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, 2000.
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, 2001, 14,985,713 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
December 31, September 30,
2000 2000
ASSETS (Unaudited) (Audited)
------ ----------- ---------
Current assets:
Cash and equivalents $ 2,277,738 $ 1,673,486
Short-term investments 5,000 5,000
Accounts receivable, net 17,472,186 23,834,538
Inventories 23,163,272 21,570,553
Income taxes receivable 1,521,571 2,182,924
Other current assets 8,017,011 7,311,184
------------ ------------
Total current assets 52,456,778 56,577,685
Property, plant and equipment, net of accumulated depreciation
of $20,635,000 and $17,955,000 95,510,728 94,519,926
Intangible and other assets, net of accumulated amortization of
$1,543,000 and $1,326,000 6,892,764 7,089,649
Deferred income taxes 9,445,161 9,445,162
Other assets 46,869 47,470
------------ ------------
$164,352,300 $167,679,892
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 7,490,491 $ 7,198,411
Line of credit 10,500,000 9,700,000
Accounts payable 21,579,888 24,872,142
Accrued compensation 2,432,355 2,173,881
Other accrued liabilities 5,466,663 6,336,127
------------ ------------
Total current liabilities 47,469,397 50,280,561
Long-term debt, less current maturities 20,769,106 21,003,284
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares authorized,
14,985,713 and 14,930,286 shares issued and outstanding 599,209 597,211
Capital in excess of par value 17,429,308 17,086,609
Retained earnings 78,085,280 78,712,227
------------ ------------
Total stockholders' equity 96,113,797 96,396,047
------------ ------------
$164,352,300 $167,679,892
============ ============
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,
2000 1999
------------ ------------
Net sales $ 38,576,884 $ 44,724,625
Costs and expenses:
Cost of sales 32,550,180 40,009,449
Selling, general and administrative 4,205,031 4,235,842
Engineering 1,695,565 1,704,115
Restructuring charges -- 13,785,085
Net interest (income) expense 919,023 526,829
Net other (income) expense 90,109 194,660
------------ ------------
Income (loss) before taxes (883,024) (15,731,355)
Provision for income taxes (256,077) (4,562,093)
------------ ------------
Net income (loss) $ (626,947) $(11,169,262)
============ ============
Net income (loss) per share:
Basic ($ 0.04) ($ 0.75)
============ ============
Diluted ($ 0.04) ($ 0.75)
============ ============
Weighted average shares outstanding:
Basic 14,960,126 14,823,634
============ ============
Diluted 14,960,126 14,823,634
============ ============
See accompanying notes to condensed consolidated financial statements.
INNOVEX, INC. AND SUBSIDIARIES
Page 3 of 21
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (626,947) $(11,169,262)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,328,393 2,988,733
Restructuring and asset impairment charges -- 13,785,085
Other non-cash items 42,965 (120,682)
Changes in operating assets and liabilities net of business
acquisitions and restructurings:
Accounts receivable 6,362,352 4,416,659
Inventories (1,592,719) 2,218,749
Other current assets (725,162) (59,777)
Accounts payable (3,292,254) (12,092,370)
Other liabilities (610,989) (2,643,082)
Income taxes payable 661,353 (5,588,116)
------------ ------------
Net cash provided by (used in) operating activities 3,546,992 (8,264,063)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,173,919) (2,909,832)
Business acquisition -- (3,750,000)
Proceeds from sale of assets 28,580 3,609
Maturities of held-to-maturity securities -- 7,615,000
------------ ------------
Net cash provided by (used in) investing activities (4,145,339) 958,777
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,806,830) 622,520
Issuance of long-term debt 1,864,732 --
Net activity on line of credit 800,000 5,000,000
Proceeds from exercise of stock options 344,697 13,950
Dividends paid -- (592,948)
------------ ------------
Net cash provided by (used in) financing activities 1,202,599 5,043,522
Increase (decrease) in cash and equivalents 604,252 (2,261,764)
Cash and equivalents at beginning of year 1,673,486 6,231,430
------------ ------------
Cash and equivalents at end of period $ 2,277,738 $ 3,969,666
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest was $1,029,000 and $607,000 in fiscal 2001 and 2000,
respectively.
Income tax payments were $-0- and $107,000 in fiscal 2001 and 2000,
respectively.
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
registrant's annual report on Form 10-K for the year ended September 30, 2000.
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
LEAD WIRE ASSEMBLY PRODUCT LINE DISPOSITION-
During the fourth quarter of fiscal 1999, the Company recorded a charge of
approximately $2,765,000 related to the discontinuation of the lead wire
assembly product line. The charge included approximately $871,000 related to
asset impairment, $1,403,000 for the write off of inventory and supplies,
$197,000 in employee severance, $156,000 in facility abandonment costs and
$138,000 to increase the accounts receivable reserve. The disposition was
substantially completed by June 30, 2000. The restructuring charge was reduced
by $184,000 in the third quarter of fiscal 2000 as a result of a change in the
estimated liability.
MANUFACTURING OPERATIONS RESTRUCTURING-
The fiscal 2000 first quarter includes a $13,785,085 restructuring charge
related to restructuring the Company's manufacturing operations. The
restructuring is primarily related to moving operations from the Company's Agua
Prieta, Mexico facility to its new 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.
The company expected approximately 2,100 employees to be terminated as a result
of the restructuring, primarily in the Agua Prieta, Mexico facility. The
restructuring was substantially complete as of September 2000 with the exception
of completing the disposition of the Mexican facility. During the fourth quarter
of fiscal 2000, the Company had a change in estimate of employee termination
benefits. The change from the original estimate is due to higher turnover than
projected. The Company also increased its facility abandonment charges due to
additional costs relating to the disposition of the facility located in Agua
Prieta, Mexico.
The remaining restructuring accrual as of December 31, 2000 totaled $877,000.
Selected information regarding the restructuring follows (in thousands):
Lead Wire Assembly Product Manufacturing Operations
Line Disposition Restructuring
Facility Employee Facility Employee
Abandonment Termination Abandonment Termination
Charges Benefits Charges Benefits Total
--------------------------------------------------------
Page 5 of 21
Accrual at September 30,
1999 $ 156 $ 197 $- $- $ 353
Establishment of accrual 2,101 4,547 6,648
Payments (3) (152) (2,124) (5,091) (2,812)
Change in estimate (153) 19 1,435 (1,485) (184)
--------------------------------------------------------
Accrual remaining at
September 30, 2000 -- 64 1,412 250 1,726
Payments (58) (688) (103) (849)
Change in estimate (6) 6 --
--------------------------------------------------------
Accrual remaining at
December 31, 2000 $- $- $ 730 $ 147 $ 877
========================================================
On January 23, 2001, the Company announced plans to close its Chandler
manufacturing facility and transfer those operations to its Minnesota
facilities. The Company expects to incur restructuring and asset impairment
charges of up to $20 million related to this manufacturing operation
consolidation. The restructuring is expected to significantly reduce operating
costs by the end of the fiscal year as a result of consolidating facilities and
the higher level of efficiency of the Minnesota operations.
NOTE 3 - EARNINGS 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 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. Options to purchase
771,970 shares of common stock with a weighted average exercise price of $14.72
were outstanding during the three month period ending December 31, 1999, 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,
2000 2000
---------------------------------
Raw materials and purchased parts $11,961 $11,804
Work-in-process and finished goods 11,202 9,767
---------------------------------
$23,163 $21,571
=================================
PART I: ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
On August 9, 1999, Innovex, Inc. and its subsidiaries (the "Company")
consummated the purchase of approximately 76% of the outstanding shares of
ADFlex Solutions, Inc. ("ADFlex") at a purchase price of $3.80 per share subject
to a tender offer. The remaining approximately 24% of ADFlex issued and
outstanding common stock not tendered in response to the tender offer was
acquired by the Company through a merger transaction completed on September 14,
1999. The total ADFlex purchase price, including transaction costs, change in
control payments and all of the issued and outstanding common stock was
approximately $37 million. 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
Page 6 of 21
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 into
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. As a result, during the fiscal 1999
fourth quarter, charges of $2.8 million were recorded to account for the
discontinuance of this product line.
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 $38,577,000 for the quarter,
down 14% from $44,725,000 reported in fiscal 2000. The decrease in net sales for
the first quarter of fiscal 2001 was due to lower revenue generated by standard
flexible circuit product lines associated with the ADFlex Solutions acquisition
in late 1999. Revenue generated by the acquired ADFlex Solutions operation
declined throughout fiscal 2000 as a result of quality, cost and customer
service issues existing at the time of purchase. These issues have been
addressed and revenue increases are expected from these product lines in the
last half of fiscal 2001.
Revenue from the disk drive industry generated 61% of the Company's revenue for
the quarter. In addition, 14% of the revenue was generated by flexible circuits
for consumer applications, 16% from
Page 7 of 21
network system applications, 4% from telecommunication applications and 5% from
applications for other industries. The acquisition of ADFlex has reduced the
Company's dependence on the disk drive industry significantly from its
historical levels of 85-90% of revenue. Although revenue growth for the next
quarter will be limited as a result of the current economic conditions, the last
half of fiscal 2001 should benefit from continued 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 2001.
GROSS MARGINS
The Company's gross profit as a percent of sales for the quarter increased to
16%, from the 11% reported for the fiscal 2000 first quarter. The increase was
due to yield and efficiency improvements related to manufacture of the high
technology flexible circuits. These improvements offset the unfavorable impact
on gross margins resulting from the lower revenue level of the standard flexible
circuits. The Company anticipates that gross margins in the last quarter of
fiscal 2001 will improve as a result of the cost reductions and improved
efficiencies related to closing the Chandler manufacturing facility. Near term
gross margins will be negatively impacted due to the duplicate costs of ramping
up production at the Company's Minnesota operations while discontinuing the
Chandler operation. Revenue increases during the last half of fiscal 2001 should
also have a favorable impact on gross margins.
OPERATING EXPENSES
Operating expenses were 15.3% of sales for the current quarter, as compared to
13.3% in the prior year's first quarter. The increase in operating expenses as a
percent of sales for the current year is primarily due to decreased revenue
generated by the standard flexible circuit product lines. Total operating
expenditures remained unchanged from the same period last year. Fiscal 2001
operating expenses are expected to decrease as a percent of sales due to
increased revenue in the last half of the year.
RESTRUCTURING CHARGES
A restructuring charge of $13,785,000 was recorded during the first quarter of
fiscal 2000 related to the restructuring of the Company's manufacturing
operations. The restructuring was primarily related to moving operations from
the Company's Agua Prieta, Mexico facility to its new facility in Lamphun,
Thailand. The majority of this charge included employee severance, asset
impairment of property and equipment and facility abandonment costs.
On January 23, 2001, the Company announced plans to close its Chandler
manufacturing facility and transfer those operations to its Minnesota
facilities. The Company expects to incur restructuring and asset impairment
charges of up to $20 million related to this manufacturing operation
consolidation. The restructuring is expected to significantly reduce operating
costs by the end of the fiscal year as a result of consolidating facilities and
the higher level of efficiency of the Minnesota operations.
OPERATING PROFIT (LOSS)
The consolidated operating profit of $126,000 in the current quarter was up from
the operating loss of $(15,010,000) for the prior year first quarter. The
increase is primarily due to the restructuring charge recorded during the prior
year first quarter.
NET INCOME (LOSS)
Consolidated net loss for the fiscal 2001 first quarter was $(627,000) as
compared to $(11,169,000) for the prior year. Basic and diluted net loss per
share were ($0.04) as compared to ($0.75) for the prior year first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased to $2.3 million at December 31, 2000
from $1.7 million at September 30, 2000.
Page 8 of 21
Accounts receivable at December 31, 2000 decreased by $6.4 from September 30,
2000 due to a large customer temporarily reducing their payment cycle.
Inventories at December 31, 2000 increased by $1.6 million from September 30,
2000 due a build up of inventory for a new program ramp up that was temporarily
delayed.
Accounts payable at December 31, 2000 decreased by $3.3 million primarily due
the reduced level of capital expenditures during the quarter and the lower level
of purchasing activity toward the end of the quarter.
Working capital totaled $5.0 million and $6.3 million at December 31, 2000 and
September 30, 2000.
Since September 30, 2000, the Company has invested $4.2 million in capital
expenditures primarily for FSA attachment equipment. Capital expenditures of
approximately $6 million are expected during the remainder of fiscal 2001. These
expenditures will increase the Company's FSA production capacities and complete
the move of the Chandler operation to Minnesota.
Management has entered into negotiations for obtaining additional credit
facilities that would be secured by the receivables, inventory and assets held
by the Company in Thailand. Management believes that a new credit facility
secured by Thailand assets, existing credit facilities, cash and investments and
cash generated from operations will provide an adequate source of funds to
support projected working capital and capital expenditures in fiscal 2001. The
Company will seek alternative financing if it is not successful in negotiating
this credit facility on terms acceptable to the Company. The Company is in
compliance with the debt covenants of its primary financing agreement as amended
by the Second Amendment to Credit Agreement attached to this document as an
exhibit.
FORWARD LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, elsewhere in the Company's Form 10-Q 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 FSA and
semiconductor packaging substrates, the impact of competitive products and
pricing, the development and implementation of a materials manufacturing
process, the transfer of Chandler AZ operations to Minnesota, interruptions in
the operations 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, network system and telecommunication industries and any changes in
the structure, technology or outlook of these industries could have a
significant 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.
Page 9 of 21
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, 2000.
PART II - OTHER INFORMATION
Responses to Items 1 through 3 and 5 are omitted since these items are either
inapplicable or the response thereto would be negative.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of the shareholders of Innovex, Inc. was held on January
17, 2001. There were 14,980,213 shares of common stock entitled to vote at
the meeting and a total of 13,758,409 shares were represented at the meeting.
b) Seven directors were elected at the meeting to serve for one year or until
their successors are elected and qualified. Shares were voted as follows:
For Withheld
--- --------
Gerald M. Bestler 13,523,872 234,537
Frank L. Farrar 11,529,314 2,229,095
Thomas W. Haley 12,382,715 1,375,694
Elick Eugene Hawk 13,578,679 179,730
William P. Murnane 13,523,932 234,477
Michael C. Slagle 13,580,710 177,699
Bernt M. Tessem 13,578,692 179,717
c) Other matters voted on at the meeting:
Proposal #2. A proposal was made to approve the selection of the
Company's independent public accountants for the current fiscal year.
Shares were voted as follows:
For Against Abstain
---- ------- -------
13,642,120 26,848 89,441
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10 Second 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, 2001
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 Second Amendment to Credit Agreement 13
Page 12 of 21