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 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 March 5, 1996 there were outstanding 10,162,936 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
QUARTERS ENDED FEBRUARY 4, 1996 AND FEBRUARY 3, 1995
- -------------------------------------------------------------------------------
(Unaudited)
(Thousands of dollars
except per share data)
February 4, February 3,
1996 1995
-------------- --------------
<S> <C> <C>
Net sales $ 51,510 49,949
Cost of sales 37,713 37,138
-------------- --------------
Gross profit 13,797 12,811
Selling, general and administrative expenses 13,789 14,434
-------------- --------------
Operating income (loss) 8 (1,623)
-------------- --------------
Other income (expense):
Interest expense (1,365) (691)
Interest income 236 197
Foreign currency transaction gains 67 175
Other, net 210 14
-------------- --------------
(852) (305)
Loss before provision (benefit)
for income taxes (844) (1,928)
Provision (benefit) for income taxes 145 (673)
-------------- --------------
Net loss (989) (1,255)
Retained earnings:
Beginning 1,560 14,501
-------------- --------------
Ending $ 571 13,246
============== ==============
Net loss per share $ (0.10) (0.12)
============== ==============
Weighted average shares of common stock
outstanding 10,149,070 10,096,111
============== ==============
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<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 4, 1996 AND FEBRUARY 3, 1995
- -------------------------------------------------------------------------------
(Unaudited)
(Thousands of dollars)
February 4, November 3,
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,221 3,657
Trade Receivables, net 30,057 39,824
Inventories:
Raw materials 11,366 13,391
Work in process 12,185 14,429
Finished goods 44,080 44,943
-------------- --------------
Total inventories 67,631 72,763
Other current assets 11,811 11,667
-------------- --------------
Total current assets 113,720 127,911
Note receivable 5,518 5,600
Property, plant and equipment, net 33,113 33,363
Other non-current assets 7,034 6,953
-------------- --------------
$ 159,385 173,827
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 38,252 44,779
Current installments of long-term debt 2,277 2,407
Trade payables 14,911 17,644
Other current liabilities 10,761 14,073
-------------- --------------
Total current liabilities 66,201 78,903
Long-term debt, excluding current
installments 12,606 12,568
Other non-current liabilities 3,159 3,136
Deferred gain on sale of building 4,742 5,250
Shareholders' equity:
Common stock, no par value,
$.01 stated value, 20,000,000
shares authorized; issued 10,191,843
in 1996 and 10,181,601 in 1995 46,024 46,024
Additional paid-in capital 29,644 29,425
Cumulative foreign currency
translation adjustment (1,818) (1,295)
Minimum pension liability adjustment (1,635) (1,635)
Retained earnings 571 1,560
-------------- --------------
72,786 74,079
Less: Treasury stock, 36,275 shares in
1996 and 1995, at cost 109 109
-------------- --------------
Total shareholders' equity 72,677 73,970
-------------- --------------
$ 159,385 173,827
============== ==============
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<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED FEBRUARY 4, 1996 AND FEBRUARY 3, 1995
- -------------------------------------------------------------------------------
(Unaudited)
(Thousands of dollars)
1996 1995
---------------- --------------
<S> <C> <C>
Cash flows from (used in)
operating activities:
Net loss $ (989) (1,255)
Adjustments to reconcile net
loss to net cash from (used in)
operating activities:
Depreciation and amortization 1,325 881
Amortization of deferred gain on
building sale (508) (508)
Decrease (increase) in:
Trade receivables 9,767 9,718
Inventories 5,132 (4,438)
Other current assets (144) (3,293)
Increase (decrease) in:
Trade payables (2,733) (4,983)
Other current liabilities (3,093) (5,169)
---------------- --------------
Net cash from (used
in)operating activities 8,757 (9,047)
---------------- --------------
Cash flows used in investing activities:
Purchases of property, plant
and equipment (667) (3,509)
---------------- --------------
Net cash used in
investing activities (667) (3,509)
---------------- --------------
Cash flows from (used in)
financing activities:
Net increase (decrease)
in short-term debt (6,527) 10,065
Proceeds from issuance
of long-term debt 3 3,692
Repayment of long-term debt (603) (517)
Proceeds from sale of common stock - 86
Other 124 66
---------------- --------------
Net cash from (used in)
financing activities (7,003) 13,392
---------------- --------------
Foreign currency translation adjustment (523) (280)
---------------- --------------
Net increase in cash 564 556
Cash, beginning of quarter 3,657 2,372
---------------- --------------
Cash, end of quarter $ 4,221 2,928
================ ==============
Supplemental cash flow disclosures:
Interest paid $ 1,419 651
Income taxes paid 299 1,425
Assets acquired through direct
financing loans or capital leases 508 976
</TABLE>
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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. The Company maintains its fiscal year on a 52/53 week fiscal year
basis. Effective in the first quarter of 1996, the Company revised its
fiscal month-end from Friday to the following Sunday. The change was
implemented to conform the Company's accounting period to the month-end
shipping pattern required by customers and to minimize overtime and
transportation costs. The effect of the change was an increase in net
sales of approximately $2,383,000 and was not material to gross profit
for the first quarter of 1996.
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FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The following sets forth, certain financial data as percentages of net
sales:
<TABLE>
First Quarter Ended
---------------------------------
1996 1995
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<S> <C> <C>
Net sales:
Farah U.S.A. 72.6% 72.7%
Farah International 19.4 18.7
Value Slacks 8.0 8.6
-------------- -------------
Total net sales 100.0 100.0
Cost of sales 73.2 74.4
-------------- -------------
Gross profit 26.8 25.6
Selling, general and
administrative expenses 26.8 28.9
-------------- -------------
Operating income (loss) 0.0 -3.3
Other expense, net 1.6 0.6
-------------- -------------
Loss before income taxes -1.6 -3.9
Income tax expense (benefit) 0.3 -1.4
-------------- -------------
Net loss -1.9% -2.5%
============== =============
</TABLE>
Consolidated sales for the first quarter of fiscal 1996 increased by
$1,561,000 (3.1%) compared to the first quarter of fiscal 1995. Sales increased
at Farah U.S.A. and Farah International by 3% and 7%, respectively, and were
down at Value Slacks by 4%.
Farah U.S.A. sales for the first quarter of fiscal 1996 were
$37,386,000 compared to $36,334,000 in the first quarter of 1995. Unit sales
increased 5% while the average unit selling price decreased 2%. Overall, the
retail market in the U.S. remained soft in the first quarter with continued
competitive and promotional pressures having a negative impact on first quarter
sales. The reduction in the average unit selling price was also due to the
change in product mix, with the Company selling fewer coats and more private
label product this year compared to last year. Sales of Savane(R) product
increased 31% in the first quarter of 1996 compared to 1995. The sales increase
was due to the introduction of the Savane(R) Soft Wash(TM) labeled product, an
increase in sales of seasonal product and the introduction of Savane suit
separates. Offsetting the Savane increase were decreases in Farah(R), Farah
Clothing Co.(R) and John Henry(R) sales as certain customers re-positioned their
business in these brands to other labels. Sales of private label products
increased by 18% as a result of the addition of several new customers and new
programs with existing customers compared to 1995.
Farah International sales in the first quarter of 1996 were $9,982,000
compared to $9,320,000 in the first quarter of 1995. Unit volume increased 9%
while the average unit selling price decreased 2%. Sales at Farah U.K.
represented 63% of international sales and increased 6% for the quarter. Sales
at Farah Australia and New Zealand, which represented 35% of total international
sales, increased 14% in the first quarter of 1996 compared to 1995. Increases in
international sales were mainly attributable to higher sales of Savane no
wrinkle product and increased private label business.
Value Slacks sales in the first quarter of 1996 were $4,142,000
compared to $4,295,000 in the first quarter of 1995, a 4% decrease. At the end
of the first quarter of 1996 the Company was operating 38 retail stores in the
U. S. At the end of the first quarter of 1995 the Company had 29 U.S. stores and
5 Puerto Rican stores. All Puerto Rican stores were closed by the end of the
fourth quarter of 1995 and additional stores were opened in the U.S. during
1995. Overall store sales decreased due to the soft retail market nation-wide
and, more specifically, in the U.S./Mexico border area due to the Mexican peso
devaluation. Sales were also down in stores located in the Eastern United States
as a result of severe weather conditions experienced during the period.
As a percent of sales, gross profit was 26.8% in the first quarter of 1996
and 25.6% in the first quarter of 1995.
Farah U.S.A. gross profit as a percent of sales was 22% in the first
quarter of 1996 compared to 20% in the same period of 1995. The higher gross
profit percent was attributable to increased sales of Savane product, which
generally carry higher profit margins, combined with overall lower costs
resulting from the reconfiguration of the Company's cost structure which began
in 1995 and continued through the first quarter of 1996. Costs were also
favorably impacted by the devaluation of the Mexican peso. The average exchange
rate of the Mexican peso devalued by more than 85% in the first quarter of 1996
compared to the same period a year ago. Partially offsetting the reductions in
costs were employee severance expenses recorded in the first quarter of 1996.
The increase in the gross profit margin was also partially offset by increased
sales of private label product which generally carry lower gross profit margins.
Farah International gross profit as a percent of sales decreased from
35% in the first quarter of 1995 to 34% in the first quarter of 1996. Higher
sales of private label product, which carry lower margins, combined with
manufacturing inefficiencies in the Irish factories reduced this percentage.
Value Slacks gross profit as a percent of sales decreased from 53% in
the first quarter of 1995 to 50% in the first quarter of 1996. Promotional sales
were higher in the first quarter of 1996 as a result of decreased market demand
at retail during the 1995 holiday season.
Selling, general and administrative expenses ("SG&A") as a percent of
sales was 26.8% in the first quarter of 1996, down from 28.9% in the first
quarter of 1995. SG&A was down 3% at Farah U.S.A., offset partially by an
increase of 1% at Farah International and an increase of 3% at Value Slacks. At
Farah U.S.A., the decrease in SG&A was attributable to a 32% decrease in
advertising expense, combined with the effect of lower overall expenses
resulting from company wide cost reduction efforts. The increase in SG&A at
Farah International resulted from higher sales in retail concessions which carry
higher expenses. At Value Slacks the increase resulted from higher advertising
in an effort to stimulate sales during a competitive retail season.
Other expense was $547,000 higher in the first quarter of 1996 compared
to the first quarter of 1995. The increase was mainly attributable to increased
net interest expense on higher debt levels. Partially offsetting this increase
was higher royalty income from the Company's Savane and Process 2000(R)
licensing agreements.
Income tax expense was recorded in the first quarter of 1996 compared
to an income tax benefit in the first quarter of 1995. The Company's effective
tax rate varies with the mix of income or loss in countries in which the Company
conducts its business. In addition, in the first quarter of 1995 deferred tax
benefits were recognized associated with net operating loss carryforwards,
while no such tax benefits were recognized in the first quarter of 1996.
Financial Condition
The Company's primary Credit Agreement provides up to $50,000,000 of
credit through July 1, 1997, 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 February 4, 1996, usage under the agreement was $38,647,000 and
the excess credit line available was $8,035,000. As of February 4, 1996 the
Company was in compliance with all covenants under the Credit Agreement.
The Company also maintains a capital lease which originated in 1995 to
acquire laundry, finishing, sewing and cutting equipment in Mexico, Costa Rica
and the United States. As of February 4, 1996, the outstanding balance was
$7,494,000. The lease contains certain financial covenants and as of February 4,
1996, the Company was in compliance with all such covenants.
Net cash from operations in the first quarter of 1996 was $8,538,000,
primarily as a result of a decrease in accounts receivable and inventories.
Production levels were decreased in the first quarter in an attempt to better
match inventory levels with current demand. The decrease in accounts receivable
was consistent with the normal seasonality of the Company's business. The
decrease in inventory levels and higher collections on accounts receivable also
resulted in a decrease of short-term borrowings for the quarter. Somewhat
offsetting the cash generated from the receivables and inventory decrease was a
reduction in trade payables and accrued expenses. These reductions were a result
of lower raw materials inventory purchases and seasonal payment of accrued
expenses.
Capital expenditures through February 4, 1996 approximated $1,175,000.
Expenditures were mainly for manufacturing equipment and information systems. As
of February 4, 1996, the Company had commitments for future capital expenditures
of approximately $140,000.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 11 Statement regarding computation of
net 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 6, 1996 /s/ Richard C. Allender
Richard C. Allender
Chairman, Principal Executive Officer
/s/ Russell G. Gibson
Russell G. Gibson
Principal Accounting Officer
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FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-Q INDEX TO EXHIBITS
FEBRUARY 4, 1996
Page
Description Number
<S> <C> <C>
Exhibit 11 Statement regarding computation of
net loss per share. 11
Exhibit 27 Financial Data Schedule 12
</TABLE>
<PAGE>
Exhibit 11
FARAH INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
Net loss per share is based on weighted average shares of common
stock outstanding.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-03-1995
<PERIOD-END> FEB-04-1996
<CASH> 4,221
<SECURITIES> 0
<RECEIVABLES> 30,762
<ALLOWANCES> 705
<INVENTORY> 67,631
<CURRENT-ASSETS> 113,720
<PP&E> 63,445
<DEPRECIATION> 30,332
<TOTAL-ASSETS> 159,385
<CURRENT-LIABILITIES> 66,201
<BONDS> 1,663
0
0
<COMMON> 46,024
<OTHER-SE> 26,653
<TOTAL-LIABILITY-AND-EQUITY> 159,385
<SALES> 51,510
<TOTAL-REVENUES> 51,510
<CGS> 37,713
<TOTAL-COSTS> 51,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,365
<INCOME-PRETAX> (844)
<INCOME-TAX> 145
<INCOME-CONTINUING> (989)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (989)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
