SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended February 3, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-5400
FARAH INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1061146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8889 Gateway West, El Paso, Texas 79925
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (915) 593-4444
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities and 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 .
As of March 3, 1995 there were outstanding 10,127,291 shares of the
registrant's common stock, no par value, which is the only class of
common or voting stock of the registrant.
1
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
QUARTERS ENDED FEBRUARY 3, 1995 AND FEBRUARY 4, 1994
(Unaudited)
February 3, February 4,
1995 1994
(Thousands of dollars except
per share data)
Net sales $49,949 51,270
Cost of sales 37,138 35,886
Gross profit 12,811 15,384
Selling, general and
administrative expenses 14,434 12,888
Operating income (loss) (1,623) 2,496
Other income (expense):
Interest expense (691) (687)
Interest income 197 180
Foreign currency transaction gains 175 75
Other, net 14 3
(305) (429)
Income (loss) before provision
(benefit) for income taxes (1,928) 2,067
Provision (benefit) for income taxes (673) 56
Net income (loss) (1,255) 2,011
Retained earnings:
Beginning 14,501 3,696
Ending $13,246 5,707
Net income (loss) per share $(0.12) 0.25
Weighted average shares of common stock
(all periods) and common stock
equivalents (income periods only)
outstanding 10,096,111 8,204,472
2
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FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 3, 1995 AND NOVEMBER 4, 1994
(Unaudited)
February 3, November 4,
1995 1994
(Thousands of dollars)
ASSETS
Current assets:
Cash $2,928 2,372
Trade receivables, net 27,213 36,931
Inventories:
Raw materials 13,755 11,625
Work in process 19,075 16,949
Finished goods 46,810 46,628
79,640 75,202
Other current assets 12,707 9,414
Total current assets 122,488 123,919
Notes receivable 5,835 5,910
Property, plant and equipment, net 26,458 22,872
Other non-current assets 5,400 5,350
$160,181 158,051
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $28,098 18,184
Current installments of long-term debt 830 874
Trade payables 17,323 22,306
Other current liabilities 9,448 15,171
Total current liabilities 55,699 56,535
Long-term debt, excluding
current installments 9,516 5,170
Other non-current liabilities 3,126 3,103
Deferred gain on sale of building 6,774 7,282
Shareholders' equity:
Common stock, no par value,
$.01 stated value, authorized
20,000,000 shares; issued 10,156,198
in 1995 and 10,116,616 in 1994 46,019 46,018
Additional paid-in capital 29,136 28,497
Cumulative foreign currency
translation adjustment (1,346) (1,066)
Minimum pension liability adjustment (1,880) (1,880)
Retained earnings 13,246 14,501
85,175 86,070
Less: Treasury stock, 36,275 shares in
1995 and 1994, at cost 109 109
Total shareholders' equity 85,066 85,961
$160,181 158,051
3
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FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarters Ended February 3, 1995 and February 4, 1994
(Unaudited)
1995 1994
(Thousands of dollars)
Cash flows from (used in) operating activities:
Net income (loss) $(1,255) 2,011
Adjustments to reconcile net income
(loss) to net cash
used in operating activities:
Depreciation and amortization 881 874
Amortization of deferred gain
on building sale (508) (508)
Decrease (increase) in:
Trade receivables 9,718 5,147
Inventories (4,438) (9,404)
Other current assets (3,293) (1,223)
Decrease in:
Trade payables (4,983) (99)
Other current liabilities (5,723) (515)
Net cash used in
operating activities (9,601) (3,717)
Cash flows used in investing activities:
Purchases of property, plant and equipment (3,509) (1,062)
Net cash used in
investing activities (3,509) (1,062)
Cash flows from (used in) financing activities:
Net change in revolving credit facility 10,065 5,981
Proceeds from issuance of debt 3,692 -
Repayment of long-term debt (517) (2,445)
Receipts from exercise of stock options 640 1,055
Other 66 129
Net cash from
financing activities 13,946 4,720
Foreign currency translation adjustment (280) 388
Net increase in cash flow 556 329
Cash, beginning of quarter 2,372 2,007
Cash, end of quarter $2,928 2,336
Supplemental cash flow disclosures:
Interest paid 651 763
Income taxes paid 1,425 272
Assets acquired through direct financing
loans or capital leases 976 225
Exchange of debentures - 1,673
4
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FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The attached condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. As a result, certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The Company believes that the disclosures made are adequate to
make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes
included in the Company's 1994 Annual Report on Form 10-K.
2. The foregoing financial information reflects all adjustments
(which consist only of normal recurring adjustments) which are,
in the opinion of management, necessary to present a fair
statement of the financial position and the results of
operations and cash flows for the interim periods.
5
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
Consolidated sales for the first quarter of fiscal 1995
decreased by $1,321,000 (2.6%) compared to the first quarter of
fiscal 1994. Sales decreased at Farah U.S.A. by 12%, were
comparable at Value Slacks and increased by 65% at Farah
International.
Farah U.S.A. sales for the first quarter of fiscal 1995 were
$36,334,000 compared to $41,310,000 in the first quarter of 1994.
Unit sales decreased by 10% while the average selling price
decreased by 3%. A comparison of sales by product line is as
follows:
% of Sales % Increase (Decrease)
1995 1994 1995 1994
Savane 57% 55% -11% 3%
Farah 20% 27% -26% -11%
Private Label 14% 9% 41% -6%
John Henry 9% 9% -16% 0%
Competitive and promotional pressures from other manufacturers
of wrinkle resistant product had a negative impact on first
quarter 1995 branded sales. First quarter 1994 sales of Savane
products were higher due to initial stocking of base products by a
large number of customers, compared to first quarter 1995
which consisted mainly of replenishment of existing inventories.
Sales were also adversely affected by unfilled orders which
resulted from certain manufacturing inefficiencies associated with
new private label programs. The overall average unit selling
price decreased as a result of a higher proportion of private
label sales which carry a lower selling price compared to the
Company's branded product and were also negatively impacted by
higher levels of promotional sales in 1995 than in 1994.
Farah International sales were $9,320,000 in the first quarter
of 1995 compared to $5,655,000 in the first quarter of 1994. Unit
volume was up 51% while the average selling price increased 9%.
Sales at Farah U.K. were up 64% due to the introduction of new
products, increased promotional sales and higher private label
sales. Sales at Farah Australia and New Zealand combined were up
75% in the first quarter of 1995 compared to the same period in
1994. This increase resulted mainly from an increase in sales of
Savane and Private Label products which were only in the start-up
phase in the first quarter of 1994. Also favorably impacting U.S.
Dollar sales was the effect of the weakening U.S. Dollar compared
to the British Pound Sterling and the Australian Dollar. The
average exchange rate of the British Pound Sterling was
approximately 5% higher in the first quarter of 1995 compared to
the same period of 1994 and the average exchange rate of the
Australian Dollar was approximately 13% higher for the same
<PAGE>
period. The higher exchange rate resulted in higher sales when
translated into U.S. Dollars.
Value Slacks sales were $4,295,000 in the first quarter of 1995
compared to $4,305,000 in the first quarter of 1994. Unit sales
increased by 4% while the average selling price per unit decreased
by 4%. Sales in Puerto Rico decreased by 49%, while sales in the
U.S. increased by 33%. The Company has continued to close stores
in Puerto Rico while opening new stores in the United States. In
the first quarter of 1995 the Company had 29 U.S. stores and 5
Puerto Rican stores in operation compared to 21 U.S. stores and 11
Puerto Rican stores in the first quarter of 1994.
6
<PAGE>
Consolidated gross profit decreased by $2,573,000 (16.7%) in
the first quarter of 1995 compared to the first quarter of 1994.
As a percent of sales, gross profit was lower at 25.6% in 1995
compared to 30.0% in the first quarter of 1994.
At Farah U.S.A. gross profit as a percent of sales was 20% in
the first quarter of 1995 compared to 27% in the same period of
1994. As a result of the overall sales decrease at Farah U.S.A.,
production levels also decreased in the first quarter which
resulted in higher fixed costs per unit produced. The shift in
sales mix to more private label products which carry a lower
margin combined with higher promotional sales activities
negatively impacted margins in the first quarter. Margins were
also negatively affected by lower efficiencies and start-up costs
on new private label production. Partially offsetting these
increased costs was the favorable effect of the devaluation of the
Mexican Peso.
At Farah International gross profit as a percent of sales was
down from 38% in the first quarter of 1994 to 35% in the first
quarter of 1995. Higher promotional sales in Farah U.K., combined
with manufacturing inefficiencies in the Irish factories, reduced
margins. At Value Slacks gross profit as a percent of sales
increased from 45% in the first quarter of 1994 to 53% in the
first quarter of 1995. The shift in sales to U.S. stores from
Puerto Rican stores had a favorable impact on margins, as overall
margins earned are higher at U.S. locations. Margins were also up
as a result of increased sales of certain higher margin casual and
Savane product.
Selling, general and administrative expenses ("SG&A") as a
percent of sales increased from 25.1% in the first quarter of 1994
to 28.9% in the first quarter of 1995. At Farah U.S.A. SG&A
increased from 22% to 26%. This increase was mainly attributable
to higher computer systems implementation costs, combined with the
effect of fixed costs that did not decrease in relation to the
lower sales levels. Conversely, at Farah International, SG&A as a
percent of sales decreased from 36% in the first quarter of 1994
to 31% in the same period of 1995 due to fixed costs that did not
increase in relation to the higher sales levels. At Value Slacks
SG&A increased from 44% in the first quarter of 1994 to 49% in the
first quarter of 1995. The increased percentage was related to
higher employee benefit expenses as well as costs related to the
closing of two stores in Puerto Rico.
Other expense was $124,000 lower in the first
quarter of 1995 compared to the first quarter of 1994. Net
interest expense was comparable in both periods; however, it was
partially offset in the first quarter of 1995 by higher currency
gains related to the strengthening of the U.S. Dollar compared to
the Mexican Peso.
<PAGE>
An income tax benefit was recorded in the first quarter of 1995
compared to an expense in the first quarter of 1994. In 1994 the
effective tax rate was lower than statutory rates due to the
effect of recognition of net operating loss carryforwards in 1994.
Financial Condition
The Company's primary Credit Agreement provides up to
$40,000,000 of credit through November 3, 1995. Farah U.S.A.,
Value Slacks and Farah U.K. are parties to the Credit Agreement.
Availability under the Agreement is limited by formulas derived
from accounts receivable, inventory and fixed assets. As of
February 3, 1995, usage under the agreement was $28,917,000 and
available credit was $11,083,000.
7
<PAGE>
In the first quarter of 1995, the Company entered into a
$10,000,000 lease line of credit which will be used to finance the
purchase of laundry, finishing, sewing and cutting equipment in
Mexico, Costa Rica and the United States. Usage under this
line totaled $4,664,000 as of February 3, 1995. The Company was in
compliance with all financial covenants under this agreement as of
February 3, 1995.
In addition, the Company's primary credit facilities contain
certain financial covenants including, in one instance a quartely
profitability covenant. Compliance with the profitability covenant
has been waived for the fiscal quarter ended February 3, 1995. The
Company intends to seek amendments to the credit facilities to
establish new covenants which are consistent with managements
current business plan. In the event the credit facilities are not
amended, management believes it can obtain waivers from its lenders
if it fails to comply with the covenants in the future. However,
there can be no assurance such waivers will be obtained.
Net cash used in operations in the first quarter of 1995 was
approximately $10 million as a result of higher inventory levels
and a decrease in trade payables and accrued expenses. The higher
inventories were due to lower than expected sales and the
reduction in trade payables and accrued expenses was consistent
with the normal seasonality of the Company's business. These uses
of funds were financed through accounts receivable collections and
increases in short term borrowings. The Company is currently
attempting to reduce inventory levels to match anticipated sales
levels. To the extent inventory levels cannot be reduced, it may
be necessary to request additional credit from the Company's
lender. There can be no assurance that additional credit will be
extended.
Capital expenditures through February 3, 1995 approximated
$4,485,000. Expenditures were mainly for manufacturing equipment
and improvements to our new laundry and cutting facilities. As of
February 3, 1995 the Company had commitments for future capital
expenditures of approximately $2,270,000.
8
<PAGE>
PART II. OTHER
INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 11 Statement regarding computation
of net income (loss) per share.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter
for which the report is filed.
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.
FARAH INCORPORATED
Date: March 10, 1995
/s/ James C. Swaim
James C. Swaim
Executive Vice President
Chief Financial Officer
/s/ Russell G. Gibson
Russell G. Gibson
Chief Accounting Officer
9
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FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-Q INDEX TO EXHIBITS
FEBRUARY 3, 1995
Page
Description Number
Exhibit 11 Statement regarding computation 11
of net income (loss) per
share.
Exhibit 27 Financial Data Schedule 12
10
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<PAGE>
Exhibit 11
FARAH INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income per share is based on weighted average shares of common
stock and common stock equivalents outstanding. Stock options are
included as common stock equivalents under the treasury stock
method, where dilutive. Additional dilution from the Company's
convertible subordinated debentures, which are not common stock
equivalents, is not material. Net loss per share is based only on
weighted average shares of common stock outstanding.
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-03-1995
<PERIOD-END> FEB-03-1995
<CASH> 2,928
<SECURITIES> 0
<RECEIVABLES> 27,213
<ALLOWANCES> 673
<INVENTORY> 79,640
<CURRENT-ASSETS> 122,488
<PP&E> 55,323
<DEPRECIATION> 28,865
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 55,699
<BONDS> 1,663
<COMMON> 46,019
0
0
<OTHER-SE> 39,047
<TOTAL-LIABILITY-AND-EQUITY> 160,181
<SALES> 49,949
<TOTAL-REVENUES> 49,949
<CGS> 37,138
<TOTAL-COSTS> 37,138
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 691
<INCOME-PRETAX> (1,928)
<INCOME-TAX> (673)
<INCOME-CONTINUING> (1,255)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,255)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
