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, December 31, 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 February 10, 1997, 6,393,780 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 - December 31, 1996, and June 30, 1996 . . . . . . . 4 Condensed Consolidated Statements of Earnings - Three and six months ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Shareholders' Equity - Three and six months ended December 31, 1996 . . . . . . . . . . . . . . . . . 7 Condensed Consolidated Statements of Cash Flows - Six months ended December 31, 1996 and 1995 . . . . . . . . . . . . 8 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . 10 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . . . . . . . 11 Item 5. Other Events . . . . . . . . . . . . . . . . . . . 12 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 December 31, 1996, and the related condensed consolidated statements of earnings, shareholders' equity and cash flows for the six month periods ended December 31, 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 January 20, 1997 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> December 31 June 30 Assets 1996 1996 ------------ ----------- <S> <C> <C> Current Assets Cash and equivalents $ 9,389 $ 9,417 Accounts receivable - less allowance for doubtful accounts of $266 in December and $246 in June 8,533 8,712 Inventories 6,766 5,490 Deferred income taxes 428 429 Prepaid and other current assets 687 607 ------- ------- Total Current Assets 25,803 24,655 Property, Plant & Equipment, net 17,163 15,085 Goodwill 2,090 2,138 Other Assets 2,236 2,291 ------- ------- $47,292 $44,169 ------- ------- Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 926 $ 1,393 Accounts payable - trade 1,661 1,260 Accrued salaries, wages and bonuses 2,362 3,105 Income taxes payable 301 607 Accrued profit sharing contribution 346 556 Other current liabilities 999 1,024 Current portion of long-term debt 73 23 ------- ------- Total Current Liabilities 6,668 7,968 Long-Term Debt--less current portion 715 45 Deferred Income Taxes 1,697 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 - 6,751,480 shares in December 1996; 6,691,718 shares in June 1996 17,480 17,055 Foreign Currency Translation 88 79 Retained Earnings 21,406 18,031 ------- ------- 38,974 35,165 Less treasury stock, at cost - 384,440 shares at 12/31/96 and 6/30/96. 762 762 ------- ------- 38,212 34,403 ------- ------- $47,292 $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 December 31, 1996 1995 -------- -------- <S> <C> <C> Revenues Net Sales: Domestic $ 6,531 $ 4,076 International 4,984 3,642 ------- ------- 11,515 7,718 Contract research and development 675 236 ------- ------- 12,190 7,954 ------- ------- Costs, Expenses & Other Income Cost of goods sold 6,264 4,475 Contract research and development 468 163 Internal research and development 260 138 Selling, general and administrative expenses 2,951 2,152 Interest and other expense - net (168) (139) ------- ------- 9,775 6,789 ------- ------- Earnings Before Income Taxes 2,415 1,165 Income Tax Expense 700 331 ------- ------- Net Earnings $ 1,715 $ 834 ------- ------- Earnings Per Share $ 0.25 $ 0.14 ------- ------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 5 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) <TABLE> <CAPTION> Six Months Ended December 31, 1996 1995 -------- -------- <S> <C> <C> Revenues Net Sales: Domestic $13,303 $ 8,313 International 9,804 7,362 ------- ------- 23,107 15,675 Contract research and development 1,193 367 ------- ------- 24,300 16,042 ------- ------- Costs, Expenses & Other Income Cost of goods sold 12,612 9,031 Contract research and development 863 264 Internal research and development 384 286 Selling, general and administrative expenses 5,981 4,283 Interest and other expense - net (293) (123) ------- ------- 19,547 13,741 ------- ------- Earnings Before Income Taxes 4,753 2,301 Income Tax Expense 1,378 661 ------- ------- Net Earnings $ 3,375 $ 1,640 ------- ------- Earnings Per Share $ 0.50 $ 0.28 ------- ------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 6 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 Shares issued under stock option plan 30 63 - - - - 63 Net earnings for the quarter - - - 1,715 - - 1,715 Translation adjustment - - 7 - - - 7 Tax benefit for options exercised - 296 - - - - 296 ------ ------- ----------- -------- ------- -------- ------- Balance--December 31, 1996 6,751 $17,480 $ 88 $ 21,406 (384) $ (762) $38,212 </TABLE> [FN] - -See notes to condensed consolidated financial statements. 7 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ($000) <TABLE> <CAPTION> Six Months Ended December 31, 1996 1995 ------- ------- <S> <C> <C> s from Operating Activities Net Earnings $ 3,375 $ 1,640 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,663 1,195 (Gain) on foreign currency transactions (207) (87) Deferred income taxes (54) 4 Increase (decrease) in cash from changes in: Accounts receivable 224 (271) Inventories (1,307) (668) Accounts payable 515 298 Accrued salaries, wages and bonuses (773) (647) Accrued profit sharing contribution (210) (107) Income taxes payable (10) (354) Other operating net assets (69) (451) ------- ------- Net cash provided by operating activities 3,147 552 ------- ------- Cash Flows from Investing Activities Additions to property, plant & equipment (3,550) (3,920) Additions to other assets (87) - ------- ------- Net cash used in investing activities (3,637) (3,920) ------- ------- Cash Flows from Financing Activities Payments on short-term borrowings (388) - Proceeds from long-term borrowings 741 - Payments on long-term borrowings (21) (141) Proceeds from sale of common stock 130 10,998 ------- ------- Net cash provided by financing activities 462 10,857 ------- ------- Net increase (decrease) in cash and equivalents (28) 7,489 Cash and Equivalents at Beginning of Period 9,417 3,822 ------- ------- Cash and Equivalents at End of Period $ 9,389 $11,311 ------- ------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 8 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, 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 and six month periods ended December 31, 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: December 31 June 30 1996 1996 Raw Materials $ 3,016 $ 2,279 Work in Progress 1,468 1,427 Finished Goods 2,282 1,784 -------- ------- $ 6,766 $ 5,490 -------- ------- Note C - Property, Plant and Equipment ($000) Property, plant and equipment consist of the following: December 31 June 30 1996 1996 Land and land improvements $ 555 $ 539 Buildings and improvements 7,254 6,952 Machinery and equipment 25,316 22,084 ------- ------- 33,125 29,575 Less accumulated depreciation 15,962 14,490 ------- ------- $17,163 $15,085 ------- ------- 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 second fiscal quarter of 1997, ended December 31, 1996, were $1,715,000 ($0.25 per share) on revenues of $12,190,000. This compares to net earnings of $834,000 ($0.14 per share) on revenues of $7,954,000 in the second quarter of fiscal 1996. For the six months ended December 31, 1996, net earnings were $3,375,000 ($0.50 per share) on revenues of $24,300,000. This compares with net earnings of $1,640,000 ($0.28 per share) on revenues of $16,042,000 for the same period last fiscal year. The increased earnings were driven by the improved revenue volume. Order bookings for the second quarter were $13,894,000 compared to $10,642,000 for the same period last fiscal year, a 31% increase. Year- to-date order bookings grew by 44% to $26,821,000 from $18,569,000 last fiscal year. Commercial orders at the Company's VLOC operation accounted for two-thirds of the increase for the quarter, while domestic industrial orders for infrared optics and materials accounted for most of the remaining increase. Year-to-date, VLOC Commercial orders were responsible for approximately one-half of the increase, followed by higher infrared optics and materials orders and Contract Research and Development awards. Manufacturing revenues for the second quarter were $11,515,000 compared to $7,718,000 for the same period last fiscal year, a 49% increase. Year-to-date manufacturing revenues grew by 47% to $23,107,000 from $15,675,000 last fiscal year. These increases are the result of improved shipments in all of the markets served by the Company. The Company's VLOC operation contributed approximately one-half of the quarter and year-to-date improvements. Manufacturing gross margin for the second quarter was $5,251,000 or 46% of revenues compared to $3,243,000 or 42% of revenues for the second quarter of fiscal 1996. Manufacturing gross margin year-to-date was $10,495,000 or 45% of revenues compared to $6,644,000 or 42% of revenues in fiscal 1996. Both the quarter and year-to-date increases in gross margin as a percent of revenues reflect lower per unit operating costs associated with increased volume and efficiency improvements, which are partially offset by the strengthening of the U.S. dollar against the Japanese yen. Selling, General and Administrative expenses for the second quarter were $2,951,000 or 24% of revenues compared to $2,152,000 or 27% of revenues for last fiscal year's second quarter. Selling, General and Administrative expenses year-to-date were $5,981,000 or 25% of revenues compared to $4,283,000 or 27% of revenues in fiscal 1996. The increases in expense are attributable to additional 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. 10 Other income for the quarter was $168,000 compared to $139,000 for last fiscal year's second quarter. Other income year-to-date was $293,000 compared to $123,000 in fiscal 1996. The year-to-date increase is primarily due to foreign currency gains and investment earnings on increased cash balances. The increase in cash was primarily due to the October 1995 public stock offering. The Company's year-to-date effective income tax rate was 29% of pre-tax earnings, the same as the first six months of fiscal 1996. Liquidity and Capital Resources Cash decreased during the first six months of fiscal 1997 by $28,000 primarily from cash generated from operations of $3,147,000 and $741,000 of financing from a low interest rate loan with the Pennsylvania Industrial Development Authority being offset by $3,550,000 of capital expenditures. The capital expenditures focused on improved capacity, process automation and the start up of the Company's China operation. The Company generated $3,147,000 in cash from operations for the first six months of fiscal 1997. The $5,038,000 in cash generated from net earnings before depreciation and amortization was offset by increases in inventories needed to support the growth in sales volume and the payment of compensation costs relating to the Company's fiscal 1996 world-wide profit-driven bonus and retirement programs. The current cash balance will be used for working capital needs, further capital expenditures, and possible acquisitions of complementary businesses, products or technologies. There are certain 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. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- On November 1, 1996, the Company held its annual meeting of shareholders. The three matters voted upon at the annual meeting were the election of two directors, the ratification of the selection of Alpern, Rosenthal & Company as auditors for the year ending June 30, 1997 and the ratification of the purchase of common stock by the deferred compensation plan for participants. 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 5,800,971. Following is a separate tabulation with respect to each director: Votes For Votes Withheld Carl J. Johnson 5,787,216 15,205 Thomas E. Mistler 5,784,166 15,355 11 The total number of votes cast for the ratification of the appointment of Alpern, Rosenthal & Company as auditors for the year ending June 30, 1997 was 5,800,971 with 5,734,371 votes for, 49,890 votes against and 16,710 votes abstaining. The total number of votes cast for the ratification of the purchase of common stock by the deferred compensation plan for participants was 5,800,971 with 5,562,901 votes for, 108,130 votes against and 28,720 votes abstaining. There were no broker non-votes on these three matters. Item 5. OTHER EVENTS ------------ On February 12, 1997, the Company filed a current report on Form 8-K for the events dated February 10, 1997. On February 10, 1997, the Registrant terminated Alpern, Rosenthal & Company as independent accountants for the Registrant and its subsidiaries (other than II-VI Singapore Pte. Ltd. which will continue to be serviced by Deloitte & Touche LLP) upon completion of its review of the Registrant's unaudited financial statements for its second fiscal quarter ended December 31, 1996. Also effective February 10, 1997, the Registrant engaged Deloitte & Touche LLP as independent auditors to review the Registrant's unaudited financial statements for its third fiscal quarter ending March 31, 1997, and to audit the Registrant's financial statements for the fiscal year ending 1997. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) Exhibits. -------- 10.01 Amended and Restated II-VI Incorporated Deferred Compensation Plan . . . . . . . Filed herewith. 15.01 Accountant's acknowledgment letter dated February 13, 1997 . . . . . . . . . . . . Filed herewith. 27.01 Financial Data Schedule . . . . . . . . . Filed herewith. 99.01 Press release dated January 21, 1997. . . Filed herewith. (b) Reports on Form 8-K. None 12 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 13, 1997 By: /s/ Carl J. Johnson ----------------------- Carl J. Johnson Chairman and Chief Executive Officer Date: February 13, 1997 By: /s/ James Martinelli ----------------------- James Martinelli Treasurer & Chief Financial Officer EXHIBIT INDEX Exhibit No. - ----------- 10.01 Amended and Restated II-VI Incorporated Deferred Compensation Plan . . . . . . . Filed herewith. 15.01 Accountant's acknowledgment letter dated February 13, 1997 . . . . . . . . . . . . Filed herewith. 27.01 Financial Data Schedule . . . . . . . . . Filed herewith. 99.01 Press release dated January 21, 1997. . . Filed herewith. 14