1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 / / FOR THE QUARTER ENDED APRIL 29, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-8088 FURON COMPANY (Exact name of registrant as specified in its charter) California 95-1947155 - ---------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 29982 Ivy Glenn Drive Laguna Niguel, CA 92677 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 831-5350 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 ----- ----- Number of shares of common stock outstanding as of April 29, 1995: 8,853,150 2 FURON COMPANY INDEX PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets April 29, 1995 and January 28, 1995 3 Condensed Consolidated Statements of Income Three months ended April 29, 1995 and April 30, 1994 5 Condensed Consolidated Statements of Cash Flows Three months ended April 29, 1995 and April 30, 1994 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION 13 - --------------------------- 2 3 ITEM 1. FINANCIAL STATEMENTS FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited) April 29, January 28, In thousands 1995 1995 - ----------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ -- $ 6,475 Accounts receivable, less allowance for doubtful accounts of $813 at April 29, 1995 and $696 at January 28, 1995 52,131 48,955 Inventories 39,289 31,197 Deferred tax benefit 8,215 8,215 Prepaid expenses and other assets 5,710 6,843 -------- -------- Total current assets 105,345 101,685 Property, plant & equipment, at cost: Land 904 456 Buildings and leasehold improvements 19,070 13,868 Machinery and equipment 106,149 99,718 -------- -------- 126,123 114,042 Less accumulated depreciation and amortization (64,842) (61,981) -------- -------- Net property, plant and equipment 61,281 52,061 Intangible assets, at cost less accumulated amortization of $24,680 at April 29, 1995 and $23,739 at January 28, 1995 30,421 17,953 Other assets 8,189 8,174 -------- -------- $205,236 $179,873 ======== ======== See accompanying notes. 3 4 FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) April 29, January 28, In thousands, except share data 1995 1995 - ------------------------------------------------------------------------------------------------------------------- Current liabilities: Cash, less checks outstanding $ 3,304 $ -- Accounts payable 18,528 19,093 Salaries, wages and related benefits payable 9,251 10,508 Current portion of long-term debt 8,004 8,004 Income taxes payable 1,421 770 Other current liabilities 9,186 8,585 -------- -------- Total current liabilities 49,694 46,960 Long-term debt due after one year 30,751 12,752 Other long-term liabilities 20,088 20,039 Deferred taxes 8,523 8,523 Commitments and contingencies Stockholders' equity: Capital stock: Preferred stock without par value, 2,000,000 shares authorized, none issued or outstanding -- -- Common stock without par value, 15,000,000 shares authorized, 8,853,150 shares issued and outstanding at April 29, 1995 and 8,800,164 at January 28, 1995 36,872 36,280 Foreign currency translation adjustment 1,483 419 Unearned ESOP shares (3,112) (3,112) Unearned compensation (784) (885) Additional pension liability (379) (379) Retained earnings 62,100 59,276 -------- -------- Total stockholders' equity 96,180 91,599 -------- -------- $205,236 $179,873 ======== ======== See accompanying notes. 4 5 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended ------------------------------------------- April 29, April 30, In thousands, except per share amounts 1995 1994 - --------------------------------------------------------------------------------------------------------------- Net sales $88,442 $74,960 Cost of sales 62,881 53,000 ------- ------- Gross profit 25,561 21,960 Selling, general and administrative expenses 20,380 17,821 Other (income), net (775) (336) Interest expense 794 643 ------- ------- Income before income taxes 5,162 3,832 Provision for income taxes 1,807 1,418 ------- ------- Net income $ 3,355 $ 2,414 ======= ======= Net income per share of Common Stock $ 0.37 $ 0.27 ======= ======= See accompanying notes. 5 6 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended ----------------------------------------- April 29, April 30, In thousands 1995 1994 - -------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 3,355 $ 2,414 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 2,510 2,188 Amortization 1,032 906 Provision for losses on accounts receivable 105 89 Increase in deferred income taxes -- 215 Loss on sale of assets and divestitures 11 (7) Working capital changes: Accounts receivable (1,231) (2,621) Inventories (5,612) (805) Cash, less checks outstanding 3,304 - Accounts payable and accrued liabilities (4,096) (2,244) Income taxes payable 651 (728) Other current assets and liabilities, net 1,218 (1,647) Changes in other long-term operating assets and liabilities 25 444 -------- -------- Net cash provided by (used in) operating activities 1,272 (1,796) INVESTING ACTIVITIES Acquisition of business (23,763) -- Purchases of property, plant and equipment (3,342) (2,328) Proceeds from sale of divestitures 567 -- Proceeds from sale of equipment 47 63 Proceeds from notes receivable -- 711 Decrease (increase) in notes receivable 9 (198) -------- -------- Net cash used in investing activities (26,482) (1,752) FINANCING ACTIVITIES Proceeds from long-term debt 21,000 -- Principal payments on long-term debt (3,001) (1,504) Proceeds from issuance of common stock 601 131 Dividends paid on common stock (531) (520) --------- -------- Net cash provided by (used in) financing activities 18,069 (1,893) EFFECT OF EXCHANGE RATE CHANGES ON CASH 666 117 --------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (6,475) (5,324) --------- -------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,475 18,483 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 13,159 ========= ======== See accompanying notes. 6 7 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS April 29, 1995 (Unaudited) 1. GENERAL The accompanying unaudited consolidated financial statements have been condensed in certain respects and should therefore be read in conjunction with the consolidated financial statements and related notes thereto contained in the Company's Annual Report to Shareholders on Form 10-K for the fiscal year ended January 28, 1995. Certain reclassifications have been made to prior year amounts in order to be consistent with the current year presentation. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring adjustments) to present fairly the financial position of the Company as of April 29, 1995, and the results of operations and cash flows for the three months ended April 29, 1995 and April 30, 1994. Results of the Company's operations for the three months ended April 29, 1995 are not necessarily indicative of the results to be expected for the full year. Income taxes paid for the three months ended April 29, 1995 and April 30, 1994 were $650,000 and $1,900,000, respectively. 2. INVENTORIES Substantially all inventories are valued at the lower of cost (first-in, first-out) or market, and are summarized as follows: April 29, January 28, In thousands 1995 1995 ---------------------------------------------------------------------- Raw materials and purchased parts $16,594 $12,482 Work-in-process 7,636 9,153 Finished goods 15,059 9,562 ------- ------- $39,289 $31,197 ======= ======= 7 8 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS April 29, 1995 (Unaudited) 3. INTANGIBLES Intangible assets acquired in business combinations are summarized as follows: April 29, January 28, In thousands 1995 1995 ------------------------------------------------------------------- Goodwill $13,657 $ 328 Other intangible assets 16,764 17,625 ------- ------- $30,421 $17,953 ======= ======= 4. LONG-TERM DEBT Long-term debt is summarized as follows: April 29, January 28, In thousands 1995 1995 ---------------------------------------------------------------------- Loans under bank credit agreements due through fiscal 1998 $38,750 $20,750 Other 5 6 ------- ------- Total long-term debt 38,755 20,756 Less current portion (8,004) (8,004) ------- ------- Due after one year $30,751 $12,752 ======= ======= At April 29, 1995, the weighted average interest rate on the loans under bank credit agreements was 8.27%. In August 1988, the Company entered into an 8-year Interest Rate Swap agreement. The notional amount of the swap totaled $12 million at April 29, 1995. The swap agreement effectively changes the Company's interest rate exposure on the majority of its borrowings to a fixed interest rate of 9.938% plus a .75% spread on the notional portion of the facility. Interest paid for the three months ended April 29, 1995 and April 30, 1994 was $628,000 and $623,000, respectively. 8 9 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS April 29, 1995 (Unaudited) 5. BUSINESS ACQUISITION On January 31, 1995, the Company acquired certain assets of Custom Coating & Laminating Corporation ("CC&L"). The Company paid $24 million ($18 million of which was borrowed under the Company's unsecured revolving facility), assumed certain liabilities approximating $2.4 million, and may pay up to an additional $4 million based upon product sales over the next three fiscal years. The results of operations of CC&L from February 1, 1995 have been included in the condensed consolidated financial statements. The following compares an unaudited summary of results of operations for the three months ended April 29, 1995 with an unaudited pro forma combined summary of results of operations of CC&L and the Company for the three months ended April 30, 1994 assuming the acquisition had been consummated on January 29, 1994. Three months ended ------------------------------ April 29, April 30, (in thousands except per share data) 1995 1994 --------------- ---------- Net sales $88,442 $80,863 Net income 3,355 2,905 Net income per share of Common Stock 0.37 0.32 6. CONTINGENCIES At April 29, 1995, the Company has approximately $1.5 million of foreign currency hedge contracts outstanding which consist of over- the-counter forward contracts. The contracts reflect the selective hedging of the Belgium Franc with varying maturities up to six months. Net unrealized losses from hedging activities totaled $122,000 at April 29,1995. At April 29, 1995, the Company is obligated under irrevocable letters of credit totaling $3,275,000. The Company is currently involved in litigation arising in the normal course of business. Management of the Company is of the opinion that such litigation will not have a material effect on the Company's consolidated financial position or results of operations. The Company from time to time incurs investigation, remedial response, voluntary clean-up and other costs associated with environmental matters. As of April 29, 1995, the Company's reserves for environmental matters totaled approximately $2,500,000. These reserves primarily relate to environmental costs associated with facilities that have been sold or closed. While neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined, management does not expect those matters to have a material adverse effect on the Company's consolidated financial position or results of operations. 9 10 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS April 29, 1995 (Unaudited) 6. CONTINGENCIES (CONTINUED) One of the Company's subsidiaries has been notified by the Environmental Protection Agency that it has been named as a potentially responsible party in connection with the cleanup of hazardous wastes at two sites, the Solvents Recovery Service of New England site in Southington, Connecticut (notified in June 1992), and the Gallups Quarry site in Plainfield, Connecticut (notified in April 1993). Since these matters are in their preliminary stages, no assurance can be given at this time concerning the ultimate outcome. However, based on preliminary investigations to determine the subsidiary's potential liability and the estimated amount of remedial costs necessary to clean up the sites, the Company presently does not expect these matters to have a material adverse effect on its consolidated financial position or results of operations. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated sales for the three months ended April 29, 1995 of $88 million represent an 18% increase over the same period of the prior year. After removing the effect of acquisition and business held for sale, sales increased 13%. The Company has benefited from continued strength in the industrial economy. Sales into the electronics and truck markets were particularly strong. Sales to the commercial aircraft, aerospace, and industrial equipment markets also increased. Sales into the chemical processing markets were down from last year as the result of significant export sales included in last year's sales that were not repeated in this year's first quarter. Sales of the Company's European operations were up 34% (14% after removing the effect of foreign currency exchange rate changes) over last year. Gross profit as a percentage of sales for the three months ended April 29, 1995 was down 0.4% from the same period in the prior year to 28.9%. After removing the effects of acquisition and business held for sale, the gross profit margin was up 0.5% from 29.6% to 30.1%. The operating leverage effect of sales increasing at a greater rate than fixed manufacturing costs, and continued productivity improvements, more than offset the impact of increased raw material prices. In addition, gross profit earned by the Company's foreign operations from U.S. manufactured products were positively impacted by favorable foreign currency rate changes during the quarter. Selling, general and administrative expenses as a percentage of sales was 23.0%, down from 23.8% in the same period a year ago. After removing the effect of acquisition and business held for sale, operating expenses were 23.7% of sales, down from 24.3% in the first quarter of the prior year. Excluding the acquisition and business held for sale, the 11% increase in selling, general and administrative expenses over the prior year reflects relocation, travel and professional fees associated with the implementation of the Company's new operating structure and new management information systems. Product development expenses were up in the first quarter over the same prior year period, reflecting the Company's continued commitment to new products and materials development. Other income, net increased due to higher licensee fees and a decrease in other expense attributable to the elimination of income related to business held for sale which was higher in the prior year. Offsetting these increases was lower interest income resulting from a reduction in cash balances available for investing due to the acquisition. Interest expense for the three months ended April 29, 1995 was up 23.5% from the same period in the prior year. The increase is due to the acquisition of the assets of Custom Coating and Laminating Corporation ("CC&L") on January 31, 1995 for $24 million, of which $18 million was borrowed. Pretax results of operations improved 35% to $5.2 million from $3.8 million for the three months ended April 29, 1995 and April 30, 1994, respectively. After removing the effects of acquisition and business held for sale, pretax results of operations were up 38% from the same period last year. The improvement is generally the result of higher sales, stable manufacturing costs, and continued productivity improvements, offset by slightly higher operating expenses. 11 12 The Company's effective tax rate for the three months ended April 29, 1995 was 35% as compared to 37% for the same period in the prior year. The lower effective tax rate in the period as compared to the same period in the prior year was primarily due to lower state and foreign income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong at April 29, 1995. The Company's ratio of current assets to current liabilities was 2.1 to 1.0, down from 2.2 to 1 at the beginning of the period. Net working capital increased $0.9 million during the first quarter to a total of $56 million. Cash provided by operations during the quarter was $1.3 million while operations used $1.8 million cash in the same period last year. Excluding the balances related to CC&L, accounts receivable increased $0.6 million, and inventories increased $5.1 million over the three months ended April 29, 1995. Capital expenditures totaled $3.3 million and were primarily for operating systems and system development associated with the new operating structure, leasehold improvements, and replacement of existing equipment. Cash and cash equivalents decreased $6.5 million primarily as a result of cash used in the acquisition and to fund capital expenditures and working capital requirements. Long-term debt increased $18 million as a result of funds borrowed to complete the acquisition of CC&L. The Company's debt to equity ratio is currently .40 to 1.0, an increase from .23 to 1.0 at the beginning of the period. The Company continues to believe that it generates sufficient cash flow from its operations to finance near and long-term internal growth, capital expenditures and the principal and interest payments on its long-term debt. The Company will continue to evaluate its employment of capital resources including asset management and other sources of financing. The Company continually reviews possible acquisitions and should the Company make a substantial acquisition, it would require the utilization of the remaining $12 million available from its existing credit facility or financing from other sources. One of the Company's subsidiaries has been notified by the Environmental Protection Agency that it has been named as a potentially responsible party in connection with the clean up of hazardous wastes at two sites, the Solvents Recovery Service of New England site in Southington, Connecticut (notified in June 1992), and the Gallups Quarry site in Plainfield, Connecticut (notified in April 1993). Since these matters are in their preliminary stages, no assurance can be given at this time concerning the ultimate outcome. However, based on preliminary investigations to determine the nature of the subsidiary's potential liability and the estimated amount of remedial costs necessary to clean up the sites, the Company presently does not expect these or other known matters to have a material adverse effect on its consolidated financial position, results of operations or liquidity. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: PAGE NUMBER ----------- The exhibits listed in the accompanying index are filed as part of this quarterly report. Exhibit 11. Statement re: Computation of Net Income Per Share. Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K. During the three months ended April 29, 1995, the Registrant filed with the Commission a Form 8-K and two Form 8-KA's, each dated January 31, 1995, reporting an Item 2 acquisition of certain assets of Custom Coating & Laminating Corporation and containing the financial statements required by Item 7, comprised of audited financial statements of the business acquired at and for the twelve month period ended January 31, 1995, and a pro forma balance sheet at, and pro forma statement of income for the year ended, January 28, 1995. 13 14 PART II (CONTINUED) 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. FURON COMPANY ------------------------------ REGISTRANT /S/ MONTY A. HOUDESHELL /S/ KOICHI HOSOKAWA - --------------------------------------- --------------------------------- Monty A. Houdeshell, Vice President, Koichi Hosokawa Chief Financial Officer and Treasurer Controller June 1, 1995 14