SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the Period ended December 31, 2001.
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
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.)
5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359-9003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (763) 479-5300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of February 2, 2002, 15,053,349 shares of the registrant's common stock, $.04
par value per share, were outstanding.
Exhibit Index, page 12
PART 1: ITEM 1 FINANCIAL INFORMATION
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
December 31, September 30,
2001 2001
-------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents $ 2,422,027 $ 1,798,272
Accounts receivable, net 17,368,364 19,315,306
Inventories 14,815,267 13,782,195
Other current assets 6,283,489 6,465,201
------------ ------------
Total current assets 40,889,147 41,360,974
Property, plant and equipment, net of accumulated depreciation
of $30,887,000 and $27,534,000 84,140,375 86,738,970
Intangible and other assets, net of accumulated amortization of
$1,316,000 and $1,316,000 3,000,971 3,000,971
Deferred income taxes 9,602,867 9,602,867
Other assets 2,130,794 1,962,759
------------ ------------
$139,764,154 $142,666,541
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,953,492 $ 9,467,354
Line of credit 14,427,221 11,900,000
Accounts payable 16,869,262 16,438,885
Accrued compensation 1,678,390 1,617,672
Other accrued liabilities 4,472,167 7,819,837
------------ ------------
Total current liabilities 46,400,532 47,243,748
Other long-term liabilities 845,000 845,000
Long-term debt, less current maturities 24,623,841 26,403,021
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares authorized,
15,053,349 and 15,044,249 shares issued and outstanding 602,134 601,770
Capital in excess of par value 17,753,017 17,736,455
Retained earnings 49,539,630 49,836,547
------------ ------------
Total stockholders' equity 67,894,781 68,174,772
------------ ------------
$139,764,154 $142,666,541
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 2 of 21
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended December 31,
2001 2000
---- ----
Net sales $ 37,842,859 $ 38,576,884
Costs and expenses:
Cost of sales 32,069,495 32,550,180
Selling, general and administrative 4,228,609 4,205,031
Engineering 1,393,783 1,695,565
Net interest (income) expense 769,746 919,023
Net other (income) expense (200,587) 90,109
------------ ------------
Income (loss) before taxes (418,187) (883,024)
Income taxes (121,270) (256,077)
------------ ------------
Net income (loss) $ (296,917) $ (626,947)
============ ============
Net income (loss) per share:
Basic ($ 0.02) ($ 0.04)
============ ============
Diluted ($ 0.02) ($ 0.04)
============ ============
Weighted average shares outstanding:
Basic 15,051,849 14,960,126
============ ============
Diluted 15,051,849 14,960,126
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3 of 21
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended December 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (296,917) $ (626,947)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,375,000 3,328,393
Other non-cash items (154,116) 42,965
Changes in operating assets and liabilities:
Accounts receivable 1,946,942 6,362,352
Inventories (1,033,072) (1,592,719)
Other current assets 181,712 (725,162)
Accounts payable 430,377 (3,292,254)
Other liabilities (3,186,617) (610,989)
Income taxes payable (100,335) 661,353
----------- -----------
Net cash provided by (used in) operating activities 1,162,974 3,546,992
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (791,943) (4,173,919)
Proceeds from sale of assets 1,619 28,580
----------- -----------
Net cash provided by (used in) investing activities (790,324) (4,145,339)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (2,292,389) (1,806,830)
Issuance of long-term debt -- 1,864,732
Net activity on line of credit 2,526,568 800,000
Proceeds from exercise of stock options 16,926 344,697
----------- -----------
Net cash provided by (used in) financing activities 251,105 1,202,599
Increase (decrease) in cash and equivalents 623,755 604,252
Cash and equivalents at beginning of year 1,798,272 1,673,486
----------- -----------
Cash and equivalents at end of period $ 2,422,027 $ 2,277,738
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest was $911,000 and $1,029,000 in fiscal 2002 and 2001.
Income tax payments were $24,000 and $-0- in fiscal 2002 and 2001.
See accompanying notes to condensed consolidated financial statements.
Page 4 of 21
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, 2001.
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-
The fiscal 2001 second quarter included 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 is primarily related to
moving manufacturing operations from the Company's Chandler, Arizona facility to
the Company's Minnesota locations. The charges were recorded pursuant to a plan
announced in January 2001. The charge included approximately $6,380,000 related
to asset impairment of property and equipment and $3,374,000 for the impairment
of the remaining unamortized balance of the goodwill recorded at the time of the
Company's September 1999 acquisition of ADFlex Solutions, Inc. The charge also
includes $1,636,000 of inventory written off related to discontinued product
lines and accrued liabilities of $2,156,000 for employee severance and benefits
and $6,332,000 for facility abandonment costs. The restructuring is
substantially complete with the exception of the costs accrued to maintain the
leased Chandler facility through the June 2003 lease termination.
The fiscal 2000 first quarter includes a $13,785,000 restructuring charge
related to restructuring the Company's manufacturing operations. The
restructuring is primarily related to closing the Company's Agua Prieta, Mexico
facility and moving operations to its facility in Lamphun, Thailand. The charge
was recorded pursuant to a plan announced in November 1999. The charge included
approximately $6,605,000 related to asset impairment of property and equipment,
$356,000 for the write off of inventory and supplies, $176,000 for increasing
the accounts receivable reserve, and accrued liabilities of $2,101,000 for
facility abandonment costs and $4,547,000 in employee severance and benefits. A
change in estimate was recorded in the quarter ending September 2000 increasing
the facility abandonment accrual by $1,435,000 and decreasing the accrued
employee severance by $1,485,000. The estimate changes were due to higher costs
than expected to discontinue the operation of the Mexican facility and higher
turnover than expected prior to the payment of severance. The restructuring was
substantially complete as of September 2000 with the exception of completing the
disposition of the Mexican facility. During the quarter ending March 31, 2001,
the Company had a $495,000 increase in the estimate of the facility abandonment
charges relating to the length of time required to complete the disposition of
the facility located in Agua Prieta, Mexico.
Page 5 of 21
The remaining restructuring accrual as of December 31, 2001 totaled $1,858,000.
Selected information regarding the restructuring follows (in thousands):
Manufacturing Operations Manufacturing Operations
Restructuring - Arizona Restructuring -Mexico
-------------------------------- -------------------------------
Facility Employee Facility Employee
Abandonment Termination Abandonment Termination
Charges Benefits Charges Benefits Total
------------------------------ ---------------- --------------- ---------------- -------------- ---------
Accrual at October 1, 2001 $2,193 $ 824 $ 386 $ 136 $ 3,539
Payments (1,240) (439) (2) -- (1,681)
---------------- --------------- ---------------- -------------- ---------
Accrual at December 31, 2001 $ 953 $ 385 $ 384 $ 136 $ 1,858
------------------------------ ================ =============== ================ ============== =========
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 1,470,673 shares of common stock with
a weighted average exercise price of $10.89 were outstanding during the three
month period ending December 31, 2001, but were excluded from the computation of
common share equivalents because they were not dilutive. Options to purchase
805,250 shares of common stock with a weighted average exercise price of $14.97
were outstanding during the three month period ending December 31, 2000, but
were excluded from the computation of common share equivalents because they were
not dilutive.
NOTE 4 - INVENTORIES
Inventories are comprised of the following (in thousands):
December 31, September 30,
2001 2001
---------------- ----------------
Raw materials and purchased parts $7,082 $6,155
Work-in-process and finished goods 7,733 7,627
---------------- ----------------
$14,815 $13,782
================ ================
NOTE 5 - DERIVATIVE INSTRUMENTS AND HEDGING
The Company adopted SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities, and No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities, on November 1, 2000. These Standards require
entities to recognize derivatives in their financial statements as either assets
or liabilities measured at fair value. The accounting for changes in the fair
value of a derivative is recognized in earnings unless certain criteria are met.
These Standards also require formal documentation, designation and effectiveness
assessment of transactions receiving hedge accounting. The Company formally
documents all relations between hedging instruments and the hedged items, as
well as its risk-management objectives and strategy for undertaking various
hedge transactions. The Company assesses, both at the hedge's inception and on
an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of the hedged items.
The Company enters into forward exchange contracts, to hedge foreign currency
denominated assets or liabilities, that are recorded at fair value with related
fair value hedge gains or losses recorded in earnings within the caption other
income / expense. Generally, the Company purchases these contracts near the
beginning of each quarter while the expiration is near the end of each quarter.
The Company does not enter into forward exchange contracts for trading purposes.
As of December 31, 2001, the Company had open forward contracts to buy Thai
Baht, maturing in January 2002, with notional amounts totaling 600,000,000
Thailand Baht or approximately $13.6 million US dollars.
Page 6 of 21
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. These pronouncements, among other things,
eliminate the pooling-of-interest method of accounting for business combinations
and require intangible assets acquired in business combinations to be recorded
separately from goodwill. The pronouncements also eliminate the amortization of
goodwill and other intangible assets with indefinite lives and require negative
goodwill be recognized as an extraordinary gain. Goodwill and other intangible
assets with indefinite lives will be tested for impairment annually or whenever
an impairment indicator arises. The Company adopted these pronouncements as of
October 1, 2001 and as a result, has discontinued the amortization of goodwill
and any other intangible assets determined to have indefinite useful lives. The
Company has determined goodwill relates to one reporting unit for purposes of
impairment testing and expects to complete a transitional fair value based
impairment test of goodwill by March 31, 2002.
In September 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of long-lived Assets. SFAS 144 clarifies the accounting for disposals
of long-lived assets. This statement is effective for the Company beginning
October 1, 2002.
PART I: ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
In the fiscal 1999 fourth quarter, Innovex, Inc. and its subsidiaries (the
"Company") acquired ADFlex Solutions, Inc. ("ADFlex") for approximately $37
million. At that time, the Company also obtained credit facilities totaling in
principal amount $40 million, which were utilized to refinance ADFlex's
outstanding debt, pay down current liabilities and pay related transaction
costs. Prior to the acquisition, ADFlex was a leading supplier of flexible
circuit based solutions to the computer, computer peripheral, communications and
consumer electronics industries. Applications for these flex-based interconnects
include cellular phones, hard disk drives, other storage systems, high-end
consumer products, notebook computers, pagers and personal communication
systems. ADFlex's diverse customer and industry base has reduced Innovex's
reliance on the disk drive industry.
Prior to the ADFlex acquisition, the Company had one primary operating group,
Innovex Precision Components. The Company has combined the ADFlex operation with
its existing operations as both operations design and manufacture flexible
circuits.
Prior to fiscal 1999, the Company operated through three divisions, Precision
Products (Precision), Litchfield Precision Components (LPC) and Iconovex. Each
division had its own administrative, engineering, manufacturing and marketing
organizations. During the quarter ending September 30, 1998, the Company
combined the operations of its two core operating divisions, Precision and LPC
into one operating division, Innovex Precision Components. The combination
merged the rapidly growing LPC flexible circuit fabrication and chemical etching
operations with Precision's high volume fine wire manufacturing expertise. The
combination also allowed Innovex to leverage Precision's disk drive industry
market and trade knowledge to disk drive industry flexible circuit applications
as the industry transitioned from wire interconnects.
Prior to the divisional combination, the largest division, Precision, developed,
engineered and manufactured specialty precision electromagnetic products for
original equipment manufacturers ("OEM's"). Lead wire assemblies for the thin
film disk drive market were the division's primary product. Lead wire assemblies
are fine twisted magnet wires that connect the back end electronics of a disk
drive with the inductive or magneto resistive thin film heads that read and
write information on the disk. Since the divisional combination, the lead wire
assembly revenue declined as anticipated.
Page 7 of 21
LPC, prior to the fiscal 1998 divisional combination, designed and manufactured
highly complex flexible circuitry and chemically machined components for
computer, computer peripheral, medical and other applications. The Company
purchased Litchfield Precision Components, Inc. on May 16, 1996. This
acquisition reduced the Company's reliance on the disk drive industry while
providing an entry into the large and rapidly growing flexible circuit market.
Innovex's flexible circuit operation is one of a limited number of operations in
the world able to produce flexible circuits with line and spacing tolerances of
less than 2 mils for the high-end portion of the flexible circuit market.
Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972.
Its principal executive offices are located at 5540 Pioneer Creek Drive, Maple
Plain, Minnesota 55359-9003 and its telephone number is (763) 479-5300. Products
are developed and manufactured through the Company's wholly owned subsidiaries,
Innovex Precision Components, Inc., Innovex Southwest, Inc., Innovex (Thailand)
Ltd. and Innovex Limited. Innovex Precision Components, Inc. and Innovex Ltd.
are Minnesota corporations. Innovex Southwest, Inc. is a Delaware corporation
and Innovex (Thailand) Ltd. is a Thailand corporation.
RESULTS OF OPERATIONS
NET SALES
---------
The Company's net sales from operations totaled $37,843,000 for the quarter,
down 2% from $38,577,000 reported in fiscal 2001. The small decrease in net
sales for the first quarter of fiscal 2002 as compared to fiscal 2001 was due to
the increased revenue from the adoption of the Company's FSA product being
offset by lower revenue generated by other product lines as a result of economic
conditions. Revenue from the disk drive industry generated 77% of the Company's
revenue for the quarter as compared to 61% for fiscal 2001. In addition, revenue
from consumer applications was 11% versus 14% from the prior year, network
system application revenue was 7% versus 16% and revenue from other industry
applications was 5% versus 9% from the prior year.
Although revenue growth for the next quarter will be limited as a result of the
current economic conditions, the last half of 2002 should benefit from
improvements in economic conditions and growth in demand for high technology
flexible circuit products including the Company's Flex Suspension Assembly
(FSA). Significant progress has been made in gaining customer acceptance of the
Company's FSA product that will be integral to increasing revenue in fiscal
2002.
GROSS MARGINS
-------------
The Company's gross profit as a percent of sales for the quarter decreased to
15.3% from the 15.6% reported for the fiscal 2001 first quarter. The decrease
was due to a change in product mix from the prior year. The reduction in labor
and overhead costs as a result of the Company's cost cutting measures was offset
by increased material costs primarily due to purchased suspensions required for
the FSA product.
The Company anticipates that gross margins in the last half of fiscal 2002 will
improve as a result of the refinement of manufacturing processes transferred to
the Company's Minnesota and Thailand locations due to closing the Chandler
manufacturing facility. Revenue increases during the last half of fiscal 2002
should also have a favorable impact on gross margins.
OPERATING EXPENSES
------------------
Operating expenses were 14.9% of sales for the current quarter, as compared to
15.3% in the prior year's first quarter. The decrease in operating expenses as a
percent of sales for the current year is primarily due to cost reduction
measures taken in fiscal 2001 including the closing of the Company's Chandler
facility. Fiscal 2002 operating expenses are expected to decrease as a percent
of sales due to cost reductions and anticipated increased revenue in the last
half of the year.
Page 8 of 21
OPERATING PROFIT
----------------
The consolidated operating profit of $151,000 in the current quarter was
virtually unchanged from the $126,000 for the prior year first quarter.
NET LOSS
--------
Net loss for the fiscal 2002 first quarter was $(297,000) as compared to
$(627,000) for the prior year first quarter. Basic and diluted net loss per
share were ($0.02) as compared to ($0.04) for the prior year first quarter.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and short-term investments increased to $2.4 million at December 31, 2001
from $1.8 million at September 30, 2001.
Accounts receivable at December 31, 2001 decreased by $1.9 from September 30,
2001 due to the timing of payment receipts. Inventories at December 31, 2001
increased by $1.0 million from September 30, 2001 due a build up of inventory to
ensure adequate availability through the holiday period.
Accounts payable at December 31, 2001 increased by $0.4 million primarily due to
the increased level of inventory. Other liabilities at December 31, 2001
decreased by $3.2 million primarily due to the payment of restructuring related
expenses and severance.
Working capital totaled ($5.5) million and ($5.9) million at December 31, 2001
and September 30, 2001.
Since September 30, 2001, the Company has invested $0.8 million in capital
expenditures. Capital expenditures of approximately $3 million are expected
during the remainder of fiscal 2002. These expenditures will include
technological upgrades and replacement of equipment.
On January 25, 2002, the Company entered into a sale/leaseback transaction that
is expected to generate $11.5 million in cash, which funds will be used to
reduce bank debt and provide additional working capital for the Company. The
transaction is expected to close on or before March 31, 2002, although it is
subject to various conditions and, therefore, there can be no assurance that it
will close. In addition, the Company is negotiating an expansion of its Thailand
credit facilities. The Company believes that with the existing U.S. and Thailand
credit facilities, cash generated from operations and cash generated from the
sale/leaseback transaction, it will have adequate funds to support projected
working capital and capital expenditures for fiscal 2002 and beyond. The Company
is considering alternatives for generating additional working capital and will
continue to pursue financing opportunities in both Thailand and the U.S to
better leverage its assets. 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 acceptance of the FSA product and cash flow from operations.
The Company failed to comply with certain covenants under its U.S. credit
facility during the current quarter. The attached Sixth Amendment to Credit
Agreement includes the bank's waiver of this non-compliance as of December 31,
2001 and a revised second quarter payment schedule.
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 and semiconductor
packaging substrates, the impact of
Page 9 of 21
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, consumer electronics,
computer 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's market risk during the
three-month period ended December 31, 2001.
PART II - OTHER INFORMATION
Responses to Items 1 through 5 are omitted since these items are either
inapplicable or the response thereto would be negative.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10 Sixth Amendment to Credit Agreement.
b) Reports on Form 8-K
None.
Page 10 of 21
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: February 14, 2002
By \s\ William P. Murnane
William P. Murnane
President and Chief Executive Officer
By \s\ Thomas Paulson
Thomas Paulson
Chief Financial Officer
Page 11 of 21
INDEX TO EXHIBITS
Exhibits Page
10 Sixth Amendment to Credit Agreement 13
Page 12 of 21