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, 1999 [ ] 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or or organization) 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 7, 1999, 6,859,966 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 Condensed Consolidated Balance Sheets - March 31, 1999 and June 30, 1998. . . . . . . 4 Condensed Consolidated Statements of Earnings -- Three and nine months ended March 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows -- Nine months ended March 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . 7 Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk (no significant changes since June 30, 1998) PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 13 2 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries: We have reviewed the accompanying condensed consolidated balance sheet of II-VI Incorporated and Subsidiaries as of March 31, 1999, and the related condensed consolidated statements of earnings for the three- month and nine-month periods ended March 31, 1999 and 1998, and the related condensed consolidated statements of cash flows for the nine- month periods ended March 31, 1999 and 1998. 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 sheet of II-VI Incorporated and Subsidiaries as of June 30, 1998, 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 7, 1998, 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, 1998 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 21, 1999 3 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements: II-VI Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ($000) March 31, June 30, Assets 1999 1998 --------- -------- Current Assets Cash and cash equivalents $ 4,483 $ 4,160 Accounts receivable - net 10,779 11,018 Inventories 9,380 10,056 Other current assets 1,475 1,998 ------- ------- Total Current Assets 26,117 27,232 Property, Plant and Equipment, net 36,537 35,887 Other Assets 4,990 4,655 ------- ------ $67,644 $67,774 ======= ======= Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 5,145 $ 5,833 Accounts payable 1,204 2,810 Accrued salaries, wages and bonuses 2,255 2,972 Accrued profit sharing contribution 404 711 Other current liabilities 1,835 1,418 Current portion of long-term debt 42 68 ------- ------- Total Current Liabilities 10,885 13,812 Long-Term Debt--less current portion 2,568 2,308 Other Liabilities, primarily deferred income taxes 2,287 1,591 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 - 6,859,966 shares at March 31, 1999; 6,834,786 shares at June 30, 1998 18,660 18,468 Accumulated other comprehensive income (197) 435 Retained earnings 35,351 31,922 ------- ------- 53,814 50,825 Less treasury stock, at cost - 534,440 shares at March 31, 1999; 384,440 shares at June 30, 1998 1,910 762 ------- ------- 51,904 50,063 ------- ------- $67,644 $67,774 ======= ======= - -See notes to condensed consolidated financial statements. 4 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) Three Months Ended March 31, 1999 1998 -------- -------- Revenues Net sales: Domestic $ 8,109 $ 7,954 International 7,151 7,781 -------- -------- 15,260 15,735 Contract research and development 278 495 -------- -------- 15,538 16,230 -------- -------- Costs, Expenses & Other (Income) Expense Cost of goods sold 8,792 9,101 Contract research and development 146 382 Internal research and development 617 516 Selling, general and administrative 3,592 3,727 Interest expense 61 64 Other expense (income) - net 107 (105) -------- -------- 13,315 13,685 -------- -------- Earnings Before Income Taxes 2,223 2,545 Income Taxes 725 762 -------- -------- Net Earnings $ 1,498 $ 1,783 ======== ======== Basic Earnings Per Share $ 0.24 $ 0.28 ======== ======== Diluted Earnings Per Share $ 0.23 $ 0.27 ======== ======== - -See notes to condensed consolidated financial statements. 5 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) ($000 except per share data) Nine Months Ended March 31, 1999 1998 -------- -------- Revenues Net sales: Domestic $ 23,833 $ 23,764 International 19,732 21,232 -------- -------- 43,565 44,996 Contract research and development 976 1,811 -------- -------- 44,541 46,807 -------- -------- Costs, Expenses & Other (Income) Expense Cost of goods sold 26,838 25,204 Contract research and development 686 1,376 Internal research and development 1,769 1,161 Selling, general and administrative 10,035 10,829 Interest expense 341 91 Other (income) expense - net (173) 51 -------- -------- 39,496 38,712 -------- -------- Earnings Before Income Taxes 5,045 8,095 Income Taxes 1,616 2,416 -------- -------- Net Earnings $ 3,429 $ 5,679 ======== ======== Basic Earnings Per Share $ 0.54 $ 0.88 ======== ======== Diluted Earnings Per Share $ 0.53 $ 0.85 ======== ======== - -See notes to condensed consolidated financial statements. 6 II-VI Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ($000) Nine Months Ended March 31, 1999 1998 -------- -------- Cash Flows from Operating Activities Net earnings $ 3,429 $ 5,679 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,645 3,073 (Gain) loss on foreign currency transactions (216) 383 Writedown of property held for sale 200 - Deferred income taxes 240 (31) Increase (decrease) in cash from changes in: Accounts receivable 692 (3,337) Inventories 810 (2,308) Accounts payable (1,930) (118) Other operating net assets 155 (1,694) -------- -------- Net cash provided by operating activities 7,025 1,647 -------- -------- Cash Flows from Investing Activities Additions to property, plant and equipment (4,051) (16,932) (Additions to) disposals of other assets (600) 2 -------- -------- Net cash used in investing activities (4,651) (16,930) -------- -------- Cash Flows from Financing Activities (Payments on) proceeds from short-term borrowings, net (729) 4,467 (Payments on) proceeds from long-term borrowings (22) 1,933 Proceeds from sale of common stock 151 406 Purchase of treasury stock (1,148) - -------- -------- Net cash (used in) provided by financing activities (1,748) 6,806 Effect of exchange rate changes on cash and cash equivalents (303) (241) -------- -------- Net increase (decrease) in cash and cash equivalents 323 (8,718) Cash and Cash Equivalents at Beginning of Period 4,160 10,854 -------- -------- Cash and Cash Equivalents at End of Period $ 4,483 $ 2,136 ======== ======== Cash paid for interest $ 304 $ 54 ======== ======== Cash paid for income taxes $ 773 $ 2,919 ======== ======== - -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 consolidated financial statements for the three and nine month periods ended March 31, 1999 and 1998 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 1998 Annual Report to shareholders. The consolidated results of operations for the three and nine month periods ended March 31, 1999 and 1998 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, 1999 1998 --------- -------- Raw materials $ 2,684 $ 3,220 Work in progress 4,252 3,633 Finished goods 2,444 3,203 --------- -------- $ 9,380 $ 10,056 ========= ======== Note C - Property, Plant and Equipment ($000) Property, plant and equipment consist of the following: March 31, June 30, 1999 1998 --------- -------- Land and land improvements $ 1,551 $ 1,501 Buildings and improvements 19,348 16,951 Machinery and equipment 39,584 37,980 --------- -------- 60,483 56,432 Less accumulated depreciation 23,946 20,545 --------- -------- $ 36,537 $ 35,887 ========= ======== 8 II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note D - Debt On December 31, 1997, the Company entered into a $10.0 million unsecured line of credit agreement with PNC Bank, which was scheduled to expire December 30, 1998. The Company received an extension of the expiration date from the bank to March 31, 1999. On March 26, 1999, the Company replaced its $10.0 million unsecured line of credit agreement by entering into a $15.0 million unsecured committed line of credit agreement with PNC Bank that expires on March 25, 2000. This line of credit may be extended for an additional two years. The average interest rate in effect as of March 31, 1999 was 5.88%. As of March 31, 1999, the total borrowings under this line of credit were $5.0 million. The Company is subject to certain restrictive covenants under this agreement. Note E - Earnings Per Share The following table sets forth the computation of earnings per share for the periods indicated: Three Months Ended Nine Months Ended March 31, March 31, (000 except per share data) 1999 1998 1999 1998 - ------------------------------------------------------------------------- Net earnings $1,498 $1,783 $3,429 $5,679 Divided by: Weighted average shares 6,323 6,445 6,368 6,433 - ------------------------------------------------------------------------- Basic earnings per share $ 0.24 $ 0.28 $ 0.54 $ 0.88 - ------------------------------------------------------------------------- Net earnings $1,498 $1,783 $3,429 $5,679 Divided by: Weighted average shares 6,323 6,445 6,369 6,433 Dilutive effect of common stock equivalents 137 232 137 245 - ------------------------------------------------------------------------- Diluted weighted average common shares 6,460 6,677 6,506 6,678 - ------------------------------------------------------------------------- Diluted earnings per share $ 0.23 $ 0.27 $ 0.53 $ 0.85 - ------------------------------------------------------------------------- 9 II-VI Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Note F - Other Comprehensive Income During the quarter ended September 30, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which requires the Company to report and disclose a measure ("comprehensive income") of all changes in shareholders' equity that result from transactions and other economic events of the period other than transactions with owners. The components of comprehensive income, net of related tax, were as follows for the periods indicated ($000): Three Months Ended March 31, Three Months Ended Nine Months Ended March 31, March 31, ------------------ ---------------- 1999 1998 1999 1998 ------ ------ ------ ------ Net earnings $1,498 $1,783 $3,429 $5,679 Cumulative translation adjustments (133) 163 (632) 171 ------ ------ ------ ------ Comprehensive income $1,365 $1,946 $2,797 $5,850 ====== ====== ====== ====== 10 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 1999, ended March 31, 1999 were $1,498,000 ($0.23 per share-diluted) on revenues of $15,538,000. This compares to net earnings of $1,783,000 ($0.27 per share-diluted) on revenues of $16,230,000 in the third quarter of fiscal 1998. For the nine months ended March 31, 1999, net earnings were $3,429,000 ($0.53 per share-diluted) on revenues of $44,541,000. This compares with net earnings of $5,679,000 ($0.85 per share-diluted) on revenues of $46,807,000 for the same period last fiscal year. Order bookings for the third quarter of fiscal 1999 were $14,655,000 compared to $16,083,000 for the same period last year, a decrease of 9%. Year-to-date order bookings for 1999 decreased 10% to $43,959,000 from $48,958,000 for the same period last year. Year-to-date manufacturing bookings decreased 10% to $43,718,000 from $48,455,000 last fiscal year. For the quarter, the manufacturing bookings decrease was attributable to decreased bookings at the Company's VLOC subsidiary and at the Company's eV PRODUCTS division. Bookings of infrared optics and material products increased by approximately 5%. For the year-to-date, approximately 75% of the decrease in manufacturing bookings was attributable to bookings at the Company's VLOC subsidiary and the remaining decrease was attributable to bookings of infrared optics and material products. Revenues for the third quarter of fiscal 1999 decreased 4% to $15,538,000 compared to $16,230,000 for the same period last year. Year-to-date revenues for fiscal 1999 decreased 5% to $44,541,000 from $46,807,000 for the same period last year. For both the quarter and year-to-date, the decrease was related equally to decreased shipments of infrared optics and material products and decreased shipments at the Company's VLOC subsidiary. These decreases were offset by increases in shipments at the Company's eV PRODUCTS division of approximately 40% for the quarter and approximately 15% for the year-to-date. Manufacturing gross margin for the third quarter of fiscal 1999 was $6,468,000 or 42% of revenues compared to $6,634,000 or 42% of revenues for the same period last year. Year-to-date for fiscal 1999, manufacturing gross margin was $16,727,000 or 38% of revenues compared to $19,792,000 or 44% of revenues for the same period last year. The lower gross margin percentage for the year-to-date reflects higher per unit costs at the Company's VLOC subsidiary and continued price sensitivity in the infrared optics and materials market. The manufacturing gross margin percentage has increased from 34% of revenues in the first quarter of fiscal 1999 to 42% of revenues in the third quarter of fiscal 1999 and reflects increases in every product line. Internal research and development expenses for the third quarter of fiscal year 1999 were $617,000 or 4% of revenues compared to $516,000 or 3% of revenues for the same period last year. Year-to-date for fiscal 1999, internal research and development expenses were $1,769,000 or 4% of revenues compared to $1,161,000 or 2% of revenues for the same period last year. The increased expense for the quarter and year-to-date is the result of internally funded projects associated with the development of new materials to improve and expand product offerings, as well as continued efforts to improve material growth yields. Selling, general and administrative expenses for the third quarter of fiscal 1999 were $3,592,000 or 23% of revenues compared to $3,727,000 or 23% of revenues for the same period last year. Year-to-date for fiscal 1999, selling, general and administrative expenses were $10,035,000 or 23% of revenues compared to $10,829,000 or 23% of revenues for the same period last year. The dollar decreases for the quarter and year-to-date reflect planned discretionary cost reductions, decreased expense associated with the Company's worldwide profit-driven bonus programs and improved utilization of existing personnel and resources. Interest expense for the third quarter of fiscal 1999 was $61,000 compared to $64,000 for the same period last year. Year-to-date for fiscal 1999, interest expense was $341,000 compared to $91,000 for the same period last year. The year-to-date fluctuation is the direct result of increased borrowings. Other expense for the third quarter of fiscal 1999 was $107,000 compared to other income of $105,000 for the same period last year. Year-to-date for fiscal 1999, other income was $173,000 compared to other expense of $51,000 for the same period last year. The quarter fluctuation was primarily the result of foreign currency translation losses. The year- 11 to-date fluctuation was the result of foreign currency translation gains offset by the writedown of certain assets held for sale. For fiscal 1999, the Company's year-to-date effective income tax rate was 32% which was higher than the 30% income tax rate for the same period last fiscal year. The increase in the effective income tax rate is the result of higher state income taxes and lower earnings from certain foreign subsidiaries. Liquidity and Capital Resources - ------------------------------- Cash increased during the first nine months of fiscal 1999 by $323,000 primarily due to net earnings before depreciation and amortization of $7,074,000 and reductions of accounts receivable and inventories totaling $1,502,000. This increase was offset by $4,051,000 in capital expenditures, a reduction of accounts payable of $1,930,000 due to payment of amounts in the normal course of business, the repurchase of 150,000 shares of the Company's common stock, repayment of short-term borrowings and payment of compensation costs relating to the Company's fiscal 1998 worldwide profit-driven bonus programs. The Company generated $7,025,000 in cash from operations for the first nine months of fiscal 1999. The $7,074,000 in cash generated from net earnings before depreciation and amortization for the nine months ended March 31, 1999 and reductions of accounts receivable and inventories were offset by a reduction of accounts payable in the normal course of business and the payment of compensation costs relating to the Company's fiscal 1998 worldwide profit-driven bonus programs. The Company has a $15.0 million unsecured committed line of credit with PNC Bank that expires on March 25, 2000. This line of credit may be extended for an additional two years. The current cash balance and the existing credit facility, as well as cash to be provided by operations during the remainder of fiscal year 1999, will be used for working capital needs, further capital expenditures for facilities and equipment, scheduled debt payments, and possible acquisitions of complementary businesses, products, or technologies. Other Matters - ------------- The "Year 2000" issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the use of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. The Company has developed a formal plan to address the Year 2000 implications of its information technology and noninformation technology systems. The first phase of this plan is complete and consisted of an evaluation of the systems impacted by the Year 2000 issue. The second phase of this plan is substantially completed and consisted of an evaluation of the third parties with whom the Company has significant relations and their Year 2000 compliance. The last phase of this plan will be the implementation of corrective measures deemed necessary, as identified during the first two stages of the plan. This phase has begun and is expected to be completed by June 30, 1999. Based upon the information obtained from the first two stages of the plan, the Company does not believe its information technology and noninformation technology systems will experience significant Year 2000 problems. However, there can be no assurance that the third parties with whom the Company has significant relations will not experience disruptions in their business that could have a material adverse affect on the Company. An example of a worst case scenario caused by the Year 2000 issue would be the failure in the accounting systems of a significant number of the Company's key customers which resulted in a delay in the payment of invoices issued by the Company. To date, the Company has spent approximately $150,000 on the Year 2000 issue and believes that the remaining potential cost related to the Year 2000 issue will range between $150,000 and $250,000. Although the Company has developed and expects to execute the plan described above, due to the inherent uncertainty and complexity involved with the Year 2000 issue, there can be no assurance that the Company will address all aspects of the Year 2000 issue. A contingency plan is expected to be developed by June 30, 1999. 12 This Management's Discussion and Analysis contains forward looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including the statements regarding the Company's ability to fund future working capital needs, capital expenditures, scheduled debt payments and possible acquisitions and the Company's plan to address the Year 2000 issue. Actual results could differ from such statements if worldwide economic conditions change, competitive conditions intensify, technology problems emerge, and/or if suitable acquisitions 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 1998 Form 10-K as filed with the Securities and Exchange Commission on September 23, 1998. PART II - OTHER INFORMATION --------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits. 10.01 Agreement by and between PNC Bank, National Association and II-VI Incorporated for Amended and Restated Letter Agreement for Committed Line of Credit and Japanese Yen Term Loan Filed herewith. 15.01 Accountants' awareness letter dated May 13, 1999 Filed herewith. 27.01 Financial Data Schedule Filed herewith. (b) Reports on Form 8-K. None. 13 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 13, 1999 By: /s/ Carl J. Johnson Carl J. Johnson Chairman and Chief Executive Officer Date: May 13, 1999 By: /s/ James Martinelli James Martinelli Treasurer & Chief Financial Officer 14 EXHIBIT INDEX ------------- Exhibit No. - ----------- 10.01 Agreement by and between PNC Bank, National Association and II-VI Incorporated for Amended and Restated Letter Agreement for Committed Line of Credit and Japanese Yen Term Loan Filed herewith. 15.01 Accountants' awareness letter dated May 13, 1999 Filed herewith. 27.01 Financial Data Schedule Filed herewith.