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 June 30, 1999.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934. For the transition Period from
to . -------------
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Commission File No. 1-8467
BMC INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0169210
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
One Meridian Crossings, Suite 850, Minneapolis, Minnesota 55423
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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 27,350,632 shares of common stock as of
August 11, 1999. There is no other class of stock outstanding.
Exhibit Index Begins at Page 15
PART I: FINANCIAL INFORMATION
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
Item 1: Financial Statements
JUNE 30 December 31
ASSETS 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 947 $ 1,028
Trade accounts receivable, net of allowances 52,871 39,163
Inventories 86,137 82,853
Deferred income taxes 14,644 14,603
Other current assets 12,214 14,347
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Total Current Assets 166,813 151,994
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Property, Plant and Equipment 273,173 276,630
Less Accumulated Depreciation 118,830 114,036
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Property, Plant and Equipment, Net 154,343 162,594
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Deferred Income Taxes 3,775 5,431
Intangible Assets, Net 72,001 73,178
Other Assets 7,793 6,268
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Total Assets $ 404,725 $ 399,465
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LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Current Liabilities
Short-term borrowings $ 1,362 $ 1,929
Accounts payable 37,002 28,315
Income taxes payable 2,078 3,375
Accrued expenses and other liabilities 27,050 23,404
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Total Current Liabilities 67,492 57,023
- --------------------------------------------------------------------------------------------------------------------
Long-term Debt 173,603 187,266
Other Liabilities 17,965 18,372
Deferred Income Taxes 7,873 3,547
Stockholders' Equity
Common stock 48,667 47,714
Retained earnings 93,816 86,436
Accumulated other comprehensive income (loss) (2,886) 1,113
Other (1,805) (2,006)
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Total Stockholders' Equity 137,792 133,257
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Total Liabilities and Stockholders' Equity $ 404,725 $ 399,465
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- --------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 2
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 93,339 $ 84,941 $ 177,984 $ 165,025
Cost of products sold 75,866 82,080 146,944 150,535
- ----------------------------------------------------------------------------------------------------------------------
Gross margin 17,473 2,861 31,040 14,490
Selling 4,999 3,914 9,364 7,203
Administration 1,486 1,529 2,719 2,859
Impairment of long-lived assets - 42,800 - 42,800
Acquired research and development - 9,500 - 9,500
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Operations 10,988 (54,882) 18,957 (47,872)
- ----------------------------------------------------------------------------------------------------------------------
Other Income and (Expense)
Interest expense (3,410) (4,318) (6,873) (5,701)
Interest income 81 45 86 77
Other income (expense) 69 (389) 459 (533)
- ----------------------------------------------------------------------------------------------------------------------
Earnings (Loss) before Income Taxes 7,728 (59,544) 12,629 (54,029)
Income Tax Expense (Benefit) 2,721 (22,392) 4,431 (20,686)
- ----------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) $ 5,007 $ (37,152) $ 8,198 $ (33,343)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Per Share:
Basic $ 0.18 $ (1.38) $ 0.30 $ (1.24)
Diluted 0.18 (1.38) 0.30 (1.24)
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- ----------------------------------------------------------------------------------------------------------------------
Number of Shares Included in Per Share Computation:
Basic 27,275 26,905 27,238 26,949
Diluted 27,769 26,905 27,587 26,949
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- ----------------------------------------------------------------------------------------------------------------------
Dividends Declared Per Share $ 0.015 $ 0.015 $ 0.03 $ 0.03
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30
--------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities
Net earnings (loss) $ 8,198 $ (33,343)
Depreciation and amortization 11,377 10,369
Write-down of impaired long-lived assets - 42,800
Acquired in-process research and development - 9,500
Deferred income taxes 6,459 (18,798)
Changes in operating assets and liabilities (7,679) (23,862)
- -------------------------------------------------------------------------------------------------------------------------------
Total 18,355 (13,334)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities
Additions to property, plant and equipment (5,251) (11,532)
Business acquisitions, net of cash acquired - (101,000)
- -------------------------------------------------------------------------------------------------------------------------------
Total (5,251) (112,532)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities
Decrease in short-term borrowings (186) (158)
Increase (decrease) in long-term debt (13,195) 143,251
Common stock issued (repurchased), net 953 (15,720)
Cash dividends paid (818) (820)
Other 201 (84)
- -------------------------------------------------------------------------------------------------------------------------------
Total (13,045) 126,469
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Effect of Exchange Rate Changes on Cash and Cash Equivalents (140) (17)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (81) 586
Cash and Cash Equivalents at Beginning of Period 1,028 2,383
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Cash and Cash Equivalents at End of Period $ 947 $ 2,969
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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 June 30,
1999, and the results of operations and the cash flows for the periods
ended June 30, 1999 and 1998. Except for the special charges recorded
in the three and six-month periods ended June 30, 1998, such
adjustments are of a normal recurring nature. Certain items in the
financial statements for the periods ended June 30, 1998 have been
reclassified to conform to the presentation for the periods ended June
30, 1999. The results of operations for the six-month period ended June
30, 1999 are not necessarily indicative of the results to be expected
for the full year. The balance sheet as of December 31, 1998 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, 1998.
2. Inventories
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 19,506 $ 24,845
Work in process 14,149 9,047
Finished goods 52,482 48,961
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$ 86,137 $ 82,853
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3. Derivative Financial Instruments
Derivative financial instruments are used by the Company to reduce
foreign exchange and interest rate risks.
Effective in the quarter ended June 30, 1999, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivatives and Similar Financial Instruments and for Hedging
Activities." This Statement changed how the Company accounts for
certain derivatives and hedging activities, including the following two
key elements: (1) all derivatives are now measured at fair value and
recognized as assets or liabilities and (2) derivatives meeting certain
criteria required by SFAS No. 133 are now specifically designated as
hedges and allowed hedge-accounting treatment. Changes in the fair
value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, depending on
the type of hedge transaction. For cash-flow hedge transactions in
which the Company is hedging the variability of cash flows related
to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be
recorded in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive
income will be reclassified as earnings in the periods in which
earnings are impacted by the variability of the cash flows of the
hedged item. The ineffective portion of all hedges will be
recognized in current period earnings. Accounting for the Company's
cross-currency swap agreements remains unchanged under SFAS No. 133
as these swaps continue to be accounted for under mark-to-market
accounting.
Interest Swap Agreements - In August 1998, the Company entered into
multiple interest rate swap agreements for a total of $100,000 of
notional debt which provide for the Company to swap a variable interest
rate for fixed interest rates ranging from 7.12% to 7.14%. These swaps
expire at various dates ranging from July 1999 to August 2000. Fixing
the interest rate minimizes the Company's exposure to the uncertainty
of floating
Page 5
interest rates during the periods the swaps are outstanding. Amounts
paid or received under the interest rate swap agreements are recorded
as an adjustment to Interest Expense. At June 30, 1999, in accordance
with SFAS No. 133, the fair market value of these swaps, which are
classified as cash flow hedges, was recorded as a liability and as
part of accumulated other comprehensive income (loss) - see footnote 4.
Assuming no changes in underlying interest rates, approximately 85% of
these losses are expected to be recorded into earnings within the next
twelve months.
Cross-Currency Swap Agreements - In January 1999, the Company entered
into a cross-currency swap which provided for the Company to swap
$10,000 of notional debt for the equivalent amount of Japanese
yen-denominated debt. This swap was subsequently closed out in May
1999. Under this swap, the Company also effectively swapped a fixed
U.S. dollar-based interest rate of 5.1% for a fixed Japanese yen-based
interest rate of 1.05%. This Japanese yen-based debt derivative was
accounted for under mark-to-market accounting. The Company recorded as
other income a foreign exchange gain of $112 in the quarter ended June
30, 1999 related to this swap, realizing a total year-to-date foreign
exchange gain of $453.
In August 1999, the Company entered into an agreement to swap $10,000
of notional debt for the equivalent amount of Japanese yen-denominated
debt. Under this swap, the Company also effectively swapped a floating
U.S. dollar-based interest rate for a floating Japanese yen-based
interest rate. This Japanese yen-based derivative is accounted for
under mark-to-market accounting.
Forward Foreign Exchange Contracts - In April 1999, to hedge certain
German mark (DM) denominated raw material purchases, the Company
entered into forward foreign exchange contracts to purchase a total of
15 million DM in monthly increments during the period ending December
31, 1999. As of June 30, 1999, contracts to purchase 12 million DM
remained outstanding. At June 30, 1999, in accordance with SFAS No.
133, the fair market value of these contracts was recorded as a
liability and as part of accumulated other comprehensive income (loss)
- see footnote 4. Assuming no change in underlying foreign exchange
rates, these losses are all expected to be recorded into earnings
within the next twelve months. These contracts are classified as cash
flow hedges under SFAS No. 133.
4. Comprehensive Income
The components of comprehensive income, net of related tax, for the
three and six-month periods ended June 30, 1999 and 1998 are as
follows:
Three Months Ended Six Months Ended
June 30 June 30
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1999 1998 1999 1998
-------------------------------------------------------------------
Net earnings (loss) $ 5,007 $ (37,152) $ 8,198 $ (33,343)
Foreign currency translation adjustments (1,095) 344 (3,525) (133)
Loss on derivative instruments (474) - (474) -
-------------- ------------- --------------- --------------
Comprehensive income (loss) $ 3,438 $ (36,808) $ 4,199 $ (33,476)
-------------- ------------- --------------- --------------
-------------- ------------- --------------- --------------
Foreign currency translation adjustment for 1999 is primarily due to
the change in cumulative translation adjustment resulting from the
strengthening of the U.S. dollar against the DM/Euro during the
six-month period ended June 30, 1999.
Page 6
5. Business Acquisition
On May 15, 1998, the Company, through a wholly owned subsidiary,
acquired the Orcolite business unit of the Monsanto Company (Orcolite)
for the cash purchase price of $101,000. For financial statement
purposes, the acquisition has been accounted for under the purchase
method of accounting with the excess of the purchase price over the
fair value of the net tangible assets acquired recorded as intangible
assets which are being amortized over periods ranging from seven to
thirty years.
In addition, in accordance with generally accepted accounting
principles, the independently appraised value of acquired in-process
research and development purchased in conjunction with the acquisition
was written-off as a charge of $9,500 (pre-tax) during the second
quarter of 1998. The appraised value represents the estimated fair
value of in-process R&D based on risk-adjusted cash flows related to
the in-process R&D projects. At the date of the acquisition, the
development of these projects had not reached technological
feasibility, and these projects had no alternative future uses. There
is no assurance that the in-process projects, which remain in progress,
will be completed, or that they will meet either technological or
commercial success.
The consolidated statements of operations reflect the operations of
Orcolite after May 15, 1998. The following unaudited pro forma
information presents a summary of consolidated results of operations of
the Company and the Orcolite business unit as if the acquisition had
occurred at the beginning of fiscal 1998, with pro forma adjustments to
give effect to amortization of goodwill and other intangible assets,
depreciation expense on the fair value of property, plant and equipment
and interest expense on acquisition debt, together with the related
income tax effects. The pro forma adjustments do not include the $9,500
write-off of acquired in-process research and development discussed
above.
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------
Revenues $ 93,339 $ 90,151 $ 177,984 $ 179,243
Net earnings (loss) 5,007 (37,692) 8,198 (34,961)
Diluted earnings (loss) per share 0.18 (1.40) 0.30 (1.30)
The unaudited pro forma condensed combined financial information above
is not necessarily indicative of what actual results would have been
had the acquisition occurred at the date indicated. Also, the financial
impact resulting from business synergies has not been reflected in the
above pro forma financial information. Such synergies include the
following: consolidation of selling, marketing, distribution, customer
service and administrative functions; consolidation of research and
development and technical services functions; optimization of combined
production capacity; and improved purchasing leverage.
6. Impairment of Long-Lived Assets/Acquired In-Process Research and
Development
During the second quarter ended June 30, 1998, the Company recorded a
pre-tax charge of $42,800 for the write-down of certain Precision
Imaged Products (PIP) operations fixed assets,
Page 7
primarily those related to the production of computer monitor masks.
After careful assessment of various factors relevant to these assets,
including significant declines in sales prices within the computer
monitor mask market, management determined it was appropriate to
write-down the value of these assets and, accordingly, such assets
were written down to estimated fair value based on estimated
discounted cash flows in accordance with SFAS No. 121.
Also during the second quarter ended June 30, 1998, the independently
appraised value of acquired in-process research and development
purchased in conjunction with the Orcolite acquisition was written-off
as a pre-tax charge of $9,500.
7. Segment Information
The Company has two operating segments which manufacture and sell a
variety of products: Precision Imaged Products (PIP) and Optical
Products. PIP manufactures principally aperture masks which are
photochemically etched fine mesh grids used in the manufacture of color
television tubes and computer monitors. Optical Products manufactures
ophthalmic lenses.
The following is a summary of certain financial information relating to
the two segments for the three-month period ended June 30, 1999:
Three Months Ended June 30
-----------------------------------------------------------------------------------------------
Precision Image Products Optical Products Consolidated
--------------------------------- ------------------------------ -----------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Revenues $ 55,851 $ 53,296 $ 37,488 $ 31,645 $ 93,339 $ 84,941
Cost of products sold 47,250 58,255 28,616 23,825 75,866 82,080
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Gross margin 8,601 (4,959) 8,872 7,820 17,473 2,861
Gross margin % 15.4% (9.3)% 23.7% 24.7% 18.7% 3.4%
Selling 1,591 1,133 3,408 2,781 4,999 3,914
Impairment of long-
lived assets - 42,800 - - - 42,800
Acquired research and
development - - - 9,500 - 9,500
Unallocated corporate
administration - - - - 1,486 1,529
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Income from operations $ 7,010 $ (48,892) $ 5,464 $ (4,461) $ 10,988 $ (54,882)
------------------------------------------------------------
------------------------------------------------------------
Operating income % 12.6% (91.7)% 14.6% (14.1)% 11.8% (64.6)%
Interest and other income
(expense), net (3,260) (4,662)
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Earnings before income
taxes $ 7,728 $ (59,544)
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Page 8
The following is a summary of certain financial information relating to
the two segments for the six-month period ended June 30, 1999:
Six Months Ended June 30
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Precision Image Products Optical Products Consolidated
--------------------------------- ------------------------------ -----------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Revenues $ 105,850 $ 108,568 $ 72,134 $ 56,457 $ 177,984 $ 165,025
Cost of products sold 92,339 108,320 54,605 42,215 146,944 150,535
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Gross margin 13,511 248 17,529 14,242 31,040 14,490
Gross margin % 12.8% 0.2% 24.3% 25.2% 17.4% 8.8%
Selling 2,948 2,266 6,416 4,937 9,364 7,203
Impairment of long-
lived assets - 42,800 - - - 42,800
Acquired research and
development - - - 9,500 - 9,500
Unallocated corporate
administration - - - - 2,719 2,859
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Income from operations $ 10,563 $ (44,818) $ 11,113 $ (195) $ 18,957 $ (47,872)
------------------------------------------------------------
------------------------------------------------------------
Operating income % 10.0% (41.3)% 15.4% (0.3)% 10.7% (29.0)%
Interest and other income
(expense), net (6,328) (6,157)
------------ ------------
Earnings before income
taxes $ 12,629 $ (54,029)
------------ ------------
------------ ------------
8. Legal Matters
During the quarter ended June 30, 1999, no significant new legal
proceedings or environmental matters arose and there were no material
changes in the status of the legal proceedings or environmental matters
described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
Page 9
BMC INDUSTRIES, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of results of operations and financial
condition should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes thereto and
the audited consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Total revenues for the second quarter of 1999 increased by $8.4 million, or
10%, from the second quarter of 1998. Revenues of the Optical Products group
generated sales of $37.5 million in the second quarter of 1999, up 18%, or
$5.8 million, over the prior year quarter due predominantly to growth in
sales of high-end products (polycarbonate, progressive and polarizing sun
lenses) and largely driven by the acquisition of Orcolite in May 1998. Sales
of high-end products increased 38% in second quarter 1999 over second quarter
1998 and accounted for 57% of total Optical Products group revenues in second
quarter 1999 compared to 48% in second quarter 1998. Second quarter 1999
Optical Products group revenues were up 2% compared to the pro forma combined
Vision-Ease/Orcolite 1998 revenues for the same period reflecting a decline
in glass and plastic lens sales resulting from the continued shift in the
ophthalmic lens market towards polycarbonate and a soft domestic retail
segment affected by consolidation. Sales of high-end products in second
quarter 1999 increased 11% over the pro forma combined Vision-Ease/Orcolite
revenues for the same period in 1998. Revenues of the Precision Imaged
Products (PIP) group for the second quarter increased 5% from the prior year
quarter which was driven by increased sales of computer monitor masks and
jumbo invar entertainment masks, offset by lower sales of standard AK steel
and other-than-jumbo invar entertainment masks and by lower sales at BMSP.
Sales of computer monitor masks in the second quarter of 1999 nearly doubled,
increasing 97% compared to second quarter 1998, due to both incremental
revenue from the Cortland monitor mask line that was restarted in the first
quarter of 1999 and increased sales of larger-sized monitor masks. Sales of
standard AK steel and other-than-jumbo invar entertainment masks in second
quarter 1999 declined 19%, collectively, compared to the prior year quarter.
These declines were partially offset by a 53% increase in sales of jumbo
invar entertainment masks. In addition, performance of the Cortland monitor
mask line showed progressive improvement over the course of the quarter.
BMSP's second quarter 1999 revenues and operating income were down compared
to second quarter 1998, but showed improvement over first quarter 1999, as
disruptions in the ordering patterns of certain major customers improved.
Cost of products sold were 81% of net sales for the second quarter of 1999,
compared to 97% in the same period of 1998. The decreased cost of products
sold percentage was due primarily to improved PIP gross margins and the
increased mix of higher-margin optical product sales. The PIP gross margin
percentage is up significantly from 1998 reflecting the unusual charges in
the second quarter of 1998 related to mask inventories and moving certain
mask inspection operations, the heavier mix of higher-margin invar
entertainment mask sales, an improved monitor mask sales mix, and the impact
of cost reduction initiatives; all offset by overall lower pricing within the
Mask business, particularly within the monitor segment, and lower
profitability at BMSP.
Page 10
Selling expenses were $5.0 million, or 5.4%, of revenues and $3.9 million, or
4.6%, of revenues for the second quarter of 1999 and 1998, respectively. The
increase is primarily due to higher selling costs associated with the Optical
Products group, principally for expanded sales and marketing efforts
associated with high-end products.
During the second quarter ended June 30, 1998, the Company recorded a pre-tax
charge of $42,800 for the write-down of certain Precision Imaged Products
(PIP) operations fixed assets, primarily those related to the production of
computer monitor masks. After careful assessment of various factors relevant
to these assets, including significant declines in sales prices within the
computer monitor mask market, management determined it was appropriate to
write-down the value of these assets and, accordingly, such assets were
written down to estimated fair value based on estimated discounted cash flows
in accordance with SFAS No. 121. Also during the second quarter ended June
30, 1998, the independently appraised value of acquired in-process research
and development purchased in conjunction with the Orcolite acquisition was
written-off as a pre-tax charge of $9,500.
Interest expense in the second quarter of 1999 decreased $0.9 million from
the prior year quarter. This decrease is primarily due to financing costs
incurred in the prior year as part of the cash purchase of Orcolite for $101
million in May of 1998.
The provision for income tax expense (benefit) was 35% of pre-tax income and
(38%) of pre-tax loss in the second quarter of 1999 and 1998, respectively.
The difference in effective tax rate versus the statutory U.S. tax rate is
primarily due to the impact of the tax benefit associated with dividends paid
by the Company's German operation to the Parent Company which reduce the
Company's effective tax rate.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Total revenues for the first six months of 1999 increased by $13.0 million,
or 8%, from the first six months of 1998. Revenues of the Optical Products
group were up 28% due mainly to growth in sales of high-end products
(polycarbonate, progressive and polarizing sun lenses) and largely resulting
from the acquisition of Orcolite in May 1998. Optical Products group revenues
for the six month period were up 2% compared to the pro forma combined
Vision-Ease/Orcolite 1998 revenues for the same period. Revenues of the
Precision Imaged Products (PIP) group for the six month period decreased 3%
from the prior year period due primarily to a decline in sales of AK steel
entertainment masks and the slowdown of BMSP offset by increased sales of
monitor masks and jumbo invar entertainment masks.
Cost of products sold were 83% and 91% of net sales for the first six months
of 1999 and 1998, respectively. The decreased cost of sales percentage was
due primarily to improved PIP gross margins and the increased mix of
higher-margin optical product sales. The PIP gross margin is up from 1998
reflecting the unusual charges in the second quarter of 1998 related to mask
inventories and moving certain mask inspection operations, the heavier mix of
high-margin invar entertainment mask sales, an improved monitor mask sales
mix and the impact of cost reduction initiatives; all offset by overall lower
pricing within the Mask business, particularly within the monitor segment,
and lower profitability at BMSP.
Selling expenses were $9.4 million, or 5.3%, of revenues and $7.2 million, or
4.4%, of revenues for the first six months of 1999 and 1998, respectively.
The increase is primarily due to higher selling costs associated with the
Optical Products group, principally for expanded sales and marketing efforts
associated with high-end products and incremental costs associated the
Orcolite acquisition.
Page 11
During the second quarter ended June 30, 1998, the Company recorded a pre-tax
charge of $42,800 for the write-down of certain Precision Imaged Products
(PIP) operations fixed assets, primarily those related to the production of
computer monitor masks. After careful assessment of various factors relevant
to these assets, including significant declines in sales prices within the
computer monitor mask market, management determined it was appropriate to
write-down the value of these assets and, accordingly, such assets were
written down to estimated fair value based on estimated discounted cash flows
in accordance with SFAS No. 121. Also during the second quarter ended June
30, 1998, the independently appraised value of acquired in-process research
and development purchased in conjunction with the Orcolite acquisition was
written-off as a pre-tax charge of $9,500.
Interest expense in the first six months of 1999 was $6.9 million compared to
$5.7 million in the first six months of 1998. This increase is primarily due
to the increased debt level to fund the cash purchase of Orcolite for $101
million in May of 1998, offset partially by the financing costs incurred
related to the Orcolite acquisition.
The provision for income tax expense (benefit) was 35% of pre-tax income and
(38%) of pre-tax loss for the first six months of 1999 and 1998,
respectively. The difference in effective tax rate versus the statutory U.S.
tax rate is primarily due to the impact of the tax benefit associated with
dividends paid by the Company's German operation to the Parent Company which
reduce the Company's effective tax rate.
MARKET RISK
There were no significant changes in market risks from those disclosed in the
Company's Form 10-K for the year ended December 31, 1998. However, to hedge
certain German mark (DM) denominated steel purchases, the Company entered
into forward foreign exchange contracts to purchase a total of 15 million DM
in monthly increments during the period ending December 31, 1999.
FINANCIAL POSITION AND LIQUIDITY
Debt decreased approximately $14.2 million from $189.2 million to $175.0
million during the first six months of 1999 primarily as a result of cash
flow from operations of $18.8 million, offset by capital expenditures of $5.3
million. Working capital was $99.3 million at June 30, 1999 compared to $95
million at December 31, 1998. The current ratio was 2.5 at June 30, 1999
compared to 2.7 at December 31, 1998. The ratio of debt to capitalization was
0.56 at June 30, 1999 compared to 0.59 at December 31, 1998.
There were no significant changes in the Company's credit facilities during
the quarter ended June 30, 1999. The Company was in compliance with all
covenants related to credit facilities at June 30, 1999. The Company
continues to expect that the combination of present capital resources,
internally-generated funds and unused financing sources will be adequate to
meet the Company's financing requirements for 1999.
ENVIRONMENTAL
There were 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, 1998.
Page 12
YEAR 2000 COMPLIANCE
The Company has computer systems and applications at the corporate level and
at each of its operating divisions that require or have required
modifications made necessary by the upcoming year 2000. If appropriate
modifications are not made, or are not completed in a timely manner, the Y2K
issue could have a material adverse impact on the operations of the Company.
The Company has been addressing the Y2K issue using essentially the following
four-phase approach:
- Phase I - Identification of all significant computer systems within
the Company with exposure to Y2K issues;
- Phase II - For each system, assessment of Y2K issue(s) and required
remediation;
- Phase III - Remediation and testing of systems to be Y2K compliant;
- Phase IV - Assessment of Y2K preparedness of significant third
parties.
Phase I was formally completed and summarized on a Company-wide basis in
early 1998. Phase II is essentially completed for all information technology
(IT) systems and is in process and estimated to be completed in the third
quarter of 1999 for all non-IT systems. Non-IT systems are generally embedded
technology, such as micro-controllers. Phase III is in various stages of
completion depending on the systems involved. For IT systems, the most
significant efforts of this phase involve the accelerated replacement of
non-compliant IT systems within the Mask Operations group and the remediation
and testing of important mainframe applications and operating systems within
the Optical Products group. Y2K-compliant integrated IT systems from SAP are
currently being implemented in the Mask Operations group in various phases
beginning in early 1999 and continuing through the third quarter and fourth
quarter of 1999. Y2K remediation and testing within the Optical Products
group is currently in process and estimated to be completed during the fourth
quarter of 1999. For non-IT systems, Phase III is scheduled to be completed
during the fourth quarter of 1999. For Phase IV, the Company is in the
process of assessing the Y2K preparedness of significant third parties,
including key vendors and service providers, and estimates that this phase
will be ongoing during the remainder of 1999.
The Company currently estimates that it will cost $3-4 million using both
internal and external resources to address the Y2K issue as discussed above,
including the cost of replacing the IT systems within the Mask Operations
group. Through June 30, 1999, the Company had spent approximately $2 million
of this total estimate.
The Company's current most reasonably likely worst case Y2K scenario is that
modification work will not proceed on schedule, causing some increase to the
total cost of achieving Y2K compliance, or the potential inability to obtain
raw materials from suppliers in a timely manner. The impact on the Company's
results of operations if the Company or its suppliers or customers are not
fully Y2K compliant is not reasonably determinable. Since the Company is
depending on its ability to execute modification plans and its vendors to
continue material supply without interruption, there can be no assurance that
unforeseen difficulties will not arise for the Company or its customers and
that related costs will not thereby be incurred.
Management believes it has planned appropriately to resolve the Y2K issue
with respect to all material elements under the Company's direct control. A
number of significant risks do exist, however, including the potential
inability of the Company to obtain (or retain) the proper internal and
external resources to fully address all Y2K exposures in the timeframes
required and at the cost estimated, as well as the risk that key suppliers,
customers or other significant third parties, including those in utilities,
communications, transportation, banking and government are not prepared for
the year 2000.
Page 13
The Company has begun to establish contingency plans relative to the Y2K
issue and expects to further develop such plans during the remainder of 1999.
CAUTIONARY STATEMENTS
Certain statements included in this Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-Q by the
Company or its representatives, as well as other communications, including
reports to shareholders, news releases and presentations to securities
analysts or investors, contain forward-looking statements made in good faith
by the Company pursuant to the "Safe Harbor" provisions of the PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. These statements relate to
non-historical information and include, without limitation, any statement
that may predict, forecast, indicate or imply future results, performance or
achievements. The Company wishes to caution the reader not to place undo
reliance on any such forward-looking statements, which reflect our opinion as
of the date of this Form 10-Q. These statements are not guarantees of future
performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those presently anticipated or
projected and include, among others, lower demand for televisions and computer
monitors; further mask price declines and imbalances of supply and demand;
unsuccessful customer part qualifications; liability and other claims
asserted against the Company; continued slowdown at BMSP; inability to
penetrate the lead frame market; inability to develop and introduce new
products; failure of new products to gain customer acceptance; unsuccessful
cost reduction and reorganization efforts; potential loss on cross-currency
swaps; higher operating expenses and lower yields associated with production
shutdowns or start-ups; negative foreign currency fluctuations affecting
cross-currency swaps; inability to partner with new BMSP customers or
transition development relationships into full scale production; the impact
of Y2K information systems issues; the effect of the economic uncertainty in
Asia; and a potential economic slowdown in other parts of the world such as
South America. These and other factors are more particularly described in
"Item 1 - Business" of the Company's Form 10-K for the year ended December
31, 1998, 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 14
Part II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
With regard to legal proceedings and certain environmental
matters, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which begins on
page 10 and Note 8 of the "Notes to Condensed Consolidated
Financial Statements" on page 9.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 12 .
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
The Company's 1999 Annual Meeting of Stockholders was held on
May 12, 1999. One matter was submitted to a vote of
stockholders: Election of certain members of the Company's
Board of Directors.
(1) The nominees for election to the Company's Board of
Directors, as listed in the Company's Proxy Statement
dated March 31, 1999, were elected for two year terms
at that meeting. Voting for the individual nominees
was as follows:
Nominee Votes For Votes Withheld or Against
------- --------- -------------------------
Mr. John W. Castro 22,211,506 853,658
Dr. H. Ted Davis 22,197,545 867,619
Mr. Joe E. Davis 22,197,706 867,458
Mr. James M. Ramich 22,201,605 863,559
The following directors did not stand for election
this year because their terms of office continued
after the meeting: Mr. Lyle D. Altman, Mr. Paul B.
Burke and Mr. Harry A. Hammerly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Third Declaration of Amendment, dated July 7, 1999, to
the BMC Industries, Inc. Savings and Profit Sharing
Plan (filed herein).
10.2 BME Share Pledge Agreement dated June 24, 1999 among
the Company, Buckbee-Mears Europe and several banks
(filed herein).
27. Financial Data Schedule (filed only in electronic
format).
99.1 News Release, dated July 20, 1999, announcing the
second quarter 1999 operating results (filed herein).
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99.2 News Release, dated June 10, 1999, announcing
quarterly dividend (filed herein).
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K for the
quarter ended June 30, 1999.
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 J. Hattara
------------------------------------------
Jeffrey J. Hattara
Chief Financial Officer
(Principal Financial Officer)
/s/ Steven E. Opdahl
------------------------------------------
Steven E. Opdahl
Controller
(Principal Accounting Officer)
Dated: August 16, 1999
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