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 September 30, 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 November 6, 1998, 6,852,966 shares of Common Stock,
no par value, of the registrant were outstanding.
II-VI INCORPORATED AND SUBSIDIARIES
-----------------------------------
INDEX
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Page No.
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements:
Independent Accountants' Report. . . . . . 3
Condensed Consolidated Balance Sheets
-- September 30, 1998 and June 30, 1998. . 4
Condensed Consolidated Statements of
Earnings -- Three months ended
September 30, 1998 and 1997 . . . . . . . 5
Condensed Consolidated Statements of
Cash Flows -- Three months ended
September 30, 1998 and 1997. . . . . . . . 6
Notes to Condensed Consolidated
Financial Statements . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. . . . . . . . . . . 10
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 . . . . . 12
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 September 30, 1998, and
the related condensed consolidated statements of earnings and cash
flows for the three-month periods ended September 30, 1998 and 1997.
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
October 19, 1998
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements:
- -----------------------------
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 1,763 $ 4,160
Accounts receivable - net 10,599 11,018
Inventories 10,234 10,056
Other current assets 1,923 1,998
-------- --------
Total Current Assets 24,519 27,232
Property, Plant and Equipment, net 36,481 35,887
Other Assets 4,574 4,655
-------- --------
$ 65,574 $ 67,774
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 7,240 $ 5,833
Accounts payable 1,381 2,810
Accrued salaries, wages and bonuses 1,328 2,972
Accrued profit sharing contribution 74 711
Other current liabilities 1,306 1,418
Current portion of long-term debt 42 68
-------- --------
Total Current Liabilities 11,371 13,812
Long-Term Debt--less current portion 2,391 2,308
Deferred Income Taxes 1,591 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 -
6,846,786 shares at
September 30, 1998; 6,834,786
shares at June 30, 1998 18,572 18,468
Cumulative translation adjustment 312 435
Retained earnings 32,551 31,922
-------- --------
51,435 50,825
Less treasury stock, at cost
- 431,940 shares at September 30, 1998;
384,440 shares at June 30, 1998 1,214 762
-------- --------
50,221 50,063
-------- --------
$ 65,574 $ 67,774
======== ========
</TABLE>
- -See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Revenues
Net sales:
Domestic $ 7,665 $ 7,793
International 5,829 7,087
-------- --------
13,494 14,880
Contract research and development 299 639
-------- --------
13,793 15,519
Costs, Expenses & Other Expense (Income)
Cost of goods sold 8,969 8,305
Contract research and development 235 471
Internal research and development 578 300
Selling, general and administrative 3,007 3,450
Other expense (income) - net 107 (17)
-------- --------
12,896 12,509
-------- --------
Earnings Before Income Taxes 897 3,010
Income Taxes 268 898
-------- --------
Net Earnings $ 629 $ 2,112
======== ========
Basic Earnings Per Share $ 0.10 $ 0.33
======== ========
Diluted Earnings Per Share $ 0.10 $ 0.32
======== ========
</TABLE>
- -See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 629 $ 2,112
Adjustments to reconcile net earnings
to net cash used in operating
activities:
Depreciation and amortization 1,200 1,061
Loss on foreign currency transactions 33 204
Deferred income taxes - 59
Increase (decrease) in cash from
changes in:
Accounts receivable 447 (1,834)
Inventories (128) (860)
Accounts payable (1,519) (95)
Other operating net assets (2,369) (1,605)
-------- --------
Net cash used in operating activities (1,707) (958)
-------- --------
Cash Flows from Investing Activities
Additions to property, plant
and equipment (1,719) (4,926)
Disposals of other assets - 2
-------- --------
Net cash used in investing activities (1,719) (4,924)
-------- --------
Cash Flows from Financing Activities
Proceeds (payments) on short-term
borrowings, net 1,397 205
Proceeds from long-term borrowings - 1,980
Payments on long-term borrowings (13) (15)
Proceeds from sale of common stock 84 45
Purchase of treasury stock (452) -
-------- --------
Net cash provided by financing
activities 1,016 2,215
Effect of exchange rate changes on
cash and cash equivalents 13 (90)
-------- --------
Net decrease in cash and
cash equivalents (2,397) (3,757)
Cash and Cash Equivalents at
Beginning of Period 4,160 10,854
-------- --------
Cash and Cash Equivalents at
End of Period $ 1,763 $ 7,097
======== ========
</TABLE>
- -See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A - Basis of Presentation
---------------------
The consolidated financial statements for the three month periods
ended September 30, 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 1998 Annual Report to
shareholders. The consolidated results of operations for the three
month periods ended September 30, 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:
September 30, June 30,
1998 1998
------------- --------
Raw materials $ 3,482 $ 3,220
Work in progress 3,820 3,633
Finished goods 2,932 3,203
------------- --------
$10,234 $10,056
============= ========
Note C - Property, Plant and Equipment ($000)
-------------------------------------
Property, plant and equipment (at cost) consist of the following:
September 30, June 30,
1998 1998
------------- --------
Land and land improvements $ 1,546 $ 1,501
Buildings and improvements 17,359 16,951
Machinery and equipment 39,246 37,980
------------- --------
58,151 56,432
Less accumulated depreciation 21,670 20,545
------------- --------
$36,481 $35,887
============= ========
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 will expire December 30,
1998. The average interest rate in effect as of September 30, 1998 was
6.44%. As of September 30, 1998, the total borrowings under this line
of credit was $7.0 million. The Company is subject to certain
restrictive covenants under this agreement. During the three months
ended September 30, 1998, the Company was not in compliance with one
covenant relating to a limitation on capital expenditures. The Company
received a waiver from the bank dated September 18, 1998 for this
convenant violation.
In September 1997, the Company secured a 237 million Yen loan with PNC
Bank. Interest is 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%. On September 30, 1998, the Japanese Yen Base Rate
was 0.66% and the floating rate was 1.84%.
Note E - Earnings Per Share
------------------
The following table sets forth the computation of earnings per share
for the periods indicated:
Three Months Ended September 30,
(000 except per share data) 1998 1997
- -------------------------------------------------------------------
Net earnings $629 $2,112
Divided by:
Weighted average shares 6,444 6,420
- -------------------------------------------------------------------
Basic earnings per share $0.10 $0.33
Net earnings $629 $2,112
Divided by:
Weighted average shares 6,444 6,420
Dilutive effect of common
stock equivalents 159 264
- -------------------------------------------------------------------
Diluted weighted average
common shares 6,603 6,684
- -------------------------------------------------------------------
Diluted earnings per share $0.10 $0.32
- -------------------------------------------------------------------
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 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 September 30,
1998 1997
---- ------
Net earnings $629 $2,112
Cumulative translation
adjustments, net of related tax (86) (7)
---- ------
Comprehensive income $543 $2,105
==== ======
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Results of Operations
- ---------------------
Net earnings for the first quarter of fiscal 1999 were $629,000 ($0.10
per share-diluted) on revenues of $13,793,000. This compares to net
earnings of $2,112,000 ($0.32 per share-diluted) on revenues of
$15,519,000 in the first quarter of fiscal 1998.
Order bookings for the first quarter of fiscal 1999 were $12,812,000
compared to $16,050,000 for the same period last fiscal year, a decrease
of 20%. There were no bookings for contract research and development
for the first quarter of fiscal year 1999. This compares to $90,000 of
contract research and development bookings for the same period last
fiscal year. Excluding these long-term research and development contract
bookings, manufacturing bookings decreased 20% to $12,812,000 for the
quarter from $15,960,000 for the same period last year. Bookings for
infrared optics and material products and bookings at the Company's VLOC
subsidiary combined to account for an approximate $3,874,000 decrease
while bookings of the eV PRODUCTS division increased by approximately
$726,000.
Revenues for the first quarter of fiscal 1999 decreased 11% to
$13,793,000 compared to $15,519,000 for the same period last fiscal
year. Approximately 80% of the decrease reflects lower shipments of
infrared optics and material products. The remaining 20% decrease is
attributable to lower shipments from the Company's VLOC subsidiary
offset by an increase in eV PRODUCTS division shipments.
Manufacturing gross margin for the first quarter of fiscal 1999 was
$4,525,000 or 34% of revenues compared to $6,575,000 or 44% of revenues
for the same period last fiscal year. The lower gross margin percentage
for the quarter reflects price sensitivity in the infrared optics and
materials market, higher per unit costs at the Company's VLOC subsidiary,
and a higher percentage of total revenues from the eV PRODUCTS division.
Internal research and development expenses for the quarter were $578,000
or 4% of revenues compared to $300,000 or 2% of revenues for the same
period last year. The increased expenses for the quarter reflect
internally funded projects associated with the development of new
materials to improve profitability and expand product offerings, as well
as continued efforts to improve material growth yields.
Selling, general and administrative expenses for the first quarter of
fiscal 1999 were $3,007,000 or 22% of revenues compared to $3,450,000 or
22% of revenues for last fiscal year's first quarter. The dollar
decrease is attributable to decreased compensation expense associated
with the Company's worldwide profit-driven bonus programs, planned
discretionary cost reductions, and improved utilization of existing
personnel and resources.
Other expense for the first quarter of fiscal 1999 was $107,000 compared
to other income of $17,000 for last fiscal year's first quarter due to
foreign currency translation losses, increased interest expense, and
lower investment earnings on reduced cash balances. The increased
interest expense is the result of higher borrowings. The lower cash
balance and related investment earnings is primarily due to increased
capital spending.
The Company's first quarter fiscal 1999 effective income tax rate is 30%,
which is comparable to the income tax rate of last fiscal year's first
quarter.
Liquidity and Capital Resources
- -------------------------------
Cash decreased during the first quarter of fiscal 1999 by $2,397,000
primarily due to $1,719,000 in capital expenditures, a reduction of
accounts payable of $1,519,000 due to payment of amounts in the normal
course of business, and payment of compensation costs relating to the
Company's fiscal 1998 worldwide profit-driven bonus programs. The
capital expenditures focused on the automation of manufacturing processes.
The Company used $1,707,000 in cash from operations for the first
quarter of fiscal 1999. The $1,829,000 in cash generated from net
earnings before depreciation and amortization for the quarter was
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 current cash balance, as well as cash provided by operations
during the remainder of fiscal year 1999 will be used for working
capital needs, further capital expenditures on facilities and
equipment, scheduled debt payments, and possible acquisitions of
complementary businesses, products, or technologies.
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 of technologies or businesses 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.
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 in process and
consists of an evaluation of the systems impacted by the Year 2000 issue.
Until this phase of the plan is completed, the Company cannot assess all
risks related to the Year 2000 issue. Progress has been made on this
phase and is expected to be completed by November 30, 1998 which is one
month later than previously expected. The second phase of this plan will
be an evaluation of the third parties with whom the Company has
significant relations and their Year 2000 compliance. This phase is
expected to be completed by December 31, 1998. 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 is
expected to be completed by June 30, 1999.
To date, the Company has spent approximately $100,000 on the Year 2000
issue and believes that the remaining potential cost related to the
Year 2000 issue will range between $200,000 and $300,000.
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.
PART II - OTHER INFORMATION
---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits.
--------
15.01 Accountants' awareness letter
dated November 12, 1998 . . . Filed herewith.
27.01 Financial Data Schedule . . . Filed herewith.
(b) Reports on Form 8-K.
On July 9, 1998, the registrant filed a report on
Form 8-K for the events dated July 9, 1998, covering
Items 5 and 7 thereof.
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: November 12, 1998 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
Date: November 12, 1998 By: /s/ James Martinelli
James Martinelli
Treasurer & Chief Financial Officer
EXHIBIT INDEX
-------------
Exhibit No.
- -----------
15.01 Accountants' awareness letter dated
November 12, 1998. . . . . . . . . .Filed herewith.
27.01 Financial Data Schedule. . . . . . .Filed herewith.
November 12, 1998
II-VI Incorporated
375 Saxonburg Boulevard
Saxonburg, PA 16056
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
interim financial information of II-VI Incorporated and subsidiaries
for the periods ended September 30, 1998 and 1997, as indicated in our
report dated October 19, 1998; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in
your Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, is incorporated by reference in Registration Statement
No. 33-19511, No. 33-38019, No. 33-19510, No. 33-63739, and
No. 333-12737 on Form S-8 and Registration No. 333-04531 on Form S-3.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered a
part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant within
the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,763
<SECURITIES> 0
<RECEIVABLES> 10,907
<ALLOWANCES> 308
<INVENTORY> 10,234
<CURRENT-ASSETS> 24,519
<PP&E> 58,151
<DEPRECIATION> 21,670
<TOTAL-ASSETS> 65,574
<CURRENT-LIABILITIES> 11,371
<BONDS> 2,391
0
0
<COMMON> 18,572
<OTHER-SE> 31,649
<TOTAL-LIABILITY-AND-EQUITY> 65,574
<SALES> 13,793
<TOTAL-REVENUES> 13,793
<CGS> 9,204
<TOTAL-COSTS> 9,204
<OTHER-EXPENSES> 3,566
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> 897
<INCOME-TAX> 268
<INCOME-CONTINUING> 629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
