HISTORICAL FINANCIAL SUMMARY
(in thousands, except per share amounts and statistics and ratios)
YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Revenues $ 312,538 $ 280,487 $ 255,355 $ 219,968 $ 195,431
Operations Cost of products sold 244,468 213,007 202,595 181,024 163,828
- ------------------------------------------------------------------------------------------------------------------------------
Gross margin 68,070 67,480 52,760 38,944 31,603
Selling and administrative 16,012 15,033 14,137 12,188 11,706
- ------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
interest, other expense and income taxes 52,058 52,447 38,623 26,756 19,897
Interest income (expense), net (1,065) (280) 467 (2,369) (4,820)
Other income (expense) 209 236 (146) (57) 93
Income taxes 15,481 17,302 14,397 9,326 4,790
- ------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before cumulative effect of accounting changes 35,721 35,101 24,547 15,004 10,380
Provision for loss related to discontinued
operation, net of tax -- -- -- (839) (415)
Cumulative effect of accounting changes -- -- -- -- 12,131
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 35,721 $ 35,101 $ 24,547 $ 14,165 $ 22,096
- ------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Number of shares included in per share
Per Share computation 27,583 27,268 26,896 25,023 22,423
Earnings from continuing operations $ 1.30 $ 1.29 $ 0.91 $ 0.60 $ 0.46
Loss from discontinued operation -- -- -- (0.03) (0.01)
Cumulative effect of accounting changes -- -- -- -- 0.54
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.30 $ 1.29 $ 0.91 $ 0.57 $ 0.99
- ------------------------------------------------------------------------------------------------------------------------------
Diluted Number of shares included in per share computation 28,530 28,363 28,234 27,335 24,868
Earnings Per Earnings from continuing operations $ 1.25 $ 1.24 $ 0.87 $ 0.55 $ 0.42
Share Loss from discontinued operation -- -- -- (0.03) (0.02)
Cumulative effect of accounting changes -- -- -- -- 0.49
- ------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.25 $ 1.24 $ 0.87 $ 0.52 $ 0.89
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flow Cash dividends per share $ 0.06 $ 0.0525 $ 0.0425 $ 0.02 $ --
Depreciation and amortization expense 13,349 10,171 8,290 8,250 8,462
Net cash provided by operating activities 14,667 20,786 45,261 36,680 25,931
Capital expenditures 75,110 54,662 39,196 13,537 7,870
- ------------------------------------------------------------------------------------------------------------------------------
Financial Working capital $ 74,914 $ 41,354 $ 32,730 $ 38,769 $ 34,517
Position Property, plant and equipment, net 182,382 123,845 81,409 49,858 43,005
Total assets 319,407 232,969 182,332 138,686 130,312
Total debt 74,565 17,989 47 66 27,247
Stockholders' equity 178,752 144,108 108,466 81,788 58,900
- ------------------------------------------------------------------------------------------------------------------------------
Statistics Current ratio 2.6 1.8 1.6 2.0 1.9
and Ratios Total debt to equity ratio 0.4 0.1 0.0 0.0 0.5
Earnings from continuing operations before
interest, other expense
and income taxes, as a percentage of revenues 16.7% 18.7% 15.1% 12.2% 10.2%
Return on average equity(1) 22.1% 27.8% 25.8% 20.1% 20.7%
Book value per share $ 6.43 $ 5.26 $ 4.01 $ 3.05 $ 2.59
THE NUMBER OF SHARES AND PER SHARE AMOUNTS HAVE BEEN ADJUSTED FOR
TWO-FOR-ONE STOCK SPLITS IN 1995 AND 1994.
EARNING PER SHARE FOR ALL PERIODS HAVE BEEN RESTATED TO REFLECT
ADOPTIONING STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128,
EARNINGS PER SHARE.
(1) CALCULATION EXCLUDES CUMULATIVE EFFECT OF ACCOUNTING CHANGES
IN 1993.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following discussion and analysis examines the operating results of the
Company's two business segments. As used herein, "operating profit" refers to
operating profit before corporate allocations, corporate expense and interest,
as shown in Note 10 to the Consolidated Financial Statements-Segment
Information.
PRECISION IMAGED PRODUCTS
REVENUES AND OPERATING PROFIT
COMPARISON OF 1997 AND 1996. Revenues of the Precision Imaged Products group
were $219.0 million for 1997, an increase of $26.5 million or 14% from those for
1996. The improvement was primarily attributable to increased sales of computer
monitor masks. Total year 1997 computer monitor mask sales exceeded $20.0
million, an increase of over $15.0 million compared to 1996. Almost all of the
computer monitor masks in 1997 were produced at the Mullheim, Germany plant.
Sales of large (25-29 inches) television masks were up 16% while sales of invar
television masks were flat compared to total year 1996 sales. Jumbo (30 inches
and larger) television mask sales were 16% below the prior year which is a
difficult comparison following a 58% increase in jumbo mask sales over 1995.
Sales were reduced almost $11 million in 1997 due to the strengthening of the
U.S. dollar versus the German mark. Buckbee-Mears St. Paul posted record total
year 1997 sales while generating its first sales of lead frames for
semiconductor packages in the fourth quarter of 1997.
Operating profit of the Precision Imaged Products group was $41.5 million for
1997, a decrease of $1.6 million or 4% from that realized in 1996. The rate of
operating profit expressed as a percentage of revenues was 19% for 1997,
compared to 22% for 1996. The decline in operating profit is primarily due to
the start-up and de-bugging of the new Cortland, New York monitor mask line. The
Company dedicated a large portion of production time to the qualification of
parts for a number of customers. In addition, resources were allocated to the
new television mask line in Cortland which continued to ramp up in 1997,
including successfully qualifying parts in a multiple-up configuration. The
Company expects these lines to reach their full production capabilities in the
second half of 1998. Additional contributing factors to the lower operating
profits were slower growth in higher-priced color television masks, which was
described above, and a downward pressure on mask prices. These operating profit
reductions were offset partially by the record earnings posted by Buckbee-Mears
St. Paul for the year as a result of product mix and manufacturing improvements
and profit recognized upon completion of a long-term mask equipment and
technology contract.
COMPARISON OF 1996 AND 1995. Revenues of the Precision Imaged Products group
were $192.6 million for 1996, an increase of $13.4 million or 7% from those for
1995. The improvement was primarily attributable to a continued sales mix shift
to higher-priced color television masks as consumers worldwide purchased larger
televisions. Further, the Company began producing computer monitor masks in
Mullheim, Germany which resulted in the Company's first sales into the computer
monitor mask market. For the year, sales of jumbo (30 inches and larger), large
(25-29 inches), and invar masks increased 58%, 14% and 18%, respectively.
Operating profit of the Precision Imaged Products group was $43.1 million for
1996, an increase of $8.6 million or 25% from that realized in 1995. The rate of
operating profit expressed as a percentage of revenues was 22% for 1996,
compared to 19% for 1995. This improvement was primarily due to a continued
shift in the Company's product mix to higher margin products, including computer
monitor masks, and improved operating performance, partially offset by start-up
costs associated with the new German computer monitor mask line. Buckbee-Mears
St. Paul posted record earnings for the year as a result of product mix and
manufacturing improvements.
OPTICAL PRODUCTS
REVENUES AND OPERATING PROFIT
COMPARISON OF 1997 AND 1996. Revenues of the Optical Products group were
$93.5 million for 1997, an increase of $5.6 million or 6% from those for
1996. The increase was primarily due to a 26% increase in sales of high-end
products (polycarbonate, progressive, high index and polarizing sun lenses)
as consumer preferences for advanced materials, designs and features increased.
Sales of mid-range hard-resin plastic products showed more modest gains as
competition continued to grow in this segment of the market and were impacted
by Vision-Ease's transition to a new supply arrangement with a Southeast Asian
lens manufacturer. Glass product sales declined because of contraction of the
worldwide market for glass lenses. Overall glass earnings are expected to
decline in the future due to continued contraction in the demand for glass
products. To partially offset this decline, the Company entered into a
majority-owned joint venture in 1997 with a glass lens manufacturer located in
Southeast Asia to establish an alternate, low cost source for glass lenses.
Operating profit of the Optical Products group was $14.9 million for 1997, an
increase of $0.5 million or 4% over 1996. The rate of operating profit expressed
as a percentage of total revenues was 16% for 1997 and 1996. 1997 operating
profit growth lagged the sales growth due to a number of factors, including the
weakening of earnings on glass products, new lens product development, new
polycarbonate product promotions, duplicate facility costs associated with
polycarbonate manufacturing and costs associated with closing the Ft.
Lauderdale, Florida facility and transitioning production to St. Cloud,
Minnesota. The new polycarbonate manufacturing, centralized distribution and
research and development facility was completed in the third quarter of 1997,
but a full transfer of operations will not be completed until the second quarter
of 1998 to ensure minimal interruption of polycarbonate manufacturing.
2
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COMPARISON OF 1996 AND 1995. Revenues of the Optical Products group were
$87.9 million for 1996, an increase of $11.8 million or 15% from those for
1995. The increase was primarily due to increased sales in each major product
line and strong international sales growth. Sales of high-end products
(polycarbonate, progressive, high index and polarizing sun lenses) increased
18% for the total year as consumer preferences for advanced materials,
designs and features increased.
Operating profit of the Optical Products group was $14.4 million for 1996, an
increase of $4.7 million or 48% over 1995. The rate of operating profit
expressed as a percentage of total revenues was 16% for 1996, compared to 13%
for 1995. The increase was primarily due to increased sales of high-end
products and margin improvements attributable to the Company's Southeast
Asian sourcing program for hard-resin plastic lenses established late in 1995.
SELLING EXPENSES
Selling expenses were $11.7 million, $10.0 million and $8.6 million or 3.7%,
3.6% and 3.4% of revenues for 1997, 1996 and 1995, respectively. The increase
in 1997 is primarily due to incremental costs to launch the Optical Products
group new premium line of polycarbonate lenses bearing the Tegra-Registered
Trademark- trade name. The increase in 1996 over 1995 reflects the impact of
increased revenues.
ADMINISTRATIVE EXPENSES
Administrative expenses were $4.3 million, $5.0 million and $5.5 million or
1.4%, 1.8% and 2.2% of revenues for 1997, 1996 and 1995, respectively. The
decline in administrative expenses from 1996 to 1997 is primarily due to a
reduction in employee performance based incentive benefits tied to the
Company's earnings. The decline in administrative expenses from 1995 to 1996
is primarily due to a reduction in the cost of certain deferred compensation
plans which are tied to the Company's stock price.
INTEREST INCOME (EXPENSE)
Interest expense was $1.3 million, $0.5 million and $0.6 million for 1997, 1996
and 1995, respectively. Interest income was $0.2 million, $0.3 million and $1.0
million for 1997, 1996 and 1995, respectively. Due to increases in short-term
and long-term debt levels, interest expense increased in 1997, although a full
year's interest impact was not realized due to the capitalization of interest
costs in connection with the Company's expansion projects. Interest expense is
expected to increase significantly in 1998 because of the larger debt balance
and a lower amount of interest that can be capitalized. In 1996, interest income
earned on cash balances declined because internally generated cash was used to
fund the Company's expansion projects. Despite increases in short-term and
long-term debt levels, interest expense in 1996 was comparable to the prior year
due to the capitalization of interest costs in connection with the Company's
expansion projects. In 1995, the Company earned interest income on cash balances
and had minimal short-term and long-term debt.
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 (approximately 31% and 28% in 1997 and 1996, respectively). 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. Sales were reduced almost $11.0
million in 1997 due to the strengthening of the U.S. dollar versus the German
mark; however, earnings were impacted less than $0.4 million. See Note 6 to the
Consolidated Financial Statements--Commitments for a discussion of the foreign
currency exchange options outstanding at December 31, 1997.
Exposure to foreign currency exchange rate fluctuations also may exist with
respect to intercompany payables or receivables to or from the Company's German
subsidiary. The Company minimizes this exposure by holding such balances at low
levels.
In 1997, the Company established a majority-owned subsidiary (the Subsidiary) in
Southeast Asia. In accordance with generally accepted accounting principles, the
functional currency of the Subsidiary is the U.S. dollar. As a large majority
of the Subsidiary's economic activities are transacted in U.S. dollars, foreign
exchange exposure is limited.
In 1997, the Company incurred $0.4 million of foreign exchange gains and
incurred minimal foreign exchange losses in 1996 and 1995.
SEASONALITY
The Company's earnings are generally lower in the first and third quarters due
to maintenance shutdowns at the Company's mask production facilities.
Maintenance shutdowns also occur at the Company's lens manufacturing facilities
in the third quarter. Also, the seasonality of end products in several markets
(televisions, computer monitors and eyeglasses) affects the Company's annual
earnings pattern.
INCOME TAXES
Expressed as a percentage of earnings before income taxes, the Company's
effective tax rate was 30%, 33% and 37% in 1997, 1996 and 1995, respectively. In
all years presented, reduction of the valuation allowance relating to deferred
tax assets lowered the effective tax rate with the largest impact occurring in
1997. The 1996 rate was lower than the 1995 rate due principally to a lower
proportion of the Company's total earnings being generated by the Company's
German subsidiary.
DIVIDENDS
In 1997, the Company continued the payment of cash dividends to shareholders.
Cash dividends of one and one half cents per share were declared in each quarter
of 1997. The Company expects to continue dividend payments in 1998.
2
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ENVIRONMENTAL
Prior to 1997, the Company had been involved in seven sites where environmental
investigations were still occurring and where final settlement had not been
reached. During 1997, the Company reached a de minimis settlement of its
liability at one of the sites in which the Company was named as a potentially
responsible party (PRP) and signed a de micromis settlement agreement with the
PRP group for another site in February 1998. With this activity, the total
number of potential sites involving the Company where environmental
investigations are still occurring and where final settlement has not been
reached is reduced to five.
In addition to the five sites, the Company has continued its site
investigations at its former Ft. Lauderdale facility for contamination which
occurred prior to the Company's operation of the facility. During 1997, the
Company submitted additional test results for the site to the state
regulatory agency seeking approval of the scope and completion of testing.
The Company's consultant had indicated that it is reasonably probable that
some type of remediation would be required and had provided the Company with
an approximate cost range for that remediation. Based on the consultant's
estimates, and in accordance with generally accepted accounting principles,
the Company had previously established a reserve for potential remediation
costs. The Company is seeking reimbursement of its costs and expenses from
the prior owner of the site based upon contractual indemnification provisions
and Comprehensive Environmental Response Compensation and Liability Act
(CERCLA). Because the governmental bodies have not yet identified the full
extent of any remedial actions, it is still impossible at this time to
predict the likely outcome of the Ft. Lauderdale matter, as well as the
additional five sites discussed above, or the Company's exposure if any of
these cases are decided adversely.
In addition to the above investigations, PRPs for a site in Cortland, New York
have alleged that the Company is a participant in depositing waste at that site.
The Company believes it has no liability for this site and is committed to a
vigorous defense of this case. It is impossible at this time to predict the
likely outcome of this matter, or the Company's exposure if this case is decided
adversely.
It is not currently anticipated that the Company's share of the costs of
environmental remediation activities for any of the sites discussed above,
including the range provided by the Company's consultant for the former Ft.
Lauderdale facility, will have a materially adverse effect on the financial
condition of the Company beyond the recorded reserves.
FINANCIAL POSITION AND LIQUIDITY
Working capital was $74.9 million, and the current ratio was 2.6 at December 31,
1997, compared to $41.4 million and a current ratio of 1.8 at December 31, 1996.
Inventory balances increased $19.7 million during 1997. Precision Imaged
Products' inventory levels primarily increased due to the addition of the
computer monitor mask production line in Mullheim, Germany and the addition of
the two new production lines in Cortland, New York. Optical Products'
inventories have increased in preparation for future orders and to support new
product introductions and sales growth. Other current assets increased $5.2
million due primarily to an income tax refund expected to be received in the
first quarter of 1998. Accounts payable were up primarily to fund the increased
production levels resulting from the Company's expansion efforts in 1997.
At December 31, 1997, the Company had $74.6 million in debt and the ratio of
total debt to total equity was 0.4. At December 31, 1996, the Company had $18.0
million in debt and the ratio of total debt to total equity was 0.1. The
incremental debt was incurred to support the Company's expansion projects.
The Company's cash flow activities in 1997 included generating $14.7 million
of cash flow from operating activities and $62.1 million from financing
activities, primarily through incremental debt. The cash generated from
operating and financing activities was used for property, plant and equipment
additions totaling $75.1 million. The increase in the Company's capital
spending in 1997 was primarily due to $49.4 million of capital spending
relating to the two-line expansion of the Company's mask manufacturing
facility at Cortland, New York. The Cortland expansion was completed in the
second and third quarters of 1997. In addition, $8.4 million of capital
spending was used for the new polycarbonate manufacturing facility and
equipment. The Company's cash flow activities in 1996 included generating
$20.8 million of cash flow from operating activities and $20.6 million from
financing activities, primarily through incremental debt. The cash generated
from operating and financing activities combined with the cash accumulated
prior to 1996 was used for property, plant and equipment additions totaling
$54.7 million. The increase in the Company's capital spending in 1996 was
primarily due to $43.0 million of capital spending relating to the two-line
expansion of the Company's mask manufacturing facility in Cortland. The
Company's primary cash flow activities in 1995 included generating $45.3
million of cash flow from operating activities, using $39.2 million of cash
for property, plant and equipment additions and using $5.2 million for
acquisitions by the Optical Products group. Expansion projects at both the
Mullheim, Germany and Cortland, New York mask manufacturing facilities
accounted for $25.6 million of the 1995 property, plant and equipment
additions.
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7
The Company has a $150 million domestic unsecured credit facility consisting of
a $70 million revolving credit facility for general purposes and an $80 million
acquisition credit facility. In December 1997, the credit facility was amended
to allow up to $25 million of borrowing under the $80 million acquisition credit
facility specifically for purposes of repurchasing the Company's common stock.
Additionally, in early 1998, the credit facility was further amended to provide
for up to $20 million of borrowing under the $80 million acquisition facility
for general corporate purposes. Borrowings under this $20 million portion of the
acquisition facility must be repaid by June 26, 1998. The Company's German
subsidiary maintains short-term and long-term credit facilities totaling $19.2
million. The acquisition credit facility will provide funds for the Company's
stock repurchase program and in the event the Company encounters a strategic
acquisition opportunity. These credit facilities along with cash generated from
operations should be sufficient to meet the Company's future capital and
operating requirements.
YEAR 2000 COMPLIANCE
The Company has many computer applications at each of its locations that require
modifications made necessary by the upcoming year 2000. These time-sensitive
applications could cause a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities. Management
at each location has determined what actions are necessary to prepare for this
change. Certain applications have already been upgraded and the remaining
application conversions are planned at various intervals with all computer
systems scheduled to be upgraded by the middle of 1999. Management does not
anticipate that the conversion of any computer system to be year 2000 compliant,
or the cost associated with those conversions, will have a materially adverse
effect on the consolidated financial statements or operations of the Company.
However, if such modifications and conversions are not made, or are not
completed timely, the year 2000 issue could have a material impact on the
operations of the Company.
CAUTIONARY STATEMENTS
Certain statements included in this discussion of operations and financial
results by the Company or its representatives, as well as other communications,
including its filings with the Securities and Exchange Commission, 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 nonhistorical information and 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 undue reliance on any such
forward-looking statements. These statements are qualified by potential risks
and uncertainties, including lower demand for televisions and computer monitors,
inability to penetrate the lead frame market, problems associated with shut-down
of the Brooklyn Center, Minnesota polycarbonate manufacturing facility and the
transfer of operations to the Ramsey, Minnesota facility, higher operating
expenses and lower yields associated with production start-up, foreign currency
fluctuations, successful customer part qualifications and economic uncertainty
in Asia. These factors are more particularly described in "Item 1 - Business" of
the Company's Form 10-K and in some cases have affected and in the future could
adversely affect the Company's actual results, thereby causing 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.
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31 1997 1996 1995
---------------------------------------------------------------------------
Operating Revenues Revenues $ 312,538 $ 280,487 $ 255,355
and Expenses Cost of products sold 244,468 213,007 202,595
---------------------------------------------------------------------------
Gross margin 68,070 67,480 52,760
Selling 11,696 10,028 8,592
Administrative 4,316 5,005 5,545
---------------------------------------------------------------------------
Income from Operations 52,058 52,447 38,623
---------------------------------------------------------------------------
Other Income Interest income 233 260 1,029
and (Expenses) Interest expense (1,298) (540) (562)
Other income (expense) 209 236 (146)
---------------------------------------------------------------------------
Earnings before Income Taxes 51,202 52,403 38,944
Income Taxes 15,481 17,302 14,397
---------------------------------------------------------------------------
Net Earnings $ 35,721 $ 35,101 $ 24,547
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings Per Share Basic $ 1.30 $ 1.29 $ 0.91
Diluted 1.25 1.24 0.87
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number of Shares Included Basic 27,583 27,268 26,896
in Per Share Computation Diluted 28,530 28,363 28,234
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED BALANCE SHEETS
(in thousands)
YEARS ENDED DECEMBER 31 1997 1996
-------------------------------------------------------------------------------------
Assets CURRENT ASSETS
Cash and cash equivalents $ 2,383 $ 2,544
Trade accounts receivable,
less allowances of $2,118 and $2,330 29,824 24,979
Inventories 70,111 50,451
Deferred income taxes 5,881 5,372
Other current assets 13,595 8,354
-------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 121,794 91,700
-------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 182,382 123,845
DEFERRED INCOME TAXES 1,429 5,797
OTHER ASSETS, NET 13,802 11,627
-------------------------------------------------------------------------------------
TOTAL ASSETS $ 319,407 $ 232,969
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
LIABILITIES AND CURRENT LIABILITIES
STOCKHOLDERS' EQUITY Short-term borrowings $ 1,139 $ 1,355
Accounts payable 25,623 19,434
Accrued compensation and benefits 11,614 14,919
Income taxes payable 2,830 7,657
Other current liabilities 5,674 6,981
-------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 46,880 50,346
-------------------------------------------------------------------------------------
LONG-TERM DEBT 73,426 16,634
OTHER LIABILITIES 17,718 19,421
DEFERRED INCOME TAXES 2,631 2,460
STOCKHOLDERS' EQUITY
Common stock (shares issued of 27,811 and 27,381) 62,263 56,551
Retained earnings 118,693 84,629
Cumulative translation adjustment (1,217) 3,974
Other (987) (1,046)
-------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS EQUITY 178,752 144,108
-------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 319,407 $ 232,969
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
Cumulative
Common Retained Translation
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Stock Earnings Adjustment Other
-----------------------------------------------------------------------------------------------------------
December 31, 1994 BALANCE $ 51,156 $ 27,559 $ 4,336 $ (1,263)
Net earnings - 24,547 - -
Exercise of options, 277 shares, including tax benefit 1,776 - - -
Restricted stock grants, including tax benefit 42 - - -
Employee loans for option exercises, net of repayments - - - (218)
Minimum pension liability adjustment - - - 262
Cash dividends declared-$0.0425 per share - (1,144) - -
Translation adjustment - 1,413 - -
-----------------------------------------------------------------------------------------------------------
December 31, 1995 BALANCE 52,974 50,962 5,749 (1,219)
Net earnings - 35,101 - -
Exercise of options, 315 shares, including tax benefit 3,593 - - -
Restricted stock grants, net of
forfeitures and including tax benefit (16) - - -
Repayments of employee loans for option exercises,
net of additional loans - - - 173
Cash dividends declared-$0.0525 per share - (1,434) - -
Translation adjustment - - (1,775) -
-----------------------------------------------------------------------------------------------------------
December 31, 1996 BALANCE 56,551 84,629 3,974 (1,046)
Net earnings - 35,721 - -
Exercise of options, 428 shares, including tax benefit 5,697 - - -
Restricted stock grants, net of forfeitures
and including tax benefit 15 - - -
Repayments of employee loans for option exercises,
net of additional loans - - - 59
Cash dividends declared-$0.06 per share - (1,657) - -
Translation adjustment - - (5,191) -
-----------------------------------------------------------------------------------------------------------
December 31, 1997 BALANCE $ 62,263 $ 118,693 $ (1,217) $ (987)
-----------------------------------------------------------------------------------------------------------
COMMON STOCK: 99,000 SHARES OF VOTING COMMON STOCK WITHOUT
PAR VALUE AUTHORIZED; 27,811, 27,381, AND 27,066 SHARES
ISSUED AND OUTSTANDING AT DECEMBER 31, 1997, 1996 AND 1995,
RESPECTIVELY.
UNDESIGNATED STOCK: 500 SHARES AUTHORIZED; NONE ISSUED. THE
BOARD OF DIRECTORS IS AUTHORIZED TO DESIGNATE THE NAME OF
EACH CLASS OR SERIES OF THE UNDESIGNATED SHARES AND TO SET
THE TERMS THEREOF (INCLUDING, WITHOUT LIMITATION, TERMS
WITH RESPECT TO REDEMPTION, DIVIDEND, LIQUIDATION,
CONVERSION AND VOTING RIGHTS AND PREFERENCES).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31 1997 1996 1995
------------------------------------------------------------------------------------
Cash Flows from NET EARNINGS $ 35,721 $ 35,101 $ 24,547
Operating ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
Activities CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 13,349 10,171 8,290
Provisions for product returns, uncollectible
trade receivables and inventory reserves 2,322 4,358 3,854
Deferred income taxes 4,347 (460) 613
Other non-cash income and expense items (864) (1,489) 191
DECREASE (INCREASE) IN ASSETS
Trade accounts receivable (7,308) (3,482) 653
Inventories (23,066) (19,599) (5,209)
Other current assets (5,296) (3,471) (626)
Other noncurrent assets (3,051) (217) (1,013)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 6,438 (785) 7,858
Income taxes payable (4,248) (1,300) 1,747
Accrued expenses and other current liabilities (2,568) 3,585 (951)
Other noncurrent liabilities (1,109) (1,626) 5,307
------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,667 20,786 45,261
------------------------------------------------------------------------------------
Cash Flows from Additions to property, plant and equipment (75,110) (54,662) (39,196)
Investing Business acquisitions, net of cash acquired (1,817) - (5,167)
Activities Proceeds from sale of property and equipment 60 - 28
------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (76,867) (54,662) (44,335)
------------------------------------------------------------------------------------
Cash Flows from Increase (decrease) in short-term borrowings (130) 1,257 -
Financing Increase (decrease) in long-term debt 58,135 16,950 (19)
Activities Common stock issued, including tax benefit 5,712 3,577 1,818
Cash dividends paid (1,650) (1,361) (1,074)
Employee (loans) for exercise of stock options,
net of repayments 59 173 (218)
------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 62,126 20,596 507
------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (87) (50) 114
------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (161) (13,330) 1,547
Cash and cash equivalents at beginning of year 2,544 15,874 14,327
------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,383 $ 2,544 $ 15,874
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries, all of which are wholly or majority-owned.
REVENUE RECOGNITION--Revenue related to the majority of the Company's products
is recognized upon shipment of product to the customer.
CASH EQUIVALENTS--consist of highly-liquid debt instruments with a maturity of
three months or less at the date of purchase.
INVENTORIES--are stated at the lower of cost or market. Cost is determined
principally on the average cost method. Provision for potentially obsolete or
slow-moving inventory is made based on management's analysis of inventory levels
and future sales forecasts.
PROPERTY, PLANT AND EQUIPMENT--are stated at cost. Depreciation is provided on
the straight-line method over estimated useful lives of generally 40 years for
buildings, 20 years for building improvements and infrastructure, and 8 years
for machinery and equipment. Depreciation of assets included in construction in
progress does not begin until the construction is complete and the assets are
placed into service.
INCOME TAXES--A deferred tax liability is recognized for temporary differences
between financial reporting and tax reporting which will result in taxable
income in future years. A deferred tax asset is recognized for temporary
differences which will result in tax deductions in future years and for net
operating loss and tax credit carryforwards. The deferred tax asset is reduced
by a valuation allowance to a net amount which the Company believes it more
likely than not will realize, based on estimates of its future earnings and the
expected timing of temporary difference reversals.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--The Company accrues the expected
cost of providing postretirement benefits other than pensions during the years
that eligible employees render service.
EARNINGS PER SHARE--In 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, EARNINGS PER SHARE (Statement 128). Statement 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 128
requirements.
STOCK-BASED COMPENSATION--The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (Statement 123).
ESTIMATES--The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS--In June 1997, the 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.
RECLASSIFICATION--Certain items in the 1996 and 1995 Consolidated Financial
Statements have been reclassified to conform to the 1997 presentation. These
reclassifications had no impact on net income or shareholders' equity as
previously reported.
3
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2. INVENTORIES
The following is a summary of inventories at December 31:
1997 1996
- ----------------------------------------------------------------------
Raw materials $ 24,542 $ 15,461
Work in process 15,971 9,807
Finished goods 29,598 25,183
- ----------------------------------------------------------------------
Total inventories $ 70,111 $ 50,451
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
3. OTHER CURRENT ASSETS AND OTHER LIABILITIES
The following is a summary of other current assets at December 31:
1997 1996
- ----------------------------------------------------------------------
Federal income tax refundable $ 5,628 $ --
Molds used to produce eyewear lenses 4,169 4,795
Other 3,798 3,559
- ----------------------------------------------------------------------
Total other current assets $ 13,595 $ 8,354
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
The following is a summary of other liabilities at December 31:
1997 1996
- ----------------------------------------------------------------------
Accrued foreign pension cost $ 8,042 $ 8,469
Employee retirement obligations 4,991 5,099
Other 4,685 5,853
- ----------------------------------------------------------------------
Total other liabilities $ 17,718 $ 19,421
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT, NET
The following is a summary of property, plant and equipment, net at December
31:
1997 1996
- ----------------------------------------------------------------------
Land and improvements $ 3,495 $ 2,508
Buildings and improvements 111,236 49,154
Machinery and equipment 150,834 110,460
Construction in progress 17,505 58,367
- ----------------------------------------------------------------------
Total 283,070 220,489
Less accumulated depreciation
and amortization 100,688 96,644
Total property, plant and equipment, net $ 182,382 $ 123,845
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
5. DEBT
The following is a summary of long-term debt at December 31:
1997 1996
- ----------------------------------------------------------------------
1997 1996
U.S. revolving credit facility $ 64,250 $ 6,800
German credit facility 8,712 11,064
Other 1,603 125
- ----------------------------------------------------------------------
74,565 17,989
Less amounts due within one year 1,139 1,355
- ----------------------------------------------------------------------
Total long-term debt $ 73,426 $ 16,634
- ----------------------------------------------------------------------
The Company maintains a credit agreement (the Agreement) with three domestic
banks for unsecured borrowings totaling $150,000. This Agreement consists of a
$70,000 four-year revolving credit facility for general corporate purposes and
an $80,000 one-year acquisition credit facility. In December 1997, the Agreement
was amended to allow up to $25,000 of borrowing under the $80,000 acquisition
facility specifically for purposes of repurchasing the Company's common stock.
Additionally, in early 1998, the credit facility was further amended to provide
for up to $20,000 of borrowing under the $80,000 acquisition facility for
general corporate purposes. Any borrowings under the $20,000 for general
corporate purposes must be repaid by June 26, 1998.
Borrowings under the Agreement bear interest at the Eurodollar Rate plus 0.30%
to 0.70%. The rate spread is dependent upon the Company's ratio of debt to total
capitalization. In addition, the Company pays a facility fee on unborrowed funds
at rates ranging from 0.08% to 0.175%, depending on the Company's debt to total
capitalization ratio. Under terms of the Agreement, the Company must meet
certain affirmative covenants, including maintaining a specified total
capitalization ratio, interest coverage ratio, cash flow leverage ratio and
tangible net worth. The Company was in compliance with all covenants under the
Agreement at December 31, 1997.
The Company's German subsidiary maintains short-term credit lines of $2,503 and
long-term credit lines of $16,686. The short-term credit lines are unsecured and
bear interest at either 0.75% over the DM LIBOR rate or approximately 3.0% over
the German Bundesbank Discount rate. The short-term credit lines may be
withdrawn by the lender at any time. The weighted average interest rate on
short-term debt outstanding at December 31, 1997 and 1996 was 7.0% and 7.25%,
respectively. A portion of the long-term credit line is secured by land and
buildings with a net book value of $10,519 at December 31, 1997. These long-term
credit lines bear interest at 0.50% to 0.75% over the DM LIBOR rate.
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% 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 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.
On December 31, 1997 and 1996, the estimated fair value of the Company's debt
described above would approximate the recorded amount since the debt bears a
floating interest rate.
Annual maturities of long-term debt for the next five years are $1,139 in 1998,
$8,564 in 1999, $64,480 in 2000, $231 in 2001, $112 in 2002 and $39
thereafter.
There were $1,819 of outstanding letters of credit at December 31, 1997.
Interest expense paid, net of amounts capitalized of $2,609, $302 and $0, was
$660, $15 and $55 in 1997, 1996 and 1995, respectively.
3
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4
6. COMMITMENTS
The Company leases four manufacturing facilities, 16 sales, distribution or
administrative facilities and the Company headquarters. In addition, the Company
leases data processing and other equipment.
At December 31, 1997, the approximate future minimum rental commitments required
under non-cancelable operating leases are as follows:
1998 $1,082
1999 567
2000 444
2001 280
2002 268
Thereafter 65
- ---------------------------------------------
Total minimum lease payments $2,706
- ---------------------------------------------
- ---------------------------------------------
Rent expense was $1,892, $2,535 and $2,644 in 1997, 1996 and 1995, respectively.
The Company's Vision-Ease subsidiary has entered into a long-term Product
Manufacturing and Sales Agreement (the Supply Agreement) with a plastic lens
manufacturer located in Southeast Asia. The Supply Agreement provides for the
Southeast Asian manufacturer to supply and Vision-Ease to purchase certain
minimum levels of plastic lenses. At December 31, 1997, the approximate future
purchase commitments under this Supply Agreement are as follows:
1998 $6,000
1999 7,000
2000 8,500
- ---------------------------------------------
- ---------------------------------------------
The Company's German subsidiary has a large portion of its sales denominated in
U.S. dollars (approximately 31% and 28% in 1997 and 1996, respectively). 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 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. At December
31, 1996, there were no outstanding forward contracts or options. 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 recorded as a reduction
of Cost of Products Sold.
At December 31, 1997, the Company had commitments of approximately $3,100
related to capital projects.
7. STOCK OPTION PLAN AND COMMON STOCK REPURCHASES
The 1994 Stock Incentive Plan (the 1994 Plan) provides for the granting of
either incentive stock options or nonqualified stock options to purchase shares
of the Company's common stock and for other stock-based awards to officers,
directors and key employees responsible for the direction and management of the
Company and to non-employee consultants and independent contractors. At December
31, 1997, 3,368 shares of common stock were reserved for issuance under the 1994
Plan and for outstanding options from the 1984 Omnibus Stock Plan, which
terminated on January 10, 1994. The reserved shares included 1,143 shares
available for awards under the 1994 Plan.
Information relating to stock options during 1997, 1996
and 1995 is as follows:
Option Price
-------------------
Number Per Share Total
of Shares Average Price
- ------------------------------------------------------------------------
Shares under option
at December 31, 1994 2,358 $ 3.54 $ 8,344
Granted 295 15.39 4,538
Exercised (277) 2.24 (621)
Forfeited (13) 1.91 (25)
- ------------------------------------------------------------------------
Shares under option
at December 31, 1995 2,363 5.18 12,236
Granted 87 26.99 2,362
Exercised (315) 2.79 (882)
Forfeited (15) 8.71 (131)
- ------------------------------------------------------------------------
Shares under option
at December 31, 1996 2,120 6.41 13,585
Granted 611 23.75 14,513
Exercised (428) 3.81 (1,631)
Forfeited (78) 15.15 (1,182)
- ------------------------------------------------------------------------
Shares under option
at December 31, 1997 2,225 $11.36 $25,285
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Shares exercisable
at December 31, 1997 908 $ 4.18 $ 3,797
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Shares exercisable
at December 31, 1996 1,035 $ 3.04 $ 3,149
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Shares exercisable
at December 31, 1995 824 $ 2.47 $ 2,033
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Weighted
Range Average Weighted Weighted
of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- ---------------------------------------------------------------------------------------
$ 0 - 5 1,050 5.2 $ 3.30 765 $ 2.96
5 - 10 290 6.2 7.48 99 7.26
10 - 20 354 8.9 15.86 23 14.99
20 - 31 531 8.5 26.44 21 22.06
- ---------------------------------------------------------------------------------------
2,225 6.7 $ 11.36 908 $ 4.18
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
3
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5
All outstanding options are nonqualified options. No compensation expense
related to stock option grants was recorded in 1997, 1996 or 1995 as the option
exercise prices were equal to fair market value on the date of grant.
At December 31, 1997, there were 6 shares outstanding pursuant to other
stock-based awards under the 1994 Plan.
Pro forma information regarding net income and earnings per share is required by
Statement 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1997,
1996 and 1995:
1997 1996 1995
- ----------------------------------------------------------------------
Risk-free interest rate 5.71% 6.21% 5.37%
Dividend yield 0.30% 0.19% 0.16%
Volatility factor 0.47 0.39 0.41
Weighted average expected life 5 years 5 years 5 years
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per share were as follows:
1997 1996 1995
- ----------------------------------------------------------------------
Net earnings - as reported $35,721 $35,101 $24,547
Net earnings - pro forma 34,926 34,746 24,475
Basic earnings per share - as reported 1.30 1.29 0.91
Basic earnings per share - pro forma 1.27 1.23 0.91
Diluted earnings per share - as reported 1.25 1.24 0.87
Diluted earnings per share - pro forma 1.22 1.23 0.87
Weighted average fair value of
options granted during the year 10.98 11.61 6.61
- ----------------------------------------------------------------------
Because Statement 123 provides for pro forma amounts for options granted
beginning in 1995, the pro forma expense will likely increase in future years as
the new option grants become subject to the pricing model.
STOCK OPTION EXERCISE LOAN PROGRAM--The Company maintains the Stock Option
Exercise Loan Program under which holders of exercisable stock options may
obtain interest-free and interest-bearing loans from the Company to facilitate
their exercise of stock options. Such loans are evidenced by demand promissory
notes and are secured by the shares of stock. The portion of such loans directly
related to the option exercise price is classified as a reduction of
stockholders' equity. The remainder is included in current assets.
COMMON STOCK REPURCHASES--Subsequent to December 31, 1997, the Company
repurchased 1,000 common shares at a total cost of approximately $16,600. This
share repurchase was financed using the Company's amended domestic bank credit
facility and; accordingly, was recorded as a reduction to common stock and an
increase to long-term debt.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory profit sharing plan covering
substantially all of its domestic salaried employees and those domestic hourly
employees not covered by a pension plan or retirement fund described below.
Under the terms of the profit sharing plan, the Company makes an annual minimum
contribution equal to 3% of participants' wages, with the potential for an
additional discretionary contribution depending upon the Company's
profitability. Provisions of the plan include 100% vesting after five years of
continuous service and payment of benefits upon retirement, total disability,
death or termination.
The Company also maintains a 401(k) savings plan covering substantially all of
its domestic salaried employees and a majority of those domestic hourly
employees not covered by a pension plan or retirement fund described below.
Under the terms of the savings plan, the Company makes an annual minimum
contribution, which is invested in Company stock, equal to 25% of participants'
before-tax contributions up to 6% of base salary, with the potential for an
additional discretionary contribution depending upon the Company's
profitability. Provisions of the plan include vesting of the Company's
contributions at the rate of 25% per year of continuous service and payment of
benefits upon retirement, total disability, death or termination.
One domestic operation has a noncontributory defined benefit pension plan for
its hourly employees. During 1997, the Company curtailed benefits payable under
the plan, resulting in a curtailment loss of $141. Benefits payable under the
plan are based upon various monthly amounts for each year of credited service.
The Company's funding policy meets or exceeds the funding requirements of
federal laws and regulations.
In 1989, the Company adopted a supplemental defined benefit retirement plan for
corporate and operations management over 45 years of age. In 1992, the Company
curtailed benefits payable under the plan. The Company's funding policy is to
maintain plan assets approximately equal to the vested benefit obligation.
In addition, the Company's German subsidiary has a noncontributory defined
benefit pension plan covering substantially all of its employees. Benefits
payable under the plan are based upon the participant's base salary prior to
retirement and years of credited service. As allowed under German law, this plan
is not funded. However, under generally accepted accounting principles, the
estimated future liability is accrued on the Consolidated Balance Sheets.
3
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6
Pension costs for the above three defined benefit plans included the following
components:
YEARS ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Service cost for benefits
earned during the year $ 469 $ 475 $ 434
Interest cost on projected
benefit obligation 824 810 775
Actual return on plan assets (766) (578) (710)
Net amortization and deferral 535 405 572
Curtailment loss 141 -- --
Pension costs $ 1,203 $ 1,112 $ 1,071
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
The following is a summary of the funded status of the above three defined
benefit plans and the accrued pension costs recorded in the Company's
Consolidated Balance Sheets at December 31:
1997 1996
- ------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ (10,719) $ (10,538)
- ------------------------------------------------------------------
Accumulated benefit obligation $ (11,478) $ (11,279)
- ------------------------------------------------------------------
Projected benefit obligation $ (12,898) $ (12,636)
Plan assets at fair value 4,225 3,650
- ------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets (8,673) (8,986)
Unrecognized net loss 150 68
Unrecognized prior service cost -- 123
Unrecognized transition amount 97 160
- ------------------------------------------------------------------
Accrued pension costs $ (8,426) $ (8,635)
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Assumptions used in developing the projected benefit obligation and the net
periodic pension cost as of December 31 were as follows:
1997 1996 1995
- ------------------------------------------------------------------------------
Domestic plans (including postretirement plan):
Discount rate 6.75% 7.50% 7.00%
Rate of return on plan assets 7.00% 7.00% 7.00%
Foreign plan:
Discount rate 6.30% 7.00% 7.50%
Rate of increase in compensation 3.00% 3.00% 3.00%
- ------------------------------------------------------------------------------
Under a contract with its union employees, another domestic operation makes, on
behalf of each active participant, fixed weekly contributions to a retirement
fund (aggregating $145, $150 and $145 in 1997, 1996 and 1995, respectively). At
December 31, 1997, the market value of this fund's assets of $17,776 exceeded
benefit obligations of $14,755 by $3,021. Pursuant to the plan, excess funded
amounts are not available to the Company.
The total cost of all profit sharing, savings and pension plans, domestic and
foreign, was $3,118, $4,523 and $4,301 in 1997, 1996 and 1995, respectively.
In addition to the defined benefit plans discussed above, the Company has two
defined benefit postretirement plans covering certain domestic employees. One
plan provides medical benefits and the other provides life insurance benefits.
Under the medical benefits plan, the Company provides a specific dollar amount
to retired salaried employees or their surviving spouses to purchase coverage
through the BMC Flexible Benefits Plan. The annual increase in these Company
provided amounts is limited to 5%. The life insurance plan provides term life
insurance coverage to all retired full-time hourly employees at one domestic
operation. The Company accrues the expected cost of providing benefits under
these two plans during the years that eligible employees render service. Neither
plan is funded.
The following table shows the two plans' accrued postretirement benefit
obligations at December 31:
1997 1996
- ------------------------------------------------------------------
Accumulated postretirement
benefit obligation $(1,543) $(1,243)
Unrecognized net gain (146) (371)
- ------------------------------------------------------------------
Accrued postretirement benefit obligation $(1,689) $(1,614)
- ------------------------------------------------------------------
9. INCOME TAXES
The provision for income taxes was based on earnings before income taxes, as
follows:
YEARS ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------
Domestic $ 42,605 $ 47,397 $28,362
Foreign 8,597 5,006 10,582
- -----------------------------------------------------------------------
Earnings before income taxes $ 51,202 $ 52,403 $38,944
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
The provision (benefit) for income taxes consisted of:
YEARS ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------------------------------
Current
Federal $ 7,957 $13,227 $ 7,162
State 722 1,931 1,661
Foreign 2,455 2,604 4,961
Deferred
Federal and state 2,736 (386) 72
Foreign 1,611 (74) 541
- ----------------------------------------------------------------------
Income tax expense $15,481 $17,302 $14,397
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Significant components of deferred income tax assets and liabilities were as
follows at December 31:
1997 1996
- ------------------------------------------------------------------
FEDERAL AND STATE NET DEFERRED INCOME TAXES
Deferred tax asset
Compensation and benefit-related
accruals $ 4,574 $ 5,555
Reserves and accruals 3,583 4,043
Depreciation -- 3,412
Other temporary differences 2,180 2,341
- ------------------------------------------------------------------
Total 10,337 15,351
- ------------------------------------------------------------------
Deferred tax liability
Depreciation (2,031) --
Capitalized molds (996) (1,659)
- ------------------------------------------------------------------
Total (3,027) (1,659)
- ------------------------------------------------------------------
Net deferred tax asset
before valuation allowance 7,310 13,692
- ------------------------------------------------------------------
Valuation allowance -- (3,670)
Net deferred tax asset $ 7,310 $10,022
- ------------------------------------------------------------------
- ------------------------------------------------------------------
FOREIGN NET DEFERRED INCOME TAXES
Deferred tax liability
Depreciation $(3,264) $(3,020)
Other temporary differences (203) (3)
- ------------------------------------------------------------------
Total (3,467) (3,023)
- ------------------------------------------------------------------
Deferred tax asset
Reserves and accruals -- 936
Retirement benefits 586 560
Other temporary differences 161 214
- ------------------------------------------------------------------
Total 747 1,710
- ------------------------------------------------------------------
Net deferred tax liability $(2,720) $(1,313)
- ------------------------------------------------------------------
- ------------------------------------------------------------------
3
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7
The federal and state net deferred tax asset included a current portion of
$5,881 and $4,225 at December 31, 1997 and 1996, respectively, and a long-term
portion of $1,429 and $5,797 at December 31, 1997 and 1996, respectively. The
foreign net deferred tax liability included a current liability of $89 at
December 31, 1997, a current asset of $1,147 at December 31, 1996 and a
long-term liability of $2,631 and $2,460 at December 31, 1997 and 1996,
respectively.
At December 31, 1996, net future tax deductions from the reversal of temporary
differences comprised the federal and state net deferred tax asset, which had
been reduced by a valuation allowance. This valuation allowance reduced the
deferred tax asset to a net amount which the Company believed more likely than
not that it would realize, based on the Company's estimates of its future
earnings and the expected timing of temporary difference reversals. During 1997,
the Company concluded a valuation reserve was no longer necessary given its
estimates of future earnings and the expected timing of temporary difference
reversals. Accordingly, the allowance of $3,670 was reversed during 1997,
eliminating the balance.
The differences between income taxes at the U.S. federal statutory tax rate and
the effective tax rate were as follows:
YEARS ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
- -----------------------------------------------------------------------
Differences in taxation
of foreign earnings 2.0 1.5 4.6
State income taxes,
net of federal benefit 1.3 2.6 2.5
- -----------------------------------------------------------------------
Change in deferred
tax valuation allowance (7.2) (5.4) (4.8)
- -----------------------------------------------------------------------
Other items (0.9) (0.7) (0.3)
- -----------------------------------------------------------------------
Effective tax rate 30.2% 33.0% 37.0%
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Differences in taxation of foreign earnings relate primarily to taxation of
foreign earnings at rates in excess of the U.S. statutory rate. Undistributed
earnings of foreign subsidiaries at December 31, 1997 were approximately
$18,125. No U.S. taxes have been provided on these undistributed earnings
because the Company expects to be able to utilize foreign tax credits to offset
any U.S. tax that would result from their distribution.
Income taxes paid were $17,447, $17,039 and $10,333 in 1997, 1996 and 1995,
respectively.
10. SEGMENT INFORMATION
The Company manufactures and sells a variety of products in two business
segments. Precision Imaged Products manufactures principally aperture masks,
photochemically etched fine mesh grids used in the manufacture of color
television tubes and computer monitors. Net sales of aperture masks comprised
61%, 60% and 57% of the Company's consolidated total revenues in 1997, 1996 and
1995, respectively. Optical Products manufactures ophthalmic lenses.
The following is a summary of certain financial information relating to the two
industry segments served:
YEARS ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------
TOTAL REVENUES BY SEGMENT
Precision Imaged Products $219,007 $192,552 $179,199
Optical Products 93,531 87,935 76,156
- ---------------------------------------------------------------------------------
TOTAL REVENUES $312,538 $280,487 $255,355
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
OPERATING PROFIT BY SEGMENT
Precision Imaged Products
Before corporate allocation $ 41,489 $ 43,087 $ 34,475
Less corporate allocation(1) (2,314) (2,416) (2,131)
- ---------------------------------------------------------------------------------
TOTAL 39,175 40,671 32,344
Optical Products
Before corporate allocation 14,885 14,365 9,693
Less corporate allocation(1) (988) (1,104) (905)
- ---------------------------------------------------------------------------------
TOTAL 13,897 13,261 8,788
- ---------------------------------------------------------------------------------
TOTAL OPERATING PROFIT 53,072 53,932 41,132
Corporate expense (1,014) (1,485) (2,509)
Interest income (expense), net (1,065) (280) 467
Other income (expense) 209 236 (146)
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EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ 51,202 $ 52,403 $ 38,944
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IDENTIFIABLE ASSETS BY SEGMENT
Precision Imaged Products $218,988 $158,276 $106,685
Optical Products 81,834 58,617 46,094
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TOTAL IDENTIFIABLE ASSETS 300,822 216,893 152,779
Corporate and other assets 18,585 16,076 29,553
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TOTAL ASSETS $319,407 $232,969 $182,332
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DEPRECIATION AND AMORTIZATION BY SEGMENT
Precision Imaged Products $ 10,457 $ 7,391 $ 5,689
Optical Products 2,670 2,536 2,436
Corporate and other 222 244 165
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TOTAL DEPRECIATION
AND AMORTIZATION $ 13,349 $ 10,171 $ 8,290
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CAPITAL EXPENDITURES BY SEGMENT
Precision Imaged Products $ 60,605 $ 49,672 $ 35,316
Optical Products 14,397 4,750 3,637
Corporate and other 108 240 243
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TOTAL CAPITAL EXPENDITURES $ 75,110 $ 54,662 $ 39,196
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(1) CORPORATE ALLOCATIONS INCLUDE ADMINISTRATIVE EXPENSES INCURRED AT THE
CORPORATE HEADQUARTERS WHICH PROVIDE BENEFIT TO THE OPERATING DIVISIONS.
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The following is a summary of the Company's operations in different geographic
areas:
YEARS ENDED DECEMBER 31 1997 1996 1995
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TOTAL REVENUES FROM UNAFFILIATED
CUSTOMERS
United States $199,825 $187,430 $176,173
Germany 104,384 85,667 76,220
Other 8,329 7,390 2,962
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TOTAL $312,538 $280,487 $255,355
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TRANSFERS BETWEEN GEOGRAPHIC AREAS
United States $ 7,546 $ 5,810 $ 3,143
Germany 7,720 2,893 16,228
Other 4,285 -- --
Eliminations (19,551) (8,703) (19,371)
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NET EARNINGS
United States $ 31,191 $ 32,625 $ 19,467
Germany 4,776 2,084 5,016
Other (246) 392 64
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TOTAL $ 35,721 $ 35,101 $ 24,547
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IDENTIFIABLE ASSETS
United States $263,637 $175,636 $136,692
Germany 52,535 62,016 50,677
Other 11,804 2,642 1,093
Eliminations (8,569) (7,325) (6,130)
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TOTAL $319,407 $232,969 $182,332
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Transfers between geographic areas are accounted for principally at estimated
market value. Net sales to unaffiliated foreign customers from domestic
operations (export sales) in 1997, 1996 and 1995 were $47,913, $43,492 and
$40,566, or 15%, 16% and 16%, respectively, of total revenues. Precision Imaged
Products had sales to one customer of $62,062, $52,899 and $60,738; to another
customer of $48,963, $33,435 and $22,202; to a third customer of $34,101,
$28,600 and $16,857; and to a fourth customer of $33,336, $32,417 and $31,975 in
1997, 1996 and 1995, respectively.
11. CONCENTRATIONS OF CREDIT RISK
Approximately 65% of the trade accounts receivable before allowances
(receivables) of Precision Imaged Products at December 31, 1997 were represented
by four customers. Approximately 42% of the receivables of Optical Products at
December 31, 1997 were represented by 20 customers. These 24 customers
represented approximately 55% of the Company's consolidated receivables at
December 31, 1997, with one customer of Precision Imaged Products representing
approximately 19% of consolidated receivables.
Mask Operations' customer base consists of the largest television and computer
monitor manufacturers in the world. Accordingly, Mask Operations generally does
not require collateral and its trade receivables are unsecured. Optical
Products' customer base consists of a wide range of eyewear retailers and
optical laboratories. Optical Products performs detailed credit evaluations of
customers and establishes credit limits as required. Collateral or other
security for accounts receivable is obtained as needed for Optical Products'
customers.
12. LEGAL MATTERS
In January 1995, a U.S. District Court in Miami, Florida, awarded the Company a
$5.1 million judgment against Barth Industries (Barth) of Cleveland, Ohio and
its parent, Nesco Holdings, Inc. (Nesco). The judgment relates to an agreement
under which Barth and Nesco were to help automate the plastic lens production
plant in Ft. Lauderdale, Florida. The Company has not recorded any income
relating to this judgment because Barth and Nesco filed an appeal. The appeal
has been argued before the U.S. Court of Appeals for the Eleventh Circuit and
the Company is awaiting the Court's decision.
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REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS BMC INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheets of BMC Industries,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of earnings, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BMC Industries,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 26, 1998
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PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange under the
ticker symbol "BMC". The table below sets forth the high and low reported sales
prices of BMC stock by quarter for the years 1997, 1996 and 1995. At March 2,
1998 there were approximately 1,001 stockholders of record.
Price
Dividends ----------------------------
Per Share High Low
-------------------------------------------------------------------
1995 First Quarter $ .0100 $ 9 1/8 $ 7 11/16
Second Quarter .0100 12 9/16 8 1/4
Third Quarter .0100 19 15/16 12 3/16
Fourth Quarter .0125 23 5/8 15 1/8
-------------------------------------------------------------------
1996 First Quarter $ .0125 $ 25 1/8 $ 19 3/4
Second Quarter .0125 32 3/8 21
Third Quarter .0125 31 3/8 24 3/4
Fourth Quarter .0150 31 1/2 26 5/8
-------------------------------------------------------------------
1997 FIRST QUARTER $ .0150 $ 34 1/4 $ 27 5/8
SECOND QUARTER .0150 35 3/8 24
THIRD QUARTER .0150 35 3/16 29 3/4
FOURTH QUARTER .0150 32 15/16 15 15/16
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SELECTED QUARTERLY DATA
(unaudited, in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
1996 Revenues $ 68,301 $ 68,174 $ 68,158 $ 75,854 $ 280,487
Gross margin 13,040 18,483 14,318 21,639 67,480
Net earnings 6,183 9,842 7,157 11,919 35,101
Earnings per share(1)
Basic 0.23 0.36 0.26 0.44 1.29
Diluted 0.22 0.35 0.25 0.42 1.24
Number of Shares Included
in Computation
Basic 27,167 27,264 27,309 27,331 27,268
Diluted 28,278 28,369 28,390 28,416 28,363
--------------------------------------------------------------------------------------------------------------
1997 Revenues $ 77,127 $ 80,257 $ 79,086 $ 76,068 $ 312,538
Gross profit 15,982 21,859 17,273 12,956 68,070
Net earnings 7,883 11,989 8,875 6,974 35,721
Earnings per share(1)
Basic 0.29 0.44 0.32 0.25 1.30
Diluted 0.28 0.42 0.31 0.24 1.25
Number of Shares Included
in Computation
Basic 27,410 27,463 27,681 27,776 27,583
Diluted 28,458 28,496 28,619 28,545 28,530
--------------------------------------------------------------------------------------------------------------
(1) EARNINGS PER SHARE FOR ALL PERIODS HAVE BEEN RESTATED TO REFLECT
ADOPTING STATEMENT OF FINANCIAL ACCOUNTING STANDARDS BOARD NO.
128, EARNINGS PER SHARE.
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