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 MAY 2, 1998
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: (949) 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 May 25, 1998: 18,291,753
2
FURON COMPANY
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
May 2, 1998 and January 31, 1998 3
Condensed Consolidated Statements of Income
Three months ended May 2, 1998 and
May 3, 1997 5
Condensed Consolidated Statements of Cash Flows
Three months ended May 2, 1998 and
May 3, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION 17
2
3
ITEM 1. FINANCIAL STATEMENTS
FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 2, January 31,
In thousands 1998 1998
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,405 $ --
Accounts receivable, less allowance for
doubtful accounts of $1,689 at May 2, 1998
and $1,741 at January 31, 1998 75,086 75,661
Inventories 59,344 54,704
Deferred income taxes 11,356 11,052
Prepaid expenses and other current assets 6,489 4,959
--------- ---------
Total current assets 157,680 146,376
Property, plant & equipment, at cost:
Land 6,999 6,976
Buildings and leasehold improvements 32,736 31,493
Machinery and equipment 163,292 158,999
--------- ---------
203,027 197,468
Less accumulated depreciation and amortization (91,993) (87,832)
--------- ---------
Net property, plant and equipment 111,034 109,636
Intangible assets, at cost less accumulated
amortization of $34,418 at May 2, 1998
and $35,354 at January 31, 1998 96,038 83,129
Other assets 10,661 7,208
--------- ---------
TOTAL ASSETS $ 375,413 $ 346,349
========= =========
See accompanying notes.
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4
FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 2, January 31,
In thousands, except share data 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash, less checks outstanding $ -- $ 1,025
Accounts payable 27,045 25,384
Salaries, wages and related benefits payable 11,267 18,203
Income taxes payable 5,415 4,228
Current portion of long-term debt 1,120 966
Facility rationalization and severance 7,801 10,091
Other current liabilities 18,742 14,035
--------- ---------
Total current liabilities 71,390 73,932
Long-term debt 158,788 148,657
Other long-term liabilities 40,842 23,883
Deferred income taxes 18,743 18,738
Commitments and contingencies
Shareholders' equity:
Preferred stock without par value, 2,000,000 shares authorized, none issued
or outstanding -- --
Common stock without par value, 30,000,000 shares authorized, 18,291,753
shares issued and outstanding
at May 2, 1998 and 18,227,898 at January 31, 1998 41,000 40,864
Employee Benefit Trust shares (1,169) --
Accumulated other comprehensive income (3,470) (4,236)
Unearned ESOP shares (3,229) (3,229)
Unearned compensation (193) (232)
Retained earnings 52,711 47,972
--------- ---------
Total shareholders' equity 85,650 81,139
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 375,413 $ 346,349
========= =========
See accompanying notes.
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5
FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
-----------------------------
May 2, May 3,
In thousands, except per share amounts 1998 1997
- -----------------------------------------------------------------------------------
Net sales $ 119,805 $ 119,649
Cost of sales 82,539 81,330
--------- ---------
Gross profit 37,266 38,319
Selling, general and administrative expenses 27,561 28,139
Nonrecurring charges and facilities
rationalization (417) --
Other (income), expense (721) (247)
Interest expense, net 2,932 2,886
--------- ---------
Income before income taxes 7,911 7,541
Provision for income taxes 2,492 2,564
--------- ---------
Net income $ 5,419 $ 4,977
========= =========
Basic income per share $ 0.30 $ 0.28
========= =========
Diluted income per share $ 0.29 $ 0.27
========= =========
Cash dividends per share $ 0.03 $ 0.03
========= =========
See accompanying notes.
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6
FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
-----------------------------
May 2, May 3,
In thousands 1998 1997
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,419 $ 4,977
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 4,273 4,231
Amortization 1,528 1,406
Provision for losses on accounts receivable 70 155
Deferred income taxes (369) (29)
Nonrecurring charges and facilities rationalization (417) --
Loss on sale of assets 62 19
Working capital changes, net of acquisitions and
disposals:
Accounts receivable 1,790 2,063
Inventories (3,064) 640
Accounts payable and accrued liabilities (4,413) (3,910)
Income taxes payable (564) 3,549
Other current assets and liabilities, net (860) (1,741)
Changes in other long-term operating assets and
liabilities 88 769
--------- ---------
Net cash provided by operating activities 3,543 12,129
INVESTING ACTIVITIES
Acquisition of businesses (115) --
Cash acquired in purchase of business 3,037 --
Purchases of property, plant and equipment (5,166) (2,892)
Proceeds from sale of businesses 5 249
Proceeds from sale of equipment 40 57
Increase in notes receivable (606) --
--------- ---------
Net cash used in investing activities (2,805) (2,586)
FINANCING ACTIVITIES
Proceeds from long-term debt 134,194 4,081
Principal payments on long-term debt (124,341) (7,069)
Deferred debt costs (3,918) --
Employee benefit trust funding (1,300) --
Proceeds, net of cancellations, from issuance of common stock 137 (25)
Dividends paid on common stock (549) (540)
--------- ---------
Net cash provided by (used in) financing activities
4,223 (3,553)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 444 (730)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 5,405 5,260
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- --
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,405 $ 5,260
========= =========
See accompanying notes.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1998
(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 on Form 10-K for the
fiscal year ended January 31, 1998. 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 2, 1998, and the results of
operations and cash flows for the three months ended May 2, 1998 and May
3, 1997. Results of the Company's operations for the three months ended
May 2, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or market,
are summarized as follows:
May 2, January 31,
In thousands 1998 1998
- -------------------------------------------------------------------------
Raw materials and purchased parts $ 25,029 $ 24,781
Work-in-process 12,620 11,538
Finished goods 21,695 18,385
---------- ----------
$ 59,344 $ 54,704
========== ==========
3. INTANGIBLES
Intangible assets, primarily acquired in business combinations, net of
accumulated amortization, are summarized as follows:
May 2, January 31,
In thousands 1998 1998
- ---------------------------------------------------------------
Goodwill $ 67,980 $ 54,476
Other intangible assets 28,058 28,653
---------- ----------
$ 96,038 $ 83,129
========== ==========
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1998
(Unaudited)
4. LONG-TERM DEBT
Long-term debt is summarized as follows:
May 2, January 31,
In thousands 1998 1998
- --------------------------------------------------------------------------
Senior Subordinated Notes $ 125,000 $ --
Loans under bank credit agreements
due through fiscal year 2002 27,000 142,000
Industrial Revenue Bonds 6,175 6,175
Other 1,733 1,448
---------- ----------
Total long-term debt 159,908 149,623
Less current portion 1,120 966
---------- ----------
Due after one year $ 158,788 $ 148,657
========== ==========
Effective February 3, 1998, the Company amended and restated its Credit
Agreement to decrease the aggregate credit facility from $250.0 million to
$200.0 million.
On March 4, 1998 the Company issued $125.0 million of 8.125% Senior
Subordinated Notes (the "Notes") due March 1, 2008 (the "Offering"). The
Company used the net proceeds of the Offering to repay a portion of
existing indebtedness under the Company's amended Credit Agreement.
For the three months ended May 2, 1998, the weighted average interest rate
on the loans under the bank credit agreement was 6.3%.
Interest paid for the three months ended May 2, 1998 and May 3, 1997 was
$2.0 million and $2.3 million, respectively.
5. INCOME TAXES
The Company's effective tax rate for the three months ended May 2, 1998
was 31.5% as compared with 34.0% for the same period 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 (received) for the three months ended May 2, 1998 and
May 3, 1997 were $2.1 million and $(0.5 million), respectively.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1998
(Unaudited)
6. CONTINGENCIES
At May 2, 1998, the Company had approximately $2.6 million of foreign
currency hedge contracts outstanding consisting of over-the-counter
forward contracts. Net unrealized losses from hedging activities were not
material as of May 2, 1998.
At May 2, 1998, the Company is obligated under irrevocable letters of
credit totaling $7.3 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. While no assurance can be given, the Company does 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 are
reasonably likely to form a material component of its operating costs or
have or are reasonably likely to have a material adverse effect on its
competitive or consolidated financial positions.
As of May 2, 1998 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 certain
"superfund" waste disposal sites. 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, while no assurance
can be given, it 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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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1998
(Unaudited)
7. SHAREHOLDERS' EQUITY
Earnings Per Share
On November 20, 1997, the Company's Board of Directors approved a
two-for-one stock split. One share of the Company's common stock for each
full share of common stock outstanding to holders of record on December 2,
1997 was distributed on December 16, 1997. Accordingly, all numbers of
Common Shares, and all per share data have been restated to reflect this
stock split.
The calculation of earnings per share is presented below:
THREE MONTHS ENDED
---------------------------------
MAY 2, MAY 3,
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1998 1997
- ---------------------------------------------------------------------------------------------------------
Net income $ 5,419 $ 4,977
============ ============
Weighted average shares outstanding for basic income per share 18,032,374 17,779,198
------------ ------------
Effect of dilutive securities:
Employee stock options and awards 669,146 531,816
------------ ------------
Weighted average shares outstanding for diluted income per
share 18,701,520 18,311,014
------------ ------------
Basic income per share $ 0.30 $ 0.28
============ ============
Diluted income per share $ 0.29 $ 0.27
============ ============
Employee Benefits Trust
On March 24, 1998, the Company entered into an Employee Benefits Trust
(the "Trust") with Wachovia Bank, N.A., Trustee. The Trust was established
to provide a source of funds to assist the Company in meeting obligations
under various employee benefit plans. On March 26, 1998, the Company
contributed $1.3 million to the Trust to purchase shares of the Company's
common stock on the open market. During the first quarter of fiscal year
1999, the Trust purchased 55,795 shares of common stock at an average cost
of $23.26 per share (55,795 shares held at May 2, 1998).
For financial reporting purposes, the Trust is consolidated with the
Company. The shares are accounted for by the treasury stock method. The
fair market value of the shares held by the Trust is shown as a reduction
to shareholders' equity in the Company's consolidated balance sheet. Any
dividend transactions between the Company and the Trust are eliminated.
Shares will be released from the Trust as granted to participants in
connection with annual incentive plan awards. Common stock held in the
Trust is not considered outstanding for earnings per share calculations
until they are granted to participants. The Trustee is responsible for
voting the shares of common stock held in the Trust.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1998
(Unaudited)
8. COMPREHENSIVE INCOME
As of February 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires the change in the minimum pension liability
and the foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. Prior years' financial statements have been
reclassified to conform to these requirements.
The components of comprehensive income, net of related tax, are as
follows:
Three month period ended
-----------------------------
May 2, 1998 May 3, 1997
------------ ------------
Net income $ 5,419 $ 4,977
Foreign currency translation adjustments 766 (846)
------------ ------------
Comprehensive income $ 6,185 $ 4,131
============ ============
9. SEGMENT INFORMATION
The Company operates in two business segments: Industrial Products,
including highly engineered seals and bearings, fluid handling,
components, tapes, films and coated fabrics, hose and tubing, wire and
cable, and plastic formed components; and Medical Device Products,
including critical care products and infusion systems for medical and
surgical applications.
The factors impacting the Company's basis for reportable segments include
separate management teams, infrastructures, and discrete financial
information about each. Additionally, the long-term financial performance
of the Medical Device Products segment is affected by an environment
governed by regulatory standards.
Sales, operating profit, interest expense, net and identifiable assets are
set forth in the following table:
INDUSTRIAL MEDICAL
IN THOUSANDS PRODUCTS DEVICE PRODUCTS ADJUSTMENT CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------
Three months ended May 2, 1998:
Sales to unaffiliated customers $ 97,974 $ 21,831 $119,805
Operating profit 10,010 112 10,122
Interest expense, net -- -- $ 2,932 2,932
Identifiable assets 220,117 155,296 375,413
Three months ended May 3, 1997:
Sales to unaffiliated customers $ 92,446 $ 27,203 $119,649
Operating profit 6,503 3,677 10,180
Interest expense, net -- -- $ 2,886 2,886
Identifiable assets 210,592 131,896 342,488
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis is based upon and should be read in
conjunction with the historical consolidated financial statements of the Company
and related notes thereto. The Company's fiscal 1999 first quarter ended May 2,
1998 and fiscal 1998 first quarter ended May 3, 1997. The fiscal 1999 and 1998
quarters each consisted of 13 weeks.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 2, 1998 COMPARED WITH THREE MONTHS ENDED
MAY 3, 1997
Net Sales. Net sales of $119.8 million for the three months ended May 2, 1998
("FY 1999 Period") increased $0.2 million, from $119.6 million for the three
months ended May 3, 1997 ("FY 1998 Period"). The increase in net sales was the
result of increased sales of industrial products, offset by lower volumes in
medical device products. Net of acquisitions and divestitures, sales for the FY
1999 Period increased 1.2% over the same period of the prior year.
Gross Profit. Gross profit of $37.3 million in the FY 1999 Period decreased $1.0
million, or 2.6% from $38.3 million in the FY 1998 Period. The gross profit
margin decreased to 31.1% in the FY 1999 Period from 32.0% in the FY 1998
Period. The decrease was due to lower volume in the medical device segment which
offset the impact of continued productivity improvements and cost containment in
the Industrial Segment.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses of $27.6 million in the FY 1999 Period
decreased $0.5 million, or 1.8%, from $28.1 million in the FY 1998 Period. SG&A
expenses as a percentage of net sales was 23.0% in the FY 1999 Period, down from
23.5% in the FY 1998 Period. The decline was mainly the result of lower costs
incurred for performance based incentive compensation, group insurance and
outside services, partially offset by increased professional fees.
Research and development expenses of $3.8 million for the FY 1999 Period
increased $0.4 million, or 11.8%, from $3.4 million in the FY 1998 Period. This
increase reflects the continued commitment to new products and materials
development.
Other Income. Other income of $0.7 million in the FY 1999 Period increased $0.5
million, or 250%, from $0.2 million in the FY 1998 Period. The increase
primarily resulted from a reduction in foreign exchange transaction losses.
Nonrecurring Charges and Facilities Rationalization. For the FY 1999 Period, the
Company recorded a $0.4 million net reversal of facilities rationalization
charges as a result of a change in facility relocation plans.
Interest Expense, Net. Interest expense, net of $2.9 million for the FY 1999
Period remained flat compared to $2.9 million in the FY 1998 Period. The savings
in the Company's interest expense as a result of its reduction in overall debt
was offset by an increase in interest rates associated with the Company's
subordinated debt.
Income Before Income Taxes. Income before income taxes of $7.9 million in the FY
1999 Period increased $0.4 million, or 5.3%, from $7.5 million in the FY 1998
Period. Net of acquisitions and divestitures, pretax results of operations were
up 8% from the FY 1998 Period. This improvement was generally the result of
continued productivity improvements and lower operating expenses in the
Industrial Segment, increased other
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
income and a reversal of nonrecurring charges and facilities rationalization,
offset by lower volume and margin in the Medical Segment.
Provision for Income Taxes. The Company's effective tax rate for the FY 1999
Period was 31.5%, compared with 34.0% in the FY 1998 Period. The lower effective
tax rate was primarily the result of increase in research and experimental
credits and foreign tax credits.
SEGMENT RESULTS
The Company operates in two business segments: Industrial Products, including
highly engineered seals and bearings, fluid handling components, tapes, films
and coated fabrics, hose and tubing, wire and cable, and plastic formed
components; and Medical Device Products, including critical care products,
infusion systems for medical and surgical applications. For additional financial
information about industry segments and performance in various geographic areas,
see Note 9 of the "Notes to Condensed Consolidated Financial Statements"
contained herein.
INDUSTRIAL PRODUCTS
MAY 2, MAY 3,
IN THOUSANDS 1998 1997
- ---------------------------------------------------------------------------------
Sales $ 97,974 $ 92,446
Operating profit 10,010 6,503
Operating profit before nonrecurring charges
and facilities rationalization 9,593 6,503
Net Sales. Industrial net sales for the FY 1999 Period increased $5.5 million,
or 6.0% from the FY 1998 period. Net of acquisitions and divestitures,
Industrial Product net sales for the FY 1999 Period increased 8% over the FY
1998 Period. Domestically, net sales were particularly strong in several of the
markets the Company serves including, commercial aircraft, off-shore
exploration, food & beverage and general industrial markets. Continued softness
in the electronics and semiconductor markets contributed to lower shipments of
products to these markets. Improved demand in Europe across most product lines,
along with the impact of an acquisition, was further assisted by the favorable
effect of foreign currency exchange rates, resulting in increased dollar net
sales of 34% over the FY 1998 Period. (A 14% increase net of acquisitions and a
7% increase after removing the effect of foreign currency exchange rate
changes).
Gross Profit. The gross profit margin for the FY 1999 Period was 29.8%, an
increase from 28.5% in the FY 1998 Period. This was the net result of spending
controls in variable and fixed overhead, and increased sales volume, partially
offset by product mix.
Selling, General and Administrative Expenses. SG&A expenses as a percentage of
net sales decreased 1.5% to 20.0%, for the FY 1999 Period from the FY 1998
Period. General and administrative expenses were lower in several categories,
including lower performance based incentive compensation, group insurance and
outside services, partially offset by increased professional fees. Investments
in research and development were up, as the Company continued to increase its
focus on new product development.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Profit, before Nonrecurring Charges and Facilities Rationalization.
Operating profit, before nonrecurring charges and facilities rationalization,
increased 48% to $9.6 million for the FY 1999 Period, from $6.5 million in the
FY 1998 Period. The improvement in profitability reflects higher net sales
volumes, margins, and reduced operating expenses.
MEDICAL DEVICE PRODUCTS
MAY 2, MAY 3,
IN THOUSANDS 1998 1997
- ---------------------------------------------------------------------------------
Sales $ 21,831 $ 27,203
Operating profit 112 3,677
Operating profit before nonrecurring charges
and facilities rationalization 112 3,677
Net Sales. Net sales for the FY 1999 Period decreased $5.4 million, or 19.8%
over the FY 1998 Period. Domestically, contributing factors included specific
customer inventory build-up in the fourth quarter of the prior year.
Additionally, sales of silicone products decreased due to start-up issues in
connection with relocating the production of these products from the Company's
facility in Fremont, California to Dublin, Ohio. The domestic decrease also
reflects a reclassification of freight costs, lower sales of certain product
particularly in fluid & drug and infusion systems product lines, and a delay in
the introduction of new products. Sales in Europe decreased primarily due to the
loss of a large customer which was acquired by a competitor, and the impact of
unfavorable foreign currency exchange rates, particularly in Germany.
Gross Profit. The gross profit margin for the FY 1999 Period was 37.2% compared
to 44.0% in the FY 1998 Period. The decline in margin was due to reduced volume
and lesser higher margin product sales associated with much of the inventory
build-up referred to above. In addition, cost of sales was further negatively
impacted by start-up costs in connection with the move of two production
facilities from California to Dublin, Ohio.
Selling, General and Administrative Expenses. SG&A expenses as a percentage of
net sales for the FY 1999 and FY 1998 Periods, was 36.7% and 30.5%,
respectively. Actual expenses for the FY 1999 Period were slightly less than the
FY 1998 Period. The decline is the net result of efficiencies that were achieved
in connection with the relocation of the silicone products operations, somewhat
offset by increased product development expenses.
Operating Profit, before Nonrecurring Charges and Facilities Rationalization.
Operating profit, before nonrecurring charges and facilities rationalization,
decreased 97% to $0.1 million for the FY 1999 Period, from $3.7 million in the
FY 1998 Period. This decrease reflects lower net sales volumes and margins in
addition to certain one-time relocation and start-up costs incurred in
connection with the consolidation of two production facilities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
On March 4, 1998, the Company completed the Offering of its 8.125% Senior
Subordinated Notes (see Note 4 of the "Notes to Condensed Consolidated Financial
Statements"). The net proceeds from the Offering were approximately $121.0
million.
In conjunction with the Offering, the Company amended its bank credit facility
to, among other things, reduce the maximum principal amount available from
$250.0 million to $200.0 million (the "Credit Facility"). The Company used the
net proceeds of the Offering to repay a portion of existing indebtedness under
the Credit Facility. Amounts borrowed under the Credit Facility mature November
12, 2001. The Notes mature March 1, 2008.
Cash Provided by Operating Activities. Cash provided by operating activities for
the FY 1999 Period decreased to $3.5 million, or $8.6 million from $12.1 million
from the FY 1998 Period. This decrease is primarily due to working capital
changes in inventory and income taxes payable from a $4.2 million source for the
FY 1998 Period, to a $3.6 million use of cash for the FY 1999 Period.
Cash Used in Investing Activities. During the quarter the Company completed the
acquisition of Corotec GmbH, a medical device supplier based in Mainz, Germany.
Cash used in investing activities for the FY 1999 Period included cash balances
of $3.0 million obtained in the acquisition. The actual cash outlay for the
acquisition occurred subsequent to May 2, 1998. During the FY 1999 Period, the
Company invested $5.2 million in renovation of existing facilities, leasehold
improvements and the replacement of existing equipment. Capital expenditures for
the FY 1999 Period increased $2.3 million from $2.9 million in the FY 1998
Period.
The Company believes that it generates sufficient cash flow from its operations
to finance near and long-term internal growth and capital expenditures and to
make principal and interest payments on its loans payable to banks and the
Notes. The Company continually evaluates its employment of capital resources,
including asset management and other sources of financing.
CONTINGENCIES
For information regarding environmental matters and other contingencies, see
Note 6 of the "Notes to Condensed Consolidated Financial Statements" and the
"Risk Factors" section of the Company's 1998 Annual Report on Form 10-K.
While the year 2000 considerations are not expected to materially impact Furon's
internal operations, they may have an effect on some of our customers and
suppliers, and thus indirectly affect Furon. It is not possible to quantify the
aggregate cost to Furon with respect to customers and suppliers with year 2000
problems, although the Company does not anticipate it will have a material
adverse impact on the Company's business, financial condition or results of
operations.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended, including, without
limitation, statements that include the words "believes," "expects,"
"anticipates" or similar expressions and statements relating to anticipated cost
savings, the Company's strategic plans, capital expenditures, industry trends
and prospects and the Company's financial position. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause actual results, performance or achievements of the Company to differ
materially from those expressed or implied by such forward-looking statements.
Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. For a
more complete discussion of risk factors, please refer to the "Risk Factors"
section of the Company's 1998 Annual Report on Form 10-K. All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements
contained in this Form 10-Q and Cautionary Statements and "Risk Factors" section
in the Company's 1998 Annual Report on Form 10-K.
16
17
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.
17
18
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.7* Deferred Compensation Plan, as amended and restated
effective February 1, 1998.
10.8* Economic Value Added (EVA) Incentive Compensation Plan, as
amended and restated effective February 1, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
* A management contract or compensatory plan or arrangement.
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19
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
May 29, 1998
20
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.7* Deferred Compensation Plan, as amended and restated
effective February 1, 1998.
10.8* Economic Value Added (EVA) Incentive Compensation Plan, as
amended and restated effective February 1, 1998.
27 Financial Data Schedule
- ----------
* A management contract or compensatory plan or arrangement.