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 June 30, 1998.
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.)
1313 South Fifth Street, Hopkins, Minnesota 55343-9904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 938-4155
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 July 22, 1998, 14,764,604 shares of the registrant's common stock, $.04
par value per share, were outstanding.
Exhibit Index, page 11
<PAGE>
PART 1: ITEM 1 FINANCIAL INFORMATION
INNOVEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
ASSETS (Unaudited) (Audited)
- ------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,556,026 $ 9,442,620
Short-term investments 45,484,000 28,440,000
Accounts receivable, less allowance for
doubtful accounts of $404,000 and $621,000 10,724,105 22,052,121
Inventories 5,731,301 7,252,596
Other current assets 5,019,753 4,161,938
------------ ------------
Total current assets 76,515,185 71,349,275
Property, plant and equipment, net of accumulated depreciation
of $14,389,000 and $12,202,000 28,935,831 23,748,632
Intangible assets, net of amortization of $2,013,000 and $3,099,000 1,920,295 1,849,381
Other assets 327,466 327,466
------------ ------------
$107,698,777 $ 97,274,754
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 82,000 $ 104,000
Accounts payable 2,931,421 4,662,543
Accrued compensation 1,729,473 2,980,086
Income taxes payable 885,286 864,313
Other accrued liabilities 1,213,442 895,705
------------ ------------
Total current liabilities 6,841,622 9,506,647
Long-term debt 776,141 950,733
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares authorized,
14,740,204 and 14,619,504 shares issued and outstanding 589,608 584,780
Capital in excess of par value 14,844,338 14,065,186
Retained earnings 84,647,068 72,167,408
------------ ------------
Total stockholders' equity 100,081,014 86,817,374
------------ ------------
$107,698,777 $ 97,274,754
============ ============
</TABLE>
See accompanying notes.
<PAGE>
INNOVEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 20,298,838 $ 41,960,060
Costs and expenses:
Cost of sales 14,900,713 23,597,133
Selling, general and administrative 1,608,180 2,185,779
Engineering 884,260 893,120
Net interest and other (income) expense (525,978) (346,290)
------------- -------------
Income before taxes 3,431,663 15,630,318
Provision for income taxes 1,021,000 4,688,000
------------- -------------
Net income $ 2,410,663 $ 10,942,318
============= =============
Net income per share:
Basic $ 0.16 $ 0.76
============= =============
Diluted $ 0.16 $ 0.72
============= =============
Weighted average shares outstanding:
Basic 14,713,817 14,479,138
============= =============
Diluted 15,115,344 15,221,231
============= =============
Nine Months Ended June 30,
1998 1997
---- ----
Net sales $ 78,412,668 $ 109,660,885
Costs and expenses:
Cost of sales 51,056,349 61,608,458
Selling, general and administrative 5,598,987 7,212,908
Engineering 3,283,842 2,625,942
Net interest and other (income) expense (1,405,978) (838,456)
------------- -------------
Income before taxes 19,879,468 39,052,033
Provision for income taxes 5,933,000 11,715,000
------------- -------------
Net income $ 13,946,468 $ 27,337,033
============= =============
Net income per share:
Basic $ 0.95 $ 1.90
============= =============
Diluted $ 0.92 $ 1.81
============= =============
Weighted average shares outstanding:
Basic 14,669,848 14,361,675
============= =============
Diluted 15,153,960 15,129,909
============= =============
</TABLE>
See accompanying notes.
<PAGE>
INNOVEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,946,468 $ 27,337,033
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,847,995 3,338,774
Other non-cash charges (credits) 155,470 128,767
Changes in operating assets and liabilities:
Accounts receivable 10,918,625 (9,447,342)
Inventories 1,080,843 (1,200,321)
Other current assets (500,090) (902,893)
Accounts payable (1,678,701) 1,010,356
Other liabilities (1,163,893) 546,597
Income taxes payable 20,973 2,778,672
------------ ------------
Net cash provided by (used in) operating activities 27,627,690 23,589,643
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,754,386) (9,841,453)
Proceeds from sale of assets 1,163,522 951,898
Purchase of held-to-maturity securities (38,769,000) (23,060,000)
Maturities of held-to-maturity securities 21,725,000 12,330,000
------------ ------------
Net cash provided by (used in) investing activities (26,634,864) (19,619,555)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (196,592) (77,761)
Proceeds from exercise of stock options 783,980 1,720,769
Dividends paid (1,466,808) (1,185,946)
------------ ------------
Net cash provided by (used in) financing activities (879,420) 457,062
Increase (decrease) in cash and cash equivalents 113,406 4,427,150
Cash and cash equivalents at beginning of year 9,442,620 5,635,534
------------ ------------
Cash and cash equivalents at end of period $ 9,556,026 $ 10,062,684
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURES:
The Company considers all highly liquid investments with a maturity date of
three months or less when purchased to be "cash equivalents."
Cash paid for interest was $50,000 and $62,000 in 1998 and 1997.
Income tax payments were $5,913,000 and $9,173,000 in 1998 and 1997.
The Company received a $400,000 note receivable as partial consideration for the
June 1, 1998 sale of the InnoMedica assets.
See accompanying notes.
<PAGE>
INNOVEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
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 which may be expected for the year as a
whole. 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, 1997.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENT
The Company adopted FASB Statement of Financial Accounting Standards
No. 128, Earnings Per Share, which was effective for financial statements issued
for periods ending after December 15, 1997. The new standard eliminates primary
and fully diluted income per share and requires presentation of basic and
diluted income per share together with disclosure of how the per share amounts
were computed. All share and per share information for prior periods has been
adjusted to reflect the adoption of SFAS 128 effective for the period ending
December 31, 1997.
The Company's basic net income per share is computed by dividing net
income by the weighted average number of outstanding common shares. The
Company's diluted net income per share is computed by dividing net income by the
weighted average number of outstanding common shares and common share
equivalents relating to stock options when dilutive. Options to purchase 196,250
shares of common stock with a weighted average exercise price of $28.76 were
outstanding during the three and nine month periods ending June 30, 1998, but
were excluded from the computation of common share equivalents because they were
not dilutive. All stock options outstanding during the fiscal 1997 third quarter
were dilutive. Options to purchase 5,000 shares of common stock with a weighted
average exercise price of $27.44 were outstanding during the nine months ending
June 30, 1997, but were excluded from the computation of common share
equivalents because they were not dilutive.
NOTE 3 - SALE OF INNOMEDICA ASSETS
Effective June 1, 1998, substantially all of the assets of the
InnoMedica Division were sold to a privately held third party. $1.1 million of
the $1.5 million selling price was received in cash with the remainder being a
$400,000 note to be received over the next two years. InnoMedica's historical
results of operations were not material in relation to the Company's
consolidated financial statements. The transaction did not have a significant
impact on the Company's earnings.
PART I: ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
Prior to July 28, 1998, Innovex, Inc. and its subsidiaries (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 will combine the operations
of its two primary operating divisions, Precision and LPC. The combination will
merge the rapidly growing LPC flexible circuit fabrication and chemical etching
operations with Precision's high volume fine wire manufacturing expertise. The
combination also allows Innovex to leverage Precision's disk drive
<PAGE>
industry market and trade knowledge to disk drive industry flexible circuit
applications as the industry transitions from wire interconnects.
Prior to the divisional combination, the largest division, Precision
Products, 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 which read and write information on the disk.
The Litchfield Precision Components Division, prior to the divisional
combination, designed and manufactured highly complex flexible circuitry and
chemically machined components. Approximately 30% of LPC's sales were medical
product applications, 50% were computer and computer peripheral applications
with the remaining 20% being other applications. LPC is one of a limited number
of companies in the world able to produce flexible circuits with line and
spacing tolerances of less than 2 mils.
The Iconovex Division produces a small portion of the Company's
revenue. Iconovex was established to market and further develop a
technologically advanced software product. The core software utilizes
syntactical analysis to recognize meanings and relationships among words and
phrases in order to prepare indexes and abstracts of electronically stored
information. In October 1997, Iconovex became the 51% owner of a joint venture
with Solutions Corporation of America. The new joint venture, Smart Solution,
intends to target the corporate intranet market by providing a product to
organize, analyze, screen and index email and to eventually perform the same
function for corporate databases.
On June 1, 1998 the Company sold the assets of its InnoMedica Division.
This division, which produced an immaterial portion of the Company's revenue,
provided contract development and manufacturing services primarily to the
medical device industry as well as pacing/defibrillation leads and adapters for
the implantable bradycardia and tachacardia industry. The transaction did not
have a significant impact on the Company's earnings.
RESULTS OF OPERATIONS
NET SALES
The Company's net sales from operations totaled $20,299,000 for the
quarter, down 52% from $41,960,000 reported in fiscal 1997. Sales of $78,413,000
for the nine months ended June 30, 1998 decreased 28% from the prior year
period. The decreases were due to softness in the disk drive industry which
began in the quarter ending September 30, 1997. This softness appears to be
primarily due to an over supply of disk drives caused by the high levels of disk
drives produced during the March 1997 and June 1997 quarters and due to a
reduction in the number of disk drives kept in inventory by computer
manufacturers as they adopt a build to order business model. Also contributing
to the sales decrease was a reduction in the average number of heads per disk
drive. This reduction is the result of an increasing number of low cost disk
drives being sold and as a result of the conversion to magneto resistive (MR)
disk drive heads which increased the storage capacity per disk drive platter and
reduced the number of heads required to provide the same disk drive capacity.
The higher price obtained from the sale of MR lead wire assemblies, which have a
higher value added content and sell for a higher price than the low end
inductive assemblies, has partially offset the decreased number of lead wire
assemblies being sold.
LPC's sales continue to increase as a proportion of total sales, providing over
30% of the Company's sales for the quarter and over 20% for the first nine
months of fiscal 1998. The first phase of the new
<PAGE>
LPC automated high volume production facility continues to ramp up and
contributed to the increased volume of LPC sales. The total cost of the facility
and related equipment through the first phase was approximately $15 million. The
facility, which is designed to produce large volumes of high end flexible
circuits for various applications, is currently being utilized to produce the
Head Interconnect Flex (HIF) for the disk drive industry. The HIF product
provides a technologically advanced solution for the Company's customers which
is believed to be significantly more cost effective than any competing new
technologies.
The largest portion of the Company's sales for the remainder of fiscal 1998 will
continue to be generated by the Precision Products Division. However, an
increasing portion of the Company's sales will come from the LPC Division due to
the strong demand for LPC's high end flexible circuit products including the
HIF. The Company expects that an increasing portion of the demand for disk drive
head interconnects will be met by products such as the HIF. The magnitude of the
increase in sales from the LPC Division will depend on the timing and acceptance
of the Company's new Flex Suspension Assembly (FSA) product. The FSA will be
produced by equipment currently in development which will automatically attach
HIF's to suspensions. The sale of the InnoMedica Division will have an
immaterial impact on sales for the remainder of the fiscal year.
GROSS MARGINS
The Company's consolidated gross profit as a percent of sales for the
quarter decreased to 27%, down from the 44% reported for the same period last
year. The gross margin percent for the first nine months decreased to 35% from
the 44% reported last year. Gross margin percents decreased primarily due to the
lower demand for lead wire assemblies reducing the leverage of the Precision
Products Division's fixed overhead costs. Also, pricing pressures returned as a
normal operating factor after being unusually low during the first nine months
of fiscal 1997 as a result of the heavy demand for lead wire assemblies during
that time. Gross margins were also impacted by the increased level of fixed
costs related to the continued ramp up of the new LPC facility. Gross margins
for the existing lead wire assembly business will fluctuate during the remainder
of the fiscal year as a function of unit demand for disk drive heads. LPC gross
margins will improve as the production volume and yields in the new facility
increase.
OPERATING EXPENSES
Operating expenses were 12.3% of sales for the current quarter, as
compared to 7.3% in the prior year's third quarter. Operating expenses for the
first nine months of fiscal 1998 were 11.3%, up from 9.0% for the prior year's
first nine months. The increase in operating expenses as a percent of sales for
the current year is primarily due to the decrease in sales. Total operating
expenses decreased due to a reduction in incentive based compensation more than
offsetting an increase in engineering spending. Engineering spending increased
as a result of new product development costs at both Precision Products and LPC
and due to costs related to the new facility at LPC. The level of operating
expenses is not expected to change significantly as a percent of sales for the
remainder of the fiscal year.
OPERATING PROFIT
Consolidated operating profit of $2,906,000 in the current quarter was
down 81% from the $15,284,000 profit for the prior year third quarter.
Consolidated operating profit for the first nine months was $18,473,000 versus
$38,214,000 for the same period last year. This is primarily the result of the
decreased sales volume. The Precision Products Division's operating profit for
the remainder of the fiscal year will vary depending on changes in disk drive
industry unit volumes. Continued operating profit improvements are expected at
Litchfield Precision Components as the demand for
<PAGE>
high end flexible circuits increases. The Iconovex Division is not expected to
have a significant impact on operating profit for the remainder of the fiscal
year.
NET INCOME
Consolidated net income for the fiscal 1998 third quarter was
$2,411,000 as compared to $10,942,000 for the prior year. Basic and diluted net
income per share were $0.16 as compared to $0.76 and $0.72 for the prior year
third quarter. Consolidated net income for the first nine months of fiscal 1998
was $13,946,000 as compared to $27,337,000 for the prior year. Basic and diluted
net income per share were $0.95 and $0.92 as compared to $1.90 and $1.81 for the
same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased to $55.0 million at June 30,
1998 from $37.9 million at September 30, 1997. This increase was primarily due
to income generated from operating activities.
Excluding reductions related to the InnoMedica asset sale, accounts
receivable and inventory at June 30, 1998 decreased by $10.9 million and $1
million, respectively, from September 30, 1997 due to the decreased level of
Precision Products Division sales.
Working capital totaled $69.7 million and $61.8 million at June 30,
1998 and September 30, 1997. The increase is primarily due to the decrease in
accounts payable and accrued compensation.
Since September 30, 1997, the Company has invested $10.8 million in
capital expenditures. These additions include a portion of the costs to
construct and equip an automated production facility at Litchfield Precision
Components to meet the expected demand for new high volume applications
including the Head Interconnect Flex(HIF), Flex Suspension Assembly(FSA) and
chip packaging related products. The first phase of this facility, which cost
approximately $15 million, was completed during the March 1998 quarter and
provides a capacity of over 2 million units per week. Capital expenditures of
approximately $3 million are expected during the fiscal 1998 fourth quarter to
increase the capacity of the new LPC facility to 5 million units per week.
Management believes that internally generated funds will provide
adequate sources of capital for supporting projected growth in fiscal 1998.
FORWARD LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, in letters to shareholders,
elsewhere in the Company's Form 10-Q and in future filings by the Company with
the SEC, except for historical information contained herein and therein, are
"forward looking statements" that involve risks and uncertainties, including the
timely availability and acceptance of new products, the impact of competitive
products and pricing and a general downturn in the Company's principal market.
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>
PART II - OTHER INFORMATION
Responses to Items 1 through 4 are omitted since these items are either
inapplicable or the response thereto would be negative.
ITEM 5. OTHER INFORMATION
The deadline for submission of shareholder proposals pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended, for inclusion in
the Company's proxy statement for its 1999 Annual Meeting of Shareholders is
August 16, 1998. Additionally, if the Company receives notice of a shareholder
proposal after November 4, 1998, such proposal will be considered untimely
pursuant to Rules 14a-4 and 14a-5(e) and the persons named in proxies solicited
by the Board of Directors of the Company for its 1999 Annual Meeting of
Shareholders may exercise discretionary voting power with respect to such
proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVEX, INC.
Registrant
Date: August 4, 1998
By \s\ Thomas W. Haley
Thomas W. Haley
Chief Executive Officer
By \s\ Douglas W. Keller
Douglas W. Keller
Vice President, Finance
<PAGE>
INDEX TO EXHIBITS
Exhibits Page
27 Financial Data Schedule 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THE 10-Q FOR THE QUARTER ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1998
<CASH> 9,556
<SECURITIES> 45,484
<RECEIVABLES> 11,128
<ALLOWANCES> 404
<INVENTORY> 5,731
<CURRENT-ASSETS> 76,515
<PP&E> 43,324
<DEPRECIATION> 14,389
<TOTAL-ASSETS> 107,699
<CURRENT-LIABILITIES> 6,842
<BONDS> 776
<COMMON> 590
0
0
<OTHER-SE> 99,491
<TOTAL-LIABILITY-AND-EQUITY> 107,699
<SALES> 78,413
<TOTAL-REVENUES> 78,413
<CGS> 51,056
<TOTAL-COSTS> 51,056
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 19,879
<INCOME-TAX> 5,933
<INCOME-CONTINUING> 13,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,946
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.92
</TABLE>
