FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
MARCH 29, 1998
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 1-12767
CHEMFAB CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 03-0221503
(State of Incorporation) (I.R.S. Employer Identification No.)
701 DANIEL WEBSTER HIGHWAY 03054
MERRIMACK, NEW HAMPSHIRE (Zip Code)
(Address of principal executive offices)
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, 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.
AS OF APRIL 30, 1998, THE COMPANY HAD 7,820,550 SHARES OF COMMON
STOCK, PAR VALUE $0.10 PER SHARE, OUTSTANDING.
CHEMFAB CORPORATION
-------------------
INDEX
-----
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets at
March 29, 1998 and June 30, 1997 3
Consolidated Statements of Income for the
Three Months and Nine Months Ended
March 29, 1998 and March 30, 1997 5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 29, 1998 and
March 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 3. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
CHEMFAB CORPORATION
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands)
March 29, June 30,
1998 1997
---------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 8,315 $ 8,055
Receivables:
Trade 20,220 17,078
Other 85 425
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,835 1,741
Inventories 17,346 16,373
Prepaid expenses, and other current assets 976 1,174
Deferred tax assets 772 770
----------- ----------
Total current assets 49,549 45,616
Property, plant and equipment, at cost 48,801 43,937
Less: accumulated depreciation 25,365 22,465
----------- ----------
Property, plant and equipment, net 23,436 21,472
Goodwill, net 10,228 10,740
Other assets 2,712 2,737
----------- -----------
Total assets $ 85,925 $ 80,565
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 29, June 30,
1998 1997
--------- ----------
(Unaudited)
Current liabilities:
Accounts payable and accrued
expenses $ 10,435 10,169
Accrued income taxes 3,248 2,119
Billings in excess of costs and
estimated earnings on
uncompleted contracts 82 102
----------- ----------
Total current liabilities 13,765 12,390
Deferred tax liabilities 1,790 1,790
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 8,655,951 at March 29, 1998
and 8,521,110 at June 30, 1997 866 852
Additional paid-in capital 24,478 22,749
Retained earnings 57,503 50,104
Treasury stock, at cost
(805,629 shares at March 29, 1998
and 547,719 at June 30, 1997) (13,411) (8,007)
Foreign currency translation
adjustment 934 687
----------- ----------
Total shareholders' equity 70,370 66,385
----------- ----------
Total liabilities and shareholders' $ 85,925 80,565
equity =========== ==========
See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
---------------------- ---------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
---------- --------- --------- ---------
Net sales $ 27,257 $ 23,446 $ 75,312 $ 65,511
Cost of sales 17,983 15,570 49,745 43,430
--------- --------- --------- ---------
Gross profit 9,274 7,876 25,567 22,081
Selling, general and
administrative expenses 4,421 3,948 12,661 11,464
Research and development 812 639 2,234 1,864
Other expense (income) (31) (36) 17 (168)
Interest income, net (74) (70) (234) (88)
--------- --------- --------- ---------
Income before income taxes 4,146 3,395 10,889 9,009
Provision for income taxes 1,338 1,076 3,494 2,865
--------- --------- --------- ---------
Net income $ 2,808 $ 2,319 $ 7,395 $ 6,144
========= ========= ========= =========
Earnings per share:
- Basic $0.36 $0.29 $0.93 $0.76
- Diluted $0.34 $0.28 $0.90 $0.74
Weighted average common share
outstanding:
- Basic 7,860 8,111 7,918 8,051
- Diluted 8,160 8,338 8,228 8,280
See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
---------------------------
March 29, March 30,
1998 1997
--------- ----------
Cash flows from operating activities:
Net income $ 7,395 $ 6,144
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,615 3,230
Change in assets and liabilities:
Receivables (2,653) 1,197
Costs and estimated earnings in
excess of billings on
uncompleted contracts, net (114) (588)
Inventories (967) (1,988)
9
Prepaid expenses and other 174 (690)
Other assets (384) (487)
Accounts payable and accrued expenses 249 264
Accrued income taxes 1,093 630
Deferred tax assets and liabilities (2) 83
--------- ----------
Total adjustments 1,011 1,651
--------- ----------
Net cash provided by operating 8,406 7,795
activities
Cash flows from investing activities:
Capital expenditures (net) (4,528) (2,451)
--------- ----------
Net cash used in investing activities (4,528) (2,451)
Cash flows from financing activities:
Proceeds from exercise of stock options 1,743 4,046
Repayment of long-term debt 0 (2,447)
Purchase of treasury shares (5,404) (3,655)
--------- ----------
Net cash used in financing activities (3,661) (2,056)
Effect of exchange rate changes on cash 43 (18)
--------- ----------
Net increase in cash and cash equivalents 260 3,270
Cash and cash equivalents at beginning of year 8,055 5,017
--------- ----------
Cash and cash equivalents at end of period $ 8,315 $ 8,287
========= ==========
Interest paid $ 0 $ 106
Income taxes paid $ 2,248 $ 1,168
See accompanying Notes to Consolidated Financial Statements.
CHEMFAB CORPORATION
-------------------
Notes to Consolidated Financial Statements
-----------------------------------------
March 29, 1998
--------------
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
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 29, 1998 and June 30, 1997 and the consolidated statements of income
and cash flows for the three months and nine months ended March 29, 1998
and March 30, 1997. 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, 1997 (file no. 1-12767).
NOTE 2 - INVENTORIES:
Inventories consisted of the following:
March 29, 1998 June 30, 1997
-------------- -------------
(in thousands)
Finished Goods $ 5,833 $ 6,153
Work in Process 6,920 5,597
Raw Materials 4,593 4,623
-------- -------
$ 17,346 $16,373
======== =======
NOTE 3 - COMMITMENTS AND CONTINGENCIES:
In connection with the CERCLA litigation pertaining to the Bennington
Landfill Superfund Site described in Part 1, Item 3 in the Company's 1997
Form 10-K, the District Court has approved the Consent Decree and the
settlement payment has been made.
Various other 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, 1997. 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 that 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 - EARNINGS PER SHARE
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128),
which is effective for periods ending after December 15, 1997, including
interim periods. SFAS 128 replaces APB Opinion 15 and related
interpretations (APB 15). The new standard attempts to simplify the
computation of earnings per share (EPS) by replacing the presentation of
primary earnings per share with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share
in the earnings of an entity, similar to fully diluted EPS under APB 15.
Both earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to the SFAS 128 requirement.
The following table sets forth the computation of basic and diluted earnings per
share for the quarter and year-to-date, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
3/29/98 3/30/97 3/29/98 3/30/97
------- ------- ------- -------
( in thousands)
NUMERATOR:
Net income for both basic and
diluted earnings per share $ 2,808 $ 2,319 $ 7,395 $ 6,144
======= ======= ======== ========
DENOMINATOR:
Denominator for basic earnings
per share - weighted average
outstanding shares 7,860 8,111 7,918 8,051
Effect of dilutive securities:
Stock options to employees,
directors and consultants 300 227 310 229
------- -------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted
average shares and effects of
assumed conversions 8,160 8,338 8,228 8,280
======= ======== ======== ========
Basic earnings per share $ 0.36 $ 0.29 $ 0.93 $ 0.76
======= ======== ======== ========
Diluted earnings per share $ 0.34 $ 0.28 $ 0.90 $ 0.74
======= ======== ======== ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
THREE MONTHS ENDED MARCH 29, 1998
NET SALES
- ---------
The Company's consolidated net sales for the three months ended March 29, 1998,
the third quarter of fiscal 1998, increased 16% to $27,257,000 from $23,446,000
in the same quarter last year. Shipments of the Company's engineered products
worldwide increased 5% over the year earlier period while shipments of
architectural products rose 107%. Had mainland European currencies and the
Pound Sterling remained at the same exchange rates as last year, consolidated
revenue would have increased by 18% and worldwide engineered product sales would
have increased by 7% over the previous year.
The Company's consolidated financial statements include revenue derived from
transactions with external customers for many products sold into various
geographic regions. The following information has been compiled to present such
revenues by certain major product groups manufactured or sold in different
regions.
Engineered Products - Americas Business Group sales (which include all non-
architectural product sales to customers in North America and South America)
increased 15% to $13,507,000 from $11,737,000 for the same quarter last year.
This sales increase resulted principally from strength in the Company's
communication and protective system markets offsetting lower sales in the
electrical, electronic and the aerospace 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) declined 5% to $7,293,000 from $7,693,000 in the same quarter last year.
During the fiscal 1998 quarter, reported revenue continued to be adversely
impacted by weaker mainland European currencies relative to the British Pound
Sterling and competitive price pressures. If these currency exchange rates had
remained unchanged from the prior year, European Business Group sales for the
quarter, prior to translation into U.S. dollars would have increased 1% over the
same quarter a year ago. Because the British Pound is expected to remain
generally strong relative to mainland Europe currencies for some time to come,
management has continued to take steps to mitigate, to the extent possible, the
resulting adverse effect on the European Business Group margins and profits.
Engineered Products - Asia Pacific Business Group sales (which include all non-
architectural product sales to customers in the Far East and Australia)
decreased 22% to $1,214,000 from $1,481,000 in the same quarter last year. This
was the first quarterly period in which the adverse economic conditions in Asia
had an unfavorable impact on the Company's consolidated sales. Percentage
revenue growth in the next few quarters from industrial product shipments into
the Asia Pacific region will largely be dependent on the ability of the various
Asian economies to recover from the current severe economic conditions in the
area.
Architectural Product sales increased 107% to $5,243,000 from $2,535,000 in the
same quarter last year. This increase in revenues was the result of an increase
in sizable projects underway to-date this year versus last year. Although the
architectural business has been inherently cyclical, recent order entry
continues at historically high levels. Based on current backlogs and other
relevant market data, the Company expects that architectural product sales for
the remainder of the year will be significantly above the levels achieved last
year.
GROSS PROFIT MARGINS
- --------------------
Gross profit margins as a percentage of consolidated net sales were 34.0% for
the quarter, up from 33.6% for the same quarter last year. Gross profit
benefited from manufacturing leverages and a continuing commitment to effective
expense management, offset by the traditionally lower margins on architectural
product. The Company increased its consolidated gross margin percentage despite
continued margin pressures in Europe due to the strong British Pound and other
competitive price pressures in Europe. During the quarter, the Company
commenced use of new and cost-efficient production capacity which, together with
new additions in the fourth quarter, is now available to meet expected demands.
SELLING, ADMINISTRATIVE, RESEARCH AND DEVELOPMENT EXPENSES
- ----------------------------------------------------------
Selling, general and administrative expenses increased 12% to $4,421,000 from
$3,948,000 in the same quarter last year. This increase resulted from the
combined effects of the higher cost structure in place to support the Company's
newly established subsidiary operations in Japan as well as normal increases in
salaries and additional bad debt reserves. Selling, general and administrative
expenses as a percentage of sales were 16%, down slightly from the third quarter
of last year.
Research and development expenses were $812,000 compared to last year's level of
$639,000. This level of spending, at approximately 3% of total revenues, is
consistent with recent, as well as planned, levels of research and development
spending. The higher costs are primarily attributable to new product
development activities.
OTHER (INCOME) EXPENSE
- ----------------------
The Company had net other income of $31,000 for the current quarter, compared to
$36,000 of net other income for the same quarter last year.
INTEREST INCOME
- ----------------
The Company had net interest income of $74,000 for the current quarter, compared
to $70,000 for the same quarter last year.
NINE MONTHS ENDED MARCH 29, 1998
NET SALES
- ---------
The Company's consolidated net sales for the nine months ended March 29, 1998
increased 15% to $75,312,000 from $65,511,000 in the same period last year. The
Company continues to be affected by the weak mainland European currencies. Had
mainland European currencies and the Pound Sterling remained at the same
exchange rates as last year, consolidated revenue would have increased by 17%.
Shipments of the Company's engineered products worldwide increased 6% over the
year earlier, while architectural product shipments increased 93% for the same
period.
The Company's consolidated financial statements include revenue derived from
transactions with external customers for many products sold into various
geographic regions. The following information has been compiled to present such
revenues by certain major product groups manufactured or sold in different
regions.
Engineered Products - Americas Business Group sales (which include all non-
architectural product sales to customers in North America and South America)
increased 12% to $37,504,000 from $33,379,000 for the same period last year.
This sales increase resulted principally from strength in the Company's food
processing, lab test and general distributor markets, offsetting lower sales in
the electrical, electronic and processor markets.
Engineered Products - European Business Group sales (which include all non-
architectural product sales to customers in Europe, India, the Middle East and
Africa) for the first nine months of the fiscal year decreased 5% to
$20,146,000 from $21,201,000 in the same period last year. As stated above, the
European Business Group's reported revenue continues to be affected by the weak
mainland European currencies and competitive price pressures. Measured in
constant currency rates, prior to translation into U.S. dollars, European
Business Group sales would have increased 1% over the same period last year.
Engineered Products - Asia Pacific Business Group sales (which include all non-
architectural product sales to customers in the Far East and Australia)
increased 12% to $4,702,000 from $4,197,000 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 operations in China and Japan within
the last two years. However, the recent economic crisis in certain Asian
countries has caused a downward trend in revenues in the most recent quarter.
Architectural Product sales increased 93% to $12,960,000 from $6,734,000 in the
same period last year. This increase in revenues was the result of an increase
in sizable projects underway to-date this year versus last year. Although the
architectural business has been inherently cyclical, recent order entry
continues at historically high levels. Based on current backlogs and other
relevant market data, the Company expects that architectural product sales for
the full fiscal year are likely to continue at record levels.
GROSS PROFIT MARGINS
- --------------------
Gross profit margins as a percentage of consolidated net sales improved slightly
to 33.9% for the nine months ended March 29, 1998, up from 33.7% for the same
period last year. Consolidated gross profit margins benefited from
manufacturing leverages and a continuing commitment to effective expense
management. Strong margins in the Americas Business Group helped to mitigate
some of the margin pressures in Europe due to competitive pressures and the
strong British Pound.
SELLING, ADMINISTRATIVE, RESEARCH AND DEVELOPMENT EXPENSES
- ----------------------------------------------------------
Selling, general and administrative expenses increased 10% to $12,661,000 from
$11,464,000 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 Japan (that 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%, unchanged from the
same period last year.
Research and development expenses were $2,234,000, compared to last year's level
of 1,864,000. This level of spending, at approximately 3% of total revenues,
is consistent with recent, as well as planned, levels of research and
development spending. The higher spending is primarily attributed to new
product development activities.
OTHER (INCOME) EXPENSE
- -----------------------
The Company had net other expense of $17,000 for the nine months ended March 29,
1998, compared to $168,000 of net other income in the year-earlier period.
Included in the year-earlier period is $95,000 of income related to a fire
insurance claim.
INTEREST INCOME
- ----------------
The Company had net interest income of $234,000 for the nine months ended March
29, 1998, compared to net interest income of $88,000 for the same period last
year. The increase is the result of surplus cash during the period ended March
29, 1998, compared with lower cash balances during the period ended March 30,
1997 and the early repayment of debt in September of 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 29, 1998, the Company generated $8,406,000
cash from operations, up from $7,795,000 in the same period of the prior year.
During the period, the Company invested $4,528,000 in property, plant and
equipment additions mainly to increase capacity to meet expected customer
demand, and expended $5,404,000 to repurchase stock under its share repurchase
program. The Company also received $1,743,000 in cash proceeds and related tax
benefits from the exercise of stock options during this period.
Working capital increased to $35,784,000 from $33,226,000 at the end of fiscal
1997. As of March 29, 1998, the Company had approximately $21,000,000 of
additional 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.
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. Investors are cautioned that forward-
looking statements are inherently uncertain. Actual performance and results may
differ materially from those projected or suggested due to certain risks and
uncertainties, including the cyclical nature of the demand for the Company's
architectural products and similar economic and industry risks related to the
award and continuation of certain large projects, and the Company's ability to
penetrate the consumer bakeware liner market. Additional information concerning
certain risks and uncertainties that could cause actual results to differ
materially from those projected or suggested is contained in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997, which has
been filed with the Securities and Exchange Commission. The forward-looking
statements contained herein represent the Company's judgment as of the date of
this filing, and the Company cautions readers not to place undue reliance on
such statements.
PART II. OTHER INFORMATION
---------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
See the information under the caption "Note 3 - Commitments and Contingencies"
in Notes to Consolidated Financial Statements, on page 7 of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
--------
None.
(b) REPORTS ON FORM 8-K
-------------------
None.
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
Date: May 11, 1998 /s/ John W. Verbicky
----------------------
John W. Verbicky, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 11, 1998 /s/ Moosa E. Moosa
------------------
Moosa E. Moosa
Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
Date: May 11, 1998 /s/ Hilary A. Arwine
---------------------
Hilary A. Arwine
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000725813
<NAME> YVETTE DESMARAIS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-29-1998
<CASH> 8,315,000
<SECURITIES> 0
<RECEIVABLES> 20,618,000
<ALLOWANCES> 398,000
<INVENTORY> 17,346,000
<CURRENT-ASSETS> 49,549,000
<PP&E> 48,801,000
<DEPRECIATION> 25,365,000
<TOTAL-ASSETS> 85,925,000
<CURRENT-LIABILITIES> 13,765,000
<BONDS> 0
0
0
<COMMON> 866,000
<OTHER-SE> 69,504,000
<TOTAL-LIABILITY-AND-EQUITY> 85,925,000
<SALES> 75,312,000
<TOTAL-REVENUES> 75,312,000
<CGS> 49,745,000
<TOTAL-COSTS> 49,745,000
<OTHER-EXPENSES> 14,912,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (234,000)
<INCOME-PRETAX> 10,889,000
<INCOME-TAX> 3,494,000
<INCOME-CONTINUING> 7,395,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,395,000
<EPS-PRIMARY> .93
<EPS-DILUTED> .90
</TABLE>
