SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended August 4, 1996
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 executive offices) (Zip Code)
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 September 11, 1996 there were outstanding 10,167,811 shares of
the registrant's common stock, no par value, which is the only class of common
or voting stock of the registrant.
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
QUARTER AND NINE MONTHS ENDED AUGUST 4, 1996 AND AUGUST 4, 1995
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
Quarter Ended Nine Months Ended
----------------------------- ---------------------------
August 4, August 4, August 4, August 4,
1996 1995 1996 1995
------------- -------------- ------------- -------------
(Thousands of dollars except per share data)
<S> <C> <C> <C> <C>
Net sales $ 55,973 60,865 171,541 167,596
Cost of sales 41,411 46,931 127,048 128,477
------------- -------------- ------------- -------------
Gross profit 14,562 13,934 44,493 39,119
Selling, general and administrative expenses 14,208 18,124 43,789 50,176
------------- -------------- ------------- -------------
Operating income (loss) 354 (4,190) 704 (11,057)
------------- -------------- ------------- -------------
Other income (expense):
Interest expense (751) (1,294) (3,384) (3,106)
Interest income 199 204 629 712
Foreign currency transaction gains 81 23 174 366
Gain on sale of assets 9,327 11 9,970 21
Other, net 193 256 514 288
------------- -------------- ------------- -------------
9,049 (800) 7,903 (1,719)
Income (loss) before provision (benefit)
for income taxes 9,403 (4,990) 8,607 (12,776)
Provision (benefit) for income taxes 2,516 125 2,885 (2,574)
------------- -------------- ------------- -------------
Net income (loss) 6,887 (5,115) 5,722 (10,202)
Retained earnings:
Beginning 395 9,414 1,560 14,501
------------- -------------- ------------- -------------
Ending $7,282 4,299 7,282 4,299
============= ============== ============= =============
Net income (loss) per share $0.67 (0.50) 0.56 (1.01)
============= ============== ============= =============
Weighted average shares of common stock
(all periods) and common stock equivalents
(income periods only) outstanding 10,235,374 10,131,027 10,182,030 10,117,441
============= ============== ============= =============
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<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 4, 1996 AND NOVEMBER 3,1995
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
August 4, November 3,
1996 1995
---------------- ---------------
(Thousands of dollars)
<S> <C> <C>
Assets
Current assets:
Cash $ 3,694 3,657
Trade receivables, net 34,315 39,824
Inventories:
Raw materials 12,503 13,391
Work in process 13,272 14,429
Finished goods 38,205 44,943
---------------- ---------------
63,980 72,763
Other current assets 11,107 11,667
---------------- ---------------
Total current assets 113,096 127,911
Note receivable 5,348 5,600
Property, plant and equipment, net 24,121 33,363
Other non-current assets 4,498 6,953
---------------- ---------------
$ 147,063 173,827
================ ===============
Liabilities and Shareholders' Equity Current liabilities:
Short-term debt $17,848 44,779
Current installments of long-term debt 1,282 2,407
Trade payables 21,430 17,644
Other current liabilities 11,740 14,073
---------------- ---------------
Total current liabilities 52,300 78,903
Long-term debt, excluding current installments 5,034 12,568
Other non-current liabilities 5,922 3,136
Deferred gain on sale of building 3,726 5,250
Shareholders' equity:
Common stock, no par value, $.01 stated value,
authorized 20,000,000 shares; issued 10,204,086
in 1996 and 10,181,601 in 1995 46,024 46,024
Additional paid-in capital 29,855 29,425
Cumulative foreign currency translation adjustment (1,336) (1,295)
Minimum pension liability adjustment (1,635) (1,635)
Retained earnings 7,282 1,560
---------------- ---------------
80,190 74,079
Less: Treasury stock, 36,275 shares in
1996 and 1995, at cost 109 109
---------------- ---------------
Total shareholders' equity 80,081 73,970
---------------- ---------------
$ 147,063 173,827
================ ===============
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FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 4, 1996 AND AUGUST 5, 1995
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
August 4, August 5,
1996 1995
--------------- ----------------
(Thousands of dollars)
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 5,722 (10,202)
Adjustments to reconcile net income (loss) to net cash from
(used in) operating activities:
Depreciation and amortization 3,937 2,770
Amortization of deferred gain on sale of building (1,524) (1,524)
Amortization of deferred gain on sale of subsidiary (1,322) -
Deferred income taxes 1,996 (2,805)
Gain on sale of assets (9,970) (21)
Decrease (increase) in:
Trade receivables 5,509 6,686
Inventories 8,783 (10,566)
Other current assets 1,339 (2,585)
Increase (decrease) in:
Trade payables 3,786 (45)
Other (2,853) (1,630)
--------------- ----------------
Net cash from (used in) operating activities 15,403 (19,922)
--------------- ----------------
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment (1,968) (9,688)
Proceeds from sale of assets 22,588 115
--------------- ----------------
Net cash from (used in) investing activities 20,620 (9,573)
Cash flows from (used in) financing activities:
Net change in revolving credit facility (26,931) 24,554
Proceeds from issuance of debt 2 6,320
Repayment of long-term debt (9,132) (1,187)
Receipts from sale of common stock - 848
Other 116 (155)
--------------- ----------------
Net cash from (used in) financing activities (35,945) 30,380
--------------- ----------------
Foreign currency translation adjustment (41) (274)
--------------- ----------------
Net increase in cash flow 37 611
Cash, beginning of year 3,657 2,372
--------------- ----------------
Cash, end of period $3,694 2,983
=============== ================
Supplemental cash flow disclosures:
Interest paid $ 4,103 2,828
Income taxes paid 837 1,886
Assets acquired through direct financing loans or capital leases 723 2,875
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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 1995 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.
3. On June 7, 1996, the Company sold its Piedras Negras, Mexico sewing and
finishing facility to Galey & Lord, Inc. for a purchase price of
approximately $22,250,000 in cash. A non-recurring pre-tax gain of
$9,300,000 was recognized in the third quarter of 1996.
Proceeds from the sale were used to retire a long-term capital lease
obligation of approximately $7,224,000 plus other long-term
obligations. The balance of the proceeds of approximately $13,250,000
was applied to the Company's credit line.
In conjunction with this sale, the Company entered into a long-term
supply agreement whereby Galey & Lord, Inc. will continue to produce
products for Farah at the Piedras Negras facility. In addition to the
long-term supply agreement, the Company expects to invest in joint
ventures or other similar arrangements to meet its future production
requirements.
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FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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Results of Operations
Third Quarter Ended Nine Months Ended
--------------------------------- -----------------------------------
1996 1995 1996 1995
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales:
Farah U.S.A. 73.6 % 76.0 % 73.6 % 73.8 %
Farah International 18.1 16.3 19.0 18.9
Value Slacks 8.3 7.7 7.4 7.3
------------ ----------- ------------ ------------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 74.0 77.1 74.1 76.7
------------ ----------- ------------ ------------
Gross profit 26.0 22.9 25.9 23.3
Selling, general and
administrative expenses 25.4 29.8 25.5 29.9
------------ ----------- ------------ ------------
Operating income (loss) 0.6 -6.9 0.4 -6.6
Other income (expense), net 16.2 -1.3 4.6 -1.0
------------ ----------- ------------ ------------
Income (loss) before income taxes 16.8 -8.2 5.0 -7.6
Income tax expense (benefit) 4.5 0.2 1.7 -1.5
------------ ----------- ------------ ------------
Net income (loss) 12.3 % -8.4 % 3.3 % -6.1 %
============ =========== ============ ============
</TABLE>
Consolidated sales for the third quarter of fiscal 1996 were $4,892,000
(8.0%) lower than in the third quarter of fiscal 1995. For the first nine
months, sales increased by $3,945,000 (2.4%) compared to the same period of
1995. Sales in the third quarter of 1995 benefited by delayed shipments
scheduled for the second quarter of approximately $4,125,000. Excluding these
shipments, the decrease in third quarter sales was 1.2%.
Farah U.S.A. sales for the third quarter of fiscal 1996 were
$41,173,000 compared to $46,281,000 in the third quarter of 1995, an 11.0%
decline. (Excluding the effect of the delayed shipments previously discussed,
Farah U.S.A. sales were down approximately 2.3%.) Unit sales also decreased by
approximately the same percentage, while the average selling price was
comparable in both periods. In the first nine months of 1996, Farah U.S.A. sales
were $126,306,000 compared to $123,702,000 in the same period of 1995. Unit
sales increased 4.1% while the average selling price declined 1.9%.
Third quarter 1996 sales of Savane were comparable to the same period
of 1995 after giving effect to the delayed shipments last year. However, Savane
continues to maintain strong market share with year to date sales 12.7% above
last year's level. The Company introduced its new Deep Dye products and
Womenswear late in the third quarter and early information indicates good
consumer acceptance. Initial shipments of John Henry product to Sears began in
the third quarter of 1996, resulting in an increase in this category, partially
offset by decreases in sales of Farah product as Sears phased out of the Farah
label program. In late August, the Company made initial shipments of Farah
branded product to Wal-Mart. Sales of private label product showed a 2.4%
increase in the third quarter, excluding the effect of the 1995 delayed
shipments previously discussed, and a 24.6% increase for the first nine months
of 1996 compared to 1995.
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Sales at Farah International were $10,149,000 in the third quarter of
1996 compared to $9,905,000 in the third quarter of 1995, a 2.5% increase. In
the first nine months of fiscal 1996, sales were also up 2.5%, increasing from
$31,722,000 in 1995 to $32,519,000 in the same period of 1996. Unit volume and
the average selling price both increased 1.2% during the quarter. For the nine
month period, units sales increased 2.7%, while the average selling price
remained comparable. Combined sales at Farah Australia and Farah New Zealand
increased by 30.3% in the third quarter of 1996 compared to 1995, and were up
13.7 % in the nine month period. This increase in sales was mainly attributed to
higher sales of Savane no wrinkle product and increased private label business.
At Farah U.K. sales were down 7.1% in the quarter and 1.2% in the first nine
months. Farah U.K. sales have been adversely affected by soft retail conditions
as well as the strengthening of the U.S. dollar compared to the British Pound
Sterling.
Value Slacks sales in the third quarter of 1996 were comparable to
sales in the third quarter of 1995 at $4,651,000 and $4,679,000 respectively. In
the first nine months of 1996, sales increased by 4.5%, from $12,172,000 to
$12,716,000. As of the end of the third quarter, the Company was operating 40
U.S. stores compared to 32 U.S. stores and 5 Puerto Rican stores at the same
time in 1995. Same store sales were 11.5% lower in the third quarter and 6.9%
lower in the nine month period compared to the same periods in 1995. Increased
competition in the retail outlet market has resulted in softer sales. Offsetting
the decrease in same store sales, were increased revenues from new stores as
well as revenues received from three "satellite sale" programs held during the
second and third quarters of 1996.
As a percent of sales, gross profit was 26.0% in the third quarter of
1996 compared to 22.9% in the third quarter of 1995. For the nine month period,
gross profit as a percent of sales was 25.9% in 1996 compared to 23.3% in the
same period of 1995.
Farah U.S.A. gross profit as a percent of sales was 22.4% in the third
quarter of 1996 compared to 17.8% in the third quarter of 1995. In the nine
month period, gross profit increased from 17.9% in 1995 to 22.1% in 1996. Cost
reduction efforts, combined with lower dollar costs in Mexico, as a result of
the peso devaluation, favorably impacted unit production costs. In addition, the
third quarter and first nine months of 1995 were adversely affected by
transitional problems related to the start up of new production facilities.
At Farah International, gross profit as a percent of sales was
comparable in both the third quarter and first nine months of 1996 and 1995,
averaging approximately 34.0%.
At Value Slacks, gross profit as a percent of sales decreased from
50.1% in the third quarter of 1995 to 41.3% in the third quarter of 1995. For
the nine month period, gross profit decreased from 51.3% to 45.4%. Higher
promotional sales, combined with a lower mix of irregulars and closeout goods
were the principal factors contributing to the lower margins in 1996. In
addition, during the 1996 second and third quarter, margins were negatively
impacted by below normal sales prices of product sold through the "satellite
sale" programs.
Selling, general and administrative expenses ("SG&A") as a percent of
sales decreased from 29.8% in the third quarter and first nine months of 1995 to
25.4% in the third quarter and first nine months of 1996. The decrease in SG&A
resulted mainly from cost reduction efforts at Farah U.S.A, where advertising
costs were down approximately 50%, combined with lower professional fees,
commission expenses and other operating costs.
Other income in 1996 included a gain of approximately $9,300,000 on the
sale of the Company's Piedras Negras, Mexico facility. Proceeds from the sale
were used to reduce the Company's short term and long term debt, which also
resulted in a 42% decrease in interest expense in the third quarter of 1996
compared to the same period in 1995. For the nine month period, interest expense
was slightly higher in 1996 due to higher average borrowings in the first half
of the year. Also included in the nine month period was a gain of approximately
$590,000 recognized by Farah International in the second quarter of 1996, as a
result of the sale of one of the Company's manufacturing facilities located in
Galway, Ireland.
Income tax expense was recorded in the third quarter and first nine
months of 1996, principally as a result of the gain on the sale of Piedras
Negras, Mexico facility.
Financial Condition
The Company's primary Credit Agreement provides up to $50,000,000 of
credit through July 1, 1998, for the Company's United States and United Kingdom
operations for either borrowings or letters of credit. Availability under the
Credit Agreement is limited by formulas derived from accounts receivable and
inventory. As of August 4, 1996, usage under the Agreement was $20,152,000 and
the excess credit line available was $28,757,000. As of August 4, 1996, the
Company was in compliance with all covenants under the Credit Agreement.
Net cash from operations in the first nine months of 1996 was
$15,403,000, primarily as a result of a decrease in inventories and accounts
receivable. Increased promotional sales and reduced production levels resulted
in bringing inventory levels more in line with current demand. Cash flow from
operations together with proceeds from the sale of the Piedras Negras Mexico
facility of approximately $22,250,000 were used to reduce both short term and
long term borrowings.
Capital expenditures through August 4, 1996 approximated $2,691,000.
Expenditures were mainly for manufacturing equipment and information systems. As
of August 4, 1996, the Company had commitments for future capital expenditures
of approximately $1,040,000. The Company expects to incur additional commitments
for capital expenditures of approximately $2,000,000 over the next three months
to add additional laundry and finishing facilities to meet future production
requirements. These capital expenditures will be financed through the Company's
existing Credit Agreement and/or alternative financing arrangements.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) 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: September 13, 1996
Russell G. Gibson
Executive Vice President
Principal Financial Officer
Polly H. Vaughn
Principal Accounting Officer
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FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-Q INDEX TO EXHIBITS
August 4, 1996
Page
Description Number
Exhibit 11 Statement regarding computation of net income (loss)
per share. 11
Exhibit 27 Financial Data Schedule 12
<PAGE>
Exhibit 11
FARAH INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
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 on weighted
average shares of common stock outstanding.
