5.         Inventories

 

		March 31, 2003			December 31, 2002
Raw materials		$	14,026			$	13,030
Work in process			6,288				6,156
Finished goods			45,094				40,550
		$	65,408			$	59,736

 

6.         Derivative Financial Instruments

 

Derivative financial instruments are used by the Company to reduce foreign exchange and interest rate risks.

 

Interest Rate Swap Agreement - At various dates during 2001 and 2000, the Company entered into multiple interest rate swap agreements, which provide for the Company to swap a variable interest rate for fixed interest rates ranging from 6.7% to 7.1%.  At March 31, 2003, $50,000 of these swaps remained outstanding with $25,000 of these swaps expiring in May 2003 and the remaining $25,000 of these swaps expiring in June 2003.  At March 31, 2003, $391 of deferred net losses on the interest rate swap agreements were included in accumulated other comprehensive loss.

 

7.       Comprehensive Income (Loss)

 

The components of comprehensive income (loss), net of related tax, for the three-month periods ended March 31, 2003 and 2002 are as follows:

 

		2003			2002
Net earnings (loss)	$	726		$	(54,885	)
Foreign currency translation adjustments		270			(611	)
Gain (loss) on derivative instruments		763			735
Comprehensive income (loss)	$	1,759		$	(54,761	)

 

Foreign currency translation adjustment for 2003 is primarily due to the strengthening of the Euro against the U.S. dollar during the quarter ended March 31, 2003.

8.         Legal Matters

 

 

9.        Segment Information

 

The Company has two business segments that manufacture and sell a variety of products:  Buckbee-Mears and Optical Products (operating under the Vision-Ease trade name).  Buckbee-Mears, made up of Mask Operations and Non-Mask Operations, is a leading manufacturer of high-volume precision products for the entertainment, optical, high-tech, medical, and filtration industries.  Mask Operations produces aperture masks, which are critical components of color television picture tubes.  Non-Mask Operations is a leading producer of precision photo-etched metal and electroformed components that require fine features and tight tolerances.  Optical Products designs, manufactures and distributes polycarbonate, glass and hard-resin plastic eyeglass lenses.

 

 

	Three Months Ended March 31
	Buckbee-Mears						Optical Products						Consolidated
		2003			2002			2003			2002			2003			2002
Revenues	$	26,883		$	35,547		$	28,971		$	33,079		$	55,854		$	68,626
Cost of products sold		24,039			33,105			22,705			30,228			46,744			63,333
Gross margin		2,844			2,442			6,266			2,851			9,110			5,293
Gross margin %		10.6	%		6.9	%		21.6	%		8.6	%		16.3	%		7.7	%
Selling expense		1,167			1,060			2,304			2,538			3,471			3,598
Non-recurring charges		--			--			--			2,800			--			2,800
Unallocated corporate
administration		--			--			--			--			1,368			1,355
Income (loss) from   operations	$	1,677		$	1,382		$	3,962		$	(2,487	)		4,271			(2,460	)
Operating income (loss) %		6.2	%		3.9	%		13.7	%		(7.5	)%		7.6	%		(3.6	)%
Interest and other
income (expense), net														(3,127	)		1,157
Earnings (loss) before   income taxes and
accounting change													$	1,144		$	(1,303	)

 

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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, 2003 and 2002

 

Total revenues for the first quarter of 2003 of $55.9 million decreased by $12.8 million or 19% from the first quarter of 2002. 

 

Revenues of the Buckbee-Mears group for the first quarter decreased 24%, or $8.6 million, from $35.5 million in 2002 to $26.9 million in 2003.  Sales of monitor masks decreased $4.9 million from first quarter 2002 as a result of the Company's migration out of the computer monitor mask market and the sale of its non-mask sheet-etching business in 2002.  Total sales of entertainment masks decreased 10% from first quarter 2002 as a result of overall market softness.  Sales declined in the North American and European regions and were partially offset by increased sales in Asia to both traditional and new customers.  The Company has increased its selling efforts in Asia as a number of its traditional North American and Western European picture-tube customers have either closed operations or moved them to lower-cost manufacturing sites, such as China.

 

Revenues of the Optical Products group were $29.0 million in the first quarter of 2003, down $4.1 or 12% from the prior year quarter sales of $33.1 million.  First quarter sales were up $7.3 million, or 34%, compared to fourth quarter 2002.  Polycarbonate lens sales were $1.0 million lower compared to first quarter 2002, but were up $6.0 million from fourth quarter 2002.  Plastic lens sales in first quarter 2003 decreased $1.4 million and glass lens sales were $1.7 million lower than first quarter 2002.  Sales of both plastic and glass lenses grew $0.7 million compared to fourth quarter 2002.  The decrease in polycarbonate sales from first quarter 2002 was the result of manufacturing issues occurring in 2002, which hampered the Company's ability to fully meet customer demand and sales were lost.  The Company is making significant improvements in customer service and is re-establishing relationships with former customers and building new customer relationships.  Sales of plastic lenses were constrained due to supply issues and glass sales continue to decrease as the market moves away from this material for lens products.

 

Cost of products sold were 83.7% of net sales for the first quarter 2003, compared to 92.3% in the same period of 2002.  Buckbee-Mears' gross margin percentage increased from first quarter 2002 primarily due to cost reduction efforts initiated over a year ago and from exiting the low margin computer monitor mask business.  However, current market conditions in the mask business will result in pressure on margins.  The Optical Products group's gross margin increased as a result of production being moved to Jakarta resulting in lower costs and due to an increase in higher margin film product sales.  The first quarter 2002 margin was negatively impacted by a $2.8 million non-recurring restructuring charges related to the Azusa plant closure as well as manufacturing costs associated with the closure of that plant and relocation of those operations to the Ramsey, Minnesota and Jakarta, Indonesia facilities.

 

Selling expenses were $3.5 million or 6.2% of revenues and $3.6 million or 5.2% of revenues for the first quarter of 2003 and 2002, respectively.  Selling expenses in both business segments are not directly linked to sales and therefore, while the absolute amount of selling expenses was consistent quarter over quarter, selling expenses as a percent of sales increased because of a decrease in sales quarter over quarter.

 

Interest expense in the first quarter of 2003 increased $0.2 million from the prior year quarter due to higher credit spreads and fees associated with the amended debt agreement, which was completed in third quarter 2002.

 

Other income in 2002 includes a gain of approximately $3.5 million on the sale of the Optical Products group's Optifacts software unit.

 

The provision for income taxes was an expense of $0.4 million, or 37% of pre-tax income, for the first quarter 2003.  The provision for income taxes for the first quarter of 2002 was an expense of $0.9 million on a loss before accounting change of $1.3 million.  In first quarter 2002, the Company recorded an increase in its tax valuation reserve for foreign tax credits and NOL carryforwards, which resulted in additional tax expense for the quarter.  The mix of domestic and foreign earnings also impacts the 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, 2002.

 

FOREIGN CURRENCY

 

A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions.  The Company manufactures its products in the United States, Germany, Hungary and Indonesia and purchases products from Asian, as well as other foreign suppliers.  The Company sells its products in the United States and into various foreign markets.  The Company's sales are typically denominated in either the U.S. dollar or the European Union Euro.  Buckbee-Mears also has an indirect exposure to the Japanese yen and the Korean won because its most significant competitors are Japanese and Korean.  As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.  In addition, sales of products overseas are affected by the value of the U.S. dollar relative to other currencies.  Long-term strengthening of the U.S. dollar may have an adverse effect on these sales and competitive conditions in the Company's markets and may limit the Company's ability to increase product pricing in times of adverse currency movements.

 

To manage the volatility relating to these exposures, the Company from time-to-time will utilize various derivative instruments, including foreign currency forward-exchange contracts and cross-currency swaps, when considered necessary.  The Company has no foreign currency forward-exchange contracts or cross-currency swaps outstanding as of March 31, 2003.

 

INTEREST RATE SWAPS

 

At various dates during 2001 and 2000, the Company entered into multiple interest rate swap agreements which provide for the Company to swap a variable interest rate for fixed interest rates ranging from 6.7% to 7.1%.  At March 31, 2003, $50 million of these swaps remained outstanding with $25,000 of these swaps expiring in May 2003 and the remaining $25,000 of these swaps expiring in June 2003.  These swaps are discussed in footnote 5.

 

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, 2002.

FINANCIAL POSITION AND LIQUIDITY

Total debt increased $0.9 million from $112.3 million at December 31, 2002 to $113.2 million at March 31, 2003.   Working capital increased to $48.4 million at March 31, 2003 compared to $44.1 million at December 31, 2002.  The increases in debt and working capital relate primarily to lower sales and resulting increases in inventories during the quarter.  The current ratio was 1.8 and 1.7 at March 31, 2003 and December 31, 2002, respectively.  The ratio of debt to capitalization was 65% at both March 31, 2003 and December 31, 2002. 

There were no significant changes in the Company's credit facilities during the quarter ended March 31, 2003.  In March 2003, the Company made a $3.5 million payment on its term loans, reducing the outstanding balance of such term loans from $105.0 million to $101.5 million.  The Company's domestic credit agreement, which expires on May 14, 2004, has total term loans of $101.5 and revolving credit of $35.0 million, subject to a monthly borrowing base calculation, which has impacted and may impact the ability of the Company to fully utilize its total revolving commitment amount.  The Company's borrowing base under the revolving commitment as of March 31, 2003 was $33.9 million.

The Company was in compliance with all covenants related to its credit facilities at March 31, 2003.  However, given the impact of current market conditions, the Company believes it will likely not be in compliance with various financial covenants at the end of second quarter 2003.  The Company will be working with its lenders and requesting modifications to certain requirements under its senior credit facilities during the second quarter 2003.  There is no assurance, however, that the Company will be successful in these efforts to modify its existing senior credit facilities.  As a result, all of the debt under the Company's domestic credit facility has been classified as current as of March 31, 2003. 

The Company has historically had uneven cash flows, with a large amount of customer receipts received near month-ends.  In an effort to meet financial covenants, which are measured at quarter-ends, the Company takes action to minimize its outstanding debt at each quarter end.  As a result, the Company's intra-quarter debt balances may fluctuate, and have fluctuated, significantly from those debt balances reported at quarter end.  Also, the Company is required under its current senior credit facilities to make term loan amortization payments of $3.5 million at the end of each quarter.  The combination of uneven cash flows, higher inter-quarter debt balances, current letter of credit usage and the monthly borrowing base formula required under the facility may result, and has resulted, in significant usage of the revolving credit facilities and may prevent the Company from borrowing additional funds if the maximum amount of undrawn liquidity is reached. 

The Company is also assessing alternative financing arrangements to its current senior credit facilities in anticipation of the May 2004 expiration date of its current domestic credit agreement.  There is no assurance that new credit arrangements or alternative financing terms will be available, or if available will be on terms comparable to those in the current agreement.

 

CAUTIONARY STATEMENTS

 

Certain statements included in this Management's 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 undue 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, our ability to manage working capital and align costs with market conditions; ability to achieve higher yields at Vision-Ease; ability to reduce inventories while maintaining consistently high customer service levels and product fill rates; ability to increase sales of products at both business groups; ability to replace lost domestic aperture mask sales with sales in Asia and other areas of the world; further aperture mask price declines; slowdown in growth of, or price reductions in, high-end optical lens products; fluctuations in currency exchange rates; rising raw material costs; ability to execute efficiently the temporary shut down and start-up of operations at the Company's aperture mask production facilities during the second and third quarters; ability to achieve FDA approval for production of medical products at our Cortland facility; ongoing economic uncertainty and the affect of war or other conflict on the Company's operations; the ability to generate sufficient cash flow to meet debt service obligations; the ability to meet future financial covenants related to, and the ability to negotiate financing arrangements in addition to, or in replacement of, our existing senior credit facilities.  Certain of these and other risks and uncertainties are more particularly described in "Item 1 - Business" of the Company's Form 10-K for the year ended December 31, 2002, 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.

 

Item 3.             Quantitative and Qualitative Disclosure About Market Risk. 

 

See "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 10.

 

Item 4.             Controls and Procedures. 

 

Within the 90-day period prior to the filing of this report, an evaluation was performed under the supervision and with the participation of management, including Douglas C. Hepper, our principal executive officer, and Curtis E. Petersen, our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)).  Based on that evaluation, BMC's management, including Messrs. Hepper and Petersen, concluded that our disclosure controls and procedures are effective.

 

There have been no significant changes, including corrective actions with regard to significant deficiencies or material weaknesses, in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of the evaluation referenced above.

 

 

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" and Note 8 of the "Notes to Condensed Consolidated Financial Statements".

 

Item 6.             Exhibits and Reports on Form 8-K.

 

            (a)       Exhibits                                                                                                                      

                       

99.1    Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002 (filed herein.)

 

99.2    Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002 (filed herein.)

 

            (b)       Reports on Form 8-K.

 

The Company filed a Form 8-K, dated April 29, 2003, reporting BMC Industries, Inc. issued a press release announcing first quarter 2003 financial results.

 

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/Richard G. Faber                                         

Richard G. Faber

Corporate Controller

(Principal Accounting Officer)

 

Dated:  May 15, 2003

 

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CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Douglas C. Hepper, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of BMC Industries, Inc.
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

                                                                                    /s/ Douglas C. Hepper                        

                                                                                    Douglas C. Hepper

                                                                                    Chairman, President

Date:  May 15, 2003                                             and Chief Executive Officer

    

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CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Curtis E. Petersen, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of BMC Industries, Inc.
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

                                                                                    /s/ Curtis E. Petersen                                      

                                                                                    Curtis E. Petersen

                                                                                    Senior Vice President

Date:  May 15, 2003                                             and Chief Financial Officer