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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 December 29, 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, a non-accelerated filer or a smaller reporting
company. See definition of "accelerated filer" and "large accelerated filer" in
rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_|
Smaller reporting company |X|
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 January 28, 2008, 19,407,966 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
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and Results of Operations.
--------------------------
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)
December 29, September 29,
2007 2007
---------------- ----------------
ASSETS
------
Current assets:
Cash and equivalents $ 7,816,761 $ 10,453,803
Accounts receivable, net 14,292,899 13,742,477
Inventories 10,665,948 11,055,082
Other current assets 2,148,211 2,460,199
---------------- ----------------
Total current assets 34,923,819 37,711,561
Property, plant and equipment, net of accumulated depreciation of $51,118,000 and
$49,239,000 37,280,660 38,814,960
Assets held for sale 2,028,293 2,058,308
Other assets 672,332 775,593
---------------- ----------------
$ 74,905,104 $ 79,360,422
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 11,217,203 $ 11,049,170
Line of credit 29,022,011 20,433,958
Accounts payable 11,468,257 14,865,174
Accrued compensation 547,273 1,805,567
Other accrued liabilities 2,393,304 1,729,392
---------------- ----------------
Total current liabilities 54,648,048 49,883,261
Long-term debt, less current maturities 14,094,012 15,548,964
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares authorized, 19,407,966 and
19,407,966 shares issued and outstanding 776,319 776,319
Capital in excess of par value 61,821,801 61,709,491
Retained earnings (Accumulated deficit) (56,435,076) (48,557,613)
---------------- ----------------
Total stockholders' equity 6,163,044 13,928,197
---------------- ----------------
$ 74,905,104 $ 79,360,422
================ ================
See accompanying notes to condensed consolidated financial statements.
3
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
---------------------------------------------------------------------------------------------------
Three Months Ended
--------------------------------------------
December 29, 2007 December 30, 2006
--------------------- ----------------------
Net sales $ 20,795,159 $ 26,016,841
Costs and expenses:
Cost of sales 21,812,800 25,497,491
Selling, general and administrative 2,547,195 3,158,332
Royalty expense 108,031 206,140
Engineering 685,326 999,799
Restructuring charges 2,251,070 1,841,319
Net (gain) loss on sale of assets 799 (11,253)
Interest expense 738,004 569,830
Interest income (55,405) (36,145)
Net other (income) expense 584,801 117,284
--------------------- ----------------------
Income (loss) before taxes (7,877,462) (6,325,956)
Income taxes -- --
--------------------------------------------
Net income (loss) $ (7,877,462) $ (6,325,956)
============================================
Net income (loss) per share:
Basic $ (0.41) $ (0.33)
===================== ======================
Diluted $ (0.41) $ (0.33)
===================== ======================
Weighted average shares outstanding:
Basic 19,407,966 19,381,435
===================== ======================
Diluted 19,407,966 19,381,435
===================== ======================
See accompanying notes to condensed consolidated financial statements.
4
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
-------------------------------------------
December 29, 2007 December 30, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,877,462) $ (6,325,956)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,935,758 2,115,318
Stock compensation expense 111,767 147,075
Other non-cash items -- (11,253)
Changes in operating assets and liabilities:
Accounts receivable (550,422) 1,788,026
Inventories 389,134 571,511
Other current assets 311,988 (883,675)
Other long term assets 101,204 139,574
Accounts payable (3,396,917) (2,304,854)
Accrued compensation and other accrued liabilities (594,382) (117,987)
--------------------- ---------------------
Net cash provided by (used in) operating activities (9,569,332) (4,882,221)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (369,386) (2,239,838)
Proceeds from sale of assets -- 16,445
--------------------- ---------------------
Net cash provided by (used in) investing activities (369,386) (2,223,393)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (2,748,745) (1,724,482)
Issuance of long-term debt 1,461,826 8,986,889
Net activity on line of credit 8,588,052 5,786,377
Proceeds from exercise of stock options and employee stock purchase plan 543 2,719
--------------------- ---------------------
Net cash provided by (used in) financing activities 7,301,676 13,051,503
--------------------- ---------------------
Increase (decrease) in cash and equivalents (2,637,042) 5,945,889
Cash and equivalents at beginning of period 10,453,803 9,819,045
--------------------- ---------------------
Cash and equivalents at end of period $ 7,816,761 $ 15,764,934
===================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 746,000 $ 547,000
Income taxes $ 6,000 $ 4,000
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 29, 2007.
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
Corporate office relocation:
On October 1, 2007, the Company announced a plan to relocate its corporate
offices to Thailand and discontinue manufacturing activity at its Korat,
Thailand facility as the FSA product reaches its end of life by the end of the
fiscal 2008 second quarter. The restructuring was triggered by the previous move
of the Company's manufacturing operations to Thailand and the presence of its
banking sources and most of its customers and suppliers in Asia. In addition,
incremental cost reductions are required for the Company to return to
profitability.
Asset impairment charges of $400,000 related to the plan were recorded in
the fiscal 2007 fourth quarter. The impaired assets were primarily equipment
used in the FSA manufacturing process at the Korat facility. The assets were
written down to their estimated net realizable value which is negligible as a
result of their age and specialized nature.
Total cash related restructuring charges excluding asset impairments of
approximately $3.6 million are expected related to the plan. The $3.6 million is
comprised of $3.1 million for one-time termination benefits and $0.5 million
related to moving and closing costs associated with transferring the corporate
offices to Thailand, terminating the Plymouth, Minnesota office lease and
transferring equipment from Korat, Thailand to Lamphun, Thailand. Restructuring
charges of $2.0 million related to the planned corporate office and Korat
restructuring were recorded in the first quarter of fiscal 2008. These charges
were comprised of $1.9 million one time termination benefits and $0.1 million
for moving and closing costs. Total restructuring charges through December 29,
2007 were $2.1 million. These charges were comprised of $2.0 million for one
time termination benefits, $0.1 million for moving and closing costs. Most of
the remaining anticipated expenditures related to the plan of approximately $1.6
million are expected to be incurred prior to the end of the fiscal 2008 second
quarter.
Litchfield and Eastlake 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. The restructuring was triggered by the Company's need to
reduce its cost structure in order to compete effectively and as a result of
lower than expected revenue.
Asset impairment charges related to the expanded restructuring plan 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.
6
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 February 2008. 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 after the buyer arranges financing. Efforts are being made to sublease the
Eastlake facility in fiscal 2008.
Total cash related restructuring charges excluding asset impairments of
approximately $8.6 million are expected for the Litchfield and Eastlake
restructuring. The $8.6 million is comprised of $3.3 million for one-time
termination benefits and $5.3 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 $239,000 related to the Litchfield and
Eastlake restructuring were recorded in the fiscal 2008 first quarter. Total
restructuring charges through December 29, 2007 were $7.9 million. These charges
were comprised of $3.3 million for one time termination benefits, $3.8 million
for moving and closing costs and $0.8 million contract termination costs related
to the Eastlake facility lease. Remaining expenditures of approximately $700,000
are expected as part of the plan primarily related to completing the transfer of
equipment to Thailand.
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
1,876,212 shares of common stock were outstanding during the three month period
ending December 29, 2007, but were excluded from the computation of common share
equivalents because they were not dilutive. Options to purchase 1,995,062 shares
of common stock were outstanding during the three month period ending December
30, 2006, but were excluded from the computation of common share equivalents
because they were not dilutive.
NOTE 4 - STOCK BASED COMPENSATION
The Company recorded $112,000 and $147,000 of related compensation expense for
the three month periods ended December 29, 2007 and December 30, 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 December 29, 2007 and December 30, 2006. As of December 29,
2007, $939,000 of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of
approximately 1.3 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 adjustment was made to the Black Scholes calculation to
reflect that the options are not freely traded:
Three Months Ended
December 29, 2007 December 30, 2006
Risk-free interest rate 4.03% 4.53%
Expected volatility 65% 49%
Expected life (in years) 2.9 3.0
Dividend yield -- --
Weighted average fair value of options
granted $0.41 $0.86
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
December 29, 2007 the Company had 501,406 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 December 29, 2007,
the Company had 8,175 shares of common stock available for issue under the plan.
7
Transactions under the stock option and restricted stock plans during the three
months ended December 29, 2007 are summarized as follows:
Number of Weighted
Shares Under Average
Option Exercise Price
-------------- --------------
Outstanding at September 30, 2007 1,977,968 5.25
Granted 459,125 0.71
Forfeited (95,090) 10.94
Exercised -- --
--------------
Outstanding at December 29, 2007 2,342,003 4.13
==============
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 1,124,036 8.1 years $ 1.56 371,045 $ 2.03
2.70 - 4.84 656,570 6.2 years 3.69 359,959 3.81
5.28 - 7.82 155,822 4.3 years 6.83 149,522 6.82
8.71 - 9.80 202,575 5.8 years 9.56 164,650 9.56
11.49 - 11.51 102,400 0.8 years 11.50 102,400 11.50
12.59 - 13.79 100,600 2.9 years 13.03 99,600 13.03
------------ -----------
2,342,003 4.13 1,247,176 5.77
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NOTE 5 - INVENTORIES
Inventories are comprised of the following (in thousands):
December 29, September 29,
2007 2007
----------------- -----------------
Raw materials and purchased parts $ 4,957 $ 4,549
Work-in-process and finished goods 5,709 6,506
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$ 10,666 $ 11,055
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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 December 29, 2007, the Company had open forward
exchange contracts to buy Thailand baht in return for US dollars maturing on May
14, 2008; May 20, 2008; May 27, 2008; June 12, 2008 and June 19, 2008 each with
an amount of 200 million baht for a total of 1 billion Thailand baht.
8
Foreign currency translation gains or (losses) included in net other (income)
expense (in thousands):
Three months ended
------------------------------------
December 29, 2007 December 30, 2006
----------------- -----------------
Gain or (loss) from forward exchange contracts $ (206) $ 1,698
Other foreign currency gain or (loss) 809 (1,817)
----------------- -----------------
Net gain or (loss) from foreign currency
transactions $ 603 $ (119)
================= =================
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- 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 $7.8 million at
December 29, 2007 and $10.5 million at September 29, 2007. Long-term debt was
$14.1 million at December 29, 2007 and $15.5 million at September 29, 2007 less
current maturities of $11.2 and $11.0, respectively. During the three months
ended December 29, 2007 and December 30, 2006, the Company incurred losses from
continuing operations of $7.9 million and $6.3 million, respectively. Operating
activities used $9.6 million and $4.9 million during the three months ended
December 29, 2007 and December 30, 2006, respectively. As of December 29, 2007,
the Company had a working capital deficit of $19.7 million.
Total unused debt availability as of December 29, 2007 was approximately $7.1
million under the Company's long-term Thailand credit facilities and
approximately $6.5 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 through a portion of the fiscal 2008
fourth quarter. The Company requires additional capital resources for its
business and to otherwise respond to competitive pressures in the industry. 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. No assurance can be given that additional working
capital will be obtained in an amount that is sufficient for the Company's
needs, in a timely manner or on terms and conditional acceptable to the Company
or its shareholders. 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. However, the Company's efforts to raise
additional funds from the sale of its common stock may be hampered by the fact
that the Company currently fails to meet one of the listing requirements of the
Nasdaq Global Market. If the Company fails to regain compliance with the listing
requirement or if at any time the Company fails to satisfy each of the other
requirements for continued listing, its common stock will be delisted from the
Nasdaq Global Market, which will further hamper the Company's ability to raise
additional working capital.
9
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, cash flow from operations and management
estimates as to future revenue and expenses.
NOTE 10- RECENT ACCOUNTING PRONOUNCEMENTS
There are no new accounting pronouncements expected to have a significant impact
on the Company.
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 29, 2007, 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, Western Digital and other
leading electronic OEMs.
Net Sales and Revenue Recognition
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;
10
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 October 1, 2007,
we announced a plan to relocate our corporate offices to Thailand and
discontinue manufacturing activity at our Korat, Thailand location as the Flex
Suspension Assembly product reaches its end of life by the end of the fiscal
2008 second quarter. On January 16, 2006, we announced a plan to transfer our
high volume manufacturing operations from Litchfield, Minnesota to Thailand. 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. Concurrently, we also planned to accelerate
the end of life production of flexible circuit laminate material at our
Eastlake, Ohio facility and reduce indirect labor and general and administrative
expenses at our other U.S. and Thailand locations.
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
----------------------------------
December 29, December 30,
2007 2006
---------------- ---------------
Net Sales 100% 100%
Cost of goods sold 104.9 98.0
---------------- ---------------
Gross profit (4.9) 2.0
Operating expenses:
Selling, general and administrative and
royalty expense 12.8 12.9
Engineering 3.3 3.9
Restructuring and asset impairment 10.8 7.1
Net (gain) loss on sale of assets -- --
---------------- ---------------
Total operating expenses 26.9 23.9
---------------- ---------------
Income (loss) from operations (31.8) (21.9)
---------------- ---------------
Interest and other expense, net (6.1) (2.4)
---------------- ---------------
Income (loss) before provision (benefit) for
income taxes (37.9) (24.3)
Provision (benefit) for income taxes -- --
---------------- ---------------
Net income (loss) (37.9)% (24.3)%
================ ===============
Comparison of Three Months Ended December 29, 2007 and December 30, 2006
Net Sales
Our net sales were $20.8 million for the three months ended December 29,
2007, compared to $26.0 million for the three months ended December 30, 2006, a
decrease of 20%. This decrease primarily reflects a $7 million decrease in flex
suspension assembly (FSA) revenue and a $2.6 million decrease in actuator flex
circuit (AFC) revenue offset by a $5.1 million increase in flat panel display
(FPD). The decline in FSA revenue to $7.1 million in the fiscal 2008 first
quarter from $14.1 million in the prior year reflects our FSA customer's
transition to its next generation of disk drive products which use an
alternative technology. The AFC reduction was related to production issues
reducing our product allocation at a significant customer and year end customer
inventory reductions. The growth in the FPD revenue resulted from the ramp up of
a number of new FPD programs and increased volume from the FPD programs that
began ramping last quarter. While we expect FSA revenue to reach its end of life
by the end of the fiscal 2008 second quarter as the disk drive industry
completes the transition to its next generation of products, we expect increases
in AFC and FPD revenue in the fiscal 2008 second quarter as compared to the
fiscal 2008 first quarter as new programs reach volume production.
11
FSA sales to the disk drive industry generated 34% of our net sales for the
three months ended December 29, 2007, compared to 54% for the three months ended
December 30, 2006. Sales of AFC's to the disk drive industry were 34%, compared
to 37%, FPD application net sales were 29% compared to 3%, sales from integrated
circuit packaging, network system application and sales from other industry
applications were 3% and 6% for the three months ended December 29, 2007 and
December 30, 2006, respectively.
Gross Profit (Loss)
Our gross loss was $1.0 million for the three months ended December 29,
2007 compared to a gross profit of $0.5 million for the three months ended
December 30, 2006. Our gross margin for the three months ended December 29, 2007
decreased to (4.9%), from 2.0% for the three months ended December 30, 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 and short-term incremental costs
incurred while addressing operating issues related to new product ramp ups and
the introduction of a new material set. 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 gross margins to improve during the fiscal 2008
second quarter as manufacturing activity was discontinued at our Korat, Thailand
facility in November 2007 and as a result of the operating efficiency
improvements made during the fiscal 2008 first quarter.
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the three months ended December 29, 2007 were $2.7 million, compared to $3.4
million in the three months ended December 30, 2006, a decrease of 21%. As a
percentage of net sales, selling, general and administrative expenses were 13%
for the three months ended December 29, 2007, unchanged from 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 selling, general and administrative expenses as a
percentage of net sales was unchanged as compared to the prior year as the
decrease in expenses matched the decrease in revenue. Selling, general and
administrative expenses for the remainder of fiscal 2008 are expected to
decrease slightly from the fiscal 2008 first quarter.
Engineering
Engineering expenses for the three months ended December 29, 2007 were
$685,000, compared to $1.0 million for the three months ended December 30, 2006,
a decrease of 31%. 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 3.3% of sales for the three months ended December 29,
2007 compared to 3.9% for the same period in the prior year.
Restructuring
Corporate office relocation:
On October 1, 2007, we announced a plan to relocate our corporate offices
to Thailand and discontinue manufacturing activity at our Korat, Thailand
facility as the FSA product reaches its end of life by the end of the fiscal
2008 second quarter. The restructuring was triggered by the previous move of our
manufacturing operations to Thailand and the presence of our banking sources and
most of our customers and suppliers in Asia. In addition, incremental cost
reductions are required for us to return to profitability.
Actions related to the restructuring plan are expected to be substantially
completed by the end of fiscal 2008 second quarter. These actions are expected
to result in annual operating expense reductions of at least $6 million.
Approximately $5.7 million of the annualized savings are expected to have a
positive impact on cash flow. These cash related savings are comprised of $4.2
million related to compensation reductions and $1.5 million related to other
spending. The $0.3 million remaining savings are depreciation related and have
no impact on cash flow.
12
Asset impairment charges of $400,000 related to the plan were recorded in the
fiscal 2007 fourth quarter. The impaired assets were primarily equipment used in
the FSA manufacturing process at the Korat facility. The assets were written
down to their estimated net realizable value which is negligible as a result of
their age and specialized nature. Total cash related restructuring charges
excluding asset impairments of approximately $3.6 million are expected related
to the plan. The $3.6 million is comprised of $3.1 million for one-time
termination benefits and $0.5 million related to moving and closing costs
associated with transferring the corporate offices to Thailand, terminating the
Plymouth, Minnesota office lease and transferring equipment from Korat, Thailand
to Lamphun, Thailand. Restructuring charges of $2.0 million related to the
planned corporate office and Korat restructuring were recorded in the first
quarter of fiscal 2008. These charges were comprised of $1.9 million one time
termination benefits and $0.1 million for moving and closing costs. Total
restructuring charges through December 29, 2007 were $2.1 million. These charges
were comprised of $2.0 million for one time termination benefits, $0.1 million
for moving and closing costs. Most of the remaining anticipated expenditures
related to the plan of approximately $1.6 million are expected to be incurred
prior to the end of our fiscal 2008 second quarter.
The restructuring plan calls for the elimination of 595 positions in the
U.S. and Thailand consisting of 466 direct labor positions, 97 indirect labor
production support positions and 32 administrative positions. As of December 29,
2007, 583 of these positions have been eliminated.
Litchfield and Eastlake 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. 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.
While several action items related to the expanded restructuring plan
remain open, all of the expected savings were realized as of September 29, 2007.
Asset impairment charges related to the expanded restructuring plan 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.
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 February 2008. 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 after the buyer arranges financing. Efforts are being made to sublease the
Eastlake facility in fiscal 2008.
Total cash related restructuring charges excluding asset impairments of
approximately $8.6 million are expected for the Litchfield and Eastlake
restructuring. The $8.6 million is comprised of $3.3 million for one-time
termination benefits and $5.3 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 $239,000 related to the Litchfield and
Eastlake restructuring were recorded in the fiscal 2008 first quarter. Total
restructuring charges through December 29, 2007 were $7.9 million. These charges
were comprised of $3.3 million for one time termination benefits, $3.8 million
for moving and closing costs and $0.8 million contract termination costs related
to the Eastlake facility lease. Remaining expenditures of approximately $700,000
are expected as part of the plan primarily related to completing the transfer of
equipment to Thailand.
Net (Gain) Loss on the Sale of Assets
Net loss on the sale of assets was less than $1,000 for the three months
ended December 29, 2007 compared to a net gain on the sale of assets of $11,000
for the three months ended December 30, 2006.
Net Interest and Other Expense
13
Net interest expense was $0.7 million for the three months ended December
29, 2007 and $0.5 million for the three months ended December 30, 2006. The
increase was driven by higher level of debt outstanding in fiscal 2008. Net
other expense was $585,000 in the three months ended December 30, 2007 as
compared to $117,000 in the three months ended December 30, 2006. The change was
a result of higher foreign currency valuation losses being recorded in fiscal
2008 as compared to fiscal 2007.
Income Taxes
No net income tax expense or benefit was recorded for the three months
ended December 29, 2007 and December 30, 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.
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 29, 2007. The accounting policies used in preparing
our interim 2008 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 $7.8 million at
December 29, 2007 and $10.5 million at September 29, 2007. As of December 29,
2007, the Company had a working capital deficit of $19.7 million.
For the three months ended December 29, 2007, net cash used in operating
activities of $9.6 million primarily resulted from the net loss for the period
net of non-cash charges and a $3.4 million decrease in accounts payable. The
accounts payable decrease was driven by timing issues related to inventory being
received early in the quarter which was used later than expected as a result of
production delays.
Net cash used in investing activities was $0.4 million in the first three
months of fiscal 2008, compared to net cash used in investing activities of $2.2
million in the first three months of fiscal 2007. In fiscal 2008, net cash used
in investing activities was attributed to capital spending related to process
improvements at our Thailand facility. Fiscal 2007 net cash used in investing
activities was also attributed to capital spending for process improvements at
our Thailand facility.
Net cash provided by financing activities was $7.3 million in the first
three months of fiscal 2008, compared to net cash provided by financing
activities of $13.1 million in the first three months of fiscal 2007. Fiscal
2008 net cash provided by financing activities was the result of the $8.6
million borrowed under our short-term Thailand packing credit facilities, a $1.1
million draw down under our new long term Thailand credit facilities and a $0.4
million increase in the U.S. dollar foreign exchange valuation of the Thailand
baht denominated debt partially offset by the normally scheduled debt payments
on our existing Thailand debt facilities and US based debt. For the first three
months of fiscal 2007, net cash provided by financing activities was primarily
related to the $5.8 million borrowed under our short-term Thailand packing
credit facilities and a $7.6 million draw down under our new long term Thailand
credit facilities partially offset by the normally scheduled debt payments on
our existing Thailand debt facilities and US based debt.
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 $9.5 million under this new
credit facility in fiscal 2007 and $1.1 million in the fiscal 2008 first
quarter. 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 December 29, 2007, we had approximately $24.3 million
outstanding under our long-term Thailand credit facilities and a 29.0 million
outstanding balance under our short-term Thailand credit facilities. Total
unused availability as of December 29, 2007 was approximately $7.1 million under
our long-term Thailand credit facilities and approximately $6.5 million under
our short-term packing credit and working capital facilities. Utilization of the
$7.1 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. As of December 29, 2007, we were
in compliance with covenants under our Thailand credit facilities.
14
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 December 29,
2007, $1.0 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 through a portion of
the fiscal 2008 fourth quarter. We require additional capital resources for our
business and to otherwise respond to competitive pressures in the industry. 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. No assurance can be given that additional working
capital will be obtained in an amount that is sufficient for our needs, in a
timely manner or on terms and conditional acceptable to the Company or its
shareholders. 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. However, our efforts to raise additional funds from the sale of
common stock may be hampered by the fact that we currently fail to meet one of
the listing requirements of the Nasdaq Global Market. If we fail to regain
compliance with the listing requirement or if at any time we fail to satisfy
each of the other requirements for continued listing, our common stock will be
delisted from the Nasdaq Global Market, which will further hamper our ability to
raise additional working capital.
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, cash flow from operations and our estimates as to
future revenue and expenses.
Contractual Obligations
The table below discloses a summary of the Company's specified contractual
obligations at December 29, 2007 (in thousands):
Under 1 Year 1 to 3 Years 3 to 5 Years After 5 Years Total
-------------- -------------- -------------- --------------- ---------------
Long-term Debt Obligations (1) $ 11,270 $ 12,309 $ 1,798 -- $ 25,377
Operating Leases 348 700 430 -- 1,478
-------------- -------------- -------------- --------------- ---------------
Total $ 11,618 $ 13,009 $ 2,228 -- $ 26,855
============== ============== ============== =============== ===============
(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
There are no new accounting pronouncements expected to have a significant impact
on the Company.
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: the
increased utilization by our largest customer of alternative interconnect
technologies that compete with our FSA product, AFC and FPD 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 timely availability and acceptance of new products, the impact
of competitive products and pricing, changes in our customers' market share,
impact of restructuring charges, changes in manufacturing efficiencies, ability
to secure additional financing, continued cash availability under our credit
facilities and other risks detailed from time to time in our reports filed with
the Securities and Exchange Commission, including those risks described under
Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year
ended September 29, 2007. 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.
15
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 December 29, 2007, the Company had open forward
exchange contracts to buy Thailand baht in return for US dollars maturing on May
14, 2008; May 20, 2008; May 27, 2008; June 12, 2008 and June 19, 2008 each with
an amount of 200 million baht for a total of 1 billion Thailand baht. 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, Terry M. Dauenhauer, 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.
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.
16
32 Certificate pursuant to 18 U.S.C. Section 1350.
17
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: February 8, 2008
By /s/ Terry M. Dauenhauer
---------------------------
Terry M. Dauenhauer
President and Chief Executive Officer
By /s/ Douglas W. Keller
------------------------
Douglas W. Keller
Principal Financial Officer
18