SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 30, 1997
Commission File Number 0-12948
CHEMFAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 03-0221503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 Daniel Webster Highway
Merrimack, New Hampshire 03054
(Address of principal executive office) (Zip Code)
Registrant's telephone number including
area code: (603) 424-9000
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 .
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 2, 1997
Common Stock, $ .10 par value 8,015,699 shares
CHEMFAB CORPORATION
INDEX
Page No.
---------
Part I - Financial Information:
Item 1 - Financial Statements
--------------------
Consolidated Balance Sheets at March 30, 3 - 4
1997 and June 30, 1996.
Consolidated Statements of Income for 5
the Three Months and Nine Months Ended
March 30, 1997 and March 31, 1996.
Consolidated Statements of Cash Flows 6
for the Nine Months Ended March 30, 1997
and March 31, 1996.
Notes to Consolidated Financial Statements 7 - 8
Item 2 - Management's Discussion and Analysis of 8 - 12
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Part II - Other Information:
Item 6(a) - Exhibits 12
--------
Item 6(b) - Reports on Form 8-K 12
-------------------
Signatures 13
PART I - FINANCIAL INFORMATION
CHEMFAB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 30 June 30,
1997 1996
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 8,287,000 $ 5,017,000
Receivables:
Trade 17,097,000 17,797,000
Other 11,000 185,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,313,000 886,000
Inventories 15,837,000 13,622,000
Prepaid expenses, and other 1,946,000 1,246,000
Deferred tax assets 736,000 795,000
---------- ----------
Total current assets 45,227,000 39,548,000
Property, plant and equipment at cost 42,729,000 40,013,000
Less accumulated depreciation
and amortization 21,825,000 19,473,000
---------- ----------
Net property, plant and equipment 20,904,000 20,540,000
Goodwill, net 10,809,000 11,084,000
Other assets 2,796,000 2,490,000
---------- ----------
Total assets $ 79,736,000 $ 73,662,000
========== ==========
See accompanying Notes to Consolidated Financial Statements
CHEMFAB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 30 June 30,
1997 1996
----------- ------------
(Unaudited)
Current liabilities:
Accounts payable and accrued
expenses $ 9,946,000 $ 9,502,000
Accrued income taxes 2,151,000 1,441,000
Billings in excess of costs and
estimated earnings on
uncompleted contracts 152,000 313,000
---------- ----------
Total current liabilities 12,249,000 11,256,000
Long - term debt - 2,377,000
Deferred tax liabilities 1,548,000 1,524,000
Shareholders' equity:
Preferred stock, par value $.50:
authorized - 1,000,000 shares,
none issued - -
Common stock, par value $.10:
authorized - 15,000,000 shares;
issued - 8,483,715 at Mar. 30, 1997
and 8,085,607 at June 30, 199 848,000 809,000
Additional paid-in capital 22,320,000 18,314,000
Retained earnings 47,142,000 40,998,000
Treasury stock, at cost,
(352,529 shares at Mar. 30, 1997
and 95,938 at June 30,1996) (4,597,000) (943,000)
Foreign currency translation
adjustment 226,000 (673,000)
---------- ----------
Total shareholders' equity 65,939,000 58,505,000
---------- ----------
Total liabilities and shareholders' $ 79,736,000 $ 73,662,000
========== ==========
See accompanying Notes to Consolidated Financial Statements
<TABLE>
<S><C>
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ -----------------------
Mar. 30, 1997 Mar. 31, 1996 Mar. 30, 1997 Mar. 31, 1996
------------- ------------- ------------- -------------
Net sales $ 23,446,000 $ 21,814,000 $ 65,511,000 $ 61,165,000
Cost of sales 15,570,000 14,477,000 43,430,000 40,987,000
----------- ----------- ----------- ----------
Gross profit 7,876,000 7,337,000 22,081,000 20,178,000
Selling, general and
administrative expenses 3,948,000 3,638,000 11,464,000 10,520,000
Research and development expenses 639,000 614,000 1,864,000 1,730,000
Other (income) expense, net (36,000) (15,000) (168,000) 15,000
Interest expense 4,000 229,000 86,000 568,000
Interest income (74,000) (34,000) (174,000) (137,000)
----------- ----------- ----------- -----------
Income before income taxes 3,395,000 2,905,000 9,009,000 7,482,000
Provision for income taxes 1,076,000 892,000 2,865,000 2,289,000
----------- ----------- ----------- -----------
Net income $ 2,319,000 $ 2,013,000 $ 6,144,000 $ 5,193,000
=========== =========== =========== ===========
Weighted average common and
common equivalent shares 8,338,000 8,250,000 8,280,000 8,191,000
=========== =========== =========== ===========
Earnings per common share $0.28 $0.24 $0.74 $0.63
===== ===== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------
Mar. 30, 1997 Mar. 31, 1996
-----------------------------
Cash flows from operating activities:
Net income $ 6,144,000 $ 5,193,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,230,000 2,818,000
Change in assets and liabilities:
Receivables 1,197,000 (1,956,000)
Costs and estimated earnings in excess
of billings on uncompleted contracts,net (588,000) (16,000)
Inventories (1,988,000) (1,279,000)
Prepaid expenses and other (690,000) (197,000)
Other assets (487,000) (345,000)
Accounts payable and accrued expenses 264,000 1,645,000
Accrued income taxes 630,000 (708,000)
Deferred tax assets and liabilities 83,000 (94,000)
----------- ------------
Total adjustments 1,651,000 (132,000)
----------- ------------
Net cash provided by operating activities 7,795,000 5,061,000
Cash flows from investing activities:
Capital expenditures (net) (2,451,000) (2,106,000)
------------ ------------
Net cash used in investing activities (2,451,000) (2,106,000)
Cash flows from financing activities:
Proceeds from exercise of stock options 4,046,000 1,013,000
Repayment of long-term debt (2,447,000) (3,513,000)
Purchase of treasury shares (3,655,000) 0
------------ ------------
Net cash used in financing activities (2,056,000) (2,500,000)
Effect of exchange rate changes on cash (18,000) (50,000)
------------ ------------
Net increase in cash and cash equivalents 3,270,000 405,000
Cash and cash equivalents at beginning of year 5,017,000 3,780,000
----------- -----------
Cash and cash equivalents at end of period $ 8,287,000 $ 4,185,000
=========== ===========
Interest paid $ 106,000 $ 602,000
Income taxes paid $ 1,168,000 $ 2,560,000
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The consolidated financial statements of Chemfab Corporation (the
Company) included in this report reflect all adjustments (consisting
of only normally recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the consolidated
financial position at March 30, 1997 and June 30, 1996 and the
consolidated statements of income for the three months and nine months
ended March 30, 1997 and March 31, 1996 and the consolidated
statements of cash flows for the nine months ended March 30, 1997 and
March 31, 1996. The unaudited results of operations for the interim
periods reported are not necessarily indicative of results to be
expected for the year.
Certain notes and other information have been condensed or omitted
from these interim financial statements. The statements, therefore,
should be read in conjunction with the consolidated financial
statements and related notes included in the Chemfab Corporation
Annual Report on Form 10-K for the year ended June 30, 1996 (file no.
0-12948).
Note 2 Inventories consist of the following:
March 30, 1997 June 30, 1996
--------------- -------------
Finished Goods $ 5,516,000 $5,112,000
Work in Process 6,650,000 4,602,000
Raw Materials 3,671,000 3,908,000
------------ ------------
$15,837,000 $13,622,000
============ ============
Note 3 In connection with obtaining incentive grants from the Industrial
Development Authority of Ireland to subsidize certain investments in
plant and equipment in Ireland, the Company's Irish subsidiary,
Chemfab Europe, has agreed to restrict repatriation of #410,000 Irish
pounds (U.S. $646,000) of its retained earnings to fund repayment of
the grants in the event of default under the agreement. Chemfab
Corporation has also provided a parent company guarantee in the event
that the subsidiary's equity, so restricted, is not sufficient to
repay any amount due.
Various lawsuits and claims are pending or have been asserted against
the Company, including matters previously disclosed by the Company in
its Form 10-K for the year ended June 30, 1996. Although the outcome
of such matters cannot be predicted with certainty and some lawsuits
or claims may be disposed of unfavorably to the Company, management
believes their disposition, to the extent not covered by insurance,
will not have a material adverse effect on the Company's financial
condition and results of operations.
Note 4 On October 4, 1996, the Company entered into a new three year
revolving credit agreement jointly with two commercial banks, one
based in the U.S. and the other in Ireland. Under the terms of the
agreement, the Company has available a $20,000,000 unsecured credit
facility until October 4, 1999. Thereafter, any balance outstanding
will convert into a four year term loan with a five year amortization
schedule and a lump sum payment due October 4, 2003. Borrowing under
the facility is at LIBOR plus 1%, and the Company is obligated to pay
a commitment fee of 0.125% of the unused portion of the line. The
Company has terminated its previously existing revolving credit
agreement.
ITEM 2 Management's Discussion and Analysis of Financial Condition
----------------------------------------------------------
and Results of Operations
-------------------------
Three Months Ended March 30, 1997
- ---------------------------------
Net Sales
- ---------
The Company's consolidated net sales for the three months ended March 30, 1997,
the third quarter of fiscal 1997, increased 7% to $23,446,000 from $21,814,000
in the same quarter last year. Shipments of the Company's engineered products
worldwide increased 13% over the year earlier period, but were offset, in part,
by an expected decline in shipments of architectural products. Measured in
constant foreign currency translation rates, the consolidated sales increase
would have been 5%.
Engineered Products - Americas Business Group sales (which include all non-
architectural product sales to customers in North America and South America)
increased 19% to $11,737,000 from $9,890,000 for the same quarter last year.
This sales increase resulted principally from strength in the Company's food
processing, lab test/healthcare, protective systems and general distribution
markets. It is expected that revenues from sales of engineered products into
the Americas will remain relatively strong through the end of the fiscal year.
Engineered Products - European Business Group sales (which include all non-
architectural product sales to customers in Europe, India, the Middle East and
Africa) increased 5% to $7,691,000 from $7,332,000 for the same quarter last
year. This increase resulted entirely from the effects of translating sales
recorded in British Pounds Sterling, the Company's functional currency in
Europe, into U.S. Dollars at a higher exchange rate this year than applied last
year as a result of the Pound having increased in value relative to the U.S.
Dollar. Conversely, sales transacted in other European currencies (i.e., other
than in British Pounds) were adversely affected upon conversion into Pounds for
the same underlying reason (i.e., the Pound also increased in value this year
versus last year relative to other European currencies and this resulted in
comparatively lower exchange rates applying to such sales upon conversion into
British Pounds). Had currency exchange rates within Europe remained unchanged
from the prior year, European Business Group sales for the quarter, prior to
translation into U.S. Dollars, would have increased approximately 6% over the
same quarter a year ago. Since the British Pound is expected to remain
generally strong relative to mainland Europe currencies for some time to come,
management has taken several steps designed to mitigate, to the extent possible,
the adverse effect on European Business Group margins and profits. Management
initiated these steps during the third quarter and their full effect should be
felt beginning with the fourth quarter of the current fiscal year.
Engineered Products - Asia Pacific Business Group sales (which include all non-
architectural product sales to customers in the Far East and Australia)
increased 18% to $1,483,000 from $1,258,000 for the same quarter last year.
This increase was the result of a strong marketing and sales focus into this
geographic area since the establishment of this business group approximately 18
months ago. Sales from the Company's newly established China subsidiary, which
were not significant during the quarter, are expected to increase gradually as
customers are identified and developed. Revenue growth in the Asia Pacific
region for the fourth quarter is expected to remain strong.
Architectural Product sales decreased 24% to $2,535,000 from $3,334,000 for the
same quarter last year. This decrease in revenues was expected and was the
result of a lower number of sizable projects underway to-date this year versus
last year. For the fourth quarter of the current fiscal year, architectural
product sales are expected to be relatively strong especially in relationship to
comparable sales for the same quarter in the prior year.
Gross Profit Margins
- --------------------
Gross profit margins as a percentage of consolidated net sales were 34% for the
quarter, the same as the third quarter of last year. The Company maintained its
gross margin percentage despite considerable margin pressures in Europe due to
the stronger British Pound previously discussed.
Selling, Administrative, Research and Development Expenses
- ----------------------------------------------------------
Selling, general and administrative expenses increased 9% to $3,948,000 from
$3,638,000 in the same quarter last year. Increased selling, general and
administration expenditures resulted from the combined effects of the higher
cost structure in place to support the Company's newly established subsidiary
operations in Brazil, China and Japan, as well as normal increases in salaries
and other costs. Selling, general and administrative expenses as a percentage
of sales were 17%, the same as the third quarter of last year.
Research and development expenses were $639,000 compared to last year's level of
$614,000. This level of spending, at approximately 3% of total revenues, is
consistent with recent as well as planned levels of research and development
spending.
Interest Income (Expense)
- -------------------------
The Company had net interest income of $70,000 for the quarter compared to net
interest expense of $195,000 for the same quarter last year. This change
resulted from the repayment of debt incurred to finance the Tygaflor business
acquisition.
Nine Months Ended March 30, 1997
- --------------------------------
Net Sales
- ---------
The Company's consolidated net sales for the nine months ended March 30, 1997,
increased 7% to $65,511,000 from $61,165,000 in the same period last year.
Shipments of the Company's engineered products worldwide increased 13% over the
year earlier period but were offset, in part, by a decline in shipments of
architectural products. Measured in constant currency translation rates, the
consolidated sales increase would have been 6%.
Engineered Products - Americas Business Group sales (which include all non-
architectural product sales to customers in North America and South America)
increased 19% to $33,379,000 from $28,090,000 for the same period last year.
This sales increase was broad-based and extended to all of the major market
categories serviced by this business.
Engineered Products - European Business Group sales (which include all non-
architectural product sales to customers in Europe, India, the Middle East and
Africa) increased 8% to $21,196,000 from $19,561,000 in the same period last
year. Measured in constant currency translation rates, this increase would have
been 5%. This increase in revenues resulted principally from strength in the
Company's lab test/healthcare, energy/environment and general distributor
markets.
Engineered Products - Asia Pacific Business Group sales (which include all non-
architectural product sales to customers in the Far East and Australia)
increased 15% to $4,202,000 from $3,668,000 in the same period last year. This
increase was the result of a strong marketing and sales focus into this
geographic area since the establishment of this business group approximately
eighteen months ago. Sales from the Company's newly established China
subsidiary were not significant during the first nine months of fiscal 1997.
Architectural Product sales decreased 32% to $6,734,000 from $9,846,000 in the
same period last year. This decrease in revenues was expected and was the
result of a lower number of sizable projects underway to-date this year versus
last year.
Gross Profit Margins
- --------------------
Gross profit margins as a percentage of consolidated net sales improved to 34%
for the nine months ended March 30, 1997, up from 33% for the same period last
year. The improvement is principally attributable to the leveraging effect of
increased revenues on a relatively fixed manufacturing overhead cost structure
and targeted cost reduction programs.
Selling, Administrative, Research and Development Expenses
- ----------------------------------------------------------
Selling, general and administrative expenses increased 9% to $11,464,000 from
$10,520,000 in the same period last year. Increased selling, general and
administration expenditures resulted from the combined effects of the higher
cost structure in place to support the Company's newly established subsidiary
operations in China, Brazil and Japan (these were established after the first
half of last year), as well as normal increases in salaries and other costs.
Selling, general and administrative expenses as a percentage of sales were 17%,
the same as last year.
Research and development expenses were $1,864,000 compared to last year's level
of $1,730,000. This level of spending, at approximately 3% of total revenues,
is consistent with recent, as well as planned levels of research and development
spending.
Other (Income) Expense
- ----------------------
The Company had net other income of $168,000 for the nine months ended March 30,
1997 compared to $15,000 of net other expense in the year-earlier period.
Included in the current period is $95,000 of income related to a fire insurance
claim and the remainder consists principally of net gains related to foreign
currency hedging activities.
Interest Income (Expense)
- -------------------------
The Company had net interest income of $88,000 for the nine months ended March
30, 1997 compared to net interest expense of $431,000 for the same period last
year. This change resulted from the repayment of debt incurred to finance the
Tygaflor business acquisition.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended March 30, 1997, the Company generated $7,795,000 of
cash from operations up from $5,061,000 in the same period of the prior year.
During the period, the Company invested $2,451,000 in property, plant and
equipment additions, repaid $2,447,000 of long-term debt and used $3,655,000 to
purchase the Company's Common Stock under its share repurchase program. The
Company also received $4,046,000 in cash proceeds and related tax benefits from
the exercise of stock options during this period.
Working capital increased to $32,978,000 from $28,292,000 at the end of fiscal
1996. As of March 30, 1997, the Company had $20.0 million of credit available
under its domestic and international borrowing facilities. Management
believes that the combination of cash on hand, cash expected to be generated
from operations, and available credit facilities, will be adequate to finance
operations during fiscal 1998 and to deal with any liabilities or contingencies
described in Note 3 to the Consolidated Financial Statements.
Owens Corning Product Development Agreement
- -------------------------------------------
Effective March 28, 1997, the Company entered an agreement with Owens Corning
aimed at the development, by Owens Corning, of a new continuous filament
fiberglass yarn for use as a reinforcing fiber in the Company's polymer
composite products. A principal objective of this collaborative effort is to
replace a specialty fiberglass yarn (Beta (R) fiberglass yarn) currently being
supplied by Owens Corning with a new glass fiber that offers improved
cost/performance to the Company and that benefits Owens Corning in the form of
enhanced production efficiencies.
Owens Corning is currently the Company's sole supplier of Beta fiberglass yarn
for use as the reinforcing fiber in structural membrane products, which
constitute a significant product area for the Company. On March 31, 1997, Owens
Corning informed the Company of its intent to cease supplying Beta fiberglass
yarn effective March 31, 1999. Over the remaining two year supply period, this
development effort is intended to result in the qualification and
commercialization of a new fiberglass yarn to replace Beta yarn in the Company's
products. The Company will also use this remaining supply period to inquire
about, and possibly contract for, alternative sources of supply of Beta-type
fiberglass yarn. At the present time, management is optimistic that this
development program will be successful and/or that the Company will be able, if
and as necessary after the remaining two year supply period, to obtain from
other sources adequate quantities of Beta-type yarn at reasonable prices.
Forward-Looking Statements
- --------------------------
Except for the historical information contained herein, the matters discussed in
this Form 10-Q are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. In connection with such statements,
investors are cautioned that actual performance and results may differ
materially from that projected or suggested due to certain risks and
uncertainties including, without limitation, the impact of changes in currency
exchange rates on sales and margins. Investors are also cautioned that there
can be no assurance the Owens Corning product development program will be
successful or that the Company will be able, if necessary, to obtain from other
sources adequate quantities of Beta-type yarn at reasonable prices. Additional
information concerning certain risks and uncertainties that could cause actual
results to differ materially from that projected or suggested is contained in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996
which has been filed with the Securities and Exchange Commission. The forward-
looking statements contained herein represent the management's judgement as of
the date of this filing and the Company cautions readers not to place undue
reliance on such statements.
PART II - OTHER INFORMATION
---------------------------
6(a) Exhibits
--------
None.
6(b) Reports on Form 8-K
-------------------
None.
(R) Beta is a registered trademark of Owens Corning
CHEMFAB CORPORATION
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.
CHEMFAB CORPORATION
-------------------
(Registrant)
By:/S/ Duane C. Montopoli
------------------------------------------
Duane C. Montopoli
President and Chief Executive Officer
By:/S/Moosa E. Moosa
------------------------------------------
Moosa E. Moosa
Vice President - Finance and Administration
(Principal Financial Officer)
By:/S/ Laurence E. Richard
-----------------------
Laurence E. Richard
Controller
(Principal Accounting Officer)
Date: May 13, 1997
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