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 28, 1995
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 1, 1995, 5,404,161 shares, par value $.10 per share,
of common stock of the Registrant were outstanding.
PART I. FINANCIAL STATEMENTS
VARLEN CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Thousands of Dollars)
October 28, January 31,
1995 1995
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Cash and cash equivalents $ 21,315 $ 13,096
Accounts receivable, less allowance
for doubtful accounts of
$1,275 and $1,318 50,868 48,838
Inventories:
Raw materials 16,038 17,774
Work in process 10,753 12,890
Finished goods 8,893 9,686
35,684 40,350
Deferred and refundable income taxes 5,246 5,229
Other current assets 4,048 4,022
Total current assets 117,161 111,535
Property, plant, and equipment 134,607 125,378
Less: accumulated depreciation 65,282 65,742
69,325 59,636
Goodwill and other intangible
assets, net 44,496 46,292
Other assets 2,306 2,723
$ 233,288 $220,186
Liabilities and Stockholders' Equity
Current maturities of long-term debt 65 67
Accounts payable 22,679 27,365
Accrued expenses 22,864 23,526
Income taxes payable 2,588 2,864
Total current liabilities 48,196 53,822
Long-term debt:
Convertible subordinated debentures 69,000 69,000
Other long-term debt 4,137 3,788
Total long-term debt 73,137 72,788
Deferred income taxes 5,596 4,838
Other liabilities 10,108 9,707
Common stock 541 487
Other stockholders' equity (note 4) 95,710 78,544
$ 233,288 $220,186
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
VARLEN CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
October 28, October 29, October 28, October 29,
1995 1994 1995 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net sales $ 94,209 $ 89,017 $ 298,931 $ 246,878
Cost of sales 70,524 68,013 223,810 187,589
Gross profit 23,685 21,004 75,121 59,289
Selling, general and
administrative expenses 13,385 12,530 42,803 35,336
Interest expense, net 1,066 1,247 3,458 3,635
Earnings before income
taxes 9,234 7,227 28,860 20,318
Income taxes 4,017 2,990 12,554 8,717
Net earnings $ 5,217 $ 4,237 $ 16,306 $ 11,601
Earnings per share
(note 4):
Primary $ 0.93 $ 0.77 $ 2.92 $ 2.11
Fully diluted $ 0.70 $ 0.60 $ 2.19 $ 1.65
Weighted average number
of shares outstanding -
primary (note 4) 5,623 5,514 5,575 5,510
Weighted average number
of shares outstanding -
fully diluted (note 4) 8,409 8,291 8,380 8,286
Dividends per common
share (note 4) $ 0.10 $ 0.09 $ 0.29 $ 0.27
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
VARLEN CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
October 28, October 29,
1995 1994
<TABLE>
<CAPTION>
Increase (Decrease) in Cash
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 16,306 $ 11,601
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 8,751 8,615
Amortization 1,796 2,147
Deferred income taxes 642 266
Change in assets and liabilities
net of effects from purchased
businesses:
Accounts receivable, net (4,801) (9,141)
Inventories 2,598 2,218
Refundable income taxes (16) 122
Other current assets (102) (801)
Accounts payable (3,944) 3,974
Accrued expenses (406) 89
Income taxes payable (337) 1,457
Other noncurrent assets 980 (50)
Other noncurrent liabilities 383 762
Total adjustments 5,544 9,658
Net cash provided by operating
activities 21,850 21,259
Cash flows from investing activities:
Fixed asset expenditures (19,932) (9,531)
Cost of purchased businesses (1,753) (1,783)
Sale of business 8,013 ---
Disposals and other changes in
property, plant and equipment 365 310
Net cash used in investing
activities (13,307) (11,004)
Cash flows from financing activities:
Proceeds from debt 413 33
Payments of debt (63) (684)
Issuance of common stock under
option plans 581 85
Cash received on stock subscriptions 233 165
Cash dividends paid (1,567) (1,456)
Net cash used in financing activities (403) (1,857)
Effect of exchange rate changes on cash 79 132
Net increase in cash and cash
equivalents 8,219 8,530
Cash and cash equivalents at
beginning of year 13,096 5,168
Cash and cash equivalents
at end of period $ 21,315 $ 13,698
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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 28, 1995 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.Supplementary Cash Flow Information
(in thousands):
<TABLE>
<CAPTION>
October 28, October 29,
1995 1994
<S> <C> <C>
Cash paid during the
year to date period for:
Interest 2,611 2,658
Income taxes (net) 12,653 7,688
Purchase of Businesses:
Fair value of assets acquired 1,753 8,868
Cash paid, net of cash acquired (1,753) (1,783)
Liabilities assumed --- 7,085
</TABLE>
3.Business Segment Information
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 28, October 29, October 28, October 29,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales:
Transportation products 79,268 67,663 243,237 187,891
Laboratory equipment 14,941 21,354 55,694 58,987
94,209 89,017 298,931 246,878
Operating profits*:
Transportation products 9,532 7,369 29,821 21,484
Laboratory equipment 2,517 2,660 7,066 6,261
12,049 10,029 36,887 27,745
Before interest and general corporate expenses.
</TABLE>
4.Stock Dividend:
On May 22, 1995, the Company's Board of Directors declared a 10%
stock dividend payable on July 10, 1995 to stockholders of record
on June 23, 1995. The stock dividend increased the Company's
common shares outstanding from approximately 4,888,000 to
approximately 5,376,000 as of the payable date. The earnings per
share, weighted average number of shares outstanding and
dividends per common share amounts for all periods of financial
information contained herein reflect this stock dividend.
5. Acquisitions and Divestiture:
On January 16, 1995, the Company purchased the assets of the
Railroad Division of Prime Manufacturing Corporation
("Prime"), located in Oak Creek, Wisconsin. The acquisition
was made for $5.9 million in cash and $25,000 (1,000 shares)
of Company common stock. The Company purchased the related
land and building in June, 1995 for approximately $1.0
million. Prime manufactures a wide range of engineered
products for railroad locomotives, including heating,
ventilating and air conditioning equipment; valves and
refrigerators. Prime's products are sold to both original
equipment manufacturers and the aftermarket.
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, for $1.8 million in cash and
deferred payments including $70,000 (3,000 shares) of Company
common stock. The Company also formed on that date, Varlen
Instruments, Inc., a wholly owned North American distributor
for the products of Herzog as well as of Alcor Petroleum
Instruments, Inc. and Precision Scientific Petroleum
Instruments Company, two other operations of the Company.
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 totaling approximately
$1.1 million. The Company has injected working capital,
refinanced AP's debt to reduce interest costs and utilized
local and French government grants and interest-free loans.
AP 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.
The acquisitions have been accounted for by the purchase
method of accounting with the excess of the purchase price
over the fair value of the net assets acquired amortized over
a period of between 15 and 40 years. The operating results of
the businesses acquired have been included in the accompanying
condensed consolidated results of operations from the
respective dates of acquisition. These transactions were
financed with cash on hand.
On July 18, 1995, the Company sold its National Metalwares,
Inc. subsidiary, a maker of tubular steel components for
manufacturers of consumer durables, to a private investment
group for approximately $8.5 million in cash less selling
costs. Neither the acquisitions nor the divestiture were
material to the Company's condensed consolidated financial
statements.
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 recontinued due to the
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIOD
ENDED OCTOBER 28, 1995
Overview
The Company designs, manufactures and markets a diverse
range of products in its transportation products and laboratory
equipment 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 and petroleum
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 28, 1995,
were $298.9 million, up $52.1 million or 21.1% from sales of
$246.9 million in the comparable 1994 period. For the quarter
ended October 28, 1995, sales were $94.2 million, up $5.2 million
or 5.8% from the comparable 1994 period. Sales increased in the
transportation segment in both the nine months and quarter ended
October 28, 1995. Revenues declined in the laboratory equipment
segment during the third quarter primarily due to the sale of a
tubular metal goods subsidiary near the end of the second quarter
of 1995. This business contributed sales in the 1994 third
quarter of $6.0 million.
Net earnings for the first nine months of 1995 were $16.3 million
or $2.19 on a fully diluted basis. This represented a 40.6%
increase over the $11.6 million or $1.65 per fully diluted share
earned in the first three quarters of 1994. During the third
quarter ended October 28, 1995, net earnings were $5.2 million,
or $.70 per share on a fully diluted basis, compared to $4.2
million or $.60 per share on a fully diluted basis in the 1994
period. All per share amounts reflect a 10% stock dividend paid
on July 10, 1995 to stockholders of record on June 23, 1995.
Following the trend in revenues in the quarter ended October 28,
1995, earnings increased in the transportation products segment
but decreased in the laboratory equipment segment compared to the
1994 periods due to the disposition discussed above.
On a business segment basis, revenues in the transportation
products segment for the quarter and nine months ended October
28, 1995, were $79.3 million and $243.2 million, respectively, as
compared to $67.7 million and $187.9 million, respectively, in
the comparable prior year periods. During the 1995 periods, the
heavy duty truck and trailer business had increased sales as a
result of new products and increased demand. Additionally, sales
to the Company's second largest truck customer increased
significantly. Railroad operations also had increased revenues
during the 1995 quarter and nine-month period as a result of
acquisitions in late 1994. Sales declined somewhat in the
automotive operation as selected low margin work was eliminated.
Operating profit at the transportation products segment in the
third quarter of 1995 increased 29% to $9.5 million (12.0% of
segment sales) compared to $7.4 million (10.9% of segment sales)
in the comparable 1994 period as higher product sales in the
heavy duty truck/trailer and railroad operations, as well as
improved product mix in the automotive business resulted in
increased profitability across all business areas. Operating
profit increased for similar reasons during the first nine months
of 1995 to $29.8 million (12.3% of segment sales) compared to
$21.5 million (11.4% of segment sales) in the 1994 year-to-date
period.
Sales in the laboratory equipment segment for the quarter and
nine months ended October 28, 1995, decreased to $14.9 million
and $55.7 million, respectively, compared to $21.4 million and
$59.0 million, respectively, in the 1994 periods. This segment's
decrease in revenues in both periods resulted principally from
the divestiture of the tubular metal goods subsidiary. However,
sales of petroleum analysis instruments increased during both
periods, partially offsetting a decline in sales of research
laboratory appliances. Operating profit for the laboratory
equipment segment for the first nine months of 1995 increased to
$7.1 million (12.7% of segment sales) compared to $6.3 million
(10.6% of segment sales) in the prior year's period. For the
1995 third quarter, operating earnings of $2.5 million (16.9% of
segment sales) compared to $2.7 million (12.5% of segment sales)
in the prior year quarter. Excluding the effect of the second
quarter disposition, earnings from comparable businesses in the
1995 third quarter were slightly above the prior year's quarter
while on a nine-month year-to-date basis earnings were
significantly higher in 1995 than in 1994. The significant
increase in the operating margin percentage during the 1995 third
quarter resulted from not including any sales or earnings from
the previously sold low margin tubular metal goods business.
During the quarter and nine-month period ended October 28, 1995,
earnings of this segment compared to the prior year's period
benefited from currency translation by $98,000 and $303,000,
respectively.
Consolidated gross margin on a year-to-date basis increased to
25.1% in 1995 from 24.0% in 1994 and for the third quarter of
1995, increased to 25.1% from 23.6% in 1994. In both periods,
the transportation products segment gross margin increased due to
improvements in the automotive business offset partially by
declines in the heavy duty truck and trailer business. The
laboratory equipment segment gross margin increased substantially
in both periods as a result of the sale of the low margin tubular
metal goods business in the second quarter. Raw material prices
were not significantly different in the 1995 periods compared to
1994.
Selling, general and administrative expenses were $42.8 million
and $35.3 million in the first nine months of 1995 and 1994,
respectively, or 14.3% of sales in both periods. During the
third quarter of 1995, selling, general and administrative
expenses were $13.4 million, or 14.2% of sales compared to the
1994 amount of $12.5 million, or 14.1% of sales. In the
transportation segment, selling, general and administrative
expenses were relatively equivalent as a percent of sales in both
1995 periods compared to 1994. In the laboratory equipment
segment, selling, general and administrative expenses increased
as a percent of sales during both 1995 periods compared to 1994
as a result of the sale of the tubular metal goods business which
had low selling, general and administrative costs.
Gross interest expense for the quarter and nine months ended
October 28, 1995, was $1.3 million and $3.9 million,
respectively, compared to $1.4 million and $4.0 million for the
prior year's comparable periods. Interest expense reflected
level interest rates on similar borrowings.
Income taxes were provided at an effective rate during the 1995
quarter and nine-month period of 43.5%, compared to 41.4% and
42.9% in the comparable 1994 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 28, 1995, the Company
generated $21.9 million of cash from operating activities. As of
October 28, 1995, the Company's working capital was $69.0
million, its total assets were $233.3 million, its total debt,
excluding current portion, was $73.1 million and its
stockholders' equity was $96.3 million.
Investing activities during the nine-month period ended October
28, 1995 included capital expenditures of $19.9 million. The
capital expenditures were primarily for machinery and equipment
to support new products and to improve operating efficiency but
also included costs for equipping a facility acquired in March
1995 that is expected to begin production on approximately
February 1, 1996.
To support its investing activities, the Company has an $80
million revolving credit agreement which was initially to expire
on December 6, 1997 but has now been extended to December 6,
1998. This credit facility will be used by the Company as the
principal source of acquisition financing. At October 28, 1995,
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 and
capital expenditures.
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
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 4, 1995 By: /s/ Richard A.Nunemaker
Richard A. Nunemaker
Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
EXHIBIT INDEX
Exhibit No. Page No.
11 Computation of Per Share Earnings 14
27 Financial Data Schedule 15
VARLEN CORPORATION AND SUBSIDIARIES Exhibit 11
Computation of Per Share Earnings
Unaudited
(Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
10/28/95 10/29/94 10/28/95 10/29/94
<TABLE>
<CAPTION>
Primary Earnings Per Share:
<S> <C> <C> <C> <C>
Net earnings 5,217 4,237 16,306 11,601
Computation of the Weighted
Average Number of Shares
Outstanding as Used in the
Primary Earnings Per Share
Computation:
Weighted average number of
shares outstanding 5,398 5,340 5,375 5,337
Shares assumed issued under
the treasury stock method 225 174 200 173
Weighted average number of
shares outstanding as
adjusted 5,623 5,514 5,575 5,510
Primary Earnings Per Share: 0.93 0.77 2.92 2.11
Fully Diluted Earnings Per
Share:
Reconciliation of net earnings
per the condensed consolidated
financial statements to the
amount used for the fully
diluted computation:
Net earnings 5,217 4,237 16,306 11,601
Add interest on 6.5% convertible
subordinated debentures, net of
income tax effects 683 682 2,024 2,031
Net earnings, as adjusted 5,900 4,919 18,330 13,632
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 5,398 5,340 5,375 5,337
Shares assumed issued under
the treasury stock method 234 175 228 173
Shares issuable from assumed
exercise of 6.5% convertible
subordinated debentures 2,777 2,776 2,777 2,776
Weighted average number of
shares outstanding as
adjusted 8,409 8,291 8,380 8,286
Fully Diluted Earnings Per
Share: 0.70 0.60 2.19 1.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 1995 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> OCT-28-1995
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<INVENTORY> 35684
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<PP&E> 134607
<DEPRECIATION> 65282
<TOTAL-ASSETS> 233288
<CURRENT-LIABILITIES> 48196
<BONDS> 73137
<COMMON> 541
0
0
<OTHER-SE> 95710
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<CGS> 223810
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</TABLE>
