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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to______________
Commission file number 0-10734
FERROFLUIDICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 02-0275185
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization Identification No.)
40 Simon Street,
Nashua, New Hampshire 03061
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (603) 883-9800
(Former name, former address and former fiscal year, if
changed since last report.)
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.
(1) Yes X No___
(2) Yes X No___
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of April 30, 1996.
Common Stock, $.004 par value per share 6,060,902
- -------------------------------------------- --------------
(Class) (No. of Shares)
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TABLE OF CONTENTS
Page Nos.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1996 and June 30, 1995 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Operations -
Nine months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows -
Nine months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Position 9 - 11
Part II. Other Information
None
Signatures 12
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PART I. FINANCIAL INFORMATION
ITEM 1.
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and June 30, 1995
(unaudited)
ASSETS March 31, 1996 June 30, 1995
- ------ --------------- ---------------
Current Assets:
Cash and cash equivalents $ 765,000 $ 1,563,000
Accounts receivable - trade, less allowance
for doubtful accounts of $347,000 at
March 31, 1996 and $357,000 at June 30, 1995 12,647,000 7,774,000
Inventories 14,271,000 14,130,000
Prepaid and other current assets 3,089,000 2,659,000
--------------- ---------------
Total Current Assets 30,772,000 26,126,000
--------------- ---------------
Property, plant and equipment, at cost, net
of accumulated depreciation of $9,510,000 at
March 31, 1996 and $8,895,000 at June 30, 1995 8,686,000 8,116,000
Cash value of life insurance 2,706,000 2,976,000
Other assets, principally goodwill 2,182,000 2,311,000
--------------- ---------------
TOTAL ASSETS $ 44,346,000 $ 39,529,000
=============== ===============
LIABILITIES
Current Liabilities:
Bank notes payable 4,134,000 --
Accounts payable 4,451,000 5,318,000
Customer deposits 7,090,000 9,403,000
Accrued expenses 4,512,000 3,594,000
--------------- ---------------
Total Current Liabilities 20,187,000 18,315,000
--------------- ---------------
Long-term debt obligations 5,000,000 5,036,000
Other liabilities 229,000 397,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized
100,000 shares, issued and outstanding, none -- --
Common stock, $.004 par value, authorized
12,500,000 shares, issued 6,060,902 at March 31,
1996 and 5,997,198 shares at June 30, 1995 24,000 24,000
Additional paid-in capital 35,819,000 35,485,000
Retained deficit (16,445,000) (19,463,000)
Currency translation adjustments (468,000) (265,000)
--------------- ---------------
Total Stockholders' Equity 18,930,000 15,781,000
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,346,000 $ 39,529,000
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements
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FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
---- ----
Net sales and revenues $ 19,810,000 $ 8,491,000
Cost of goods sold 14,152,000 5,025,000
------------ ------------
5,658,000 3,466,000
Engineering and product development expenses 1,060,000 824,000
Selling, general and administrative expense 3,080,000 2,661,000
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Income (loss) from operations 1,518,000 (19,000)
Interest income 41,000 105,000
Interest expense (165,000) (206,000)
Other expense (24,000) 230,000
------------ ------------
Income before income taxes 1,370,000 110,000
Provision for income taxes 153,000 60,000
------------ ------------
Net income $ 1,217,000 $ 50,000
============ ============
Per Share Data:
Net income $ .20 $ .01
============ ============
Weighted average common and common equivalent
shares outstanding 6,213,148 5,686,949
The accompanying notes are an integral part of the consolidated financial
statements.
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FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
---- ----
Net sales and revenues $ 53,670,000 $ 23,977,000
Cost of goods sold 37,614,000 14,167,000
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16,056,000 9,810,000
Engineering and product development expenses 3,206,000 2,387,000
Selling, general and administrative expense 8,972,000 7,790,000
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Income (loss) from operations, before license fees 3,878,000 (367,000)
License fee income -- 1,300,000
------------ ------------
Operating income 3,878,000 933,000
Interest income 78,000 175,000
Interest expense (431,000) (515,000)
Other expense (122,000) (27,000)
------------ ------------
Income before income taxes 3,403,000 566,000
Provision for income taxes 385,000 68,000
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Net income $ 3,018,000 $ 498,000
============ ============
Per Share Data:
Net income $ .49 $ .09
============ ============
Weighted average common and common equivalent
shares outstanding 6,189,148 5,534,949
The accompanying notes are an integral part of the consolidated financial
statements.
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FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 3,018,000 $ 498,000
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Depreciation and amortization 615,000 725,000
Restricted stock expense 334,000 --
Other 221,000 261,000
Changes in assets and liabilities:
Accounts receivable (4,863,000) (521,000)
Inventories (141,000) (772,000)
Prepaid expenses and other current assets (430,000) 33,000
Accounts payable and accrued expenses 51,000 (3,044,000)
Customer deposits (2,313,000) 4,789,000
----------- -----------
Net cash provided by (used in) operating activities (3,508,000) 1,969,000
----------- -----------
Cash flow from investing activities:
Proceeds from sale of investment in affiliate -- 3,994,000
Proceeds from note receivable -- 350,000
Acquisition of property, plant and equipment (1,185,000) (468,000)
----------- -----------
Net cash provided by (used in) investing activities (1,185,000) 3,876,000
----------- -----------
Cash flow from financing activities:
Short term borrowing, net 4,134,000 (2,189,000)
Payments on long term debt obligations (36,000) --
----------- -----------
Net cash provided by (used in) financing activities 4,098,000 (2,189,000)
----------- -----------
Effect of currency rate changes on cash (203,000) 630,000
----------- -----------
Net increase (decrease) in cash (798,000) 4,286,000
----------- -----------
Cash and cash equivalents at beginning of period 1,563,000 322,000
----------- -----------
Cash and cash equivalents at end of period $ 765,000 $ 4,608,000
=========== ===========
Cash paid for interest and income taxes for the nine months ended March 31, 1996
and 1995 is as follows:
1996 1995
---- ----
Interest $295,000 $342,000
Income taxes $ 63,000 $ 41,000
The accompanying notes are an integral part of the consolidated financial
statements.
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FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Ferrofluidics
Corporation and its subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of operations
of any interim period are subject to year-end audit and adjustments, and are not
necessarily indicative of the results of operations for the fiscal year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 1995.
The Company has reclassified the presentation of certain prior year
information to conform with the current presentation format.
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are comprised of the following elements at March 31, 1996
and June 30, 1995:
March 31, 1996 June 30, 1995
-------------- -------------
Raw materials and purchased parts $ 7,447,000 $ 8,018,000
Work-in-process 5,071,000 2,634,000
Finished goods 1,753,000 3,478,000
----------- -----------
Total inventories $14,271,000 $14,130,000
=========== ===========
C. CASH VALUE OF LIFE INSURANCE
In October 1995, the Company terminated certain insurance agreements
with the former chief executive officer and transferred the ownership of certain
of the policies to him in exchange for an amount approximating their net book
value.
In addition, the Company eliminated certain indemnification liabilities
relating to these agreements, extended the covenant not to compete with the
former chief executive officer through the year 2000, and made a present valued
cash payment to him settling its obligations to him under a termination
agreement. The termination agreement originally called for payments to the
former officer through June 1997. The Company has retained ownership in one
policy on the life of the former chief executive and certain other policies on
the life of another former officer which have an aggregate cash value at March
31, 1996, net of policy loans, of approximately $1,000,000.
D. BANK NOTES PAYABLE
The Company has available to it a total credit facility with its bank
of approximately $7,900,000, which includes approximately $5,400,000 in the form
of a stand-by letter of credit for the Company's $5,000,000 1984 Series
Industrial Revenue Bonds, and a $2,500,000 revolving line of credit for working
capital purposes. The credit facility is collateralized by substantially all of
the assets of the Company. At March 31, 1996, there was $2,500,000 outstanding
against the domestic revolving line of credit and approximately $20,000 of short
term debt outstanding against credit lines at AP&T in Europe. Additionally, its
bank has made available, and the Company has borrowed, amounts aggregating
$1,614,000 for additional short term working capital needs. The interest rate on
the revolving line and additional borrowings at March 31, 1996 was 9.25%.
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E. DISCONTINUED OPERATIONS
In September 1994, in connection with the discontinuation of the
operations of VSE, a former majority-owned subsidiary in Austria, the Company
entered into a fifteen year agreement with a Swiss vacuum-valve manufacturer
pursuant to which the manufacturer has been granted exclusive right to utilize
certain rotary feedthrough sealing technology of the Company and ownership of
all patents and technical information of VSE in exchange for $1,300,000 in cash,
with an additional payment of $200,000 by June 30, 1996 upon the occurrence of
certain events by that date. During October and November 1994, the Company
received an aggregate of $1,300,000 in cash payments pursuant to this license
arrangement and has recorded the payments as license fee income in fiscal 1995.
F. EARNINGS PER SHARE
Net income per share for the three and nine months ended March 31, 1996
and 1995 is based on the weighted average number of common shares outstanding as
well as the effect of all dilutive common stock equivalents. Pursuant to the
terms of the settlement of the shareholder class action lawsuit against the
Company, which became final on September 23, 1994, the Company agreed to issue
600,000 shares of its common stock in settlement of the matter. In October 1994
and May 1995, the Company issued 180,000 and 420,000 shares to the class,
respectively, and accordingly, the shares have been included in the weighted
average outstanding common shares for the three and nine months ended March 31,
1996. Additionally, the weighted average outstanding shares includes 254,336
shares of common stock which were granted pursuant to the Company's 1994
Restricted Stock Plan during 1996, 1995 and 1994. These shares vest ratably over
three years from the date of grant.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
The following discussion provides information to assist in the
understanding of Ferrofluidics' results of operations and financial condition.
It should be read in conjunction with the consolidated financial statements and
notes thereto that appear elsewhere herein.
RESULTS OF OPERATIONS
Nine months ended March 31, 1996 and 1995:
In the nine months ended March 31, 1996, the Company generated net
income of $3,018,000, or $.49 per share, as compared to net income in the same
period of fiscal 1995 of $498,000, or $.09 per share. As more fully discussed in
Note E to the Consolidated Financial Statements, the results of operations for
the first nine months of 1995 includes nonrecurring license fee income received
pursuant to a license agreement entered into with a Swiss vacuum-valve
manufacturer.
Net sales and revenues for the nine months ended March 31, 1996
increased 124% to $53,670,000 as compared to $23,977,000 in the same period of
the prior year. A product line comparison of the net sales and revenues, for the
nine months ended March 31, 1996 and 1995 is as follows:
1996 1995
---- ----
Crystal growing systems $33,987,000 $ 8,028,000
Components 11,535,000 8,459,000
Fluids 1,841,000 1,705,000
Distributed products 6,307,000 5,785,000
----------- -----------
Total net sales and revenues $53,670,000 $23,977,000
=========== ===========
Of the revenues in the first three quarters of fiscal 1996,
approximately $33.5 million, or 62%, represented sales to one affiliated group
of companies. Management expects this concentration of revenues with this
customer group to continue throughout the current and next fiscal year.
Consolidated gross margins for the nine months ended March 31, 1996
amounted to 29.9% of product sales as compared to 40.9% of product sales in the
prior years' nine months. The decline in gross margin in the current year
compared to the prior year is due to product mix, with approximately 63% of the
product revenues in the current year's first nine months representing crystal
growing systems, which generate lower gross margins, as compared to 33% in the
same period of the prior year.
Consolidated order bookings for the nine months ended March 31, 1996
totaled $85,035,000 as compared to $51,856,000 in the same period of the prior
year. Of the current year's bookings, $63,543,000 represent orders for silicon
crystal growing systems as compared to $35,167,000 in the previous period.
Bookings for the Company's other proprietary products increased 33% from
$10,706,000 in the prior period to $14,215,000 in the first nine months of the
current year. Bookings for distributed products by AP&T increased from
$6,002,000 in fiscal 1995 to $7,277,000 in the current year.
Consolidated backlog at March 31, 1996 was $70,236,000 compared to
$43,076,000 at March 31, 1995 and $37,756,000 at June 30, 1995. Backlog for the
Company's crystal growing systems at March 31, 1996 totaled $65,623,000 as
compared to $35,600,000 at March 31, 1995. Approximately 20% of the systems
backlog is expected to ship in the current fiscal year. Backlog of components
products, including fluids, remained steady at approximately $4.4 million
whereas backlog of distributed products declined from $3,104,000 at March 31,
1995 to $2,372,000 at March 31, 1996. Of the order backlog for components and
distributed products at March 31, 1996, approximately 50% is expected to be
shipped during the current fiscal year.
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Engineering and product development expenditures in the nine months
ended March 31, 1996 totaled $3,206,000, an increase of $818,000, or 34%,
compared to $2,387,000 in the comparable period last year. However, as a percent
of revenues, engineering and product development declined from 10% in 1995 to a
current level of 6%. The total engineering expenditures in the first nine months
of 1996 are comprised of $1,172,000 of research and development expenditures and
$2,033,000 of engineering expenses relating to applications, design and general
sales support. In the prior year's same period, product development expenditures
totaled $966,000 and all other engineering totaled $1,421,000.
Selling, general and administrative expenses (SG&A) for the nine months
ended March 31, 1996 totaled $8,972,000, up 15% from the SG&A of $7,790,000 in
the same period of the prior year. The increase is due primarily to increased
corporate staffing, incremental restricted stock vesting, warranty costs and
other sales and marketing expenditures attributable to the growth in revenues.
Interest income declined in the nine months ended March 31, 1996 to
$78,000 compared to $175,000 in the same period last year due to lower invested
cash balances. Interest expense for the first nine months of fiscal 1996 of
$431,000 also declined from $515,000 in the same period in fiscal 1995 due
principally to lower average outstanding balance on the Company's revolving
credit facility and lower average interest rates on the Company's industrial
development bonds and the revolving credit line.
The Company has available to it approximately $30,000,000 in net
operating loss carryforwards for Federal income tax purposes which can be used
to offset future taxable income, if any, and will expire at various dates
through 2010. The tax provision for the nine months ended March 31, 1996
includes a provision for certain state and alternative minimum taxes, as well as
a provision for foreign income taxes.
Three months ended March 31, 1996 and 1995:
In the quarter ended March 31, 1996, the Company generated net income
of $1,217,000, or $.20 per share on 6,213,148 weighted average shares
outstanding, as compared to net income in the same quarter of fiscal 1995 of
$50,000, or $.01 per share based on 5,686,949 weighted average shares
outstanding.
Net sales and revenues for the quarter ended March 31, 1996 totaled
$19,810,000 up 133% compared to $8,491,000 in the same period of the prior year.
A product line comparison of the net sales and revenues, in thousands, for the
three months ended March 31, 1996 and 1995 is as follows:
1996 1995
---- ----
Crystal growing systems $12,723,000 $2,819,000
Components 4,360,000 3,191,000
Fluids 669,000 668,000
Distributed products 2,058,000 1,813,000
----------- ----------
Total net sales and revenues $19,810,000 $8,491,000
=========== ==========
Of the revenues in the third quarter, approximately $12.6 million, or
64%, represented sales to one affiliated group of companies. Management expects
this concentration of revenues with this customer group to continue throughout
the current and next fiscal year.
Consolidated gross margins for the third quarter of fiscal 1996
amounted to 28.6% of product sales as compared to 40.8% of product sales in the
prior years' third quarter. The decline in gross margin in the current quarter
compared to the prior year is due principally to the product mix of revenues,
which is weighted heavily toward the crystal growing systems, which, as noted
above, generate lower gross margins than the Company's core products.
Consolidated order bookings for the quarter ended March 31, 1996
totaled $30,322,000, including $23,353,000 in crystal growing systems and
related products, as compared to $39,559,000 in the third quarter of the prior
year, which included two multi-unit crystal growing system orders aggregating
$33,428,000.
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Engineering expenses in the third quarter of 1996 increased to
$1,060,000 (5.4% of revenues) as compared to $824,000 (9.7% of revenues) in the
third quarter of fiscal year 1995. Engineering expenses declined slightly from
the second quarter of 1996 of $1,153,000 (6.1% of revenues) due to the
completion of certain development and design efforts pertaining to current
system orders. Engineering and development expenses are expected to maintain
this relationship through the remainder of the fiscal year, however management
expects a rise in engineering expenditures in relation to revenues next year as
development of the next generation of crystal growing systems reaches its peak.
Selling, general and administrative expenses of $3,080,000 in the current
quarter increased nearly 16% over the $2,661,000 of the third quarter of the
prior year, however, as a percentage of sales, has declined from 31.3% in 1995
to 15.5% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1996 totaled $10,585,000 as compared to
$7,811,000 at June 30, 1995, due principally to an increase in accounts
receivable ($4,863,000) coupled with a reduction in customer deposits
($2,313,000), which was offset by an increase in short-term bank borrowings of
$4,134,000 during the period. Customer deposits declined in the period as the
related crystal growing systems being delivered to the customers during the
period exceeded the receipt of new deposits on orders received. During the
fourth quarter, management expects to receive additional advance payments of
approximately $5.0 million on previously reported orders for its crystal growing
systems.
During the first nine months of fiscal 1996, the operations of the
business used $3,508,000 of cash, due principally to the growth in trade
receivables driven by higher revenues. At March 31, 1996, the Company had
outstanding purchase commitments for material of approximately $28,000,000
representing long lead items and other component parts pertaining to the
Company's crystal growing system backlog.
Investing activities during the nine months ended March 31, 1996 were
comprised only of the acquisition of property, plant and equipment of
$1,185,000. At March 31, 1996, the Company did not have any material purchase
commitments with respect to property and equipment. Financing activities of the
Company during the nine-month period ended March 31, 1996 were limited to only
borrowings against the revolving line of credit of $4,134,000. Increases in
stockholders' equity during the nine months ended March 31, 1996 are the result
of vesting of restricted stock grants to key members of management which vest to
the owner ratably over the three years following the date of grant. The
consolidated results of operations for the nine month ended March 31, 1996
includes a charge of $334,000 representing the restricted stock expense.
The Company continues to maintain relatively low operating cash
balances, however, management believes it has sufficient working capital
resources to fund its operations through fiscal 1996 and into fiscal 1997. The
Company continues to be heavily reliant upon the receipt of contractual advance
payments from customers in its systems business with regard to its ability to
satisfy that business's obligations in the normal course.
PART II. OTHER INFORMATION
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FERROFLUIDICS CORPORATION
(Registrant)
Date: May 10, 1996 By: /s/ Salvatore J. Vinciguerra
-------------- ------------------------------
Salvatore J. Vinciguerra
President and Chief Operating Officer
By: /s/ Stephen P. Morin
----------------------
Stephen P. Morin
Principal Accounting Officer
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