1
UNITED STATES
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 AUGUST 2, 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
- ---------------------------- ----------------------------
(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 August 26, 1997:
9,054,296.
1
2
FURON COMPANY
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
August 2, 1997 and February 1, 1997 3
Condensed Consolidated Statements of Income
Three and six months ended August 2, 1997 and
August 3, 1996 5
Condensed Consolidated Statements of Cash Flows
Three and six months ended August 2, 1997 and
August 3, 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
- ---------------------------
2
3
ITEM 1. FINANCIAL STATEMENTS
FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
August 2, February 1,
In thousands 1997 1997
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 164 $ --
Accounts receivable, less allowance for
doubtful accounts of $1,793 at August 2, 1997
and $2,093 at February 1, 1997 69,027 72,315
Inventories 54,551 58,611
Deferred income taxes 10,411 10,411
Prepaid expenses and other assets 6,556 5,389
--------- ---------
Total current assets 140,709 146,726
Property, plant & equipment, at cost:
Land 7,379 7,096
Buildings and leasehold improvements 30,493 30,712
Machinery and equipment 156,323 152,998
--------- ---------
194,195 190,806
Less accumulated depreciation and amortization (83,215) (76,214)
--------- ---------
Net property, plant and equipment 110,980 114,592
Intangible assets, at cost less accumulated
amortization of $32,542 at August 2, 1997
and $29,971 at February 1, 1997 71,632 74,640
Other assets 7,484 8,385
--------- ---------
TOTAL ASSETS $ 330,805 $ 344,343
========= =========
See accompanying notes.
3
4
FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
August 2, February 1,
In thousands, except share data 1997 1997
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash, less checks outstanding $ - $ 1,665
Accounts payable 24,099 24,319
Salaries, wages and related benefits payable 13,211 14,141
Current portion of long-term debt 1,002 1,001
Facility rationalization and severance 8,109 10,369
Other current liabilities 20,817 16,407
--------- ---------
Total current liabilities 67,238 67,902
Long-term debt 154,216 176,983
Other long-term liabilities 23,598 21,933
Deferred income taxes 16,002 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,
9,056,056 shares issued and outstanding at August 2, 1997 and
9,003,140 at February 1, 1997 39,708 38,787
Foreign currency translation adjustment (2,774) (977)
Unearned ESOP shares (2,961) (3,224)
Unearned compensation (334) (238)
Additional pension liability (1,413) (1,413)
Retained earnings 37,525 28,409
--------- ---------
Total stockholders' equity 69,751 61,344
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 330,805 $ 344,343
========= =========
See accompanying notes.
4
5
FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
---------------------------------------------------------------------
August 2, August 3, August 2, August 3,
In thousands, except per share amounts 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 118,696 $ 96,216 $ 238,345 $ 190,979
Cost of sales 80,214 70,170 161,544 138,436
--------- --------- --------- ---------
Gross profit 38,482 26,046 76,801 52,543
Selling, general and administrative expenses 28,625 20,340 56,764 40,345
Other (income), expense (399) (873) (809) (1,963)
Interest expense 2,905 678 5,954 1,354
--------- --------- --------- ---------
Income before income taxes 7,351 5,901 14,892 12,807
Provision for income taxes 2,127 2,006 4,691 4,354
--------- --------- --------- ---------
Net income $ 5,224 $ 3,895 $ 10,201 $ 8,453
========= ========= ========= =========
Net income per share of Common Stock $ 0.56 $ 0.43 $ 1.10 $ 0.93
========= ========= ========= =========
See accompanying notes.
5
6
FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Six months ended
----------------------------------------------------------------
August 2, August 3, August 2, August 3,
In thousands 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,224 $ 3,895 $ 10,201 $ 8,453
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 4,070 3,420 8,301 6,708
Amortization 1,379 867 2,785 1,645
Provision for losses on accounts receivable (6) 182 149 287
Deferred income taxes 2 -- (27) 76
(Gain) loss on sale of assets (11) -- 8 --
Working capital changes, net of acquisitions and
disposals:
Accounts receivable 83 2,083 2,146 2,105
Inventories 3,420 (683) 4,060 (3,121)
Accounts payable and accrued liabilities 2,643 (83) (1,267) (1,650)
Income taxes payable (762) 750 2,787 1,308
Other current assets and liabilities, net 1,494 121 (247) 356
Changes in other long-term operating assets and
liabilities (37) 530 732 (899)
------- ------- ------- -------
Net cash provided by operating activities 17,499 11,082 29,628 15,268
INVESTING ACTIVITIES
Acquisition of businesses -- (777) -- (4,071)
Purchases of property, plant and equipment (2,625) (6,497) (5,477) (10,852)
Proceeds from sale of businesses 170 373 419 779
Proceeds from sale of equipment 16 26 33 50
Proceeds from notes receivable -- 1 -- 5
------- ------- ------- -------
Net cash used in investing activities (2,439) (6,874) (5,025) (14,089)
FINANCING ACTIVITIES
Proceeds from long-term debt -- 6,000 4,081 13,000
Principal payments on long-term debt (19,736) (10,177) (26,805) (14,177)
Proceeds, net of cancellations, from issuance of
common stock 672 72 647 769
Loan to ESOP (266) (243) (266) (566)
Principal payments received from loan to ESOP 529 458 529 458
Dividends paid on common stock (544) (538) (1,084) (1,076)
------- ------- ------- -------
Net cash used in financing activities (19,345) (4,428) (22,898) (1,592)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (811) 220 (1,541) 413
------- ------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,096) -- 164 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,260 -- -- --
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 164 $ - $ 164 $ -
======= ======= ======= =======
See accompanying notes.
6
7
FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 2, 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.
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 August 2, 1997, and the
results of operations and cash flows for the three and six months
ended August 2, 1997 and August 3, 1996. Results of the Company's
operations for the three and six months ended August 2, 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
three and six months ended August 2, 1997 of $0.02 and $0.04 per
share, respectively. The impact is expected to result in an increase
in basic earnings per share for the three and six months ended August
3, 1996 of $0.01 and $0.02 per share, respectively. The impact of
Statement 128 on the calculation of fully diluted earnings per share
for these periods 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:
August 2, February 1,
In thousands 1997 1997
--------------------------------------------------------------------
Raw materials and purchased parts $24,460 $22,841
Work-in-process 10,340 14,121
Finished goods 19,751 21,649
------- -------
$54,551 $58,611
======= =======
7
8
FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 2, 1997
(Unaudited)
3. INTANGIBLES
Intangible assets, primarily acquired in business combinations, net of
accumulated amortization, are summarized as follows:
August 2, February 1,
In thousands 1997 1997
---------------------------------------------------------------------------
Goodwill $41,128 $42,016
Other intangible assets 30,504 32,624
------- -------
$71,632 $74,640
======= =======
4. LONG-TERM DEBT
Long-term debt is summarized as follows:
August 2, February 1,
In thousands 1997 1997
--------------------------------------------------------------------------------
Loans under bank credit agreements
due through fiscal year 2000 $147,000 $169,000
Industrial Revenue Bonds 6,175 6,775
Other 2,043 2,209
-------- --------
Total long-term debt 155,218 177,984
Less current portion 1,002 1,001
-------- --------
Due after one year $154,216 $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 and six months ended August 2, 1997, the weighted
average interest rate on the loans under bank credit agreements was
6.7% and 6.6%, respectively.
Interest paid for the three and six months ended August 2, 1997 was
$2.7 million and $5.0 million, respectively. Interest paid for the
three and six months ended August 3, 1996 was $0.5 million and $1.3
million, respectively.
8
9
FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 2, 1997
(Unaudited)
5. INCOME TAXES
The Company's effective tax rate for the three and six months ended
August 2, 1997 was 28.9% and 31.5%, respectively, as compared with
34.0% for the same periods in the prior year. The lower effective tax
rate was primarily due to increases in research and experimental
credits and foreign tax credits.
Income taxes paid for the three and six months ended August 2, 1997
were $2.7 million and $2.2 million, respectively. Income taxes paid
for the three and six months ended August 3, 1996 were $1.1 million
and $1.6 million, respectively.
6. CONTINGENCIES
At August 2, 1997, the Company had approximately $1.4 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 six months.
Net unrealized gains from hedging activities were not material as of
August 2, 1997.
At August 2, 1997, the Company is obligated under irrevocable letters
of credit totaling $8.5 million.
The Company is currently involved in various litigation. 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.
9
10
FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 2, 1997
(Unaudited)
6. CONTINGENCIES (CONTINUED)
As of August 2, 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.
10
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated sales for the second quarter and six months year to date, 1997
rose 23% to $118.7 million and 25% to $238.3 million, respectively, over the
same periods of the prior year. Medex, having been acquired on January 2,
1997, recorded sales of $24.5 and $49.8 million during the same periods.
Exclusive of the Medex acquisition, and several product line divestitures,
sales increased in the second quarter over the prior year as the Company has
benefited from continued strength in certain industrial markets. The rate of
expansion however, slowed from the first quarter. Sales to the aerospace,
medical devices OEM, heavy duty truck, and general industrial markets were
particularly strong during the quarter compared to the same period of last
year. Partially offsetting this is the general softness in the semiconductor
equipment market, as well as a shortfall in chemical and industrial processing
markets that are the result of major projects included in last year's sales
that were not repeated this year. Sales for the Company's European operations
for the quarter and the six months, excluding Medex, were down 13% and 10%,
respectively, over the same periods of the prior year. However, after removing
the unfavorable effect of foreign currency exchange rate changes, sales for the
three and six month periods were unchanged and up 3%, over the same periods
of last year.
Gross profit as a percentage of sales for the three and six months ended August
2, 1997 was up 5.4% and 4.7%, respectively, from the same periods of the prior
year to 32.4% and 32.2%. This continues to be the result of both higher margins
earned by Medex, which were 44.6% and 44.8% for the three and six month periods
and domestic productivity improvements. Exclusive of Medex, gross margins in
the second quarter increased from the second quarter last year by 2.2% to 29.3%.
This represents an 0.8% increase over the comparable first quarter margins. The
current quarter benefited from improved yields resulting in reduced material
costs compared to the same period of the prior year. Compared to the first
quarter, the operating leverage effect of favorable domestic manufacturing
costs, and continued productivity and process improvements were enough to offset
the impact of higher manufacturing costs experienced in Europe, in part due to
seasonal softness in sales and a shift in product mix.
Selling, general and administrative expenses as a percentage of sales were
24.1% and 23.8% for both the quarter and six months year to date, up from 21.1%
for both the same periods a year ago. The increase in operating expenses as a
percentage of sales from last year is primarily the result of the Medex
addition, at 29.8% and 30.6% for the three and six months ended August 2, 1997.
After removing the effect of acquisitions and divestitures, these same
operating expenses were 22.7% and 21.9%, for both the three and six months
ended August 2, 1997, up from 21.4% for both the same periods a year ago. The
increase in selling, general and administrative expense in terms of dollars
from last year was primarily the result of the settlement of product warranty
litigation and higher performance based incentive compensation, partially
offset by lower costs for professional fees.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Other income and expense net, for the three and six months ended August 2, 1997
reflected a decrease from the same periods the prior year due to foreign
currency exchange losses related to Medex operations.
Interest expense for the three and six months ended August 2, 1997 increased
significantly from the same periods of the prior year. This increase is due in
full to the debt incurred for the acquisition of Medex. Interest expense for
the three months ended August 2, 1997 reflects a 4.7% decrease over the
previous quarter ended May 3, 1997 due to the repayment of principal.
Pretax results of operations for the three and six months ended August 2, 1997
improved 25% and 16%, respectively, compared to the same periods last year.
Net of acquisitions and divestitures, pretax results of operations were up 18%
and 14%, respectively, for the three and six months ended August 2, 1997. The
improvement generally reflected higher sales, improved margins and continued
productivity improvements, which were somewhat offset by higher material costs
in Europe and higher operating and interest expenses.
The Company's effective tax rate for the three and six months ended August 2,
1997 was 28.9% and 31.5%, respectively, compared with 34.0% in the same
periods last year. The lower effective tax rate was primarily due to increases
in research and experimental credits and foreign tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong at August 2, 1997. The ratio
of current assets to current liabilities was 2.1 to 1.0, down slightly from the
beginning of the year. Net working capital decreased $5.4 million from the end
of the prior year to a total of $73.5 million. Cash provided by operations
for the three and six months ended August 2, 1997 was $17.5 million and
$29.6 million, respectively, compared with $11.1 million and $15.3 million,
provided in the same periods of the prior year. Inclusive of the Medex
acquisition, accounts receivable decreased $2.1 million, inventories decreased
$4.1 million, income taxes payable increased $2.8 million and accounts payable
and accrued liabilities decreased $1.3 million from the prior year end. Capital
expenditures totaled $5.5 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 $1.8 million, in addition to a decrease in
long-term debt of $22.8 million which was a result of funds generated by
operations. The Company's debt to equity ratio is currently 2.2 to 1.0, a
decrease from 2.9 to 1.0 at the beginning of the 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 loan payable to
banks. 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 the utilization of the
remaining $103.0 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) in 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.
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 3, 1997. The following matters were voted upon and approved
at the meeting:
VOTES CAST
------------------------------------- BROKER
MATTER FOR AGAINST WITHHELD ABSTENTIONS NONVOTES
- ---------------------------------------- --------- --------- --------- --------- ---------
1. Election of Class I Directors:
Terrence A. Noonan 8,104,959 - 39,807 - -
R. David Threshie 8,109,032 - 35,734 - -
Bruce E. Ranck 8,110,482 - 34,284 - -
2. Ratification of Appointment of
Ernst & Young LLP as Independent
Auditors for Fiscal Year Ending
January 31, 1998 7,681,593 13,186 - 449,987 -
ITEM 5. OTHER INFORMATION.
Not applicable.
14
15
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1A* Amendment 1997-1 to 1982 Stock Incentive Plan.
10.3A* Amendment 1997-1 to Supplemental Executive
Retirement Plan.
10.7A* Amendment 1997-1 to Deferred Compensation Plan.
10.8A* Amendment 1997-1 to EVA Incentive Compensation
Plan.
10.11A Amendment 1997-1 to 1993 Non-Employee Directors'
Stock Compensation Plan.
10.12B* Amendment 1997-1 to 1995 Stock Incentive Plan.
11 Statement re: Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
__________
* 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/DAVID L. MASCARIN
- ---------------------------------- ----------------------------------
Monty A. Houdeshell David L. Mascarin
Vice President, Chief Financial Officer Controller
and Treasurer
September 2, 1997
16