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, 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: 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 February 6, 1998, 6,826,386 shares of Common Stock, no par value, of the registrant were outstanding. II-VI INCORPORATED AND SUBSIDIARIES INDEX Page No. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements: Independent Accountants' Report. . . . . . . . . . . . . 3 Consolidated Balance Sheets -- December 31, 1997 and June 30, 1997. . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Earnings -- Three and six months ended December 31, 1997 and 1996. . . . . . . 5 Consolidated Statements of Cash Flows -- Six months ended December 31, 1997 and 1996 . . . . . . . . . . . . 7 Notes to Consolidated Financial Statements . . . . . . . 8 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 6. Exhibits and Reports on Form 8-K. . . . . . . 12 2 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries Saxonburg, Pennsylvania We have reviewed the accompanying consolidated balance sheet of II-VI Incorporated and subsidiaries as of December 31, 1997 and the related consolidated statements of earnings for the three-month and six-month periods then ended and the related consolidated statements of cash flows for the six- month period then ended. These financial statements are the responsibility of the Company's management. The interim financial statements as of December 31, 1996, and for the three-month and six-month periods then ended, were reviewed by other accountants whose report dated January 20, 1997 stated that they were not aware of any material modifications that should be made to those statements in order for them to be in conformity with generally accepted accounting principles. 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 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 sheet of II-VI Incorporated and subsidiaries as of June 30, 1997, 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, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania January 19, 1998 3 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------------------------ II-VI Incorporated and Subsidiaries Consolidated Balance Sheets (Unaudited) ($000) <TABLE> <CAPTION> December 31, June 30, 1997 1997 ------------ ----------- <S> <C> <C> Assets Current Assets Cash and cash equivalents $ 2,673 $ 10,854 Accounts receivable - net 11,912 10,808 Inventories 9,672 8,129 Other current assets 1,080 991 ---------- --------- Total Current Assets 25,337 30,782 Property, Plant & Equipment, net 28,558 19,631 Other Assets 3,934 4,099 ---------- --------- $ 57,829 $ 54,512 ========== ========= Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 595 $ 590 Accounts payable 2,138 3,207 Accrued salaries, wages and bonuses 2,535 3,740 Income taxes payable - 80 Accrued profit sharing contribution 427 740 Other current liabilities 1,099 1,264 Current portion of long-term debt 68 72 --------- --------- Total Current Liabilities 6,862 9,693 Long-Term Debt--less current portion 2,637 684 Deferred Income Taxes 1,679 1,613 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 - 6,822,386 shares at December 1997, 6,802,946 shares at June 1997 18,297 18,072 Foreign currency translation 78 70 Retained earnings 29,038 25,142 --------- --------- 47,413 43,284 Less treasury stock, at cost - 384,440 shares at December 1997 and at June 1997 762 762 --------- --------- 46,651 42,522 --------- --------- $ 57,829 $ 54,512 ========== ========= </TABLE> [FN] - -See notes to consolidated financial statements. 4 II-VI Incorporated and Subsidiaries Consolidated Statements of Earnings (Unaudited) ($000 except per share data) <TABLE> <CAPTION> Three Months Ended December 31, 1997 1996 -------- -------- <S> <C> <C> Revenues Net Sales: Domestic $ 8,017 $ 6,531 International 6,364 4,984 -------- -------- 14,381 11,515 Contract research and development 677 675 -------- -------- 15,058 12,190 -------- -------- Costs, Expenses & Other Expense (Income) Cost of goods sold 7,799 6,264 Contract research and development 523 468 Internal research and development 345 260 Selling, general and administrative 3,652 2,951 Other expense (income) - net 200 (168) -------- -------- 12,519 9,775 -------- -------- Earnings Before Income Taxes 2,539 2,415 Income Taxes 755 700 -------- -------- Net Earnings $ 1,784 $ 1,715 ======== ======== Basic Earnings Per Share $ 0.28 $ 0.27 ======== ======== Diluted Earnings Per Share $ 0.27 $ 0.25 ======== ======== </TABLE> [FN] - -See notes to consolidated financial statements. 5 II-VI Incorporated and Subsidiaries Consolidated Statements of Earnings (Unaudited) ($000 except per share data) <TABLE> <CAPTION> Six Months Ended December 31, 1997 1996 -------- -------- <S> <C> <C> Revenues Net Sales: Domestic $ 15,810 $ 13,303 International 13,451 9,804 -------- -------- 29,261 23,107 Contract research and development 1,316 1,193 -------- -------- 30,577 24,300 -------- -------- Costs, Expenses & Other Expense (Income) Cost of goods sold 16,103 12,612 Contract research and development 994 863 Internal research and development 645 384 Selling, general and administrative 7,102 5,981 Other expense (income) - net 183 (293) -------- -------- 25,027 19,547 -------- -------- Earnings Before Income Taxes 5,550 4,753 Income Taxes 1,654 1,378 -------- -------- Net Earnings $ 3,896 $ 3,375 ======== ======== Basic Earnings Per Share $ 0.61 $ 0.53 ======== ======== Diluted Earnings Per Share $ 0.58 $ 0.50 ======== ======== </TABLE> [FN] - -See notes to consolidated financial statements. 6 II-VI Incorporated and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) ($000) <TABLE> <CAPTION> Six Months Ended December 31, 1997 1996 ------- ------- <S> <C> <C> Cash Flows from Operating Activities Net earnings $ 3,896 $ 3,375 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,153 1,663 Loss/(gain) on foreign currency transactions 478 (19) Deferred income taxes (31) (54) Increase (decrease) in cash from changes in: Accounts receivable (1,519) 224 Inventories (1,955) (1,307) Accounts payable (621) 515 Accrued salaries, wages and bonuses (1,156) (773) Accrued profit sharing contribution (313) (210) Income taxes payable (72) (10) Other operating net assets 174 (69) ------- ------- Net cash provided by operating activities 1,034 3,335 ------- ------- Cash Flows from Investing Activities Additions to property, plant & equipment (10,917) (3,550) Net change in other assets 2 (87) ------- ------- Net cash used in investing activities (10,915) (3,637) ------- ------- Cash Flows from Financing Activities Net change in notes payable 76 (388) Proceeds from long-term borrowings 1,980 741 Payments on long-term borrowings (31) (21) Proceeds from sale of common stock 83 130 ------- ------- Net cash provided by financing activities 2,108 462 ------- ------- Effect of exchange rate changes on cash and cash equivalents (408) (188) ------- ------- Net decrease in cash and cash equivalents (8,181) (28) Cash and Cash Equivalents at Beginning of Period 10,854 9,417 ------- ------- Cash and Cash Equivalents at End of Period $ 2,673 $ 9,389 ======= ======= </TABLE> [FN] - -See notes to consolidated financial statements. 7 II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note A - Basis of Presentation The consolidated financial statements for the three and six month periods ended December 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 footnotes thereto contained in the Company's 1997 Annual Report to the shareholders. The consolidated results of operations for the three and six month periods ended December 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: December 31, June 30, 1997 1997 ------------ ------------ Raw materials $ 3,701 $ 3,083 Work in progress 2,585 1,992 Finished goods 3,386 3,054 ------------ ------------ $ 9,672 $ 8,129 ============ ============ Note C - Property, Plant and Equipment ($000) Property, plant and equipment consist of the following: December 31, June 30, 1997 1997 ------------ ------------ Land and land improvements $ 2,048 $ 876 Buildings and improvements 12,878 8,073 Machinery and equipment 32,828 27,893 ------------ ------------ 47,754 36,842 Less accumulated depreciation 19,196 17,211 ------------ ------------ $ 28,558 $ 19,631 ============ ============ 8 II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note D - Credit Facilities In September 1997, the Company secured a $1,980,000 low interest rate loan from a bank. The terms of the loan call for the entire principal amount to be paid on September 25, 2002. Interest payments are payable semi-annually from the inception of the loan at a rate equal to the lesser of the floating rate or the maximum rate as defined in the loan agreement. The floating rate is equal to the Euro-Rate plus 1.49% and the maximum rate is 3.74%. On December 31, 1997, the Company entered into a $10.0 million unsecured, line of credit with PNC Bank which will expire December 30, 1998. Borrowings under the line of credit will bear interest at a rate equal to the Euro-Rate plus .75%. The interest rate in effect as of December 31, 1997 was 6.56%. Note E - Earnings Per Share During the quarter ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" which establishes standards for computing and presenting earnings per share. This statement requires restatement of all prior period earnings per share data presented. <TABLE> <CAPTION> For the Three Months Ended December 31, 1997 1996 ------------------------------------- ------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $1,784,000 6,432,246 $ 0.28 $1,715,000 6,338,953 $ 0.27 Effect of Dilutive Securities - Options outstanding - 255,293 - 460,712 ---------- ------------- ---------- ------------- Diluted EPS $1,784,000 6,687,539 $ 0.27 $1,715,000 6,799,665 $ 0.25 ========== ============= ======== ========== ============= ======== </TABLE> <TABLE> <CAPTION> For the Six Months Ended December 31, 1997 1996 ------------------------------------- ------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $3,896,000 6,426,406 $ 0.61 $3,375,000 6,325,726 $ 0.53 Effect of Dilutive Securities - Options outstanding - 256,678 - 435,769 ---------- ------------- ---------- ------------- Diluted EPS $3,896,000 6,683,084 $ 0.58 $3,375,000 6,761,495 $ 0.50 ========== ============= ======== ========== ============= ======== </TABLE> 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Results of Operations Net earnings for the second quarter of fiscal 1998, ended December 31, 1997, were $1,784,000 ($0.27 per share - diluted) on revenues of $15,058,000. This compares to net earnings of $1,715,000 ($0.25 per share - diluted) on revenues of $12,190,000 in the second quarter of fiscal 1997. For the six months ended December 31, 1997, net earnings were $3,896,000 ($0.58 per share - diluted) on revenues of $30,577,000. This compares with net earnings of $3,375,000 ($0.50 per share - diluted) on revenues of $24,300,000 for the same period last fiscal year. The increased earnings were driven by increased revenue volume. Order bookings for the second quarter were $16,825,000 compared to $13,894,000 for the same period last fiscal Year, a 21% increase. Year-to-date order bookings grew by 23% to $32,875,000 from $26,821,000 last fiscal year. Commercial orders for infrared optics and materials accounted for approximately 80% of the quarter and year-to- date increases. Manufacturing revenues for the second quarter were $14,381,000 compared to $11,515,000 for the same period last fiscal year, a 25% increase. Year-to-date manufacturing revenues grew by 27% to $29,261,000 from $23,107,000 last fiscal year. These increases are the result of increased shipments in all of the markets served by the Company. Manufacturing gross margin for the second quarter was $6,582,000 or 46% of revenues compared to $5,251,000 or 46% of revenues for the second quarter of fiscal 1997. Manufacturing gross margin year-to-date was $13,158,000 or 45% of revenues compared to $10,495,000 or 45% of revenues in fiscal 1997. Selling, General and Administrative expenses for the second quarter were $3,652,000 or 24% of revenues compared to $2,951,000 or 24% of revenues for last fiscal year's second quarter. Selling, General and Administrative expenses year-to-date were $7,102,000 or 23% of revenues compared to $5,981,000 or 25% of revenues in fiscal 1997. The increase in expenses is attributable to higher general and administrative expenses needed to support the Company's growth and higher compensation expense associated with the Company's world-wide profit-driven bonus programs. Other expense for the second quarter was $200,000 compared to other income of $168,000 for last fiscal year's second quarter. Other expense year-to-date was $183,000 compared to other income of $293,000 in fiscal 1997. The quarter and year-to-date fluctuations are due to foreign currency translation losses as a result of the decline of the Singapore dollar against the U.S. dollar and lower interest income resulting from lower cash balances. The lower cash balance was primarily due to increased capital spending. The Company's year-to-date effective tax rate was 30% of pre-tax earnings which was slightly higher than the 29% effective rate for fiscal 1997. This increase is due to a higher percentage of earnings generated from U.S. operations. Liquidity and Capital Resources Cash decreased during the first six months of fiscal 1998 by $8,181,000 primarily due to $10,917,000 in capital expenditures and payment of compensation costs relating to the Company's fiscal 1997 world-wide profit-driven bonus and retirement programs, partially offset by proceeds from a long-term loan. The capital expenditures focused on increasing capacity and included the construction costs incurred for a new 45,000 square foot manufacturing facility at the Company's VLOC subsidiary in Florida and a new 30,000 square foot manufacturing facility for the Company's eV PRODUCTS division in Pennsylvania. The Company generated $1,034,000 in cash from operations for the first six months of fiscal 1998. The $6,049,000 in cash generated from net earnings before depreciation and amortization year-to-date was offset by the payment of compensation costs relating to the Company's fiscal 1997 world-wide profit-driven bonus and retirement programs and increases in accounts receivable and inventories needed to support the growth in sales volume. 10 Historically, the Company has funded growth from cash flow from operations and, to a lesser extent, borrowings. In the first six months of fiscal 1998, in addition to cash generated from operations, the Company executed a $1,980,000 loan from PNC and entered into a $10.0 million unsecured line of credit. The December 31, 1997 cash balance, in addition to these external sources of funding, will be used for working capital needs, further capital expenditures, scheduled debt payments and other general corporate business purposes. Capital expenditures for the second half of fiscal 1998 are estimated to be $11.6 million with continued focus on expanding capacity and process automation. This Management's Discussion and Analysis contains forward looking statements as defined by Section 21E of the Securities Exchange Act of 1934, including the statements regarding the Company's ability to fund future working capital needs, capital expenditures and scheduled debt payments from internally generated funds and existing cash reserves. The Company's ability to fund future capital needs from internally generated funds and existing cash reserves could differ from these statements if world-wide economic conditions change, competitive conditions intensify, technology problems emerge, and/or if suitable acquisitions of technologies or businesses cannot be consummated. 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 1997 Form 10-K filed on September 29, 1997. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- On November 7, 1997, 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 Deloitte & Touche LLP as auditors for the year ending June 30, 1998 and the approval of the II-VI Incorporated Stock Option Plan of 1997. 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 6,056,402. Votes For Votes Withheld --------- -------------- Richard W. Bohlen 5,820,717 229,266 Duncan A.J. Morrison 5,822,736 227,166 The total number of votes cast for the ratification of the appointment of Deloitte & Touche LLP as auditors for the year ending June 30, 1998 was 6,056,402 with 6,015,062 votes for, 13,082 votes against and 28,258 votes abstaining. The total number of votes cast for the ratification of the approval of the II-VI Incorporated Stock Option Plan of 1997 was 4,945,195 with 4,071,232 votes for, 830,875 votes against and 43,088 votes abstaining. There were no broker non-votes on these three matters. 11 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) Exhibits. -------- 10.01 II-VI Incorporated 1997 Incentive Incorporated herein Stock Option Plan by reference is Exhibit A to the Registrant's Proxy Statement from the Annual Meeting of Shareholders held on November 7, 1997. 10.02 Agreement by and between PNC Bank, Filed herewith. National Association and II-VI Incorporated for Committed Line of Credit (including credit note) and Japanese Yen Term Loan 15.01 Accountant's awareness letter dated Filed herewith. February 13, 1998 27.01 Financial Data Schedule 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: February 14, 1998 By: /s/ Carl J. Johnson Carl J. Johnson Chairman and Chief Executive Officer Date: February 14, 1998 By: /s/ James Martinelli James Martinelli Treasurer & Chief Financial Officer 13 EXHIBIT INDEX Exhibit No. 10.01 II-VI Incorporated 1997 Incentive Incorporated herein Stock Option Plan by reference is Exhibit A to the Registrant's Proxy Statement from the Annual Meeting of Shareholders held on November 7, 1997. 10.02 Agreement by and between PNC Bank, Filed herewith. National Association and II-VI Incorporated for Committed Line of Credit (including credit note) and Japanese Yen Term Loan 15.01 Accountant's awareness letter dated February 13, 1998 Filed herewith. 27.01 Financial Data Schedule Filed herewith. 14