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 May 3, 1997
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 (630) 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 June 2, 1997, approximately 5,787,388 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)
May 3, January 31,
1997 1997
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Cash and cash equivalents $ 2,139 $ 3,133
Accounts receivable, less
allowance for doubtful accounts
$1,401 and $1,455 67,818 62,088
Inventories:
Raw materials 24,146 23,795
Work in process 17,107 17,285
Finished goods 11,136 12,551
52,389 53,631
Deferred and refundable income
taxes 7,579 8,244
Other current assets 7,780 5,357
Total current assets 137,705 132,453
Property, plant, and equipment 202,872 200,439
Less: accumulated depreciation 79,838 75,859
123,034 124,580
Goodwill and other intangible
assets, net 131,313 133,419
Investments and other assets 4,115 3,426
$ 396,167 $ 393,878
Liabilities and Stockholders' Equity
Current maturities of long-term
debt $ 2,210 $ 2,273
Accounts payable 28,376 26,623
Accrued expenses 28,936 32,366
Income taxes payable 4,786 1,730
Total current liabilities 64,308 62,992
Long-term debt:
Convertible subordinated
debentures 69,000 69,000
Other long-term debt 112,056 115,353
Total long-term debt 181,056 184,353
Deferred income taxes 16,089 16,252
Other liabilities 20,671 20,295
Common stock 579 576
Other stockholders' equity 113,464 109,410
$ 396,167 $ 393,878
<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
May 3, May 4,
1997 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Net sales $ 123,975 $ 91,975
Cost of sales 94,570 68,178
Gross profit 29,405 23,797
Selling, general and
administrative expenses 17,198 14,254
Interest expense, net 3,182 1,053
Earnings before income taxes 9,025 8,490
Income taxes 4,016 3,668
Net earnings $ 5,009 $ 4,822
Earnings per share:
Primary $ 0.84 $ 0.79
Fully diluted $ 0.63 $ 0.60
Weighted average number of
shares outstanding - primary 5,959 6,095
Weighted average number of
shares outstanding - fully diluted 9,048 9,159
Dividends per common share $ 0.09 $ 0.09
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
VARLEN CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of Dollars)
Three Months Ended
May 3, May 4,
1997 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
Net earnings $ 5,009 $ 4,822
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 4,380 2,896
Amortization 1,492 576
Deferred income taxes (10) 17
Change in assets and liabilities
net of effects from purchased and
sold businesses:
Accounts receivable, net (6,169) (3,262)
Inventories 832 (1,151)
Refundable income taxes 665 ---
Other current assets (2,486) 485
Accounts payable 1,827 1,489
Accrued expenses (2,294) (4,300)
Income taxes payable 2,987 3,066
Other noncurrent assets (1,052) (128)
Other noncurrent liabilities 401 89
Total adjustments 573 (223)
Net cash provided by operating
activities 5,582 4,599
Cash flows from investing activities:
Fixed asset expenditures (3,751) (4,983)
Purchases of long-term investments (284) (478)
Disposals and other changes in
property, plant and equipment 405 (6)
Net cash used in investing activities (3,630) (5,467)
Cash flows from financing activities:
Proceeds from debt 244 26
Payments of debt (3,314) (134)
Issuance of common stock under
option plans 140 32
Cash received on stock subscriptions 70 78
Purchase of treasury stock --- (1,666)
Cash dividends paid --- (530)
Net cash used in financing activities (2,860) (2,194)
Effect of exchange rate changes on cash (86) (58)
Net decrease in cash and cash equivalents (994) (3,120)
Cash and cash equivalents at beginning
of year 3,133 22,915
Cash and cash equivalents at end of
period $ 2,139 $ 19,795
<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 May 3, 1997 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 at period end is comprised of the following
(in thousands):
<TABLE>
<CAPTION>
May 3, January 31,
1997 1997
<S> <C> <C>
Term loan $105,500 $107,000
Revolving credit facility 2,200 4,000
6.5% convertible debentures
due 2003 69,000 69,000
Industrial revenue bonds and
other debt 6,566 6,626
183,266 186,626
Less current maturities (2,210) (2,273)
Long-term debt $181,056 $184,353
</TABLE>
On July 19, 1996, the Company entered into a $190 million
term loan and revolving credit agreement (the "Agreement")
which replaced its $80 million revolving credit facility.
This Agreement was obtained to facilitate the Brenco,
Incorporated acquisition as well as future acquisitions. As
amended on October 15, 1996, the Agreement is in the form of
two facilities. Facility "A" is a term-loan with a total
capacity of $110 million and facility "B" is a revolving
credit facility with an $80 million capacity. The term-loan
comes due on July 19, 2002 and requires escalating quarterly
principal payments which began in October 1996. The
revolving credit facility requires no prepayments and comes
due on July 19, 2002 with two optional one year extensions.
The Agreement provides for interest at one of three market
interest rates selected by the Company plus an applicable
margin which is dependent upon the market interest rate
chosen and the relationship of debt to cash flow. The
highest interest rate under the Agreement was the prime rate
with maximum commitment fees of 3/8 of 1% on the unused
portion of the line of credit. The average interest rate on
$40 million of this debt was fixed through interest rate
swap agreements at approximately 7.0% which includes the
current applicable margin. The interest rate swap
agreements cover periods which can range from one to three
years and were entered into in the third quarter of 1996.
The average interest rate on all of the Company's long-term
debt during the first quarter of 1997 was approximately
7.0%.
3. Supplemental Cash Flow Information
(in thousands):
<TABLE>
<CAPTION>
Quarter Ended
May 3, May 4,
1997 1996
<S> <C> <C>
Cash paid during the year-to-date
period for:
Interest $ 2,007 $ 108
Income taxes (net) $ 111 $ 433
</TABLE>
4. Business Segment Information
(in thousands):
<TABLE>
<CAPTION>
Quarter Ended
May 3, May 4,
1997 1996
<S> <C> <C>
Net Sales:
Transportation products $116,002 $ 77,589
Analytical instruments 7,973 14,386
$123,975 $ 91,975
Operating profits (1):
Transportation products $ 13,001 $ 8,941
Analytical instruments 1,012 2,034
$ 14,013 $ 10,975
<FN>
(1) Before interest and general corporate expenses.
</TABLE>
5. Acquisition:
On June 15, 1996, the Company, a wholly-owned subsidiary of
the Company and Brenco, Incorporated ("Brenco"), a
manufacturer and reconditioner of specialized tapered roller
bearings for the railroad industry with headquarters in
Virginia, entered into an acquisition agreement for the
purchase of all of Brenco's outstanding common stock for
$16.125 per share. As a result of the tender offer which
expired on July 18, 1996, the Company owned approximately 96%
of the outstanding common stock of Brenco. On August 23,
1996, the remaining non-tendered shares were canceled and
converted into the right to receive $16.125 per share, making
Brenco a wholly-owned subsidiary of the Company. The total
purchase price for the common stock of Brenco was
approximately $165 million in cash and was financed within a
$190 million credit facility from the Company's existing bank
group plus cash on hand. The consolidated results of
operations on a pro forma basis as though Brenco had been
acquired on February 1, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended
May 3, May 4,
1997 1996
<S> <C> <C>
Net Sales $ 123,975 $ 122,297
Net earnings $ 5,009 $ 5,161
Net earnings per share -
primary $.84 $.85
Net earnings per share -
fully diluted $.63 $.64
</TABLE>
6. Divestitures:
On July 30, 1996, the Company sold the laboratory
appliance division of its Precision Scientific, Inc.
subsidiary, a manufacturer of research laboratory appliances
for approximately $12.0 million net of selling costs. Net
sales from this entity were $4.6 million for the first
quarter of fiscal 1996.
7. Stock Purchase:
On January 4, 1996, the Company's Board of Directors
authorized the purchase of up to 500,000 shares of its
Common Stock or the equivalent amount of its 6 1/2 percent
convertible subordinated debentures by the Company. As of
May 3, 1997, approximately 320,000 shares of Common Stock or
its equivalent are available to be repurchased under this
authorization.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD
ENDED MAY 3, 1997
Overview
The Company designs, manufactures and markets a diverse
range of products in its transportation products and analytical
instruments business segments. These products are marketed to
the railroad, heavy-duty truck and trailer, automotive, and
petroleum industries. The demand for the Company's products by
many of these industries is affected by domestic as well as
international economic conditions. 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 three months ended May 3, 1997,
were $124.0 million, up $32.0 million or 34.8% from sales of
$92.0 million in the comparable 1996 period. Sales increased
substantially in the transportation products segment and declined
in the analytical instruments segment.
Net earnings for the first three months of 1997 increased
3.9% to $5.0 million from $4.8 million in the first quarter of
1996. Earnings were $.63 per share on a fully diluted basis for
the first quarter of 1997 compared to $.60 per share on a fully
diluted basis in the first quarter of 1996. Operating profit
changes corresponded to revenue changes with the transportation
products segment having increased operating profit while
analytical instruments' earnings declined.
On a business segment basis, revenues in the transportation
products segment for the three months ended May 3, 1997, were
$116.0 million, compared to $77.6 million in the prior year
equivalent period. Sales increased in all business areas within
this segment. Operating profit at this segment in the first
three months of 1997 increased 45.4% to $13.0 million (11.2% of
segment sales) from $8.9 million (11.5% of segment sales) in the
comparable 1996 period. Operating profit increased at all
business areas following the revenue trend.
Heavy-duty truck and trailer sales were higher in the 1997
period despite a decline in industry-wide sales vs. the
comparable 1996 period. The increase in sales was due primarily
to new products as well as greater penetration at existing
customers. During the quarter, the Company's largest customer
continued to increase the production of a new vehicle introduced
in 1996. This truck has significantly higher product content
than the model it is replacing. Heavy-duty truck and trailer
earnings increased in the 1997 quarter as compared to the 1996
period, following the increase in revenue. Automotive industry
sales were relatively level with the prior year's first quarter.
However, sales at the Company's automotive components business
increased as a result of favorable product mix, increased export
revenues, and new program introductions. Despite a reduction of
operating income of approximately $850,000 as a result of
development and start-up costs for the new Mechanical Diode one-
way clutch, earnings at this business improved in 1997 compared
to the 1996 first quarter. Railroad industry demand, as measured
by new railcar builds and new locomotive builds, decreased in the
first quarter compared to the equivalent period in 1996, although
production of both improved towards the end of the first quarter.
Lower production resulted from weather problems and program
deferrals at Eastern Class 1 railroads. Revenue ton-miles
increased to record levels during the 1997 quarter. Despite
industry conditions, sales increased significantly at the
Company's railroad components business, principally as a result
of two acquisitions in the second half of 1996. Correspondingly,
operating profit followed the revenue trend and was up primarily
as a result of the acquisitions.
Sales in the analytical segment for the quarter ended May 3,
1997, decreased 44.6% to $8.0 million, compared to $14.4 million
in the 1996 period. The bulk of the sales decrease resulted from
the July 1996 sale of a business that generated $4.6 million of
sales in the first quarter of 1996. However, sales in the
remaining business in this segment were also lower as North
American order patterns declined. Operating profit for the
analytical instruments segment for the first three months of 1997
decreased to $1.0 million (12.7% of segment sales) compared to
$2.0 million (14.1% of segment sales). Again, the greatest
portion ($.6 million) of the decline resulted from the sale of
the non-strategic business in July 1996. The remainder of the
decline occurred in the petroleum instrumentation business.
Consolidated gross margin declined to 23.7% in the first
quarter of 1997 from 25.9% in 1996. The decline was due
principally to the 1996 sale of a non-core business which had a
gross margin percent significantly greater than the consolidated
gross margin percent. On an individual segment basis, the
transportation gross margin percent declined as a result of
product mix at the heavy-duty truck business as well as costs
related to the start-up of the Mechanical Diode one-way clutch at
the automotive business. Gross margin increased at the
analytical instruments segment solely as a result of the 1996 non-
core disposition.
Selling, general and administrative expenses of $17.2
million or 13.9% of sales in the first three months of 1997
compared to $14.3 million or 15.5% of sales in the prior year's
comparable period. Most of the dollar increase in selling,
general and administrative expenses resulted from two
acquisitions, net of one divestiture. The decrease in selling,
general and administrative expenses percentage also resulted from
the two acquisitions and one disposition in the last half of
1996. The acquisitions had a lower percentage expense than the
consolidated percent, and the disposition had a higher percent
expense.
Gross interest expense for the quarter ended May 3, 1997,
was $3.2 million up from $1.3 million in the prior year's
comparable period. The increase resulted from higher debt
incurred for acquisitions. Interest income declined $.2 million
in the first quarter of 1997 as a result of lower cash and
investment balances.
Income taxes were provided at an effective rate during the
1997 quarter of 44.5% compared to 43.2% in the comparable 1996
period. 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 three-month period ended May 3, 1997, the Company
generated $5.6 million of cash from operating activities. As of
May 3, 1997, the Company's working capital was $73.4 million, its
total assets were $396.2 million, its total debt was $183.3
million, and its stockholders' equity was $114.0 million.
Investing activities during the three-month period ended May
3, 1997, included capital expenditures of $3.8 million. These
capital expenditures were primarily for machinery and equipment
to support new products and to improve operating efficiency. To
support its investing activities, the Company has a $190.0
million term loan and revolving credit agreement which was
entered into in 1996 and expires on July 19, 2002. The $110.0
million term loan portion of this facility was used to finance a
large acquisition in 1996. The $80.0 million revolving credit
facility will be used by the Company as the principal source of
acquisition funding. At May 3, 1997, the Company had $105.5
million outstanding under the term loan portion of the facility
and $2.2 million outstanding under the revolving credit portion
of the facility. The percentage of debt to total capitalization
at May 3, 1997, was 61.6%, down slightly from 62.9% at January
31, 1997. The Company believes that internally generated funds
will be sufficient to satisfy its anticipated working capital
needs, capital expenditures, and scheduled debt repayments.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on May 29, 1997, the
stockholders voted on one item. The item voted on and the
results of the voting were as follows:
<TABLE>
<CAPTION>
For Withheld
1. Elect a Board of Directors:
<S> <C> <C>
Ernest H. Lorch 4,936,270 94,273
Richard L. Wellek 4,936,270 94,273
Rudolph Grua 5,029,227 1,316
L. William Miles 5,028,749 1,794
Joseph J. Ross 5,029,249 1,294
Greg A. Rosenbaum 4,935,770 94,773
Theodore A. Ruppert 5,026,726 3,817
Total number of shares eligible
to be voted at the Annual Meeting
of Stockholders. 5,780,822
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 (l) - First Amendment to the Varlen Corporation
1993 Directors Incentive Stock Grant Plan.
Exhibit 11 - Computation of Per Share Earnings.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
None
Safe Harbor Provision
This Quarterly Report contains outlook and other forward-looking
statements which are not historical facts. These forward-looking
statements are based upon certain assumptions about a number of
important factors. While the Company believes that its
assumptions are reasonable, it cautions that there are inherent
difficulties in predicting these factors, that they are subject
to change at any time and that any such change could cause the
Company's actual results to differ materially from those
projected in its forward-looking statements. Among the factors
that could cause actual results to differ materially are:
expectations of market growth and size; the demand for the
Company's products and other market acceptance risks; the
presence in the market of competitors with greater financial
resources, and the impact of competitive products and pricing:
actual product purchases under existing purchase agreements and
the loss of any significant customers; general market conditions;
the ability of the Company to develop new products; capacity and
supply constraints or difficulties; productivity and efficiency
of operations; availability of resources; the results of the
Company's financing efforts; the effect of the Company's
accounting policies; and the effects of general economic, trade,
legal, social and economic conditions. Other risk factors may be
detailed from time to time in the Company's Securities and
Exchange Commission filings. The Company assumes no obligation
to update its forward-looking statements or advise of changes in
the assumptions and factors on which they are based.
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)
June 16, 1997 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.
10(l) First Amendment to the Varlen Corporation
1993 Directors Incentive Stock Grant Plan 15
11 Computation of Per Share Earnings 17
27 Financial Data Schedule 19
FIRST AMENDMENT TO THE
VARLEN CORPORATION
1993 DIRECTORS INCENTIVE STOCK GRANT PLAN
The Varlen Corporation 1993 Director Incentive Stock Grant Plan
(the "Director Stock Plan") shall be and hereby is amended,
effective May 29, 1997, as follows:
Section 7(1) of the Director Stock Plan shall be deleted and
replaced with the following:
7. Grant of Awards
(1) Terms of Awards. Each individual who becomes
an eligible Director shall be granted an Award of Common Stock
worth $12,000 based on the average of the high/ask price and the
low/bid price for the Common Stock rounded down to the nearest
whole share determined (i) on the date of the annual meeting of
stockholders of the Company on which the Director is elected to
office, and (ii) on the date of each annual meeting of
stockholders of the Company thereafter so long as the Director
continues to serve as an eligible Director following the close of
such annual meeting. If an individual becomes an eligible
Director on a date other than the date of an annual meeting of
stockholders of the Company, the eligible Director shall be
granted an Award on the date he takes the office for (i) shares
worth $12,000 as determined above if the date he takes office is
on or before six months anniversary of the previous annual
meeting of stockholders of the Company, or (ii) shares worth
$6,000 as determined above if the date he takes office is after
the six month anniversary of the previous annual meeting of
stockholders of the Company. Each Director's Award shall be
conditioned on the Director (or the legal representative of his
estate in the event of his death) accepting the Award by paying
in cash the par value per share of Common Stock granted within 10
business days following the date the Award is granted.
Exhibit 11
VARLEN CORPORATION AND SUBSIDIARIES
Computation of Per Share Earnings Unaudited
(Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
5/3/97 5/4/96
Primary Earnings Per Share:
<S> <C> <C>
Net earnings $ 5,009 $ 4,822
Computation of the Weighted Average
Number of Shares Outstanding as Used
in the Primary Earnings Per Share
Computation:
Weighted average number of shares
outstanding 5,777 5,853
Shares assumed issued under the
treasury stock method 182 242
Weighted average number of shares
outstanding, as adjusted 5,959 6,095
Primary Earnings Per Share: $ 0.84 $ 0.79
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 $ 5,009 $ 4,822
Add interest on 6.5% convertible
subordinated debentures, net of
income tax effects 690 703
Net earnings, as adjusted $ 5,699 $ 5,525
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 5,777 5,853
Shares assumed issued under the
treasury stock method 217 252
Shares issuable from assumed exercise
of 6.5% convertible subordinated
debentures 3,054 3,054
Weighted average number of shares
outstanding, as adjusted 9,048 9,159
Fully Diluted Earnings Per Share: $ 0.63 $ 0.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> MAY-03-1997
<CASH> 2139
<SECURITIES> 0
<RECEIVABLES> 67818
<ALLOWANCES> 0
<INVENTORY> 52389
<CURRENT-ASSETS> 137705
<PP&E> 202872
<DEPRECIATION> 79838
<TOTAL-ASSETS> 396167
<CURRENT-LIABILITIES> 64308
<BONDS> 181056
0
0
<COMMON> 579
<OTHER-SE> 113464
<TOTAL-LIABILITY-AND-EQUITY> 396167
<SALES> 123975
<TOTAL-REVENUES> 123975
<CGS> 94570
<TOTAL-COSTS> 94570
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3219
<INCOME-PRETAX> 9025
<INCOME-TAX> 4016
<INCOME-CONTINUING> 5009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5009
<EPS-PRIMARY> .84
<EPS-DILUTED> .63
</TABLE>
