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, 2003
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 Identification No.)
incorporation or organization)
5540 Pioneer Creek Drive, Maple Plain, MN 55359
(Address of principal executive offices)
(763) 479-5300 (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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. As of July 26, 2003,
15,272,750 shares of the registrant's common stock, $.04 par value per share,
were outstanding.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. 3-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 8-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 15
Item 4 Controls And Procedures. 15
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds. 15
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
Page 2 of 20
PART 1: ITEM 1 FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, September 30,
2003 2002
---------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents $ 3,808,042 $ 2,364,136
Accounts receivable, net 20,188,698 16,773,103
Inventories 8,477,150 9,285,600
Deferred income taxes - current 5,775,551 3,147,691
Other current assets 2,118,193 3,111,291
------------ ------------
Total current assets 40,367,634 34,681,821
Property, plant and equipment, net of accumulated depreciation
of $47,311,000 and $39,316,000 68,041,504 73,691,694
Goodwill 3,000,971 3,000,971
Deferred income taxes - long-term 2,424,706 1,236,038
Other assets 2,654,047 2,317,340
------------ ------------
$116,488,862 $114,927,864
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,308,414 $ 10,798,096
Line of credit 18,117,743 7,302,352
Accounts payable 14,852,567 13,075,040
Accrued compensation 2,289,821 1,653,223
Other accrued liabilities 1,223,844 2,305,858
------------ ------------
Total current liabilities 44,792,389 35,134,569
Long-term debt, less current maturities 10,633,008 15,371,841
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares authorized,
15,240,570 and 15,108,283 shares issued and outstanding 609,623 604,331
Capital in excess of par value 18,170,739 17,815,641
Retained earnings 42,283,103 46,001,482
------------ ------------
Total stockholders' equity 61,063,465 64,421,454
------------ ------------
$116,488,862 $114,927,864
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3 of 20
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
2003 2002
---- ----
Net sales $ 39,943,486 $ 31,823,731
Costs and expenses:
Cost of sales 34,066,596 28,266,943
Selling, general and administrative 4,248,825 4,262,546
Engineering 1,623,148 1,417,260
Net interest (income) expense 546,242 530,988
Net other (income) expense 20,997 (134,967)
------------ ------------
Income (loss) before taxes (562,322) (2,518,949)
Income taxes (507,261) (1,241,433)
------------ ------------
Net income (loss) $ (55,061) $ (1,277,516)
============ ============
Net income (loss) per share:
Basic ($0.00) ($0.08)
============ ============
Diluted ($0.00) ($0.08)
============ ============
Weighted average shares outstanding:
Basic 15,180,629 15,108,282
============ ============
Diluted 15,180,629 15,108,282
============ ============
Nine months Ended June 30,
2003 2002
---- ----
Net sales $111,524,460 $104,638,352
Costs and expenses:
Cost of sales 97,919,646 90,283,011
Selling, general and administrative 13,614,065 12,474,863
Engineering 4,800,919 4,039,589
Restructuring charges 750,000 950,000
Net interest (income) expense 1,668,140 2,049,460
Net other (income) expense 23,288 (346,891)
------------ ------------
Income (loss) before taxes (7,251,598) (4,811,680)
Income tax benefit (3,533,219) (3,579,240)
------------ ------------
Net income (loss) $ (3,718,379) $ (1,232,440)
============ ============
Net income (loss) per share:
Basic ($0.25) ($0.08)
============ ============
Diluted ($0.25) ($0.08)
============ ============
Weighted average shares outstanding:
Basic 15,169,651 15,071,160
============ ============
Diluted 15,169,651 15,071,160
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 4 of 20
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended June 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,718,379) $ (1,232,440)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,855,388 10,174,447
Restructuring charges 750,000 950,000
Other non-cash items (4,136,000) (88,245)
Changes in operating assets and liabilities:
Accounts receivable (3,415,595) 976,943
Inventories 808,450 3,889,843
Other current assets 993,098 9,811,718
Accounts payable 1,777,527 (4,428,093)
Other liabilities (1,195,416) (6,617,282)
------------ ------------
Net cash provided by (used in) operating activities 719,073 13,436,891
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,255,401) (2,253,883)
Other 32,968 2,451,099
------------ ------------
Net cash provided by (used in) investing activities (3,222,433) 197,216
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (7,228,516) (9,483,864)
Issuance of long-term debt -- 454,402
Net activity on line of credit 10,815,392 (3,220,466)
Proceeds from exercise of stock options 360,390 81,747
------------ ------------
Net cash provided by (used in) financing activities 3,947,266 (12,168,181)
Increase (decrease) in cash and equivalents 1,443,906 1,465,926
Cash and equivalents at beginning of period 2,364,136 1,798,272
------------ ------------
Cash and equivalents at end of period $ 3,808,042 $ 3,264,198
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest was $1,744,000 and $2,339,000 in fiscal 2003 and 2002.
Income tax payments were $6,000 and $29,000 in fiscal 2003 and 2002.
See accompanying notes to condensed consolidated financial statements.
Page 5 of 20
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. For clarity of presentation, the Company has described all periods
as if they end at the end of the calendar quarter. 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, 2002.
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
Manufacturing operations restructuring-
During fiscal 2001, the Company recorded asset impairment and restructuring
charges of $9,754,000 and $10,124,000 related to the restructuring of the
Company's manufacturing operations. The restructuring was primarily related to
moving manufacturing operations from the Company's Chandler, Arizona facility to
the Company's Minnesota locations. During the fiscal 2002 second quarter and the
fiscal 2003 first quarter, additional restructuring charges of $876,000 and
$750,000, respectively, were recorded due to an increase in the estimate of the
leased Chandler facility disposition costs. As of March 31, 2003, the
restructuring was substantially complete. During the second quarter of fiscal
2003, payments of approximately $633,000 were made to buy out the remainder of
the Chandler facility lease through its June 2003 termination.
The remaining restructuring accrual as of June 30, 2003 totaled $112,000.
Selected information regarding the restructuring follows (in thousands):
Manufacturing Operations
Restructuring - Arizona
-------------------------
Facility Employee
Abandonment Termination
Charges Benefits Total
------------------------------------
Accrual at October 1, 2002 $ 225 $ 78 $ 303
Change in estimate 750 -- 750
Payments (900) (41) (941)
------------------------------------
Accrual at June 30, 2003 $ 75 $ 37 $ 112
====================================
NOTE 3 - EARNINGS PER SHARE
The Company's basic net loss per share is computed by dividing net loss by the
weighted average number of outstanding common shares. The Company's diluted net
loss per share is computed by dividing net loss by the weighted average number
of outstanding common shares and common share equivalents relating to stock
options when dilutive. Options to purchase 721,100 and 1,049,917 shares of
common stock with weighted average exercise prices of $14.24 and $11.87 were
outstanding during the three and nine month periods ending June 30, 2003, but
were excluded from the computation of common share equivalents because they were
not dilutive. Options to purchase 1,117,900 and 1,292,032 shares of common stock
with weighted average exercise prices of
Page 6 of 20
$12.12 and $11.50 were outstanding during the three and nine month periods
ending June 30, 2002, but were excluded from the computation of common share
equivalents because they were not dilutive. The Company's fiscal 2003 third
quarter and first nine months pro forma net loss would have been ($231,000) and
($4,250,000) or ($0.02) and ($0.28) diluted net loss per share had the fair
value method been used for valuing options granted. The Company's fiscal 2002
third quarter and first nine months pro forma net loss would have been
($1,474,000) and ($1,823,000) or ($0.10) and ($0.12) diluted net loss per share
had the fair value method been used for valuing options granted. No adjustment
was made to the Black Scholes calculation to reflect that the options are not
freely traded.
NOTE 4 - INVENTORIES
Inventories are comprised of the following (in thousands):
June 30, September 30,
2003 2002
------------------------------
Raw materials and purchased parts $3,563 $3,939
Work-in-process and finished goods 4,914 5,347
------------------------------
$8,477 $9,286
==============================
NOTE 5 - DERIVATIVE INSTRUMENTS
The Company enters into forward exchange contracts that are recorded at fair
value with related fair value gains or losses recorded in earnings within the
caption 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, 2003, the Company had open forward
exchange contracts to buy Thailand baht maturing July 3, 2003 with notional
amounts of 880,000,000. The total open contracts for 880,000,000 baht equates to
approximately $21.0 million U.S. dollars.
NOTE 6 - REVENUE RECOGNITION
Innovex 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. The Company has
an implied warranty that the products meet the customer's specification. Credits
are only issued for customer returns. In recognizing revenue in any period, the
company applies the provisions of SEC Staff Accounting Bulletin 101, "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.
NOTE 7 - RECENTLY RELEASED ACCOUNTING PRONOUNCEMENT
In May 2003, the FASB issued Statement 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. Statement 150
changes the statement of financial position classification of certain financial
instruments from either equity or mezzanine presentation to liabilities and
requires an issuer of those financial statements to recognize changes in fair
value or redemption amount, as applicable, in earnings. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Adoption of Statement 150 is not anticipated to have an
impact on the Company's financial position or results of operations.
Page 7 of 20
NOTE 8 - SUBSEQUENT EVENT - FOLLOW-ON PUBLIC OFFERING
On August 4, 2003, the Company consummated the sale of 3,450,000 shares of
common stock at a public offering price of $12.25 per share. Net offering
proceeds to the Company were $39,237,000 after deducting total estimated
expenses of the offering.
On August 4, 2003, the Company applied $4.7 million of the net offering proceeds
to pay down outstanding debt relating to its credit facilities with Wells Fargo
Commercial Bank. Subsequent to August 4, 2003, the Company paid down the
outstanding balance under its revolving Thailand packing credit facilities by
$15.0 million. The Company intends to use the remainder of the net proceeds for
general corporate purposes.
PART I: 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 condensed consolidated financial
statements and notes to those statements included elsewhere in this prospectus.
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.
We utilize a fiscal year that ends on the Saturday nearest to September
30. For clarity of presentation, we have described all periods as if they end at
the end of the calendar quarter.
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 and printers. Our customers
include 3M, Dell, Hitachi, HP, Maxtor, Medtronic, Philips, Quantum, SAE
Magnetics (a subsidiary of TDK), Samsung, Seagate, Staktek, StorageTek, Xerox
and other leading electronic OEMs.
Prior to 1999, our primary products were small lead wire assemblies for
computer disk drives. The disk drive industry has transitioned away from lead
wire assembly interconnects to integrated interconnects such as our Head
Interconnect Flex ("HIF") and Flex Suspension Assembly ("FSA") products. This
transition has had a significant impact on our operations since 1998 as we have
had to manage the rapid increase in our flexible circuit business while
controlling the rapid drop in our lead wire assembly operations. Lead wire
assembly sales constituted none of fiscal 2002 and 2001 consolidated net sales
and less than 1% of fiscal 2000 net sales after comprising over 72% of fiscal
1998 net sales.
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, with sales through distributors
representing less than 5% of our total net sales for the nine months ended June
30, 2003 and for fiscal years 2002, 2001 and 2000. 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, following the customer's acknowledgment
of the receipt of the goods.
Page 8 of 20
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. In fiscal 2000, we
closed our Agua Prieta, Mexico facility and moved the operations to our facility
in Lamphun, Thailand and recorded the associated restructuring charges. In
fiscal 2001, we recorded restructuring charges related to closing our Chandler,
Arizona facility and transferring manufacturing operations to our Minnesota and
Thailand locations. Because we initially underestimated the costs relating to
these restructurings, we recorded additional restructuring charges in fiscal
2001 and 2002 and in our current fiscal year. As of June 30, 2003, we believe
that the restructuring related to the closing of these two facilities has been
substantially completed.
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
June 30, June 30,
-------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net Sales 100% 100% 100% 100%
Cost of goods sold 85.3 88.8 87.8 86.3
Gross profit 14.7 11.2 12.2 13.7
Operating expenses:
Selling, general and administrative 10.6 13.4 12.2 11.9
Engineering 4.1 4.5 4.3 3.9
Restructuring -- -- 0.7 0.9
-------- -------- -------- --------
Total operating expenses 14.7 17.9 17.2 16.7
-------- -------- -------- --------
Income (loss) from operations -- (6.7) (5.0) (3.0)
-------- -------- -------- --------
Interest and other expense, net (1.4) (1.2) (1.5) (1.6)
-------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes (1.4) (7.9) (6.5) (4.6)
Provision (benefit) for income taxes 1.3 3.9 3.2 3.4
-------- -------- -------- --------
Net income (loss) (0.1)% (4.0)% (3.3)% (1.2)%
======== ======== ======== ========
Page 9 of 20
Comparison of Three Months Ended June 30, 2003 and 2002
Net Sales
Our net sales were $39.9 million for the three months ended June 30, 2003,
compared to $31.8 million for the three months ended June 30, 2002, an increase
of 26%. This increase was due to higher sales generated by disk drive,
semiconductor packaging and LCD display applications. The increased disk drive
sales were related to our improved FSA market share resulting from our largest
customer in the disk drive industry transitioning to the 80 gigabyte ("GB") per
platter technology platform. Semiconductor packaging net sales increased due to
higher demand from our stacked memory customers. The LCD sales improvement was
related to the continued ramp-up of the new LCD program announced during the
first quarter of fiscal 2003.
Sales from the disk drive industry generated 77% of our net sales for the
three months ended June 30, 2003, compared to 70% for the three months ended
June 30, 2002, sales from semiconductor packaging applications were 6% in both
periods, consumer application sales were 5% versus 15%, network system
application sales were 5% versus 6%, display application net sales were 6%
versus 0% and sales from other industry applications were 1% for the three
months ended June 30, 2003 versus 3% for the three months ended June 30, 2002.
Gross Profit
Our gross profit was $5.9 million for the three months ended June 30,
2003, compared to $3.6 million for the three months ended June 30, 2002, an
increase of 65%. Our gross margin for the three months ended June 30, 2003
increased to 15%, compared to 11% for the three months ended June 30, 2002. The
increase in gross margin was primarily due to higher net sales increasing fixed
cost leverage. We anticipate that gross margins in the fiscal 2003 fourth
quarter will improve as new program introductions reach higher production
volumes and sales levels increase. We currently anticipate reporting positive
net income for the fourth quarter of fiscal 2003.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended
June 30, 2003 were $4.2 million, compared to $4.3 million in the three months
ended June 30, 2002. As a percentage of net sales, selling, general and
administrative expenses were 11% for the three months ended June 30, 2003, down
from 13% for the same period in the prior year. The decrease in fiscal 2003 as a
percent of net sales was primarily due to increased fiscal 2003 net sales.
Selling, general and administrative expenses for the remainder of fiscal 2003
are expected to decrease as a percentage of net sales due to anticipated
increased sales.
Engineering
Engineering expenses for the three months ended June 30, 2003 were $1.6
million, compared to $1.4 million for the three months ended June 30, 2002, an
increase of 15%. The increase in fiscal 2003 engineering expenses was primarily
due to increased spending on new product development, further spending related
to FSA and FgSA technology improvements, qualifying products and processes for
new applications including LCD displays, printers, semiconductor packaging
substrates and other high-end flexible circuit technology development related to
new products. As a percentage of net sales, engineering expenses were 4% of
sales for the three months ended June 30, 2003 and 2002.
Page 10 of 20
Engineering expenses for the remainder of fiscal 2003 are expected to
decrease as a percentage of net sales due to an expected increase in sales while
engineering expenses are expected to remain flat.
Net Interest and Other Expense
Net interest expenses were $0.5 million in the three months ended June 30,
2003, unchanged as compared to the three months ended June 30, 2002. Net other
(income) expense was $21,000 in the three months ended June 30, 2003 as compared
to ($135,000) in the three months ended June 30, 2002. The decrease was the
result of foreign currency exchange losses being incurred in fiscal 2003 while a
small foreign currency gain was generated in fiscal 2002.
Income Taxes
Income tax benefit for the three months ended June 30, 2003 was $507,000,
compared to $1.2 million for the three months ended June 30, 2002. The fiscal
2003 tax benefit was calculated by applying an effective tax rate of 36.7% to
our U.S. based pretax loss. We have determined that it is more likely than not
that we will be able to utilize the tax benefit in the future.
Comparison of Nine Months Ended June 30, 2003 and 2002
Net Sales
Our net sales were $111.5 million for the nine months ended June 30, 2003,
compared to $104.6 million for the nine months ended June 30, 2002, an increase
of 7%. This increase was due to higher sales generated by disk drive,
semiconductor packaging and LCD display applications offsetting a decrease in
net sales from consumer applications. The increased disk drive sales were
related to our improved FSA market share resulting from our largest customer in
the disk drive industry transitioning to the 80 gigabyte ("GB") per platter
technology platform. Semiconductor packaging net sales increased due to higher
demand from our stacked memory customers. The LCD sales improvement was related
to the continued ramp-up of the new LCD program announced during the first
quarter of fiscal 2003. The decrease in net sales from consumer related
applications is the result of reduced demand from our customer for optical
pickup units for DVD applications.
Sales from the disk drive industry generated 76% of our net sales for the
nine months ended June 30, 2003, compared to 73% for the nine months ended June
30, 2002, sales from semiconductor packaging applications were 7%, compared to
3%, consumer application sales were 6% versus 14%, network system application
sales were 6% in both periods, display application net sales were 5% versus 0%
and sales from other industry applications were less than 1% for the nine months
ended June 30, 2003 versus 4% for the nine months ended June 30, 2002.
Gross Profit
Our gross profit was $13.6 million for the nine months ended June 30,
2003, compared to $14.4 million for the nine months ended June 30, 2002, a
decrease of 5%. Our gross margin for the nine months ended June 30, 2003
decreased to 12%, compared to 14% for the nine months ended June 30, 2002. The
decrease in gross margin was primarily due to incremental start-up and tooling
costs related to new product introductions and product mix changes resulting
from a lower portion of sales from HIF, one of our older products, within our
product mix. We experienced a significant product transition during the second
quarter of fiscal 2003, converting approximately 70% of our products to new
designs. The product mix for the nine months ended June 30, 2003 also had an
increased share of FSA sales with higher material pass through content related
to the suspension material used in the FSA product. The nine months ended June
30, 2002 product mix included a higher share of our HIF product, which does not
include the suspension related pass through material.
Selling, General and Administrative
Selling, general and administrative expenses for the nine months ended
June 30, 2003 were $13.6 million, compared to $12.5 million in the nine months
ended June 30, 2002, an increase of 9%. As a percentage of net sales, selling,
general and administrative expenses were 12% for both the nine months ended June
30, 2003 and
Page 11 of 20
2002. The increase in fiscal 2003 spending was primarily due to consulting and
training costs related to implementation of the company-wide Six Sigma program
and severance costs of approximately $400,000 recorded during the first quarter
of fiscal 2003 related to efforts to increase operational efficiency by
consolidating from four marketing groups to three.
Engineering
Engineering expenses for the nine months ended June 30, 2003 were $4.8
million, compared to $4.0 million for the nine months ended June 30, 2002, an
increase of 19%. The increase in fiscal 2003 engineering expenses was primarily
due to increased spending on new product development, further spending related
to FSA and FgSA technology improvements, qualifying products and processes for
new applications including LCD displays, printers, semiconductor packaging
substrates and other high-end flexible circuit technology development related to
new products. As a percentage of net sales, engineering expenses were 4% of
sales for the nine months ended June 30, 2003 and 2002.
Restructuring
Restructuring charges for the nine months ended June 30, 2003 were
$750,000, compared to $950,000 for the nine months ended June 30, 2002. In
fiscal 2003, the charges to date were recorded due to an increase in the
estimate of the leased Chandler, Arizona facility disposition costs, primarily
to buy out the remainder of the Chandler, Arizona facility lease through its
June 2003 termination. In the nine months ended June 30, 2002, the charges were
also recorded due to an increase in the estimate of the leased Chandler, Arizona
facility disposition costs and an additional accrual was recorded to complete
the restructuring related to the closing of our Mexican facility. As of June 30,
2003, the restructuring was substantially complete.
Net Interest and Other Expense
Net interest expenses were $1.7 million in the nine months ended June 30,
2003, compared to $2.0 million for the nine months ended June 30, 2002, a
decrease of 19%. Interest expense decreased in 2003 primarily due to average
interest-bearing debt being $10.0 million lower for the nine months ended June
30, 2003 compared to the nine months ended June 30, 2002. Net other income was
$23,000 in the nine months ended June 30, 2003 as compared to $347,000 in the
nine months ended June 30, 2002. The decrease was the result of foreign currency
exchange losses being incurred in fiscal 2003 while a foreign currency gain was
generated in fiscal 2002.
Income Taxes
Income tax benefit for the nine months ended June 30, 2003 was $3.5
million, compared to $3.6 million for the nine months ended June 30, 2002. The
fiscal 2003 tax benefit was calculated by applying an effective tax rate of
36.7% to our U.S. based pretax loss. We have determined that it is more likely
than not that we will be able to utilize the tax benefit in the future. During
the second quarter of fiscal 2002, approximately $1.7 million of the tax benefit
recorded was due to a reduction of the deferred tax allowance. The deferred tax
allowance was reduced as a result of the estimated improvement in deferred tax
asset recoverability in light of the receipt of a $13.2 million tax refund
resulting from the carry-back of the fiscal 2001 net operating loss.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, estimates are evaluated based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
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We apply the following critical accounting policies in the preparation of
our consolidated financial statements:
o Allowance for Excess and Obsolete Inventory. Inventories, which are
composed of raw materials, work in process and finished goods, are valued
at the lower of cost or market with cost being determined by the first-in,
first-out method. On a periodic basis, we analyze the level of inventory
on hand, our cost in relation to market value and estimated customer
requirements to determine whether write-downs for excess or obsolete
inventory are required. Actual customer requirements in any future periods
are inherently uncertain and thus may differ from estimates. If actual or
expected requirements were significantly greater or lower than the
established reserves, a reduction or increase to the obsolescence
allowance would be recorded in the period in which such a determination
was made.
o Goodwill. We adopted Statement of Financial Accounting Standards 142,
Goodwill and Intangible Assets effective October 1, 2001 and as a result
discontinued the amortization of goodwill and any other intangible assets
determined to have indefinite lives. We have determined goodwill relates
to one reporting unit for purposes of impairment testing. Goodwill and
other intangible assets with indefinite lives are tested for impairment
annually or whenever an impairment indicator arises. If events or
circumstances change, including reductions in anticipated cash flows
generated by operations, goodwill could become impaired and result in a
charge to earnings.
o Deferred Taxes. We account for income taxes using the liability method.
Deferred income taxes are provided for temporary differences between the
financial reporting and tax bases of assets and liabilities. A valuation
allowance is set up where the realization of any deferred taxes becomes
less likely than not to occur. We analyze the valuation allowance
periodically which may result in income tax expense being different than
statutory rates.
Liquidity and Capital Resources
We have historically financed our operations primarily through cash from
operating activities, bank credit facilities and employee stock option
exercises. Cash and equivalents were $3.8 million at June 30, 2003 and $2.4
million at September 30, 2002.
Net cash provided by operating activities was $719,000 in the nine months
ended June 30, 2003, compared to net cash provided by operating activities of
$13.4 million in the nine months ended June 30, 2002.
For the nine months ended June 30, 2003, net cash provided by operating
activities was primarily due to non-cash charges for restructuring, depreciation
and deferred tax benefits more than offsetting the net loss for the period. Net
cash provided by operating activities was also benefited by decreases in
inventory and increases in accounts payable offsetting a portion of the increase
in accounts receivable for the period. A decrease in accrued liabilities
resulting from the payment of accrued restructuring charges during the period
also reduced the net cash provided by operating activities.
Net cash used in investing activities was $3.2 million in the nine months
ended June 30, 2003, compared to net cash provided by investing activities of
$197,000 in the nine months ended June 30, 2002. In the nine months ended June
30, 2003, net cash used in investing activities was attributed to the purchase
of test equipment and equipment to expand capacity in selected areas. Fiscal
2002 net cash provided by investing activities was due to capital expenditures
of $2.3 million being offset by proceeds from the sale of our Mexican facility.
Net cash provided by financing activities was $3.9 million in the nine
months ended June 30, 2003, compared to net cash used in financing activities of
$12.2 million in the nine months ended June 30, 2002. During the nine months
ended June 30, 2003, net cash provided by financing activities was the result of
increased borrowing under our Thailand packing credit facilities more than
offsetting required term loan payments under both our U.S. and Thailand
long-term credit facilities. Fiscal 2002 net cash used by financing activities
was due to reductions in the outstanding balances under our Thailand packing
credit facilities, scheduled payments under our U.S. and Thailand long-term
credit facilities and an additional $1.6 million payment made under our U.S.
long-term credit facility.
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In April 2001, we entered into a 1.2 billion Thailand baht (approximately
$28.0 million) credit facility agreement with Bank of Ayudhya Public Company
Limited and The Industrial Finance Corporation of Thailand. The facility is
comprised of a 590 million baht long-term facility, a 530 million baht packing
credit facility, a 70 million baht short-term working capital facility and a 10
million baht overdraft facility. The Thailand based facility is secured by
certain receivables, inventory and assets held by us in Thailand. In June 2002,
we completed a 300 million Thailand baht (approximately $6.8 million) expansion
of our Thailand credit facilities also secured by certain receivables and
inventory held by us in Thailand. In February 2003, we completed a 220 million
baht (approximately $5.1 million) expansion of our Thailand credit facilities,
increased our working capital facility by 150 million baht and reduced our
packing credit facility by 150 million baht. The new long-term debt is secured
by specified equipment held by Innovex Thailand, our wholly owned subsidiary. As
of June 30, 2003 we had approximately $29.7 million outstanding under our
Thailand credit facilities. Subsequent to August 4, 2003, the balance
outstanding under the revolving portion of the Thailand credit facilities was
paid down by $15.0 million.
On September 15, 1999 we entered into a credit facility with Wells Fargo
Commercial Bank to pay off all outstanding ADFlex loan balances existing at the
time of the ADFlex acquisition as required by the ADFlex merger agreement. As
amended, the credit facility consisted of a $25.0 million, five-year term loan
with equal principal payments of $1.6 million due each quarter continuing
through December 31, 2003. Under the terms of the amended credit facility, the
term facility bore interest at the prime interest rate plus 2.5%. The credit
facility was collateralized by all of our U.S. based accounts receivable,
inventory, equipment, real property and general intangibles. As of June 30,
2003, we had $4.7 million outstanding under the Wells Fargo credit facility. On
August 4, 2004, the entire remaining $4.7 million balance was paid off.
We received a waiver of certain restrictive covenants under our U.S.
credit facility applicable to our quarter ended June 30, 2003. As of August 4,
2003, the entire remaining balance on the U.S credit facility was paid off, as a
result, the restrictive covenants under that agreement are no longer in effect.
We are currently in compliance with covenants under our Thailand based financing
agreements.
We believe that with the existing U.S. and Thailand credit facilities,
cash generated from operations and the proceeds from a stock offering received
on August 4, 2003, we will have adequate funds to support projected working
capital and capital expenditures for the next twenty-four 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. 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 acceptance of
our FSA products and cash flow from operations.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 clarifies the accounting for costs
associated with exit or disposal activities. We adopted this statement effective
in January 2003, which did not have a material effect on our consolidated
financial statements.
Effective for the period ended March 31, 2003, we adopted SFAS 148,
Accounting for Stock-based Compensation-Transition and Disclosure. SFAS 148
amends the disclosure and certain transition provisions of Statement 123,
Accounting for Stock-Based Compensation. The disclosure requirements of this
pronouncement are included in our consolidated financial statements for the
period ended March 31, 2003.
In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial instruments with Characteristics of both Liabilities and Equity.
Statement 150 changes the statement of financial position classification of
certain financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of Statement 150 is not anticipated to
have an impact on the Company's financial position or results of operations.
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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 timely
availability and acceptance of new products including the FgSA, LCD flexible
circuits and semiconductor packaging substrates, the impact of competitive
products and pricing, interruptions in the operations of the Company's single
source suppliers, changes in manufacturing efficiencies and other risks detailed
from time to time in the Company's reports filed with the Securities and
Exchange Commission. In addition, a significant portion of the Company's revenue
is generated from the disk drive, integrated circuit substrates, consumer
electronics and data storage industries and the global economic downturn has had
and a continued economic downturn will continue to have an adverse impact on the
Company's operations. The Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect subsequent events or
circumstances or the occurrence of unanticipated events.
PART 1: 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 due to changes in
foreign currency exchange rates. While we transact business predominately 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, 2003, we had open forward exchange contracts
to buy Thailand baht maturing July 3, 2003 with a notional amount of 880 million
Thailand baht, (approximately $21 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.
PART 1: ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer, William P. Murnane, and Chief Financial
Officer, Thomas Paulson, have evaluated the Company's disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
review, they have concluded that these controls and procedures are effective in
ensuring that material information related to the Company is made known to them
by others within the Company.
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(b) Changes in Internal Control Over Financial Reporting
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal quarter covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
PART II - OTHER INFORMATION
Responses to Item 1 and Items 3 through 5 are omitted since these items are
either inapplicable or the response thereto would be negative.
ITEM 2: CHANGE IN SECURITIES AND USE OF PROCEEDS
On July 29, 2003, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-3 (File No. 333-106734)
registering 3,000,000 shares of its newly issued common stock (plus an
additional 450,000 to cover an overallotment). . SG Cowen Securities
Corporation, C.E. Unterberg, Towbin and Craig-Hallum Capital Group LLC acted as
managing underwriters for the offering.
On August 4, 2003, the Company consummated the sale of 3,450,000 shares of
common stock at a public offering price of $12.25 per share.
Total offering expenses were approximately $2,935,500. These expenses
consisted of $2,535,750 in underwriting discounts and approximately $400,000 of
other offering related expenses including legal and accounting fees, printing
and other expenses. The net offering proceeds to the Company were $39,237,000
after deducting total estimated expenses of the offering.
On August 4, 2003, the Company applied $4.7 million of the net offering
proceeds to pay down outstanding debt relating to its credit facilities with
Wells Fargo Commercial Bank. Subsequent to August 4, 2003, the Company paid down
the outstanding balance under its revolving Thailand packing credit facilities
by $15.0 million. The Company intends to use the remainder of the net proceeds
for general corporate purposes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act).
31.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act).
32 Certifications pursuant Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C.ss.1350).
(b) Reports on Form 8-K.
On April 14, 2003, the Company furnished a Current Report on Form 8-K with
the Securities and Exchange Commission, reporting under Items 7 and 12 the
Company's April 14, 2003 earnings release for the results of operations for the
quarter ended March 31, 2003.
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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.
Registrant
Date: August 14, 2003
By \s\ William P. Murnane
William P. Murnane
President and Chief Executive Officer
By \s\ Thomas Paulson
Thomas Paulson
Chief Financial Officer
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