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 OCTOBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-8088
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 organization) Identification No.)
29982 Ivy Glenn Drive
Laguna Niguel, CA 92677
- --------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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 December 4, 1998: 18,422,774
2
FURON COMPANY
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
October 31, and January 31, 1998 3
Condensed Consolidated Statements of Income
Three and nine months ended October 31, 1998 and
November 1, 1997 5
Condensed Consolidated Statements of Cash Flows Three
and nine months ended October 31, 1998 and
November 1, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II - OTHER INFORMATION 23
- ---------------------------
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3
ITEM 1. FINANCIAL STATEMENTS
FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, January 31,
In thousands 1998 1998
- -------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,804 $ --
Accounts receivable, less allowance for
doubtful accounts of $1,939 at October 31, 1998
and $1,741 at January 31, 1998 74,169 75,661
Inventories, net 58,641 54,704
Deferred income taxes 11,356 11,052
Prepaid expenses and other current assets 4,896 4,959
--------- --------
Total current assets 152,866 146,376
Property, plant & equipment, at cost:
Land 6,667 6,976
Buildings and leasehold improvements 30,747 31,493
Machinery and equipment 171,817 158,999
--------- --------
209,231 197,468
Less accumulated depreciation and amortization (100,085) (87,832)
--------- --------
Net property, plant and equipment 109,146 109,636
Intangible assets, at cost less accumulated
amortization of $37,428 at October 31, 1998
and $35,354 at January 31, 1998 90,914 83,129
Other assets 9,884 7,208
--------- --------
TOTAL ASSETS $ 362,810 $346,349
========= ========
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, January 31,
In thousands, except share data 1998 1998
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash, less checks outstanding $ -- $ 1,025
Accounts payable 24,060 25,384
Salaries, wages and related benefits payable 17,084 18,203
Income taxes payable 2,221 4,228
Current portion of long-term debt 1,431 966
Facility rationalization and severance 7,214 10,091
Other current liabilities 16,932 14,035
-------- --------
Total current liabilities 68,942 73,932
Long-term debt 152,742 148,657
Other long-term liabilities 26,000 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, 18,298,924 shares issued and
outstanding at October 31, 1998 and 18,227,898
at January 31, 1998 41,100 40,864
Employee Benefit Trust shares (1,538) --
Accumulated other comprehensive income (1,445) (4,236)
Unearned ESOP shares (2,630) (3,229)
Unearned compensation (151) (232)
Retained earnings 61,047 47,972
-------- --------
Total shareholders' equity 96,383 81,139
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $362,810 $346,349
======== ========
See accompanying notes.
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5
FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
-----------------------------------------------------------
October 31, November 1, October 31, November 1,
In thousands, except per share amounts 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
Net sales $120,720 $123,209 $365,571 $361,554
Cost of sales 85,793 84,304 253,181 245,848
-------- -------- -------- --------
Gross profit 34,927 38,905 112,390 115,706
Selling, general and administrative
expenses 27,598 28,898 84,430 85,662
Nonrecurring charges and facilities
rationalization -- -- (417) --
Other (income), expense (1,331) (603) (3,023) (1,025)
Interest expense, net 3,062 2,632 9,256 8,199
-------- -------- -------- --------
Income before income taxes 5,598 7,978 22,144 22,870
Provision for income taxes 1,763 2,513 6,975 7,204
-------- -------- -------- --------
Net income $ 3,835 $ 5,465 $ 15,169 $ 15,666
======== ======== ======== ========
Basic income per share $ 0.21 $ 0.31 $ 0.84 $ 0.88
======== ======== ======== ========
Diluted income per share $ 0.21 $ 0.29 $ 0.82 $ 0.84
======== ======== ======== ========
Cash dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
======== ======== ======== ========
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Nine months ended
--------------------------------------------------------
October 31, November 1, October 31, November 1,
In thousands 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 3,835 $ 5,465 $ 15,169 $ 15,666
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 4,455 4,111 13,006 12,412
Amortization 1,413 1,489 4,574 4,274
Provision for losses on accounts receivable 469 (64) 609 85
Deferred income taxes 5 4 (369) (23)
Nonrecurring charges and facilities
rationalization -- -- (417) --
(Gain) loss on sale of assets (163) 37 (61) 45
Working capital changes, net of
acquisitions and disposals:
Accounts receivable 613 (5,190) 2,048 (3,044)
Inventories (343) (237) (2,267) 3,823
Accounts payable and accrued liabilities 2,829 4,026 (1,886) 2,759
Income taxes payable (2,559) (525) (3,210) 2,262
Other current assets and liabilities, net (4,921) (43) (731) (290)
Changes in other long-term operating
assets and liabilities 1,406 130 511 862
------- -------- --------- --------
Net cash provided by operating activities 7,039 9,203 26,976 38,831
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired -- (11,100) (11,311) (11,100)
Purchases of property, plant and equipment (3,545) (3,156) (13,455) (8,633)
Proceeds from sale of businesses 151 395 432 814
Proceeds from sale of equipment 968 196 1,168 229
Decrease in notes receivable 689 -- 859 --
------- -------- --------- --------
Net cash used in investing activities (1,737) (13,665) (22,307) (18,690)
FINANCING ACTIVITIES
Proceeds from long-term debt 7,528 15,077 155,713 19,158
Principal payments on long-term debt (13,617) (11,168) (151,632) (37,973)
Deferred debt costs (34) -- (4,198) --
Employee benefit trust funding (342) -- (1,984) --
Proceeds, net of cancellations, from
issuance of common stock 15 (35) 168 612
Loan to ESOP -- (355) -- (621)
Principal payments received from loan to ESOP -- -- 599 529
Dividends paid on common stock (549) (541) (1,647) (1,625)
------- -------- --------- --------
Net cash provided by (used in)
financing activities (6,999) 2,978 (2,981) (19,920)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,624 1,320 2,116 (221)
------- -------- --------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (73) (164) 3,804 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,877 164 -- --
------- -------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,804 $ -- $ 3,804 $ --
======= ======== ========= ========
See accompanying notes.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 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 October 31, 1998, and the
results of operations and cash flows for the three and nine months ended
October 31, 1998 and November 1, 1997. Results of the Company's
operations for the three and nine months ended October 31, 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:
October 31, January 31,
In thousands 1998 1998
---------------------------------------------------------------------------
Raw materials and purchased parts $23,930 $24,781
Work-in-process 13,086 11,538
Finished goods 21,625 18,385
------- -------
$58,641 $54,704
======= =======
3. INTANGIBLES
Intangible assets, primarily acquired in business combinations, net of
accumulated amortization, are summarized as follows:
October 31, January 31,
In thousands 1998 1998
---------------------------------------------------------------------------
Goodwill $64,462 $54,476
Other intangible assets 26,452 28,653
------- -------
$90,914 $83,129
======= =======
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(Unaudited)
4. LONG-TERM DEBT
Long-term debt is summarized as follows:
October 31, January 31,
In thousands 1998 1998
--------------------------------------------------------------------------------
Senior Subordinated Notes $125,000 $ --
Loans under bank credit agreements
due through fiscal year 2002 24,000 142,000
Industrial Revenue Bonds 3,600 6,175
Other 1,573 1,448
-------- --------
Total long-term debt 154,173 149,623
Less current portion 1,431 966
-------- --------
Due after one year $152,742 $148,657
======== ========
Effective February 3, 1998, the Company amended and restated its credit
facility 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 facility
agreement. Interest on the Notes is payable semi-annually on March 1 and
September 1 of each year.
During the three months ended August 1, 1998, the Company retired
approximately $2.6 million of the Industrial Revenue Bonds.
For the three and nine months ended October 31, 1998, the weighted
average interest rate on the loans under the credit facility agreement
was 6.1% and 6.2%, respectively.
Interest paid for the three and nine months ended October 31, 1998 was
$5.6 million and $8.2 million, respectively. Interest paid for the three
and nine months ended November 1, 1997 was $2.7 million and $7.7
million, respectively.
5. INCOME TAXES
The Company's effective tax rate for the three and nine months ended
October 31, 1998 was 31.5% as compared with 31.5% for the same periods
in the prior year.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(Unaudited)
5. INCOME TAXES (CONTINUED)
Income taxes paid for the three and nine months ended October 31, 1998
were $3.2 million and $8.1 million, respectively. Income taxes paid for
the three and nine months ended November 1, 1997 were $2.5 million and
$4.7 million, respectively.
6. CONTINGENCIES
At October 31, 1998, the Company had approximately $0.7 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 October 31, 1998.
At October 31, 1998, the Company is obligated under irrevocable letters
of credit totaling $5.9 million.
The Company is currently involved in various litigation. While no
assurance can be given, 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 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 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.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(Unaudited)
6. CONTINGENCIES (CONTINUED)
As of October 31, 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 current environmental reserves
should be sufficient to cover most, if not all, of 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
October 31, 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 NINE MONTHS ENDED
-----------------------------------------------------------
IN THOUSANDS, EXCEPT SHARE AND PER OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
SHARE AMOUNTS 1998 1997 1998 1997
-------------------------------------------------------------------------------------------------
Net income $ 3,835 $ 5,465 $ 15,169 $ 15,666
=========== =========== =========== ===========
Weighted average shares
outstanding for basic income
per share 18,002,128 17,851,126 18,016,389 17,823,154
----------- ----------- ----------- -----------
Effect of dilutive securities:
Employee stock options and awards 499,081 1,023,958 571,133 829,012
----------- ----------- ----------- -----------
Weighted average shares
outstanding for diluted income
per share 18,501,209 18,875,084 18,587,522 18,652,166
----------- ----------- ----------- -----------
Basic income per share $ 0.21 $ 0.31 $ 0.84 $ 0.88
=========== =========== =========== ===========
Diluted income per share $ 0.21 $ 0.29 $ 0.82 $ 0.84
=========== =========== =========== ===========
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. During the
nine months ended October 31, 1998, the Company contributed
approximately $2.0 million to the Trust to purchase shares of the
Company's common stock on the open market. During the first nine months
of fiscal year 1999, the Trust purchased 96,671 shares of common stock
at an average cost of $20.60 per share (96,671 shares held at October
31, 1998).
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(Unaudited)
7. SHAREHOLDERS' EQUITY (CONTINUED)
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 various benefit plans. 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.
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 MONTHS ENDED NINE MONTHS ENDED
-----------------------------------------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
IN THOUSANDS 1998 1997 1998 1997
---------------------------------------------------------------------------------------------------
Net income $3,835 $5,465 $15,169 $15,666
Foreign currency translation
adjustments 2,215 1,704 2,791 (97)
------ ------ ------- -------
Comprehensive income $6,050 $7,169 $17,960 $15,569
====== ====== ======= =======
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(Unaudited)
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 October 31, 1998:
- ------------------------------------
Sales to unaffiliated customers $ 93,259 $ 27,461 $120,720
Operating profit 6,277 1,052 7,329
Interest expense, net -- -- $ 3,062 3,062
Identifiable assets 215,157 147,653 362,810
Nine months ended October 31, 1998:
- -----------------------------------
Sales to unaffiliated customers $287,777 $ 77,794 $365,571
Operating profit 24,600 3,360 27,960
Interest expense, net -- -- $ 9,256 9,256
Identifiable assets 215,157 147,653 362,810
Three months ended November 1, 1997:
- ------------------------------------
Sales to unaffiliated customers $ 96,522 $ 26,687 $123,209
Operating profit 6,899 3,108 10,007
Interest expense, net -- -- $ 2,632 2,632
Identifiable assets 208,445 139,532 347,977
Nine months ended November 1, 1997:
- -----------------------------------
Sales to unaffiliated customers $280,820 $ 80,734 $361,554
Operating profit 19,249 10,795 30,044
Interest expense, net -- -- $ 8,199 8,199
Identifiable assets 208,445 139,532 347,977
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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 third quarter ended October
31, 1998 and fiscal 1998 third quarter ended November 1, 1997. The fiscal 1999
and 1998 quarters each consisted of 13 weeks.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED WITH THREE AND NINE MONTHS
ENDED NOVEMBER 1, 1997
NET SALES. Net sales of $120.7 million for the three months ended October 31,
1998 ("Q3 1999 Period") decreased $2.5 million, or 2.0%, from $123.2 million for
the three months ended November 1, 1997 ("Q3 1998 Period"). Net sales of $365.6
million for the nine months ended October 31, 1998 ("YTD Q3 1999 Period")
increased $4.0 million, or 1.1%, from $361.6 million for the nine months ended
November 1, 1997 ("YTD Q3 1998 Period"). The current quarter's decrease in net
sales was the result of reduced demand for industrial products, partially offset
by an increase in net sales of medical device products due to acquisitions. Net
of acquisitions and divestitures, sales for the Q3 1999 Period decreased 3.5%,
while YTD Q3 1999 Period sales increased slightly over the same periods of the
prior year.
GROSS PROFIT. Gross Profit of $34.9 million for the Q3 1999 Period decreased
$4.0 million, or 10.2%, from $38.9 million in the Q3 1998 Period. Gross Profit
of $112.4 million for the YTD Q3 1999 Period decreased $3.3 million, or 2.9%,
from $115.7 million for the YTD Q3 1998 Period. For the Q3 1999 Period, the
decrease in gross profit resulted from lower volumes from the Industrial
Products Segment coupled with continued unfavorable manufacturing variances and
cost containment challenges affecting the Medical Device Products Segment. For
the YTD Q3 1999 Period, the decrease in gross profit was due to the lower
volumes and cost containment affecting the Medical Device Products Segment,
which more than offset continued cost containment achieved by the Industrial
Products Segment.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $27.6 million in the Q3 1999 Period
decreased $1.3 million, or 4.5%, from $28.9 million in the Q3 1998 Period. This
decrease was primarily due to reduced labor, travel, legal and outside services
costs together with decreased performance based incentive compensation awards,
which more than offset increased professional fees and relocation expenses. SG&A
expenses of $84.4 million in the YTD Q3 1999 Period decreased $1.3 million, or
1.4% from $85.7 million in the YTD Q3 1998 Period. SG&A expenses as a percentage
of sales decreased to 22.9% in the Q3 1999 Period and 23.1% in the YTD Q3 1999
Period from 23.5% and 23.7%, respectively, in the same periods of the prior
year. The decline in SG&A expenses as a percentage of sales was primarily due to
reduced labor, travel, legal and outside services costs together with decreased
performance based incentive compensation awards, which more than offset
increased professional fees and relocation expenses.
Research and development expenses of $3.4 million for the Q3 1999 Period
decreased $0.2 million, or 4.8%, from the Q3 1998 period primarily due to lower
labor expenses. However, research and development expenses of $10.6 million for
the YTD Q3 1999 Period increased $0.3 million, or 3.1%, from the YTD Q3 1998
Period primarily because higher labor costs for the first two fiscal quarters
more than offset the third quarter reduction.
OTHER INCOME. Other income of $1.3 million for the Q3 1999 Period and $3.0
million for the YTD Q3 1999 Period increased $0.7 million and $2.0 million from
$0.6 million and $1.0 million from the same periods of the prior year. For the
Q3 1999 Period, the increase resulted primarily from the following items: a gain
on the cash surrender value of a life insurance policy and a gain from the sale
of a building for the Medical Device Products Segment, and a legal settlement
and a miscellaneous write-off taken in prior year periods but not repeated in
this year's periods for the Industrial Products Segment. For the YTD Q3 1999
Period, this increase is primarily the result of a turnaround in foreign
exchange losses experienced in the same period of the prior year.
INTEREST EXPENSE, NET. Interest expense, net of $3.1 million for the Q3 1999
Period and $9.3 million for the YTD Q3 1999 Period increased $0.4 million and
$1.1 million from the same periods of the prior year. The increase in the
Company's interest expense was primarily the result of the higher interest rates
attributable to the Company's subordinated debt, as compared to the Company's
bank borrowing rate.
INCOME BEFORE INCOME TAXES. Income before income taxes of $5.6 million in the Q3
1999 Period decreased $2.4 million, or 29.8%, from $8.0 million in the Q3 1998
Period. Income before income taxes of $22.1 million in the YTD Q3 1999 Period
decreased $0.8 million, or 3.2%, from $22.9 million in the YTD Q3 1998 Period.
These decreases are generally the result of lower sales, reduced margins and
higher interest expense somewhat offset by lower operating expenses and
increased other income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
PROVISION FOR INCOME TAXES. Provision for income taxes of $1.8 million for the
Q3 1999 Period decreased $0.7 million from the same period of the prior year.
Provision for income taxes of $7.0 million for the YTD Q3 1999 Period decreased
$0.2 million from the same period of the prior year. The Company's effective tax
rate for the Q3 1999 and YTD Q3 1999 Periods was 31.5%, unchanged from the same
periods of the prior year.
SEGMENT RESULTS
A discussion of the operations of the business segments follows. 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. For additional financial
information about industry segments see Note 9 of the "Notes to Condensed
Consolidated Financial Statements."
INDUSTRIAL PRODUCTS
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
IN THOUSANDS 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
Sales $93,259 $96,522 $287,777 $280,820
Operating profit 6,277 6,899 25,017 19,249
Operating profit before nonrecurring
and facilities rationalizations 6,277 6,899 24,600 19,249
NET SALES. Industrial net sales for the Q3 1999 Period and YTD Q3 1999 Period
decreased $3.3 million and increased $7.0 million, respectively, over the same
periods of the prior year. Net of acquisitions and divestitures, for the Q3 1999
Period and YTD Q3 1999 Period, Industrial Products net sales decreased 1.2% and
increased 4.3%, respectively, compared to the same periods of the prior year. In
the current quarter, domestic net sales in the commercial aircraft, heavy duty
truck, and business equipment markets continued to show growth. This growth was
more than offset by reduced demand in most industrial process markets such as
off-shore exploration, along with the general softness in the electronics and
semiconductor markets. Sustained demand in Europe across most product lines
during the current quarter and an acquisition resulted in increased net sales
over the same period of the prior year of 24.0% and was further assisted by the
favorable effect of foreign currency exchange rates, resulting in increased
dollar net sales of 28.1% over the same period of the prior year. Net of the
acquisition, for the Q3 1999 Period, Industrial Product net sales were 14.4%
higher than the same period the prior year.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
GROSS PROFIT. The gross profit margin for the Q3 1999 Period was 27.6%, a
decrease from 28.3% the same period of the prior year. This decrease was
primarily the result of increased material usage due to product mix content. For
the YTD Q3 1999 Period, spending controls in variable and fixed overhead more
than offset the higher raw material content, as a percentage of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses as a percentage of
net sales decreased 0.2% and 1.3% to 20.9% and 20.5%, for the Q3 1999 Period and
YTD Q3 1999 Period, respectively, from the same periods of the prior year.
Favorable selling, general and administrative variances include salaries and
benefits, including lower performance based incentive compensation, travel and
outside services, partially offset by increased professional and relocation
fees. Favorable variances in research and development also contributed to lower
operating expenses.
OPERATING PROFIT, BEFORE NONRECURRING CHARGES AND FACILITIES RATIONALIZATION.
Operating profit, before nonrecurring charges and facilities rationalization,
decreased 9.0% to $6.3 million and increased 27.8% to $24.6 million for the Q3
1999 Period and YTD Q3 1999 Period, respectively, from the same periods of the
prior year. The Q3 1999 Period reflects the impact of lower domestic volumes on
overhead and unfavorable product mix partially offset by reduced operating
expenses. The YTD Q3 1999 Period improvement in profitability reflects higher
net sales volumes and margins, reduced operating expenses and increased other
income.
MEDICAL DEVICE PRODUCTS
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
IN THOUSANDS 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
Sales $27,461 $26,687 $77,794 $80,734
Operating profit 1,052 3,108 3,360 10,795
Operating profit before nonrecurring
and facilities rationalizations 1,052 3,108 3,360 10,795
NET SALES. Net sales for the Q3 1999 Period increased $0.8 million, or 2.9%,
over the same period of the prior year. The increase is the net result of a
39.9% increase in European sales, primarily related to an acquisition, offset by
lower domestic volumes in the fluid and drug, pressure monitoring,
cardiovascular, and infusion systems markets. For the YTD Q3 1999 Period, sales
were down 3.6% over the same period of the prior year. This is due to lower
domestic volumes as noted above.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
GROSS PROFIT. The gross profit margin for the Q3 1999 Period and YTD Q3 1999
Period was 33.5% and 36.9% as compared to 43.5% and 43.6% for the Q3 1998 Period
and YTD Q3 1998 Period, respectively. This resulted from reduced volume impact
on manufacturing overhead and unfavorable product mix. In addition, cost of
sales was further negatively impacted by manufacturing difficulties specifically
related to the moves of the silicone products plant and the SDM operation
(acquired August 1997) from California to Dublin, Ohio.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses as a percentage of
net sales for the Q3 1999 Period and YTD Q3 1999 Period, decreased by 2.1% to
29.7% and increased by 2.4% to 32.6%, respectively, over same periods of the
prior year. Current quarter favorable selling, general and administrative
variances included lower performance based incentive compensation and
reclassification of freight, somewhat offset by increases due to the Corotec
acquisition (April 1998) and product development expenses. For the YTD Q3 1999
Period, SG&A expenses include costs associated with the integration of the
Corotec acquisition and increased product development expenses leveraged against
lower sales volumes partially offset by freight reclassification.
OPERATING PROFIT, BEFORE NONRECURRING CHARGES AND FACILITIES RATIONALIZATION.
Operating profit, before nonrecurring charges and facilities rationalization,
decreased 66.2% and 68.9% for the Q3 1999 Period and YTD Q3 1999 Period,
respectively, from $3.1 million and $10.8 million, respectively, the same
periods of the prior year. These decreases reflect lower net sales volumes and
margins in addition to certain relocation and start-up costs which were incurred
in connection with the move of two production facilities.
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 the credit
facility agreement 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.
The Company's financial condition remained strong at October 31, 1998. The ratio
of current assets to current liabilities was 2.2 to 1.0, an increase from 2.0 to
1.0 at January 31, 1998. Net working capital of $83.9 million increased by $11.5
million from January 31, 1998.
CASH PROVIDED BY OPERATING ACTIVITIES. Cash provided by operating activities for
the Q3 1999 Period decreased $2.2 million from $9.2 million from the same period
of the prior year. This decrease is primarily due to a decrease in net income of
$1.6 million and net changes in working capital and other long-term assets and
liabilities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities for the Q3
1999 Period of $1.7 million decreased by $11.9 million from the same period of
the prior year. This change is due primarily to the acquisition of SDM and AS
Medical for $11.1 million during August 1997. During the Q3 1999 Period, the
Company invested $3.5 million in renovation of existing facilities, leasehold
improvements and the replacement of existing equipment. Capital expenditures for
the Q3 1999 Period increased $0.3 million from $3.2 million from the same period
of the prior year.
The Company believes that it generates sufficient cash flow from its operations
to finance near and long-term internal growth, capital expenditures and
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 the
sections entitled "Business - Medical Device Business - FDA Compliance/Product
Regulation" and "Legal Proceedings" in Part I of the Company's 1998 Annual
Report on Form 10-K and Note 6 of the "Notes to Condensed Consolidated Financial
Statements" in this 10-Q.
Year 2000 Readiness Disclosure
All statements contained in the Quarterly Report on Form 10-Q, including those
contained in the following section are "Year 2000 Readiness Disclosures" within
the meaning of the Year 2000 Information and Disclosure Act.
The Year 2000 ("Y2K") Problem in computers arises from the common industry
practice of using two digits to represent a date in computer software code and
databases to enhance both processing time and save storage space. Therefore,
when dates in the year 2000 and beyond are indicated and computer programs read
the date "00," the computer may default to the year "1900" rather than the
correct "2000." This could result in incorrect calculations, faulty data and
computer shutdowns, potentially impairing the conduct of business.
The Company has instituted a Y2K readiness program (the "Program") to address
these issues as they relate to the Company. The Company's Program is divided
into two phases and is being conducted in three areas. The two phases of the
Program are: (i) identifying potentially non-complaint areas and (ii) addressing
those areas to make them Y2K ready. This two phase process is being conducted
across three areas. The three areas include: (i) Information Technology Systems
and Equipment; (ii) Non-Information Technology Systems and Equipment, and (iii)
compliance of third party vendors and suppliers with which the Company has
material relationships.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Year 2000 Readiness Disclosure (continued)
The Company believes it has made a great deal of progress in Phase I of the
Program. With respect to Information Technology Systems and Equipment, the
Company has identified applications systems, hardware/networks, personal
computers and telecommunications equipment that is potentially Y2K sensitive.
With respect to Non-Information Technology Systems and Equipment, the Company
has identified its Industrial Products Segment manufacturing equipment that is
potentially Y2K sensitive and is in the process of completing a similar task for
its Medical Device Products Segment. The Company has already completed a survey
of its complete product line across both the Industrial Products and Medical
Device Products segments and believes its product offering addresses material
Y2K issues.
Phase II of the Company's Program is in process. The majority of application
systems and personal computers were replaced with Y2K ready systems, and the
Company expects the remaining systems to be Y2K ready by the first quarter of
1999. The Company believes a majority of its hardware/networks and
telecommunications systems are Y2K ready. With respect to Non-Information
Technology Systems and Equipment, the Company has completed the process of
identifying manufacturing equipment used in its Industrial Products Segment that
potentially has Y2K issues and is in the process of completing a similar task
for its Medical Device Products Segment. The Company is contacting the suppliers
of its manufacturing equipment to determine whether the equipment is Y2K ready.
Large scale testing to verify that the Company's Y2K ready Information
Technology and Non-Information Technology Systems and Equipment are operational
is expected to begin the first quarter of 1999 and is expected to be completed
by mid-year 1999.
The Company has identified its key third party vendors and suppliers and has
asked them to disclose their state of Y2K readiness. Further, the Company's
Industrial Products Segment has identified and its Medical Device Products
Segment is in the process of identifying, and both expect to audit selected
"critical" suppliers, and develop strategies for working with them through Y2K
issues and develop contingency plans in the event of a problem with obtaining
materials from these "critical" suppliers. The Company intends to survey its key
customers to determine their state of Y2K readiness. For the nine months ended
October 31, 1998, no single customer accounted for more than 4% of the Company's
net sales of Industrial Products or more than 7% of the Company's net sales of
Medical Device Products.
The Company expended approximately $9 million between 1994 and 1997 replacing
Information Technology Systems and Equipment with systems and equipment that is
Y2K ready. The Company has expended approximately $1 million and expects to have
recurring operating costs of approximately $1.2 million per year to lease
upgraded personal computers. The system and equipment replacements that have
been made were scheduled to occur without regard for the Program and the Program
is being conducted by the Company's employees. While no assurance can be given,
at this time the Company does not anticipate that the Y2K Problem will have a
material adverse impact on the Company's business, financial condition or
results of operation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Euro Conversion
Eleven of the fifteen member countries of the European Monetary Union have
agreed to adopt the euro as their common legal currency commencing January 1,
1999. Fixed conversion rates between these participating countries' present
currencies, or "legacy currencies", and the euro are scheduled to be established
as of January 1, 1999. The legacy currencies are scheduled to remain legal
tender in the participating countries as denominations of the euro between
January 1, 1999 and January 1, 2002. Beginning January 1, 2002, the
participating countries will issue new euro-denominated bills and coins. No
later than July 1, 2002, the participating countries will withdraw all bills and
coins denominated in their legacy currencies.
Transition to the euro creates a number of issues for the Company. Business
issues that must be addressed include product pricing policies and ensuring the
continuity of business and financial contracts. The increased price transparency
resulting from the use of a single currency may affect the ability of the
Company to price its products differently in the various European markets. For
the nine months ended October 31, 1998, approximately 15% of the Company's net
sales were made to countries that have agreed to adopt the euro as their
currency. Finance and accounting issues include the conversion of accounting
systems, statutory records, tax books and payroll systems to the euro, as well
as conversion of bank accounts and other treasury and cash management
activities.
While the Company is still in the process of assessing potential issues caused
by conversion to the euro and possible ways to resolve those issues, based on
the information currently available to it, the Company does not expect that
conversion to the euro will have a material adverse impact on its results of
operations, financial position or liquidity.
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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 Year 2000 readiness effort and progress toward that
goal, the Company's Year 2000 Readiness Disclosure, Euro conversion, 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 the "Risk Factors" section in the
Company's 1998 Annual Report on Form 10-K.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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:
10.1A* Amendments to Furon Company 1982 Stock Incentive Plan
effective August 25, 1998.
10.7* Furon Company Deferred Compensation Plan, as amended and
restated effective February 1, 1998.
10.9A* Amendments to Furon Company 1995 Stock Incentive Plan
effective August 25, 1998.
10.16* Furon Company Option Gain Deferral Program.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
- --------------------
* 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
REGISTRANT
-------------------------------
/s/ MONTY A. HOUDESHELL /s/ DAVID L. MASCARIN
- --------------------------------------- ------------------------------------
Monty A. Houdeshell David L. Mascarin
Vice President, Chief Financial Officer Controller
December 11, 1998
25