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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 December 28, 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
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(Exact name of registrant as specified in its charter)
Massachusetts 02-0275185
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization Identification No.)
40 Simon Street,
Nashua, New Hampshire 03061
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (603) 883-9800
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(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 January 31, 1997.
Common Stock, $.004 par value per share 6,104,692
- --------------------------------------- ---------------
(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 -
December 28, 1996 and June 30, 1996 3
Consolidated Statements of Operations -
Three Months Ended December 28, 1996 and December 31, 1995 4
Consolidated Statements of Operations -
Six Months Ended December 28, 1996 and December 31, 1995 5
Consolidated Statements of Cash Flows -
Six months Ended December 28, 1996 and December 31, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Position 8 - 10
Part II. Other Information 10
Signatures 11
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PART I. FINANCIAL INFORMATION
ITEM 1.
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 28, 1996 and June 30, 1996
ASSETS December 28, 1996 June 30, 1996
- ------ ----------------- -------------
Current Assets: (unaudited) (note)
Cash and cash equivalents $ 1,489,000 $ 1,701,000
Accounts receivable - trade, less allowance
for doubtful accounts of $339,000 at
December 28, 1996 and $320,000 at June 30, 1996 14,505,000 12,757,000
Inventories 14,080,000 13,829,000
Advances to suppliers 1,814,000 1,916,000
Prepaid and other current assets 994,000 672,000
----------- -----------
Total Current Assets 32,882,000 30,875,000
----------- -----------
Property, plant and equipment, at cost, net
of accumulated depreciation of $10,360,000 at
December 28, 1996 and $9,583,000 at June 30, 1996 8,444,000 8,784,000
Cash value of life insurance 1,739,000 1,731,000
Other assets, principally goodwill 2,219,000 2,249,000
----------- -----------
TOTAL ASSETS $45,284,000 $43,639,000
=========== ===========
LIABILITIES
Current Liabilities:
Bank notes payable $ 7,796,000 $ 4,262,000
Accounts payable 3,609,000 6,366,000
Customer deposits 4,715,000 4,368,000
Accrued expenses 3,105,000 3,739,000
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Total Current Liabilities 19,225,000 18,735,000
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Long-term debt obligations 5,000,000 5,000,000
Other liabilities 192,000 202,000
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 and outstanding 6,104,692 shares
at December 28, 1996 and 6,060,902 at June 30, 1996 24,000 24,000
Additional paid-in capital 36,277,000 35,871,000
Accumulated deficit (14,853,000) (15,643,000)
Currency translation adjustments (581,000) (550,000)
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Total Stockholders' Equity 20,867,000 19,702,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,284,000 $43,639,000
=========== ===========
Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
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 December 28, 1996 and December 31, 1995
(unaudited)
1996 1995
---- ----
Net sales and revenues $15,598,000 $18,849,000
Cost of goods sold 10,843,000 13,309,000
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4,755,000 5,540,000
Engineering and product development expenses 1,222,000 1,153,000
Selling, general and administrative expense 3,112,000 2,973,000
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Operating income 421,000 1,414,000
Interest income 13,000 13,000
Interest (expense) (199,000) (148,000)
Other (expense) (27,000) (60,000)
----------- -----------
Income before income taxes 208,000 1,219,000
Provision for income taxes 24,000 132,000
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Net income $ 184,000 $ 1,087,000
=========== ===========
Per Share Data:
Net income $ 0.03 $ .18
=========== ===========
Weighted average common and common equivalent
shares outstanding 6,229,516 6,183,148
The accompanying notes are an integral part of the consolidated financial
statements.
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FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six months Ended December 28, 1996 and December 31, 1995
(unaudited)
1996 1995
---- ----
Net sales and revenues $33,068,000 $33,860,000
Cost of goods sold 22,693,000 23,462,000
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10,375,000 10,398,000
Engineering and product development expenses 2,786,000 2,146,000
Selling, general and administrative expense 6,353,000 5,892,000
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Operating income 1,236,000 2,360,000
Interest income 31,000 37,000
Interest (expense) (362,000) (266,000)
Other (expense) (14,000) (98,000)
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Income before income taxes 891,000 2,033,000
Provision for income taxes 101,000 232,000
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Net income $ 790,000 $ 1,801,000
=========== ===========
Per Share Data:
Net income $ .13 $ .29
=========== ===========
Weighted average common and common equivalent
shares outstanding 6,239,632 6,178,862
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 Six Months Ended December 28, 1996 and December 31, 1995
(unaudited)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 790,000 $ 1,801,000
Adjustments to reconcile net income to net
cash used in operations:
Depreciation and amortization 868,000 500,000
Stock related compensation 261,000 207,000
Other (47,000) 160,000
Changes in operating assets and liabilities:
Accounts receivable (1,807,000) (2,217,000)
Inventories (283,000) (1,002,000)
Prepaid expenses and other current assets (224,000) (60,000)
Accounts payable and accrued expenses (3,354,000) (698,000)
Customer deposits 347,000 (1,052,000)
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Net cash used in operating activities (3,449,000) (2,361,000)
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Cash flow from investing activities:
Acquisition of property, plant and equipment (473,000) (1,069,000)
Proceeds from the sale of assets 38,000 -
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Net cash used in investing activities (435,000) (1,069,000)
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Cash flow from financing activities:
Proceeds from issuance of common stock 156,000 -
Short term borrowing, net 3,542,000 3,550,000
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Net cash provided by financing activities 3,698,000 3,550,000
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Effect of currency rate changes on cash (26,000) (105,000)
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Net (decrease) increase in cash (212,000) 15,000
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Cash and cash equivalents at beginning of period 1,701,000 1,563,000
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Cash and cash equivalents at end of period $ 1,489,000 $ 1,578,000
============ ==============
Cash paid for interest and income taxes for the six months ended December 28,
1996 and December 31, 1995 is as follows:
1996 1995
---- ----
Interest $294,000 $130,000
Income taxes $327,000 $ 7,000
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 (the "Company") 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 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, 1996.
The Company adopted a fiscal calendar wherein each fiscal quarter contains
two four week periods and one five week period, with each period beginning on a
Sunday and ending on Saturday. Previously, the Company used calendar months for
its fiscal periods. The purpose of this change is to provide more consistent
comparability between fiscal periods.
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are comprised of the following elements at December 28, 1996
and June 30, 1996:
December 28, 1996 June 30, 1996
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Raw materials and purchased parts $ 7,493,000 $ 6,845,000
Work-in-process 3,136,000 3,188,000
Finished goods 3,451,000 3,796,000
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Total inventories $14,080,000 $ 13,829,000
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C. BANK NOTES PAYABLE
In December 1996, the Company successfully completed negotiations with its
bank to increase its revolving line-of-credit agreement from $2,500,000 to
$8,500,000, which included the consolidation of certain small demand notes
advanced to the Company for operating purposes. Under the new arrangement with
its bank, the Company has available to it a total credit facility with its bank
of approximately $14,600,000, 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, an $8,500,000 revolving line-of-credit for working
capital purposes, and $681,000 representing the remaining balance of a note used
to finance the expansion of its in-house machine shop. The credit facility is
collateralized by substantially all of the assets of the Company. At December
28, 1996, there was approximately $7,100,000 outstanding against the domestic
revolving line-of-credit. The interest rate on the revolving line at December
28, 1996 was 9.25%.
D. EARNINGS PER SHARE
Net income per share for the three and six months ended December 28, 1996
and December 31, 1995 is based on the weighted average number of common shares
outstanding as well as the effect of all dilutive common stock equivalents.
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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 the Company's 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
Three months ended December 28, 1996 and December 31, 1995:
In the quarter ended December 28, 1996, the Company generated net income
of $184,000, or $0.03 per share, as compared to net income in the same period of
fiscal 1996 of $1,087,000, or $.18 per share.
Net sales and revenues for the quarter ended December 28, 1996 totaled
$15,598,000 as compared to $18,849,000 in the same period of the prior year. A
product line comparison of the net sales and revenues is as follows:
Q2 97 Q2 96
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Crystal growing systems $ 9,556,000 $12,024,000
Seals 3,023,000 4,185,000
Fluids 666,000 615,000
Distributed products 2,353,000 2,025,000
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Total net sales and revenues $15,598,000 $18,849,000
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Of the revenues in the second quarter, approximately $8.3 million, or 53%,
represented sales to one affiliated group of companies. In fiscal 1996, the same
customer group accounted for approximately $11.7, or 62%, of consolidated
revenues. Management expects the concentration of revenues with this customer
group to remain relatively high throughout the current fiscal year.
Consolidated gross margins for the second quarter of fiscal 1997 amounted
to 30.5% of product sales as compared to 29.4% of product sales in the prior
year's second quarter. The improvement in gross margin in the current year is
due in part to improved pricing on certain crystal growing systems, cost
reductions on purchased materials and production related efficiencies.
Consolidated order bookings for the second quarter ended December 28, 1996
totaled $13,350,000 as compared to $32,917,000 in the same period of the prior
year. Of the bookings for the second quarter of fiscal 1997, $7,904,000
represent orders for silicon crystal growing systems as compared to $25,960,000
in the same period of fiscal 1996. Bookings for the Company's other proprietary
products decreased 48% from $5,107,000 in the second quarter of fiscal 1996 to
$2,669,000 in the second quarter of fiscal 1997. Bookings in the second quarter
for Distributed products increased from $1,850,000 in fiscal 1996 to $2,777,000
in the same period of fiscal 1997.
Consolidated backlog at December 28, 1996 was $53,430,000 compared to
$59,020,000 at June 30, 1996. Backlog for the Company's crystal growing systems
at December 28, 1996 totaled $47,916,000 as compared to $53,072,000 at June 30,
1996. Approximately 50% of the systems backlog is expected to ship in the
current fiscal year. The backlog of orders for Components products, including
fluids, decreased from $3,944,000 at June 30, 1996 to $3,002,000 at December 28,
1996 and backlog of Distributed products increased from $2,004,000 at June 30,
1996 to $2,512,000 at December 28, 1996. Of the order backlog for Components and
Distributed products at December 28, 1996, approximately 75% is expected to be
shipped during the current fiscal year.
Engineering and product development expenditures in the three months ended
December 28, 1996 totaled $1,222,000, an increase of 6% over the $1,153,000 in
the same period last year. As a percentage of revenues, engineering and product
development expenses increased from 6.1% in the second quarter of fiscal 1996 to
7.8% in the current year's second quarter. The total engineering expenditures in
the second quarter of fiscal 1997 are comprised of $688,000 of research and
development expenditures and $534,000 of engineering expenses relating to
applications, design and
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general sales support. In the same period of fiscal 1996, product development
expenditures totaled $349,000 and all other engineering totaled $804,000.
Selling, general and administrative expenses (SG&A) for the three months
ended December 28, 1996 totaled $3,112,000, up 5% from the SG&A of $2,973,000 in
the same period of the prior year. The increase is due primarily to increased
staffing and sales and marketing expenditures.
Interest income remained unchanged at $13,000 in the three months ended
December 28, 1996 and December 31, 1995. Interest expense of $199,000 for the
three months ended December 28, 1996 represented an increase from $148,000 in
the same period in fiscal 1996 due principally to higher borrowings under the
Company's revolving credit facility.
The Company has available to it approximately $25,200,000 in net operating
loss carryforwards for Federal income tax purposes which can be used to offset
future taxable income, if any, and which will expire at various dates through
2010. The tax provision for the three and six months ended December 28, 1996
includes principally a provision for certain state and alternative minimum
taxes.
Six months ended December 28, 1996 and December 31, 1995:
In the six months ended December 28, 1996, the Company generated net
income of $790,000, or $.13 per share, as compared to net income in the same
period of fiscal 1996 of $1,801,000, or $.29 per share
Net sales and revenues for the six months ended December 28, 1996 declined
slightly to $33,068,000 as compared to $33,860,000 in the same period of the
prior year. A product line comparison of the net sales and revenues, for the six
months ended December 28, 1996 and December 31, 1995 is as follows:
1996 1995
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Crystal growing systems $21,192,000 $21,271,000
Seals 6,073,000 7,168,000
Fluids 1,253,000 1,172,000
Distributed products 4,550,000 4,249,000
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Total net sales and revenues $33,068,000 $33,860,000
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Of the revenues in the first six months of fiscal 1997 and fiscal 1996,
approximately $15.9 million (48%) and $20.8 million (61%), respectively,
represented sales to one affiliated group of companies. Management expects this
concentration of revenues with this customer group to remain relatively high
throughout the current fiscal year.
Consolidated gross margins for the six months ended December 28, 1996
amounted to 31.4% of product sales as compared to 30.7% of product sales in the
same period of the prior year. The improvement in gross margin in the current
year is due in part to improved pricing on certain crystal growing systems, cost
reductions on purchased material components and production related efficiencies.
Consolidated order bookings for the six months ended December 28, 1996
totaled $27,499,000 as compared to $53,492,000 in the same period of the prior
year. Of the current year's bookings, $16,035,000 represent orders for silicon
crystal growing systems as compared to $39,188,000 in the previous period.
Bookings for the remaining product lines decreased 20% from $14,304,000 in the
prior period to $11,464,000 in the first six months of the current year.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital at December 28, 1996 was $13,657,000 as compared to
$12,140,000 at June 30, 1996. The current asset component of this increase,
after the effects of currency translation adjustments, was primarily due to
increases in accounts receivable, inventories, and prepaid expenses totaling
$2,314,000 offset by a reduction in cash balances of $212,000. The increase in
accounts receivable of $1,807,000 was the result of an increase in receivables
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of the crystal growing systems business (primarily a result of certain customer
payments due but not received until February 1997.) Receivables in the
components business declined during the first half of fiscal 1997. Total current
liabilities increased by only $535,000, as the increase in bank borrowings of
$3,542,000 were partially offset by decreases in accounts payable and accrued
expenses of $3,354,000. Customer deposits during the first half of fiscal 1997
increased slightly by $347,000 as reductions due to deliveries of crystal
growing systems during the six month period were more than compensated for by
deposits received on new orders.
During the first half of fiscal 1997, the operations of the business used
$3,449,000 of cash, due principally to the growth in trade receivables and
reductions in trade payables and accrued expenses. At December 28, 1996, the
Company had outstanding purchase commitments for material of approximately
$15,000,000 representing long lead items and other component parts for the
Company's crystal growing system business.
Investing activities during the six months ended December 28, 1996
consisted only of the acquisition of property, plant and equipment of $473,000.
At December 28, 1996, the Company did not have any material purchase commitments
with respect to property and equipment. Financing activities of the Company
during the six months ended December 28, 1996 included short term borrowings
totaling $3,542,000 from its bank credit facilities. The increases in additional
paid-in capital during the six months ended December 28, 1996 is the result of
(i) 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 and (ii)
exercising of certain employee stock options during the period which provided
proceeds of $156,000. The consolidated results of operations for the six months
ended December 28, 1996 includes a non-cash charge of $261,000 for stock related
compensation pertaining to the restricted stock grants as compared to $207,000
for the same period last year.
In December 1996, the Company increased its revolving credit facility with
its bank from $2,500,000 to $8,500,000. Under the new arrangement with its bank,
the Company has available to it a total credit facility with its bank of
approximately $14,600,000, 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, an $8,500,000 revolving line-of-credit for working
capital purposes, and $681,000 representing the remaining balance of an note
used to finance the expansion of its in-house machine shop. The credit facility
is collateralized by substantially all of the assets of the Company. At December
28, 1996, there was approximately $7,100,000 outstanding against the domestic
revolving line-of-credit. The interest rate on the revolving line at December
28, 1996 was 9.25%.
With its new banking agreement and the Company's operating cash flow, the
Company believes it has sufficient working capital resources to fund its
operations through fiscal 1997 and into fiscal 1998. In addition, the Company
continues to obtain contractual advance payments from customers in its systems
business in order to satisfy that business's obligations in the normal course.
This report contains forward-looking statements. There are certain factors
that could cause actual results to differ materially from those anticipated by
the statements made above. These include, but are not limited to, cancellation
of letters of intent, further rescheduling of existing crystal puller orders,
additional crystal puller orders from existing or new customers, including those
mentioned above, lack of new crystal puller orders from existing or new
customers, change in revenues in the Company's other business, and a material
change in the market conditions within the semiconductor industry. For
additional information concerning these and other important factors which may
cause the Company's actual results to differ materially from expectations and
underlying assumptions, please refer to the reports filed by the Company with
the Securities and Exchange Commission.
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: February 14, 1997 By: /s/ Salvatore J. Vinciguerra
-----------------------------------
Salvatore J. Vinciguerra
President and Chief Executive Officer
By: /s/ William B. Ford
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William B. Ford
Vice President Finance
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