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, September 30, 1996 [ ] 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 16056 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 412-352-4455 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 November 7, 1996, 6,362,296 shares of Common Stock, no par value, of the registrant were outstanding. II-VI INCORPORATED AND SUBSIDIARIES ----------------------------------- INDEX ----- <TABLE> <CAPTION> Page No. -------- <S> <C> PART 1 FINANCIAL INFORMATION Item 1. Financial Statements. Independent Accountants' Report. . . . . . . . . . 3 Condensed Consolidated Balance Sheets - September 30, 1996, and June 30, 1996. . . . . . . 4 Condensed Consolidated Statements of Earnings - Three months ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Shareholders' Equity - Three months ended September 30, 1996 . . . . . . . . . . . . . . . . 6 Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 1996 and 1995. . . . . . . . . . . . 7 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . 10 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . 12 </TABLE> 2 [LOGO OF ALPERN, ROSENTHAL & COMPANY] Certified Public Accountants Warner Centre, Suite 400 . 332 Fifth Avenue Pittsburgh, Pennsylvania 15222-2413 (412) 281-2501 . Fax (412) 471-1996 Independent Accountants' Report To the Board of Directors and Shareholders of II-VI Incorporated Saxonburg, Pennsylvania We have reviewed the accompanying condensed consolidated balance sheet of II-VI Incorporated and Subsidiaries as of September 30, 1996, and the related condensed consolidated statements of earnings, shareholders' equity and cash flows for the three month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated August 12, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1996 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Alpern, Rosenthal & Company October 16, 1996 A Professional Corporation - ---------------------------------------------------------------- Members American and Pennsylvania Institutes of Certified Public Accountants Accounting Firms Associated, inc. Member Firms in Principal Cities <TABLE> <S> <C> Irving P. Rosenthal, CPA Deborah H. Wells, CPA Michael H. Levin, CPA Fred M. Rock, CPA Harvey A. Pollack, CPA Sean M. Brennan, CPA Fred J. Morelli, Jr., CPA Alexander Paul, CPA Edward F. Rockman, CPA Michael E. Forgas, CPA Emanuel V. DiNatale, CPA Joel M. Rosenthal, CPA </TABLE> 3 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------------------------ II-VI Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ($000 except share data) <TABLE> <CAPTION> September 30 June 30 Assets 1996 1996 ------------ ----------- <S> <C> <C> Current Assets Cash and equivalents $ 8,606 $ 9,417 Accounts receivable - less allowance for doubtful accounts of $256 at 9/30/96 and $246 at 6/30/96 9,177 8,712 Inventories 6,004 5,490 Deferred income taxes 429 429 Prepaid and other current assets 720 607 ------- ------- Total Current Assets 24,936 24,655 Property, Plant & Equipment, net 15,762 15,085 Goodwill 2,126 2,138 Other Assets 2,227 2,291 ------- ------- $45,051 $44,169 ------- ------- Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 1,167 $ 1,393 Accounts payable - trade 1,276 1,260 Accrued salaries, wages and bonuses 1,770 3,105 Income taxes payable 950 607 Accrued profit sharing contribution 207 556 Other current liabilities 993 1,024 Current portion of long-term debt 73 23 ------- ------- Total Current Liabilities 6,436 7,968 Long-Term Debt--less current portion 731 45 Deferred Income Taxes 1,753 1,753 Commitments & Contingencies - - Shareholders' Equity Preferred stock, no par value; authorized - 5,000,000 shares; unissued - - Common stock, no par value; authorized - 30,000,000 shares; issued - 6,720,636 shares in September 1996; 6,691,718 shares in June 1996 17,121 17,055 Cumulative Translation Adjustment 81 79 Retained Earnings 19,691 18,031 ------- ------- 36,893 35,165 Less treasury stock, at cost - 384,440 shares at 9/30/96 and 6/30/96. 762 762 ------- ------- 36,131 34,403 ------- ------- $45,051 $44,169 ------- ------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 4 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) <TABLE> <CAPTION> Three Months Ended September 30, 1996 1995 -------- -------- <S> <C> <C> Revenues Net Sales: Domestic $ 6,772 $ 4,237 International 4,820 3,720 ------- ------- 11,592 7,957 Contract research and development 518 131 ------- ------- 12,110 8,088 ------- ------- Costs, Expenses & Other Income Cost of goods sold 6,348 4,556 Contract research and development 395 101 Internal research and development 124 148 Selling, general and administrative expenses 3,030 2,131 Interest and other (income) expense - net (125) 16 ------- ------- 9,772 6,952 ------- ------- Earnings Before Income Taxes 2,338 1,136 Income Tax Expense 678 330 ------- ------- Net Earnings $ 1,660 $ 806 ------- ------- Earnings Per Share $ 0.25 $ 0.15 ------- ------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 5 II-VI Incorporated and Subsidiaries Condensed Consolidated Statement of Shareholders' Equity (Unaudited) (000) II-VI Incorporated and Subsidiaries Condensed Consolidated Statement of Shareholders' Equity (Unaudited) (000) <TABLE> <CAPTION> Common Stock Cumulative Treasury Stock -------------- Translation Retained ---------------- Shares Amount Adjustment Earnings Shares Amount Total ------ ------ ----------- -------- ------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Balance--July 1, 1996 6,692 $17,055 $ 79 $ 18,031 (384) $ (762) $34,403 Shares issued under stock option plan 29 66 - - - - 66 Net earnings for the quarter - - - 1,660 - - 1,660 Translation adjustment - - 2 - - - 2 ------ ------ ----------- -------- ------- -------- ------- Balance-- September 30, 1996 6,721 $17,121 $ 81 $ 19,691 (384) $ (762) $36,131 </TABLE> [FN] - -See notes to condensed consolidated financial statements. 6 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ($000) <TABLE> <CAPTION> Three Months Ended September 30, 1996 1995 ------- ------- <S> <C> <C> Cash Flows from Operating Activities Net Earnings $ 1,660 $ 806 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 816 593 (Gain) loss on foreign currency transactions (58) 39 Deferred income taxes - (38) Increase (decrease) in cash from changes in: Accounts receivable (456) (405) Inventories (525) (221) Accounts payable 43 346 Accrued salaries, wages and bonuses (1,336) (923) Accrued profit sharing contribution (349) (187) Income taxes payable 343 (21) Other operating net assets (132) (175) ------- ------- Net cash provided by (used in) operating activities 6 (186) ------- ------- Cash Flows from Investing Activities Additions to property, plant, & equipment (1,407) (2,482) Additions to other assets (9) - ------- ------- Net cash used in investing activities (1,416) (2,482) ------- ------- Cash Flows from Financing Activities Payments on short-term borrowings (202) - Proceeds from long-term borrowings 741 - Payments on long-term borrowings (6) (57) Proceeds from sale of common stock 66 51 ------- ------- Net cash provided by (used in) financing activities 599 (6) ------- ------- Net decrease in cash and equivalents (811) (2,674) Cash and Equivalents at Beginning of period 9,417 3,822 ------- ------- Cash and Equivalents at End of period $ 8,606 $ 1,148 ------- ------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 7 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 month periods ended September 30, 1996 and 1995 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 1996 Annual Report to the shareholders. The consolidated results of operations for the three month periods ended September 30, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. Note B - Inventories ($000) The components of inventories are as follows: September 30 June 30 1996 1996 Raw Materials $ 2,464 $ 2,279 Work in Progress 1,550 1,427 Finished Goods 1,990 1,784 -------- ------- $ 6,004 $ 5,490 -------- ------- Note C - Property, Plant and Equipment ($000) Property, plant and equipment consist of the following: September 30 June 30 1996 1996 Land and land improvements $ 545 $ 539 Buildings and improvements 7,139 6,952 Machinery and equipment 23,298 22,084 ------- ------- 30,982 29,575 Less accumulated depreciation 15,220 14,490 ------- ------- $15,762 $15,085 ------- ------- 8 II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note D - Debt In September of 1996, the Company secured a $741,000 low interest rate loan from the Pennsylvania Industrial Development Authority to finance a portion of a facility expansion. The terms of the loan call for equal monthly payments over a fifteen year period, including interest at three percent. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net earnings for the first quarter of fiscal 1997 were $1,660,000 ($0.25 per share) on revenues of $12,110,000. This compares to net earnings of $806,000 ($0.15 per share) on revenues of $8,088,000 in the first quarter of fiscal 1996. The increased earnings were driven by the improved revenue volume. Order bookings for the first quarter were $12,927,000 compared to $8,017,000 for the same period last fiscal year, an increase of 61%. Approximately two-thirds of this increase was from the VLOC operation and included $1.1 million of Research and Development contract awards. The remaining increase was attributable to increased demand for infrared optics and materials in the worldwide industrial market and the military/aerospace market, in conjunction with improved bookings in the eV PRODUCTS division. As indicated in the Company's press release announcing the first quarter results, overall market demand for the Company's products continues its strong growth. Manufacturing revenues for the first quarter increased 46% to $11,592,000 compared to $7,957,000 for the same period last fiscal year. This increase was the result of improved shipments in all of the markets served by the Company with the VLOC operation contributing more than one half of the increase. Manufacturing gross margin for the first quarter was $5,244,000 or 45% of revenues compared to $3,401,000 or 43% of revenues for the first quarter of fiscal 1996. Improved manufacturing efficiency in the VLOC operation was the primary driver to the increased gross margin as a percentage of revenues. This was partially offset by the further strengthening of the U.S. dollar against the Japanese Yen. Selling, General and Administrative expenses for the quarter were $3,030,000 or 25% of revenues compared to $2,131,000 or 26% of revenues for last fiscal year's first quarter. The increase in expense is attributable to increased expenses in the VLOC operation, higher compensation expense associated with the Company's world-wide profit driven bonus programs and higher general and administrative expenses needed to support the Company's growth. Other income increased by $141,000 in comparison to last fiscal year's first quarter due to investment earnings on increased cash balances. The increased cash is primarily due to the October 1995 public stock offering. The Company's first quarter effective income tax rate is 29%, the same as last fiscal year's first quarter. Liquidity and Capital Resources - ------------------------------- Cash decreased during the first three months of fiscal 1997 by $800,000 primarily from $1,407,000 in capital expenditures being partially offset by $741,000 of financing from a low interest rate loan with the Pennsylvania Industrial Development Authority. The capital expenditures focused on improved capacity, process automation and the start up of the Company's China operation. The Company generated $6,000 in cash from operations for the first quarter of fiscal 1997, as cash generated from net earnings before depreciation and amortization was offset by the payment of compensation costs relating to the Company's fiscal 1996 world-wide profit-driven bonus and retirement programs, and increases in inventories and accounts receivable needed to support the growth in sales volume. The current cash balance will be used for working capital needs, further capital expenditures, and possible acquisitions of complementary businesses, products or technologies. 10 This Management's Discussion and Analysis contains forward looking statements as defined by Section 21E of the Securities Exchange Act of 1934, including the statement regarding strong demand for the Company's products. The projected strong demand for our products could differ from our statements if worldwide economic conditions change, competitive conditions intensify, technology problems emerge, and/or if suitable acquisitions of technologies or business cannot be consummated. 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 Form 10-K filed on September 24, 1996. 11 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. -------- 10.01 II-VI Incorporated Amended and Restated Stock Option Plan of 1990 . . . . . . . . Filed herewith. 15.01 Accountant's acknowledgment letter dated November 12, 1996 . . . . . . . . . . . . Filed herewith. 27.01 Financial Data Schedule . . . . . . . . . Filed herewith. 99.01 Press release dated October 17, 1996. . . Filed herewith. (b) Reports on Form 8-K. None 12 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: November 12, 1996 By: /s/ Carl J. Johnson ----------------------- Carl J. Johnson Chairman and Chief Executive Officer Date: November 12, 1996 By: /s/ James Martinelli ----------------------- James Martinelli Treasurer & Chief Financial Officer EXHIBIT INDEX Exhibit No. 10.01 II-VI Incorporated Amended and Restated Stock Option Plan of 1990 . . . . . . . . Filed herewith. 15.01 Accountant's acknowledgment letter dated November 12, 1996 . . . . . . . . . . . . Filed herewith. 27.01 Financial Data Schedule . . . . . . . . . Filed herewith. 99.01 Press release dated October 17, 1996. . . Filed herewith. 14