Description

INVX BACKGROUND....
Innovex manufactures flexible circuits and interconnect solutions for electronics OEMs. INVX provides a full range of flex circuit applications and services including design, development, fabrication, assembly and test on a global basis. Products are used in notebook computers, portable communication devices (cell phones, pagers, PDAs), data storage devices (mainly hard disk drives but also tape drives and arrays), and consumer electronics products like CD players, cameras and camcorders.

EV is 98.3 mkt cap + 38.8 debt - 2.3 cash = 134.8MM
EV is 10.2x run-rate EBITDA and 0.87x run-rate revenue

Chairman Tom Haley owns 800,000 shares. Other execs have meaningful (but not large) stakes. No insider selling in past year. Some buying.

For Q1 ended 12/00 INVX had -.04 eps. Operating profit was .13MM versus an operating loss of 15mm a year ago. Revenues for Q1 were down 14% TO $38.6MM due to the rapid decline in INVX's wire business and continued weakness at the ADFlex business (both discussed below). Management expects profitability in the current quarter and strong sequential earnings growth for the remainder of the year. Analysts expect .35 eps for FYE 9/01. Earnings should reach $1 by next year now that INVX has its costs under control and revenue is expected to grow strongly.

BACKGROUND ON FLEX...
Flexible circuits are used to connect components in electronic systems and are increasingly used as a platform to support the attachment of electronic devices. Flex circuits are experiencing rapid growth in new computing, communications and storage products because of numerous advantages over rigid printed circuit boards, particularly for small, complex systems. Flex circuits have mechanical flexure and 3D customized shapes better suited for new package contours, tight spaces and motion (for portable products) compared to traditional two-dimensional rigid boards. Flex circuits also have better heat dissipation and signal propagation. Most importantly, they can reduce the size, weight and expense of the interconnect application. These advantages make flex circuits ideal for solving many of the new product design challenges faced by OEMs. FLEX applications have been growing from 30-50% annually according to numerous sources. Growth will slow materially this year with a decline in many end markets (but ongoing new product penetration and outsourcing to flex solution providers should still support double digit growth).

The key trends driving Flex growth are: miniaturization, portability, design complexity, shorter life-cycles, cost pressure, outsourcing (firms that previously designed their own boards prefer to outsource flex due to avoid substantial investment in mfg and design expertise).

INVX and FLEX...
INVX is a leader in flex circuits -- targeting high-volume markets where miniaturization, form and weight are driving factors and flexible circuits are an enabling technology. Key customers include Compaq, Dell, Digital Equipment, IBM, Iomega, Maxtor, Motorola, Nokia, Philips, Qualcomm, Quantum, ReadRite, SAE Magnetics, Samsung, Seagate, StorageTek and other leading OEMs.

The company increased its Flex capabilities significantly with the acquisition of ADFlex in August 1999 for $37MM cash (funded with bank debt, much of which remains on the balance sheet today). The ADFlex business was merged with INVX existing Flex business.

REASON FOR THE STOCK TO BE DOWN....
Innovex ran into numerous problems in 1998-2000.
- ADFlex acquisition was done poorly and the company had not been reinvesting in new R&D or aggressively building the pipeline when it was acquired 18months ago. ADFlex therefore has seen its revenues actually decline in a growth market. INVX has now solved this problem and rebuilt the design process and pipeline and management claims ADFLEX will begin growing again this qtr or next.
- Company did not keep up with cost cutting in the face of price pressure from customers. In response company moved production to new low-cost facility in Thailand, but the transition and ramp created even more costs over the past year. This move was completed successfully last quarter. Company is also consolidating domestic production in a low-cost state-of the art facility in Minnesota.
- Most important... historically INVX's wire operations produced a variety of small lead wire assemblies primarily for disk drives. The disk drive industry has transitioned away from lead wire assemblies to a variety of new wireless interconnect solutions. This transition had a significant impact on INVX over the last three years. INVX had to manage a rapid increase in its flexible circuit business while controlling the rapid drop in its lead wire business. Lead wire assembly sales constituted less than 1% of fiscal 2000 revenues, down from over 70% of fiscal 1998 revenues. Growth in Flex, including Flex solutions for disk drive assemblies, was masked by the rapid disappearance of the wire business.

** The key to the INVX story is that ADFlex revenues are now turning north at the same time that manufacturing cost structure has been fixed...and the wire business will no longer hide the Flex growth. A further benefit is the ramp up and customer acceptance (esp. Seagate) of the companys new Flex Suspension Assembly (FSA) for disk drives. These factors are all coinciding at a time when INVX stock is down meaningfully due to the drop in communications and electronics generally.

Analysts (one *buy* and one *strong buy*) expect .05 eps this qtr (March), .14 next quarter, and .20 in Q4 ending September (despite the downturn in many end markets). This would bring EPS for FYE 9/01 to .35. INVX management seemed quite comfortable with these numbers in their latest conf. call. Earnings could hit $1 next year (6.6x P/E) -- which would still be a significant leveling off from the rapid sequential QTR growth expected this year.

KEY RISKS...
The biggest risk is probably competition. There are several large companies that produce flex circuits, including 3M and Sumitomo in high-end applications, and Nippon Mektron, Fujikura, Nitto Denko, and others in mid-range. Still, INVX remains one of the leaders (share is difficult to assess since various Flex applications may not truly compete with one another) and does enjoy a size advantage over the U.S.-based players in polyimide flex circuits. INVX is also more of a one-stop provider than most competitors due to its test and assembly services.

Concentration in the disk drive market (61% of last year's revenues) is another risk, but this is mitigated ramping penetration for FSA (which will offset a slow-down in this sector) and the fact that concentration to this sector is expected to continue declining (was about 85% a couple years ago).

Catalyst

INVX has not been buying back stock and management has indicated that this may occur as cash flow ramps up (though not if it jeopardized debt reduction). No insider selling over past year ---- there has been some buying. The real catalysts will be the return to profitability this quarter and next, which should show strong sequential earnings growth. And the reappearance of growth as the wire business and ADflex will no longer be negative factors.