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 July 30, 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 September 1, 1994, 4,853,382 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>
July 30, January 31,
1994 1994
<C> <C>
Assets
Cash and cash equivalents $ 14,901 $ 5,168
Accounts receivable, less allowance for doubtful 36,369 35,455
accounts of $1,347 and $1,207
Inventories:
Raw materials 13,885 12,594
Work in process 12,645 13,228
Finished goods 9,058 11,245
35,588 37,067
Deferred and refundable income taxes 3,968 4,095
Other current assets 3,503 2,621
Total current assets 94,329 84,406
Property, plant, and equipment 112,664 106,700
Less: accumulated depreciation 59,132 53,833
53,532 52,867
Goodwill and other intangible assets, net 45,372 45,829
Other assets 2,519 2,461
Net assets of discontinued operations 223 701
$ 195,975 $ 186,264
Liabilities and Stockholders' Equity
Current maturities of long-term debt $ 67 $ 122
Accounts payable 19,450 16,784
Accrued expenses 16,309 18,230
Income taxes payable 1,534 393
Total current liabilities 37,360 35,529
Long-term debt:
Convertible subordinated debentures 69,000 69,000
Other long-term debt 3,703 3,698
Total long-term debt (notes 2 and 5) 72,703 72,698
Deferred income taxes 5,461 5,217
Other liabilities 8,892 9,176
Common stock 486 485
Other stockholders' equity (notes 5 and 6) 71,073 63,159
$ 195,975 $ 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 Six Months Ended
July 30, July 31, July 30, July 31,
1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 77,961 $ 71,824 $ 157,861 $ 150,431
Cost of sales 59,200 54,625 119,576 113,352
Gross profit 18,761 17,199 38,285 37,079
Selling, general and administrative expenses
11,034 10,178 22,806 22,196
Interest expense, net 1,147 1,472 2,388 2,836
Earnings before income taxes 6,580 5,549 13,091 12,047
Income taxes 2,846 2,524 5,727 5,481
Net earnings $ 3,734 $ 3,025 $ 7,364 $ 6,566
Earnings per share (notes 5 and 6):
Primary $ 0.75 $ 0.61 $ 1.47 $ 1.34
Fully diluted $ 0.59 $ 0.52 $ 1.16 $ 1.21
Weighted average number of shares outstanding - primary
4,985 4,935 5,006 4,902
Weighted average number of shares outstanding - fully diluted
7,510 6,767 7,531 5,823
Dividends per common share
$ 0.10 $ 0.10 $ 0.20 $ 0.20
</TABLE>
See Notes to Condensed Consolidated Financial Statements<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
<C> <C> <C> <C>
July 30, July 31,
Increase (Decrease) in Cash 1994 1993
Cash flows from operating activities:
Net earnings $ 7,364 $ 6,566
Adjustments to reconcile net earnings to net cash provided
by continuing operating activities:
Depreciation 5,724 4,602
Amortization 1,586 1,546
Deferred income taxes 152 (981)
Change in assets and liabilities net of effects
from purchased and discontinued businesses:
Accounts receivable, net (640) 2,717
Inventories 1,773 (2,603)
Refundable income taxes 132 (79)
Other current assets (872) (389)
Accounts payable 2,590 478
Accrued expenses (2,415) (63)
Income taxes payable 1,120 (576)
Other noncurrent assets (92) (1,999)
Other noncurrent liabilities (284) 675
Total adjustments 8,774 3,328
Net cash provided by continuing operating activities
16,138 9,894
Net cash provided by (used in) discontinued operations
478 (80)
Net cash provided by operating activities
16,616 9,814
Cash flows from investing activities:
Fixed asset expenditures (6,264) (6,300)
Sale of business --- 2,000
Disposals and other changes in property, plant and equipment
164 214
Net cash used in investing activities (6,100) (4,086)
Cash flows from financing activities:
Proceeds from debt 14 70,296
Payments of debt (77) (61,280)
Issuance of common stock under option plans
51 770
Cash received on stock subscriptions 95 ---
Cash dividends paid (971) (962)
Net cash (used in) provided by financing activities
(888) 8,824
Effect of exchange rate changes on cash 105 (238)
Net increase in cash and cash equivalents 9,733 14,314
Cash at beginning of year 5,168 1,292
Cash and cash equivalents at end of period
$ 14,901 $ 15,606
</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 July 30,
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>
July 30, January 31,
1994 1994
<S> <C> <S> <C> <C>
6.5% Convertible Subordinated
Debentures Due 2003 $ 69,000 $ 69,000
Industrial revenue bonds 3,770 3,820
and other notes
72,770 72,820
Less current portion (67) (122)
Long-term debt $ 72,703 $ 72,698
</TABLE>
3. Supplementary Cash Flow Information (in thousands):
July 30, July 31,
1994 1993
Cash paid during the year to
date period for:
Interest $ 2,466 $ 2,098
Income taxes (net) $ 4,727 $ 6,977
4. Business Segment Information (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 30, July 31, July 30, July 31,
1994 1993 1994 1993
<C> <C> <C> <C>
Net sales:
Transportation products $ 59,347 $ 54,850 $120,228 $114,690
Laboratory and other products 18,614 16,974 37,633 35,741
$ 77,961 $ 71,824 $157,861 $150,431
Operating profits*:
Transportation products $ 6,955 $ 7,579 $ 14,115 $ 16,231
Laboratory and other products 1,535 751 3,601 1,150
$ 8,490 $ 8,330 $ 17,716 $ 17,381
</TABLE>
*Before interest and general corporate expenses.
5. Issuance of Convertible Debentures:
During the second quarter of 1993, the Company issued $69 million
aggregate principal amount of 6.5% Convertible Subordinated Debentures Due
2003. The debentures are convertible into common stock of the Company at
$27.33 per share and are callable in whole or in part after June 3, 1996
at the option of the Company at specified redemption prices plus accrued
interest. The proceeds from the issuance were used to reduce outstanding
indebtedness under the Company's revolving credit agreement with the
excess proceeds used for general corporate purposes.
6. Stock Split:
On August 23, 1993, the Company's Board of Directors declared a three-for-
two stock split, effected in the form of a stock dividend, payable on
October 14, 1993 to stockholders of record on September 30, 1993. The
stock split increased the Company's common shares outstanding from
approximately 3,214,000 to approximately 4,821,000 as of the declaration
date. In addition, the quarterly cash dividend of $.15 per share was
adjusted to $.10 per share to maintain the net amount of the dividend
payment at its previous level. The earnings per share, weighted average
number of shares outstanding and dividends per common share for all
periods of financial information contained herein reflect this stock
split.
7. Acquisition:
On November 23, 1993, the Company acquired the petroleum analysis
equipment and testing services division of San Antonio-based Alcor, Inc.,
a privately held company. The acquisition was made for $5.4 million in
cash and $499,000 (19,550 shares) of the Company's common stock. The
acquired business, which had annual revenues of approximately $4 million,
designs, develops, manufactures and sells petroleum analysis equipment.
It is also engaged in the testing of petroleum products in its laboratory,
and the sale of petroleum product reference samples. The acquired
business markets its products and services under the name of Alcor
Petroleum Instruments, Inc. The acquisition has been accounted for by the
purchase method of accounting with the preliminary allocation of the
excess of the purchase price over the fair value of the net assets
acquired amortized over 40 years. The operating results of the business
acquired have been included in the accompanying condensed consolidated
statements of earnings from the date of acquisition. The transaction was
financed with cash on hand.
8. Subsequent Event:
On August 18, 1994, the Company acquired Acieries de Ploermel ("A.P."), 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 A.P.'s debt to reduce interest
costs, and utilize local and French government grants and interest-free
loans. A.P., which had annual revenues of approximately $9 million,
specializes in railroad products and is an approved source for most of the
national railroads in Europe. A.P. also provides castings for valve
manufacturers and, to a lesser extent, for the auto industry. This
acquisition, which was financed with cash on hand, will be accounted for
by the purchase method of accounting.
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTH PERIOD
ENDED JULY 30, 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 six months ended July 30, 1994 were $157.9
million or 4.9% higher than the $150.4 million achieved in the first six
months of 1993. Sales increased approximately 5% in both the transportation
products segment and the laboratory and other products segment. For the
second quarter of 1994, sales were $78.0 million, up $6.1 million or 8.5%
from sales of $71.8 million in the comparable 1993 period. Corresponding to
the six month period, the sales increase was spread across both business
segments.
Net earnings for the first six months of 1994 increased to $7.4 million
from $6.6 million in 1993's first half. Earnings per share for the first six
months in 1994 was $1.47 per share on a primary basis and $1.16 per share on
a fully diluted basis which compared to $1.34 per share primary and $1.21 per
share fully diluted in the comparable 1993 period. Weighted average fully
diluted shares outstanding in 1994 were considerably higher in the six month
period than during the equivalent 1993 period as a result of a convertible
debenture offering by the Company in May, 1993. During the second quarter
ended July 30, 1994, net earnings increased to $3.7 million from $3.0 million
in the same 1993 quarter. Earnings per share was $.75 per share on a primary
basis and $.59 on a fully diluted basis for the second quarter of 1994
compared to $.61 per share on a primary basis and $.52 per share on a fully
diluted basis in the equivalent 1993 period. Included in the second quarter
of 1994 were the effects of two non-operating events which had a net $.05 per
share fully diluted positive impact. These were a gain of $.06 per share on
an insurance cost reallocation partially offset by costs equivalent to $.01
per share relating to the June closing of an unprofitable tool and die
facility. Operating profit increased in the laboratory and other products
segment while a decline was experienced in the transportation products
segment in both the six month period and quarter ended July 30, 1994.
On a business segment basis, revenues in the transportation products
segment for the quarter and six months ended July 30, 1994 were $59.3 million
and $120.2 million, respectively, as compared to $54.9 million and $114.7
million, in the comparable prior year periods. For both the quarter and year
to date, heavy duty truck/trailer and automotive sales increased while
railroad business sales declined. Operating profit in the first six months
of 1994 was $14.1 million (11.7% of segment sales), down from $16.2 million
(14.2% of segment sales). Similarly, operating profit in the 1994 second
quarter declined 8.2% to $7.0 million (11.7% of segment sales) compared to
$7.6 million (13.8% of segment sales) in the comparable 1993 period. In both
the second quarter and six month periods lower railroad products sales
resulted in decreased profitability which more than offset an increase
elsewhere in the segment.
Heavy duty truck and trailer industry sales were 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 two
largest heavy duty truck customers maintained their number one and number two
market share positions during 1994. Automotive industry sales, particularly
light truck sales, continued their increase during 1994 over the year earlier
period which benefitted the Company's automotive parts operations. Despite
volume increases in both of these businesses, selling prices were not always
able to be increased to recover higher raw material prices. Offsetting
increased large truck/trailer and automotive demand, sales for the Company's
railroad products declined compared to both the second quarter and first half
of 1993 as a result of reduced demand caused by budget shifting, customer
production limitations, product mix and inclement weather.
Sales in the laboratory and other products segment for the quarter and six
months ended July 30, 1994, increased to $18.6 million and $37.6 million,
respectively, compared to $17.0 million and $35.7 million in the 1993
periods. The increase in revenues in this segment resulted from increased
sales of tubular metal goods and petroleum instruments. The tubular metal
goods business benefitted from increased demand as well as new products while
the petroleum instruments business benefitted from an acquisition in late
1993.
Operating profit for the laboratory and other products segment for the
first six months of 1994 increased substantially to $3.6 million (9.6% of
segment sales) compared to $1.2 million (3.2% of segment sales) in the prior
year's period. For the 1994 second quarter, operating profit increased to
$1.5 million (8.3% of segment sales) compared to $.8 million (4.4% of segment
sales) in the prior year quarter. The principal increase in operating profit
in both the quarter and six month period was in the research laboratory
appliance business where a program of cost reductions, begun over a year ago,
reduced costs and reversed the losses incurred in the 1993 periods. For the
quarter and year to date periods, earnings at the petroleum analysis
instrument business increased as a result of a 1993 acquisition.
Consolidated gross margin in the first six months declined to 24.25% in
1994 from 24.65% in 1993 but for the second quarter, consolidated gross
margin was relatively unchanged at 24.1% in 1994 compared to 24.0% in 1993.
The transportation products segment caused the year to date gross margin
decline as a result of margin pressure in the railroad business resulting
from both lower volume and prices compared to 1993. The gross margin of the
laboratory and other products segment increased during the second quarter and
year to date periods ended July 30, 1994 compared to the prior year periods.
The increase resulted from the impact of cost reduction programs mentioned
previously and the acquisition of a high gross margin business late in 1993
partially offset in the second quarter by margin decline in the tubular goods
business resulting from lower selling prices.
Selling, general and administrative expenses of $22.8 million or 14.5% of
sales in the first six months of 1994 compared to $22.2 million or 14.75% of
sales in the comparable 1993 period. During the second quarter of 1994,
selling, general and administrative expenses were $11.0 million or 14.2% of
sales compared to $10.2 million or 14.2% of sales in the prior year's
comparable period. The expenses in 1994 are net of $.8 million ($.5 million
after tax) of income from an insurance cost reallocation. In the
transportation segment, selling, general and administrative expenses during
the quarter and six month periods increased as a dollar amount and as a
percent of sales from 1993 to 1994. The increase as a percent of sales
resulted from lower sales in the railroad business. In the laboratory and
other products segment, selling, general and administrative expenses as a
dollar amount and as a percent of sales declined in both periods due to the
cost reductions mentioned previously offset partially by selling, general and
administrative expenses of the acquired petroleum instrument business.
Gross interest expense for the quarter and six months ended July 30, 1994
was $1.3 million and $2.6 million, respectively, compared to $1.5 million and
$2.9 million for the prior year's comparable periods. Interest expense in
1994 reflected lower borrowings. Additionally, interest income increased in
1994 due to higher cash balances.
Income taxes were provided at an effective rate during the second quarter
and first six months of 1994 of 43.3% and 43.7%, respectively, compared to
45.5% 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 second quarter and six month periods ended July 30, 1994, the
Company generated $11.6 and $16.6 million, respectively, of cash from
operating activities. As of July 30, 1994, the Company's working capital was
$57.0 million, total assets were $196.0 million, total debt, excluding
current portion, was $72.7 million and stockholders' equity was $71.6
million.
Investing activities during the second quarter and six month periods ended
July 30, 1994 included capital expenditures of $3.7 million and $6.3 million,
respectively. These capital expenditures were primarily for machinery and
equipment to support new products and to improve operating efficiency. At
July 30, 1994, the Company did not have any material commitments for capital
expenditures.
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 the 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 December 6, 1997. This credit facility is
expected to be used by the Company as the principal source of acquisition
financing. At July 30, 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 a foreign acquisition in Germany. The
effects of foreign currency fluctuations did not have a significant impact in
the six 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)
September 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
Computation of Per Share Earnings
(Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Primary Earnings Per Share: 7/30/94 7/31/93 7/30/94 7/31/93
<S> <C> <C> <C> <C>
Net earnings $ 3,734 $ 3,025 $ 7,364 $ 6,566
Computation of the Weighted Average Number of
Shares Outstanding as Used in the Primary
Earnings Per Share Computation:
Weighted average number of shares outstanding
4,875 4,818 4,870 4,797
Shares assumed issued under the treasury
stock method 110 117 136 105
Weighted average number of shares outstanding, as adjusted
4,985 4,935 5,006 4,902
Primary Earnings Per Share: $ 0.75 $ 0.61 $ 1.47 $ 1.34
Fully Diluted Earnings Per Share:
Reconciliation of net earnings per the financial statements
to the amount used for the fully diluted computation:
Net earnings $ 3,734 $3,025 $ 7,364 $ 6,566
Add interest on 6.5% convertible subordinated
debentures, net of income tax effects 682 494 1,349 494
Net earnings, as adjusted $ 4,416 $ 3,519 $ 8,713 7,060
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
4,875 4,818 4,870 4,797
Shares assumed issued under the treasury
stock method 110 117 136 105
Shares issuable from assumed exercise of
6.5% convertible subordinated debentures 2,525 1,832 2,525 921
Weighted average number of shares outstanding, as adjusted
7,510 6,767 7,531 5,823
Fully Diluted Earnings Per Share: $ 0.59 $ 0.52 $ 1.16 $ 1.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> JAN-31-1994
<PERIOD-END> JUL-30-1994
<CASH> 14901
<SECURITIES> 0
<RECEIVABLES> 36369
<ALLOWANCES> 1347
<INVENTORY> 35588
<CURRENT-ASSETS> 94329
<PP&E> 112664
<DEPRECIATION> 59132
<TOTAL-ASSETS> 195975
<CURRENT-LIABILITIES> 37360
<BONDS> 72703
<COMMON> 486
0
0
<OTHER-SE> 71073
<TOTAL-LIABILITY-AND-EQUITY> 195975
<SALES> 157861
<TOTAL-REVENUES> 157861
<CGS> 119576
<TOTAL-COSTS> 119576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2583
<INCOME-PRETAX> 13091
<INCOME-TAX> 5727
<INCOME-CONTINUING> 7364
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7364
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.16
</TABLE>
