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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MAY 3, 1997
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
29982 Ivy Glenn Drive
Laguna Niguel, CA 92677
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(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
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Number of shares of common stock outstanding as of May 23, 1997: 9,029,066.
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FURON COMPANY
INDEX
PART I - FINANCIAL INFORMATION
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PAGE NO.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
May 3, 1997 and February 1, 1997 3
Condensed Consolidated Statements of Income
Three months ended May 3, 1997 and
May 4, 1996 5
Condensed Consolidated Statements of Cash Flows
Three months ended May 3, 1997 and
May 4, 1996 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
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ITEM 1. FINANCIAL STATEMENTS
FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 3, February 1,
In thousands 1997 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 5,260 $ -
Accounts receivable, less allowance for doubtful
accounts of $1,904 at May 3, 1997 and $2,093 at
February 1, 1997 69,105 72,315
Inventories 57,971 58,611
Deferred income taxes 10,411 10,411
Prepaid expenses and other assets 6,092 5,389
------------------ ---------------------
Total current assets 148,839 146,726
Property, plant & equipment, at cost:
Land 7,013 7,096
Buildings and leasehold improvements 30,385 30,712
Machinery and equipment 155,087 152,998
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192,485 190,806
Less accumulated depreciation and amortization (79,850) (76,214)
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Net property, plant and equipment 112,635 114,592
Intangible assets, at cost less accumulated amortization
of $31,194 at May 3, 1997 and $29,971 at February 1, 1997
73,138 74,640
Other assets 7,876 8,385
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TOTAL ASSETS $ 342,488 $ 344,343
================== =====================
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 3, February 1,
In thousands, except share data 1997 1997
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash, less checks outstanding $ - $ 1,665
Accounts payable 23,860 24,319
Salaries, wages and related benefits payable 10,807 14,141
Current portion of long-term debt 2,076 1,001
Facility rationalization and severance 8,777 10,369
Other current liabilities 19,740 16,407
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Total current liabilities 65,260 67,902
Long-term debt 172,910 176,983
Other long-term liabilities 23,360 21,933
Deferred income taxes 16,001 16,181
Commitments and contingencies
Stockholders' equity:
Preferred stock without par value, 2,000,000 shares authorized,
none issued or outstanding - -
Common stock without par value, 15,000,000 shares authorized, 9,003,582
shares issued and outstanding at May 3, 1997 and
9,003,140 at February 1, 1997 38,762 38,787
Foreign currency translation adjustment (1,823) (977)
Unearned ESOP shares (3,224) (3,224)
Unearned compensation (191) (238)
Additional pension liability (1,413) (1,413)
Retained earnings 32,846 28,409
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Total stockholders' equity 64,957 61,344
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 342,488 $ 344,343
============== ==============
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
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May 3, May 4,
In thousands, except per share amounts 1997 1996
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Net sales $ 119,649 $ 94,763
Cost of sales 81,330 68,266
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Gross profit 38,319 26,497
Selling, general and administrative expenses 28,139 20,005
Other (income), expense (410) (1,090)
Interest expense 3,049 676
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Income before income taxes 7,541 6,906
Provision for income taxes 2,564 2,348
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Net income $ 4,977 $ 4,558
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Net income per share of Common Stock $ 0.54 $ 0.50
================== ================
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
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May 3, May 4,
In thousands 1997 1996
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OPERATING ACTIVITIES
Net income $ 4,977 $ 4,558
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 4,231 3,202
Amortization 1,406 778
Provision for losses on accounts receivable 155 105
Deferred income taxes (29) 76
Loss on sale of assets 19 -
Working capital changes, net of acquisitions and disposals:
Accounts receivable 2,063 22
Inventories 640 (2,438)
Accounts payable and accrued liabilities (3,910) (1,567)
Income taxes payable 3,549 558
Other current assets and liabilities, net (1,741) 235
Changes in other long-term operating assets and
liabilities 769 (1,429)
----------------- -----------------
Net cash provided by operating activities 12,129 4,100
INVESTING ACTIVITIES
Acquisition of businesses - (3,294)
Purchases of property, plant and equipment (2,892) (4,505)
Proceeds from sale of businesses 249 406
Proceeds from sale of equipment 57 260
Proceeds from notes receivable - 4
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Net cash used in investing activities (2,586) (7,129)
FINANCING ACTIVITIES
Proceeds from long-term debt 4,081 7,000
Principal payments on long-term debt (7,069) (4,000)
Proceeds, net of cancellations, from issuance of
common stock (25) 697
Loan to ESOP - (323)
Dividends paid on common stock (540) (538)
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Net cash provided by (used in) financing
activities (3,553) 2,836
EFFECT OF EXCHANGE RATE CHANGES ON CASH (730) 193
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INCREASE IN CASH AND CASH EQUIVALENTS 5,260 -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - -
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,260 $ -
================= =================
See accompanying notes.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 3, 1997
(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 February 1, 1997. 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 May 3, 1997, and the results of
operations and cash flows for the three months ended May 3, 1997 and
May 4, 1996. Results of the Company's operations for the three months
ended May 3, 1997 are not necessarily indicative of the results to be
expected for the full year.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is effective for financial
statements for periods ending after December 15, 1997. The Company will
be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock
options will be excluded. The impact is expected to result in an
increase in basic earnings per share for the first quarter ended May 3,
1997 and May 4, 1996 of $0.02 and $0.01 per share, respectively. The
impact of Statement 128 on the calculation of fully diluted earnings
per share for these quarters is not expected to be material.
2. INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or
market, are summarized as follows:
May 3, February 1,
In thousands 1997 1997
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Raw materials and purchased parts $ 25,227 $ 22,841
Work-in-process 11,490 14,121
Finished goods 21,254 21,649
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$ 57,971 $ 58,611
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 3, 1997
(Unaudited)
3. INTANGIBLES
Intangible assets, primarily acquired in business combinations, net of
accumulated amortization, are summarized as follows:
May 3, February 1,
In thousands 1997 1997
---------------------------------------------------------------------------------
Goodwill $ 41,575 $ 42,016
Other intangible assets 31,563 32,624
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$ 73,138 $ 74,640
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4. LONG-TERM DEBT
Long-term debt is summarized as follows:
May 3, February 1,
In thousands 1997 1997
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Loans under bank credit agreements
due through fiscal year 2000 $ 166,000 $ 169,000
Industrial Revenue Bonds 6,775 6,775
Other 2,211 2,209
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Total long-term debt 174,986 177,984
Less current portion 2,076 1,001
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Due after one year $ 172,910 $ 176,983
================= ==================
Effective March 27, 1997, the Company amended and restated its Credit
Agreement to increase the aggregate principal amount from $200.0
million to $250.0 million.
For the three months ended May 3, 1997, the weighted average interest
rate on the loans under bank credit agreements was 6.4%.
Interest paid for the three months ended May 3, 1997 and May 4, 1996
was $2.3 million and $0.8 million, respectively.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 3, 1997
(Unaudited)
5. INCOME TAXES
The Company's effective tax rate for the three month periods ended May
3, 1997 and May 4, 1996 was 34%.
Income taxes paid (received) for the three months ended May 3, 1997
and May 4, 1996 were $(0.5 million) and $0.5 million, respectively.
6. CONTINGENCIES
At May 3, 1997, the Company had approximately $1.5 million of foreign
currency hedge contracts outstanding consisting of over-the-counter
forward contracts. The contracts reflect the selective hedging of the
Belgium Franc with varying maturities up to nine months. Net unrealized
gains from hedging activities were not material as of May 3, 1997.
At May 3, 1997, the Company is obligated under irrevocable letters of
credit totaling $9.2 million.
The Company is currently involved in various litigation in the normal
course of business. Management of the Company is of the opinion that
the ultimate resolution of such litigation should not have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Compliance with environmental laws and regulations designed to regulate
the discharge of materials into the environment or otherwise protect
the environment requires continuing management effort and expenditures
by the Company. The Company does not believe that the operating costs
incurred in the ordinary course of business to satisfy air and other
permit requirements, properly dispose of hazardous wastes and otherwise
comply with these laws and regulations form or will form a material
component of its operating costs or have or will have a material
adverse effect on its competitive or consolidated financial positions.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 3, 1997
(Unaudited)
6. CONTINGENCIES (CONTINUED)
As of May 3, 1997 the Company's reserves for environmental matters
totaled approximately $1.6 million. The Company or one or more of its
subsidiaries is currently involved in environmental investigation or
remediation directly or as an EPA-named potentially responsible party
or private cost recovery/contribution action defendant at various
sites, including the following "superfund" waste disposal sites:
Solvents Recovery Service of New England in Southington, Connecticut;
Gallup's Quarry in Plainfield, Connecticut; Davis Liquid Waste and
Picillo in Coventry, Rhode Island; Malvern in Malvern, Pennsylvania;
and Granville in Granville, Ohio. While neither the timing nor the
amount of the ultimate costs associated with these matters can be
determined with certainty, based on information currently available to
the Company, including investigations to determine the nature of the
potential liability, the estimated amount of investigation and remedial
costs expected to be incurred and other factors, the Company presently
believes that its environmental reserves should be sufficient to cover
the Company's aggregate liability for these matters and, accordingly,
does not expect them to have a material adverse effect on its
consolidated financial position or results of operations. The actual
costs to be incurred by the Company at each site will depend on a
number of factors, including one or more of the following: the final
delineation of contamination; the final determination of the remedial
action required; negotiations with governmental agencies with respect
to cleanup levels; changes in regulatory requirements; innovations in
investigatory and remedial technology; effectiveness of remedial
technologies employed; and the ultimate ability to pay of any other
responsible parties.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Consolidated sales for the three months ended May 3, 1997 of $119.6 million
represented a 26% increase over the same period of the prior year. Comparing
sales for the three months ended May 3, 1997 reflects a 16% increase over the
previous quarter ended February 1, 1997. For the quarter ended May 3, 1997,
Medex recorded sales of $25.3 million.
Along with the net effect of the Medex acquisition, the Company has benefited
from continued strength in specific industrial markets. Domestically, sales to
the healthcare market increased eight fold, all due to Medex, over the same
period of the prior year. Sales into the transportation and industrial equipment
markets remain strong with the main contributors coming from aircraft, truck,
coating and laminating, and food and beverage sectors. Sales into the chemical
processing market have softened, while demand from the semiconductor market was
down 23%, consistent with industry conditions. Excluding Medex, sales for the
three months ended May 3, 1997 of the Company's European operations were down 6%
(before the impact of a stronger U.S. dollar, European sales increased 7%) over
the same period of the prior year.
Gross profit as a percentage of sales for the first quarter ended May 3, 1997
was up 4% from the same period the prior year to 32%. This is the result of
significantly higher margins earned by Medex, which were 45.1% for the quarter
ended May 3, 1997. After removing the effects of acquisitions and divestitures,
for the first quarter ended May 3, 1997 gross profit margin was up 0.7% from
28.3% to 29% over the same period of the prior year. Despite some adverse
product mix, the continued operating productivity improvements and controlled
fixed manufacturing costs were more than enough to offset the impact of
increased raw material prices.
Selling, general and administrative expenses as a percentage of sales for the
first quarter ended May 3, 1997 was 23.5%, up from 21.1% in the same period a
year ago. The increase in operating expense as a percentage of sales from last
year is primarily the result of the Medex addition, at 31.4%. After removing the
effect of acquisitions and divestitures, these same operating expenses were
21.2%, down from 21.4% in the first quarter of the prior year and down from the
22.3% incurred in the fourth quarter of the prior year. The decline in selling,
general and administrative expense as a percentage of sales from last year is
mainly the result of fewer costs incurred related to insurance, utilities and
reduced travel. Product development expenses were up slightly in the first
quarter over the same period prior year as a percentage of sales by 0.1% to
2.8%.
Other income and expense net, for the three months ended May 3, 1997 decreased
from the same period in the prior year due to non-reoccurrence of dividend
income received from one of the Company's investments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations (continued)
Interest expense for the three months ended May 3, 1997 was up significantly
from the same period in the prior year. This increase is due in full to the debt
incurred for the acquisition of Medex.
Pretax results of operations improved 9% to $7.5 million from $6.9 million for
the three months ended May 3, 1997 and May 4, 1996, respectively. Net of
acquisitions and divestitures, pretax results of operations were up 10% from the
same period last year. The improvement is generally the result of higher sales
and improved margins, somewhat offset by higher operating and interest expenses.
For the three months ended May 3, 1997, Medex earnings before interest and taxes
was 12.9% of sales (Medex earnings before interest and taxes and amortization
was 15.5% of sales). For the three months ended May 3, 1997, consolidated
earnings before interest, taxes, depreciation and amortization was $16.2
million, an increase of $4.7 million, or 40% from the same period in the prior
year.
The Company's effective tax rate for the first quarter ended May 3, 1997 was
34%, unchanged from the same period last year.
Liquidity and Capital Resources
The Company's financial condition remained strong at May 3, 1997. For the three
months ended May 3, 1997, the Company's cash provided by operations was $12.1
million, or $8.0 million higher than the same period last year. The Company's
ratio of current assets to current liabilities improved to 2.3 to 1.0, up from
2.2 to 1.0 at the beginning of the period. Net working capital increased $4.8
million during the first quarter to a total of $83.6 million. Inclusive of the
Medex acquisition, accounts receivable decreased $2.1 million, inventories
decreased $0.6 million and accounts payable and accrued liabilities decreased
$3.9 million from the prior year end. Capital expenditures totaled $2.9 million
and were primarily for renovating existing facilities, leasehold improvements,
or replacement of existing equipment in addition to implementation of the
operating systems to support the Company's structure.
Cash and cash equivalents increased $6.9 million, in addition to a decrease in
long-term debt of $3.0 million which was a result of funds generated by
operations. The Company's debt-to-equity ratio is currently 2.7 to 1.0, a
decrease from 2.9 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 interests payments on its loan payable to banks. The
Company will
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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 the utilization of the
remaining $85.0 million available on its existing credit facility or financing
from other sources.
Contingencies
For information regarding environmental matters and other contingencies, see
note 6 to the Notes to Condensed Consolidated Financial Statements.
Statement Regarding Forward Looking Disclosure
Except for the historical information contained in this report, certain matters
discussed herein, including (without limitation) the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Item 2) in Part I, are forward looking statements. These statements
involve risks and uncertainties, including (without limitation) the matters
identified in that section and the following: the effect of economic and market
conditions and raw material price increases; the impact of costs, insurance
recoveries and governmental, judicial and other third party interpretations and
determinations in connection with legal and environmental proceedings; and the
impact of current or pending legislation and regulation.
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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.
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PART II - OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: Page Number
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10.6* Form of Change in Control Agreement
between the Registrant and each of its
executive officers.
10.13 First Amended and Restated Credit Agreement,
dated as of March 27, 1997, by and among the
Registrant, the Lenders party thereto, and
co-agents, documentation agent, swing line lender
and administrative agent, and arranging agent named
therein.
11 Statement re: Computation of Net
Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
On March 18, 1997, the Registrant filed with the Commission a Form
8-K/A dated that date, which reported the pro forma financial
information for Furon on a combined basis, reflecting the
acquisition of Medex for the nine months ended November 2, 1996
and the fiscal year ended February 3, 1996.
* A management contract or compensatory plan or arrangement
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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
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REGISTRANT
/S/MONTY A. HOUDESHELL /S/DAVID L. MASCARIN
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Monty A. Houdeshell David L. Mascarin
Vice President, Chief Financial Officer Controller
and Treasurer
May 30, 1997
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