FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 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 jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 375 Saxonburg Boulevard Saxonburg, PA 16056 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 724-352-4455 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: At February 8, 2002, 13,993,883 shares of Common Stock, no par value, of the registrant were outstanding. II-VI INCORPORATED INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - December 31, 2001 and June 30, 2001 . . . . . . . . . . . . . . . . . . . . . . .3 Condensed Consolidated Statements of Earnings - Three and Six months ended December 31, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Condensed Consolidated Statements of Cash Flows - Six months ended December 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 . . . . . . . . . . . . . . . . . . . . .16 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . .17 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 18 -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: II-VI Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ($000) December 31, June 30, Assets 2001 2001 ------- ------- Current Assets Cash and cash equivalents $ 8,771 $ 8,093 Accounts receivable, net 18,476 21,884 Inventories 20,532 20,782 Deferred income taxes 3,297 3,304 Other current assets 1,946 1,644 ------- ------- Total Current Assets 53,022 55,707 Property, Plant and Equipment, net 60,951 58,031 Goodwill, net 29,236 29,236 Other Intangible Assets, net 3,926 4,086 Other Assets 2,756 1,113 ------- ------- $149,891 $148,173 ======= ======= Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 4,424 $ 5,714 Accrued salaries, wages and bonuses 3,657 7,086 Income taxes payable 1,233 2,158 Accrued profit sharing contribution 372 1,122 Other current liabilities 2,701 1,817 Current portion of long-term debt 5,058 3,834 ------- ------- Total Current Liabilities 17,445 21,731 Long-Term Debt--less current portion 33,912 33,172 Other Liabilities, primarily deferred income taxes 4,451 3,857 Shareholders' Equity Preferred stock, no par value; authorized -5,000,000 shares; unissued - - Common stock, no par value; authorized - 30,000,000 shares; issued - 15,023,163 shares at December 31, 2001; 14,981,163 shares at June 30, 2001 37,434 37,045 Accumulated other comprehensive income 288 91 Retained earnings 58,271 54,187 ------- ------- 95,993 91,323 Less treasury stock, at cost - 1,068,880 shares 1,910 1,910 ------- ------- 94,083 89,413 ------- ------- $149,891 $148,173 ======= ======= - -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 December 31, 2001 2000 -------- -------- Revenues Net sales: Domestic $ 13,255 $ 19,696 International 11,441 10,668 -------- -------- 24,696 30,364 Contract research and development 2,750 1,374 -------- -------- 27,446 31,738 -------- -------- Costs, Expenses & Other Income Cost of goods sold 16,726 18,722 Contract research and development 1,914 642 Internal research and development 1,345 1,166 Selling, general and administrative 4,876 6,239 Interest expense 358 837 Other expense (income), net (95) 543 -------- -------- 25,124 28,149 -------- -------- Earnings Before Income Taxes 2,322 3,589 Income Taxes 577 1,246 -------- -------- Net Earnings $ 1,745 $ 2,343 ======== ======== Basic Earnings Per Share $ 0.13 $ 0.17 ======== ======== Diluted Earnings Per Share $ 0.12 $ 0.16 ======== ======== - -See notes to condensed consolidated financial statements. -4- II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) Six Months Ended December 31, 2001 2000 -------- -------- Revenues Net sales: Domestic $ 28,423 $ 34,338 International 23,534 21,684 -------- -------- 51,957 56,022 Contract research and development 4,182 2,429 -------- -------- 56,139 58,451 Costs, Expenses & Other Income Cost of goods sold 34,353 34,170 Contract research and development 2,877 1,374 Internal research and development 2,335 2,158 Selling, general and administrative 10,521 12,507 Interest expense 900 1,174 Other expense (income) - net (660) 610 -------- -------- 50,326 51,993 -------- -------- Earnings Before Income Taxes 5,813 6,458 Income Taxes 1,729 2,155 -------- -------- Net Earnings $ 4,084 $ 4,303 ======== ======== Basic Earnings Per Share $ 0.29 $ 0.32 ======== ======== Diluted Earnings Per Share $ 0.29 $ 0.31 ======== ======== - -See notes to condensed consolidated financial statements. -5- II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ($000) Six Months Ended December 31, 2001 2000 -------- -------- Cash Flows from Operating Activities Net earnings $ 4,084 4,303 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,363 3,704 (Gain) on foreign currency transactions (250) (220) Deferred income taxes 1,188 (84) Increase (decrease) in cash from changes in: Accounts receivable 3,749 (1,997) Inventories 335 (1,505) Accounts payable (1,244) 1,207 Other operating net assets (4,690) (3,607) -------- -------- Net cash provided by operating activities 7,535 1,801 -------- -------- Cash Flows from Investing Activities Purchases of businesses (2,172) (27,726) Investment in unconsolidated businesses (1,500) - Additions to property, plant and equipment (5,227) (6,794) Disposals of other assets 15 121 -------- -------- Net cash used in investing activities (8,884) (34,399) -------- -------- Cash Flows from Financing Activities Proceeds from short-term borrowings, net 3,250 6,252 Increase in long-term borrowings 0 25,000 Payments on long-term borrowings (1,301) (22) Proceeds from sale of common stock 228 382 -------- -------- Net cash provided by financing activities 2,177 31,612 -------- -------- Effect of exchange rate changes on cash and cash equivalents (150) 334 Net increase (decrease) in cash and cash equivalents 678 (652) Cash and Cash Equivalents at Beginning of Period 8,093 6,330 -------- -------- Cash and Cash Equivalents at End of Period $ 8,771 $ 5,678 ======== ======== Cash paid for interest $ 897 $ 692 Cash paid for taxes $ 721 $ 705 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 condensed consolidated financial statements for the three and six month periods ended December 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 2001 Annual Report to shareholders. The consolidated results of operations for the three and six month periods ended December 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. The results for the six month period ended December 31, 2000 include five months of operations of Laser Power Corporation. Note B - Inventories ----------- The components of inventories are as follows ($000): December 31, June 30, 2001 2001 ----------- ----------- Raw materials $ 7,067 $ 6,173 Work in progress 7,688 8,680 Finished goods 5,777 5,929 ----------- ----------- $20,532 $20,782 =========== =========== Note C - Property, Plant and Equipment ----------------------------- Property, plant and equipment (at cost or valuation) consist of the following ($000): December 31, June 30, 2001 2001 ----------- ----------- Land and land improvements $ 1,715 $ 1,715 Buildings and improvements 24,729 24,426 Machinery and equipment 74,969 68,217 ----------- ----------- 101,413 94,358 Less accumulated depreciation 40,462 36,327 ----------- ----------- $ 60,951 $ 58,031 =========== =========== Note D - Debt ==== The Company has a $45.0 million secured credit agreement. 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 December 31, 2001 was 3.34%. As of December 31, 2001, the total borrowings under this facility of $36.5 million consisted of $23.8 million under the term loan option and $12.7 million under the line of credit option. -7- II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Note E - Earnings Per Share ------------------ The following table sets forth the computation of earnings per share for the periods indicated: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, (000 except per share data) 2001 2000 2001 2000 - ----------------------------------- ------------ ------------------ ----------- -------- <s> <c> <c> <c> <c> Net earnings $ 1,745 $ 2,343 $ 4,084 $ 4,303 Divided by: Weighted average shares 13,938 13,838 13,926 13,582 - ----------------------------------- ------------ ------------------ ----------- -------- Basic earnings per share $ 0.13 $ 0.17 $ 0.29 $ 0.32 - ----------------------------------- ------------ ------------------ ----------- -------- Net earnings $ 1,745 $ 2,343 $ 4,084 $ 4,303 Divided by: Weighted average shares 13,938 13,838 13,926 13,582 Dilutive effect of common stock equivalents 378 454 379 480 - ----------------------------------- ------------ ------------------ ----------- -------- Diluted weighted average common shares 14,316 14,292 14,305 14,062 - ----------------------------------- ------------ ------------------ ----------- -------- Diluted earnings per share $ 0.12 $ 0.16 $ 0.29 $ 0.31 - ----------------------------------- ------------ ------------------ ----------- -------- </TABLE> Note F - Comprehensive Income -------------------- The components of comprehensive income were as follows for the periods indicated ($000): Three Months Ended Six Months Ended December 31, December 31, 2001 2000 2001 2000 - --------------------------------------------------------------------- Net income $1,745 $2,343 $4,084 $4,303 Foreign currency translation adjustments (12) (10) 197 7 - --------------------------------------------------------------------- Comprehensive income $1,733 $2,333 $4,281 $4,310 - --------------------------------------------------------------------- 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. 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. -8- II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Note G - Segment Reporting - Continued ----------------------------- The following table summarizes selected financial information of the Company's operations by segment ($000's): <TABLE> <CAPTION> Three Months Ended December 31, 2001 -------------------------------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - ---------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> Net revenues $17,630 $1,684 $8,132 $27,446 Income (loss) from operations 3,185 (395) (205) 2,585 Interest expense - - - 358 Other (income), net - - - (95) Earnings before income taxes - - - 2,322 Depreciation and amortization 1,482 175 489 2,146 Capital expenditures 1,162 461 523 2,146 Goodwill, net 1,698 - 27,538 29,236 Segment assets 85,622 9,351 54,918 149,891 </TABLE> <TABLE> <CAPTION> Three Months Ended December 31, 2000 -------------------------------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - ---------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> Net revenues $20,867 $2,242 $8,629 $31,738 Income (loss) from operations 3,745 (78) 1,302 4,969 Interest expense - - - 837 Other expense, net - - - 543 Earnings before income taxes - - - 3,589 Depreciation and amortization 1,056 169 819 2,044 Capital expenditures 2,646 80 434 3,160 Goodwill, net 1,748 - 32,988 34,736 Segment assets 79,947 8,342 56,990 145,279 </TABLE> <TABLE> <CAPTION> Six Months Ended December 31, 2001 -------------------------------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - ---------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> Net revenues $36,213 $3,555 $16,371 $56,139 Income (loss) from operations 6,062 (503) 494 6,053 Interest expense - - - 900 Other (income), net - - - (660) Earnings before income taxes - - - 5,813 Depreciation and amortization 2,990 358 1,015 4,363 Capital expenditures 3,946 591 690 5,227 </TABLE> -9- II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Note G - Segment Reporting - Continued ----------------------------- <TABLE> <CAPTION> Six Months Ended December 31, 2000 -------------------------------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - ---------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> Net revenues $40,487 $3,861 $14,103 $58,451 Income (loss) from operations 7,565 (842) 1,519 8,242 Interest expense - - - 1,174 Other expense, net - - - 610 Earnings before income taxes - - - 6,458 Depreciation and amortization 2,184 337 1,183 3,704 Capital expenditures 6,125 120 549 6,794 </TABLE> Note H - Derivative Instruments ---------------------- Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company from time to time purchases foreign currency forward exchange contracts, 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 $2.0 million as of December 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 records the change in the fair value of these contracts in the results of operations as they occur. For the three and six months ended December 31, 2001 and 2000, the change in the fair value of these contracts increased net earnings by $25,000 and $51,000, respectively. For the six months ended December 31, 2001 and 2000, the change in the fair value of these contracts (decreased) increased net earnings by $(20,000) and $39,000, 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. This agreement was entered into to limit interest rate exposure on one-half of the $25 million term loan. 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 December 31, 2001 the one-month LIBOR rate was 1.87%. 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 decreased net earnings for the three and six months ended December 31, 2001 by approximately $14,000. and $57,000, respectively. -10- II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Note I - New Accounting Pronouncements ----------------------------- Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", was effective for the Company as of July 1, 2001. SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of- interests method. The statement requires the initial recognition and measurement of goodwill and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. The adoption of SFAS 141 had no financial impact on the financial statements of the Company for the three and six months ended December 31, 2001. SFAS 142 "Goodwill and Other Intangible Assets", was adopted by the Company as of July 1, 2001. SFAS 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually. SFAS 142 also requires recognized intangible assets be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with the Standard until its life is determined to no longer be indefinite. As of December 31, 2001 and 2000, the Company had goodwill and other intangible assets, net of accumulated amortization, of $29,236,000 and $34,736,000, respectively, which is subject to the transitional assessment provisions of SFAS 142. The Company completed its initial step of the transition impairment test prior to December 31, 2001. The results of this test indicated that the Company's goodwill was not impaired as of June 30, 2001, therefore, no impairment loss was recorded. In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective July 1, 2001. The following fiscal 2000 pro forma information adjusts previously reported net earnings, basic earnings per share and diluted earnings per share to exclude goodwill amortization: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, --------------------------------------------- (000 except per share data) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net earnings $1,745 $2,343 $4,084 $4,303 Add: Goodwill amortization - 440 - 712 ------ ------ ------ ------ Adjusted net income $1,745 $2,783 $4,084 $5,015 ====== ====== ====== ====== Basic earnings per share $0.13 $0.17 $0.29 $0.32 Add: Goodwill amortization - 0.03 - 0.05 ------ ------ ------ ------ Adjusted basic earnings per share $0.13 $0.20 $0.29 $0.37 ====== ====== ====== ====== Diluted earnings per share $0.12 $0.16 $0.29 $0.31 Add: Goodwill amortization - 0.03 - 0.05 ------ ------ ------ ------ Adjusted diluted earnings per share $0.12 $0.19 $0.29 $0.36 ====== ====== ====== ====== </TABLE> SFAS 143, "Accounting for Asset Retirement Obligations" 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 is currently evaluating the impact that this Statement will have on the Company's financial statements. In October 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which provides guidance that will eliminate inconsistencies in the accounting for the impairment or disposal of long-lived assets under existing accounting pronouncements. The Company will apply the provisions of the pronouncement prospectively beginning July 1, 2002. The Company does not expect the adoption of this pronouncement to have a material impact on its financial position or results of operations. -11- II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Note J - Acquisition of Litton Systems, Inc. Silicon Carbide Group --------------------------------------------------------- On October 19, 2001, the Company acquired the Litton Systems, Inc. Silicon Carbide (SiC) Group for approximately $2.2 million in cash. The acquired group, located in New Jersey, concentrates their efforts on research and development of SiC and will complement the Company's Pennsylvania-based SiC research and development activities that have been ongoing since 1998. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Results of Operations - --------------------- Net earnings for the second quarter of fiscal 2002 were $1,745,000 ($0.12 per share-diluted) on revenues of $27,446,000. This compares to net earnings of $2,343,000 ($0.16 per share-diluted) on revenues of $31,738,000 in the second quarter of fiscal 2001. For the six months ended December 31, 2002, net earnings were $4,084,000 ($0.29 per share- diluted) on revenues of $56,139,000. This compares with net earnings of $4,303,000 ($0.31 per share-diluted) on revenues of $58,451,000 for the same period last fiscal year. On July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized, but instead be tested annually for impairment. Comparable results for the quarter and six months ended December 31, 2000, excluding the amortization of goodwill, were net earnings of $2,783,000 ($0.19 per share-diluted) and $5,015,000 ($0.36 per share-diluted), respectively. See Note I of the Notes to the Condensed Consolidated Financial Statements. Order bookings for the second quarter of fiscal 2002 were $25,185,000 compared to $38,014,000 for the same period last fiscal year, a decrease of 34%. Bookings for contract research and development for the second quarter of fiscal year 2002 were $1,791,000 compared to $1,571,000 for the same period last fiscal year. For the quarter, bookings for laser optics and component products decreased approximately 35%, bookings for the eV PRODUCTS division decreased approximately 75% and bookings for Laser Power Corporation decreased approximately 30%. The overall decrease in order bookings for the second quarter of fiscal 2002 as compared to the prior period was driven by the weak worldwide economy and, more specifically, lower industrial demand. Additionally, in the laser optics and component products area, a major one-year blanket order received in the second quarter of last fiscal year was delayed and is now expected in the third or fourth quarter of fiscal 2002. Order bookings for the six months ended December 31, 2001 were $52,986,000 compared to $67,441,000 for the same period last fiscal year, a decrease of 21%. Bookings for contract research and development for the six months ended December 31, 2001 were $6,470,000 compared to $2,668,000 for the same period last fiscal year. This increase was primarily due to contracts awarded at the Company's VLOC subsidiary. For the six months ended December 31, 2001, bookings for laser optics and component products decreased approximately 20%, bookings for the eV PRODUCTS division decreased approximately 55%, and bookings for Laser Power Corporation were approximately $15,972,000 for the six months ended December 31, 2001 compared to approximately $19,455,000 for five months of the same period of the prior fiscal year. The overall decrease in order bookings for the six months ended December 31, 2001 as compared to the same period last fiscal year was driven by the weak worldwide economy and industrial demand. Additionally, in the laser optics and component products area, a major one-year blanket order received in the first half of last fiscal year was delayed and is now expected in the second half of fiscal 2002. Revenues for the second quarter of fiscal 2002 decreased 14% to $27,446,000 compared to $31,738,000 for the same period last fiscal year. For the quarter, revenues from laser optics and component products decreased by approximately 15%, revenues from the eV PRODUCTS division decreased by approximately 25% and revenues from Laser Power Corporation decreased approximately 5%. The overall decrease in revenues for the second quarter of fiscal 2002 as compared to the prior period was due to the weak worldwide economy and, more specifically, lower industrial demand, which also impacted the Company's bookings. Lower industrial capital spending and lower industrial production has decreased the demand for the Company's laser optics and component products. Revenues for the six months ended December 31, 2001 decreased 4% to $56,139,000 from $58,451,000 for the same period last fiscal year. Revenues from laser optics and component products decreased approximately 10%, revenues from the eV PRODUCTS division decreased approximately 10% and revenues from Laser Power Corporation were approximately $16,371,000 for the six months ended Decmeber 31, 2001 compared to approximately $14,103,000 for five months of the same period of the prior fiscal year. Manufacturing gross margin for the second quarter of fiscal 2002 was $7,970,000 or 32% of revenues compared to $11,642,000 or 38% of revenues for the same period last fiscal year. For the six months ended December 31, 2001, manufacturing gross margin was $17,604,000 or 34% of revenues compared to $21,852,000 or 39% of revenues for the same period last fiscal year. The reduction in gross margin percentage for the quarter and six month periods is a result of lower sales volume and lower gross margins at the Company's Laser Power Corporation and VLOC subsidiaries. The lower gross margins at Laser Power Corporation were due to production issues related to certain development projects. The lower gross margins at the VLOC subsidiary were due to non-recurring production issues encountered primarily in the first fiscal quarter. -13- Company-funded internal research and development expenses for the second quarter of fiscal 2002 were $1,345,000 or 5% of revenues compared to $1,166,000 or 4% of revenues for the same period last fiscal year. For the six months ended December 31, 2001, internal research and development expenses were $2,335,000 or 4% of revenues compared to $2,158,000 or 4% of revenues for the same period last fiscal year. These expenditures for the quarter and six month periods reflect an accelerated pace of silicon carbide crystal growth technology development and an increase in near-term research and development costs as a result of the acquisition of the Litton Systems, Inc. Silicon Carbide Group. These expenditures also include corporate research and development activities in addition to the research and development activities of eV PRODUCTS. Selling, general and administrative expenses for the second quarter of fiscal 2002 were $4,876,000 or 18% of revenues compared to $6,239,000 or 20% of revenues for the same period last fiscal year. For the six months ended December 31, 2001, selling, general and administrative expenses were $10,521,000 or 19% of revenues compared to $12,507,000 or 21% of revenues for the same period last fiscal year. The dollar and percentage decreases for the current quarter and six month period as compared to the same periods last fiscal year reflect the addition of Laser Power Corporation and the elimination of certain redundant expenses, as well as expense and manpower reductions in these areas. Interest expense for the second quarter of fiscal 2002 was $358,000 compared to $837,000 for the same period last fiscal year. For the six months ended December 31, 2001, interest expense was $900,000 compared to $1,174,000 for the same period last fiscal year. The decrease in interest expense reflects a decrease in interest rates for the current quarter and six month period as compared to the same periods last fiscal year. Other income for the second quarter of fiscal 2002 of $95,000 compared to other expense of $543,000 for the same period last fiscal year. For the six months ended December 31, 2001, other income was $660,000 compared to other expense of $610,000 for the same period last fiscal year. The change for the current quarter and six month period was primarily due to net foreign currency gains as a result of the dollar's performance relative to other currencies compared to foreign currency losses in the same periods of the prior fiscal year. The balance of the other income for the current quarter and six month period was derived from royalty income and interest income. For fiscal 2002, the Company's year-to-date effective income tax rate is 30% compared to an effective income tax rate of 33% for the same period last fiscal year. The income tax rate reflects the continued benefit from international related tax opportunities from the Company's Asian operations. These international operations are expected to be an increasing component of the Company's consolidated taxable income. For the third quarter of fiscal 2002, the Company is currently forecasting revenues to decrease approximately 5% from the just completed second quarter of fiscal 2002 and earnings per share to range from $0.07 to $0.11. The Company currently expects revenues for fiscal 2002 to be lower than the prior fiscal year and income from operations for each of the third and fourth quarters of fiscal 2002 to be less than the just completed second quarter. Actual results may differ from these forecasts due to factors such as changes in product demand, competition and general economic conditions. Liquidity and Capital Resources - ------------------------------- In the first six months of fiscal 2002, cash generated from operations of $7.5 million and proceeds from an increase in borrowings of $3.3 million were used primarily to fund an investment of $5.2 million in property, plant and equipment, to finance a $1.5 million investment for a 33% ownership of a key supplier to the Company, to acquire for $2.2 million the Litton Systems, Inc. Silicon Carbide Group and to pay down $1.3 million due on the term loan. Cash transactions for the first six months of fiscal 2002 plus cash on hand at the beginning of the fiscal year resulted in a cash position of $8.8 million at December 31, 2001. 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 2002. 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. -14- 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, 2001. -15- Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------ --------------------------------------------------------- Market Risks - ------------ The Company is exposed to market risks arising from adverse changes in interest rates and foreign currency exchange rates. In the normal course of business, the Company uses a variety of techniques and instruments as part of its overall risk management strategy. For the quarter ended December 31, 2001, the Company increased its borrowings an additional $0.5 million. As of December 31, 2001, the total borrowings of $39.0 million include $23.8 million under the term loan option and $12.7 million under the line of credit option. 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 $91,000 and $179,000 for the three and six month periods ended December 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 H of the Notes to Condensed Consolidated Financial Statements. -16- PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- On November 2, 2001, the Company held its annual meeting of shareholders. The three matters voted upon at the annual meeting were the election of two directors for terms to expire in 2004, the ratification of the Board of Directors' selection of Deloitte & Touche LLP as auditors for the fiscal year ending June 30, 2002 and the approval of the II-VI Incorporated Stock Option Plan of 2001. Each of the Company's nominees for director was reelected at the annual meeting. The total number of votes cast for the election of directors was 12,240,685. Following is a separate tabulation with respect to each director: Votes For Votes Withheld Peter W. Sognefest 11,300,455 940,230 Francis J. Kramer 10,864,345 1,376,340 The total number of votes cast for the ratification of the appointment of Deloitte & Touche LLP as auditors for the year ending June 30, 2002 was 12,240,685 with 12,141,019 votes for, 88,612 votes against and 11,054 votes abstaining. The total number of votes cast for the approval of the II-VI Incorporated Stock Option Plan of 2001 was 9,049,664 with 6,249,109 votes for, 2,755,251 votes against and 45,304 votes abstaining. There were no broker non-votes on these matters. -17- Item 6. EXHIBITS AND REPORTS ON FORM 8-K. - ------ -------------------------------- (a) Exhibits. 10.01 II-VI Incorporated Incorporated herein by Stock Option Plan reference is Exhibit 4.1 of 2001 to the Registrant's Form S-8 filed December 6, 2001. (b) Reports on Form 8-K. On October 24, 2001, the registrant filed a report on Form 8-K for the events dated October 19, 2001, covering Item 2 thereof. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. II-VI INCORPORATED (Registrant) Date: February 12, 2002 By: /s/ Carl J. Johnson Carl J. Johnson Chairman and Chief Executive Officer Date: February 12, 2002 By: /s/ Craig A. Creaturo Craig A. Creaturo Treasurer -19- EXHIBIT INDEX 10.01 II-VI Incorporated Incorporated herein by Stock Option Plan reference is Exhibit 4.1 of 2001 to the Registrant's Form S-8 filed -20-