FORM 10-Q
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, 1997.
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.)
TWO APPLETREE SQUARE, MINNEAPOLIS, MINNESOTA 55425
(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 27,749,672 shares of common stock as of
November 10, 1997. There is no other class of stock outstanding.
Page 1 of 81
Exhibit Index Begins at Page 11.
PART I: FINANCIAL INFORMATION
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
Item 1: Financial Statements
SEPTEMBER 30 DECEMBER 31
ASSETS 1997 1996
- -------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 2,138 $ 2,544
Trade accounts receivable, net of allowances 34,450 24,979
Inventories 62,080 50,451
Deferred income taxes 6,655 5,372
Other current assets 7,483 8,354
- -------------------------------------------------------------------------------
Total Current Assets 112,806 91,700
- -------------------------------------------------------------------------------
Property, Plant and Equipment 277,788 220,489
Less Accumulated Depreciation 99,171 96,644
-------- --------
Property, Plant and Equipment, Net 178,617 123,845
-------- --------
Deferred Income Taxes 4,783 5,797
Other Assets, Net 13,636 11,627
- -------------------------------------------------------------------------------
Total Assets $309,842 $232,969
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current Liabilities
Short-term borrowings $ 1,195 $ 1,355
Accounts payable 20,398 19,434
Income taxes payable 1,902 7,657
Accrued expenses and other liabilities 17,914 21,900
- -------------------------------------------------------------------------------
Total Current Liabilities 41,409 50,346
- -------------------------------------------------------------------------------
Long-Term Debt 75,688 16,634
Other Liabilities 18,233 19,421
Deferred Income Taxes 2,685 2,460
Stockholders' Equity
Common stock 61,452 56,551
Retained earnings 112,137 84,629
Cumulative translation adjustment (1,010) 3,974
Other (752) (1,046)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 171,827 144,108
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 309,842 $ 232,969
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 2
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 79,086 $ 68,158 $ 236,470 $ 204,633
Cost of products sold 61,813 53,840 181,356 158,792
- -----------------------------------------------------------------------------------------------------------------------
Gross margin 17,273 14,318 55,114 45,841
Selling 3,042 2,334 8,616 7,451
Administrative 1,006 1,210 3,634 3,725
- -----------------------------------------------------------------------------------------------------------------------
Income from Operations 13,225 10,774 42,864 34,665
- -----------------------------------------------------------------------------------------------------------------------
Other Income and (Expense)
Interest expense (403) (246) (707) (436)
Interest income 45 60 143 210
Other income 71 89 300 120
- -----------------------------------------------------------------------------------------------------------------------
Earnings before Income Taxes 12,938 10,677 42,600 34,559
Income Taxes 4,063 3,520 13,853 11,377
- -----------------------------------------------------------------------------------------------------------------------
Net Earnings $ 8,875 $ 7,157 $ 28,747 $ 23,182
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Net Earnings Per Share $ 0.31 $ 0.25 $ 1.01 $ 0.82
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Number of Shares Included in Per Share Computation 28,619 28,390 28,524 28,346
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Dividends Declared Per Share $ 0.015 $ 0.0125 $ 0.045 $ 0.0375
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30
------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities
Net earnings $ 28,747 $ 23,182
Depreciation and amortization 10,527 7,661
Changes in operating assets and liabilities (33,647) (17,622)
- ----------------------------------------------------------------------------------------------
Total 5,627 13,221
- ----------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities
Additions to property, plant and equipment (68,203) (32,908)
Business acquisitions, net of cash acquired (1,817) --
- ----------------------------------------------------------------------------------------------
Total (70,020) (32,908)
- ----------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities
Net increase (decrease) in short-term borrowings (81) 3,139
Net increase in long-term debt 60,278 3,941
Common stock issued 4,901 2,639
Cash dividends paid (1,234) (1,020)
Other 294 462
- ----------------------------------------------------------------------------------------------
Total 64,158 9,161
- ----------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (171) (78)
- ----------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (406) (10,604)
Cash and Cash Equivalents at Beginning of Period 2,544 15,874
- ----------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 2,138 $ 5,270
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 4
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, 1997, and the results
of operations and the cash flows for the periods
ended September 30, 1997 and 1996. Such
adjustments are of a normal recurring nature.
Certain items in the financial statements for the
periods ended September 30, 1996 have been
reclassified to conform to the presentation for
the periods ended September 30, 1997. The results
of operations for the three-month and nine-month
periods ended September 30, 1997 are not
necessarily indicative of the results to be
expected for the full year. The balance sheet as
of December 31, 1996 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, 1996.
2. 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 periods 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,
1997, the Company had approximately $8.1 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 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 Swap Agreement - As of September 30,
1997, the Company had 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% on $15 million of notional debt for a period of
two years ending March, 1999. 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
Page 5
to the uncertainty of floating interest rates during this two
year period. Amounts to be paid or received under the
interest rate swap agreement are accrued and recorded
as an adjustment to Interest Expense during the term of
the interest rate swap agreement.
3. New Accounting Standards
In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE
INCOME, which requires disclosure of comprehensive
income and its components in the Company's financial
statements. Additionally, the FASB issued SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION. Both statements require
additional disclosure only, and as such, are not
expected to change net income or shareholders' equity
as previously reported by the Company. The statements
are effective for the Company's fiscal year ended
December 31, 1998.
4. Inventories
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Raw materials $ 19,359 $ 15,461
Work in process 13,722 9,807
Finished goods 28,999 25,183
--------- ----------
Total Inventories $ 62,080 $ 50,451
--------- ----------
--------- ----------
5. Earnings Per Share
Primary earnings per share is computed using the
weighted average number of common and common
equivalent shares outstanding during the period.
Common stock equivalents include dilutive stock
options using the treasury stock method. Fully
diluted earnings per share did not differ
significantly from primary earnings per share in
any period.
Currently, earnings per share calculations are
performed pursuant to Accounting Principles Board
Opinion No. 15, EARNINGS PER SHARE. The Company
will be required to present earnings per share
data in accordance with Statement of Accounting
Standards No. 128, EARNINGS PER SHARE, commencing
with the fourth quarter of 1997. Statement No.
128 will require the presentation of basic
earnings per share and diluted earnings per share.
Basic earnings per share is calculated as net
earnings divided by the weighted average
outstanding common shares. Diluted earnings per
share includes the effect of all outstanding
dilutive securities, such as stock options, and is
calculated similarly to the current fully-diluted
earnings per share. While early adoption of
Statement No. 128 is not permitted, the following
pro-forma supplemental data is presented using the
Statement No. 128 approach:
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Basic $ 0.32 $ 0.26 $ 1.04 $ 0.85
Diluted 0.31 0.25 1.01 0.82
Page 6
6. Legal Matters
In July 1997, the Company executed a de minimus
settlement with the Envirotek II/Roblin Steel Site PRP
Group for a nominal amount in settlement of its
liablility as a potentially responsible party at this
site in Tonawanda, New York. There are no material changes
in the status of any other legal proceeding, including
the Barth Industries legal proceeding, or environmental
matter described in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
Page 7
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, 1997 AND 1996
Total revenues for the third quarter of 1997 increased $10.9
million or 16% from the third quarter of 1996. Revenues of
the Precision Imaged Products group for the third quarter
increased 22% due to the continued sales mix shift to higher
margin products, including over $6 million of high
resolution computer monitor mask sales from the Company's
German monitor mask line. Sales of large (25-29 inches)
television aperture masks increased 19% over third quarter
1996 sales, while invar and jumbo mask sales lagged 1996
third quarter sales. The strength of the U.S. dollar versus
the German mark had an immaterial impact on earnings but
reduced sales, as compared with the prior year quarter, by
approximately $4 million. Buckbee-Mears St. Paul had record
sales and profits in the quarter. Net sales of the Optical
Products group increased 5% over the prior year quarter.
Sales growth was driven by a 27% increase in high end
products (polycarbonate, progressive, high index and
polarizing sun lenses) over the prior year.
Cost of sales were 78% of net sales for the third quarter of
1997 compared to 79% in the same period of 1996.
Profitability of the Mask Operations increased due to the
continued sales mix shift to higher margin products, but was
depressed by lower yields on the manufacturing lines at the
Company's Cortland, New York facility. The Cortland plant
also incurred significant start-up and part qualification
expenses on their two new manufacturing lines during the
third quarter. These significant start-up expenses were
partially offset by $1.5 million of operating profit
generated from the final completion of a long-term mask
equipment and technology contract during the third quarter.
With the completion of the expansion at the
Cortland Facility, depreciation expense will increase in the
fourth quarter of 1997 and thereafter. Due to the strong sales
growth of high end products, Optical Product's gross profit
increased despite one-time expenses related to the shut down
of the Ft. Lauderdale plastic lens manufacturing facility which
ceased operations in July. The Optical Products group also incurred
expenses related to the start-up of the new polycarbonate
manufacturing, centralized distribution and research and
development facilities, as well as increased research and development
spending. The increase in gross profit was also offset by
increased advertising and promotional expenses, primarily
related to polycarbonate lenses.
Despite an increased debt level, interest expense in the
third quarter of 1997 was only slightly higher than the
prior year quarter due to the capitalization of interest
costs in connection with the Company's expansion projects.
With the completion of the expansion at the Cortland Facility,
the Company will no longer be able to capitalize interest
related to this expansion project; therefore, interest expense
will increase in the fourth quarter of 1997 and thereafter.
The provision for income taxes was 31% of pre-tax income in
the third quarter of 1997 compared to 33% in the third
quarter of 1996. The lower income tax rate was caused by an
income shift between domestic and foreign earnings.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Total revenues for the first nine months of 1997 increased
$31.8 million or 16% from the first nine months of 1996.
Revenues of the Precision Imaged Products group increased
20% for the first nine months due primarily to sales of
large (25-29 inches) and invar television aperture
page 8
masks increasing 27% and 9%, respectively, over 1996 sales.
Jumbo mask sales continue to lag 1996 sales for the nine
months, which is a difficult comparison following a 51%
increase over 1995. The first nine months included over $11
million of computer monitor mask sales. Net sales of the
Optical Products group increased 6% due to higher sales in all
major product lines, except for glass. Sales of high end
products increased 23% over the same period in the prior year.
Cost of sales were 77% of net sales for the first nine
months of 1997 compared to 78% in the same period of 1996.
Profitability of the Mask Operations increased due to the
continued sales mix shift to higher margin products, but was
depressed by lower yields on the manufacturing lines at the
Cortland facility. Mask operations has incurred significant
start-up and part qualification expenses during the first
nine months of 1997. These expenses were partially offset
by $2.5 million of income recognized upon completion of a
long-term mask equipment and technology contract. As
discussed above, the gross profit generated from the strong
sales growth for the high end products in the Optics Products
group increased despite one-time expenses related to
the shut down of the Ft. Lauderdale plastic lens
manufacturing facility, start-up of the new polycarbonate
manufacturing, centralized distribution and research and
development facilities, as well as increased research and
development spending. The increase in gross profit was also
offset by increased advertising and promotional expenses,
primarily related to polycarbonate lenses.
Despite an increased debt level, interest expense in the
first nine months of 1997 was only slightly higher than the
prior year due to the capitalization of interest costs in
connection with the Company's expansion projects.
The provision the income taxes was 33% of pre-tax income in
the first nine months of 1997 and 1996.
FINANCIAL POSITION AND LIQUIDITY
Cash and cash equivalent balances decreased $0.4
million and debt increased $58.9 million during the
first nine months of 1997. The increased debt level
was the result of $70 million of capital
expenditures relating primarily to the expansion of the
Company's aperture mask manufacturing facilities and
increased inventory and accounts receivable levels,
offset partially by increased accounts payable
balances. The Company has now substantially completed
the two-line aperture mask manufacturing expansion at
the Cortland facility. Total expenditures on this
expansion during 1997 were approximately $50 million.
The increased inventory levels were due primarily to
the new aperture mask production lines at the Cortland
facility and the acquisition of P.T. Vision-Ease Asia early
in 1997. The increased accounts receivable levels were
the result of the increased sales. The increased
accounts payable balance was due primarily to payables
related to the Cortland expansion project and increased
raw material requirements to support the higher sales
levels. Due primarily to the increases in accounts
receivable and inventory, working capital was $71.4
million at September 30, 1997 compared to $41.4 million
at December 31, 1996. The current ratio was 2.72 at
September 30, 1997, compared to 1.82 at December 31,
1996. The ratio of debt to equity increased to 0.45 at
September 30, 1997 compared to 0.12 at December 31,
1996 due to the increased debt levels.
In addition to the $70 million of capital expenditures
mentioned above, the Company expects to spend approximately
$10 million during the fourth quarter of 1997. The Company
has $88 million in
Page 9
revolving credit facilities which will provide the funds
needed for capital spending related to the Cortland expansion
and the Company's new polycarbonate facility in Ramsey,
Minnesota. The Company's $80 million acquisition credit
facility will provide funds in the event the Company
encounters a strategic acquisition opportunity. As of
September 30, 1997, the Company had commitments of
approximately $8 million related to capital projects.
The revolving credit facilities along with cash
generated from operations should be sufficient to meet
the Company's expected future capital and operating
requirements.
FOREIGN CURRENCY
Fluctuations in foreign currency exchange rates,
principally the German mark versus the U.S. dollar, may
affect the Company's financial results. 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 represents the most significant element of
the Company's exposure to currency rate fluctuations.
This exposure is generally addressed as needed through
the purchase of forward contracts and options. As of
September 30, 1997, the Company had approximately $8.1
million of outstanding foreign exchange options to
exchange U.S. dollars for German marks at a set
exchange rate. These options mature at various
intervals through March 1998.
Exposure to foreign currency exchange rate fluctuations
also may exist with respect to intercompany payables or
receivables with the Company's foreign subsidiaries.
The Company minimizes this exposure by holding such
balances at low levels.
ENVIRONMENTAL
In July 1997, the Company executed a de minimus settlement
agreement with the Envirotek II/Roblin Steel Site PRP Group
for a nominal amount in settlement of its liability as a
potentially responsible party at this site in Tonawanda,
New York. There are no other 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, 1996.
CAUTIONARY STATEMENTS
Certain statements included in this Discussion and
Analysis of Financial Condition and Results of
Operations 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, 1996, 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. 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 10
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" on page 10
and Note 6 of the "Notes to Condensed
Consolidated Financial Statements" on page 7.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS PAGE
-------- ----
10.1 Amendment of the Product Manufacturing and
Sales Agreement, dated August 11, 1997, between
Polycore Optical, PTE. Ltd. and Vision-Ease
Lens, Inc............................................ 13
10.2 Second Declaration of Amendment, dated August 8,
1997, to the BMC Industries, Inc. 1994 Stock
Incentive Plan....................................... 16
10.3 Lease, dated October 29, 1997, by and among the
Company and Meridian Crossings LLC
(d/b/a Told Development Company)..................... 17
11.1 Computation of Net Earnings per Share................ 75
27. Financial Data Schedule (filed only in electronic
format)
99.1 News Release, dated October 22, 1997, announcing the
third quarter 1997 operating results................. 76
99.2 News Release, dated September 5, 1997, announcing
quarterly dividend................................... 80
99.3 News Release, dated August 15, 1997, announcing intent
to establish a Brazilian joint venture............... 81
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1997.
Page 11
SIGNATURES
Pursuant to the requirements of the Securities and wExchange
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/ Jeffrey L. Wright
----------------------------------------
Jeffrey L. Wright
Controller (Principal Accounting Officer)
Dated: November 14, 1997
Page 12