FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 [ ] 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 375 Saxonburg Boulevard Saxonburg, PA 16056 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: 724-352-4455 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: At May 11, 2001, 13,903,991 shares of Common Stock, no par value, of the registrant were outstanding. II-VI INCORPORATED AND SUBSIDIARIES ----------------------------------- INDEX ----- Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - March 31, 2001 and June 30, 2000 3 Condensed Consolidated Statements of Earnings - Three and nine months ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2001 and 2000 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk (Incorporated herein in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations) PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: - ----------------------------- II-VI Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ($000) March 31, June 30, Assets 2001 2000 --------- -------- Current Assets Cash and cash equivalents $ 5,378 $ 6,330 Accounts receivable, net 22,496 14,202 Inventories 20,234 13,738 Other current assets 4,427 2,080 --------- -------- Total Current Assets $ 52,535 $ 36,350 Property, Plant and Equipment, net 54,975 40,883 Cost in Excess of Net Assets Acquired, net 33,754 1,792 Other Intangible Assets, net 1,389 1,516 Other Assets 4,339 3,690 --------- -------- $ 146,992 $ 84,231 ========= ======== Liabilities and Shareholders' Equity Current Liabilities Accounts payable 5,394 3,726 Accrued salaries, wages and bonuses 6,777 4,685 Income taxes payable 2,397 222 Accrued profit sharing contribution 829 812 Other current liabilities 5,984 2,526 Current portion of long-term debt 2,605 44 --------- -------- Total Current Liabilities 23,986 12,015 Long-Term Debt--less current portion 33,195 5,541 Other Liabilities, primarily deferred income taxes 3,235 3,120 Shareholders' Equity Preferred stock, no par value; authorized - 5,000,000 shares; unissued - - Common stock, no par value; authorized - 30,000,000 shares; issued - 14,959,765 shares at March 31, 2001; 13,976,102 shares at June 30, 2000 36,952 20,454 Accumulated other comprehensive income (loss) (29) 186 Retained earnings 51,563 44,825 --------- -------- 88,486 65,465 Less treasury stock, at cost - 1,068,880 shares 1,910 1,910 --------- -------- 86,576 63,555 --------- -------- $ 146,992 $ 84,231 ========= ======== - -See notes to condensed consolidated financial statements. -3- II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) Three Months Ended March 31, 2001 2000 --------- -------- Revenues Net sales: Domestic $ 19,335 $ 9,212 International 11,778 10,026 --------- -------- 31,113 19,238 Contract research and development 1,418 543 --------- -------- 32,531 19,781 --------- -------- Costs, Expenses & Other Income Cost of goods sold 19,814 10,905 Contract research and development 1,033 410 Internal research and development 1,088 744 Selling, general and administrative 6,083 4,933 Interest expense 657 79 Other expense, net 180 85 --------- -------- 28,855 17,156 --------- -------- Earnings Before Income Taxes 3,676 2,625 Income Taxes 1,241 574 --------- -------- Net Earnings $ 2,435 $ 2,051 ========= ======== Basic Earnings Per Share $ 0.18 $ 0.16 ========= ======== Diluted Earnings Per Share $ 0.17 $ 0.15 ========= ======== - -See notes to condensed consolidated financial statements. -4- II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) Nine Months Ended March 31, 2001 2000 --------- -------- Revenues Net sales: Domestic $ 53,673 $ 26,004 International 33,462 26,009 --------- -------- 87,135 52,013 --------- -------- Contract research and development 3,847 840 --------- -------- 90,982 52,853 --------- -------- Costs, Expenses & Other Income Cost of goods sold 53,984 29,609 Contract research and development 2,407 636 Internal research and development 3,246 1,969 Selling, general and administrative 18,590 12,947 Interest expense 1,831 258 Other expense (income), net 790 (46) --------- -------- 80,848 45,373 --------- -------- Earnings Before Income Taxes 10,134 7,480 Income Taxes 3,396 2,020 --------- -------- Net Earnings $ 6,738 $ 5,460 ========= ======== Basic Earnings Per Share $ 0.49 $ 0.43 ========= ======== Diluted Earnings Per Share $ 0.48 $ 0.42 ========= ======== - -See notes to condensed consolidated financial statements. -5- II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ($000) Nine Months Ended March 31, 2001 2000 --------- -------- Cash Flows from Operating Activities Net earnings $ 6,738 $ 5,460 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,281 3,934 Loss on foreign currency transactions 1,001 47 Deferred income taxes (146) 80 Increase (decrease) in cash from changes in: Accounts receivable (4,172) (1,997) Inventories (1,299) (2,634) Accounts payable 1,688 353 Other operating net assets (1,031) 1,786 --------- -------- Net cash provided by operating activities 9,060 7,029 --------- -------- Cash Flows from Investing Activities Purchases of businesses (27,726) - Additions to property, plant and equipment (10,983) (5,674) Investments in unconsolidated businesses - (2,894) Disposals of other assets 132 619 --------- -------- Net cash used in investing activities (38,577) (7,949) --------- -------- Cash Flows from Financing Activities Proceeds (payments) on short-term borrowings, net 3,473 (91) Increase in long-term borrowings 25,000 - Payments on long-term borrowings (32) (35) Proceeds from sale of common stock 413 408 --------- -------- Net cash provided by financing activities 28,854 282 --------- -------- Effect of exchange rate changes on cash and cash equivalents (289) 301 Net (decrease) in cash and cash equivalents (952) (337) Cash and Cash Equivalents at Beginning of Period 6,330 5,558 --------- -------- Cash and Cash Equivalents at End of Period $ 5,378 $ 5,221 ========= ======== Cash paid for interest $ 1,459 $ 275 Cash paid for taxes $ 1,492 $ 1,163 Non-cash transactions: Net assets acquired for fair value of common stock $ 15,469 $ - - -See notes to condensed consolidated financial statements. -6- II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note A - Basis of Presentation --------------------- The consolidated financial statements for the three and nine month periods ended March 31, 2001 and 2000 are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation for the periods presented have been included. These interim statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto contained in the Company's 2000 Annual Report to shareholders. The consolidated results of operations for the three and nine month periods ended March 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. The results for the nine month period ended March 31, 2001 include eight months of operations of the Company's Laser Power Corporation subsidiary. Certain amounts from the prior period financial statements have been reclassified to conform with current period presentation, including classification of Laser Power Corporation as an investment accounted for under the Equity method. Note B - Inventories ----------- The components of inventories are as follows ($000): March 31, June 30, 2001 2000 --------- -------- Raw materials $ 5,469 $ 3,947 Work in progress 9,053 5,518 Finished goods 5,712 4,273 --------- -------- $ 20,234 $ 13,738 ========= ======== Note C - Property, Plant and Equipment ----------------------------- Property, plant and equipment (at cost/valuation) consist of the following ($000): March 31, June 30, 2001 2000 --------- -------- Land and land improvements $ 1,652 $ 1,528 Buildings and improvements 26,607 21,333 Machinery and equipment 61,918 47,578 --------- -------- 90,177 70,439 Less accumulated depreciation 35,202 29,556 --------- -------- $ 54,975 $ 40,883 ========= ======== -7- II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note D - Debt ---- On August 14, 2000, the Company replaced its $15.0 million unsecured line of credit agreement with a $45.0 million secured credit agreement in connection with the Company's acquisition of Laser Power Corporation. This facility has a five-year life and contains term and line of credit borrowing options. This facility is secured by certain assets of the Company and is subject to certain restrictive covenants, including those related to minimum net worth, leverage and interest coverage. This facility has an interest rate range of LIBOR plus 0.88% to LIBOR plus 1.50%. The average interest rate in effect as of March 31, 2001 was 7.93%. As of March 31, 2001, the total borrowings under this line of credit of $33.3 million consisted of $25.0 million under the term loan option and $8.3 million under the line of credit option. Note E - Earnings Per Share ------------------ The following table sets forth the computation of earnings per share for the periods indicated: Three Months Ended Nine Months Ended March 31, March 31, (000 except per share data) 2001 2000 2001 2000 - --------------------------------------------------------------------- Net earnings $ 2,435 $ 2,051 $ 6,738 $ 5,460 Divided by: Weighted average shares 13,886 12,764 13,684 12,722 - --------------------------------------------------------------------- Basic earnings per share $0.18 $0.16 $ 0.49 $ 0.43 - --------------------------------------------------------------------- Net earnings $ 2,435 $ 2,051 $ 6,738 $ 5,460 Divided by: Weighted average shares 13,886 12,764 13,684 12,722 Dilutive effect of common stock equivalents 382 533 447 399 - --------------------------------------------------------------------- Diluted weighted average common shares 14,268 13,297 14,131 13,121 - --------------------------------------------------------------------- Diluted earnings per share $ 0.17 $ 0.15 $ 0.48 $ 0.42 - --------------------------------------------------------------------- Note F - Comprehensive Income -------------------- The components of comprehensive income were as follows for the periods indicated ($000): Three Months Ended Nine Months Ended March 31, March 31, 2001 2000 2001 2000 - --------------------------------------------------------------------- Net income $2,435 $2,051 $6,738 $5,460 Foreign currency translation adjustments (222) (1) (215) (132) - --------------------------------------------------------------------- Comprehensive income $2,213 $2,050 $6,523 $5,328 - --------------------------------------------------------------------- -8- II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note G - Segment Reporting ----------------- The Company has three reportable segments: Optical Components, which is an aggregation of the Company's II-VI infrared optics and material products business and the Company's VLOC subsidiary; Radiation Detectors, which is the Company's eV PRODUCTS division; and the Company's Laser Power Corporation subsidiary acquired in fiscal 2001. The accounting policies of the segments are the same as those of the Company. Substantially all of the Company's corporate expenses are allocated to the segments. The Company evaluates segment performance based upon reported segment profit or loss from operations. Inter-segment sales and transfers have been eliminated. The following table summarizes selected financial information of the Company's operations by segment ($000's): <TABLE> <CAPTION> Three Months Ended March 31, 2001 ----------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net revenues $21,561 $2,541 $8,429 $32,531 Income (loss) from operations 3,587 (169) 1,095 4,513 Interest expense - - - 657 Other expense, net - - - 180 Earnings before income taxes - - - 3,676 Depreciation and amortization 1,592 181 804 2,577 Segment assets 82,922 7,958 56,112 46,992 Capital expenditures 3,757 169 262 4,188 Cost in excess of net assets acquired, net 1,726 - 32,028 33,754 </TABLE> Three Months Ended March 31, 2000 ----------------------------------- Optical Radiation Components Detectors Totals - --------------------------------------------------------------- Net revenues $18,052 $1,729 $19,781 Income (loss) from operations 3,305 (516) 2,789 Interest expense - - 79 Other expense, net - - 85 Earnings before income taxes - - 2,625 Depreciation and amortization 980 164 1,144 Segment assets 75,129 8,513 83,642 Capital expenditures 2,773 60 2,833 Cost in excess of net assets acquired, net 1,814 - 1,814 -9- II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note G - Segment Reporting, Continued ---------------------------- <TABLE> <CAPTION> Nine Months Ended March 31, 2001 ----------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net revenues $62,048 $6,402 $22,532 $90,982 Income (loss) from operations 11,152 (1,011) 2,614 12,755 Interest expense - - - 1,831 Other expense, net - - - 790 Earnings before income taxes - - - 10,134 Depreciation and amortization 3,776 518 1,987 6,281 Segment assets 82,922 7,958 56,112 146,992 Capital expenditures 9,882 289 811 10,982 Cost in excess of net assets acquired, net 1,726 - 32,028 33,754 </TABLE> Three Months Ended March 31, 2000 ----------------------------------- Optical Radiation Components Detectors Totals - --------------------------------------------------------------- Net revenues $48,561 $4,292 $52,853 Income (loss) from operations 9,113 (1,421) 7,692 Interest expense - - 258 Other (income), net - - (46) Earnings before income taxes - - 7,480 Depreciation and amortization 3,419 515 3,934 Segment assets 75,129 8,513 83,642 Capital expenditures 5,422 252 5,674 Cost in excess of net assets acquired, net 1,814 - 1,814 Note H - Acquisition of Laser Power Corporation -------------------------------------- On September 21, 1999, the Company purchased 1,250,000 shares of Laser Power Corporation common stock for a total purchase price of approximately $2.8 million. Laser Power Corporation designs, manufactures, and markets high performance optics for the industrial, medical and military applications. Laser Power also provides thin film design and coating services to industrial and military customers. On August 14, 2000, the Company increased its ownership in Laser Power Corporation to approximately 88%, giving the Company a controlling interest. This additional ownership was acquired for a total consideration of approximately $23.8 million in cash and the issuance of approximately 739,000 shares of the Company's common stock. On October 24, 2000, the Company completed its acquisition of Laser Power Corporation for a total consideration of approximately $3.9 million in cash and the issuance of approximately 132,000 shares of the Company's common stock. -10- II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note H - Acquisition of Laser Power Corporation, Continued ------------------------------------------------- The transaction is being accounted for as a purchase. The excess of the purchase price over the value of net assets acquired will be amortized over 20 years on a straight-line basis. The preliminary purchase price allocation is subject to change when additional information concerning intangible assets and liability values is obtained. All remaining valuation adjustments will be recorded in the fourth quarter to properly reflect the acquisition of Laser Power in the fiscal year ended June 30, 2001 consolidated financial statements. The results of Laser Power Corporation for the three months ended March 31, 2001 and for eight months ended March 31, 2001 are included in the Company's consolidated financial statements. Pro forma results, as if the acquisition of Laser Power Corporation had occurred at the beginning of the period, are as follows. Results presented for the three months ended March 31, 2001 are shown for comparative purposes only and do not reflect any changes from amounts presented in the consolidated statement of earnings. Three Months Ended Nine Months Ended March 31, March 31, ----------------------------------------- (000 except per share data) 2001 2000 2001 2000 - --------------------------------------------------------------------- Net revenues $32,531 $27,988 $93,131 $78,687 Net income from continuing operations 2,435 2,518 6,486 6,956 Net income 2,435 2,518 6,486 5,728 Basic earnings per share: Income from continuing operations $0.18 $0.18 $0.47 $0.51 Loss from discontinued operations - - - ($0.09) - --------------------------------------------------------------------- Net income $0.18 $0.18 $0.47 $0.42 Diluted earnings per share: Income from continuing operations $0.17 $0.18 $0.46 $0.49 Loss from discontinued operations - - - ($0.09) --------------------------------------------------------------------- Net income $0.17 $0.18 $0.46 $0.40 The pro forma results are not necessarily indicative of what actually would have occurred if the transaction had taken place at the beginning of the period, are not intended to be a projection of future results and do not reflect any cost savings that might be achieved from the combined operations. Prior year financial statements reflect the adoption of the Equity method in a manner consistent with the accounting for a step-by-step acquisition of Laser Power Corporation. The effect of the restatement was to reclassify all of the Company's investment in Laser Power common stock at June 30, 2000 from an investment accounted for as an Available for Sale Security to an investment accounted for under the Equity method. The effect of the restatement on income for the three and nine month periods ended March 31, 2000 was immaterial. -11- II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note I - Stock Split ----------- On August 23, 2000, the Company announced that its Board of Directors had declared a two-for-one stock split of the Company's common stock in the form of a 100% common stock dividend. The record date was September 5, 2000 and the distribution date was September 20, 2000. All share and per share amounts included in the Company's consolidated financial statements have been restated to reflect the stock split for all periods presented. Note J - New Accounting Pronouncements ----------------------------- Statement of Financial Accounting Standards (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", is 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 from time to time purchases foreign currency forward exchange contracts, primarily in Japanese Yen, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on a basis of its aggregate net cash flows in respective currencies, to foreign currency risk. The Company recorded the fair value of contracts with a notional amount of approximately $1.8 million as of March 31, 2001 on the statement of financial position. The Company has elected not to account for these contracts as hedges as defined by SFAS No. 133, and recorded the change in the fair value of these contracts in the results of operations as they occur. For the three and nine month periods ended March 31, 2001 the change in the fair value of these contracts increased net earnings by $50,000 and $89,000, respectively. To satisfy certain provisions of its line of credit facility, on March 5, 2001 the Company entered into an interest rate collar with a notional amount of $12.5 million. The floating rate option is the one-month LIBOR rate with the cap strike rate of 7.00% and the floor strike rate of 4.02%. The agreement expires March 5, 2002. At March 31, 2001 the one-month LIBOR rate was 5.08%. This agreement was entered into to limit interest rate exposure on one-half of the $25 million term loan. The Company has elected not to account for this agreement as a hedge as defined by SFAS No. 133, and recorded the unrealized change in the fair value of this collar as an increase or decrease to interest expense in the results of operations. The effect of the interest rate collar on net earnings for the quarter ended March 31, 2001 was immaterial. -12- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net earnings for the third quarter of fiscal 2001 were $2,435,000 ($0.17 per diluted share) on revenues of $32,531,000. This compares to net earnings of $2,051,000 ($0.15 per diluted share) on revenues of $19,781,000 in the third quarter of fiscal 2000. For the nine months ended March 31, 2001, net earnings were $6,738,000 ($0.48 per diluted share) on revenues of $90,982,000. This compares with net earnings of $5,460,000 ($0.42 per diluted share) on revenues of $52,853,000 for the same period last fiscal year. Order bookings for the third quarter of fiscal 2001 were $33,385,000 compared to $23,473,000 for the same period last fiscal year, an increase of 42%. Bookings for contract research and development for the third quarter of fiscal year 2001 were $497,000 compared to $1,902,000 for the same period last fiscal year. For the quarter, bookings for laser optics and component products, including bookings from telecommunication products of approximately $1,400,000, decreased approximately 10%, bookings for the eV PRODUCTS division increased approximately 55% and the Company recorded bookings from its recently acquired Laser Power Corporation subsidiary of approximately $11,640,000. Order bookings for the nine months ended March 31, 2001 were $100,826,000 compared to $60,329,000 for the same period last fiscal year, an increase of 67%. Bookings for contract research and development for the nine months ended March 31, 2001 were $3,326,000 compared to $2,350,000 for the same period last fiscal year. For the year-to-date, bookings for laser optics and component products, including bookings from telecommunication products of approximately $2,650,000, increased approximately 15%, bookings for the eV PRODUCTS division increased approximately 55%, and the Company recorded bookings from its Laser Power Corporation subsidiary of approximately $31,095,000. Revenues for the third quarter of fiscal 2001 increased 64% to $32,531,000 compared to $19,781,000 for the same period last fiscal year. For the nine months ended March 31, 2001, revenues increased 72% to $90,982,000 from $52,853,000 for the same period last fiscal year. For the quarter, revenues from laser optics and component products, including revenues from telecommunication products of approximately $850,000, increased by approximately 20%, revenues from the eV PRODUCTS division increased by approximately 50%, and the Company recorded revenues from its Laser Power Corporation subsidiary of approximately $8,429,000. For the nine months ended March 31, 2001, revenues from laser optics and component products, including revenues from telecommunication products of approximately $1,800,000, increased approximately 30%, revenues from the eV PRODUCTS division increased approximately 50% and the Company recorded revenues from its Laser Power Corporation subsidiary of approximately $22,532,000. Manufacturing gross margin for the third quarter of fiscal 2001 was $11,299,000 or 36% of revenues compared to $8,333,000 or 43% of revenues for the same period last fiscal year. For the nine months ended March 31, 2001, manufacturing gross margin was $33,151,000 or 38% of revenues compared to $22,404,000 or 43% of revenues for the same period last fiscal year. The reduction in gross margin percentage for the quarter and year-to-date reflects the addition of Laser Power Corporation and more sales being generated from the eV PRODUCTS division which has lower gross margins than other II-VI businesses. Company-funded internal research and development expenses for the third quarter of fiscal 2001 were $1,088,000 or 3% of revenues compared to $744,000 or 4% of revenues for the same period last fiscal year. For the nine months ended March 31, 2001, internal research and development expenses were $3,246,000 or 4% of revenues compared to $1,969,000 or 4% of revenues for the same period last fiscal year. The increased expenses for the quarter and year-to-date reflect projects associated with the continued effort to develop silicon carbide crystal growth technology, nuclear radiation detector development, programs associated with materials development in both the infrared and telecommunication markets, and ongoing research and development programs at the Company's Laser Power Corporation subsidiary. -13- Selling, general and administrative expenses for the third quarter of fiscal 2001 were $6,083,000 or 19% of revenues compared to $4,933,000 or 25% of revenues for the same period last fiscal year. For the nine months ended March 31, 2001, selling, general and administrative expenses were $18,590,000 or 20% of revenues compared to $12,947,000 or 24% of revenues for the same period last fiscal year. The quarter and year-to-date percentage decreases as compared to the same periods last fiscal year reflect the addition of the Company's Laser Power Corporation subsidiary and revenue improvements from the eV PRODUCTS division and the Company's VLOC subsidiary with limited corresponding increases to selling, general and administrative expenses. The quarter and year-to-date dollar increase over the same periods last fiscal year reflect the addition of the selling, general, and administrative expenses of Laser Power Corporation, increased employment costs associated with new employees and increased payroll expense attributable to the Company's worldwide profit driven bonus programs, increased legal and professional fees resulting from protecting and defending eV PRODUCTS' trade secrets and increased sales and marketing efforts. Interest expense for the third quarter of fiscal 2001 was $657,000 compared to $79,000 for the same period last fiscal year. For the nine months ended March 31, 2001, interest expense was $1,831,000 compared to $258,000 for the same period last fiscal year. The quarter and year-to-date increase in interest expense are the direct result of additional borrowings in connection with the purchase of Laser Power Corporation. For fiscal 2001, the Company's year-to-date effective income tax rate is 33.5% compared to an effective income tax rate of 27.0% for the same period last fiscal year. This increase in the income tax rate reflects a return to a rate that is closer to the statutory rate and was primarily due to the completion of several international related tax opportunities during fiscal 2000 and changes to state taxation in connection with the Company's acquisition of Laser Power Corporation. Liquidity and Capital Resources - ------------------------------- In the first nine months of fiscal 2001, cash generated from operations of $9.1 million, and proceeds from the net increase in borrowings of $28.3 million were used primarily to finance the cash portion of the Company's acquisition of Laser Power Corporation for $27.7 million, an investment of $11.0 million in property, plant and equipment, and payment of various compensation costs relating to the Company's fiscal 2000 worldwide profit-driven bonus programs. Cash transactions for the first nine months of fiscal 2001 plus cash on hand at the beginning of the fiscal year resulted in a cash position of $5.4 million at March 31, 2001. On August 23, 2000, the Company announced that its Board of Directors had declared a two-for-one stock split of the Company's common stock in the form of a 100% common stock dividend. The record date was September 5, 2000 and the distribution date was September 20, 2000. All share and per share amounts included in the Company's consolidated financial statements have been restated to reflect the stock split for all periods presented. In October 2000, the Company borrowed $4.0 million against its available line of credit of $45.0 million to finance the remaining cash portion of the Laser Power Corporation acquisition. In November 2000, the Company borrowed $2.0 million against its available line of credit of $45.0 million to liquidate the Laser Power Corporation line of credit arrangement with Wells Fargo Bank. During the third quarter of fiscal 2001, the Company paid down $2.7 million against its available line of credit of $45.0 million using cash generated from operations, thereby increasing the unused available line of credit to $11.7 million. The Company believes internally generated funds, existing cash reserves and available borrowing capacity will be sufficient to fund its working capital needs, capital expenditures and scheduled debt payments for fiscal 2001. Market Risks - ------------ The Company is exposed to market risks arising from adverse changes in interest rates and foreign currency exchange rates. In the normal course of business, the Company uses a variety of techniques and instruments as part of its overall risk management strategy. -14- For the quarter ended September 30, 2000, the Company increased its borrowings an additional $25.0 million. For the quarter ended December 31, 2000, the Company increased its borrowings an additional $6.0 million. For the quarter ended March 31, 2001, the Company repaid $2.7 million of these borrowings. As such, the Company has increased its exposure to potential adverse changes in interest rates. A change in the interest rate of 1% would have changed the interest expense by approximately $85,000 and $185,000 for the three and nine month periods ended March 31, 2001, respectively. To satisfy certain provisions of its line of credit facility relating to mitigating interest rate risk, on March 5, 2001 the Company entered into an interest rate collar with a notional amount of $12.5 million. See Note J of the Notes to Condensed Consolidated Financial Statements. This Management's Discussion and Analysis contains forward looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including the statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as "expects," "anticipates," "intends," "plans," "projects" or similar expressions. Actual results could materially differ from such statements due to the following factors: materially adverse changes in economic or industry conditions generally (including capital markets) or in the markets served by the Company, the development and use of new technology and the actions of competitors. There are additional risk factors that could affect the Company's business, results of operations or financial condition. Investors are encouraged to review the risk factors set forth in the Company's most recent Form 10-K as filed with the Securities and Exchange Commission on September 27, 2000. -15- PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K. - ------ --------------------------------- (a) Exhibits. No updates to exhibits since 10-K filing for the year ended June 30, 2000. (b) Reports on Form 8-K. None -16- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. II-VI INCORPORATED (Registrant) Date: May 14, 2001 By: /s/ Carl J. Johnson Carl J. Johnson Chairman and Chief Executive Officer Date: May 14, 2001 By: /s/ Craig A. Creaturo Craig A. Creaturo Treasurer -17-