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 JULY 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 (I.R.S. Employer of incorporation or Identification No.) organization) 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 July 29, 1995: 8,886,559 1 2 FURON COMPANY INDEX PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets July 29, 1995 and January 28, 1995 3 Condensed Consolidated Statements of Income Three and six months ended July 29, 1995 and July 30, 1994 5 Condensed Consolidated Statements of Cash Flows Three and six months ended July 29, 1995 and July 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 14 2 3 ITEM 1. FINANCIAL STATEMENTS FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited) July 29, January 28, In thousands 1995 1995 ------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 2,043 $ 6,475 Accounts receivable, less allowance for doubtful accounts of $926 at July 29, 1995 and $696 at January 28, 1995 45,116 48,955 Inventories 38,280 31,197 Deferred tax benefit 8,180 8,215 Prepaid expenses and other assets 4,832 6,843 -------- -------- Total current assets 98,451 101,685 Property, plant & equipment, at cost: Land 851 456 Buildings and leasehold improvements 16,133 13,868 Machinery and equipment 113,878 99,718 -------- -------- 130,862 114,042 Less accumulated depreciation and amortization (66,456) (61,981) -------- -------- Net property, plant and equipment 64,406 52,061 Intangible assets, at cost less accumulated amortization of $25,528 at July 29, 1995 and $23,739 at January 28, 1995 26,208 17,953 Other assets 8,577 8,174 -------- -------- $197,642 $179,873 ======== ======== See accompanying notes. 3 4 FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) July 29, January 28, In thousands, except share data 1995 1995 ----------------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 15,459 $ 19,093 Salaries, wages and related benefits payable 9,292 10,508 Current portion of long-term debt 8,008 8,004 Other current liabilities 8,972 9,355 --------- --------- Total current liabilities 41,731 46,960 Long-term debt due after one year 28,753 12,752 Other long-term liabilities 19,770 20,039 Deferred taxes 8,723 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, 8,886,559 shares issued and outstanding at July 29, 1995 and 8,800,164 at January 28, 1995 37,261 36,280 Foreign currency translation adjustment 1,234 419 Unearned ESOP shares (2,959) (3,112) Unearned compensation (770) (885) Additional pension liability (379) (379) Retained earnings 64,278 59,276 --------- --------- Total stockholders' equity 98,665 91,599 --------- --------- $ 197,642 $ 179,873 ========= ========= See accompanying notes. 4 5 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended Six months ended ---------------------- ---------------------- July 29, July 30, July 29, July 30, In thousands, except per share amounts 1995 1994 1995 1994 ----------------------------------------------------------------------------------------------- Net sales $ 82,300 $ 75,127 $ 170,753 $ 150,087 Cost of sales 59,957 52,547 122,850 105,547 --------- --------- --------- --------- Gross profit 22,343 22,580 47,903 44,540 Selling, general and administrative expenses 18,123 18,433 38,503 36,254 Other (income), net (736) (710) (1,512) (1,046) Interest expense 787 623 1,581 1,266 --------- --------- --------- --------- Income before income taxes 4,169 4,234 9,331 8,066 Provision for income taxes 1,459 1,567 3,266 2,985 --------- --------- --------- --------- Net income $ 2,710 $ 2,667 $ 6,065 $ 5,081 ========= ========= ========= ========= Net income per share of Common Stock $ 0.30 $ 0.30 $ 0.67 $ 0.57 ========= ========= ========= ========= See accompanying notes. 5 6 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended Six months ended ------------------------ ------------------------ July 29, July 30, July 29, July 30, In thousands 1995 1994 1995 1994 -------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 2,710 $ 2,667 $ 6,065 $ 5,081 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 2,465 2,170 4,975 4,358 Amortization 925 973 1,957 1,879 Provision for losses on accounts receivable 155 86 260 175 Increase (decrease) in deferred income taxes 235 (354) 235 (139) (Gain) loss on sale of assets and divestitures 50 (3) 61 (10) Working capital changes: Accounts receivable 6,860 963 5,629 (1,658) Inventories 1,009 (1,132) (4,603) (1,937) Accounts payable and accrued liabilities (3,028) 2,458 (7,124) 214 Income taxes payable (709) (911) (58) (1,639) Other current assets and liabilities, net (176) (307) 1,042 (1,954) Changes in other long-term operating assets and liabilities (190) 385 (165) 829 -------- -------- -------- -------- Net cash provided by operating activities 10,306 6,995 8,274 5,199 INVESTING ACTIVITIES Acquisition of business -- -- (23,763) -- Purchases of property, plant and equipment (3,679) (2,925) (7,021) (5,253) Proceeds from sale of divestitures 200 -- 767 -- Proceeds from sale of equipment 1,391 79 1,438 142 Proceeds from notes receivable 593 187 593 898 Increase (decrease) in notes receivable (1,109) 136 (1,100) (62) -------- -------- -------- -------- Net cash used in investing activities (2,604) (2,523) (29,086) (4,275) FINANCING ACTIVITIES Proceeds from long-term debt 2,008 8 23,008 8 Principal payments on long-term debt (4,002) (1,505) (7,003) (3,009) Proceeds from issuance of common stock 163 -- 764 131 Increase in loan to ESOP (231) (218) (231) (218) Principal payments received from loan to ESOP 384 384 384 384 Dividends paid on common stock (532) (523) (1,063) (1,043) -------- -------- -------- -------- Net cash provided by (used in) financing activities (2,210) (1,854) 15,859 (3,747) EFFECT OF EXCHANGE RATE CHANGES ON CASH (145) 484 521 601 -------- -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,347 3,102 (4,432) (2,222) -------- -------- -------- -------- CASH AND CASH EQUIVALENTS (BANK OVERDRAFTS) AT BEGINNING OF PERIOD (3,304) 13,159 6,475 18,483 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,043 $ 16,261 $ 2,043 $ 16,261 ======== ======== ======== ======== See accompanying notes. 6 7 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 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 July 29, 1995, and the results of operations and cash flows for the three and six months ended July 29, 1995 and July 30, 1994. Results of the Company's operations for the three and six months ended July 29, 1995 are not necessarily indicative of the results to be expected for the full year. Income taxes paid for the three and six months ended July 29, 1995 were $2,250,000 and $2,900,000, respectively. Income taxes paid for the three and six months ended July 30, 1994 were $2,600,000 and $4,500,000, respectively. 2. INVENTORIES Substantially all inventories are valued at the lower of cost (first-in, first-out) or market, and are summarized as follows: July 29, January 28, In thousands 1995 1995 -------------------------------------------------------------------------------------------------------- Raw materials and purchased parts $ 13,175 $ 12,482 Work-in-process 9,301 9,153 Finished goods 15,804 9,562 ------------- ------------- $ 38,280 $ 31,197 ============= ============= 3. INTANGIBLES Intangible assets acquired in business combinations are summarized as follows: July 29, January 28, In thousands 1995 1995 -------------------------------------------------------------------------------------------------------- Goodwill $ 10,190 $ 328 Other intangible assets 16,018 17,625 ------------- ------------- $ 26,208 $ 17,953 ============= ============= 7 8 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 29, 1995 (Unaudited) 4. LONG-TERM DEBT Long-term debt is summarized as follows: July 29, January 28, In thousands 1995 1995 -------------------------------------------------------------------------------------------------------- Loans under bank credit agreements due through fiscal 1998 $ 36,750 $ 20,750 Other 11 6 ------------ ------------- Total long-term debt 36,761 20,756 Less current portion (8,008) (8,004) ------------- -------------- Due after one year $ 28,753 $ 12,752 ============= ============= At July 29, 1995, the weighted average interest rate on the loans under bank credit agreements was 8.06%. In August 1988, the Company entered into an 8-year Interest Rate Swap agreement. The notional amount of the swap totaled $10 million at July 29, 1995. The swap agreement effectively changes the Company's interest rate exposure on a portion 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 and six months ended July 29, 1995 was $822,000 and $1,450,000, respectively. Interest paid for the three and six months ended July 30, 1994 was $650,000 and $1,273,000, respectively. 8 9 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 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 six months ended July 29, 1995 with an unaudited pro forma combined summary of results of operations of CC&L and the Company for the six months ended July 30, 1994 assuming the acquisition had been consummated on January 29, 1994. Six months ended ----------------------------------- July 29, July 30, (in thousands, except per share data) 1995 1994 -------------------------------------------------------------------------------------------------------------- Net sales $170,753 $163,892 Net income 6,065 6,422 Net income per share of Common Stock 0.67 0.72 6. STOCKHOLDERS' EQUITY During June 1995 the Company contributed $541,000 to the Employee Stock Ownership Plan (ESOP) for the plan year ended April 30, 1995. Of this amount $384,000 served to reduce loans previously made to the plan. In addition, the Company advanced an additional $231,000 to the ESOP which has been presented as unearned ESOP shares in the accompanying condensed consolidated balance sheet. The ESOP used the funds to acquire 10,000 shares of the Company's common stock from a Director of the Company. Excluded from the Statement of Cash Flows is a noncash transaction that relates to the issuance of restricted shares. This transaction resulted in a $217,000 increase to common stock and unearned compensation which is amortized over the shares' five year vesting period. 9 10 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 29, 1995 (Unaudited) 7. CONTINGENCIES At July 29, 1995, the Company has approximately $1.4 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 of up to six months. Net unrealized losses from hedging activities were not material as of July 29, 1995. At July 29, 1995, the Company is obligated under irrevocable letters of credit totaling $3,294,000. 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 July 29, 1995, the Company's reserves for environmental matters totaled approximately $2,100,000. 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. 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 Sales for the three and six months ended July 29, 1995 increased 10% and 14%, respectively, over the same periods of the prior year. After removing the effect of acquisitions and businesses held for sale, sales from continuing operations for the three and six month periods increased 5% and 9%, respectively, over the prior year periods. The Company has continued to benefit from strength in the industrial economy, although the rate of expansion has slowed from the first quarter. Compared to the second quarter of the prior year, sales to the semiconductor and truck markets were particularly strong. Sales to the commercial aircraft, aerospace and industrial equipment markets were relatively flat. Sales in the second quarter to the chemical processing markets were down substantially from last year. Sales of the Company's European operations were up 26% (11.3% after removing the effect of foreign currency exchange rate changes) over last year. Compared to the first quarter, sales to the truck, chemical processing and general industrial equipment markets were down significantly. However, sales to the semiconductor, commercial aircraft and aerospace markets were up compared to the first quarter. Gross profit as a percentage of sales for the three and six months ended July 29, 1995 was down 3.0% and 1.6%, respectively, from the same periods of the prior year to 27.1% and 28.1%. After removing the effects of acquisitions and businesses held for sale, the gross profit margin on continuing operations was down 2.6% and 1.0% for the three and six month periods, respectively, to 28.2% and 29.2%. The reduction in gross profit reflects significant increases in raw material costs which were not fully offset by productivity improvements, volume gains, and strategic increases in sales pricing. Selling, general and administrative expenses as a percentage of sales was 22.0% and 22.5% for the three and six month periods ended July 29, 1995, respectively, down from 24.5% and 24.2% in the same periods a year ago. After removing the effect of acquisitions and businesses held for sale, operating expenses were 22.9% and 22.8% for the three and six month periods, respectively, down from 25.1% and 24.7% in the prior year periods. The decline in selling, general and administrative expenses as a percentage of sales from last year is primarily the result of fewer costs incurred related to the implementation of the Company's new operating structure, and lower costs incurred for performance based incentive compensation and employee benefit plans. Partially offsetting the lower general and administrative expenses were higher product development costs. Other income, net for the three and six month periods increased from the same periods in the prior year primarily as a result of higher licensee fees and a decrease in expenses attributable to the elimination of income related to businesses 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 an acquisition in the first quarter. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) Interest expense for the three and six months ended July 29, 1995 was up 26% and 25%, respectively, from the same periods in the prior year. The increase is due to the acquisition of the assets of Custom Coating and Laminating Corporation ("CC&L" ) acquired on January 31, 1995 for $24 million, of which $18 million was borrowed. Pretax results of operations for the three and six month periods ended July 29, 1995 were down 2% and up 16%, respectively, compared to the same periods last year. After removing the effects of acquisitions, pretax results of operations decreased 8% for the three month period and increased 14% for the six month period, compared to the same periods last year. The decrease in results for the quarter are due primarily to lower gross margins offset by increased volume and lower operating expenses. The improvement in the six month period is generally the result of higher sales, stable manufacturing costs, continued productivity improvements, and lower operating expenses. The Company's effective tax rate for the three and six months ended July 29, 1995 was 35% compared to 37% in the same periods in the prior year. The lower effective tax rate was primarily due to lower state and foreign income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong at July 29, 1995. The Company's ratio of current assets to current liabilities was 2.4:1, up from 2.2:1 at the beginning of the year. Net working capital increased $1.1 million during the second quarter to $56.7 million. Cash provided by operations for the three and six months ended July 29, 1995 was $10.3 million and $8.3 million, respectively, compared to $7.0 million and $5.2 million, respectively, provided in the same periods of the prior year. Excluding the balances related to CC&L, accounts receivable and inventory decreased $7.1 million and $0.6 million, respectively, during the quarter. During the six months ended July 29, 1995, accounts receivable decreased $6.6 million, while inventory increased $4.5 million during the period. The Company's capital expenditures totaled $3.7 million for the quarter and $7.0 million for the six month period, primarily for renovating existing facilities, leasehold improvements, and replacement of existing equipment in addition to implementation of the operating systems to support the Company's new structure. Cash and cash equivalents decreased $4.4 million in the six month period ended July 29,1995 due to cash used in the acquisition of CC&L and to fund capital expenditures and working capital requirements. Long-term debt increased $16.0 million during the period as a result of funds borrowed to complete the acquisition. The Company's debt to equity ratio is currently .37:1, an increase from .23:1 at the beginning of the six month period. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) 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 could require either the utilization of the remaining $10 million available on 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 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. 13 14 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. The Annual Meeting of the Shareholders of the registrant was held on June 6, 1995. The following matters were voted upon and approved at the meeting: Broker Votes Cast Non- ----------------------------------------- Matter For Against Withheld Abstentions votes ------ ----- ------- -------- ----------- ----- 1. Election of Class II Directors: Cochrane Chase 7,902,746 - 270,898 - - H. David Bright 7,902,746 - 270,898 - - William C. Shepherd 7,901,446 - 272,198 - - 2. Approval of Furon Company 1995 Stock Incentive Plan 4,930,733 2,469,024 - 122,897 650,990 3. Ratification of appointment of Ernst & Young LLP as Independent Auditors for Fiscal Year Ending February 3, 1996 7,682,665 21,740 - 469,239 - 14 15 FURON COMPANY PART II - OTHER INFORMATION 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. 10.12A First Amendment to 1993 Non-Employee Directors' Stock Compensation Plan 17 10.13** 1995 Stock Incentive Plan (Incorporated by reference to Exhibit A to the Registrant's definitive Proxy Statement filed May 1, 1995, Commission File No. 0-8088) 11 Statement re: Computation of Net Income Per Share 18 27 Financial Data Schedule 19 (b) Reports on Form 8-K: There were no reports on Form 8-K for the three months ended July 29, 1995. **A management contract or compensatory plan or arrangement. 15 16 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 Koichi Hosokawa Vice President, Chief Financial Officer Controller and Treasurer August 24, 1995 16