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 March 31, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934. For the transition Period from N/A to ____.
Commission File No. 1-8467
BMC INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0169210
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(State of Incorporation) (IRS Employer Identification No.)
One Meridian Crossings, Suite 850, Minneapolis, Minnesota 55423
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(Address of Principal Executive Offices) (Zip Code)
(612) 851-6000
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(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
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BMC Industries, Inc. has outstanding 26,907,972 shares of common stock as of
May 14, 1998. There is no other class of stock outstanding.
Page 1 of 23
Exhibit Index Begins at Page 11
PART I: FINANCIAL INFORMATION
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
Item 1: Financial Statements
March 31 December 31
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1998 1997
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ASSETS
Current Assets
Cash and cash equivalents $ 2,238 $ 2,383
Trade accounts receivable, net of allowances 35,893 29,824
Inventories 78,957 70,111
Deferred income taxes 6,171 5,881
Other current assets 9,173 13,595
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Total Current Assets 132,432 121,794
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Property, Plant and Equipment 285,666 283,070
Less Accumulated Depreciation 104,816 100,688
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Property, Plant and Equipment, Net 180,850 182,382
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Deferred Income Taxes 1,229 1,429
Other Assets, Net 14,110 13,802
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Total Assets $328,621 $319,407
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LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities
Short-term borrowings $ 1,222 $ 1,139
Accounts payable 23,540 25,623
Income taxes payable 3,495 2,830
Accrued expenses and other liabilities 18,826 17,288
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Total Current Liabilities 47,083 46,880
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Long-Term Debt 95,571 73,426
Other Liabilities 17,430 17,718
Deferred Income Taxes 2,824 2,631
Stockholders' Equity
Common stock 46,358 62,263
Retained earnings 122,099 118,693
Accumulated other comprehensive income (1,694) (1,217)
Other (1,050) (987)
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Total Stockholders' Equity 165,713 178,752
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Total Liabilities and Stockholders' Equity $328,621 $319,407
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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
March 31
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1998 1997
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Revenues $ 80,084 $ 77,127
Cost of products sold 68,455 61,145
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Gross margin 11,629 15,982
Selling 3,289 2,837
Administrative 1,330 1,539
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Income from Operations 7,010 11,606
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Other Income and (Expense)
Interest expense (1,383) (144)
Interest income 32 42
Other income (expense) (144) 262
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Earnings before Income Taxes 5,515 11,766
Income Taxes 1,706 3,883
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Net Earnings $ 3,809 $ 7,883
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Net Earnings Per Share:
Basic $ 0.14 $ 0.29
Diluted 0.14 0.28
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- --------------------------------------------------------------------------------
Number of Shares Included in Per Share Computation:
Basic 26,994 27,410
Diluted 27,644 28,458
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Dividends Declared Per Share $ 0.015 $ 0.015
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See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31
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1998 1997
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Net Cash Provided by (Used in) Operating Activities
Net earnings $ 3,809 $ 7,883
Depreciation and amortization 5,002 3,283
Changes in operating assets and liabilities (10,990) 1,997
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Total (2,179) 13,163
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Net Cash Used in Investing Activities
Additions to property, plant and equipment (3,958) (26,321)
Business acquisitions, net of cash acquired -- (1,817)
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Total (3,958) (28,138)
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Net Cash Provided by Financing Activities
Increase (decrease) in short-term borrowings 114 (769)
Increase in long-term debt 22,270 16,950
Common stock issued (repurchased), net (15,905) 731
Cash dividends paid (417) (411)
Other (63) 144
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Total 5,999 16,645
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Effect of Exchange Rate Changes on Cash and Cash
Equivalents (7) (45)
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Net Increase (Decrease) in Cash and Cash Equivalents (145) 1,625
Cash and Cash Equivalents at Beginning of Period 2,383 2,544
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Cash and Cash Equivalents at End of Period $ 2,238 $ 4,169
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- --------------------------------------------------------------------------------
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 March 31, 1998,
and the results of operations and the cash flows for the periods ended
March 31, 1998 and 1997. Such adjustments are of a normal recurring
nature. Certain items in the financial statements for the period ended
March 31, 1997 have been reclassified to conform to the presentation for
the period ended March 31, 1998. The results of operations for the three-
month period ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year. The balance sheet as of
December 31, 1997 is derived from the audited balance sheet as of that
date. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
2. Inventories
March 31, 1998 December 31, 1997
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Raw materials $ 28,961 $ 24,542
Work in process 21,222 15,971
Finished goods 28,774 29,598
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Total Inventories $ 78,957 $ 70,111
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3. Earnings Per Share
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE
(Statement No. 128). Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes the dilutive effects of stock options and any other dilutive
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. For the Company's earnings per
share calculations, the basic and diluted weighted average outstanding
shares differ only due to the dilutive impact of stock options. All
earnings per share amounts for all periods have been restated to conform to
the Statement No. 128 requirements.
Page 5
4. 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 March 31, 1998, there were no
outstanding foreign currency exchange options. As of December 31, 1997,
the Company had approximately $3.6 million of outstanding foreign currency
exchange options to exchange U.S. dollars for German marks at a set
exchange rate. These foreign exchange options do not expose the Company to
financial risk as the contracts provide an option to 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 March 31, 1998, 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 during a period 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 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.
5. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME (Statement No. 130). Statement No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement No. 130 requires
foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement No. 130.
Page 6
The components of comprehensive income, net of related tax, for the three-
month periods ended March 31, 1998 and 1997 are as follows:
1998 1997
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Net income $ 3,809 $ 7,883
Foreign currency translation adjustments (477) (3,127)
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Comprehensive income $ 3,332 $ 4,756
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6. New Accounting Standards
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement requires additional
disclosure only, and as such, is not expected to change net income or
stockholders' equity as previously reported by the Company. The statement
is effective for the Company's fiscal year ended December 31, 1998.
7. Legal Matters
There are no material changes in the status of the Barth Industries legal
proceeding or any other legal proceeding or environmental matter described
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Page 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 MARCH 31, 1998 AND 1997
Total revenues for the first quarter of 1998 increased by $3.0 million or 4%
from the first quarter of 1997. Revenues of the Precision Imaged Products
(PIP) group for the first quarter increased 2% due primarily to increased
sales of computer monitor masks. Computer monitor mask sales were
approximately $8.0 million in the first quarter, an increase of 145% over the
prior year quarter. Monitor mask shipments were made to additional customers
in the first quarter as the PIP group continues to diversify their monitor
mask customer base. Entertainment mask sales were down 15% from the prior
year quarter due primarily to lower invar (a nickel alloy) mask sales.
Entertainment mask sales made from invar were down 45% compared to the prior
year quarter and the Company expects the soft market for invar masks to
continue for the balance of 1998. The migration to larger sized masks
continued in the first quarter. Jumbo (30" and larger) and large (25" to
29") AK television aperture mask sales increased 11% and 18%, respectively.
The weakening of the German mark relative to the U.S. dollar had virtually no
impact on earnings but reduced sales, as compared with the prior year
quarter, by approximately $1.8 million. Net sales of the Optical Products
group increased 7%. Sales of high end products (polycarbonate, progressive,
high index and polarizing sun lenses) increased 25% over the same quarter in
the prior year.
Cost of sales was 85% of net sales for the first quarter of 1998, compared to
79% in the same period of 1997. The increased cost of sales percentage was
almost solely due to significant start-up costs incurred on the new computer
monitor mask line in Cortland, New York. The remainder of the PIP group
(including both the German mask operation and Buckbee-Mears St. Paul) as well as
the Optical Products group all achieved expanded gross margins over the prior
year quarter.
Interest expense in the first quarter of 1998 increased $1.2 million over the
prior year quarter. This increase is primarily due to the significantly larger
debt balance as total debt at March 31, 1997 was $33.2 million compared to $96.8
million at March 31, 1998. Interest expense also increased over the prior year
due to the prior year capitalization of interest costs in connection with the
Company's expansion projects. Interest expense will continue to increase during
the remainder of 1998 due to the larger debt balance and the lower amount of
interest that qualifies for capitalization.
The provision for income taxes was 31% and 33% of pre-tax income in the first
quarter of 1998 and 1997, respectively. This decrease was primarily due to
dividends projected to be paid by the Company's German operation to the
Parent Company which reduces the Company's effective tax rate.
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
Page 8
fluctuations. This exposure is generally addressed as needed through the
purchase of forward contracts and options. As of March 31, 1998, the Company
had no forward options or contracts. 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.
FINANCIAL POSITION AND LIQUIDITY
The ratio of debt to equity increased to 0.6 at March 31, 1998 compared to
0.4 at December 31, 1997. Debt increased $22.2 million during the first three
months of 1998. The increased debt level was due primarily to $16.6 million
used to repurchase 1,000,000 shares of the Company's common stock. In
addition, funds were used for increased working capital needs. These uses
were partially offset by net earnings. Working capital was $85.3 million at
March 31, 1998 compared to $74.9 million at December 31, 1997. The current
ratio was 2.8 at March 31, 1998, compared to 2.6 at December 31, 1997.
Working capital increases were primarily in inventory and accounts
receivable. The increased inventory levels were due primarily to the addition
of two new production lines in Cortland, New York and an increase in the
number of part types produced by mask operations. Additional part types
require increased raw materials to support production. Work-in-process
inventory levels have also increased at mask operations as new employees are
trained on the more rigorous inspection criteria for computer monitor masks.
The increase in accounts receivable was due to a combination of the sales
increase and timing of shipments.
The Company expects to incur $35 to $40 million of capital spending during 1998.
The Company maintains a credit agreement with three domestic banks for unsecured
borrowings totaling $150 million. Additionally, the Company's German subsidiary
maintains short-term and long-term credit lines totaling approximately $19
million. These credit facilities along with cash generated from operations
should be sufficient to meet the Company's future capital and operating
requirements.
On March 24, 1998, the Company received a commitment letter from BT Alex.
Brown for an unsecured revolving credit facility totaling $275 million. The
purpose of the funds is to refinance the Company's existing debt and finance
the Orcolite acquisition discussed below. The commitment letter is subject
to customary terms and conditions.
ENVIRONMENTAL
There are no material changes in the status of the legal proceedings and
environmental matters described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
ACQUISITION
On March 25, 1998 the Company entered into a definitive agreement to acquire
Monsanto's Orcolite ophthalmic lens manufacturing business for $100 million in
cash. The transaction has been approved by the boards of directors of both
companies and is subject to customary conditions and normal regulatory approval.
The transaction is expected to close in the second quarter of 1998. Orcolite,
headquartered in Azusa, California, is a producer of ophthalmic lenses with
estimated 1997 sales of $34 million. Orcolite produces both hard resin plastic
and polycarbonate lenses and is well regarded in the ophthalmic lens industry
for its manufacturing abilities, product innovation and customer service.
Page 9
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, 1997,
which in some cases have affected and in the future could adversely affect the
Company's actual results and could cause the Company's actual financial
performance to differ materially from that expressed in any forward-looking
statement. 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 9 and Note 7 of the "Notes to Condensed
Consolidated Financial Statements" on page 7.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Page
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10.1 Commitment letter, dated March 24, 1998, from BT Alex.
Brown for an unsecured revolving credit facility totaling
$275 million . . . . . . . . . . . . . . . . . . . . . . . . .12
27. Financial Data Schedule (filed only in electronic format)
99.1 News Release, dated May 12, 1998, announcing the addition of
two new directors to the Board of Directors . . . . . . . . .19
99.2 News Release, dated April 22, 1998, announcing the first
quarter 1998 operating results . . . . . . . . . . . . . . . .20
(b) REPORTS ON FORM 8-K.
The Company filed a Form 8-K, dated April 3, 1998, reporting the
acquisition of Monsanto's Orcolite unit.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BMC INDUSTRIES, INC.
/s/ Jeffrey L. Wright
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Jeffrey L. Wright
Controller (Principal Accounting Officer)
Dated: May 14, 1998
Page 11