FORM 10-Q/A
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
December 26, 1999
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 January 31, 2000, the Company had 7,520,207 shares of Common
Stock, par value $0.10 per share, outstanding.
<PAGE>
CHEMFAB CORPORATION
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets at
December 26, 1999 and June 30, 1999 3
Consolidated Statements of Income for the
Three Months and Six Months Ended
December 26, 1999 and December 27, 1998 5
Consolidated Statements of Cash Flows for the
Six Months Ended December 26, 1999 and
December 27, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Signatures 23
<PAGE>
Item I. Financial Information
CHEMFAB CORPORATION
CONSOLIDATED BALANCE SHEETS (Page 1 of 2)
(in thousands except par value amounts)
December 26, June 30,
1999 1999
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents ...................... $ 3,161 $ 4,783
Receivables:
Trade ....................................... 27,454 25,020
Other ....................................... 75 92
Inventories .................................... 22,841 19,649
Costs and estimated earnings in excess of
billings on uncompleted contracts ........... 2,134 958
Prepaid expenses, and other current assets ..... 2,244 3,266
Deferred tax assets ............................ 1,248 1,248
--------- ---------
Total current assets ........................ 59,157 55,016
Property, plant and equipment, at cost ............. 61,281 59,418
Less: accumulated depreciation ................. (30,713) (29,466)
--------- --------
Property, plant and equipment, net .............. 30,568 29,952
Goodwill, net ...................................... 23,103 19,297
Other assets ....................................... 2,114 2,103
--------- ---------
Total assets ............................. $ 114,942 $ 106,368
========= =========
See accompanying notes to Consolidated Financial Statements.
<PAGE>
CHEMFAB CORPORATION
CONSOLIDATED BALANCE SHEETS (Page 2 of 2)
(in thousands except par value amounts)
December 26, June 30,
1999 1999
----------- --------
(Unaudited)
Current liabilities:
Accounts payable and accrued
expenses $ 17,411 $ 14,974
Short-term borrowings 12,632 11,028
Accrued income taxes 3,000 1,209
Billings in excess of costs and
estimated earnings on
uncompleted contracts
75 250
-------- ------
Total current liabilities 33,118 27,461
-------- -------
Other liabilities 1,115 -
Deferred tax liabilities 2,394 2,051
Shareholders' equity:
Preferred stock, par value $0.50:
authorized - 1,000 shares,
none issued - -
Common stock, par value $0.10:
authorized - 15,000 shares;
issued 8,884 at December 26, 1999
and 8,828 shares at June 30, 1999 888 883
Additional paid-in capital 27,468 26,829
Retained earnings 75,176 69,972
Treasury stock, at cost
(1,365 shares at December 26, 1999
and 1,091 at June 30, 1999) (23,464) (19,012)
Accumulated other comprehensive income (1,753) (1,816)
------- -------
Total shareholders' equity 78,315 76,856
------- ------
Total liabilities and shareholders' equity $114,942 $106,368
======= =======
See accompanying notes to Consolidated Financial Statements.
<PAGE>
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
--------------------- --------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
------- ------ ------ -------
Net sales $31,109 $ 27,892 $57,147 $53,125
Cost of sales 20,381 18,430 37,103 35,226
------ ------- ------ ------
Gross profit 10,728 9,462 20,044 17,899
Selling, general and
administrative expenses 5,496 5,070 10,797 9,324
Research and development 869 796 1,581 1,656
Other expense (income) (41) (36) 112 (160)
Interest expense (income), net 40 (25) 119 (128)
------- -------- ----- -----
Income before income taxes 4,364 3,657 7,435 7,207
Provision for income taxes 1,310 1,149 2,231 2,306
------- ------ ----- -----
Net income $ 3,054 $ 2,508 $ 5,204 $ 4,901
====== ======= ======= ========
Earnings per share:
- Basic $0.40 $0.32 $0.68 $0.63
- Diluted $0.40 $0.31 $0.67 $0.61
Weighted average common share
outstanding:
- Basic 7,597 7,839 7,648 7,828
- Diluted 7,726 8,087 7,795 8,096
See accompanying notes to Consolidated Financial Statements.
<PAGE>
CHEMFAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amount in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Dec. 26, Dec. 27,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 5,204 $ 4,901
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization ......................... 3,312 2,731
Special charges, cash payments ........................ (1,153) -
Change in working capital:
Receivables ....................................... (2,000) (1,276)
Inventories ....................................... (2,267) (9,938)
Costs and estimated earnings in excess of billings
on uncompleted contracts, net ................... (1,351) (1,539)
Prepaid expenses and other current assets ......... (617) (527)
Accounts payable and accrued expenses ............. 2,398 5,349
Income taxes ...................................... 1,777 545
Deferred tax assets and liabilities ............... 343 -
Other assets .......................................... (309) (521)
-------- --------
Total adjustments ......................... 133 (5,176)
-------- --------
Net cash (used in) provided by operating activities 5,337 (275)
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired ......................... (2,481) (6,237)
Capital expenditures, (net) ................................ (2,505) (8,344)
-------- --------
Net cash used in investing activities ............. (4,986) (14,581)
-------- --------
Cash flows from financing activities:
Short-term borrowings ...................................... 1,756 6,003
Proceeds from exercise of stock options .................... 645 964
Purchase of treasury shares ................................ (4,452) (689)
-------- --------
Net cash provided by (used in) financing activities (2,051) 6,278
-------- --------
Effect of exchange rate changes on cash ........................ 78 143
-------- --------
Net decrease in cash and cash equivalents ...................... (1,622) (8,435)
Cash and cash equivalents at beginning of year ................. 4,783 11,099
-------- --------
Cash and cash equivalents at end of period ..................... $ 3,161 $ 2,664
======== ========
Interest paid .................................................. $ 287 $ 33
Income taxes paid .............................................. $ 319 $ 1,844
See accompanying notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements
December 26, 1999
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 December 26, 1999 and June 30, 1999, and the consolidated
statements of income and cash flows for the three months and six months
ended December 26, 1999 and December 27, 1998. 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, 1999 (file no. 1-12767).
Note 2 - Acquisitions:
During fiscal 1999, the Company completed the purchase of the business
assets and assumed certain liabilities (principally inventory, accounts
receivable, equipment, certain liabilities and accounts payable,
accruals and intangibles) of Vdb/hi-tex Technische Gewebe GmbH (Vdb),
Breitenborn GmbH and Synthetica W. Muller GmbH & Co. (collectively the
"German Acquisitions") for approximately $12,368,000 in cash, including
associated transaction costs. These acquisitions were accounted for
using the purchase method of accounting. Prior to the acquisitions,
each of the entities' main business was in the fabrication and
distribution of PTFE composite products principally purchased from
Chemfab. These businesses are expected to continue. The acquired
operations' primary markets are in Germany and Eastern European
countries. These acquisitions resulted in the recognition of goodwill
of approximately $11,825,000 that is being amortized on a
straight-line basis over the estimated useful life of 15 years.
The following are the Company's unaudited pro forma results for fiscal
2000 and 1999, assuming the German Acquisitions occurred at the
beginning of the fiscal year. These pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have
resulted had the acquisitions occurred on the date indicated, or which
may result in the future.
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements
December 26, 1999
Note 2 - Acquisitions (continued):
Three Months Ended Six Months Ended
------------------- ------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $31,109 $29,685 $57,147 $57,780
Net income 3,054 2,567 5,204 5,084
Diluted income per share $0.40 $0.32 $0.67 $0.63
On July 16, 1999, the Company completed the purchase of the capital
stock of Holding Christian Cases S.A. (HCC) for $1,236,000 in net cash,
including associated transaction costs. The purchase agreement also
requires the payment of approximately $100,000 in each of the following
two years for a non-compete agreement. The acquisition was accounted
for using the purchase method of accounting. Prior to the acquisition,
the main business of HCC and its subsidiaries was in the fabrication
and distribution of PTFE composite products in France principally
purchased from Chemfab. This business is expected to continue. The
acquisition of HCC resulted in the recognition of goodwill of
approximately $858,000, that will be amortized over 15 years.
On September 27, 1999, the Company completed the purchase of the PTFE
business of CTF LTDA, formerly operating as Taconic Glasslon
(Taconic), for $1,769,000 in cash, including associated transaction
costs plus the payment of $600,000 in aggregate over the current year
and ensuing five years. The acquisition was accounted for using the
purchase method of accounting. Prior to the acquisition, the main
business of Taconic was the manufacture, fabrication and distribution
of PTFE composite products in Brazil. This business is expected to
continue. The acquisition of Taconic resulted in the recognition of
goodwill of approximately $1,971,000 that will be amortized over 15
years.
On November 10, 1999, the Company completed the purchase of certain
business assets and assumed certain liabilities of Orvim for
approximately $1,080,000 in cash. The acquisition was accounted for
using the purchase method of accounting. Prior to the acquisition, the
main business of Orvim was in the fabrication and distribution of PTFE
composites produced in Italy principally purchased from Chemfab. The
business is expected to continue. The allocation of the purchase price
has not yet been completed.
On December 27, 1999, the Company completed the purchase of UroQuest
Medical Corporation (UroQuest). This acquisition was completed after
the end of the Company's second quarter, and is therefore not reflected
in these financial statements. The Company acquired all of the
outstanding capital stock of UroQuest in a cash merger for
approximately $29,000,000 including associated transaction costs. The
Company used the proceeds of its new borrowing agreement to fund the
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements
December 26, 1999
Note 2 - Acquisitions (continued):
acquisition (see Note 3). UroQuest through its wholly-owned
subsidiary, Bivona Medical Technologies, designs, manufactures and
markets proprietary disposable silicone elastomer products and
silicone elastomer components used in products serving the healthcare
and personal care industry, and is a market leader in the design and
manufacture of silicone elastomer products for airway management
applications. The allocation of the purchase price has not yet been
completed.
Note 3 - Debt:
During November 1999, the Company entered into a five-year revolving
credit facility with a group of four United States commercial banks.
Under the terms of the agreement the Company has a $30,000,000 term
loan and a $30,000,000 unsecured revolving credit facility, which
expire on December 31, 2004. Thereafter the revolving credit facility
may be extended for each of the next two years subject to the approval
by all lenders. Borrowing under these facilities can be, at the
election of the Company, in dollars or Euros. The interest rate is
based on the appropriate LIBOR or EURIBOR interest rate plus a spread
between 100 and 150 basis points, based on the Company's trailing four
quarter EBITDA to debt ratio. The term loan requires $1,500,000
quarterly principal payments over five years. At December 26, 1999, the
amount outstanding under the revolving credit facility was $12,632,000.
On December 27, 1999, the Company borrowed $30,000,000 under the term
loan in connection with its acquisition of UroQuest (see Note 2). This
borrowing was completed after the end of the Company's second quarter,
and is therefore not reflected in these financial statements.
The credit facility contains various financial and other covenants
including maintenance of minimum levels of tangible net worth, cash
flow coverage, the ratio of debt to equity and the ratio of
indebtedness for borrowed money to capitalization. The loan agreement
also contains various other restrictions including restrictions on
additional debt and dividend payments.
In September 1999, the Company amended its $20,000,000 revolving credit
agreement with two commercial banks, one based in the U.S. and the
other in Ireland. Under the terms of the amended agreement, the Company
had available a $20,000,000 unsecured credit facility until December
31, 1999. The loan agreement required that any balance outstanding
would at December 31, 1999, convert into a four-year loan with a
five-year amortization schedule and a lump sum partial payment due
December 31, 2003. This loan was fully repaid as of December 1999 and
this loan agreement was cancelled.
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements (continued)
December 26, 1999
Note 4 - Inventories:
Inventories consisted of the following:
December 26, 1999 June 30, 1999
----------------- -------------
(in thousands)
Finished goods $ 8,387 $ 7,541
Work in process 7,485 6,160
Raw materials 6,969 5,948
------ ------
$22,841 $19,649
====== ======
Note 5 - Earnings Per Share:
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Numerator:
Net income for both basic and
diluted earnings per share ... $3,054 $2,508 $5,204 $4,901
------ ------ ------ -----
Denominator:
Denominator for basic earnings
per share - weighted average
outstanding shares ........... 7,597 7,839 7,648 7,828
Effect of dilutive securities:
Stock options to employees
and directors .............. 129 248 147 268
------ ------ ----- -----
Denominator for diluted earnings
per share .................... 7,726 8,087 7,795 8,096
------ ------ ------ -----
Net income per share:
- Basic $ 0.40 $ 0.32 $ 0.68 $ 0.63
------ ------ ----- -----
- Diluted $ 0.40 $ 0.31 $ 0.67 $ 0.61
----- ----- ----- -----
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements (continued)
December 26, 1999
Note 6 - Comprehensive Income:
The components of comprehensive income were as follows:
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Net income $3,054 $2,508 $5,204 $4,901
Foreign currency
translation adjustments (793) (127) 63 396
------ ------ ------- ------
Comprehensive income $2,261 $2,381 $5,267 $5,297
===== ===== ===== =====
Note 7 - Segment Reporting:
The Company adopted Statement of Financial Accounting Standards No. 131
(SFAS No. 131), "Disclosures about Segments of an Enterprise and Related
Information" in fiscal year 1999. SFAS No. 131 establishes standards for
the way the Company reports information about its operational segments.
The Company operates predominantly in one industry segment, that being
the development, manufacture and marketing of high-performance flexible
composite materials. The Company's reportable segments are strategic
business units which are managed separately due largely to their geographic
location.
The Company has two principal reportable business segments, its Americas
Business Group and European Business Group. The Americas Business Group is
principally responsible for all manufacturing and sales of Engineered
Products made in and to North America and South America and for
Architectural Product sales worldwide. The European Business Group is
principally responsible for all manufacturing and sales of Engineered
Products made in and to Europe, the Middle East and Africa.
The Company has two non-reportable business segments, its Asia Pacific
Business Group and its High Performance Elastomer Division. These segments
are reported under Other below due to their size.
The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to the Consolidated Financial Statements
included in the Chemfab Corporation Annul Report on Form 10-K for the
year-ended June 30, 1999. The Company evaluates the performance of its
operating segments based on income before income taxes and after applying
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements (continued)
December 26, 1999
Note 7 - Segment Reporting (continued):
a charge for capital employed by the segment. The charge for
capital employed is based on an established rate and on capital employed as
defined by the Company and not a measure as defined by generally accepted
accounting principles. Accordingly, the Company has reconciled below to its
consolidated results corporate related items have been allocated to the
business segments based on revenues of the segment.
The geographic distributions of the Company's identifiable assets,
operating income and revenues are summarized in the following table:
Americas European
Business Business
Group Group Other Consolidation
----- ----- ----- -------------
(in thousands)
Three months ended Dec. 26, 1999:
Revenue from external customers . $ 18,499 $ 9,231 $ 3,379 $ 31,109
Intersegment sales .............. 1,356 297 0 1,653
Operating income ................ 1,532 593 712 2,837
Identifiable assets ............. 62,813 48,598 3,531 114,942
Three months ended Dec. 27, 1998:
Revenue from external customers . $ 16,930 $ 8,439 $ 2,523 $ 27,892
Intersegment sales .............. 1,412 256 0 1,668
Operating income ................ 822 814 338 1,974
Identifiable assets ............. 63,317 40,028 4,663 108,008
Six months ended Dec. 26, 1999:
Revenue from external customers . $ 33,783 $ 17,025 $ 6,339 $ 57,147
Intersegment sales .............. 2,086 473 0 2,559
Operating income ................ 2,599 750 1,176 4,525
Identifiable assets ............. 62,813 48,598 3,531 114,942
Six months ended Dec. 27, 1998:
Revenue from external customers . $ 33,076 $ 14,869 $ 5,180 $ 53,125
Intersegment sales .............. 2,395 529 0 2,924
Operating income ................ 2,186 1,130 635 3,951
Identifiable assets ............. 63,317 40,028 4,663 108,008
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements (continued)
December 26, 1999
Note 7 - Segment Reporting (continued):
The following is the reconciliation from Segment Reporting to Consolidated
Results:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
-------- -------- -------- ------
(in thousands)
<S> <C> <C> <C> <C>
Revenue
Total external revenues
for reportable segments ......... $ 27,730 $ 25,368 $ 50,813 $ 47,945
Intersegment revenues for reportable
segments ........................ 1,653 1,668 2,559 2,924
Other .............................. 3,379 2,524 6,334 5,180
Elimination of Intersegment
Revenue ......................... (1,653) (1,668) (2,559) (2,924)
-------- -------- -------- --------
Total consolidated revenues ........ $ 31,109 $ 27,892 $ 57,147 $ 53,125
======== ======== ======== ========
Operating profit
Total profit for reportable segment $ 2,837 $ 1,974 $ 4,525 $ 3,951
Interest charged on capital employed 1,567 1,658 3,029 3,128
Net interest (expense) income ...... (40) 25 (119) 128
-------- -------- -------- --------
Income before income taxes ......... $ 4,364 $ 3,657 $ 7,435 $ 7,207
======== ======== ======== ========
</TABLE>
Note 8 - Special Charge
The Company booked a special pre-tax charge in fiscal 1999 amounting to
$3,986,000 for streamlining its European manufacturing operations, consolidating
its acquired fabrication distribution in Germany and changes to a marketing
agreement. The plan anticipates the redundancy of approximately 45 employees,
principally in manufacturing. As of December 26, 1999, 38 employees had been
involuntarily terminated. The remaining accrual balance as of December 26, 1999
was as follows:
Accrued
Amounts Restructuring
Charge Utilized Charge
------ -------- -------------
Employee termination and severance costs $1,213 $ 540 $673
Equipment write-downs 1,326 1,110 216
Contract cancellations 373 303 70
Professional services 99 0 99
Lease termination costs 183 58 125
Marketing agreement costs 792 792 -
----- ----- -----
$3,986 $2,803 $1,183
===== ===== =====
<PAGE>
CHEMFAB CORPORATION
Notes to Consolidated Financial Statements (continued)
December 26, 1999
Note 9 - Commitments and Contingencies:
The Company acquired UroQuest on December 27, 1999 (See Note 2). On October
7, 1999, UroQuest received notice that it was being sued, along with
others, in the District Court of Hidalgo County, Texas, 92nd District, for
alleged product liability in connection with the death of a young girl. The
action has been brought by the parents of Jasmine Marie Casas (deceased)
individually and on behalf of Ms. Casas' estate. The case is encaptioned
Victoriano Casas IV, et. al v. Smiths Industries PLC, et. al., C-4754-99-A.
The Company is currently investigating the facts underlying the complaint,
and based on discovery to date, is defending itself vigorously. The Company
does not believe that the disposition of this matter, to the extent not
covered by insurance, will have a material adverse effect on the Company's
financial condition or results of operations. There can be no assurance
that UroQuest will not experience other material litigation with respect to
the operation of its business.
Various other lawsuits and claims are pending or have been asserted by and
against the Company, including matters previously disclosed by the Company
in its Annual Report on Form 10-K for the year ended June 30, 1999.
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 the disposition of its current legal proceedings
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 10 - Euro Currency:
On January 1, 1999 eleven of the fifteen member countries of the European
Union adopted the Euro as their common legal currency. Following the
introduction of the Euro, the local currencies are scheduled to remain
legal tender in the participating countries until January 1, 2002. During
the transition period, goods and services may be paid for by using either
the Euro or the participating country's local currency.
Transitioning to the Euro creates a number of issues for the Company
including pricing policies, financial contracts, conversion of accounting
systems, conversion of bank accounts and other treasury and cash management
activities.
The Company had previously used the Pound Sterling as the functional
currency for its U.K. and Irish operations. Its German and Spanish
operations have used the local currency as its functional currency. The
reporting currency of the Company has always been the U.S. dollar.
The Company's Irish operation used the Pound Sterling as its functional
currency because it was the primary economic environment in which it
operated
<PAGE>
Note 10 - Euro Currency (continued):
Ireland decided to adopt the Euro as its common legal currency, the Company
moved to requiring its vendors, for its Irish operation, to invoice goods
and services in the Euro currency or a participating local currency. The
Company generally prices its products from the Irish operations in the
Euro.
As a result of these changes, effective July 1, 1999, the Company has
adopted the Euro as the functional currency for its Irish operation. The Company
has not to re-measured reported financial statements of prior periods, because
the Euro did not exist prior to January 1, 1999. The Company's U.K. operation
continues to use the Pound Sterling as its functional currency. The choice of
the functional currency of the Company's Irish operations to the Euro is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
<PAGE>
Item II Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended December 26, 1999
Net Sales
---------
The Company's consolidated sales for the three months ended December 26, 1999,
the second quarter of fiscal 2000, increased 11.5% to $31,109,000 from
$27,892,000 in the same quarter last year. Shipments of the Company's Engineered
Products worldwide increased 5.5% over the year earlier period while shipments
of architectural products increased 40.3%. Measured in constant foreign currency
rates, consolidated revenue would have increased by 13.9%. It is expected that
revenues for the remainder of the year, after excluding the impact of the
$16,631,000 sales of Tent City material in the third quarter of fiscal 1999,
will continue to grow strongly in the aggregate.
The Americas Business segment sales (which include all Engineered Product sales
from the Company's U.S. manufacturing plants into principal geographic markets
in the Americas and Architectural Product sales worldwide) increased 9.3% to
$18,499,000 from $16,930,000 for the same quarter last year. This sales increase
resulted from higher Architectural Product sales in the quarter which increased
40.3% compared with the same period last year.
The European Business segment sales (which include all Engineered Product sales
from the Company's European manufacturing plants; principal geographic markets
are Europe and Africa) increased 9.4% to $9,231,000 from $8,439,000 in the same
quarter last year. Acquisitions completed last year contributed $1,019,000 of
the increased revenue in the European Business segment. Measured in constant
foreign currency rates, European Business segment sales would have increased by
18.8%.
Sales in the Company's Other Business segment, which includes all Engineered
Product sales to the Far East and sales from the Company's High Performance
Elastomer (HPE) Division combined, increased 34.0% to $3,379,000 from $2,523,000
in the same quarter last year. This increase was due to a strengthening of the
economy in certain Asian countries, a strong currency and expansion of HPE's
domestic and European markets.
Gross Profit Margins
--------------------
Gross profit margins as a percentage of consolidated sales were 34.5% for the
quarter, up from 33.9% for the second quarter of last year. The Company
increased its gross margin percentage as a result of manufacturing efficiencies
and a net favorable product mix.
<PAGE>
Selling, Administrative, Research and Development Expenses
----------------------------------------------------------
Selling, general and administrative expenses increased 8.4% to $5,496,000 from
$5,070,000 in the same quarter last year. This increase resulted from the
combined effects of the higher cost structure in place (including goodwill
amortization), to support the Company's newly acquired business in Germany,
France and Brazil. Selling, general and administrative expenses as a percentage
of sales was 17.7%, down slightly from the second quarter of last year.
Research and development expenses were $869,000 compared to last year's level of
$796 ,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.
Interest Expense, Net
---------------------
The Company had net interest expense of $40,000 for the quarter compared to net
interest income of $25,000 for the same quarter last year, largely as a result
of lower average cash balances and borrowings made to fund acquisitions.
Special Charge
--------------
The Company booked a special pre-tax charge in fiscal 1999 amounting to
$3,986,000 for streamlining its European manufacturing operations, consolidating
its acquired fabrication distribution in Germany and changes to a marketing
agreement. The streamlining of the European operations has been slower than
anticipated as a result of delays experienced in transferring and duplicating
products in the Ireland manufacturing facility. It is expected that these issues
will be resolved however, as a result of the delay the cost savings will be less
than previously anticipated. The German consolidation plan is essentially
completed. As of December 26, 1999, 38 of the 45 employees planned to be made
redundant had been terminated. The short-term cash requirements will be funded
from the Company's operations, cash on hand and available line of credit, and it
is not expected that the Company's liquidity will be adversely affected. Period
costs related to the restructuring activities were $72,000.
Subsequent Event
----------------
On December 27, 1999, subsequent to the close of the second fiscal 2000 quarter,
the Company completed the purchase of UroQuest Medical Corporation. For
information relating to this acquisition and the related borrowings see Notes 2
and 3 of the accompanying Financial Statements.
Six Months Ended December 26, 1999
----------------------------------
Net Sales
---------
The Company's consolidated sales for the six months ended December 26, 1999, the
first half of fiscal 2000, increased 7.6% to $57,147,000 from $53,125,000 over
the same period last year. Shipments of the Company's Engineered Products
worldwide increased 9.3% over the year earlier while shipments of architectural
products remained flat. Measured in constant foreign currency rates,
consolidated revenue would have increased by 9.6%.
<PAGE>
Net Sales (continued)
---------------------
The Americas Business segment sales (which include all Engineered Product sales
from the Company's U.S. manufacturing plants into principal geographic markets
in the Americas and Architectural Product sales worldwide) increased 2.1% to
$33,783,000 from $33,076,000 for the same period last year. This sales increase
resulted from higher Engineered Product sales.
The European Business segment sales (which include all Engineered Product sales
from the Company's European manufacturing plants; principal geographic markets
are Europe and Africa) increased 14.5% to $17,025,000 from $14,869,000 in the
same period last year. Acquisitions completed last year contributed $2,797,000
of the increased revenue in the European Business segment. Measured in constant
foreign currency rates, sales for the European Business segment would have
increased 23.6%.
Sales in the Company's Other Business segment, which includes all Engineered
Product sales to the Far East and sales from the Company's High Performance
Elastomer (HPE) Division combined, increased 22.4% to $6,339,000 from $5,180,000
in the same period last year. This increase is due to a strengthening of the
economy in certain Asian countries, a strong currency and to expansion of HPE's
domestic and European markets.
Gross Profit Margins
--------------------
Gross profit margins as a percentage of consolidated sales were 35.1% for the
six months ended December 26, 1999, up from 33.7% last year. This increase was
due to a higher margin contribution from the acquisitions and favorable product
mix.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses increased 15.8% to $10,797,000 from
$9,324,000 in the same period last year. Increased selling, general and
administration expenditures resulted from the effects of the higher cost
structure in place (including goodwill amortization) to support the Company's
newly acquired businesses in Germany, France, and Brazil. Selling, general and
administrative expenses as a percentage of sales were 19%, up slightly from last
year's level of 18%.
<PAGE>
Research and Development Expenses
---------------------------------
Research and development expenses were $1,581,000 compared to last year's level
of $1,656,000. 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 expense of $112,000 for the six months ended December
26, 1999, principally due to the streamlining of the European manufacturing
operations. Other income in the year-earlier period mainly comprised currency
gains.
Interest Income
---------------
The Company had net interest expense of $119,000 for the six months ended
December 26, 1999 compared to net interest income of $128,000 for the same
period last year. The decrease is the result of a lower average cash balance and
interest expense associated with bank debt incurred to fund the acquisitions.
Special Charge
--------------
The Company booked a special pre-tax charge in fiscal 1999 amounting to
$3,986,000 for streamlining its European manufacturing operations, consolidating
its acquired fabrication distribution in Germany and changes to a marketing
agreement. The streamlining of the European operations has been slower than
anticipated as a result of delays experienced in transferring and duplicating
products in the Ireland manufacturing facility. It is expected that these issues
will be resolved however, as a result of the delay the cost savings will be less
than previously anticipated. The German consolidation plan is essentially
completed. As of December 26, 1999, 38 of the 45 employees planned to be made
redundant had been terminated. The short-term cash requirements will be funded
from the Company's operations, cash on hand and available line of credit, and it
is not expected that the Company's liquidity will be adversely affected. Period
costs related to the restructuring activities were $197,000.
<PAGE>
Liquidity and Capital Resources
During the six months ended December 26, 1999, the Company generated $5,337,000
of cash from operations, up from $275,000 of cash utilized in the same period of
the prior year. Also, during the six months ended December 26, 1999, the Company
invested $2,505,000 in property, plant and equipment additions, and expended
$4,452,000 to repurchase stock under its share repurchase program. The Company
also received $645,000 in cash proceeds and related tax benefits from the
exercise of stock options during this period.
Working capital decreased to $26,039,000 from $27,555,000 at the end of fiscal
1999. As of December 26, 1999, the Company had a line of credit of approximately
$30,000,000 and a term loan facility of approximately $30,000,000 under its
borrowing facilities. As of December 26, 1999, the Company had approximately
$47,368,000 available under these facilities.
On December 27, 1999 (after the end of the Company's fiscal quarter), the
Company borrowed $30,000,000 under the term loan for the UroQuest acquisition
(see Note 2 and 3 of the accompanying Financial Statements). Following the
completion of the UroQuest acquisition the Company's had approximately
$17,368,000 available under these 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 2000 and to deal with any contingencies
described in Note 9 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, as amended. 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 integration, and where appropriate,
consolidation of the UroQuest transaction and other acquisitions already
completed. Additional information concerning certain risks and uncertainties
that could cause 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, 1999 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.
Year 2000
In 1993, the Company began its program to prepare for the Year 2000 issues. The
Company made steady progress since then in addressing this computer programming
challenge, and spent approximately $1,525,000 to become Year 2000 compliant. The
Company believes that all of its major information management and operations
systems are currently Year 2000 compliant.
<PAGE>
Year 2000 (continued)
The Company had continuing discussions with its key vendors and customers about
contingency plans for operational, systems and infrastructure failures resulting
from the Year 2000 problem. The Company developed its own internal contingency
plans to address any impacts of the Year 2000 problem on the Company's business,
financial condition or results of operation.
The Company's internal computer systems and software were unaffected by the date
changeover. The Company's customer-related computer systems and databases,
including those managed by third parties, operated as expected. The Company's
operations, including interconnection with various networks and systems operated
by third parties, also were unaffected by the date changeover.
While no Year 2000 related disruptions have been experienced to date, there are
some remaining Year 2000 risks. Based on currently available information,
management believes that Year 2000 related disruptions or other problems, if
any, will not have a material adverse effect on the Company's financial
condition or results of operations.
<PAGE>
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: July 5, 2000 / John W. Verbicky
------------------
John W. Verbicky, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: July 5, 2000 /s/ Laurence E. Richard
------------------
Laurence E. Richard
Vice President - Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
Date: July 5, 2000 /s/ Hilary A. Arwine
--------------------
Hilary A. Arwine
Corporate Controller
(Principal Accounting Officer)
