II-VI Incorporated

375 Saxonburg Boulevard
Saxonburg, Pennsylvania 16056
U.S.A.
Telephone: (724) 352-4455
Toll Free: (888) 558-1504
Fax: (724) 352-4980
Web site: http://www.ii-vi.com

Public Company
Incorporated: 1971
Employees: 1,094
Sales: $150.84 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: IIVI
NAIC: 333314 Optical Instrument and Lens Manufacturing; 334419 Other Electronic Component Manufacturing

II-VI Incorporated develops and manufactures optical and optoelectronic devices used in laser and sensor systems. The company's products are used in industrial, medical, military, security, and aerospace applications. II-VI maintains production facilities in Pennsylvania, New Jersey, Florida, and California. Overseas, where the company generates 41 percent of its annual sales, II-VI operates manufacturing plants in Singapore and China. The company also has sales and marketing subsidiaries in Japan, the United Kingdom, Belgium, and Switzerland.

Origins

II-VI's development nearly spanned its founder's entire professional career, representing the life's work of Carl J. Johnson. Described, in the August 31, 1997 issue of the Pittsburgh Business Times by a rival as "a real capable scientist and manager," Johnson earned his bachelor's degree at Purdue University, his master's degree at Massachusetts Institute of Technology, and his doctorate in electrical engineering at the University of Illinois. He received his Ph.D. in 1964 and began what would be a brief period of working for an employer, starting out with a two-year stint as a member of Bell Laboratories' technical staff. Next, Johnson joined Essex International Inc., an automotive products maker, where he served as the director of research and development for five years. In 1971, Johnson, in his late 20s, founded II-VI, starting a company that would count him as its leader for more than 35 years.

Johnson based his entrepreneurial creation in Saxonburg, Pennsylvania, a city 25 miles north of Pittsburgh. The name of the company, pronounced "two-six," referred to groups II and VI of the Periodic Table of Elements, the two groups of elements that served as the basis for many of the components and materials made by Johnson's company. II-VI's name had deeper meaning than most other corporate titles chosen by companies since the name reflected Johnson's strategy. Industry pundits pointed to Johnson's decision to focus his efforts on the elements found in groups II and VI as the primary reason for his company's financial success. Starting out, Johnson's record of success was impressive, as II-VI remained profitable and increased its revenues every year during its first 15 years of business.

II-VI's achievements during this period not only created a sturdy financial base but also advanced the science and engineering driving the development of laser technology. Thanks in part to II-VI's research with a number of zinc-, cadmium- and gallium-based compounds, engineers were able to improve the materials used in devices that controlled and directed laser energy. One measure of the advances in laser technology propelled by II-VI's work was in the power generated by some lasers, which leaped from 300 watts in 1971 to 5,000 watts in 1987, an important year in II-VI's history.

Initial Public Offering in 1987

By 1987, Johnson was ready to offer the public an opportunity to invest in his company. He had created, according to his own assessment quoted in the August 31, 1987 issue of the Pittsburgh Business Times, "a leading researcher in the area of infrared materials and a leading producer for precision infrared optical devices," and he wanted to leverage his company's stature to gain capital from Wall Street. II-VI filed for an initial public offering (IPO) of stock in August 1987, planning to issue one million shares at between $6.50 and $7.50 per share with the hope of raising $8 million for capital investment and to fund research and development efforts.

When Johnson announced his intention to go public, he presided over a nearly $10 million-in-sales business, one that derived nearly 40 percent of its sales from overseas customers. The company's product line included precision components found in high-powered infrared lasers used for industrial, military, and medical applications, constituting the optics (lenses and reflectors) that controlled the type and amount of energy passing through a laser. Although the company received some of its income from the medical and military markets, the majority of its business was involved in supplying components for lasers used in industrial settings. II-VI equipped lasers were used to weld everything from automobile bodies to heart pacemakers and to cut, drill, and heat treat in scores of other industrial applications. II-VI sold its components to the more than 960 companies worldwide that manufactured lasers and related equipment.

Johnson owned 31 percent of II-VI following its IPO and guided the company into the 1990s, a decade of significant growth. Much of the company's growth during that decade was achieved through acquisitions, a strategy employed in earnest after Johnson and his management team resolved problems in one of the company's most important markets. By the early 1990s, II-VI collected nearly half its annual sales from foreign customers, conducting much of its international business in Japan. For years, the company faced little competition there, relying on a distributor, Material Technology Trading Corp. (25 percent owned by II-VI) to develop a leading position in the Japanese market.

The end to the years of relative ease came in the early 1990s, when Japan's Ministry of International Trade and Industry began promoting increased involvement, by Japanese companies, in the industrial laser business, including the production of advanced optical lenses. "Our first reaction was one of curiosity," II-VI's chief financial officer remarked in a November 29, 1993 interview with the Pittsburgh Business Times. "We weren't sure what we would do," CFO John Sherbin continued. "But I think we felt we just simply couldn't do the same as usual. We then made the assessment that, really for the long run, we would have to take a direct position." The management team found itself facing a wave of new competitors, such as the massive conglomerate Sumitomo Corp., and felt inadequately supported by its Japanese distributor, Material Technology. In February 1993, the company sold its 25 percent stake in Material Technology and gave the distributor a one-year termination notice, a customary practice when severing a long-term business relationship in Japan. Next, the company began working to establish its own subsidiary to directly sell its products in Japan, an objective realized in July 1993, when II-VI Japan Ltd. began operating as a wholly owned sales-and-support subsidiary.

After shoring up business in Japan, Johnson directed his energies to expanding II-VI's domestic business. His expansion program consisted largely of acquiring other companies. In 1995, II-VI acquired the Tampa, Florida-based Virgo Optics division of Sandoz Chemical Corp. Johnson merged this acquisition with a company he acquired the following year, Tarpon Springs, Florida-based Lightning Optical Corp., to create a new subsidiary named VLOC based in New Port Richey, Florida. The addition of this business helped II-VI generate $52.7 million in revenue in 1997, nearly triple the total collected three years earlier.

The Pursuit of Laser Power: 1990s–2000s

II-VI's most important acquisition was first targeted at the end of the 1990s. The object of Johnson's desire was a San Diego-based company named Laser Power Corp., one of his competitors. Laser Power, a $31 million-in-sales company founded by a former II-VI employee, manufactured infrared optics products used in carbon dioxide lasers purchased by industrial and military customers. Half of the company's sales were derived from contracts with the military, the part of Laser Power's business that interested Johnson in particular. Laser Power made domes for the front end of missiles that functioned as infrared eyes for the weapon, window assemblies for tanks and helicopters, and optical coatings for space-based lasers, additions that would enable Johnson to increase the less than 10 percent II-VI collected in sales from military work.

Johnson coveted Laser Power, demonstrating an ardent desire to purchase the company. He made his first move quietly, acquiring 100 shares of Laser Power's stock in June 1999. In late September 1999, his intentions were made public when II-VI paid $2.75 million for 14.7 percent of Laser Power, part of Johnson's plan to purchase the entire company in a stock-and-cash transaction valued at $25.5 million. Industry analysts supported Johnson's decision to buy Laser Power, noting that the acquisition would rid II-VI of a competitor, give it a manufacturing presence on the West Coast, and, most important, broaden its customer base by quintupling its military-related business. Laser Power's management, however, did not rush to complete the deal. Months passed and the new year came without any further action, as Johnson began to realize that acquiring Laser Power would be one of the most trying experiences in his career.

In mid-2000, Johnson's attempt to acquire Laser Power became a battle. In early June, II-VI's opportunity to acquire Laser Power appeared lost when another company, a Brussels-based non-ferrous metals producer named Union Minière SA, offered $39 million for Laser Power. Union Minière, which owned 10 percent of Laser Power, signed an agreement to merge with the San Diego company, prompting Johnson to counter with another, higher bid. Johnson offered $43 million for the company, setting the stage for a bidding war between II-VI and Union Minière. "Obviously," Laser Power CEO Dick Sharman said in a June 6, 2000 interview with the Press-Enterprise, "we are an attractive takeover target."

Company Perspectives:

From amber-colored lenses that focus intense laser light, to radiation detectors for nationwide security and nuclear medicine, to high power electrical and microwave components, II-VI Incorporated and its divisions and subsidiaries utilize expertise in synthetic crystal materials growth, optics fabrication, electronics component manufacture, and more to create high-tech products for a wide range of applications and industries.

In the weeks following the merger agreement between Union Minière and Laser Power, the II-VI executives in charge of the effort to acquire Laser Power scrambled to come up with a response. A bidding war ensued, as Sharman sat back and watched the value of his company escalate. By the end of the month, a winner was announced. II-VI offered $53 million for Laser Power, an amount Union Minière executives were unwilling to match. Johnson, a year after he began pursuing Laser Power, achieved his objective, paying more than twice the amount he originally expected to pay. Despite the increase in price, analysts applauded the deal, an acquisition that increased II-VI's annual revenues by 66 percent and elevated its military-related business from 5 to 25 percent of its revenue volume.

Once Laser Power was integrated into its operations, II-VI continued to strengthen its market position through acquisitions during the first half of the decade. In 2001, the company's 30th anniversary, it acquired Litton Systems, Inc.'s Silicon Carbide Group. Recessive economic conditions forced the company to halt its expansion program following the Silicon Carbide purchase, but by 2003, when the invasion of Iraq boosted prospects for military contractors, Johnson and his team again began pursuing acquisition candidates. In September 2003, the company purchased the ultraviolet filters materials business owned by rival Coherent, Inc. The filters were used by military aircraft to detect ground-launched missiles, which emit an ultraviolet plume when burning rocket fuel.

As II-VI prepared for the future, the breadth of its product line distinguished it from competing optics makers. The company, primarily from achievements during the 1990s, became a comprehensive developer and manufacturer of high technology materials, developing a portfolio of products that was diverse yet reflected the company's adherence to using elements from groups II and VI of the Periodic Table. The breadth of the company's product line translated into robust financial growth, as II-VI increased its annual revenue volume from $18.6 million in 1994 to $150 million in 2004. In the years ahead, the company was expected to build on its broad business foundation by continuing to complete acquisitions, a strategy it employed as it entered the mid-2000s. In December 2004, II-VI signed an agreement to acquire Marlow Industries, Inc., a $26 million-in-sales manufacturer of thermoelectric solutions for both cooling and power generation. II-VI marked the occasion with a press release issued December 13, 2004: "The Marlow acquisition represents a tremendous opportunity for II-VI Incorporated. Marlow's leading portfolio of thermoelectric cooling solutions complements our strong position in optical and optoelectronic components…. Our combined company will offer one of the broadest product arrays to space, defense, medical, industrial, and telecommunications markets."

Principal Subsidiaries

VLOC Incorporated; Exotic Electro-Optics, Inc.; II-VI Acquisition Corp.; II-VI Delaware, Incorporated; II-VI Holdings B.V. (Belgium); II-VI Deutschland GmbH (Germany); II-VI/L.O.T. GmbH (Germany; 75%); II-VI Singapore Pte., Ltd.; II-VI International Pte., Ltd. (Singapore); II-VI Optics (Suzhou) Co. Ltd. (China); II-VI Japan Incorporated; II-VI U.K. Limited; II-VI L.P.E. N.V. (Belgium); II-VI/L.O.T. Suisse S.a.r.l. (Switzerland; 75%); II-VI Beijing (China).

Principal Competitors

Röhm and Haas Company; Sumitomo Corp.; Ophir Optronics; Northrop Grumman Corporation; Raytheon Corporation.

Key Dates:

1971:: II-VI is founded by Carl J. Johnson.
1987:: II-VI completes its initial public offering of stock.
1997:: II-VI's VLOC subsidiary is formed by merging two acquisitions.
2000:: II-VI acquires Laser Power Corp.
2004:: II-VI acquires Marlow Industries, Inc.

II-VI Incorporated

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II-VI Incorporated

375 Saxonburg Boulevard
Saxonburg, Pennsylvania 16056
U.S.A.
Telephone: (724) 352-4455
Toll Free: (888) 558-1504
Fax: (724) 352-4980
Web site: http://www.ii-vi.com