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 March 31, 2002 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . ---- ---- Commission File Number: 0-16195 II-VI INCORPORATED (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1214948 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 375 Saxonburg Boulevard Saxonburg, PA 16056 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 724-352-4455 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 10, 2002, 14,017,170 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 - March 31, 2002 and June 30, 2001. . . . . . . . . . . . . .3 Condensed Consolidated Statements of Earnings - Three and Nine months ended March 31, 2002 and 2001. . . . 4 Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2002 and 2001. . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements. . . .7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . .13 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 17 - 2 - </PAGE>
PART I - FINANCIAL INFORMATION Item 1. Financial Statements: II-VI Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ($000) March 31, June 30, Assets 2002 2001 -------- -------- Current Assets Cash and cash equivalents $ 9,627 $ 8,093 Accounts receivable, net 19,976 21,884 Inventories 18,887 20,782 Deferred income taxes 3,672 3,304 Other current assets 1,861 1,644 -------- -------- Total Current Assets 54,023 55,707 Property, Plant and Equipment, net 61,095 58,031 Goodwill, net 28,758 29,236 Other Intangible Assets, net 3,822 4,086 Other Assets 3,018 1,113 -------- -------- $150,716 $148,173 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 5,214 $ 5,714 Accrued salaries, wages and bonuses 4,048 7,086 Income taxes payable 1,391 2,158 Accrued profit sharing contribution 513 1,122 Other current liabilities 1,954 1,817 Current portion of long-term debt 5,070 3,834 -------- -------- Total Current Liabilities 18,190 21,731 Long-Term Debt--less current portion 32,235 33,172 Other Liabilities, primarily deferred income taxes 4,844 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 - 15,066,437 shares at March 31, 2002; 14,981,163 shares at June 30, 2001 37,682 37,045 Accumulated other comprehensive income 240 91 Retained earnings 59,435 54,187 -------- -------- 97,357 91,323 Less treasury stock, at cost - 1,068,880 shares 1,910 1,910 -------- -------- 95,447 89,413 -------- -------- $150,716 $148,173 ======== ======== - -See notes to condensed consolidated financial statements. - 3 - </PAGE>
II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) Three Months Ended March 31, 2002 2001 -------- -------- Revenues Net sales: Domestic $ 13,406 $ 19,335 International 12,750 11,778 -------- -------- 26,156 31,113 Contract research and development 1,285 1,418 -------- -------- 27,441 32,531 -------- -------- Costs, Expenses & Other Income Cost of goods sold 18,122 19,814 Contract research and development 1,726 1,033 Internal research and development 1,153 1,088 Selling, general and administrative 4,824 6,083 Interest expense 313 657 Other expense (income), net (353) 180 -------- -------- 25,785 28,855 -------- -------- Earnings Before Income Taxes 1,656 3,676 Income Taxes 492 1,241 -------- -------- Net Earnings $ 1,164 $ 2,435 ======== ======== Basic Earnings Per Share $ 0.08 $ 0.18 ======== ======== Diluted Earnings Per Share $ 0.08 $ 0.17 ======== ======== - -See notes to condensed consolidated financial statements. - 4 - </PAGE>
II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) Nine Months Ended March 31, 2002 2001 -------- -------- Revenues Net sales: Domestic $ 41,829 $ 53,673 International 36,284 33,462 -------- -------- 78,113 87,135 Contract research and development 5,467 3,847 -------- -------- 83,580 90,982 -------- -------- Costs, Expenses & Other Income Cost of goods sold 52,475 53,984 Contract research and development 4,603 2,407 Internal research and development 3,488 3,246 Selling, general and administrative 15,345 18,590 Interest expense 1,213 1,831 Other expense (income) - net (1,013) 790 -------- -------- 76,111 80,848 -------- -------- Earnings Before Income Taxes 7,469 10,134 Income Taxes 2,221 3,396 Net Earnings $ 5,248 $ 6,738 ======== ======== Basic Earnings Per Share $ 0.38 $ 0.49 ======== ======== Diluted Earnings Per Share $ 0.37 $ 0.48 ======== ======== - -See notes to condensed consolidated financial statements. - 5 - </PAGE>
II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ($000) Nine Months Ended March 31, 2002 2001 -------- -------- Cash Flows from Operating Activities Net earnings $ 5,248 $ 6,738 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,513 6,281 (Gain) loss on foreign currency transactions (185) 1,001 Deferred income taxes (544) (146) Increase (decrease) in cash from changes in: Accounts receivable 2,263 (4,172) Inventories 2,124 (1,299) Accounts payable (457) 1,688 Other operating net assets (3,321) (1,031) -------- -------- Net cash provided by operating activities 11,641 9,060 -------- -------- Cash Flows from Investing Activities Purchases of businesses (2,172) (27,726) Investment in unconsolidated businesses (1,541) - Additions to property, plant and equipment (6,938) (10,983) Disposals of other assets 121 132 -------- -------- Net cash used in investing activities (10,530) (38,577) -------- -------- Cash Flows from Financing Activities Proceeds from short-term borrowings, net 3,000 3,473 Increase in long-term borrowings - 25,000 Payments on long-term borrowings (2,567) (32) Proceeds from sale of common stock 279 413 -------- -------- Net cash provided by financing activities 712 28,854 -------- -------- Effect of exchange rate changes on cash and cash equivalents (289) (289) Net increase (decrease) in cash and cash equivalents 1,534 (952) Cash and Cash Equivalents at Beginning of Period 8,093 6,330 -------- -------- Cash and Cash Equivalents at End of Period $ 9,627 $ 5,378 ======== ======== Cash paid for interest $ 1,231 $ 1,459 Cash paid for taxes $ 724 $ 1,492 Non-cash transactions: Net assets acquired for fair value of common stock $ - $ 15,469 Net assets acquired under purchase commitment $ 366 $ - - -See notes to condensed consolidated financial statements. - 6 - </PAGE>
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 nine month periods ended March 31, 2002 and 2001 are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation for the periods presented have been included. These interim statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto contained in the Company's 2001 Annual Report to shareholders. The consolidated results of operations for the three and nine month periods ended March 31, 2002 and 2001 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 Laser Power Corporation. Note B - Inventories ----------- The components of inventories are as follows ($000): March 31, June 30, 2002 2001 --------- -------- Raw materials $ 5,481 $ 6,173 Work in progress 7,750 8,680 Finished goods 5,656 5,929 --------- -------- $ 18,887 $ 20,782 ========= ======== Note C - Property, Plant and Equipment ----------------------------- Property, plant and equipment (at cost or valuation) consist of the following ($000): March 31, June 30, 2002 2001 --------- -------- Land and land improvements $ 1,715 $ 1,715 Buildings and improvements 25,322 24,426 Machinery and equipment 76,589 68,217 --------- -------- 103,626 94,358 Less accumulated depreciation 42,531 36,327 --------- -------- $ 61,095 $ 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 March 31, 2002 was 3.11%. As of March 31, 2002, the total borrowings under this facility of $35.0 million consisted of $22.5 million under the term loan option and $12.5 million under the line of credit option. - 7 - </PAGE>
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 Nine Months Ended March 31, March 31, (000 except per share data) 2002 2001 2002 2001 - ----------------------------- --------- --------- --------- ---------- <s> <c> <c> <c> <c> Net earnings $ 1,164 $ 2,435 $ 5,248 $ 6,738 Divided by: Weighted average shares 13,983 13,886 13,945 13,684 - ----------------------------- --------- --------- --------- ---------- Basic earnings per share $ 0.08 $ 0.18 $ 0.38 $ 0.49 - ----------------------------- --------- --------- --------- ---------- Net earnings $ 1,164 $ 2,435 $ 5,248 $ 6,738 Divided by: Weighted average shares 13,983 13,886 13,945 13,684 Dilutive effect of common stock equivalents 391 382 392 447 - ----------------------------- --------- --------- --------- ---------- Diluted weighted average common shares 14,374 14,268 14,337 14,131 Diluted earnings per share $ 0.08 $ 0.17 $ 0.37 $ 0.48 - ----------------------------- --------- --------- --------- ---------- </TABLE> Note F - Comprehensive Income -------------------- The components of comprehensive income were as follows for the periods indicated ($000): <TABLE> <CAPTION> Three Months Ended Nine Months Ended March 31, March 31, (000 except per share data) 2002 2001 2002 2001 - ----------------------------- --------- --------- --------- ---------- <s> <c> <c> <c> <c> Net income $ 1,164 $ 2,435 $ 5,248 $ 6,738 Foreign currency translation adjustments (48) (222) 149 (215) - ----------------------------- --------- --------- --------- ---------- Comprehensive income $ 1,116 $ 2,213 $ 5,397 $ 6,523 - ----------------------------- --------- --------- --------- ---------- </TABLE> 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 - </PAGE>
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 March 31, 2002 -------------------------------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - ----------------------------- ---------- --------- ----------- ------ <s> <c> <c> <c> <c> Net revenues $ 18,550 $ 1,521 $ 7,370 $ 27,441 Income (loss) from operations 2,507 (472) (419) 1,616 Interest expense - - - 313 Other (income), net - - - (353) Earnings before income taxes - - - 1,656 Depreciation and amortization 1,494 183 473 2,150 Capital expenditures 1,233 262 216 1,711 Goodwill, net 1,698 - 27,060 28,758 Segment assets 87,609 9,314 53,793 150,716 </TABLE> <CAPTION> <TABLE> 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 Capital expenditures 3,757 169 262 4,188 Goodwill, net 1,726 - 32,028 33,754 Segment assets 82,922 7,958 56,112 146,992 </TABLE> <CAPTION> <TABLE> Nine Months Ended March 31, 2002 -------------------------------------------------------- Optical Radiation Laser Power Components Detectors Corporation Totals - ----------------------------- ---------- --------- ----------- ------ <s> <c> <c> <c> <c> Net revenues $ 54,763 $ 5,076 $ 23,741 $ 83,580 Income (loss) from operations 8,569 (975) 75 7,669 Interest expense - - - 1,213 Other (income), net - - - (1,013) Earnings before income taxes - - - 7,469 Depreciation and amortization 4,484 541 1,488 6,513 Capital expenditures 5,179 853 906 6,938 </TABLE> - 9 - </PAGE>
II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Note G - Segment Reporting - Continued ----------------------------- <CAPTION> <TABLE> 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 Capital expenditures 9,882 289 811 10,982 </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 March 31, 2002 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 nine months ended March 31, 2002 and 2001, the change in the fair value of these contracts increased net earnings by $11,000 and $50,000, respectively. For the nine months ended March 31, 2002 and 2001, the change in the fair value of these contracts (decreased) increased net earnings by $(10,000) and $89,000, respectively. To satisfy certain provisions of its line of credit facility, on March 6, 2002 the Company entered into a one-year interest rate cap expiring March 6, 2003, with a notional amount of $12.5 million replacing an interest rate collar that expired on March 5, 2002. These agreements were entered into to limit interest rate exposure on one-half of the $25 million term loan. The floating rate option for the cap agreement is the one-month LIBOR rate with a cap strike rate of 3.00%. At March 31, 2002 the one-month LIBOR rate was 1.87%. The Company has elected not to account for these agreements as hedges as defined by SFAS No. 133, and 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 three and nine months ended March 31, 2002 by approximately $71,000 and $42,000 respectively. The effect of the interest rate collar on net earnings for the quarter ended March 31, 2001 was immaterial. - 10 - </PAGE> 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 nine months ended March 31, 2002. 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 March 31, 2002 and 2001, the Company had goodwill, net of accumulated amortization, of $28,758,000 and $33,754,000, 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. During the third quarter of fiscal 2002, the Company reduced the goodwill associated with its acquisition of Laser Power Corporation by $478,000. The reduction in goodwill resulted from the benefits associated with costs incurred in connection with the acquisition. In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective July 1, 2001. The following fiscal 2001 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 Nine Months Ended March 31, March 31, ------------------------------------------ (000 except per share data) 2002 2001 2002 2001 - --------------------------- ------ ------ ------ ------ <S> <C> <C> <C> <C> Net earnings $1,164 $2,435 $5,248 $6,738 Add: Goodwill amortization - 439 - 1,151 - --------------------------- ------ ------ ------ ------ Adjusted net income $1,164 $2,874 $5,248 $7,889 ====== ====== ====== ====== Basic earnings per share $0.08 $0.18 $0.38 $0.49 Add: Goodwill amortization - 0.03 - 0.08 - --------------------------- ------ ------ ------ ------ Adjusted basic earnings per share $0.08 $0.21 $0.38 $0.57 ====== ====== ====== ====== Diluted earnings per share $0.08 $0.17 $0.37 $0.48 Add: Goodwill amortization - 0.03 - 0.08 - --------------------------- ------ ------ ------ ------ Adjusted diluted earnings per share $0.08 $0.20 $0.37 $0.56 ====== ====== ====== ====== </TABLE> - 11 - </PAGE>
II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Note I - New Accounting Pronouncements - Continued ----------------------------------------- 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 une 15, 2002. The Company is currently evaluating the impact that this Statement will have on the Company's financial position or results of operations. 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. 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. - 13 - </PAGE>
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 2002 were $1,164,000 ($0.08 per share-diluted) on revenues of $27,441,000. This compares to net earnings of $2,435,000 ($0.17 per share-diluted) on revenues of $32,531,000 in the third quarter of fiscal 2001. For the nine months ended March 31, 2002, net earnings were $5,248,000 ($0.37 per share- diluted) on revenues of $83,580,000. This compares with net earnings of $6,738,000 ($0.48 per share-diluted) on revenues of $90,982,000 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 nine months ended March 31, 2001, excluding the amortization of goodwill, were net earnings of $2,874,000 ($0.20 per share-diluted) and $7,889,000 ($0.56 per share-diluted), respectively. See Note I of the Notes to the Condensed Consolidated Financial Statements. Order bookings for the third quarter of fiscal 2002 were $36,467,000 compared to $33,385,000 for the same period last fiscal year, an increase of 9%. Bookings for contract research and development for the third quarter of fiscal year 2002 were $2,236,000 compared to $497,000 for the same period last fiscal year. For the quarter, bookings for laser optics and component products decreased approximately 5%, bookings for the eV PRODUCTS division increased approximately 30% and bookings for Laser Power Corporation increased approximately 15%. The overall increase in order bookings for the third quarter of fiscal 2002 as compared to the prior period was driven by several one-year blanket orders recorded by the eV PRODUCTS division, significant military orders booked at Laser Power Corporation and contract bookings for the development of Silicon Carbide. Order bookings for the nine months ended March 31, 2002 were $89,453,000 compared to $100,826,000 for the same period last fiscal year, a decrease of 11%. Bookings for contract research and development for the nine months ended March 31, 2002 were $8,706,000 compared to $3,326,000 for the same period last fiscal year. For the nine months ended March 31, 2002, bookings for laser optics and component products decreased approximately 15%, bookings for the eV PRODUCTS division decreased approximately 15%, and bookings for Laser Power Corporation were approximately $29,124,000 for the nine months ended March 31, 2002 compared to approximately $31,095,000 for eight months of the same period of the prior fiscal year. The overall decrease in order bookings for the nine months ended March 31, 2002 as compared to the same period last fiscal year was driven by the weak worldwide economy and industrial demand. Revenues for the third quarter of fiscal 2002 decreased 16% to $27,441,000 compared to $32,531,000 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 40% and revenues from Laser Power Corporation decreased approximately 15%. The overall decrease in revenues for the third 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 nine months ended March 31, 2002 decreased 8% to $83,580,000 from $90,982,000 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 20% and revenues from Laser Power Corporation were approximately $23,741,000 for the nine months ended March 31, 2002 compared to approximately $22,532,000 for eight months of the same period of the prior fiscal year. The overall decrease in revenues for the third 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. Manufacturing gross margin for the third quarter of fiscal 2002 was $8,034,000 or 31% of revenues compared to $11,299,000 or 36% of revenues for the same period last fiscal year. For the nine months ended March 31, 2002, manufacturing gross margin was $25,638,000 or 33% of revenues compared to $33,151,000 or 38% of revenues for the same period last fiscal year. The reduction in gross margin percentage for the quarter and nine month periods is a result of lower sales volume and lower gross margins at the Company's Laser Power Corporation and VLOC subsidiaries. - 13 - </PAGE>
Additionally, due to the weak worldwide economy causing a slowdown in the industrial business, the Company has been using its capacity to take on more military business which is, in general, lower margin and more technically challenging work. 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. Company-funded internal research and development expenses for the third quarter of fiscal 2002 were $1,153,000 or 4% of revenues compared to $1,088,000 or 3% of revenues for the same period last fiscal year. For the nine months ended March 31, 2002, internal research and development expenses were $3,488,000 or 4% of revenues compared to $3,246,000 or 4% of revenues for the same period last fiscal year. These expenditures for the quarter and nine 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 third quarter of fiscal 2002 were $4,824,000 or 18% of revenues compared to $6,083,000 or 19% of revenues for the same period last fiscal year. For the nine months ended March 31, 2002, selling, general and administrative expenses were $15,345,000 or 18% of revenues compared to $18,590,000 or 20% of revenues for the same period last fiscal year. The dollar and percentage decreases for the current quarter and nine 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 third quarter of fiscal 2002 was $313,000 compared to $657,000 for the same period last fiscal year. For the nine months ended March 31, 2002, interest expense was $1,213,000 compared to $1,831,000 for the same period last fiscal year. The decrease in interest expense reflects the combination of a decrease in interest rates for the current quarter and nine month period and the favorable recording of the unrealized change in the fair value of the Company's interest rate protection agreements for the March 31, 2002 quarter as compared to the same periods last fiscal year. Other income for the third quarter of fiscal 2002 of $353,000 compared to other expense of $180,000 for the same period last fiscal year. For the nine months ended March 31, 2002, other income was $1,013,000 compared to other expense of $790,000 for the same period last fiscal year. The change for the current quarter and nine 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. Other income for the quarter includes approximately $366,000 of income derived from the transfer of crystal growth assets as settlement of a customer's inability to fulfill its purchase requirements to the Company. The balance of the other income for the current quarter and nine 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 primarily reflects the continued benefit from international related tax opportunities from the Company's Asian operations. For the fourth quarter of fiscal 2002, the Company is currently forecasting revenues and income from operations to be consistent with the just completed third quarter of fiscal 2002 and earnings per share to range from $0.07 to $0.11. The Company currently expects revenues and income from operations for fiscal 2002 to be lower than the prior fiscal year by approximately 10% and 25%, respectively. 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 nine months of fiscal 2002, cash generated from operations of $11.6 million and proceeds from an increase in borrowings of $3.0 million were used primarily to fund an investment of $6.9 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 $2.6 million due on the term loan. Cash transactions for the first nine months of fiscal 2002 plus cash on hand at the beginning of the fiscal year resulted in a cash position of $9.6 million at March 31, 2002. - 14 - </PAGE>
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. 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 - </PAGE>
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 March 31, 2002, the Company decreased its borrowings by $1.7 million. As of March 31, 2002, the total borrowings of $37.3 million primarily include $22.5 million under the term loan option and $12.5 million under the line of credit option. As such, the Company is exposed to changes in interest rates. A change in the interest rate of 1% would have changed the interest expense by approximately $95,000 and $286,000 for the three and nine month periods ended March 31, 2002, respectively. To satisfy certain provisions of its line of credit facility relating to mitigating interest rate risk, on March 6, 2002 the Company entered into an interest rate cap for a one-year period with a notional amount of $12.5 million. See Note H of the Notes to Condensed Consolidated Financial Statements. - 16 - </PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. -------------------------------- (a) Exhibits. None (b) Reports on Form 8-K. None - 17 - </PAGE>
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, 2002 By: /s/ Carl J. Johnson Carl J. Johnson Chairman and Chief Executive Officer Date: May 14, 2002 By: /s/ Craig A. Creaturo Craig A. Creaturo Treasurer - 18 - </PAGE>