SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 29, 1996
Commission File Number 0-12948
CHEMFAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 03-0221503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 Daniel Webster Highway
Merrimack, New Hampshire 03054
(Address of principal executive office) (Zip Code)
Registrant's telephone number including
area code: (603) 424-9000
Indicate by check mark whether the 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 the past 90 days.
YES X NO .
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
Common Stock, $ .10 par value 8,104,798 shares
CHEMFAB CORPORATION
INDEX
Part I - Financial Information: Page No.
--------
Item 1 - Financial Statements
--------------------
Consolidated Balance Sheets at December 3 - 4
29, 1996 and June 30, 1996
Consolidated Statements of Income for 5
the Three Months and Six Months Ended
December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows 6
for the Six Months Ended December 29, 1996
and December 31, 1995
Notes to Consolidated Financial Statements 7 - 8
Item 2 - Management's Discussion and Analysis of 8 - 12
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Part II - Other Information:
Item 4 - Submission of Matters to a Vote of Security Holders 12 - 13
---------------------------------------------------
Item 6(a) - Exhibits 12 - 13
--------
10(b)(11) $20,000,000 Credit Agreement by
and between Chemfab Corporation as borrower
and The First National Bank of Boston and the
Bank of Ireland as lenders.
Item 6(b) - Reports on Form 8-K 13
-------------------
Signatures 14
PART I - FINANCIAL INFORMATION
------------------------------
CHEMFAB CORPORATION
CONSOLIDATED BALANCE SHEETS
Dec. 29, June 30,
1996 1996
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,416,000 $ 5,017,000
Receivables:
Trade 17,449,000 17,797,000
Other 448,000 185,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,038,000 886,000
Inventories 15,395,000 13,622,000
Prepaid expenses, and other 1,561,000 1,246,000
Deferred tax assets 732,000 795,000
---------- ----------
Total current assets 42,039,000 39,548,000
Property, plant and equipment at cost 42,127,000 40,013,000
Less accumulated depreciation
and amortization 21,238,000 19,473,000
---------- ----------
Net property, plant and equipment 20,889,000 20,540,000
Goodwill, net 11,412,000 11,084,000
Other assets 2,663,000 2,490,000
---------- ----------
Total assets $ 77,003,000 $ 73,662,000
========== ==========
See accompanying Notes to Consolidated Financial Statements
CHEMFAB CORPORATION
CONSOLIDATED BALANCE SHEETS
Dec. 29, June 30,
1996 1996
----------- -----------
(Unaudited)
Current liabilities:
Accounts payable and accrued
expenses $ 8,793,000 $ 9,502,000
Accrued income taxes 1,937,000 1,441,000
Billings in excess of costs and
estimated earnings on
uncompleted contracts 284,000 313,000
---------- ----------
Total current liabilities 11,014,000 11,256,000
Long - term debt - 2,377,000
Deferred tax liabilities 1,530,000 1,524,000
Shareholders' equity:
Preferred stock, par value $.50:
authorized - 1,000,000 shares,
none issued - -
Common stock, par value $.10:
authorized - 15,000,000 shares;
issued - 8,283,889 at Dec. 29, 1996
and 8,085,607 at June 30, 1996 828,000 809,000
Additional paid-in capital 20,137,000 18,314,000
Retained earnings 44,823,000 40,998,000
Treasury stock, at cost,
(205,904 shares at Dec. 29, 1996
and 95,938 at June 30,1996) (2,393,000) (943,000)
Foreign currency translation
adjustment 1,064,000 (673,000)
---------- ----------
Total shareholders' equity 64,459,000 58,505,000
---------- ----------
Total liabilities and shareholders' $ 77,003,000 $ 73,662,000
========== ==========
See accompanying Notes to Consolidated Financial Statements
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- ------------------------------
Dec. 29, 1996 Dec. 31, 1995 Dec. 29, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
Net sales $ 22,127,000 $ 20,885,000 $ 42,065,000 $ 39,351,000
Cost of sales 14,669,000 13,943,000 27,860,000 26,510,000
---------- ---------- ---------- ----------
Gross profit 7,458,000 6,942,000 14,205,000 12,841,000
Selling, general and
administrative expenses 3,832,000 3,621,000 7,516,000 6,882,000
Research and development expenses 663,000 571,000 1,225,000 1,116,000
Other (income) expense, net (111,000) 31,000 (132,000) 30,000
Interest expense 6,000 157,000 82,000 339,000
Interest income (53,000) (59,000) (100,000) (103,000)
---------- ---------- ---------- ----------
Income before income taxes 3,121,000 2,621,000 5,614,000 4,577,000
Provision for income taxes 996,000 800,000 1,789,000 1,397,000
---------- ---------- ---------- ----------
Net income $ 2,125,000 $ 1,821,000 $ 3,825,000 $ 3,180,000
========== ========== ========== ==========
Weighted average common and
common equivalent shares 8,246,000 8,211,000 8,248,000 8,169,000
========== ========== ========== ==========
Earnings per common share $0.26 $0.22 $0.46 $0.39
===== ===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
----------------
Dec. 29, 1996 Dec.31, 1995
------------- ------------
Cash flows from operating activities:
Net income $ 3,825,000 $ 3,180,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,125,000 1,992,000
Change in assets and liabilities:
Receivables 651,000 594,000
Costs and estimated earnings in excess
of billings on uncompleted contracts (181,000) (567,000)
Inventories (1,321,000) (748,000)
Prepaid expenses and other (283,000) 178,000
Other assets long-term (227,000) (139,000)
Accounts payable and accrued expenses (1,044,000) (270,000)
Accrued income taxes 354,000 (1,169,000)
Deferred tax assets and liabilities 69,000 (105,000)
------------ ------------
Total adjustments 143,000 (234,000)
------------ ------------
Net cash provided by operating activities 3,968,000 2,946,000
Cash flows from investing activities:
Capital expenditures (net) (1,492,000) (1,399,000)
------------ ------------
Net cash used in investing activities (1,492,000) (1,399,000)
Cash flows from financing activities:
Proceeds from exercise of stock options 1,843,000 812,000
Repayment of long-term debt (2,447,000) (2,309,000)
Purchase of treasury shares (1,450,000) 0
------------ ------------
Net cash used in financing activities (2,054,000) (1,497,000)
Effect of exchange rate changes on cash (23,000) (30,000)
----------- ------------
Net increase in cash and cash equivalents 399,000 20,000
Cash and cash equivalents at beginning of year 5,017,000 3,780,000
----------- ------------
Cash and cash equivalents at end of period $ 5,416,000 $ 3,800,000
=========== ============
Interest paid $ 106,000 $ 169,000
Income taxes paid $ 928,000 $ 2,317,000
See accompanying notes to the Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The consolidated financial statements of Chemfab Corporation (the
Company) included in this report reflect all adjustments (consisting
of only normally recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the consolidated
financial position at December 29, 1996 and June 30, 1996 and the
consolidated statements of income for the three months and six months
ended December 29, 1996 and December 31, 1995 and the consolidated
statements of cash flows for the six months ended December 29, 1996
and December 31, 1995. The unaudited results of operations for the
interim periods reported are not necessarily indicative of results to
be expected for the year.
Certain notes and other information have been condensed or omitted
from these interim financial statements. The statements, therefore,
should be read in conjunction with the consolidated financial
statements and related notes included in the Chemfab Corporation
Annual Report on Form 10-K for the year ended June 30, 1996 (file no.
0-12948).
Note 2 Inventories consist of the following:
December 29, 1996 June 30,1996
----------------- ------------
Finished Goods $ 5,441,000 $5,112,000
Work in Process 5,313,000 4,602,000
Raw Materials 4,641,000 3,908,000
__________ __________
$15,395,000 $13,622,000
=========== ===========
Note 3 In connection with obtaining incentive grants from the Industrial
Development Authority of Ireland to subsidize certain investments in
plant and equipment in Ireland, the Company's Irish subsidiary,
Chemfab Europe, has agreed to restrict repatriation of Pounds 410,000
Irish pounds (U.S. $680,000) of its retained earnings to fund
repayment of the grants in the event of default under the agreement.
Chemfab Corporation has also provided a parent company guarantee in
the event that the subsidiary's equity, so restricted, is not
sufficient to repay any amount due.
Various lawsuits and claims are pending or have been asserted against
the Company, including matters previously disclosed by the Company in
its Form 10-K for the year ended June 30, 1996. Although the outcome
of such matters cannot be predicted with certainty and some lawsuits
or claims may be disposed of unfavorably to the Company, management
believes their disposition, to the extent not covered by insurance,
will not have a material adverse effect on the Company's financial
condition and results of operations.
Note 4 All reported share data has been adjusted to reflect the Company's 3
for 2 stock split in the form of a stock dividend in February 1996.
Note 5 On October 4, 1996, the Company entered into a new three year
revolving credit agreement jointly with two commercial banks, one
based in the U.S. and the other in Ireland. Under the terms of the
agreement, the Company has available a $20,000,000 unsecured credit
facility until October 4, 1999. Thereafter, any balance outstanding
will convert into a four year term loan with a five year amortization
schedule and a lump sum payment due October 4, 2003. Borrowing under
the facility is at LIBOR plus 1% and the Company is obligated to pay a
commitment fee of 0.125% of the unused portion of the line. The
Company has terminated its previously existing revolving credit
agreement.
ITEM 2 Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Three Months Ended December 29, 1996
- ------------------------------------
Net Sales
- ---------
The Company's consolidated net sales for the three months ended December 29,
1996, the second quarter of fiscal 1997, increased 6% to $22,127,000 from
$20,885,000 in the same quarter last year. Shipments of the Company's
engineered products worldwide increased 17% over the year earlier period but
were offset, in part, by an expected decline in shipments of architectural
products. Measured in constant foreign currency exchange rates, the
consolidated sales increase would have been 4%.
Engineered Products - Americas Business Group sales (which include all non-
architectural product sales to customers in North America and South America)
increased 21% to $11,800,000 from $9,745,000 for the same quarter last year.
This sales increase resulted principally from strength in the Company's
aerospace, communications, electrical/electronics and converter markets. It is
expected that revenues from sales of engineered products into the Americas will
remain relatively strong through the end of the fiscal year.
Engineered Products - European Business Group sales (which include all non-
architectural product sales to customers in Europe, India, the Middle East and
Africa) increased 12% to $7,368,000 from $6,571,000 for the same quarter last
year. This increase in revenues resulted principally from strength in sales
into the energy/environment, food processing and converter markets. Measured in
constant foreign currency exchange rates, revenue growth for the quarter was 9%.
Continued reported revenue growth from sales of the Company's engineered
products into these geographic areas is expected over the remainder of the
fiscal year; however, the percentage increase may be somewhat below the 12%
growth rate achieved in the second quarter.
Engineered Products - Asia Pacific Business Group sales (which include all non-
architectural product sales to customers in the Far East and Australia)
increased 6% to $1,419,000 from $1,334,000 for the same quarter last year. This
increase was lower than first quarter reported revenue growth due, in part, to
lower sales of industrial products into the Japan market caused by certain
changes made by the Company, over the course of the second quarter, in the way
that it distributes industrial products into that market (the Company expects
such Japan sales disruptions to be temporary). Sales from the Company's newly
established China subsidiary, which were not significant during the quarter, are
expected to increase gradually over the remainder of the fiscal year.
Percentage revenue growth into the Asia Pacific region over the remainder of the
fiscal year is expected to generally strengthen, as well as generally return to
levels more like that experienced in the Company's first quarter.
Architectural Product sales decreased 52% to $1,540,000 from $3,225,000 for the
same quarter last year. This decrease in revenues was expected and was the
result of a lower number of sizable projects underway to-date this year versus
last year. The Company expects architectural product sales for over remainder
of the fiscal year to remain below the record levels achieved last year;
however, the outlook for increased revenues is improving, in particular for the
Company's fourth quarter.
Gross Profit Margins
- --------------------
Gross profit margins as a percentage of consolidated net sales improved to 34%
for the quarter, up from 33% for the second quarter of last year. The
improvement is principally attributable to the leveraging effect of increased
revenues on a relatively fixed manufacturing overhead cost structure, and
targeted cost reduction programs.
Selling, Administrative, Research and Development Expenses
- ----------------------------------------------------------
Selling, general and administrative expenses increased 6% to $3,832,000 from
$3,621,000 in the same quarter last year. Increased selling, general and
administration expenditures resulted from the combined effects of the higher
cost structure in place to support the Company's newly established subsidiary
operations in China and Brazil (these were established after the second quarter
of last year), as well as normal increases in salaries and other costs.
Selling, general and administrative expenses as a percentage of sales were 17%,
the same as the second quarter of last year.
Research and development expenses were $663,000 compared to last year's level of
$571,000. This level of spending, at approximately 3% of total revenues, is
consistent with recent, as well as planned levels of research and development
spending.
Other (Income) Expenses
- -----------------------
The Company had net other income of $111,000 for the quarter compared to net
other expense of $31,000 for the same quarter last year. Included in the
current year amount is $95,000 of income related to a fire insurance claim.
Interest Income (Expense)
- -------------------------
The Company had net interest income of $47,000 for the quarter compared to net
interest expense of $98,000 for the same quarter last year. This change
resulted from the repayment of debt incurred to finance the Tygaflor business
acquisition.
Six Months Ended December 29, 1996
- ----------------------------------
Net Sales
- ---------
The Company's consolidated net sales for the six months ended December 29, 1996,
the first half of fiscal 1997, increased 7% to $42,065,000 from $39,351,000 in
the same period last year. Shipments of the Company's engineered products
worldwide increased 15% over the year earlier period but were offset, in part,
by a decline in shipments of architectural products. The impact of changes in
foreign currency exchange rates on reported revenue growth for the six months
was not material.
Engineered Products - Americas Business Group sales (which include all non-
architectural product sales to customers in North America and South America)
increased 19% to $21,645,000 from $18,201,000 for the same period last year.
This sales increase resulted principally from strength in the Company's
aerospace, communications, energy and environment, converter and general
distributor markets.
Engineered Products - European Business Group sales (which include all non-
architectural product sales to customers in Europe, India, the Middle East and
Africa) for the first half of the fiscal year increased 10% to $13,507,000 from
$12,243,000 in the same period last year. This increase in revenues resulted
principally from strength in the Company's lab test/healthcare, converter and
general distributor markets in Europe.
Engineered Products - Asia Pacific Business Group sales (which include all non-
architectural product sales to customers in the Far East and Australia)
increased 13% to $2,714,000 from $2,395,000 in the same period last year. This
increase was the result of a strong marketing and sales focus into this
geographic area since the establishment of this business group approximately
fifteen months ago. Sales from the Company's newly established China subsidiary
were not significant during the first six months of fiscal 1997.
Architectural Product sales decreased 36% to $4,199,000 from $6,512,000 in the
same period last year. This decrease in revenues was expected and was the
result of a lower number of sizable projects underway to-date this year versus
last year.
Gross Profit Margins
- --------------------
Gross profit margins as a percentage of consolidated net sales improved to 34%
for the six months ended December 29, 1996, up from 33% for the first half of
last year. The improvement is principally attributable to the leveraging effect
of increased revenues on a relatively fixed manufacturing overhead cost
structure and targeted cost reduction programs.
Selling, Administrative, Research and Development Expenses
- ----------------------------------------------------------
Selling, general and administrative expenses increased 9% to $7,516,000 from
$6,882,000 in the same period last year. Increased selling, general and
administration expenditures resulted from the combined effects of the higher
cost structure in place to support the Company's newly established subsidiary
operations in China and Brazil (these were established after the first half of
last year), as well as normal increases in salaries and other costs. Selling,
general and administrative expenses as a percentage of sales were 18%, up
slightly from last year's level of 17%.
Research and development expenses were $1,225,000 compared to last year's level
of $1,116,000. This level of spending, at approximately 3% of total revenues,
is consistent with recent, as well as planned levels of research and
development spending.
Other (Income) Expense
- ----------------------
The Company had net other income of $132,000 for the six months ended December
29, 1996 compared to $30,000 of net other expense in the year-earlier period.
Included in the current period is $95,000 of income related to a fire insurance
claim.
Interest Income (Expense)
- -------------------------
The Company had net interest income of $18,000 for the six months ended December
29, 1996 compared to net interest expense of $236,000 for the same period last
year. This change resulted from the repayment of debt incurred to finance the
Tygaflor business acquisition.
Liquidity and Capital Resources
- -------------------------------
During the six months ended December 29, 1996, the Company generated $3,968,000
of cash from operations up from $2,946,000 in the same period of the prior year.
During the period, the Company invested $1,492,000 in property, plant and
equipment additions, repaid $2,447,000 of long-term debt and used $1,450,000 to
purchase the Company's Common Stock under its share repurchase program. The
Company also received $1,843,000 in cash proceeds and related tax benefits from
the exercise of stock options during this period.
Working capital increased to $31,025,000 from $28,292,000 at the end of fiscal
1996. As of December 29, 1996, the Company had $20.0 million of credit
available under its domestic and international borrowing facilities.
Management believes that the combination of cash on hand, cash expected to be
generated from operations, and available credit facilities, will be adequate to
finance operations during fiscal 1997 and to deal with any liabilities or
contingencies described in Note 3 to the Consolidated Financial Statements.
Forward-Looking Statements
- --------------------------
Except for the historical information contained herein, the matters discussed in
this form 10-Q are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that forward-
looking statements are inherently uncertain. Actual performance and results may
differ materially from those projected or suggested in the forward-looking
statements due to certain risks and uncertainties including, without limitation,
the timely introduction of new products and the market acceptance of those
products, and the impact of changes in currency exchange rates on sales and
margins. Additional information concerning certain risks and uncertainties that
could cause actual results to differ materially from those projected or
suggested in the forward-looking statements is contained in the Company's
filings with the Securities and Exchange Commission, including those risks and
uncertainties discussed in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 in the section titled "Forward-Looking
Statements". The forward-looking statements contained herein represent the
Company's judgment as of the date of this filing, and the Company cautions
readers not to place undue reliance on such statements.
PART II - OTHER INFORMATION
---------------------------
ITEM 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 31, 1996, at the Company's Annual Meeting of Shareholders,
the Company's shareholders met to consider and vote upon the following
two proposals:
(1) A proposal to elect six directors to hold office for a one-year
term and until their respective successors have been duly qualified
and elected.
(2) A proposal to ratify the appointment of Ernst & Young LLP as the
independent auditors for the Company for the fiscal year ending
June 30, 1997.
Results with respect to the voting on each of the above proposals were
as follows:
Proposal 1:
-----------
Directors For Withhold Authority
--------- -------- ------------------------------
Paul M. Cook 6,638,976 3,901
Warren C. Cook 6,638,976 3,901
Robert E. McGill III 6,638,976 3,901
James E. McGrath 6,638,976 3,901
Duane C. Montopoli 6,638,976 3,901
Nicholas Pappas 6,638,976 3,901
Proposal 2:
-----------
6,637,412 Votes For
3,015 Votes Against
2,450 Abstentions
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
6(a) Exhibits
--------
10(b)(11) $20,000,000 Credit Agreement by
and between Chemfab Corporation as borrower
and The First National Bank of Boston and the
Bank of Ireland as lenders.
6(b) Reports on Form 8-K
-------------------
None.
CHEMFAB CORPORATION
SIGNATURES
----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CHEMFAB CORPORATION
-------------------
(Registrant)
by:/S/ Duane C. Montopoli
-------------------------------------------
Duane C. Montopoli
President and Chief Executive Officer
By:/S/Moosa E. Moosa
-------------------------------------------
Moosa E. Moosa
Vice President - Finance and Administration
(Principal Financial Officer)
by:/S/ Laurence E. Richard
------------------------------------------
Laurence E. Richard
Controller
(Principal Accounting Officer)
Date: February 11, 1997