<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --------- SECURITIES EXCHANGE ACT OF 1934. For the Quarterly Period ended
September 30, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --------- SECURITIES EXCHANGE ACT OF 1934. For the transition Period from
N/A to _____________ .
---
Commission File No. 1-8467
BMC INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
MINNESOTA 41-0169210
(State of Incorporation) (IRS Employer Identification No.)
ONE MERIDIAN CROSSINGS, SUITE 850, MINNEAPOLIS, MINNESOTA 55423
(Address of Principal Executive Offices) (Zip Code)
(612) 851-6000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether 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 at least the past 90 days.
X Yes No
------- -------
BMC Industries, Inc. has outstanding 27,164,082 shares of common stock as of
November 11, 1998. There is no other class of stock outstanding.
Exhibit Index Begins at Page 16
<PAGE>
PART I: FINANCIAL INFORMATION
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
Item 1: Financial Statements
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,742 $ 2,383
Trade accounts receivable, net of allowances 42,496 29,824
Inventories 84,856 70,111
Deferred income taxes 11,315 5,881
Other current assets 8,815 13,595
- -------------------------------------------------------------------------------
Total Current Assets 150,224 121,794
- -------------------------------------------------------------------------------
Property, Plant and Equipment 280,028 283,070
Less Accumulated Depreciation 114,292 100,688
------------ ----------
Property, Plant and Equipment, Net 165,736 182,382
------------ ----------
Deferred Income Taxes 16,515 1,429
Intangible Assets, Net 67,004 2,991
Other Assets 11,261 10,811
- -------------------------------------------------------------------------------
Total Assets $ 410,740 $ 319,407
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current Liabilities
Short-term borrowings $ 822 $ 1,139
Accounts payable 25,566 25,623
Income taxes payable 226 2,830
Accrued expenses and other liabilities 24,332 17,288
- -------------------------------------------------------------------------------
Total Current Liabilities 50,946 46,880
- -------------------------------------------------------------------------------
Long-Term Debt 209,713 73,426
Other Liabilities 18,559 17,718
Deferred Income Taxes 2,738 2,631
Stockholders' Equity
Common stock 47,662 62,263
Retained earnings 82,167 118,693
Accumulated other comprehensive income 1,047 (1,217)
Other (2,092) (987)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 128,784 178,752
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 410,740 $ 319,407
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 88,584 $ 79,086 $ 253,609 $ 236,470
Cost of products sold 81,642 61,813 232,177 181,356
- -------------------------------------------------------------------------------------------------------------------------
Gross margin 6,942 17,273 21,432 55,114
Selling 4,545 3,042 11,748 8,616
Administration 1,213 1,006 4,072 3,634
Impairment of long-lived assets - - 42,800 -
Acquired research and development - - 9,500 -
- -------------------------------------------------------------------------------------------------------------------------
Income from Operations 1,184 13,225 (46,688) 42,864
- -------------------------------------------------------------------------------------------------------------------------
Other Income and (Expense)
Interest expense (3,949) (403) (9,650) (707)
Interest income 22 45 99 143
Other income (expense) (399) 71 (932) 300
- -------------------------------------------------------------------------------------------------------------------------
Earnings before Income Taxes (3,142) 12,938 (57,171) 42,600
Income Taxes (1,173) 4,063 (21,859) 13,853
- -------------------------------------------------------------------------------------------------------------------------
Net Earnings $ (1,969) $ 8,875 $ (35,312) $ 28,747
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net Earnings Per Share:
Basic $ (0.07) $ 0.32 $ (1.31) $ 1.04
Diluted (0.07) 0.31 (1.31) 1.01
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Number of Shares Included in Per Share Computation:
Basic 26,989 27,681 26,963 27,518
Diluted 26,989 28,619 26,963 28,524
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Dividends Declared Per Share $ 0.015 $ 0.015 $ 0.045 $ 0.045
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Cash Provided by (Used in) Operating Activities
Net earnings (loss) $ (35,312) $ 28,747
Depreciation and amortization 15,765 10,527
Write-down of impaired long-lived assets 42,800 -
Acquired research and development 9,500 -
Deferred income taxes (20,604) (16)
Changes in operating assets and liabilities (8,560) (33,631)
- -------------------------------------------------------------------------------------------------------------------------
Total 3,589 5,627
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities
Additions to property, plant and equipment (18,202) (68,203)
Business acquisitions, net of cash acquired (101,000) (1,817)
- -------------------------------------------------------------------------------------------------------------------------
Total (119,202) (70,020)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities
Decrease in short-term borrowings (292) (81)
Increase in long-term debt 133,170 60,278
Common stock issued (repurchased), net (14,601) 4,901
Cash dividends paid (1,224) (1,234)
Other (1,105) 294
- -------------------------------------------------------------------------------------------------------------------------
Total 115,948 64,158
- -------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 24 (171)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 359 (406)
Cash and Cash Equivalents at Beginning of Period 2,383 2,544
- -------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 2,742 $ 2,138
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
BMC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
1. Financial Statements
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of September 30,
1998, and the results of operations and the cash flows for the periods
ended September 30, 1998 and 1997. Except for the special charges
discussed in footnote 2 and in Management's Discussion and Analysis of
Financial Condition and Results of Operations, such adjustments are of a
normal recurring nature. Certain items in the financial statements for
the periods ended September 30, 1997 have been reclassified to conform
to the presentation for the periods ended September 30, 1998. The
results of operations for the three-month and nine-month periods ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full year. The balance sheet as of December 31, 1997
is derived from the audited balance sheet as of that date. For further
information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. Restatement of 1998 Financial Statements
The accompanying financial statements for the nine month period ended
September 30, 1998 have been restated to give effect to the restatement
of the charge taken in the quarter ended June 30, 1998 for acquired
in-process research and development (IPR&D) purchased as part of the
acquisition of Orcolite (see footnote 9). This charge, originally recorded
at $11 million (pre-tax), was reduced by $1.5 million and restated to $9.5
million (pre-tax) in order to comply with Securities and Exchange
Commission interpretations regarding techniques used to value IPR&D
issued later in 1998. The effect of the restatement reduced the net loss
from amounts previously reported by $970 and the net loss per share by $.03
for the nine month period ended September 30, 1998. The pro forma amounts
reflected in footnote 9 have also been restated to reflect the above
restatement and to be consistent with the pro forma amounts presented in
the 1998 year-end financial statements.
3. Impairment of Long-Lived Assets/Acquired Research and Development
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121 (Statement No. 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS, the Company recorded a charge of $26.7 million ($42.8 million
pre-tax) during the quarter ended June 30, 1998 for the write-down of
certain Precision Imaged Products (PIP) operations fixed assets, primarily
those related to the production of computer monitor masks. Statement No.
121 prescribes that an impairment loss should be recognized in the event
that facts and circumstances indicate that the carrying amount of an asset
may not be recoverable, and the estimated future undiscounted cash flows
related to the asset are less than the carrying amount of the asset. After
careful assessment of various factors relevant to these assets, including
the computer monitor mask market, management determined it was appropriate
to write-down the value of these assets and, accordingly, such assets were
written down to estimated fair value in accordance with Statement No. 121.
In addition, in accordance with generally accepted accounting principles,
the independently appraised value of acquired in-process research and
development purchased in conjunction with the Orcolite acquisition was
written-off as a charge of $6.0 million ($9.5 million pre-tax) during the
quarter ended June 30, 1998. See footnote 9 for further discussion.
4. Inventories
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 28,834 $ 24,542
Work in process 9,347 15,971
Finished goods 46,675 29,598
---------- ----------
Total Inventories $ 84,856 $ 70,111
---------- ----------
---------- ----------
</TABLE>
<PAGE>
5. Credit Facilities
During the second quarter of 1998, the Company entered into a new domestic
credit agreement, as amended in July 1998 (the Agreement), with a syndicate
of banks for secured borrowings totaling up to $250 million. Borrowings
under the Agreement bear interest at the Eurodollar Rate plus 0.5% to
1.625% (7.0625% at September 30, 1998). The rate spread is dependent upon
the Company's ratio of debt to cash flow, as defined. In addition, the
Company pays a facility fee on unborrowed funds at rates ranging from
0.225% to 0.475% (0.425% at September 30, 1998), depending on the Company's
debt to cash flow ratio. Under terms of the Agreement, the Company must
meet certain financial covenants, including maintaining a specified
consolidated net worth, leverage ratio (debt to cash flow), interest
coverage ratio and level of capital expenditures. The Company was in
compliance with all covenants under the Agreement and had borrowings of
$198 million under the Agreement at September 30, 1998.
At September 30, 1998, the Company also had long-term and short-term
borrowings of $9.5 million under the approximately $20.6 million credit
facility maintained by the Company's German subsidiary and other debt
totaling approximately $3.0 million. The German and other debt amounts are
more completely described in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
6. Earnings Per Share
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, EARNINGS PER SHARE (Statement No. 128). Statement No. 128 replaced
the calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes the dilutive effects of stock options and any
other dilutive securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. For the
Company's earnings per share calculations, the basic and diluted weighted
average outstanding shares differ only due to the dilutive impact of stock
options. All earnings per share amounts for all periods have been restated
to conform to the Statement No. 128 requirements.
7. Derivative Financial Instruments
In January 1997, the SEC issued new rules related to disclosures about
derivative financial instruments. The new rules, effective for all
financial statements issued for periods ending after June 15, 1997, require
accounting policy disclosures about derivative financial instruments used
by the Company. Effective for fiscal years ending after
June 15, 1998, the new rules also require quantitative and qualitative
disclosures about exposures to market risk from derivative financial
instruments.
Derivative financial instruments are used by the Company to reduce foreign
exchange and interest rate risks.
Foreign Currency Exchange Options - As of September 30, 1998, there were no
outstanding foreign currency exchange options. As of December 31, 1997,
the Company had approximately $3.6 million of outstanding foreign currency
exchange options to exchange U.S. dollars for German marks at a set
exchange rate. These foreign exchange options do not expose the Company to
financial risk as the contracts provide an option to
<PAGE>
exchange the currencies, but do not obligate the Company to make a foreign
currency exchange. Premiums paid for foreign currency exchange options are
amortized to Other Expense over the life of the options. Upon exercise of
foreign currency exchange options, gains are included in income.
Interest Rate Swaps - In March 1997, the Company entered into an interest
rate swap agreement that allows the Company to swap a variable interest
rate for a fixed interest rate of 6.365% (7.74% including current spread of
1.375%) on $15 million of notional debt during a period ending March, 1999.
In August 1998, the Company entered into additional multiple interest rate
swap agreements for a total of $100 million of notional debt which provide
for the Company to swap a variable interest rate for fixed interest rates
ranging from 5.74% to 5.76% plus a specified spread depending on the swap
involved (7.12% to 7.14% including current spread of 1.375%). These swaps
expire at various dates ranging from July 1999 to August 2000.
The notional amount of debt is not a measure of the Company's exposure to
credit or market risks and is not included in the condensed consolidated
balance sheet. Fixing the interest rate minimizes the Company's exposure
to the uncertainty of floating interest rates during this period. Amounts
to be paid or received under the interest rate swap agreements are accrued
and recorded as an adjustment to Interest Expense during the term of the
interest rate swap agreement.
Cross-Currency Swaps - In October and November 1998, the Company entered
into cross-currency swaps which provide for the Company to swap $20 million
of notional debt for the equivalent amount of Japanese yen-denominated
debt. Under these swaps, the Company will also effectively swap a U.S.
dollar-based interest rate (5.5% at September 30, 1998) for a Japanese
yen-based interest rate (1.1% at September 30, 1998). These Japanese
yen-based debt derivatives will be accounted for in future periods under
mark-to-market accounting. These swaps expire in October and November
2001.
8. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME (Statement No. 130). Statement No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement No. 130 requires
foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement No. 130.
The components of comprehensive income, net of related tax, for the
three-month and nine-month periods ended September 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (1,969) $ 8,875 $ (35,312) $ 28,747
Foreign currency
translation adjustments 2,397 (1,172) 2,264 (4,984)
---------- ----------- ----------- -----------
Comprehensive income $ 428 $ 7,703 $ (33,048) $ 23,763
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
<PAGE>
9. Business Acquisition
On May 15, 1998, the Company, through a wholly-owned subsidiary, acquired
the Orcolite business unit of the Monsanto Company for the cash purchase
price of $101 million. For financial statement purposes, the acquisition
has been accounted for under the purchase method of accounting with the
excess of the purchase price over the fair value of the net tangible assets
acquired recorded as intangible assets which are being amortized over
periods ranging from 7 to 30 years. In addition, as a result of the
acquisition, a $9.5 million (pre-tax) charge was taken after the close of
the acquisition in the second quarter of 1998 related to the write-off of
acquired in-process research and development. The following unaudited pro
forma information presents a summary of consolidated results of operations
of the Company and the Orcolite business unit as if the acquisition had
occurred at the beginning of fiscal 1997, with pro forma adjustments to
give effect to amortization of goodwill and other intangible assets,
depreciation expense on the fair value of property, plant and equipment and
interest expense on acquisition debt, together with the related income tax
effects. The pro forma adjustments do not include the $9.5 million
write-off of acquired in-process research and development mentioned above.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 88,584 $ 86,788 $ 267,827 $ 257,697
Net earnings (loss) (1,969) 8,082 (36,930) 26,018
Diluted earnings per share (0.07) 0.28 (1.37) 0.91
</TABLE>
The unaudited pro forma condensed combined financial information above is
not necessarily indicative of what actual results would have been had the
acquisition occurred at the date indicated or indicative of the results
that may be expected for the full year ended December 31, 1998. Also,
numerous business synergies are projected as a result of the acquisition,
including the following: consolidation of selling, marketing, distribution,
customer service and administrative functions; consolidation of research
and development and technical services functions; optimization of combined
production capacity; and improved purchasing leverage. The anticipated
financial impact resulting from such synergies has not been reflected in
the above pro forma financial information. See the Company's Current
Reports on Form 8-K as filed on April 3, 1998 and May 29, 1998 and Current
Report on Form 8-K/A filed on July 29, 1998, for additional information
regarding the acquisition.
10. New Accounting Standards
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. This statement requires
additional disclosure only, and as such, is not expected to change net
income or stockholders' equity as previously reported by the Company.
The statement is effective for the Company's fiscal year ended December
31, 1998.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. The statement
supersedes the disclosure requirements in SFAS No. 87, EMPLOYERS'
ACCOUNTING FOR PENSIONS, No. 88, ACCOUNTING FOR SETTLEMENTS and
CURTAILMENTS OF DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION
BENEFITS, and No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS. The overall objective
<PAGE>
is to improve and standardize disclosures about pensions and other
postretirement benefits and to make the required information easier to
prepare and more understandable. SFAS No. 132 eliminates certain
existing disclosure requirements, but at the same time adds new
disclosures. This statement is effective for the Company's Fiscal year
ended December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES
AND SIMILAR FINANCIAL INSTRUMENTS AND FOR HEDGING ACTIVITIES. The new
Statement will significantly change how companies account for
derivatives and hedging activities, including the following two key
elements: (1) all derivatives would be measured at fair value and
recognized in the balance sheet as assets or liabilities, and (2)
derivatives meeting certain criteria could be specifically designated as
a hedge. The Company is currently evaluating the impact of this
Statement on the Company. The statement is effective for the Company in
the year 2000.
11. Legal Matters
There are no material changes in the status of the Barth Industries legal
proceeding or any other legal proceeding or environmental matter described
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
<PAGE>
BMC INDUSTRIES, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total revenues for the third quarter of 1998 increased $9.5 million or 12% from
the third quarter of 1997 driven primarily by additional sales resulting from
the Orcolite acquisition. Revenues of the Precision Imaged Products (PIP) group
for the third quarter decreased 5% from the prior year period. Television mask
unit sales were up 13% over third quarter 1997; however sales dollars were down
9% from the prior year period due primarily to lower invar mask sales and
overall price declines. Computer monitor mask sales increased to $7.4 million
in the third quarter of 1998 compared to $6.2 million in the third quarter of
1997. For the quarter, AK steel sales of jumbo (30" and larger) television
masks were up 18% and large (25" to 29") television masks were up 9% from the
prior year period. Invar television mask sales were down 39% for the quarter.
Revenues of the Optical Products group increased 51% over the same quarter in
the prior year driven by additional sales resulting from the Orcolite
acquisition and continued strong sales of high-end products (polycarbonate,
high-index, progressive and polarizing sun lenses). On a pro forma basis,
Optical Products group revenues increased 9% over the combined Vision-Ease and
Orcolite 1997 third quarter revenues. Sales of high-end products increased 114%
in the third quarter of 1998 compared to the third quarter of 1997. On a pro
forma basis, sales of high-end products grew 23% over the combined Vision-Ease
and Orcolite 1997 third quarter revenues.
Cost of products sold were 92% and 78% of revenues for the third quarter of 1998
and 1997, respectively. The increased cost of products sold percentage was due
primarily to the extended shutdown of three manufacturing lines at the Cortland,
New York Mask facility and continued pricing pressure in the Mask business. The
Company estimates the extended shutdown of these lines negatively impacted gross
margin by approximately $4 million during the quarter; however, this shutdown
was instrumental in allowing Mask Operations to reduce their inventory by
approximately $10 million during the third quarter. One of the three
manufacturing lines that was temporarily shutdown has now resumed operation.
Restarting the remaining two lines (one television and one computer monitor) is
contingent upon success in growing market share and improved market conditions
in the future. The Optical Products group's gross margin also decreased from
the prior year's level due primarily to expenses related to the integration of
Orcolite and amortization expense related to the Orcolite goodwill.
Selling expenses were $4.5 million or 5.1% of revenues and $3.0 million or 3.8%
of revenues for the third quarter of 1998 and 1997, respectively. The increase
is primarily due to higher selling expenses associated with the Optical Products
group, including promotional expenses related to the new premium line of
Tegra-Registered Trademark- polycarbonate lenses.
Interest expense in the third quarter of 1998 was $3.9 million compared to $0.4
million in the third quarter of 1997. This increase was due primarily to the
increased debt level and the completion of major capital projects that no longer
qualify for the capitalization of interest. The increased debt level resulted
primarily from the cash purchase of Orcolite for $101.0 million in May of 1998
and capital spending for expansion projects which were completed in 1997.
<PAGE>
The provision for income taxes was 37% and 31% of pre-tax income in the third
quarter of 1998 and 1997, respectively. The third quarter 1998 tax rate
reflects the effective rate for pre-tax losses plus the benefit of a foreign tax
credit for dividends received from the Company's German subsidiary. The third
quarter 1997 tax rate was lower because it reflects the effective tax rate on
pre-tax income less the benefit from the reduction of the deferred tax asset
valuation allowance. The tax rate for the full year of 1998 is currently
anticipated to be approximately 38%.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total revenues for the first nine months of 1998 increased $17.1 million or 7%
from the first nine months of 1997. Revenues of the PIP group were down $4.9
million or 3% during the same period. Television mask unit sales were up 10%
over the first nine months of 1997; however sales dollars were down 14% from the
prior year due primarily to a sales mix shift from invar to AK masks and overall
price reductions. Computer monitor mask sales increased to $25.4 million in the
first nine months of 1998 compared to $11.7 million in the prior year period.
For the first nine months of 1998, AK steel sales of jumbo (30" and larger)
television masks were up 1% and large (25" to 29") television masks were up 16%
from the prior year period. Invar television mask sales were down 44% during
the same period. The weakening of the German mark relative to the U.S. dollar
had virtually no impact on earnings but reduced sales, as compared with the
prior year, by approximately $2 million. Revenues of the Optical Products Group
increased 31% over the same period in the prior year driven by additional sales
resulting from the Orcolite acquisition and continued strong sales of high-end
products (polycarbonate, high-index, progressive and polarizing sun leases). On
a pro-forma basis, Optical Products Group revenues, which for 1998 include sales
from Orcolite subsequent to the date of acquisition, increased 9% over the
combined Vision-Ease and Orcolite 1997 same period revenues. Sales of high-end
products increased 126% in the first nine months of 1998 compared to the same
period of 1997. On a pro forma basis, sales of high-end products, which for
1998 include sales from Orcolite subsequent to the date of acquisition, grew 24%
over the combined Vision-Ease and Orcolite 1997 same period revenues.
Cost of products sold were 92% and 77% of revenues for the first nine months of
1998 and 1997, respectively. The increased cost of products sold percentage was
due primarily to Mask Operations and reflects pricing pressure in the mask
business, costs associated with the extended shutdown of three manufacturing
lines at the Cortland facility, and inventory charges. In addition, significant
start-up costs were incurred on the new computer monitor mask line in Cortland
in the first quarter of 1998.
Selling expenses were $11.7 million or 4.6% of revenues and $8.6 million or
3.6% of revenues for the first nine months of 1998 and 1997, respectively. The
increase is primarily due to higher selling expenses associated with the Optical
Products group, including promotional expenses related to the new premium line
of Tegra-Registered Trademark- polycarbonate lenses.
The impairment of long-lived assets of $42.8 million reflects the write-down of
the value of certain PIP Operations fixed assets, primarily those related to the
production of computer monitor masks. In accordance with Statement of Financial
Accounting Standards No. 121 (Statement No. 121) ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS, the Company recorded a charge of $26.7 million ($42.8
million pre-tax) during the second quarter of 1998 for write-down of these fixed
assets. After careful assessment of various factors relevant to these assets,
including the computer monitor mask market, management determined it was
appropriate to write-down the value of these assets and, accordingly, such
assets were written down to estimated fair value in accordance with Statement
No. 121.
<PAGE>
In accordance with generally accepted accounting principles, the independently
appraised value of acquired in-process research and development purchased in
conjunction with the Orcolite acquisition, was written-off as a charge of $6.0
million ($9.5 million pre-tax) during the second quarter of 1998. See footnote
9 for further discussion.
Interest expense in the first nine months of 1998 was $9.7 million compared to
$0.7 million in the first nine months of 1997. This increase is due primarily
to the increased debt level, debt placement underwriting fees associated with
the Orcolite acquisition and the completion of major capital projects that no
longer qualify for the capitalization of interest. The increased debt level
resulted primarily from the cash purchase of Orcolite for $101 million and
capital spending for expansion projects which were completed in 1997.
The provision for income taxes was 38% and 33% of pre-tax income for the first
nine months of 1998 and 1997, respectively. The 1998 tax rate reflects the
effective rate for pre-tax losses plus the benefit of a foreign tax credit for
dividends received from the Company's German subsidiary. The 1997 tax rate was
lower because it reflects the standard tax rate on pre-tax income less the
benefit from the reduction of the deferred tax asset valuation allowance. The
tax rate for the full year of 1998 is currently anticipated to be approximately
38%.
FINANCIAL POSITION AND LIQUIDITY
Debt, net of cash and cash equivalents, increased $135.6 million during the
first nine months of 1998. The increased debt level was due primarily to the
$101 million acquisition of Orcolite, the $16.6 million stock repurchase in
January 1998, capital spending and increased levels of working capital. Working
capital was $99.3 million at September 30, 1998 compared to $110.6 million at
June 30, 1998 and $74.9 million at December 31, 1997. The increased working
capital from December 31, 1997 was due primarily to the Orcolite acquisition and
increased inventory and accounts receivable levels to support increased optical
sales. During the third quarter, working capital was reduced by $11.3 million,
driven by a reduction in inventories of $11.0 million, and debt was reduced by
$9.6 million. The current ratio was 2.9 at September 30, 1998 compared to 3.1
at June 30, 1998 and 2.6 at December 31, 1997. The ratio of debt to equity
increased to 1.6 at September 30, 1998 compared to 0.4 at December 31, 1997 due
to the increased debt levels, the reduction in equity resulting from second
quarter 1998 charges and the January 1998 stock repurchase.
During the nine months ended September 30, 1998, the Company had $18.2 million
of capital spending and expects a total of $20.0 to $25.0 million of capital
spending for the full year of 1998. The Company has a total of approximately
$270.0 million in revolving credit facilities. The unused portion of these
facilities, along with cash generated from operations, is currently expected to
be sufficient to meet the Company's future capital requirements related to its
existing base of business. See footnote 4 for details of current credit
facilities.
FOREIGN CURRENCY
Fluctuations in foreign currency exchange rates may affect the Company's
financial results. The Company has an overall indirect exposure to Asian
currencies, primarily the Japanese yen and the Korean won, because the Mask
Operations' most significant competitors are Japanese and Korean manufacturers.
The Company's strategy is to partially offset this business exposure through the
cross-currency swaps discussed below. The Company's German subsidiary has a
large portion of its sales denominated in U.S. dollars. As most of the German
subsidiary's expenses are denominated in the German mark, this also represents
an element of the Company's exposure to currency rate fluctuations.
<PAGE>
This exposure is generally addressed as needed through the purchase of forward
contracts and options. As of September 30, 1998, the Company had no forward
options or contracts. Exposure to foreign currency exchange rate fluctuations
also exists with respect to transactions with and transactions within the
Company's German, Indonesian and Hungarian operations.
INTEREST RATE SWAPS
In March 1997, the Company entered into an interest rate swap agreement that
allows the Company to swap a variable interest rate for a fixed interest rate of
6.365% (7.74% including current spread of 1.375%) on $15.0 million of notional
debt during the period ending March 1999. In August 1998, the Company entered
into multiple interest rate swap agreements for a total of $100 million of
notional debt which provide for the Company to swap a variable interest rate for
fixed interest rates ranging from 5.74% to 5.76% plus a specified spread
depending on the swap involved (7.12% to 7.14% including current spread of
1.375%). These swaps expire at various dates ranging from July 1999 to August
2000. These swaps are discussed more fully in footnote 6.
CROSS-CURRENCY SWAPS
In October and November 1998, the Company entered into cross-currency swaps
which provide for the Company to swap a total of $20 million of notional debt
for the equivalent amount of Japanese yen-denominated debt. Under these
swaps, the Company will also effectively swap a U.S. dollar-based interest
rate (5.5% at September 30, 1998) for a Japanese yen-based interest rate
(1.1% at September 30, 1998). These Japanese yen-based debt derivatives will
be accounted for in future periods under mark-to-market accounting. These
swaps expire in October and November 2001.
ENVIRONMENTAL
During the third quarter of 1998, the Company signed a Consent Decree among the
United States and PRPs for remediation of a site in Cortland, New York. As
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, PRPs at the site previously filed suit against the Company
and sixteen other parties for allegedly sending waste to the site. Subject to
U.S. District Court approval, the Consent Decree will settle liability issues
for past and future EPA costs and future site remediation costs. The Company
also anticipates that the Consent Decree will result in the dismissal of the
original PRPs' lawsuit and that the Company will not incur liability for past
PRP response costs. It is not currently anticipated that the Company's share of
the costs of environmental remediation activities for this site will have a
materially adverse effect on the financial condition or results of operations of
the Company.
Other than as described above, there are no material changes in the status of
the legal proceedings and environmental matters described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
ACQUISITIONS
On May 15, 1998, the Company, through a wholly-owned subsidiary, acquired
Orcolite, a division of Monsanto Company which produces polycarbonate and
plastic ophthalmic lenses, for $101.0 million in cash. Orcolite, headquartered
in Azusa, California had sales of $38.0 million for the twelve months ended
March 31, 1998 and is well regarded in the ophthalmic lens industry for its
manufacturing abilities, product innovation and customer service. See footnote
9 and the Company's Current Reports
<PAGE>
on Form 8-K as filed on April 3, 1998 and May 29, 1998, and Current Report
on Form 8-K/A filed on July 29, 1998, for additional information regarding
the acquisition.
MASK OPERATIONS EXTENDED SHUTDOWN
During the third quarter of 1998, the Company shut down three manufacturing
lines at the Cortland facility for an extended period of time. These shutdowns
were done in conjunction with the Company's normal summer maintenance shutdowns
to avoid additional ramp-up time. One of the three manufacturing lines that was
temporarily shutdown has now resumed operation. Restarting the remaining two
lines (one television and one computer monitor) is contingent upon success in
growing market share and improved market conditions in the future.
YEAR 2000 COMPLIANCE
The Company has computer applications at the corporate level and at each of
its operating divisions that require or have required modifications made
necessary by the upcoming year 2000. The Year 2000 ("Y2K") issue is the
result of computer programs using a two-digit format, as opposed to four
digits, to indicate the year. Such programs will be unable to correctly
interpret dates beginning in the year 2000 and, as a result, could cause
computer system failures or miscalculations. Such failures or miscalculations
could cause significant disruptions of operations, including among other
things, an inability to process transactions or engage in normal business
activities. If appropriate modifications are not made, or are not completed
in a timely manner, the Y2K issue could have a material impact on the
operations of the Company.
The Company has been addressing the Y2K issue using essentially the following
four-phased approach:
- Phase I - Identification of all computer systems within the Company
with exposure to Y2K issues
- Phase II - For each system, assessment of Y2K issue(s) and required
remediation
- Phase III - Remediation and testing of systems to be Y2K compliant
- Phase IV - Assessment of Y2K preparedness of significant third
parties
Phase I was formally completed and summarized on a Company-wide basis in
early 1998. Phase II is essentially completed for all information technology
("IT") systems and is in process and estimated to be completed by the end of
1998 or early 1999 for all non-IT systems. Non-IT systems are generally
embedded technology, such as microcontrollers. Phase III is in various stages
of completion depending on the systems involved. For IT systems, the most
significant efforts of this phase currently involve the accelerated
replacement of non-compliant IT systems within Mask Operations and the
remediation and testing of important mainframe applications and operating
systems within the Optical Products division. Y2K-compliant integrated IT
systems are currently scheduled for implementation in Mask Operations in
various phases beginning in early 1999 and continuing through the third
quarter of 1999. Y2K remediation and testing within the Optical Products
division is currently estimated to be completed by mid-1999. For non-IT
systems, phase III is currently scheduled to be completed in conjunction with
phase II by early to mid-1999. For phase IV, the Company is in the process of
identifying and assessing the Y2K preparedness of significant third parties,
including key vendors and service providers, and estimates that this phase
will be ongoing throughout the rest of 1998 and 1999.
The Company currently estimates that it will cost $3-4 million using both
internal and external resources to address the Y2K issue as discussed above,
including the cost of replacing the IT systems within Mask Operations.
Through September 30, 1998, the Company had spent less than $1 million of
this total estimate. Expenditures related to Y2K preparedness are expected to
be funded by cash flow from operations and are not currently expected to
impact other operating or investment plans.
Management currently anticipates that the above plan will appropriately
resolve the Y2K issue with respect to all material elements under the
Company's direct control. However, a number of significant risks do exist,
including the potential inability of the Company to obtain (or retain) the
proper internal and external resources to fully address all Y2K exposures at
the cost estimated, as well as the risk that key suppliers or other
significant third parties, including those in utilities, communications,
transportation, banking and government, are not prepared for the year 2000.
The Company has not yet established a contingency plan relative to the Y2K
issue but currently anticipates establishing such a plan in 1999.
<PAGE>
CAUTIONARY STATEMENTS
Certain statements included in this Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-Q by the
Company or its representatives, as well as other communications, including
reports to shareholders, news releases and presentations to securities analysts
or investors, contain forward-looking statements made in good faith by the
Company pursuant to the "Safe Harbor" provisions of the PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. These statements relate to non-historical
information which are subject to certain risks and uncertainties that could
cause actual results to differ materially from those presently anticipated or
projected. The Company wishes to caution the reader not to place undo reliance
on any such forward-looking statements. These statements are qualified by
important factors listed separately in "Item 1 - Business" of the Company's Form
10-K for the year ended December 31, 1997, which in some cases have affected and
in the future could adversely affect the Company's actual results and could
cause the Company's actual financial performance to differ materially from that
expressed in any forward-looking statement. In addition to those factors listed
in the Company's Form 10-K for the year ended December 31, 1997, the Company's
future performance may be subject to additional risks, including integration of
the Orcolite acquisition, lower demand for televisions and computer monitors,
further mask price declines, inability to penetrate the lead frame market,
higher operating expenses and lower yields associated with production start-up,
potential future production shut downs, negative foreign currency fluctuations
including adverse fluctuations affecting cross-currency swaps, successful
customer part qualifications, the effect of the economic uncertainty in Asia and
the impact of Y2K information system issues. These factors should not, however,
be considered an exhaustive list. The Company does not undertake the
responsibility to update any forward-looking statement that may be made from
time to time by or on behalf of the Company.
<PAGE>
Part II: OTHER INFORMATION
ITEM 1. With regard to legal proceedings and certain environmental matters,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which begins on page 10 and Note 11 of the
"Notes to Condensed Consolidated Financial Statements" on page 9.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Form of Change of Control Agreement entered into between the
Company and Messr. Opdahl*.
27. Financial Data Schedule (filed only in electronic format).
99.1 News Release, dated October 22, 1998, announcing the third
quarter 1998 operating results*.
99.2 News Release, dated September 18, 1998, announcing quarterly
dividend*.
* Incorporated by reference to corresponding exhibit to the Company's
Current Report on Form 10-Q dated and filed with the Commission on
November 13, 1998 (File No. 1-8467).
(b) REPORTS ON FORM 8-K.
1. The Company filed a Form 8-K, dated as of June 20, 1998, on
July 14, 1998 reporting the adoption of a Share Rights Plan.
2. The Company filed a Form 8-K/A, dated as of May 15, 1998, on
July 29, 1998, providing financial information for the business
acquired and pro forma financial information related to the
acquisition of Monsanto Company's Orcolite business unit.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BMC INDUSTRIES, INC.
/s/Steven E. Opdahl
-----------------------------------------
Steven E. Opdahl
Controller (Principal Accounting Officer)
Dated: March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,696
<SECURITIES> 46
<RECEIVABLES> 45,231
<ALLOWANCES> 2,735
<INVENTORY> 84,856
<CURRENT-ASSETS> 150,224
<PP&E> 280,028
<DEPRECIATION> 114,292
<TOTAL-ASSETS> 410,740
<CURRENT-LIABILITIES> 50,946
<BONDS> 0
0
0
<COMMON> 47,662
<OTHER-SE> 81,122
<TOTAL-LIABILITY-AND-EQUITY> 410,740
<SALES> 253,609
<TOTAL-REVENUES> 253,609
<CGS> 232,177
<TOTAL-COSTS> 68,120
<OTHER-EXPENSES> 932
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,650
<INCOME-PRETAX> (57,171)
<INCOME-TAX> (21,859)
<INCOME-CONTINUING> (35,312)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,312)
<EPS-PRIMARY> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
