SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-5374
VARLEN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2651100
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
55 Shuman Boulevard, P.O. Box 3089
Naperville, Illinois 60566-7089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (708)420-0400
Indicate by check 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
At December 2, 1994, 4,858,307 shares, par value $.10 per share, of
common stock of the Registrant were outstanding.
<PAGE>
PART I. FINANCIAL STATEMENTS
VARLEN CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Unaudited
(Thousands of Dollars)
<TABLE>
<CAPTION>
October 29, January 31,
1994 1994
<C> <C> <C> <C>
Assets
Cash and cash equivalents
$ 13,698 $ 5,168
Accounts receivable, less allowance
for doubtful 46,854 35,455
accounts of $1,299 and $1,207
Inventories:
Raw materials
13,577 12,594
Work in process
14,284 13,228
Finished goods
9,269 11,245
37,130 37,067
Deferred and refundable income taxes
3,982 4,095
Other current assets
4,017 2,621
Total current assets
105,681 84,406
Property, plant, and equipment
120,851 106,700
Less: accumulated depreciation
64,090 53,833
56,761 52,867
Goodwill and other intangible assets,
net 47,308 45,829
Other assets
2,752 3,162
$ 212,502 $ 186,264
Liabilities and Stockholders' Equity
Current maturities of long-term debt
$ 69 $ 122
Accounts payable
24,777 16,784
Accrued expenses
20,766 18,230
Income taxes payable
1,665 393
Total current liabilities
47,277 35,529
Long-term debt:
Convertible subordinated debentures
69,000 69,000
Other long-term debt
3,814 3,698
Total long-term debt (note 2)
72,814 72,698
Deferred income taxes
5,598 5,217
Other liabilities
10,707 9,176
Common stock
486 485
Other stockholders' equity
75,620 63,159
$ 212,502 $ 186,264
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 29,October 30, October 29,October 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 89,017 $ 72,845 $ 246,878 $ 223,276
Cost of sales 68,013 56,536 187,589 169,888
Gross profit 21,004 16,309 59,289 53,388
Selling, general and administrative expenses
12,530 11,146 35,336 33,342
Interest expense, net 1,247 1,405 3,635 4,241
Earnings before income taxes
7,227 3,758 20,318 15,805
Income taxes 2,990 1,631 8,717 7,112
Net earnings $ 4,237 $ 2,127 $ 11,601 $ 8,693
Earnings per share:
Primary $ 0.85 $ 0.43 $ 2.32 $ 1.76
Fully diluted $ 0.65 $ 0.37 $ 1.81 $ 1.56
Weighted average number of
shares outstanding - primary
5,013 4,990 5,009 4,930
Weighted average number of
shares outstanding - fully diluted
7,537 7,515 7,533 6,340
Dividends per common share
$ 0.10 $ 0.10 $ 0.30 $ 0.30
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
October 29, October 30,
Increase (Decrease) in Cash 1994 1993
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 11,601 $ 8,693
Adjustments to reconcile net earnings to net cash provided
by continuing operating activities:
Depreciation 8,615 7,127
Amortization 2,147 1,906
Deferred income taxes 266 (1,302)
Change in assets and liabilities net of effects
from purchased and discontinued businesses:
Accounts receivable, net (9,141) (979)
Inventories 2,218 (1,773)
Refundable income taxes 122 60
Other current assets (801) (94)
Accounts payable 3,974 (1,892)
Accrued expenses 89 3,570
Income taxes payable 1,457 (707)
Other noncurrent assets (50) (2,095)
Other noncurrent liabilities 333 139
Total adjustments 9,229 3,960
Net cash provided by continuing operating activities
20,830 12,653
Net cash provided by discontinued operations
429 80
Net cash provided by operating activities
21,259 12,733
Cash flows from investing activities:
Fixed asset expenditures (9,531) (8,603)
Cost of purchased businesses, net of cash acquired
(1,783) ---
Sale of business --- 2,000
Disposals and other changes in property, plant and equipment
310 326
Net cash used in investing activities
(11,004) (6,277)
Cash flows from financing activities:
Proceeds from debt 33 69,440
Payments of debt (684) (61,300)
Issuance of common stock under option plans
85 920
Cash received on stock subscriptions 165 ---
Cash dividends paid (1,456) (1,451)
Net cash (used in) provided by financing activities
(1,857) 7,609
Effect of exchange rate changes on cash
132 (242)
Net increase in cash and cash equivalents
8,530 13,823
Cash at beginning of year
5,168 1,292
Cash and cash equivalents at end of period
$ 13,698 $ 15,115
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. The unaudited condensed consolidated financial statements of
Varlen Corporation (the "Company") included herein have been
prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company,
all adjustments which are considered necessary for a fair
presentation of the results for the interim periods presented and
the balance sheet at October 29, 1994 have been made. These
financial statements, which are condensed and do not include all
disclosures included in annual financial statements, should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's latest annual report on Form 10-K.
2. Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 29, January 31,
1994 1994
<S> <C> <C> <C>
6.5% Convertible Subordinated
Debentures Due 2003 $ 69,000 $ 69,000
Industrial revenue bonds
and other notes 3,883 3,820
72,883 72,820
Less current portion (69) (122)
Long-term debt $ 72,814 $ 72,698
3. Supplementary Cash Flow Information (in thousands):
October 29, October 30,
1994 1993
Cash paid during the year to
date period for:
Interest $ 2,658 $ 2,339
Income taxes (net) $ 7,688 $ 9,068
Purchase of businesses:
Fair value of assets acquired $ 8,868
Cash paid, net of cash acquired (1,783)
Liabilities assumed $ 7,085
</TABLE>
4. Business Segment Information (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 29, October 30, October 29, October 30,
1994 1993 1994 1993
<C> <C> <C> <C>
Net sales:
Transportation products
$ 67,663 $ 54,526 $187,891 $169,216
Laboratory and other
products
21,354 18,319 58,987 54,060
$ 89,017 $ 72,845 $246,878 $223,276
Operating profits*:
Transportation products
$ 7,369 $ 6,783 $ 21,484 $ 23,014
Laboratory and other
products
2,660 (637) 6,261 513
$ 10,029 $ 6,146 $ 27,745 $ 23,527
</TABLE>
*Before interest and general corporate expenses.
5. Acquisitions:
On August 18, 1994, the Company acquired Acieries de Ploermel
("AP"), a steel foundry located in the Brittany region of northwest
France. The Company initially made an equity investment and
provided loan guarantees totalling approximately $1,100,000.
Additionally, over time, the Company plans to inject working
capital, refinance AP's debt to reduce interest costs, and utilize
local and French government grants and interest-free loans. AP,
which has annual revenues of approximately $9 million, specializes
in railroad products and is an approved source for most of the
national railroads in Europe. AP also provides castings for valve
manufacturers and, to a lesser extent, for the auto industry. This
acquisition was financed with cash on hand and was accounted for by
the purchase method of accounting.
On September 30, 1994, the Company purchased the North American
distribution rights for its Walter Herzog GmbH ("Herzog") German
subsidiary from UIC, Inc., Herzog's previous North American
distributor. The Company also formed on that date, Varlen
Instruments, Inc. a wholly owned North American distributor for the
products of Herzog and Alcor Petroleum Instruments, Inc., another
of the Company's subsidiaries. This acquisition was financed with
cash on hand and was accounted for by the purchase method of
accounting.
6. Re-continued Operations:
On July 31, 1994, the Company re-continued its Chrome Crankshaft
Co. and Chrome Crankshaft Company of Illinois subsidiaries which had
been previously treated as discontinued operations. These
operations were re- continued due to the recent termination of sale
negotiations with a potential purchaser. The results of operations
of these businesses, which are not material to the Company, have
been included in the Company's condensed consolidated financial
statements starting on July 31, 1994. Net sales and earnings before
income taxes were $1,341 and $237, respectively, for the three
months ended October 29, 1994 and were $5,215 and $928,
respectively, for the year ended January 31, 1994.
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIOD
ENDED OCTOBER 29, 1994
Overview
The Company designs, manufactures and markets a diverse range
of products in its transportation products and laboratory and other
products business segments. These products are marketed to the
railroad, heavy duty truck and trailer and automotive industries,
as well as to the life sciences research, petroleum and consumer
products industries. The demand for the Company's products by many
of these industries is affected by economic conditions in the United
States and abroad. The Company's manufacturing operations have a
significant fixed cost component. Accordingly, during periods of
changing product demand the profitability of many of the Company's
operations may change proportionately more than revenues of such
operations.
Results of Operations
The Company's sales in the nine months ended October 29, 1994
were $246.9 million, up $23.6 million or 10.6% from sales of $223.3
million in the comparable 1993 period. For the quarter ended
October 29, 1994, sales were $89.0 million, up $16.2 million or
22.2% from the comparable 1993 period. Sales increased in both the
transportation segment and the laboratory and other products segment
in both the nine months and quarter ended October 29, 1994.
Net earnings for the first nine months of 1994 were $11.6
million or $2.32 per share on a primary basis and $1.81 on a fully
diluted basis. This represented a 33.5% increase over the $8.7
million earned in the first three quarters of 1993. Net earnings
per share in 1993 were $1.76 on a primary basis and $1.56 on a fully
diluted basis, with a lower number of fully diluted shares than in
1994.
During the third quarter ended October 29, 1994, net earnings
were $4.2 million, or $.85 per share on a primary basis and $.65 on
a fully diluted basis, compared to $2.1 million or $.43 per share
on a primary basis, and $.37 per share on a fully diluted basis in
the 1993 period. Included in third quarter 1993 earnings was a
special pre-tax charge of $2.0 million ($1.1 million after tax)
taken against the Company's research laboratory appliance products
operation. The impact of this charge on net earnings per share was
$.22 on a primary basis and $.15 on a fully diluted basis. The
charge reflected costs incurred in connection with a work force
reduction, installation of a new management team, valuation of
certain inventory and other realignments designed to resize this
unit and return it to profitability. Following the trend in
revenues in the quarter ended October 29, 1994, earnings increased
in both the transportation products segment and the laboratory and
other products segment compared to the 1993 period.
Beginning on July 31, 1994, the Company began reflecting its
Chrome Crankshaft Co. and Chrome Crankshaft Company of Illinois
subsidiaries as continuing operations. These companies, which had
been previously treated as discontinued operations, were re-
continued due to the recent termination of sale negotiations with
a potential purchaser. The results of operations of these
businesses, which are not material to the Company, have been
included in the Company's condensed consolidated financial
statements starting on July 31, 1994. Additional information is
further discussed in note 6 to the condensed consolidated financial
statements.
On a business segment basis, revenues in the transportation
products segment for the quarter and nine months ended October 29,
1994 were $67.7 million and $187.9 million, respectively, as
compared to $54.5 million and $169.2 million, respectively, in the
comparable prior year periods. During the 1994 quarter all
businesses in this segment had higher sales than during the prior
year's period, primarily as a result of increased customer demand
while during the nine month period, only the heavy duty truck and
trailer, and automotive businesses exceeded 1993's sales.
Operating profit in the third quarter of 1994 increased 8.7% to $7.4
million (10.9% of segment sales) compared to $6.8 million (12.4% of
segment sales) in the comparable 1993 period as higher product sales
resulted in increased profitability. Operating profit for the first
nine months of 1994 decreased to $21.5 million (11.4% of segment
sales) compared to $23.0 million (13.6% of segment sales) in the
1993 year to date period as a result of lower first half earnings
in the railroad business area.
Heavy duty truck and trailer industry sales continued to be
substantially higher in the 1994 periods than in the prior year and
the Company benefitted from this improvement. In addition, the
Company continued to benefit as its largest heavy duty truck
customer strengthened its number one market share position during
1994. Automotive industry sales, particularly light truck sales,
increased during 1994 over the year earlier periods, which
benefitted the Company's automotive parts operations. Demand for
the Company's railroad products was strong resulting in higher sales
during the third quarter. However due to customer production
limitations, budget shifting, product mix, and inclement weather
earlier in the year, sales were lower on a year to date basis in the
railroad business. Most businesses in the transportation products
segment had limited success in increasing selling prices to recover
higher raw material costs.
Sales in the laboratory and other products segment for the
quarter and nine months ended October 29, 1994, increased to $21.4
million and $59.0 million, respectively, compared to $18.3 million
and $54.1 million, respectively, in the 1993 periods. This
segment's increase in revenues in both periods was spread across all
businesses, with the petroleum instrument business having the
largest gain. The petroleum instrument business was positively
affected by a late 1993 acquisition.
Operating profit for the laboratory and other products segment
for the first nine months of 1994 increased to $6.3 million (10.6%
of segment sales) compared to $.5 million (1.0% of segment sales)
in the prior year's period. For the 1994 third quarter, operating
earnings of $2.7 million (12.5% of segment sales) compared to a $.6
million operating loss in the prior year quarter. Earnings in both
1994 periods reflected the positive impact of cost reduction
activities taken in 1993, the impact of higher sales and the
previously noted acquisition. The 1993 quarter and nine months
operating profits were also affected by the previously discussed
$2.0 million charge taken against the research laboratory products
operation.
Consolidated gross margin on a year-to-date basis increased to
24.0% in 1994 from 23.9% in 1993 and for the third quarter of 1994,
increased to 23.6% from 22.4% in 1993. The transportation products
segment gross margin as a percentage of sales declined in both
periods. This resulted from a combination of the higher costs of
selected materials and the productivity impacts of running certain
businesses at greater than peak capacity for an extended period of
time without commensurate selling price increases. The gross margin
of the laboratory and other products segment increased to 31.3%
during the nine months ended October 29, 1994 compared to 25.8% in
the prior year period and increased to 32.5% in the third quarter
of 1994 compared to 21.9% in 1993. The laboratory appliance
business had a lower gross margin in both 1993 periods due to the
$2.0 million charge at the laboratory appliance business. During
the 1994 periods raw material costs in both segments were relatively
unchanged except for increases in aluminum prices and increases in
selected steel products.
Selling, general and administrative expenses of $35.3 million
or 14.3% of sales in the first nine months of 1994 compared to $33.3
million or 14.9% of sales in the prior year's comparable period.
During the third quarter of 1994, selling, general and
administrative expenses were $12.5 million or 14.1% of sales
compared to the 1993 amount of $11.1 million or 15.3% of sales. In
the transportation segment, selling, general and administrative
expenses as a percent of sales declined in the third quarter 1994
versus 1993 although on a year to date basis they were a higher
percent due to lower railroad sales earlier in the year. In the
laboratory and other products segment, selling, general and
administrative expenses declined during both 1994 periods compared
to 1993 principally as a result of the $2.0 million charge in 1993
at the laboratory appliance business.
Gross interest expense for the quarter and nine months ended
October 29, 1994 was $1.4 million and $4.0 million, respectively,
compared to $1.5 million and $4.4 million for the prior year's
comparable periods. Interest expense reflected level interest rates
on lower borrowings.
<PAGE>
Income taxes were provided at an effective rate during the 1994
quarter and nine month period of 41.4% and 42.9%, respectively,
compared to 43.4% and 45.0% in the comparable 1993 periods. The
higher than statutory federal rate reflects non-deductible goodwill
amortization, higher taxes on foreign operations and state income
taxes.
Capital Resources and Liquidity
During the nine month period ended October 29, 1994, the
Company generated $21.3 million of cash from operating activities.
As of October 29, 1994, the Company's working capital was $58.4
million, its total assets were $212.5 million, its total debt,
excluding current portion, was $72.8 million and its stockholders'
equity was $76.1 million.
Investing activities during the nine month period ended October
29, 1994 included capital expenditures of $9.5 million and the
purchase of two businesses for $1.8 million. The capital
expenditures were primarily for machinery and equipment to support
new products and to improve operating efficiency.
On May 27, 1993, the Company publicly issued $60 million of its
6.5% Convertible Subordinated Debentures Due 2003, the proceeds of
which were used to reduce indebtedness under a revolving credit
facility. On June 18, 1993, an additional $9 million of the same
debentures were issued pursuant to an over-allotment option granted
to the underwriter of the debentures. To support its investing
activities, the Company has an $80 million revolving credit
agreement which expires on June 30, 1997. This credit facility will
be used by the Company as the principal source of acquisition
financing. At October 29, 1994, the Company had no debt outstanding
under this credit facility. The Company believes that internally
generated funds will be sufficient to satisfy its anticipated
working capital needs, capital expenditures and scheduled debt
repayments.
Beginning in 1990, the Company was subject to the direct
effects of currency movements as a result of foreign acquisitions.
The effects of foreign currency fluctuations did not have a
significant impact in the nine months of 1994 compared to 1993.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
<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.
VARLEN CORPORATION
(Registrant)
December 12, 1994 By:/s/ Richard A. Nunemaker
Richard A. Nunemaker
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Page No.
11 Computation of Per Share Earnings 15
27 Financial Data Schedule 16
VARLEN CORPORATION AND SUBSIDIARIES Exhibit 11
Computation of Per Share Earnings
Unaudited
(Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
<S> <C> <C> <C> <C> <C> <C> <C>
Primary Earnings Per Share: 10/29/94 10/30/93 10/29/94 10/30/93
Net earnings $ 4,237 $ 2,127 $ 11,601 $ 8,693
Computation of the Weighted Average Number of
Shares Outstanding as Used in the Primary
Earnings Per Share Computation:
Weighted average number of shares outstanding
4,855 4,825 4,852 4,806
Shares assumed issued under the treasury
stock method 158 165 157 124
Weighted average number of shares outstanding, as adjusted
5,013 4,990 5,009 4,930
Primary Earnings Per Share: $ 0.85 $ 0.43 $ 2.32 $ 1.76
Fully Diluted Earnings Per Share:
Reconciliation of net earnings per the financial statements
to the amount used for the fully diluted computation:
Net earnings $ 4,237 $ 2,127 $ 11,601 $ 8,693
Add interest on 6.5% convertible subordinated
debentures, net of income tax effects
682 683 2,031 1,177
Net earnings, as adjusted $ 4,919 $ 2,810 $ 13,632 $ 9,870
Computation of the Weighted Average Number of
Shares Outstanding as Used in the Fully
Diluted Earnings Per Share Computation:
Weighted average number of shares outstanding
4,855 4,825 4,852 4,806
Shares assumed issued under the treasury
stock method 158 166 157 124
Shares issuable from assumed exercise of
6.5% convertible subordinated debenture
2,524 2,524 2,524 1,410
Weighted average number of shares outstanding, as adjusted
7,537 7,515 7,533 6,340
Fully Diluted Earnings Per Share: $ 0.65 $ 0.37 $ 1.81 $ 1.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 1994 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> OCT-29-1994
<CASH> 13698
<SECURITIES> 0
<RECEIVABLES> 46854
<ALLOWANCES> 1299
<INVENTORY> 37130
<CURRENT-ASSETS> 105681
<PP&E> 120851
<DEPRECIATION> 64090
<TOTAL-ASSETS> 212502
<CURRENT-LIABILITIES> 47277
<BONDS> 72814
<COMMON> 486
0
0
<OTHER-SE> 75620
<TOTAL-LIABILITY-AND-EQUITY> 212502
<SALES> 246878
<TOTAL-REVENUES> 246878
<CGS> 187589
<TOTAL-COSTS> 187589
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3963
<INCOME-PRETAX> 20318
<INCOME-TAX> 8717
<INCOME-CONTINUING> 11601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11601
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 1.81
</TABLE>
