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 March 31, 1997 [ ] 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 May 9, 1997, 6,400,756 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. Condensed Consolidated Balance Sheets -- March 31, 1997 and June 30, 1996. . . . . . . . . . . 3 Condensed Consolidated Statements of Earnings -- Three and nine months ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Shareholders' Equity -- Three and nine months ended March 31, 1997. . . . . . . . . . . . . . . . . . . . 6 Condensed Consolidated Statements of Cash Flows -- Nine months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . 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 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------------------------- II-VI Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ($000 except share data) <TABLE> <CAPTION> March 31, June 30, 1997 1996 --------- -------- <S> <C> <C> Assets Current Assets Cash and cash equivalents $ 8,817 $ 9,417 Accounts receivable-less allowance for doubtful accounts of $275 at 3/31/97 and $246 at 6/30/96 9,757 8,712 Inventories 7,281 5,490 Deferred income taxes 430 429 Prepaid and other current assets 657 607 ------- ------- Total Current Assets 26,942 24,655 Property, Plant & Equipment, net 18,166 15,085 Goodwill 2,016 2,138 Other Assets 2,110 2,291 ------- ------- $49,234 $44,169 ------- ------- Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 685 $ 1,393 Accounts payable-trade 1,377 1,260 Accrued salaries, wages and bonuses 2,877 3,105 Income taxes payable - 607 Accrued profit sharing contribution 538 556 Other current liabilities 872 1,024 Current portion of long-term debt 72 23 ------- ------- Total Current Liabilities 6,421 7,968 Long-Term Debt--less current portion 700 45 Deferred Income Taxes 1,686 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 6,778,446 shares at 3/31/97; 6,691,718 shares at 6/30/96 17,919 17,055 Cumulative translation adjustment 96 79 Retained earnings 23,174 18,031 ------- ------- 41,189 35,165 Less treasury stock, at cost-384,440 shares at 3/31/97 and 6/30/96. 762 762 ------- ------- 40,427 34,403 ------- ------- $49,234 $44,169 ------- ------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 3 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) <TABLE> <CAPTION> Three Months Ended March 31 1997 1996 -------- -------- <S> <C> <C> Revenues Net Sales: Domestic $ 7,047 $ 5,421 International 6,072 4,233 -------- -------- 13,119 9,654 Contract research and development 532 418 -------- -------- 13,651 10,072 -------- -------- Costs, Expenses & Other Income Cost of goods sold 7,287 5,481 Contract research and development 404 284 Internal research and development 312 154 Selling, general and administrative 3,210 2,610 Other income-net (52) (83) -------- -------- 11,161 8,446 -------- -------- Earnings Before Income Taxes 2,490 1,626 Income Tax Expense 722 417 -------- -------- Net Earnings $ 1,768 $ 1,209 -------- -------- Earnings Per Share $ 0.27 $ 0.18 -------- -------- </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> Nine Months Ended March 31 1997 1996 -------- -------- <S> <C> <C> Revenues Net Sales: Domestic $ 20,350 $ 13,734 International 15,876 11,595 -------- -------- 36,226 25,329 Contract research and development 1,725 785 -------- -------- 37,951 26,114 -------- -------- Costs, Expenses & Other Income Cost of goods sold 19,899 14,512 Contract research and development 1,267 548 Internal research and development 696 440 Selling, general and administrative 9,191 6,893 Other income-net (345) (206) -------- -------- 30,708 22,187 -------- -------- Earnings Before Income Taxes 7,243 3,927 Income Tax Expense 2,100 1,078 -------- -------- Net Earnings $ 5,143 $ 2,849 -------- -------- Earnings Per Share $ 0.78 $ 0.47 -------- -------- </TABLE> [FN] - -See notes to condensed consolidated financial statements. 5 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 ------ ------- ----------- -------- ------- -------- ------- Shares issued under stock option plan 27 114 - - - - 114 Net earnings for the quarter - - - 1,768 - - 1,768 Translation adjustment - - 8 - - - 8 Tax benefit for options exercised - 325 - - - - 325 ------ ------- ----------- -------- ------- -------- ------- Balance--March 31, 1997 6,778 $17,919 $ 96 $ 23,174 (384) $ (762) $40,427 ------ ------- ----------- -------- ------- -------- ------- </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> Nine Months Ended March 31, 1997 1996 ------- ------- <S> <C> <C> Cash Flows from Operating Activities Net earnings $ 5,143 $ 2,849 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,486 1,801 Gain on foreign currency transactions (286) (4) Deferred income taxes (67) (16) Increase (decrease) in cash from changes in: Accounts receivable (1,100) (1,471) Inventories (1,923) (910) Accounts payable 331 353 Accrued salaries, wages and bonuses (222) (277) Accrued profit sharing contribution (18) 21 Income taxes payable (48) (344) Other operating net assets 4 (483) ------- ------- Net cash provided by operating activities 4,300 1,519 ------- ------- Cash Flows from Investing Activities Additions to property & equipment (5,318) (5,194) Payment for purchase of Lightning Optical, net of cash acquired - (1,989) Additions to other assets 54 - ------- ------- Net cash used in investing activities (5,264) (7,183) ------- ------- Cash Flows from Financing Activities Net change in notes payable - (519) Payments on short-term borrowings (583) - Proceeds from long-term borrowings 741 - Payments on long-term borrowings (37) (396) Proceeds from sale of common stock 243 10,990 ------- ------- Net cash provided by financing activities 364 10,075 ------- ------- Net (Decrease) Increase in Cash and Equivalents (600) 4,411 Cash and Equivalents at Beginning of Period 9,417 3,822 ------- ------- Cash and Equivalents at End of Period $ 8,817 $ 8,233 ------- ------- </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 and nine month periods ended March 31, 1997 and 1996 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 notes thereto contained in the Company's Annual Report as filed as an exhibit to the Company's 1996 Annual Report to the shareholders. The consolidated results of operations for the three and nine month periods ended March 31, 1997 and 1996 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: March 31 June 30 1997 1996 -------- ------- Raw Materials $ 2,712 $ 2,279 Work in Progress 2,065 1,427 Finished Goods 2,504 1,784 -------- ------- $ 7,281 $ 5,490 -------- ------- Note C - Property, Plant and Equipment ($000) ----------------------------------- Property, plant and equipment consist of the following: March 31 June 30 1997 1996 -------- ------- Land and land improvements $ 555 $ 539 Buildings and improvements 7,643 6,952 Machinery and equipment 26,695 22,084 ------- ------- 34,893 29,575 Less accumulated depreciation 16,727 14,490 ------- ------- $18,166 $15,085 ------- ------- 8 II-VI Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Continued 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. Note E - New Accounting Standard ----------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior- period earnings per share data presented. The basic earnings per share as defined by SFAS No. 128 for net earnings for the three and nine month periods ended March 31, 1997 would have been $.28 and $.81, respectively, and the three and nine month periods ended March 31, 1996 would have been $.20 and $.50, respectively. The diluted earnings per share as defined by SFAS No. 128 approximates the historically presented earnings per share. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net earnings for the third fiscal quarter ended March 31, 1997, were $1,768,000 ($0.27 per share) on revenues of $13,651,000. This compares to net earnings of $1,209,000 ($0.18 per share) on revenues of $10,072,000 in the third fiscal quarter of 1996. For the nine months ended March 31, 1997, net earnings were $5,143,000 ($0.78 per share) on revenues of $37,951,000. This compares with net earnings of $2,849,000 ($0.47 per share) on revenues of $26,114,000 for the same period last fiscal year. The increased earnings for the quarter and year-to-date were driven by the improved revenue volume. Order bookings for the third quarter of fiscal 1997 were $13,595,000 compared to $11,288,000 for the same period last fiscal year, a 20% increase. Year-to-date order bookings grew by 35% to $40,416,000 from $29,857,000 last fiscal year. These increases are primarily in the commercial order area as contract research and development orders decreased $1,900,000 for the quarter and $550,000 year-to-date mostly due to the large DARPA R&D contract award in the third quarter of fiscal 1996. For the quarter, nearly 70% of the commercial order increase was in infrared optics and materials, 20% was attributable to the Company's VLOC operation, and the remainder of the increase was in the eV PRODUCTS division. Year-to-date, approximately 50% of the commercial order increase was attributable to the Company's VLOC operation, 45% to improved orders for infrared optics and materials and the remainder to increased orders of the eV PRODUCTS division. Manufacturing revenues for the third quarter were $13,119,000 compared to $9,654,000 for the same period last fiscal year, a 36% increase. Year-to-date manufacturing revenues grew by 43% to $36,266,000 from $25,329,000 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 quarter was $5,832,000 or 44% of revenues compared to $4,173,000 or 43% of revenues for the third quarter of fiscal 1996. Manufacturing gross margin year-to-date was $16,327,000 or 45% of revenues compared to $10,817,000 or 43% 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 and increased pricing pressure in the infrared laser optics market. Selling, general and administrative expenses for the quarter were $3,210,000 or 24% of revenues compared to $2,610,000 or 26% of revenues for last fiscal year's third quarter. Selling, general and administrative expenses year-to-date were $9,191,000 or 24% of revenues compared to $6,893,000 or 26% of revenues in fiscal 1996. The increases in expenses 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. Other income for the quarter was $52,000 compared to $83,000 for last fiscal year's third quarter. Other income year-to-date was $345,000 compared to $206,000 in fiscal 1996. The year-to-date increase is primarily due to foreign currency gains. 10 The Company's year-to-date effective income tax rate was 29% of pre- tax earnings compared to 27% for the first nine months of fiscal 1996. The increase in the rate is primarily due to the mix between foreign and domestic earnings. Liquidity and Capital Resources - ------------------------------- Cash decreased during the first nine months of fiscal 1997 by $600,000 primarily from $5,318,000 of capital expenditures and $538,000 of payments on borrowings, offset by cash generated from operations of $4,300,000 and $741,000 of financing from a low interest rate loan with the Pennsylvania Industrial Development authority. The capital expenditures focused on improved capacity, facility upgrades and the start up of the Company's operation in China. The Company generated $4,300,000 in cash from operations for the first nine months of fiscal 1997. The $7,629,000 in cash generated from net earnings before depreciation and amortization was offset by 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. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior- period earnings per share data presented. The basic earnings per share as defined by SFAS No. 128 for net earnings for the three and nine month periods ended March 31, 1997 would have been $.28 and $.81, respectively, and the three and nine month periods ended March 31, 1996 would have been $.20 and $.50, respectively. The diluted earnings per share as defined by SFAS No. 128 approximates the historically presented earnings per share. 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. 11 PART II - OTHER INFORMATION --------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K. -------------------------------- (a) Exhibits. -------- 27.01 Financial Data Schedule . . . . Filed herewith. 99.01 Press release dated April 16, 1997. . . . . . Filed herewith. (b) Reports on Form 8-K. ------------------- On February 12, 1997, the registrant filed a report on Form 8-K for the events dated February 10, 1997, covering Items 4 and 7 thereof. 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: May 15, 1997 By: /s/ Carl J. Johnson ------------------------------------ Carl J. Johnson Chairman and Chief Executive Officer Date: May 15, 1997 By: /s/ James Martinelli ------------------------------------ James Martinelli Treasurer & Chief Financial Officer EXHIBIT INDEX ------------- Exhibit No. ---------- 27.01 Financial Data Schedule. . . . . . . . . Filed herewith. 99.01 Press release dated April 16, 1997 . . . Filed herewith.