------------------- ------- ------- ------- -------
Net earnings $ 2,339 $ 1,745 $ 1,164 $ 2,016
- ------------------------------------- ------- ------- ------- -------
Basic earnings per share $ 0.17 $ 0.13 $ 0.08 $ 0.14
- ------------------------------------- ------- ------- ------- -------
Diluted earnings per share $ 0.16 $ 0.12 $ 0.08 $ 0.14
===================================== ======= ======= ======= =======
Other expense for the quarter ended June 30, 2002 includes the closing
of operations of Laser Power in Mexico of $400, costs related to
consolidating several of the Company's European distribution
arrangements of $350, and the write-off of certain crystal growth
equipment and technology of $700.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report on Form 10-K,
the Company's management evaluated, with the participation of Carl J.
Johnson, the Company's Chairman and Chief Executive Officer and Craig
A. Creaturo, the Company's Chief Accounting Officer and Treasurer (and
principal financial officer), the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)). The Company's disclosure controls were
designed to provide reasonable assurance that information required to
be disclosed in reports that we file or submit under the Securities
50
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
Securities and Exchange Commission. It should be noted that the design
of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. However, the
controls have been designed to provide reasonable assurance of
achieving the controls' stated goals. Based on that evaluation,
Messrs. Johnson and Creaturo concluded that the Company's disclosure
controls and procedures are effective at the reasonable assurance
level. There were no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent
fiscal quarter that have materially affected or are reasonably likely
to materially affect the Company's internal control over financial
reporting.
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth above in Part I under the caption "Executive
Officers of the Registrant" is incorporated herein by reference. The
other information required by this item is incorporated herein by
reference to the information set forth under the captions "Election of
Directors," "Board of Directors and Board Committees" and "Other
Matters - Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive proxy statement for the 2003 Annual Meeting of
Shareholders filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the information set forth in the second paragraph under
the caption "Board of Directors and Board Committees" and the
information set forth under the caption "Executive Compensation and
Other Information" in the Company's definitive proxy statement for the
2003 Annual Meeting of Shareholders filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
Number of securities
Number of securities remaining available for
to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a) )
- ---------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 1,110,281 $9.81 1,026,277
Equity compensation
plans not approved
by security holders 0 0 0
- ------------------------- --------- ----- ---------
Total 1,110,281 $9.81 1,026,277
========================= ========= ===== =========
The other information required by this item is incorporated herein by
reference to the information set forth under the caption "Principal
Shareholders" in the Company's definitive proxy statement for the 2003
Annual Meeting of Shareholders filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Board of
Directors and Board Committees" in the Company's definitive proxy
statement for the 2003 Annual Meeting of Shareholders filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended.
52
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Ratification
of Selection of Auditors" in the Company's definitive proxy statement
for the 2003 Annual Meeting of Shareholders filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended.
53
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Financial Statements
The financial statements are set forth under Item 8 of this
annual report on Form 10-K.
(2) Schedules
Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended June 30, 2003 is set
forth under Item 8 of this annual report on Form 10-K.
Financial statements, financial statement schedules and exhibits not
listed have been omitted where the required information is included in
the consolidated financial statements or notes thereto, or is not
applicable or required.
(3) Exhibits.
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.01 Amended and Restated Articles Incorporated herein by
of Incorporation of II-VI Exhibit 3.02 to reference is
Incorporated Registration Statement No.
33-16389 on Form S-1.
3.02 Amended and Restated By-Laws Incorporated herein by
of II-VI Incorporated reference is II-VI's Annual
Report on Form 10-K for the
fiscal year ended
June 30, 2002.
4.01 Rights Agreement dated as of Incorporated herein by
August 11, 2001 reference is Exhibit 1 to
the Company's Exchange Act
Registration Statement
on Form 8-A (file number
0-16195) filed on
August 28, 2001.
10.01 II-VI Incorporated Employees' Incorporated herein by
Stock Purchase Plan reference is Exhibit 10.03
to Registration Statement
No. 33-16389 on Form S-1.
10.02 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' Stock reference is Exhibit 10.04
Purchase Plan to Registration Statement
No. 33-16389 on Form S-1.
10.03 First Amendment to the II-VI Incorporated herein by
Incorporated Amended and reference Exhibit 10.01 to
Restated Employees' Stock II-VI's Form 10-Q for the
Purchase Plan Quarter Ended March 31, 1996.
10.04 II-VI Incorporated Amended and Incorporated herein by
Restated Employees' Profit reference is Exhibit 10.05
-Sharing Plan and Trust to Registration Statement
Agreement, as amended No. 33-16389 on Form S-1.
54
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.05 Form of Representative Incorporated herein by
Agreement between II-VI and reference is Exhibit 10.15
its foreign representatives to Registration Statement
No. 33-16389 on Form S-1.
10.06 Form of Employment Agreement* Incorporated herein by
reference is Exhibit 10.16
to Registration Statement
33-16389 on Form S-1.
10.07 Description of Management-By- Incorporated herein by
Objective Plan* reference is Exhibit 10.09
to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1993.
10.08 II-VI Incorporated 1994 Incorporated herein by
Nonemployee Directors Stock reference is Exhibit A to
Option Plan* II-VI's Proxy Statement
dated September 30, 1994.
10.09 II-VI Incorporated Deferred Incorporated herein by
Compensation Plan* reference is Exhibit 10.12
to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996.
10.10 Trust Under the II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.13
Compensation Plan* to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996.
10.11 Description of Bonus Incorporated herein by
Incentive Plan* reference is Exhibit 10.14
to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996.
10.12 Amended and Restated II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.01
Compensation Plan* to II-VI's Form 10-Q for the
Quarter Ended
December 31, 1996.
10.13 Amended and Restated II-VI Incorporated herein by
Incorporated 1997 Stock Option reference is Exhibit 10.04
Plan* to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1998.
10.14 Agreement by and between Incorporated herein by
PNC Bank, National Association reference is Exhibit 10.01
and II-VI Incorporated for to II-VI's Form 10-Q for
Amended and Restated Letter the Quarter Ended
Agreement for Committed Line March 31, 1999.
of Credit and Japanese Yen
Term Loan
55
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.15 Credit Agreement by and among Incorporated herein by
II-VI Incorporated, its reference is Exhibit (b)(1)
subsidiary guarantors, various to Amendment No. 3 to the
lenders and PNC Bank, National Company's Tender Offer
Association dated as of Statement on Schedule TO
August 14, 2000 filed on August 24, 2000.
10.16 II-VI Incorporated Stock Incorporated herein by
Option Plan of 2001 reference is Exhibit 10.01
to II-VI's Form 10-Q for the
Quarter ended
December 31, 2001.
10.17 First Amendment to Credit Incorporated herein by
Agreement by and among reference as filed with
II-VI Incorporated, its II-VI's Annual Report on
subsidiary guarantors, various Form 10-K for the fiscal
lenders and PNC Bank, National year ended June 30, 2002.
Association dated as of
June 28, 2002
21.01 List of Subsidiaries of Filed herewith.
II-VI Incorporated
23.01 Consent of Deloitte Filed herewith.
& Touche LLP
31.01 Certification of the Chief Filed herewith.
Executive Officer pursuant
to Rule 13a-14(a) of the
Securities and Exchange Act
of 1934, as amended, and
Section 302 of the
Sarbanes-Oxley Act of 2002
31.02 Certification of the Filed herewith.
principal financial officer
pursuant to Rule 13a-14(a) of
the Securities and Exchange Act
of 1934, as amended, and
Section 302 of the
Sarbanes-Oxley Act of 2002
32.01 Certification of the Chief Filed herewith.
Executive Officer pursuant
to Rule 13a-14(b) of the
Securities and Exchange Act
of 1934, as amended, and
18 U.S.C. SS 1350 as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of the Filed herewith.
principal financial officer
pursuant to Rule 13a-14(b) of
the Securities and Exchange Act
of 1934, as amended, and
18 U.S.C. SS 1350 as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
56
- -------
* Denotes management contract or compensatory plan, contract or
arrangement.
The Registrant will furnish to the Commission upon request copies of
any instruments not filed herewith which authorize the issuance of
long-term obligations of the Registrant not in excess of 10% of the
Registrant's total assets on a consolidated basis.
(b) Reports on Form 8-K
On April 23, 2003, the Registrant filed a report on Form 8-K for
the events dated April 24, 2003, covering Item 9 thereof.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
September 26, 2003 By: /s/ Carl J. Johnson
Carl J. Johnson, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Principal Executive Officer:
September 26, 2003 By: /s/ Carl J. Johnson
Carl J. Johnson, Chairman
Chief Executive Officer and Director
Principal Financial
and Accounting Officer:
September 26, 2003 By: /s/ Craig A. Creaturo
Craig A. Creaturo
Chief Accounting Officer and Treasurer
September 26, 2003 By: /s/ Francis J. Kramer
Francis J. Kramer
President, Chief
Operating Officer and Director
September 26, 2003 By: /s/ Joseph J. Corasanti
Joseph J. Corasanti
Director
September 26, 2003 By: /s/ Thomas E. Mistler
Thomas E. Mistler
Director
September 26, 2003 By: /s/ Duncan A. J. Morrison
Duncan A. J. Morrison
Director
September 26, 2003 By: /s/ RADM Marc Y.E. Pelaez
RADM Marc Y.E. Pelaez
Director
September 26, 2003 By: /s/ Peter W. Sognefest
Peter W. Sognefest
Director
58
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.01 Amended and Restated Articles Incorporated herein by
of Incorporation of II-VI Exhibit 3.02 to reference is
Incorporated Registration Statement No.
33-16389 on Form S-1.
3.02 Amended and Restated By-Laws Incorporated herein by
of II-VI Incorporated reference is II-VI's Annual
Report on Form 10-K for the
fiscal year ended
June 30, 2002.
4.01 Rights Agreement dated as of Incorporated herein by
August 11, 2001 reference is Exhibit 1 to
the Company's Exchange Act
Registration Statement
on Form 8-A (file number
0-16195) filed on
August 28, 2001.
10.01 II-VI Incorporated Employees' Incorporated herein by
Stock Purchase Plan reference is Exhibit 10.03
to Registration Statement
No. 33-16389 on Form S-1.
10.02 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' Stock reference is Exhibit 10.04
Purchase Plan to Registration Statement
No. 33-16389 on Form S-1.
10.03 First Amendment to the II-VI Incorporated herein by
Incorporated Amended and reference Exhibit 10.01 to
Restated Employees' Stock II-VI's Form 10-Q for the
Purchase Plan Quarter Ended March 31, 1996.
10.04 II-VI Incorporated Amended and Incorporated herein by
Restated Employees' Profit reference is Exhibit 10.05
-Sharing Plan and Trust to Registration Statement
Agreement, as amended No. 33-16389 on Form S-1.
10.05 Form of Representative Incorporated herein by
Agreement between II-VI and reference is Exhibit 10.15
its foreign representatives to Registration Statement
No. 33-16389 on Form S-1.
10.06 Form of Employment Agreement* Incorporated herein by
reference is Exhibit 10.16
to Registration Statement
33-16389 on Form S-1.
10.07 Description of Management-By- Incorporated herein by
Objective Plan* reference is Exhibit 10.09
to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1993.
10.08 II-VI Incorporated 1994 Incorporated herein by
Nonemployee Directors Stock reference is Exhibit A to
Option Plan* II-VI's Proxy Statement
dated September 30, 1994.
59
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.09 II-VI Incorporated Deferred Incorporated herein by
Compensation Plan* reference is Exhibit 10.12
to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996.
10.10 Trust Under the II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.13
Compensation Plan* to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996.
10.11 Description of Bonus Incorporated herein by
Incentive Plan* reference is Exhibit 10.14
to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996.
10.12 Amended and Restated II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.01
Compensation Plan* to II-VI's Form 10-Q for the
Quarter Ended
December 31, 1996.
10.13 Amended and Restated II-VI Incorporated herein by
Incorporated 1997 Stock Option reference is Exhibit 10.04
Plan* to II-VI's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1998.
10.14 Agreement by and between Incorporated herein by
PNC Bank, National Association reference is Exhibit 10.01
and II-VI Incorporated for to II-VI's Form 10-Q for
Amended and Restated Letter the Quarter Ended
Agreement for Committed Line March 31, 1999.
of Credit and Japanese Yen
Term Loan
10.15 Credit Agreement by and among Incorporated herein by
II-VI Incorporated, its reference is Exhibit (b)(1)
subsidiary guarantors, various to Amendment No. 3 to the
lenders and PNC Bank, National Company's Tender Offer
Association dated as of Statement on Schedule TO
August 14, 2000 filed on August 24, 2000.
10.16 II-VI Incorporated Stock Incorporated herein by
Option Plan of 2001 reference is Exhibit 10.01
to II-VI's Form 10-Q for the
Quarter ended
December 31, 2001.
10.17 First Amendment to Credit Incorporated herein by
Agreement by and among reference as filed with
II-VI Incorporated, its II-VI's Annual Report on
subsidiary guarantors, various Form 10-K for the fiscal
lenders and PNC Bank, National year ended June 30, 2002.
Association dated as of
June 28, 2002
60
Exhibit
Number Description of Exhibit
- ------- ----------------------
21.01 List of Subsidiaries of Filed herewith.
II-VI Incorporated
23.01 Consent of Deloitte Filed herewith.
& Touche LLP
31.01 Certification of the Chief Filed herewith.
Executive Officer pursuant
to Rule 13a-14(a) of the
Securities and Exchange Act
of 1934, as amended, and
Section 302 of the
Sarbanes-Oxley Act of 2002
31.02 Certification of the Filed herewith.
principal financial officer
pursuant to Rule 13a-14(a) of
the Securities and Exchange Act
of 1934, as amended, and
Section 302 of the
Sarbanes-Oxley Act of 2002
32.01 Certification of the Chief Filed herewith.
Executive Officer pursuant
to Rule 13a-14(b) of the
Securities and Exchange Act
of 1934, as amended, and
18 U.S.C. SS 1350 as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of the Filed herewith.
principal financial officer
pursuant to Rule 13a-14(b) of
the Securities and Exchange Act
of 1934, as amended, and
18 U.S.C. SS 1350 as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
- -----
* Denotes management contract or compensatory plan, contract or
arrangement.
61