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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2007
or
[_] 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 0-13143
Innovex, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1223933
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3033 Campus Drive, Suite E180, Plymouth, MN 55441
(Address of principal executive offices)
(763) 383-4000 (Registrant's
telephone number, including area code)
(Former name, former address and former fiscal year if changed
since last report)
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.
[X] Yes [_] No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. (Check One):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
[_] Yes [X] No
As of July 23, 2007, 19,397,095 shares of the Company's common stock, $.04
par value per share, were outstanding.
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1
Index
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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Item 4 Controls and Procedures.
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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Item 6. Exhibits.
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SIGNATURES
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2
PART 1
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, September 30,
2007 2006
--------------- -------------
ASSETS
Current assets:
Cash and equivalents $ 9,672,575 $ 9,819,045
Accounts receivable, net 10,187,159 14,151,405
Inventories 9,968,822 12,009,288
Other current assets 2,671,599 2,544,926
--------------- --------------
Total current assets 32,500,155 38,524,664
Property, plant and equipment, net of accumulated depreciation of $49,469,000
and $52,784,000 40,688,951 51,560,241
Assets held for sale 2,091,055 --
Goodwill 3,000,971 3,000,971
Other assets 908,867 1,081,374
--------------- --------------
$ 79,189,999 $ 94,167,250
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,963,262 $ 9,044,726
Line of credit 13,626,520 --
Accounts payable 9,676,534 15,724,543
Accrued compensation 1,717,218 2,545,072
Other accrued liabilities 1,620,461 1,543,850
--------------- --------------
Total current liabilities 37,603,995 28,858,191
Long-term debt, less current maturities 17,618,502 19,800,255
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares authorized, 19,397,095 and
19,380,558 shares issued and outstanding 775,884 775,222
Capital in excess of par value 61,584,388 61,144,435
Retained earnings (Accumulated deficit) (38,392,770) (16,410,853)
--------------- --------------
Total stockholders' equity 23,967,502 45,508,804
--------------- --------------
$ 79,189,999 $ 94,167,250
=============== ==============
See accompanying notes to condensed consolidated financial statements.
3
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
------------------------------------------
June 30, 2007 July 1, 2006
----------------------- ------------------
Net sales $ 18,150,064 $ 38,890,811
Costs and expenses:
Cost of sales 19,612,363 35,926,890
Selling, general and administrative 2,835,808 3,573,197
Royalty expense 136,131 331,150
Engineering 765,556 1,274,764
Restructuring charges 1,369,182 597,152
Net (gain) loss on sale of assets 912,769 (2,672,691)
Interest expense 648,205 574,524
Interest income (32,217) (41,974)
Net other (income) expense 126,096 261,604
----------------------- ------------------
Income (loss) before taxes (8,223,829) (933,805)
Income taxes -- --
--------------------------------------------
Net income (loss) $ (8,223,829) $ (933,805)
============================================
Net income (loss) per share:
Basic $ (0.42) $ (0.05)
======================= ==================
Diluted $ (0.42) $ (0.05)
======================= ==================
Weighted average shares outstanding:
Basic 19,396,106 19,367,073
======================= ==================
Diluted 19,396,106 19,367,073
======================= ==================
Nine Months Ended
------------------------------------------------------
June 30, 2007 July 1, 2006
-------------------------- ---------------------------
Net sales $ 66,037,715 $ 140,938,042
Costs and expenses:
Cost of sales 66,949,486 124,294,069
Selling, general and administrative 8,992,772 11,560,978
Royalty expense 498,979 1,186,988
Engineering 2,578,473 4,035,012
Net asset impairment 789,867 9,134,234
Restructuring charges 5,098,929 2,769,434
Net (gain) loss on sale of assets 1,237,965 (2,868,981)
Interest expense 1,912,515 1,664,765
Interest income (145,922) (100,039)
Net other (income) expense 106,568 499,435
-------------------------- ---------------------------
Income (loss) before taxes (21,981,917) (11,237,853)
Income taxes -- --
-------------------------- ---------------------------
Net income (loss) $ (21,981,917) $ (11,237,853)
======================== ===========================
Net income (loss) per share:
Basic $ (1.13) $ (0.58)
======================== =========================
Diluted $ (1.13) $ (0.58)
======================== =========================
Weighted average shares outstanding:
Basic 19,386,526 19,277,432
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Diluted 19,386,526 19,277,432
========================== ===========================
See accompanying notes to condensed consolidated financial statements.
4
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------------------
June 30, 2007 July 1, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (21,981,917) $ (11,237,853)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,148,613 7,968,270
Asset impairment charges 789,867 9,131,804
Stock compensation expense 419,957 496,934
(Gain) loss on sale of assets 1,237,965 (2,868,981)
Other non-cash items 8,919 (426,794)
Changes in operating assets and liabilities:
Accounts receivable 3,964,246 13,905,232
Inventories 2,040,466 4,650,950
Other current assets (126,673) (973,059)
Other long term assets 169,875 2,536,618
Accounts payable (6,048,009) (5,101,083)
Accrued compensation and other accrued liabilities (751,243) (599,613)
------------------- --------------------
Net cash provided by (used in) operating activities (14,127,934) 17,482,425
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,154,093) (7,247,792)
Proceeds from sale of assets 4,751,596 5,344,204
------------------- --------------------
Net cash provided by (used in) investing activities 597,503 (1,903,588)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (10,963,285) (6,165,073)
Issuance of long-term debt 10,700,068 2,438,764
Net activity on line of credit 13,626,520 (12,728,277)
Proceeds from exercise of stock options and employee stock purchase
plan 20,658 406,170
------------------- --------------------
Net cash provided by (used in) financing activities 13,383,961 (16,048,416)
------------------- --------------------
Increase (decrease) in cash and equivalents (146,470) (469,579)
Cash and equivalents at beginning of period 9,819,045 12,914,110
------------------- --------------------
Cash and equivalents at end of period $ 9,672,575 $ 12,444,531
=================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,925,000 $ 1,716,000
Income taxes $ 11,000 $ --
5
INNOVEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions on Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The unaudited condensed
consolidated financial statements include the accounts of Innovex, Inc. and its
subsidiaries (the "Company") after elimination of all significant intercompany
transactions and accounts. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of operating results have been made. Operating results for interim periods are
not necessarily indicative of results that may be expected for the year as a
whole.
The Company utilizes a fiscal year that ends on the Saturday nearest to
September 30 which results in a 52 or 53 week year rather than a twelve-month
fiscal year. The Company's actual fiscal quarters end on the Saturday closest to
the end of the calendar quarter. All quarters presented in these financial
statements contain 13 weeks. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2006.
Preparation of the Company's condensed consolidated financial statements
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and related revenues and expenses. Actual
results could differ from these estimates.
NOTE 2 - RESTRUCTURING CHARGES
Litchfield restructuring:
On January 16, 2006, the Company announced a plan to move prototyping and high
volume manufacturing from its Litchfield, Minnesota facilities to its Lamphun,
Thailand facilities. On September 25, 2006, the Company expanded the previously
announced Litchfield restructuring to close the entire Litchfield facility and
move the remaining development efforts to its Thailand facilities. The plan
announced in September 2006 was to accelerate the end of life production for FSA
flexible circuits in Litchfield and discontinue use of that facility by the end
of April 2007. The plan also included acceleration of production end-of-life at
the Company's Eastlake, Ohio laminate material manufacturing facility. In June
2006, as part of the plan, the Company divested its low-volume etched metal
product line also located at its Litchfield facilities. In addition to closing
its Litchfield and Eastlake facilities, the Company continues to selectively
reduce its indirect labor and general and administrative expenses at both its
U.S. and Thailand locations. The restructuring was triggered by the Company's
need to reduce its cost structure in order to compete effectively and as a
result of its lower than expected level of revenue.
Asset impairment charges of $8.1 million and $2.0 million were recorded in the
first and fourth quarters, respectively, of fiscal 2006 for a total of $10.1
million. The assets that were impaired include the Litchfield facilities and
related equipment. The fair value of these assets was determined using appraised
values. Assets that were not transferred to Lamphun, Thailand were sold or
disposed. A $1.2 million loss on the sale or disposal of these assets was
recorded during the first nine months of fiscal 2007 including $900,000 in the
fiscal 2007 third quarter. There were no asset impairment charges in the first
nine months of fiscal 2007.
The Company has a purchase agreement to sell its Litchfield facilities for $2.4
million and the sale is expected to close during the fiscal 2007 fourth quarter.
The facilities have been presented as assets held for sale in the accompanying
balance sheet as of June 30, 2007. No additional restructuring charges are
expected.
Total cash related restructuring charges excluding asset impairments of
approximately $8.0 million are expected. The $8.0 million is comprised of $3.2
million for one-time termination benefits and $4.8 million related to moving and
closing costs associated with transferring portions of the Litchfield operation
to Thailand and the disposition of the Eastlake and Litchfield facilities not
being retained. Restructuring charges of $5.1 million related to the Litchfield
and Eastlake restructuring were recorded in the first nine months of fiscal
2007. These charges were comprised of $2.4 million for one time termination
benefits, $1.9 million for moving and closing costs and $0.8 million contract
termination costs related to the Eastlake facility lease. Total restructuring
charges through June 30, 2007 were $7.1 million. These charges were comprised of
$3.2 million for one time termination benefits, $3.1 million for moving and
closing costs and $0.8 million contract termination costs related to the
Eastlake facility lease.
Maple Plain restructuring:
During fiscal 2004, the Company recorded asset impairment and restructuring
charges of $13.1 million and $1.7 million related to the planned closure of the
Maple Plain facility and the plan to discontinue support of the FSA attachment
process. In fiscal 2005 additional restructuring charges of $2.8 million were
recorded related to the plan. During fiscal 2006, additional asset impairment
charges of approximately $1.0 million related to the disposition of the Maple
Plain assets and restructuring charges of approximately $1.6 million were
recorded under the restructuring plan. An asset impairment charge of $792,000
was recorded in the fiscal 2007 second quarter to reduce the book value of the
facility to its net realizable value as determined by a purchase agreement to
sell the facility. The Maple Plain facility was sold for $4.25 million in the
quarter ending June 30. 2007. The assets that were impaired included the Maple
Plain facility and related equipment and equipment used in the FSA attachment
process. The manufacturing operation has been transferred from the Maple Plain
facility to the Lamphun, Thailand facility.
6
Excluding asset impairment charges, restructuring charges were approximately
$6.1 million. The $6.1 million was comprised of $1.9 million for one-time
termination benefits, $0.4 million for contract termination costs and $3.8
million for other moving and closing costs associated with closing the Maple
Plain location.
NOTE 3 - NET INCOME (LOSS) PER SHARE
The Company's basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of outstanding common shares. The
Company's diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of outstanding common shares and common
share equivalents relating to stock options when dilutive. Options to purchase
2,093,170 and 1,978,652 shares of common stock were outstanding during the three
and nine month periods ending June 30, 2007, but were excluded from the
computation of common share equivalents because they were not dilutive. Options
to purchase 934,627 and 1,294,222 shares of common stock were outstanding during
the three and nine month periods ending July 1, 2006, but were excluded from the
computation of common share equivalents because they were not dilutive.
NOTE 4 - STOCK BASED COMPENSATION
The Company recorded $114,000 and $417,000 of related compensation expense for
the three and nine month periods ended June 30, 2007, respectively and $168,000
and $501,000 for the three and nine month periods ended July 1, 2006,
respectively. This expense is included in selling, general and administrative
expense. There was no tax benefit from recording this non-cash expense. The
compensation expense increased both basic and diluted net loss by $0.01 for the
three months ended June 30, 2007 and July 1, 2006, $0.02 for the nine months
ended June 30, 2007 and $0.03 for the nine months ended July 1, 2006. As of June
30, 2007, $1,001,000 of total unrecognized compensation costs related to
non-vested awards is expected to be recognized over a weighted average period of
approximately 1.4 years.
The Company uses the Black-Scholes option pricing model to determine the
weighted average fair value of options. The fair value of options at date of
grant and the assumptions utilized to determine such values are indicated in the
following table. No options were granted in the three months ended July 1, 2006.
No adjustment was made to the Black Scholes calculation to reflect that the
options are not freely traded:
Three Months Ended Nine Months Ended
June 30, July 1, 2006 June 30,
2007 2007 July 1, 2006
Risk-free interest rate 4.54% -- 4.53% 4.26%
Expected volatility 46% -- 48% 48%
Expected life (in years) 3.0 -- 3.0 3.0
Dividend yield -- -- -- --
Weighted average fair value of
options granted $0.66 -- $0.85 $1.18
The Company has options outstanding under its 1987 Employee Stock Option Plan
and its 1994 Stock Option Plan. The Company's stock option plans provide for
incentive and non-qualified stock options to be granted to directors, officers
and other key employees or consultants. The stock options granted generally have
a ten-year life, vest over a period of six months to five years, and have an
exercise price equal to the fair market value of the stock on the date of grant.
New shares are issued under existing registration statements upon exercise. At
June 30, 2007 the Company had 642,926 shares of common stock available for
issuance under the plans.
The Company also has a restricted stock plan that provides for grants of common
stock to key employees of the Company other than the Chief Executive Officer and
the four highest paid executives of the Company other than the Chief Executive
Officer. The common stock grants vest over three years. At June 30, 2007, the
Company had 107,300 shares of common stock available for issue under the plan.
7
Transactions under the stock option and restricted stock plans during the nine
months ended June 30, 2007 are summarized as follows:
Number of Weighted
Shares Under Average
Option Exercise Price
--------------------- ------------------
Outstanding at October 1, 2006 2,135,977 6.43
Granted 384,250 2.39
Forfeited (209,950) 7.00
Exercised (1,480) 1.84
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Outstanding at December 30, 2006 2,308,797 5.71
Granted 60,000 2.17
Forfeited (135,635) 9.30
Exercised -- --
---------------------
Outstanding at March 31, 2007 2,233,162 5.41
Granted 30,000 1.86
Forfeited (158,470) 6.00
Exercised (3,334) --
---------------------
Outstanding at June 30, 2007 2,101,358 5.32
=====================
The following table summarizes information concerning currently outstanding and
exercisable stock options:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------------- ------------------------- ----------------------- ------------------ -------------- -------------
$ 0.00 - $2.41 731,926 7.5 years $ 2.13 264,910 $ 1.88
2.70 - 4.84 724,460 7.4 years 3.70 280,219 3.90
5.28 - 9.80 402,422 5.4 years 8.41 313,397 8.15
11.49 - 11.51 103,900 1.3 years 11.50 103,900 11.50
12.59 - 13.79 103,650 3.4 years 13.05 101,650 13.05
28.75 - 28.82 35,000 0.2 years 28.77 35,000 28.77
------------------------- --------------
2,101,358 5.32 1,099,076 6.98
========================= ==============
NOTE 5 - INVENTORIES
Inventories are comprised of the following (in thousands):
June 30, September 30,
2007 2006
---------------- ----------------
Raw materials and purchased parts $ 3,300 $ 5,370
Work-in-process and finished goods 6,669 6,639
---------------- ----------------
$ 9,969 $ 12,009
================ =================
8
NOTE 6 - DERIVATIVE INSTRUMENTS - FOREIGN CURRENCY TRANSLATION
The Company enters into forward exchange contracts that are recorded at fair
value, with related fair value gains or losses recorded in income within the
caption net other (income) expense. Generally, these contracts have maturities
of six months or less. These contracts are entered into to offset the gains or
losses on foreign currency denominated assets and liabilities. The Company does
not enter into forward exchange contracts for trading purposes and the contracts
are not designated as hedges. At June 30, 2007, the Company had open forward
exchange contracts to sell US dollars in return for Thailand baht maturing on
July 9, 2007; July 10, 2007; July 16, 2007; August 6, 2007; November 9, 2007;
November 15, 2007; November 26, 2007; December 11, 2007; and December 19, 2007
with amounts of $1.5 million, $1.0 million, $1.7 million, $3.9 million, $12.6
million, $9.5 million, $1.8 million, $1.8 million and $2.2 million respectively,
for a total of $36.0 million.
Foreign currency translation gains or (losses) included in net other (income)
expense (in thousands):
Three months ended Nine months ended
-------------------------------- ---------------------------------
March 31, 2007 July 1, 2006 March 31, 2007 July 1, 2006
--------------- --------------- ---------------- ----------------
Gain or (loss) from forward exchange $ 340 $ 33 $ 2,506 $ 1,590
contracts
--------------- --------------- ---------------- ----------------
Other foreign currency gain or (loss) (475) (297) (2,627) (2,095)
--------------- --------------- ---------------- ----------------
Net gain or (loss) from foreign currency $ (135) $ (264) $ (121) $ (505)
transactions
=============== =============== ================ ================
NOTE 7 - REVENUE RECOGNITION
The Company makes electronic components (flexible circuits) based on customer
specifications. The Company's revenue recognition policy is consistently applied
regardless of sales channels utilized and product destination. In recognizing
revenue in any period, the Company applies the provisions of SEC Staff
Accounting Bulletin 104, "Revenue Recognition." Revenue from product sales is
recognized when persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed and determinable and collection of the
resulting receivable is reasonably assured.
For all sales, a binding purchase order is used as evidence of an arrangement.
The Company also stores inventory in warehouses (JIT hubs - third party owned
warehouses) that are located close to the customer's manufacturing facilities.
Revenue is recognized on sales from JIT hubs upon the transfer of title and risk
of loss, following the customer's acknowledgement of the receipt of the goods.
The Company has an implied warranty that the products meet the customer's
specification. Credits are issued for customer returns.
NOTE 8 - INCOME TAXES
The Company records income taxes in accordance with the liability method of
accounting. Deferred taxes are provided for temporary differences between the
financial reporting and tax bases of assets and liabilities. A valuation
allowance is established when the realization of a deferred tax asset becomes
less likely than not to occur. The valuation allowance is analyzed periodically
by the Company and may result in income tax expense different than statutory
rates. The Company's current deferred tax asset valuation allowance fully
offsets its deferred tax assets. With the exception of the Alternative Minimum
Tax and certain state taxes, the Company will not use cash for domestic income
taxes until its net operating losses are fully realized on its tax returns.
NOTE 9- RELATED PARTY TRANSACTIONS
Prior to March 7, 2006, the Company held 35% of the outstanding shares of
Applied Kinetics Inc. (AKI). On March 7, 2006, the Company entered into a
Settlement Agreement with AKI pursuant to which the parties dismissed with
prejudice their lawsuits against one another in exchange for redemption by AKI
of the 3,500 shares of AKI common stock owned by the Company and settlement of
all royalty and rebate amounts under the License Agreement for prior and future
periods.
AKI is a technology development company that focuses on manufacturing processes
related to disk drive components. AKI developed the manufacturing process
technology utilized by the Company's FSA products. AKI granted the Company a
license to use this technology in return for a royalty to be paid on the revenue
generated from the sale of these products. The Company had accounted for its
investment in AKI on the equity method. The Company did not record any gains or
losses on its AKI equity investment from the filing of its lawsuit against AKI
and certain AKI Shareholders in July 2005 through the settlement of the lawsuit
on March 7, 2006. The Company recorded a $6,000 loss related to the sale of its
equity holding in AKI as part of the March 7, 2006 settlement.
NOTE 10- LIQUIDITY
The Company has historically financed its operations primarily through cash from
operating activities, sales of equity securities, bank credit facilities and
employee stock option exercises. Cash and equivalents were $9.7 million at June
30, 2007 and $9.8 million at September 30, 2006. Long-term debt was $17.6
million at June 30, 2007 and $19.8 million at September 30, 2006 less current
maturities of $11.0 and $9.0, respectively. During the nine months ended June
30, 2007 and July 1, 2006, the Company incurred losses from continuing
operations of $22.0 million and $11.2 million, respectively. Operating
activities used $14.1 million and provided $17.5 million during the nine months
ended June 30, 2007 and July 1, 2006, respectively. As of June 30, 2007, the
Company had a working capital deficit of $5.1 million.
9
Total unused debt availability as of June 30, 2007 was approximately $8.6
million under the Company's long-term Thailand credit facilities and
approximately $21.1 million under its short-term packing credit and working
capital facilities.
The Company believes that with the existing Thailand credit facilities and cash
generated from operations, it will have adequate funds to support projected
working capital and capital expenditures for the next twelve months. The Company
is considering alternatives for generating additional working capital and
long-term financing and will continue to pursue financing opportunities to
better leverage its assets. The Company also filed a "shelf" registration
statement with the Securities and Exchange Commission on January 12, 2005 under
which it may offer up to an aggregate of 3,500,000 shares of its common stock in
one or more offerings from time to time. The Company's financing needs and the
financing alternatives available to it are subject to change depending on, among
other things, general economic and market conditions, changes in industry buying
patterns, customer demand for its AFC, stacked memory flex, FPD flex and other
new products, the Company's ability to meet its loan covenant requirements and
cash flow from operations.
NOTE 11- RECENT ACCOUNTING PRONOUNCEMENTS
Fair Value Option: The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 159, Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). This standard addresses
earnings volatility caused by existing accounting standards that require related
financial assets and liabilities to be measured using different measurement
attributes (such as historical cost and fair value). SFAS 159 is intended to
improve financial reporting by giving all entities the option to recognize most
financial assets and liabilities and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected should be reported in earnings. SFAS 159 is effective for the first
quarter of the Company's fiscal 2009 beginning October 1, 2008. We do not expect
SFAS 159 to have a material effect on our financial condition or results of
operations.
Accounting for Uncertainty in Income Taxes: In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109,
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides related guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure. FIN 48 is effective for the first quarter of the Company's fiscal
2009 beginning October 1, 2008. We are currently evaluating the impact of this
standard.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results
of operations in conjunction with the consolidated financial statements and
notes to those statements included in this report. This discussion may contain
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those described under the
heading "Risks Related to Our Business" in our Annual Report on Form 10-K for
the year ended September 30, 2006, as well as others not now anticipated.
We utilize a fiscal year that ends on the Saturday nearest to September 30. Each
quarter presented contains 13 weeks.
Overview
We are a leading worldwide provider of flexible circuit interconnect
solutions to OEMs in the electronics industry. We offer a full range of
customized flexible circuit applications and services from initial design,
development and prototype to fabrication, assembly and test on a global basis.
We target high-volume markets where miniaturization, form and weight are driving
factors and flexible circuits are an enabling technology. Applications for
flexible circuits currently addressed by us include data storage devices such as
hard disk drives, liquid crystal displays (LCDs) for mobile communication
devices, tape drives and arrays, flat panel displays (FPDs) and printers. Our
customers include Hitachi, HP, Philips/TPO, Quantum, SAE Magnetics (a subsidiary
of TDK), Samsung, Seagate, Staktek, StorageTek and other leading electronic
OEMs.
Net Sales and Revenue Recognition
10
We manufacture flexible circuits and perform certain additional assembly
and test functions on these flexible circuits based on customer specifications.
We sell our products directly throughout the world, primarily in North America,
Europe and the Pacific Rim countries. We use non-exclusive sales representatives
to augment our direct sales efforts. We recognize revenue from the sale of our
products upon shipment or delivery of our product to our customers, depending on
the customer agreement or shipping terms. We store some inventory in third party
owned warehouses that are located close to customers' manufacturing facilities.
Sales from third party warehouses are recognized upon the transfer of title and
risk of loss which follows the customer's acknowledgment of the receipt of the
goods.
Costs and Expenses
Cost of sales consists primarily of:
o material costs for raw materials and semi-finished components used for
assembly of our products;
o labor costs directly related to manufacture, assembly and inspection
of our products;
o costs of general utilities, production supplies and chemicals consumed
in the manufacturing processes;
o costs related to the maintenance of our manufacturing equipment and
facilities;
o costs related to material and product handling and shipment;
o depreciation costs related to facilities, machinery and equipment used
to manufacture, assemble and inspect our products; and
o salaries and overhead attributed to our supply chain, process
engineering and manufacturing personnel.
Selling, general and administrative expenses primarily consist of:
o salaries and related selling (commissions, travel, business
development and program management), administrative, finance,
human resources, regulatory, information services and executive
personnel expenses;
o other significant expenses related to external accounting,
software maintenance and legal and regulatory fees; and
o overhead attributed to our selling, general and administrative
personnel.
Engineering expenses include costs associated with the design, development
and testing of our products and processes. These costs consist primarily of:
o salaries and related development personnel expenses;
o overhead attributed to our development and test engineering
personnel; and
o prototyping costs related to the development of new products.
Restructuring charges are those costs primarily related to manufacturing
facility closures, severance and product discontinuations. On January 16, 2006,
we announced a plan to retain a portion of our Litchfield operation as a product
development center while transferring high volume manufacturing operations to
Thailand and divesting the remaining portions of the Litchfield, Minnesota
operation. On September 25, 2006, we announced a plan to accelerate the end of
life production for our FSA flexible circuits in Litchfield and discontinue the
use of that facility by the end of March 2007. The plan also included
acceleration of end of life production of flexible circuit laminate material at
our Eastlake, Ohio facility and a reduction of indirect labor and general and
administrative expenses at our other U.S. and Thailand locations. In the third
quarter of fiscal 2004, we announced the planned closure of our Maple Plain,
Minnesota facility and the plan to discontinue the support of the FSA attachment
process once all current program qualifications have reached their end of life.
Results of Operations
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
For the Three Months Ended For the Nine Months Ended
------------------------------ --------------------------
July 1, 2006 June 30, 2007 July 1, June 30,
2006 2007
-------------- -------------- ------------ ------------
Net Sales 100% 100% 100% 100%
Cost of goods sold 92.4 108.1 88.2 101.4
-------------- -------------- ------------ ------------
Gross profit 7.6 (8.1) 11.8 (1.4)
Operating expenses:
Selling, general and administrative and
royalty expense 10.0 16.4 9.0 14.4
Engineering 3.3 4.2 2.9 3.9
Restructuring and asset impairment 1.5 7.5 8.4 8.9
Net (gain) loss on sale of assets (6.9) 5.0 (2.0) 1.9
-------------- -------------- ------------ ------------
Total operating expenses 7.9 33.1 18.3 29.1
-------------- -------------- ------------ ------------
Income (loss) from operations (0.3) (41.2) (6.5) (30.5)
-------------- -------------- ------------ ------------
Interest and other expense, net (2.1) (4.1) (1.5) (2.8)
-------------- -------------- ------------ ------------
Income (loss) before provision (benefit) for
income taxes (2.4) (45.3) (8.0) (33.3)
Provision (benefit) for income taxes -- -- -- --
-------------- -------------- ------------ -----------
Net income (loss) (2.4)% (45.3)% (8.0)% (33.3)%
============== ============== ============ ============
11
Comparison of Three Months Ended June 30, 2007 and July 1, 2006
Net Sales
Our net sales were $18.2 million for the three months ended June 30, 2007,
compared to $38.9 million for the three months ended July 1, 2006, a decrease of
53%. This decrease primarily reflects lower flex suspension assembly (FSA)
revenue and lower actuator flex circuit (AFC) revenue. The decline in FSA
revenue to $8.9 million in the fiscal 2007 third quarter from $23.4 million in
the prior year reflects our FSA customer's transition to its next generation of
desktop disk drive products which use an alternative technology. AFC revenue was
lower than the prior year period as a result of a new generation of AFC programs
ramping up in fiscal 2006. The AFC programs that ramped up in fiscal 2006 began
declining in the fiscal 2007 second quarter and continued to decline in the
fiscal 2007 third quarter while our ramp up of a new generation large volume
program did not begin until late in the fiscal 2007 third quarter. While we
expect FSA revenue to continue to decrease during fiscal 2007 and fiscal 2008 as
the disk drive industry completes the transition to its next generation of
products, we expect increases in AFC and flat panel display (FPD) revenue in the
fiscal 2007 fourth quarter as compared to the fiscal 2007 third quarter as new
programs reach volume production.
FSA sales to the disk drive industry generated 49% of our net sales for the
three months ended June 30, 2007, compared to 60% for the three months ended
July 1, 2006. Sales of AFC's to the disk drive industry were 31%, compared to
27%, FPD application net sales were 14% compared to 5%, sales from integrated
circuit packaging, network system application and sales from other industry
applications were 6% and 8% for the three months ended June 30, 2007 and July 1,
2006, respectively.
Gross Profit (Loss)
Our gross loss was $1.5 million for the three months ended June 30, 2007
compared to a gross profit of $3.0 million for the three months ended July 1,
2006. Our gross margin for the three months ended June 30, 2007 decreased to
(8.1%), from 7.6% for the three months ended July 1, 2006. The decrease in gross
profit and gross margin as compared to the prior year reflects the decreased
fixed cost absorption driven by lower revenue resulting in a higher level of
excess manufacturing capacity. Spending levels were lower as a result of cost
reductions related to the transfer of operations from the U.S. facilities to our
Thailand facilities, but not low enough to offset the impact of the lower
revenue. We expect to return to a gross profit and we expect gross margins to
improve during the fiscal 2007 fourth quarter as revenue increases and further
cost benefits of transitioning our manufacturing operation from the U.S to
Thailand are realized.
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the three months ended June 30, 2007 were $3.0 million, compared to $3.9 million
in the three months ended July 1, 2006, a decrease of 24%. As a percentage of
net sales, selling, general and administrative expenses were 16% for the three
months ended June 30, 2007, up from 10% for the same period in the prior year.
Royalty expense was lower compared with the prior year as a result of lower FSA
revenue which is royalty bearing. The dollar decrease in selling, general and
administrative expenses from the prior year primarily reflects lower payroll
expenses related to reductions in U.S. sales and administrative positions. The
increase as a percentage of net sales from the prior year primarily reflects the
decrease in revenue. Selling, general and administrative expenses for the
remainder of fiscal 2007 are expected to decrease slightly from the fiscal 2007
third quarter.
12
Engineering
Engineering expenses for the three months ended June 30, 2007 were
$800,000, compared to $1.3 million for the three months ended July 1, 2006, a
decrease of 40%. The decrease was primarily the result of reducing or
transferring engineering positions to our lower salary base Thailand facility as
a result of closing our U.S. facilities. As a percentage of net sales,
engineering expenses were 4% of sales for the three months ended June 30, 2007
compared to 3% for the same period in the prior year.
Restructuring
Litchfield restructuring:
On January 16, 2006, we announced a plan to move prototyping and high volume
manufacturing from our Litchfield, Minnesota facilities to our Lamphun, Thailand
facilities. On September 25, 2006, we expanded the previously announced
Litchfield restructuring to close the entire Litchfield facility and move the
remaining development efforts to our Thailand facilities. The plan announced in
September 2006 was to accelerate the end of life production for FSA flexible
circuits in Litchfield and discontinue use of that facility by the end of April
2007. The plan also included acceleration of production end-of-life at our
Eastlake, Ohio laminate material manufacturing facility. In June 2006, as part
of the plan, we divested our low-volume etched metal product line also located
at our Litchfield facilities. In addition to closing our Litchfield and Eastlake
facilities, we continue to selectively reduce our indirect labor and general and
administrative expenses at both our U.S. and Thailand locations. The
restructuring was triggered by our need to reduce our cost structure in order to
compete effectively and as a result of our lower than expected level of revenue.
We expect actions related to the expanded restructuring plan to be substantially
completed prior to the end of fiscal 2007. These actions should result in an
annual operating expense reduction of approximately $18 million, which will be
realized in subsequent years. The estimated savings of $18 million is based on a
comparison of the fixed cost structure in place on December 31, 2005 to our
estimated fixed cost structure for the fourth quarter of fiscal 2007 after
completion of the planned restructuring. Approximately $17.0 million of the
projected savings are expected to have a positive impact on cash flow upon
realization. These cash related savings are comprised of $12.0 million related
to compensation reductions and $5 million related to other spending. The $1.0
million remaining savings are expected to be depreciation related and have no
impact on cash flow.
Through June 30, 2007, the planned annualized operating cost savings of
approximately $18.0 million have been realized, primarily comprised of
compensation savings of $12.0 million, other operating cost savings of $5.0
million and depreciation savings of $1.0 million. The impact of these reductions
on our fixed cost basis has not been evident in our operating results as a
result of concurrent reductions in revenue.
Asset impairment charges of $8.1 million and $2.0 million were recorded in the
first and fourth quarters, respectively, of fiscal 2006 for a total of $10.1
million. The assets that were impaired include the Litchfield facilities and
related equipment. The fair value of these assets was determined using appraised
values. The fair value of the Litchfield facility impairment was determined from
an independent appraisal performed by Ruhland Commercial Consultants, Ltd. The
fair value of the equipment located at the facilities was determined from
appraisals performed by Asset Reliance International, LLC. Assets that were not
transferred to Lamphun, Thailand were sold or disposed. A $900,000 loss on the
sale of assets was recorded during the fiscal 2007 third quarter as the
remaining assets were sold. Capital expenditures of less than $1 million are
expected related to the plan. These expenditures would primarily increase
selected capacity and capabilities at the Lamphun, Thailand facilities.
Manufacturing operations were completed in the Eastlake facility in February
2007 and decommission of the facility is expected to be complete by the end of
July 2007. Manufacturing operations in the Litchfield facilities were completed
during April 2007 and decommission of the facilities was completed by the end of
the fiscal 2007 third quarter. A purchase agreement has been signed to sell the
Litchfield facilities for $2.4 million. The sale is expected to close during the
fiscal 2007 fourth quarter. Efforts are being made to sublease the Eastlake
facility in fiscal 2007.
Total cash related restructuring charges excluding asset impairments of
approximately $8.0 million are expected. The $8.0 million is comprised of $3.2
million for one-time termination benefits and $4.8 million related to moving and
closing costs associated with transferring portions of the Litchfield operation
to Thailand and the disposition of the Eastlake and Litchfield facilities not
being retained. Restructuring charges of $1.4 million related to the Litchfield
and Eastlake restructuring were recorded in the third quarter of fiscal 2007.
These charges were comprised of $280,000 for one time termination benefits and
$1.1 million for moving and closing costs. Total restructuring charges through
June 30, 2007 were $7.1 million. These charges were comprised of $3.2 million
for one time termination benefits, $3.1 million for moving and closing costs and
$768,000 contract termination costs related to the Eastlake facility lease.
13
The restructuring plan calls for the elimination of 320 positions in the U.S.
and Thailand consisting of 90 direct labor positions, 173 indirect labor
production support positions and 57 administrative positions. As of June 30,
2007, 318 positions have been eliminated and the overall restructuring plan
remains substantially unchanged.
Maple Plain restructuring:
During fiscal 2004, we recorded asset impairment and restructuring charges
of $13.1 million and $1.7 million related to the planned closure of the Maple
Plain facility and the plan to discontinue support of the FSA attachment
process. In fiscal 2005 additional restructuring charges of $2.8 million were
recorded related to the plan. During fiscal 2006, additional asset impairment
charges of approximately $1.0 million related to the disposition of the Maple
Plain assets and restructuring charges of approximately $1.6 million were
recorded under the restructuring plan. The assets that were impaired included
the Maple Plain facility and related equipment and equipment used in the FSA
attachment process. The manufacturing operation has been transferred from the
Maple Plain facility to the Lamphun, Thailand facility.
In order to reduce our cost structure, we closed our Maple Plain facility
and consolidated its operations with our Lamphun, Thailand facility. In
addition, we planned to discontinue supporting the FSA attachment process in
order to utilize our resources in other growth areas where we believe we have an
advantage. Excluding asset impairment charges, restructuring charges were
approximately $6.1 million. The $6.1 million was comprised of $1.9 million for
one-time termination benefits, $0.4 million for contract termination costs and
$3.8 million for other moving and closing costs associated with closing the
Maple Plain location.
Through June 30, 2007, annualized operating cost savings of approximately
$9.5 million have been realized primarily comprised of cash related compensation
and other savings of $6 million on an annual basis and depreciation savings of
$3.5 million on an annual basis. An additional expected benefit of $0.5 million
should be realized as the FSA product line reaches its end of life.
Net (Gain) Loss on the Sale of Assets
Net loss on the sale of assets was $913,000 for the three months ended June
30, 2007 compared to a net gain on the sale of assets of $2.7 million for the
three months ended July 1, 2006. The change was a result of the loss generated
on the sale or disposal of the remaining U.S equipment that was not transferred
to Thailand in the fiscal 2007 third quarter while the fiscal 2006 third quarter
including a gain from the sale of the business, facility and assets of our
Litchfield etched metal components business.
Net Interest and Other Expense
Net interest expense was $0.6 million for the three months ended June 30,
2007 and July 1, 2006. Net other expense was $126,000 in the three months ended
June 30, 2007 as compared to $262,000 in the three months ended July 1, 2006.
The change was a result of lower foreign currency valuation losses being
recorded in fiscal 2007 as compared to fiscal 2006.
Income Taxes
No net income tax expense or benefit was recorded for the three months
ended June 30, 2007 and July 1, 2006 as the deferred tax valuation allowance was
increased to offset the tax benefit generated during the quarter. The deferred
tax assets continue to be fully reserved.
Comparison of Nine Months Ended June 30, 2007 and July 1, 2006
Net Sales
Our net sales were $66.0 million for the nine months ended June 30, 2007,
compared to $140.9 million for the nine months ended July 1, 2006, a decrease of
53%. This decrease primarily reflects lower FSA revenue and lower FPD revenue.
The decline in FSA revenue to $35 million in the first nine months of fiscal
2007 from $83 million in the prior year reflects our FSA customer's transition
to its next generation of desktop disk drive products which use an alternative
technology. FPD revenue was lower than the prior year period as a result of our
largest FPD customer experiencing lower demand from its customers and slower
than expected new program transitions.
14
FSA sales to the disk drive industry generated 52% of our net sales for the
nine months ended June 30, 2007, compared to 59% for the nine months ended July
1, 2006. Sales of AFC's to the disk drive industry were 34%, compared to 19%,
FPD application net sales were 8% compared to 16%, sales from integrated circuit
packaging, network system application and sales from other industry applications
were 6% for the nine months ended June 30, 2007 and July 1, 2006, respectively.
Gross Profit
Our gross loss was $912,000 for the nine months ended June 30, 2007,
compared to a gross profit of $16.6 million for the nine months ended July 1,
2006. Our gross margin for the nine months ended June 30, 2007 decreased to
(1.4%) from 11.8% for the nine months ended July 1, 2006. The decrease in gross
profit and gross margin as compared to the prior year reflects the decreased
fixed cost absorption driven by lower revenue resulting in a higher level of
excess manufacturing capacity. Spending levels were lower as a result of cost
reductions related to the transfer of operations from the U.S. facilities to our
Thailand facilities, but not low enough to offset the impact of the lower
revenue.
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the nine months ended June 30, 2007 were $9.5 million, compared to $12.7 million
in the nine months ended July 1, 2006, a decrease of 26%. As a percentage of net
sales, selling, general and administrative expenses were 14% for the nine months
ended June 30, 2007 and 9% for the nine months ended July 1, 2006. The dollar
decrease in selling, general and administrative expenses from the prior year
primarily reflects lower payroll expenses related to reductions in U.S. sales
and administrative positions and a $400,000 reduction in accrued incentive
compensation. The increase as a percentage of net sales from the prior year
primarily reflects the decrease in revenue.
Engineering
Engineering expenses for the nine months ended June 30, 2007 were $2.6
million, compared to $4.0 million for the nine months ended July 1, 2006, a
decrease of 36%. The decrease was primarily the result of transferring
engineering positions to our lower salary base Thailand facility as a result of
closing our U.S. facilities. As a percentage of net sales, engineering expenses
were 4% of sales for the nine months ended June 30, 2007 and 3% of sales for the
nine months ended July 1, 2006.
Restructuring
Litchfield restructuring:
As discussed above, on January 16, 2006, we announced a plan to move prototyping
and high volume manufacturing from our Litchfield, Minnesota facilities to our
Lamphun, Thailand facilities. On September 25, 2006, we expanded the previously
announced Litchfield restructuring to close the entire Litchfield facility and
our Eastlake, Ohio facility. Restructuring charges of $5.1 million were recorded
during the first nine months of fiscal 2007 related to the Litchfield
restructuring. These charges were comprised of $2.4 million for one time
termination benefits, $1.9 million for moving and closing costs and $0.8 million
contract termination costs related to the Eastlake facility lease. Restructuring
charges of $1.2 million were recorded during the first nine months of fiscal
2006 related to the Litchfield restructuring. These charges were comprised of
$630,000 for one time termination benefits and $540,000 for moving and closing
costs. Asset impairment charges of $8.1 million were recorded in the first
quarter of fiscal 2006 related to the Litchfield facilities and related
equipment.
Maple Plain restructuring:
An asset impairment charge of $792,000 was recorded in the fiscal 2007 second
quarter to reduce the book value of the facility to its net realizable value.
During the first nine months of fiscal 2006, restructuring charges of $1.6
million were recorded under the restructuring plan related to closing the Maple
Plain facility and the discontinuation of support of the FSA attachment process.
These charges were primarily related to moving and closing costs.
Net (Gain) Loss on the Sale of Assets
Net loss on the sale of assets was $1.2 million for the nine months ended
June 30, 2007 compared to a net gain on the sale of assets of $2.9 million for
the nine months ended July 1, 2006. The change was a result of the loss
generated in the first nine months of fiscal 2007 on the sale or disposal of the
remaining U.S equipment that was not transferred to Thailand while the first
nine months of fiscal 2006 including a gain from the sale of the business,
facility and assets of our Litchfield etched metal components business.
15
Net Interest and Other Expense
Net interest expense was $1.9 million for the nine months ended June 30,
2007 and $1.7 million for the nine months ended July 1, 2006. The increase is
the result of higher average levels of debt outstanding during fiscal 2007. Net
other expense was $107,000 in the nine months ended June 30, 2007 as compared to
$499,000 in the nine months ended July 1, 2006. The change was a result of a
lower loss on foreign currency valuation in fiscal 2007.
Income Taxes
No net income tax expense or benefit was recorded for the nine months ended
June 30, 2007 and July 1, 2006 as the deferred tax valuation allowance was
increased to offset the tax benefit generated during the period. The deferred
tax assets continue to be fully reserved.
Critical Accounting Policies
Our significant accounting policies are described in Note A to the
Consolidated Financial Statements and the Management's Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report
for the year ended September 30, 2006. The accounting policies used in preparing
our interim 2007 Consolidated Financial Statements are the same as those
described in our Annual Report.
Liquidity and Capital Resources
We have historically financed our operations primarily through cash from
operating activities, sales of equity securities, bank credit facilities and
employee stock option exercises. Cash and equivalents were $9.7 million at June
30, 2007 and $9.8 million at September 30, 2006. As of June 30, 2007, the
Company had a working capital deficit of $5.1 million.
For the nine months ended June 30, 2007, net cash used in operating
activities of $14.1 million primarily resulted from the net loss for the period
net of non-cash charges. The decreases in accounts receivable and inventory
offset the decrease in accounts payable. Accounts receivable, inventory and
accounts payable all decreased primarily related to lower revenue in the fiscal
2007 third quarter as compared to the fiscal 2006 fourth quarter. A large
portion of the lower revenue was related to the FSA product which contains a
pass-through material component that makes up a large portion of the product
cost and drives higher levels of revenue, receivables, inventory and payables
than other products.
Net cash provided by investing activities was $0.6 million in the first
nine months of fiscal 2007, compared to net cash used in investing activities of
$1.9 million in the first nine months of fiscal 2006. In fiscal 2007, net cash
provided by investing activities was attributed to the $4.8 million proceeds
from the sale of the U.S based assets including the Maple Plain facility more
than offsetting capital spending related to process improvements at our Thailand
facility. Fiscal 2006 net cash used in investing activities was attributed to
the expansion of our Thailand facility.
Net cash provided by financing activities was $13.4 million in the first
nine months of fiscal 2007, compared to net cash used in financing activities of
$16.0 million in the first nine months of fiscal 2006. Fiscal 2007 net cash
provided by financing activities was the result of the $13.6 million borrowed
under our short-term Thailand packing credit facilities and a $8.4 million draw
down under our new long term Thailand credit facilities and a $2.3 million
increase in the U.S. dollar foreign exchange valuation of the Thailand baht
denominated debt partially offset by the $4 million pay down of the US facility
from the Maple Plain facility sale proceeds and scheduled debt payments on our
existing Thailand debt facilities and US based debt and capital leases. For the
first nine months of fiscal 2006, net cash used in financing activities was
primarily related to the $12.7 million pay down of the balance outstanding on
our short-term Thailand revolving packing credit facility made possible by the
cash provided by operations.
In December 2006, we entered into a new credit facility with Bank of
Ayudhya Public Company Limited (BAY) and TMB Bank Public Company Limited (TMB)
which expanded our existing credit facilities with these banks. The new Third
Credit Facilities Agreement provides for an additional 600 million baht facility
to be used for procurement of equipment within 24 months from the December 19,
2006 effective date. We drew down approximately $8.4 million under this new
credit facility in the first nine months of fiscal 2007. In June 2004, we
entered into the Second Credit Facilities Agreement with BAY and TMB which
expanded the existing credit facility with these banks. The Second Credit
Facilities Agreement is now comprised of a 660 million baht long-term facility,
a 400 million baht long-term facility, packing credit facilities totaling 1,100
million baht, short-term working capital facilities totaling 90 million baht and
a 10 million baht overdraft facility. The Thailand facilities are secured by
certain receivables, inventory and assets held by us in Thailand. As of June 30,
2007, we had approximately $27.3 million outstanding under our long-term
Thailand credit facilities and a 13.6 million outstanding balance under our
short-term Thailand credit facilities. Total unused availability as of June 30,
2007 was approximately $8.6 million under our long-term Thailand credit
facilities and approximately $21.1 million under our short-term packing credit
and working capital facilities. Utilization of the $8.6 million available under
our long-term credit facility is based on capital expenditures and utilization
of our packing credit facility availability is based on qualifying customer
purchase orders. Drawdowns under the As of June 30, 2007, we were in compliance
with covenants under our Thailand credit facilities.
16
In January 2005, we entered into a financing agreement with US Federal
Credit Union under which we borrowed $4.0 million. An additional $3.1million was
borrowed under that agreement on April 15, 2005. In addition to normally
scheduled payments, a principal payment of $1.5 million was made on June 27,
2006 related to sale of the business, facility and assets of our etched metal
components business. An additional principal payment of $4 million was made on
May 18, 2007 related to the sale of the Maple Plain facility. As of June 30,
2007, $1.2 million was outstanding under our US Federal credit facility. The
note is due February 1, 2010 with principal amounts under the arrangement
bearing interest at a rate of 7% per annum. Payments under the underlying note
are calculated using a 25 year amortization with the remaining principal amount
due at maturity. The note is secured by our Litchfield facilities and any
proceeds from the sale of those facilities will be used to pay down the
outstanding note balance.
We believe that with the existing Thailand credit facilities and cash
generated from operations, we will have adequate funds to support projected
working capital and capital expenditures for the next twelve months. We are
considering alternatives for generating additional working capital and long-term
financing and will continue to pursue financing opportunities to better leverage
our assets. We also filed a "shelf" registration statement with the Securities
and Exchange Commission on January 12, 2005 under which we may offer up to an
aggregate of 3,500,000 shares of our common stock in one or more offerings from
time to time. Our financing needs and the financing alternatives available to us
are subject to change depending on, among other things, general economic and
market conditions, changes in industry buying patterns, customer demand for our
AFC, stacked memory flex, FPD flex and other new products, our ability to meet
our loan covenant requirements and cash flow from operations.
Contractual Obligations
The table below discloses a summary of the Company's specified contractual
obligations at March 31, 2007 (in thousands):
Under 1 Year 1 to 3 Years 3 to 5 Years After 5 Years Total
------------- ------------- ------------- -------------- -------------
Long-term Debt Obligations (1) $ 11,025 $ 15,328 $ 2,305 -- $ 28,658
Operating Leases 286 516 257 -- 1,059
------------- ------------- ------------- -------------- -------------
Total $ 11,311 $ 15,844 $ 2,562 -- $ 29,717
============= ============= ============= ============== =============
(1) Includes interest at a fixed rate of 7% on a portion of the debt and
excludes interest on all debt with variable interest rates.
Recent Accounting Pronouncements
Fair Value Option: The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 159, Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). This standard addresses
earnings volatility caused by existing accounting standards that require related
financial assets and liabilities to be measured using different measurement
attributes (such as historical cost and fair value). SFAS 159 is intended to
improve financial reporting by giving all entities the option to recognize most
financial assets and liabilities and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected should be reported in earnings. SFAS 159 is effective for the first
quarter of our fiscal 2009 beginning October 1, 2008. We do not expect SFAS 159
to have a material effect on our financial condition or results of operations.
Accounting for Uncertainty in Income Taxes: In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109,
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides related guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure. FIN 48 is effective for the first quarter of our fiscal 2009
beginning October 1, 2008. We are currently evaluating the impact of this
standard.
Forward Looking Statements
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, elsewhere in this report and in
future filings by the Company with the SEC, except for the historical
information contained herein and therein, are "forward-looking statements" that
involve risks and uncertainties. These risks and uncertainties include those
described under Part I, Item 1A, "Risk Factors" as our Annual Report on Form
10-K for the year ended September 30, 2006, as well as: the increased
utilization by our largest customer of alternative interconnect technologies
that compete with our FSA product, AFC revenue may not increase enough to offset
decreases in our FSA revenue, any interruption in the operations of the
Company's single source suppliers or any failure of any of the Company's single
source suppliers to timely deliver an adequate supply of components, the risk
related to the transfer of manufacturing operations from our Litchfield
facilities to our Thailand facilities, the timely availability and acceptance of
new products, the impact of competitive products and pricing, changes in our
customers' market share, changes in manufacturing efficiencies and other risks
detailed from time to time in our reports filed with the Securities and Exchange
Commission. In addition, a significant portion of the our revenue is generated
from the disk drive, flat panel display, stacked memory substrate, consumer
electronics and data storage industries and the global economic softness has had
and may have in the future, an adverse impact on our operations. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
subsequent events or circumstances or the occurrence of unanticipated events.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates and foreign currency exchange rates. These exposures may change
over time as business practices evolve and could have a material adverse impact
on our business, financial condition and results of operations.
Our earnings and cash flows are subject to fluctuations resulting from
changes in foreign currency exchange rates. While we transact business primarily
in U.S. dollars, a portion of our sales and expenses are denominated in foreign
currencies. Changes in the relation of foreign currencies to the U.S. dollar
will affect our cost of sales and operating margins and could result in exchange
gains or losses. To reduce the impact of certain foreign currency fluctuations,
we enter into short-term forward foreign currency exchange contracts in the
regular course of business to manage our risk exposure, not as speculative
instruments. Typically, these contracts have maturities of 6 months or less. The
forward exchange contracts generally require us to exchange Thailand baht for
U.S. dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to
at inception of the contracts. These contracts are not designated as hedges,
therefore, the gains and losses on foreign currency transactions are included in
income.
We periodically review the outlook for expected currency exchange rate
movements as well as the policy on desired future foreign currency cash flow
positions (long, short or balanced) for those currencies in which we have
significant activity. Expected future cash flow positions and strategies are
continuously monitored. At June 30, 2007, the Company had open forward exchange
contracts to sell US dollars in return for Thailand baht maturing on July 9,
2007; July 10, 2007; July 16, 2007; August 6, 2007; November 9, 2007; November
15, 2007; November 26, 2007; December 11, 2007; December 19, 2007 with amounts
of $1.5 million, $1.0 million, $1.7 million, $3.9 million, $12.6 million, $9.5
million, $1.8 million, $1.8 million and $2.2 million respectively, for a total
of $36.0 million. No assurance can be given that our strategies will prevent
future currency fluctuations from adversely affecting our business, financial
condition and results of operations.
We are exposed to interest rate risk as a large portion of our
interest-bearing debt is subject to interest rates which fluctuate with changes
in market interest rates or are periodically reset based on market interest
rates. A large change in market interest rates could have an adverse impact on
our business, financial condition and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer, William P. Murnane, and Principal
Financial Officer, Douglas W. Keller, have evaluated the Company's disclosure
controls and procedures as of the end of the period covered by this report.
Based upon this review, they have concluded that these controls and procedures
are effective.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during the fiscal period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
Responses to Items 1A through 5 are omitted since these items are either
inapplicable or the response thereto would be negative.
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ITEM 1. LEGAL PROCEEDINGS
We are party to certain lawsuits in the ordinary course of business. We do
not believe that these proceedings, individually or in the aggregate, will have
a material adverse effect on our business, financial condition or results of
operations.
ITEM 6. EXHIBITS
The following exhibits are included herein:
31.1 Certification of Chief Executive Officer pursuant Rules 13a-14 and
15d-14 of the Exchange Act.
31.2 Certification of Principal Financial Officer pursuant Rules 13a-14
and 15d-14 of the Exchange Act.
32 Certificate pursuant to 18 U.S.C. Section 1350.
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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.
INNOVEX, INC.
Date: August 2, 2007
By /s/ William P. Murnane
-------------------------
William P. Murnane
President and Chief Executive Officer
By /s/ Douglas W. Keller
----------------------
Douglas W. Keller
Principal Financial Officer
20