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, 2000
[ ] 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 (I.R.S. Employer
of 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 3, 2000, 13,861,838 shares of Common Stock, no par
value, of the registrant were outstanding.
II-VI INCORPORATED AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000 . . . . . . . . . . 3
Condensed Consolidated Statements of Earnings -
Three months ended September 30, 2000 and 1999. . . . . .4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2000 and 1999 . . . . . 5
Notes to Condensed Consolidated Financial Statements . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .. . . . .12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk (Incorporated herein in Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations)
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 14
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
September, June 30,
2000 2000
--------- --------
Assets
Current Assets
Cash and cash equivalents $ 3,984 $ 6,330
Accounts receivable - net 21,172 14,202
Inventories 19,849 13,738
Other current assets 5,113 2,080
--------- --------
Total Current Assets 50,118 36,350
Property, Plant and Equipment, net 50,788 40,883
Cost in Excess of Net Assets Acquired 34,847 1,792
Other Intangible Assets 1,456 1,516
Other Assets 4,449 3,690
--------- --------
$141,658 $ 84,231
========= ========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 5,736 $ -
Accounts payable 4,642 3,726
Accrued salaries, wages and bonuses 4,207 4,685
Income taxes payable 975 222
Accrued profit sharing contribution 384 812
Other current liabilities 6,473 2,526
Current portion of long-term debt 461 44
--------- -------
Total Current Liabilities 22,878 12,015
Long-Term Debt--less current portion 28,658 5,541
Other Liabilities,
primarily deferred income taxes 4,177 3,120
Minority Interest 6,304 -
Shareholders' Equity
Preferred stock, no par value; authorized -
5,000,000 shares; unissued - -
Common stock, no par value; authorized -
30,000,000 shares; issued - 14,818,018 shares
at September 30, 2000; 13,976,102 shares
at June 30, 2000 34,563 20,454
Accumulated other comprehensive income 203 186
Retained earnings 46,785 44,825
--------- -------
81,551 65,465
Less treasury stock, at cost -
1,068,880 shares 1,910 1,910
--------- -------
79,641 63,555
--------- -------
$141,658 $84,231
========= =======
-See notes to condensed consolidated financial statements.
-3-
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
Three Months Ended
March 31,
2000 1999
-------- --------
Revenues
Net sales:
Domestic $ 14,642 $ 8,536
International 11,016 7,586
-------- --------
25,658 16,122
Contract research and development 1,055 76
-------- --------
26,713 16,198
-------- --------
Costs, Expenses & Other Expense (Income)
Cost of goods sold 15,448 9,228
Contract research and development 732 58
Internal research and development 992 623
Selling, general and administrative 6,268 3,806
Interest expense 337 85
Other expense (income) - net 67 (72)
-------- --------
23,844 13,728
-------- --------
Earnings Before Income Taxes 2,869 2,470
Income Taxes 909 731
-------- --------
Net Earnings $ 1,960 $ 1,739
======== ========
Basic Earnings Per Share $ 0.15 $ 0.14
-------- --------
Diluted Earnings Per Share $ 0.14 $ 0.13
- See notes to condensed consolidated financial statements.
-4-
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
Three Months Ended
September 30,
2000 1999
-------- --------
Cash Flows from Operating Activities
Net earnings $ 1,960 $ 1,739
Adjustments to reconcile net earnings
to net cash
Provided by (used in) operating activities:
Depreciation and amortization 1,660 1,402
Gain on foreign currency transactions (6) (10)
Deferred income taxes 148 (8)
Increase (decrease) in cash
from changes in:
Accounts receivable (880) 1,381
Inventories (876) (1,022)
Accounts payable 865 (308)
Other operating net assets (5,356) (1,163)
-------- --------
Net cash provided by (used in)
operating activities (2,485) 2,011
-------- --------
Cash Flows from Investing Activities
Purchases of businesses (23,807) -
Additions to property, plant and equipment (3,634) (1,280)
Investments in unconsolidated businesses - (2,788)
Disposals of other assets - 750
-------- --------
Net cash used in investing activities (27,441) (3,318)
-------- --------
Cash Flows from Financing Activities
Proceeds on short-term borrowings, net 2,547 2,432
Increase in long-term borrowings 25,000 -
Payments on long-term borrowings (386) (25)
Proceeds from sale of common stock 347 35
-------- --------
Net cash provided by financing activities 27,508 2,442
-------- --------
Effect of exchange rate changes on
cash and cash equivalents 72 202
Net (decrease) increase in cash and
cash equivalents (2,346) 1,337
Cash and Cash Equivalents at
Beginning of Period 6,330 5,558
-------- --------
Cash and Cash Equivalents at
End of Period $ 3,984 $ 6,895
======== ========
Cash paid for interest $ 227 $ 87
Cash paid for taxes $ 321 $ 184
Non-cash transactions:
Net assets acquired for fair value
of common stock $ 13,313 $ -
-See notes to condensed consolidated financial statements.
-5-
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, 2000 and 1999 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 2000 Annual Report to
shareholders. The consolidated results of operations for the three
month periods ended September 30, 2000 and 1999 are not necessarily
indicative of the results to be expected for the full year. The
results for the quarter ended September 30, 2000 include two months of
operations of the Company's recently acquired Laser Power Corporation
subsidiary.
Certain amounts from the prior period financial statements have been
reclassified to conform with current period presentation, including
classification of Laser Power Corporation as an investment accounted
for under the Equity method.
Note B - Inventories ($000)
-------------------
The components of inventories are as follows:
September 30, June 30,
2000 2000
------------- ---------
Raw materials $ 5,480 $ 3,947
Work in progress 8,666 5,518
Finished goods 5,703 4,273
------------- ---------
$ 19,849 $ 13,738
============= =========
Note C - Property, Plant and Equipment ($000)
-------------------------------------
Property, plant and equipment (at cost) consist of the following:
September 30, June 30,
2000 2000
------------- --------
Land and land improvements $ 1,652 $ 1,528
Buildings and improvements 25,932 21,333
Machinery and equipment 54,130 47,578
------------- --------
81,714 70,439
Less accumulated depreciation 30,926 29,556
------------- --------
$ 50,788 $ 40,883
============= ========
-6-
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note D - Debt
----
On August 14, 2000, the Company replaced its $15.0 million unsecured
line of credit agreement with a $45.0 million secured credit agreement
in connection with the Company's acquisition of Laser Power
Corporation. This facility has a five-year life and contains term and
line of credit borrowing options. This facility is secured by certain
assets of the Company and is subject to certain restrictive covenants,
including those related to minimum net worth, leverage and interest
coverage. This facility has an interest rate range of LIBOR plus 0.88%
to LIBOR plus 1.50%. The average interest rate in effect as of
September 30, 2000 was 8.13%. As of September 30, 2000, the total
borrowings under this line of credit of $30.0 million consisted of
$25.0 million under the term loan option and $5.0 million under the
line of credit option.
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) 2000 1999
-----------------------------------------------------------------------
Net earnings $ 1,960 $ 1,739
Divided by:
Weighted average shares 13,327 12,694
-----------------------------------------------------------------------
Basic earnings per share $ 0.15 $ 0.14
Net earnings $ 1,960 $ 1,739
Divided by:
Weighted average shares 13,327 12,694
Dilutive effect of
common stock equivalents 495 318
-----------------------------------------------------------------------
Diluted weighted average
common shares 13,822 13,012
-----------------------------------------------------------------------
Diluted earnings per share $ 0.14 $ 0.13
-----------------------------------------------------------------------
-7-
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note F - Other Comprehensive Income ($000)
---------------------------------
Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
Net income $1,960 $1,739
Foreign currency items 17 (27)
------ ------
Comprehensive income $1,977 $1,712
Note G - Segment Reporting
-----------------
The Company has three reportable segments: Optical Components, which
is an aggregation of the Company's II-VI infrared optics and material
products business and the Company's VLOC subsidiary, Radiation
Detectors, which is the Company's eV PRODUCTS division, and the
Company's Laser Power Corporation subsidiary acquired in fiscal 2001.
The accounting policies of the segments are the same as those of the
Company. Substantially all of the Company's corporate expenses are
allocated to the segments. The Company evaluates segment performance
based upon reported segment profit or loss from operations. Inter-
segment sales and transfers have been eliminated.
The following table summarizes selected financial information of the
Company's operations by segment ($000's):
Three Months Ended September 30, 2000
---------------------------------------------
Optical Radiation Laser Power
Components Detectors Corporation Totals
-----------------------------------------------------------------------
Net revenues $19,620 $1,619 $5,474 $26,713
Income (loss)
from operations 3,820 (764) 217 3,273
Interest expense - - - 337
Other expense, net - - - 67
Earnings before income taxes - - - 2,869
Depreciation and
amortization 1,128 168 364 1,660
Segment assets 78,826 8,199 54,633 141,658
Capital expenditures 3,479 40 115 3,634
-8-
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note G - Segment Reporting Cont'd.
-------------------------
Three Months Ended September 30, 1999
-------------------------------------
Optical Radiation
Components Detectors Totals
--------------------------------------------------------------------
Net revenues $14,841 $1,357 $16,198
Income (loss) from operations 2,855 (372) 2,483
Interest expense - - 85
Other income, net - - (72)
Earnings before income taxes - - 2,470
Depreciation and amortization 1,238 164 1,402
Segment assets 66,946 8,365 75,311
Capital expenditures 1,178 102 1,280
Note H - Investment in Laser Power Corporation
-------------------------------------
On September 21, 1999, the Company purchased 1,250,000 shares of Laser
Power Corporation common stock for a total purchase price of
approximately $2.8 million. Laser Power Corporation designs,
manufactures, and markets high performance optics for the industrial,
medical and military applications. Laser Power also provides thin film
design and coating services to industrial and military customers.
On August 14, 2000, the Company increased its ownership in Laser Power
Corporation to approximately 88%, giving the Company a controlling
interest. This additional ownership was acquired for a total
consideration of approximately $23.8 million in cash and the issuance
of approximately 739,000 shares of the Company's common stock.
On October 24, 2000, the Company completed its acquisition of Laser
Power Corporation for a total consideration of approximately $3.9
million in cash and the issuance of approximately 132,000 shares of the
Company's common stock.
The transaction is being accounted for as a purchase. The excess of
the purchase price over the value of net assets acquired will be
amortized over 20 years on a straight-line basis. The preliminary
purchase price valuation is subject to change when additional
information concerning assets, primarily property, plant, and
equipment and intangible assets, and liability values is
obtained. The results of Laser Power Corporation are included in the
Company's consolidated financial statements for the two months ended
September 30, 2000.
-9-
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note H - Investment in Laser Power Corporation Cont'd
--------------------------------------------
Pro forma results, as if the acquisition of Laser Power Corporation had
occurred at the beginning of the period, are as follows:
Three Months Ended September 30,
--------------------------------
2000 1999
------- -------
Net revenues $28,862 $25,255
Net income from continuing operations 1,708 2,282
Net income 1,708 1,054
Basic earnings per share:
Income from continuing operations $0.13 $0.17
Loss from discontinued operations - ($0.09)
------- -------
Net income $0.13 $0.08
Diluted earnings per share:
Income from continuing operations $0.12 $0.16
Loss from discontinued operations - ($0.09)
------- -------
Net income $0.12 $0.07
The pro forma results are not necessarily indicative of what actually
would have occurred if the transaction had taken place at the beginning
of the period, are not intended to be a projection of future results
and do not reflect any cost savings that might be achieved from the
combined operations.
Prior year financial statements reflect the adoption of the Equity
method in a manner consistent with the accounting for a step-by-step
acquisition of Laser Power Corporation. The effect of the restatement
was to reclassify all of the Company's investment in Laser Power common
stock at June 30, 2000 from an investment accounted for as an Available
for Sale Security to an investment accounted for under the Equity
method. The effect of the restatement on income for the three months
ended September 30,1999 was immaterial.
Note I - Stock Split
-----------
On August 23, 2000, the Company announced that its Board of Directors
had declared a two-for-one stock split of the Company's common stock in
the form of a 100% common stock dividend. The record date was
September 5, 2000 and the distribution date was September 20, 2000.
All share and per share amounts included in the Company's consolidated
financial statements have been restated to reflect the stock split for
all periods presented.
-10-
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note J - New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the effective date of SFAS No. 133", and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", is effective for the Company as of July 1, 2000. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value.
The Company from time to time purchases foreign currency forward
exchange contracts, primarily Japanese Yen, that permit it to sell
specified amounts of these foreign currencies expected to be received
from its export sales for pre-established U.S. dollar amounts at
specified dates. These contracts are entered into to limit
transactional exposure to changes in currency exchange rates of export
sales transactions in which settlement will occur in future periods and
which otherwise would expose the Company, on a basis of its aggregate
net cash flows in respective currencies, to foreign currency risk.
The Company recorded the fair value of contracts with a notional amount
of approximately $2.0 million as of September 30, 2000 on the statement
of financial position. The Company has elected not to account for
these contracts as hedges as defined by SFAS No. 133, and recorded the
change in the fair value of these contracts in the results of
operations as they occur.
-11-
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 2001 ended September 30,
2000 were $1,960,000 ($0.14 per share-diluted) on revenues of
$26,713,000. This compares to net earnings of $1,739,000 ($0.13 per
share-diluted) on revenues of $16,198,000 in the first quarter of
fiscal 2000.
Order bookings for the first quarter of fiscal 2001 were $29,427,000
compared to $16,832,000 for the same period last fiscal year, an
increase of 75%. Bookings for contract research and development for
the first quarter of fiscal year 2001 were $1,097,000. There were no
bookings for contract research and development for the same period last
fiscal year. Bookings for laser optics and component products
increased approximately 35%, bookings for the eV PRODUCTS division
increased approximately 90%, and the Company recorded bookings from its
Laser Power Corporation subsidiary of approximately $6,200,000.
Revenues for the first quarter of fiscal 2001 increased 65% to
$26,713,000 compared to $16,198,000 for the same period last fiscal
year. Revenues from laser optics and products increased by
approximately 30%, revenues from the eV PRODUCTS division increased by
approximately 20% and the Company recorded revenues from its Laser
Power Corporation subsidiary of approximately $5,500,000.
Manufacturing gross margin for the first quarter of fiscal 2001 was
$10,210,000 or 40% of revenues compared to $6,894,000 or 43% of
revenues for the same period last fiscal year. The gross margin
percentage for the quarter reflects ongoing expansions of the Company's
manufacturing capability and the addition of Laser Power Corporation
which has historically lower gross margins than the Company.
Company-funded internal research and development expenses were
$992,000 and $623,000 for the first fiscal quarters of 2001 and 2000,
respectively, or 4% of revenues for both periods. The increased
expenses for the quarter reflect projects associated with infrared
optics and materials development and nuclear radiation detector
development.
Selling, general and administrative expenses were $6,268,000 and
$3,806,000 for the first fiscal quarters of 2001 and 2000,
respectively, or 23% of revenues for both periods. The increased
expenses for the quarter reflects increased professional service
expenses, increased sales and marketing efforts, the addition of the
selling, general, and administrative expenses of Laser Power
Corporation, and increased compensation expense associated with the
Company's worldwide profit-driven bonus programs.
Interest expense for the first quarter of fiscal 2001 was $337,000
compared to $85,000 for the same period last year. This increase is
the due to additional borrowings in connection with the purchase of
Laser Power Corporation.
The Company's effective income tax rate for the first quarter fiscal
2001 was 32% and for the same quarter fiscal 2000 was 30%. This
increase in the income tax rate was primarily due to the completion of
several international related tax opportunities during fiscal 2000.
Liquidity and Capital Resources
-------------------------------
In the first three months of fiscal 2001, cash generated from earnings
before depreciation and amortization of $3.6 million, and proceeds from
the net increase in borrowings of $26.8 million were used primarily to
finance the cash portion of the Company's acquisition of Laser Power
Corporation for $23.8 million, an investment of $3.6 million in
property, plant and equipment, and payment of various compensation
costs relating to the Company's fiscal 2000 worldwide profit-driven
bonus programs. Cash transactions for the quarter plus cash on hand at
the beginning of the fiscal year resulted in a cash position of $4.0
million at September 30, 2000.
-12-
On August 23, 2000, the Company announced that its Board of Directors
had declared a two-for-one stock split of the Company's common stock in
the form of a 100% common stock dividend. The record date was
September 5, 2000 and the distribution date was September 20, 2000.
All share and per share amounts included in the Company's consolidated
financial statements have been restated to reflect the stock split for
all periods presented.
In October 2000, the Company borrowed an additional $4.0 million
against its available line of credit of $45.0 million to finance the
remaining cash portion of the Laser Power Corporation acquisition,
thereby reducing its unused available line of credit to $11.0 million.
The Company believes internally generated funds, existing cash reserves
and available borrowing capacity will be sufficient to fund its working
capital needs, capital expenditures and scheduled debt payments for
fiscal 2001.
Market Risks
------------
The Company is exposed to market risks arising from adverse changes in
interest rates and foreign currency exchange rates. In the normal
course of business, the Company uses a variety of techniques and
instruments as part of its overall risk management strategy. On August
14, 2000, the Company increased its borrowings an additional $25.0
million against its available line of credit, thus increasing the
Company's exposure to potential adverse changes in interest rates. A
change in the interest rate of 1% would have changed the interest
expense by approximately $30,000 for the quarter ended September 30,
2000.
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 projected growth
rates, markets, product development, financial position, capital
expenditures and foreign currency exposure. Forward-looking statements
are also identified by words such as "expects," "anticipates,"
"intends," "plans," "projects" or similar expressions.
Actual results could materially differ from such statements due to the
following factors: materially adverse changes in economic or industry
conditions generally (including capital markets) or in the markets
served by the Company, the development and use of new technology and
the actions of competitors.
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 most
recent Form 10-K as filed with the Securities and Exchange Commission
on September 27, 2000.
-13-
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
21.01 List of Subsidiaries
of II-VI Incorporated . . . . . . . Filed herewith.
27.01 Financial Data Schedule . . . . . . Filed herewith.
(b) Reports on Form 8-K.
On August 9, 2000, the registrant filed a report on
Form 8-K for the events dated August 9, 2000,
covering Items 2 and 7 thereof.
On August 23, 2000, the registrant filed a report
on Form 8-K for the events dated August 23, 2000,
covering Item 2 and 7 thereof.
On August 24, 2000, the registrant filed a report
on Form 8-K for the events dated August 14, 2000,
covering Item 5 thereof.
-14-
SIGNATURES
-----------
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 14, 2000 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
Date: November 14, 2000 By: /s/ Craig A. Creaturo
Craig A. Creaturo
Treasurer
-15-
EXHIBIT INDEX
-------------
Exhibit No.
-----------
21.01 List of Subsidiaries
of II-VI Incorporated. . . . . . . . . . . . .Filed herewith.
27.01 Financial Data Schedule. . . . . . . . . . . .Filed herewith.
-16-
