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, 1998 [ ] 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 (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 May 8, 1998, 6,834,086 shares of Common Stock, no par value, of the registrant were outstanding. 1 II-VI INCORPORATED AND SUBSIDIARIES ------------------------------------ INDEX ----- Page No. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements: Independent Accountants' Report. . . . . 3 Consolidated Balance Sheets - March 31, 1998 and June 30, 1997 . . . . 4 Consolidated Statements of Earnings - Three and nine months ended March 31, 1998 and 1997. . . . . . . . . 5 Consolidated Statements of Cash Flows - Nine months ended March 31, 1998 and 1997. . . . . . . . . 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 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: We have reviewed the accompanying consolidated balance sheet of II-VI Incorporated and subsidiaries as of March 31, 1998 and the related consolidated statements of earnings for the three-month and nine-month periods then ended and the related consolidated statement of cash flows for the nine-month period then ended. 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 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 April 15, 1998 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements II-VI Incorporated and Subsidiaries Consolidated Balance Sheets (Unaudited) ($000) <TABLE> <CAPTION> March 31, June 30, 1998 1997 -------- -------- Assets <S> <C> <C> Current Assets Cash and cash equivalents $ 2,136 $ 10,854 Accounts receivable - net 13,687 10,808 Inventories 10,133 8,129 Other current assets 1,977 991 -------- -------- Total Current Assets 27,933 30,782 Property, Plant & Equipment, net 33,736 19,631 Other Assets 3,852 4,099 -------- -------- $ 65,521 $ 54,512 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 4,980 $ 590 Accounts payable 2,563 3,207 Accrued salaries, wages and bonuses 3,138 3,740 Income taxes payable - 80 Accrued profit sharing contribution 611 740 Other current liabilities 1,083 1,264 Current portion of long-term debt 69 72 -------- -------- Total Current Liabilities 12,444 9,693 Long-Term Debt--less current portion 2,620 684 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 - 6,834,086 shares at March 31, 1998, 6,802,946 shares at June 30, 1997 18,478 18,072 Foreign currency translation 241 70 Retained earnings 30,821 25,142 -------- -------- 49,540 43,284 Less treasury stock, at cost 384,440 shares 762 762 -------- -------- 48,778 42,522 -------- -------- $ 65,521 $ 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 March 31, 1998 1997 ------- ------ <S> <C> <C> Revenues Net Sales: Domestic $ 7,954 $ 7,047 International 7,781 6,072 ------- ------- 15,735 13,119 Contract research and development 495 532 ------- ------ 16,230 13,651 ------- ------ Costs, Expenses & Other Expense (Income) Cost of goods sold 9,101 7,287 Contract research and development 382 404 Internal research and development 516 312 Selling, general and administrative 3,727 3,210 Other expense (income) - net (41) (52) ------- ------ 13,685 11,161 ------- ------ Earnings Before Income Taxes 2,545 2,490 Income Taxes 762 722 ------- ------ Net Earnings $ 1,783 $ 1,768 ======= ======= Basic Earnings Per Share $ 0.28 $ 0.28 ======= ======= Diluted Earnings Per Share $ 0.27 $ 0.27 ======= ======= </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> Nine Months Ended March 31, 1998 1997 ------- ------- <S> <C> <C> Revenues Net Sales: Domestic $23,764 $20,350 International 21,232 15,876 ------- ------- 44,996 36,226 Contract research and development 1,811 1,725 ------- ------- 46,807 37,951 ------- ------- Costs, Expenses & Other Expense (Income) Cost of goods sold 25,204 19,899 Contract research and development 1,376 1,267 Internal research and development 1,161 696 Selling, general and administrative 10,829 9,191 Other expense (income) - net 142 (345) ------- ------- 38,712 30,708 ------- ------- Earnings Before Income Taxes 8,095 7,243 Income Taxes 2,416 2,100 ------- ------- Net Earnings $ 5,679 $ 5,143 ======= ======= Basic Earnings Per Share $ 0.88 $ 0.81 ======= ======= Diluted Earnings Per Share $ 0.85 $ 0.78 ======= ======= </TABLE> [FN] - -See notes to consolidated financial statements. 6 II-VI Incorporated and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) ($000) <TABLE> <CAPTION> Nine Months Ended March 31, 1998 1997 ------- ------ <S> <C> <C> Cash Flows from Operating Activities Net earnings $ 5,679 $5,143 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,073 2,486 Loss (gain) on foreign currency transactions 383 (286) Deferred income taxes (31) (67) Increase (decrease) in cash from changes in: Accounts receivable (3,337) (1,100) Inventories (2,308) (1,923) Accounts payable (118) 331 Accrued salaries, wages and bonuses (559) (222) Accrued profit sharing contribution (129) (18) Income taxes payable (667) (48) Other operating net assets (339) 4 ------- ------ Net cash provided by operating activities 1,647 4,300 ------- ------ Cash Flows from Investing Activities Additions to property, plant & equipment (16,932) (5,318) Net change in other assets 2 54 ------- ------ Net cash used in investing activities (16,930) (5,264) ------- ------ Cash Flows from Financing Activities Net change in notes payable (33) - Proceeds from short-term borrowings 4,500 - Payments on short-term borrowings - (583) Proceeds from long-term borrowings 1,980 741 Payments on long-term borrowings (47) (37) Proceeds from sale of common stock 406 243 ------- ------ Net cash provided by financing activities 6,806 364 Effect of exchange rate changes on cash and cash equivalents (241) - ------- ------ Net decrease in cash and cash equivalents (8,718) (600) Cash and Cash Equivalents at Beginning of Period 10,854 9,417 ------- ------ Cash and Cash Equivalents at End of Period $ 2,136 $ 8,817 ======= ======= </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 nine month periods ended March 31, 1998 and 1997 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 nine month periods ended March 31, 1998 and 1997 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, 1998 1997 --------- -------- Raw materials $ 3,606 $ 3,083 Work in progress 3,167 1,992 Finished goods 3,360 3,054 ------- ------- $10,133 $ 8,129 ======= ======= Note C - Property, Plant and Equipment ($000) Property, plant and equipment consist of the following: March 31, June 30, 1998 1997 --------- -------- Land and land improvements $ 1,458 $ 876 Buildings and improvements 16,744 8,073 Machinery and equipment 36,336 27,893 --------- -------- 54,538 36,842 Less accumulated depreciation 20,802 17,211 -------- -------- $33,736 $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 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 Japanese Yen Base Rate, as defined, plus 1.49% and the maximum rate is 3.74%. The interest rate in effect as of March 31, 1998 was 2.15%. As of March 31, 1998, $1,980,000 was outstanding on this loan. 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, as defined, plus 0.75%. The average interest rate in effect as of March 31, 1998 was 6.39%. As of March 31, 1998, $4.5 million was outstanding on this line of credit. 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. The following table sets forth the computation of earnings per share for the periods indicated: <TABLE> <CAPTION> For the Three Months Ended March 31, 1998 1997 ------------------------------------- ------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $1,783,000 6,445,475 $ 0.28 $1,768,000 6,384,344 $ 0.28 Effect of Dilutive Securities - Options outstanding - 231,668 - 286,046 ---------- ----------- ---------- ----------- Diluted EPS $1,783,000 6,677,143 $ 0.27 $1,768,000 6,670,390 $ 0.27 ========== =========== ======= ========== =========== ======= </TABLE> <TABLE> <CAPTION> For the Nine Months Ended March 31, 1998 1997 ------------------------------------- ------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $5,679,000 6,432,762 $ 0.88 $5,143,000 6,345,265 $ 0.81 Effect of Dilutive Securities - Options outstanding - 245,136 - 271,015 ---------- ----------- ---------- ----------- Diluted EPS $5,679,000 6,677,898 $ 0.85 $5,143,000 6,616,280 $ 0.78 ========== =========== ======= ========== =========== ======= </TABLE> 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net earnings for the third quarter of fiscal 1998, ended March 31, 1998, were $1,783,000 ($0.27 per share - diluted) on revenues of $16,230,000. This compares to net earnings of $1,768,000 ($0.27 per share - diluted) on revenues of $13,651,000 in the third quarter of fiscal 1997. For the nine months ended March 31, 1998, net earnings were $5,679,000 ($0.85 per share - diluted) on revenues of $46,807,000. This compares with net earnings of $5,143,000 ($0.78 per share - diluted) on revenues of $37,951,000 for the same period last fiscal year. The increased earnings for the quarter and nine months ended March 31, 1998 were driven by increased revenue volume primarily from infrared optics and materials and products from the Company's VLOC subsidiary. Order bookings for the third quarter were $16,083,000 compared to $13,595,000 for the same period last fiscal year, an 18% increase. Year-to-date order bookings grew by 21% to $48,958,000 from $40,416,000 last fiscal year. Commercial orders for infrared optics and materials accounted for approximately 30% and 50% of the quarter and year-to- date increases, respectively, while bookings at the Company's VLOC subsidiary accounted for approximately 70% and 45% of the quarter and year-to-date increases, respectively. Manufacturing revenues for the third quarter were $15,735,000 compared to $13,119,000 for the same period last fiscal year, a 20% increase. Year-to-date manufacturing revenues grew by 24% to $44,996,000 from $36,226,000 last fiscal year. For the quarter, 75% of the increase reflects higher shipments of infrared optics and materials, approximately 20% is attributable to increased shipments from the Company's VLOC subsidiary and the remaining increase is primarily due to eV PRODUCTS division shipments. Manufacturing gross margin for the third quarter was $6,634,000 or 42% of manufacturing revenues compared to $5,832,000 or 44% of manufacturing revenues for the third quarter of fiscal 1997. Manufacturing gross margin year-to-date was $19,792,000 or 44% of revenues compared to $16,327,000 or 45% of revenues in fiscal 1997. The lower gross margin percentage for the quarter reflects temporary operating inefficiencies at the Company's VLOC subsidiary resulting from its relocation to a newly expanded manufacturing facility. Also impacting gross margin for the quarter were increased per unit manufacturing costs in the eV PRODUCTS division due to the expansion of capacity in order to meet a major customer's order which was subsequently delayed. The decline in the year-to-date gross margin percentage is due to the strengthening of the U.S. dollar against the Japanese yen, increased per unit manufacturing costs in the eV PRODUCTS division due to slower than expected revenue growth and operating inefficiencies at the Company's VLOC subsidiary resulting from its relocation to a new manufacturing facility. Internal research and development expenses for the quarter were $516,000 or 3% of revenues compared to $312,000 or 2% of revenues for the same period last year. Internal research and development expenses year-to-date were $1,161,000 or 2% of revenues compared to $696,000 or 2% of revenues in fiscal 1997. The increased expenses for both the quarter and year-to-date reflect a shift toward internally funded projects associated with the development of new materials to improve profitability and expand product offering, as well as continued efforts to improve CdZnTe material growth yields. Selling, general and administrative expenses for the third quarter were $3,727,000 or 23% of revenues compared to $3,210,000 or 24% of revenues for last fiscal year's third quarter. Selling, general and administrative expenses year-to -date were $10,829,000 or 23% of revenues compared to $9,191,000 or 24% of revenues in fiscal 1997. The expense increase is attributable to higher general and administrative expenses needed to support the Company's growth. 10 Other income for the third quarter was $41,000 compared to other income of $52,000 for last fiscal year's third quarter. Other expense year-to-date was $142,000 compared to other income of $345,000 in fiscal 1997. The year-to-date fluctuation is 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 invested cash balances. The lower cash balance was primarily due to increased capital spending. See "Liquidity and Capital Resources". 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 which are generally taxed at higher rates. Liquidity and Capital Resources Cash decreased during the first nine months of fiscal 1998 by $8,718,000 primarily due to $16,932,000 in capital expenditures, partially offset by proceeds from long-term borrowings and cash generated from operations. 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, which was substantially completed during the third quarter of fiscal 1998, and a new 30,000 square foot manufacturing facility for the Company's eV PRODUCTS division in Pennsylvania, which will be substantially completed during the fourth quarter of fiscal 1998, as well as the purchase and improvement of a 22,000 square foot manufacturing facility at the Company's VLOC subsidiary. The Company generated $1,647,000 in cash from operations for the first nine months of fiscal 1998. The $8,752,000 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 and 1998 world-wide profit-driven bonus and retirement programs and increases in accounts receivable and inventories needed to support the growth in sales volume. Historically, the Company has funded growth from cash flow from operations and, to a lesser extent, borrowings. In the first nine months of fiscal 1998, in addition to cash generated from operations, the Company executed a $1,980,000 low interest rate loan and entered into a $10.0 million unsecured line of credit. As of March 31, 1998, the Company had $1,980,000 and $4.5 million outstanding under these instruments, respectively. The March 31, 1998 cash balance, in addition to available borrowings under the line of credit, will be used for working capital needs, further capital expenditures, scheduled debt payments and other general corporate business purposes. 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. 11 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 10.01 Agreement by and between Corrected copy filed PNC Bank, National Association herewith. 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. May 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: May 14, 1998 By: /s/ Carl J. Johnson ------------------------------------ Carl J. Johnson Chairman and Chief Executive Officer Date: May 14, 1998 By: /s/ James Martinelli ------------------------------------ James Martinelli Treasurer & Chief Financial Officer 13 EXHIBIT INDEX ------------- Exhibit No. - ----------- 10.01 Agreement by and between Corrected copy filed PNC Bank, National Association herewith. 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. May 13, 1998 27.01 Financial Data Schedule Filed herewith. 14