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 September 27, 1998
Commission File Number 1-12767
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_____.
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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 October 30, 1998
Common Stock, $ .10 par value 7,850,700 shares
CHEMFAB CORPORATION
INDEX
Part I - Financial Information: Page No.
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Item 1 - Financial Statements
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Consolidated Balance Sheets at September 3
27, 1998 and June 30, 1998
Consolidated Statements of Income for 5
the Three Months Ended September 27,
1998 and September 28, 1997
Consolidated Statements of Cash Flows 6
for the Three Months Ended September
27, 1998 and September 28, 1997
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of 8
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Financial Condition and Results of Operations
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Part II - Other Information:
Item 6(a) - Exhibits 11
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Item 6(b) - Reports on Form 8-K 11
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Signatures 12
CHEMFAB CORPORATION
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CONSOLIDATED BALANCE SHEETS
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(in thousands except par value amounts)
September 27, June 30,
1998 1998
_____________ ___________
(Unaudited)
Current assets:
Cash and cash equivalents $ 4,468 $ 11,099
Receivables:
Trade 19,061 20,946
Other - 17
Inventories 19,750 17,403
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,098 1,373
Prepaid expenses, and other current assets 1,202 720
Deferred tax assets 731 730
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Total current assets 47,310 52,288
Property, plant and equipment, at cost 55,701 50,260
Less: accumulated depreciation (27,074) (26,043)
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Net property, plant and equipment 28,627 24,217
Goodwill, net 15,671 9,926
Other assets 2,869 2,673
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Total assets $ 94,477 $ 89,104
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See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
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CONSOLIDATED BALANCE SHEETS
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(in thousands except par value amounts)
Sept. 27, June 30,
1998 1998
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(Unaudited)
Current liabilities:
Accounts payable and accrued
expenses $ 13,838 $ 12,307
Accrued income taxes 3,164 2,540
Billings in excess of costs and
estimated earnings on
uncompleted contracts 345 151
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Total current liabilities 17,347 14,998
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Deferred tax liabilities 1,752 1,752
Shareholders' equity:
Preferred stock, par value $.50:
authorized - 1,000 shares,
none issued - -
Common stock, par value $.10:
authorized - 15,000 shares;
issued 8,701 shares at September 27, 1998 870 869
and 8,689 shares at June 30, 1998
Additional paid-in capital 25,115 25,008
Retained earnings 63,429 61,036
Treasury stock, at cost
(877 shares at September 27, 1998
and at June 30, 1998) (15,137) (15,137)
Foreign currency translation
adjustment 1,101 578
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Total shareholders' equity 75,378 72,354
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Total liabilities and shareholders' equity $ 94,477 $ 89,104
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See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
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CONSOLIDATED STATEMENTS OF INCOME
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(Unaudited)
(in thousands except par value amount)
Three Months Ended
Sept. 27, 1998 Sept. 28, 1997
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Net sales $ 25,233 $ 22,154
Cost of sales 16,796 14,595
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Gross profit 8,437 7,559
Selling, general and
administrative expenses 4,254 3,969
Research and development 860 659
Other (income) expense (124) 16
Interest income, net (103) (82)
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Income before income taxes 3,550 2,997
Provision for income taxes 1,157 959
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Net income $ 2,393 $ 2,038
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Earnings per share:
- Basic $0.31 $0.26
- Diluted $0.30 $0.25
Weighted average common share outstanding:
- Basic 7,816 7,973
- Diluted 8,092 8,281
See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
(in thousands)
Three Months Ended
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Sept. 27, 1998 Sept. 28, 1997
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Cash flows from operating activities:
Net income $ 2,393 $ 2,038
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & Amortization 1,338 1,205
Change in assets and liabilities:
Receivables 2,619 (114)
Costs and estimated earnings in excess
of billings on uncompleted contracts, net (531) 540
Inventories (1,324) (1,262)
Prepaid expenses and other (251) (199)
Other assets (531) (68)
Accounts payable and accrued expenses (37) (1,427)
Accrued income taxes 588 827
Deferred tax assets and liabilities (1) (2)
Total adjustments 1,870 (500)
Net cash provided by operating activities 4,263 1,538
Cash flows from investing activities:
Purchase of Vdb/hi-tex (6,123) 0
Capital expenditures (net) (4,933) (1,205)
Net cash used in investing activities (11,056) (1,205)
Cash flows from financing activities:
Proceeds from exercise of stock options 108 946
Purchase of treasury shares 0 (1,889)
Net cash provided by/(used in) financing 108 (943)
activities
Effect of exchange rate changes on cash 54 (50)
Net decrease in cash and cash equivalents (6,631) (660)
Cash and cash equivalents at beginning of year 11,099 8,055
Cash and cash equivalents at end of period $ 4,468 $ 7,395
========= =========
Interest paid $ 0 $ 0
Income taxes paid $ 677 $ 203
See accompanying Notes to Consolidated Financial Statements
CHEMFAB CORPORATION
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Notes To Consolidated Financial Statements.
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September 27, 1998
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(Unaudited)
Note 1- Significant Accounting Policies
Principles of Consolidation:
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 September 27, 1998 and June 30, 1998 and the
consolidated statements of income and cash flows for the three months
ended September 27, 1998 and September 28, 1997. 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, 1998 (file
no. 1-12767).
Note 2- Acquisitions:
Purchase - Vdb/hi-tex Technische Gewebe Gmbh
On September 7, 1998 the Company completed the purchase of the
business assets (principally inventory, equipment, certain liabilities
and accounts payable, accruals and intangibles) of Vdb/hi-tex Technische
Gewebe Gmbh (Vdb) for approximately $6.2 million in cash including
associated transaction costs. The acquisition was accounted for using
the purchase method of accounting. Prior to the acquisition, Vdb's main
business was in the fabrication and distribution of PTFE composite
products principally purchased from Chemfab. This business is
expected to continue. Vdb's primary markets are in Germany, Turkey
and Eastern European countries. The acquisition of Vdb resulted in the
recognition of goodwill of approximately $5.9 million which will be
amortized over 15 years.
Note 3- Inventories:
Inventories consist of the following:
Sept. 27, 1998 June 30,1998
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(in thousands)
Finished Goods $ 7,832 $ 5,674
Work in Process 6,344 7,396
Raw Materials 5,574 4,333
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$19,750 $17,403
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Note 4- Commitments and Contingencies:
The Birdair, Inc. (Birdair) litigation described in Part 1, Item 3 in
the fiscal 1998 Annual Report is still pending. The Company
vigorously denies liability. While the litigation is in the early
stages of pretrial discovery, the Company continues its efforts to
resolve the dispute.
Various other lawsuits and claims are pending or have been asserted by
and against the Company, including matters previously disclosed by the
Company in its Form 10-K for the year ended June 30, 1998. 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 that the disposition of its current legal
proceedings, to the extent not covered by insurance, will not have a
material adverse effect on the Company's financial condition and
results of operations.
ITEM 2 Management's Discussion and Analysis of
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Financial Condition and Results of Operations
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Three Months Ended September 27, 1998
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Net Sales
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The Company's consolidated net sales for the three months ended September 27,
1998, the first quarter of fiscal 1999, increased 14% to $25,233,000 from
$22,154,000 in the same quarter last year. Shipments of the Company's
engineered products worldwide increased 4% over the year earlier period while
shipments of architectural products rose 73%. Had mainland European currencies
and the Pound Sterling remained at the same exchange rates as last year,
consolidated revenue would have increased by 13% and worldwide engineered
products would have increased by 3% over the previous year.
Engineered Products - Americas sourced sales (which include all non-
architectural product sales from the Company's U.S. manufacturing plants;
principal geographic markets are the Americas and the Far East) increased 4% to
$11,898,000 from $11,472,000 for the same quarter last year. This sales
increase resulted principally from strength in the Company's food processing
markets. It is expected that revenues from sales of engineered products,
particularly into the Americas, will remain relatively solid through the end of
the fiscal year.
Engineered Products - Europe sourced sales (which include all product sales from
the Company's European manufacturing plants; principal geographic markets are
Europe, Africa and the Far East) increased to $6,429,000 from $6,054,000 in the
same quarter last year. The British Pound, which is the currency in which the
Company's European sales are recorded, strengthened relative to mainland
European currencies and relative to the U.S. Dollar. Measured in constant
currency rates, sales would have increased 2% over the same period last year.
The impact of the purchase of Vdb (see Note 2) was minor as the acquisition was
transacted shortly before the end of the quarter. For the remainder of the
year, the Company expects to benefit from the inclusion of the revenue from the
Vdb acquisition. Sales growth for the balance of the European business is
expected to continue at approximately the same rate for the remainder of the
fiscal year.
Engineered Products - Asia Pacific Business Group sales (which include all non-
architectural product sales to customers in the Far East and Australia)
decreased slightly to $1,479,000 from $1,500,000 in the same quarter last year.
This decrease was the result of a continued weakness of the economy in certain
Asian countries which has caused a downward trend in revenues. Percentage
revenue growth from industrial product shipments into the Asia Pacific region is
expected to continue at approximately this level for the remainder of the fiscal
year.
Architectural Product sales increased 73% to $5,427,000 from $3,128,000 in the
same quarter last year. This increase in revenues was the result of an increase
in sizable projects underway to-date this year versus last year. On September
30, 1998, the Company entered into a $28,600,000 million contract to supply
PTFE-coated fabric as the roof membrane for thousands of tent-styled shelters in
Mina, Kingdom of Saudi Arabia. The Company expects to ship the entire order in
fiscal 1999, subject to various normal raw material and production risks
associated with large-volume orders. Based on recent post-period order entry
and other relevant market data, the Company expects that architectural product
sales for the remainder of the year are likely to continue at record levels,
subject to various normal raw material and production risks associated with
record volumes.
Gross Profit Margins
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Gross profit margins as a percentage of consolidated net sales declined slightly
to 33.4% for the quarter, down from 34.1% for the first quarter of last year.
The decline is principally attributable to product mix, with high architectural
sales, and some out-of-period costs associated with the Tent City project, the
revenues for which are not expected to be realized until the second and third
quarter of fiscal year 1999.
Selling, Administrative, Research and Development Expenses
- ----------------------------------------------------------
Selling, general and administrative expenses increased 7% to $4,254,000 from
$3,969,000 in the same quarter last year. Increased selling, general and
administration expenditures resulted from additional expenses relating to Vdb
(see Note 2) and additional legal expenses, as well as normal increases in
salaries and other costs. Selling, general and administrative expenses as a
percentage of sales were 17%, down slightly from the first quarter of last year.
Research and development expenses were $860,000 compared to last year's level of
$659,000. This level of spending, at approximately 3% of total revenues, is
consistent with recent, as well as planned, levels of research and development
spending.
Interest Expense, Net
- ---------------------
The Company had net interest income of $103,000 for the quarter compared to net
interest income of $82,000 for the same quarter last year, largely as a result
of excess average cash balances.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended September 27, 1998, the Company generated $4,263,000 of
cash from operations, which was up from the same quarter of the prior year.
During this same period, the Company invested $4,933,000 in property, plant and
equipment additions, and expended $6,123,000 to acquire Vdb/hi-tex Technische
Gewebe Gmbh (see Note 2). The Company also received $108,000 in cash proceeds
and related tax benefits from the exercise of stock options during this period.
Working capital decreased to $29,963,000 from $37,290,000 at the end of fiscal
1998. As of September 27, 1998, the Company had approximately $21 million of
additional credit available under its domestic and international borrowing
facilities. During the first month of the second fiscal quarter, the Company
commenced draws on its line of credit to finance operations, and expects that it
will continue to do so in connection with the cash flow requirements of the Tent
City project. 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 1999 and to deal with any
liabilities or contingencies described in Note 4 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, as amended. Investors are cautioned
that forward-looking statements are inherently uncertain. Actual performance
and results may differ materially from those projected or suggested due to
certain risks and uncertainties, including raw material procurement, production
and related risks, and shipment delays for a contract of the magnitude of Tent
City, fluctuation in the demand for the Company's architectural products and
similar economic and industry risks related to the award and continuation of
certain large projects, and the Company's ability to penetrate the consumer
bakeware liner market. Additional information concerning certain risks and
uncertainties that could cause actual results to differ materially from those
projected or suggested is contained in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 which has been filed with the Securities
and Exchange Commission. 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
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ITEM 3 _ Legal Proceedings
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See the information under the caption "Note 4 _ Commitments and Contingencies"
in Notes to Consolidated Financial Statements of this 10Q.
ITEM 6 - Exhibits and Reports on Form 8-K
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6(a) Exhibits
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10(b)10 Asset Purchase Agreement between Chemfab Corporation and
Vdb/hi-tex Technische Gewebe Gmbh dated July 17, 1998.
6(b) Reports on Form 8-K
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None.
CHEMFAB CORPORATION
SIGNATURES
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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
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(Registrant)
By:/S/ John W. Verbicky
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President, Chief Executive Officer and Director
By:/S/Moosa E. Moosa
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Moosa E. Moosa
Vice President - Finance, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By:/S/ Hilary A. Arwine
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Hilary A. Arwine
Corporate Controller
(Principal Accounting Officer)
Date: November 11, 1998