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 3, 1997
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.)
4171 N. Mesa, Building D, Suite 500, El Paso, Texas 79902-1433
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (915) 496-7000
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 10, 1997 there were outstanding 10,315,264 shares of
the registrant's common stock, no par value, which is the only class of common
or voting stock of the registrant.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
QUARTER AND NINE MONTHS ENDED AUGUST 3, 1997 AND AUGUST 4, 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
----------------------------- ---------------------------
August 3, August 4, August 3, August 4,
1997 1996 1997 1996
------------- -------------- ------------- -------------
(Thousands of dollars except per share data)
<S> <C> <C> <C> <C>
Net sales $ 64,256 55,973 196,965 171,541
Cost of sales 48,103 41,411 144,065 127,048
------------- -------------- ------------- -------------
Gross profit 16,153 14,562 52,900 44,493
Selling, general and administrative expenses 17,244 14,208 50,126 43,789
Non-recurring charge - - 2,462 -
------------- -------------- ------------- -------------
Operating income (loss) (1,091) 354 312 704
------------- -------------- ------------- -------------
Other income (expense):
Interest expense (1,091) (751) (2,719) (3,384)
Interest income 193 199 589 629
Foreign currency transaction gains 118 81 242 174
Gain (loss) on sale of assets (44) 9,327 (25) 9,970
Other, net 565 193 670 514
------------- -------------- ------------- -------------
(259) 9,049 (1,243) 7,903
Income (loss) before income taxes (1,350) 9,403 (931) 8,607
Income tax provision (benefit) (947) 2,516 (1,784) 2,885
------------- -------------- ------------- -------------
Net income (loss) (403) 6,887 853 5,722
Retained earnings:
Beginning 9,572 395 8,316 1,560
------------- -------------- ------------- -------------
Ending $ 9,169 7,282 9,169 7,282
============= ============== ============= =============
Net income (loss) per share $ (0.04) 0.67 0.08 0.56
============= ============== ============= =============
Weighted average shares of common stock
(all periods) and common stock equivalents
(income periods only) outstanding 10,276,022 10,235,374 10,300,384 10,182,030
============= ============== ============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 3, 1997 AND NOVEMBER 3, 1996
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
August 3, November 3,
1997 1996
---------------- ---------------
(Thousands of dollars)
<S> <C> <C>
Assets
Current assets:
Cash $ 2,653 3,777
Trade receivables, net 40,284 41,671
Inventories:
Raw materials 16,002 11,404
Work in process 17,666 15,251
Finished goods 47,857 35,378
---------------- ---------------
81,525 62,033
Other current assets 12,664 10,857
---------------- ---------------
Total current assets 137,126 118,338
Note receivable 4,984 5,260
Property, plant and equipment, net 32,651 25,370
Other non-current assets 7,324 4,895
---------------- ---------------
$ 182,085 153,863
================ ===============
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 39,452 20,744
Current installments of long-term debt 4,690 1,288
Trade payables 25,992 24,038
Other current liabilities 12,659 13,737
---------------- ---------------
Total current liabilities 82,793 59,807
Long-term debt, excluding current installments 12,758 4,706
Other non-current liabilities 2,388 3,992
Deferred gain on sale of building 1,693 3,218
Shareholders' equity:
Common stock, no par value, $.01 stated value,
authorized 20,000,000 shares; issued 10,278,989
shares in 1997 and 10,209,246 shares in 1996 46,026 46,024
Additional paid-in capital 30,627 29,894
Cumulative foreign currency translation adjustment (2,017) (742)
Minimum pension liability adjustment (1,243) (1,243)
Retained earnings 9,169 8,316
---------------- ---------------
82,562 82,249
Less: Treasury stock, 36,275 shares in
1997 and 1996, at cost 109 109
---------------- ---------------
Total shareholders' equity 82,453 82,140
---------------- ---------------
$ 182,085 153,863
================ ===============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 3, 1997 AND AUGUST 4, 1996
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<CAPTION>
August 3, August 4,
1997 1996
--------------- ----------------
(Thousands of dollars)
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 853 5,722
Adjustments to reconcile net income to net cash from (used in) operating
activities:
Depreciation and amortization 3,930 3,937
Amortization of deferred gain on sale of building (1,525) (1,524)
Amortization of deferred gain on sale of subsidiary (1,493) (1,322)
Deferred income taxes (2,140) 1,996
Loss (gain) on sale of assets 25 (9,970)
Non-recurring charge 2,462 -
Insurance proceeds from fire damage 1,070 -
Decrease (increase) in:
Trade receivables 1,387 5,509
Inventories (20,367) 8,783
Other current assets (1,372) 1,339
Increase (decrease) in:
Trade payables 1,954 3,786
Other (3,133) (2,853)
--------------- ----------------
Net cash from (used in) operating activities (18,349) 15,403
--------------- ----------------
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment (9,249) (1,968)
Proceeds from sale of assets 52 22,588
--------------- ----------------
Net cash from (used in) investing activities (9,197) 20,620
Cash flows from (used in) financing activities:
Net change in revolving credit facility 18,708 (26,931)
Proceeds from issuance of debt 10,000 2
Repayment of long-term debt (1,846) (9,132)
Receipts from sale of common stock 566 -
Other (489) 116
--------------- ----------------
Net cash from (used in) financing activities 26,939 (35,945)
--------------- ----------------
Foreign currency translation adjustment (517) (41)
--------------- ----------------
Net increase (decrease) in cash flow (1,124) 37
Cash, beginning of year 3,777 3,657
--------------- ----------------
Cash, end of period $ 2,653 3,694
=============== ================
Supplemental cash flow disclosures:
Interest paid $ 2,663 4,103
Income taxes paid 496 837
Assets acquired through direct financing loans or capital leases 3,301 723
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
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 1996
Annual Report on Form 10-K.
2. The foregoing financial information reflects all adjustments (which consist
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. During the second quarter of fiscal 1997, the Company reevaluated the
realizability of its deferred tax assets pursuant to the criteria of
Statement of Financial Accounting Standards No. 109, and concluded it is
more likely than not that the Company will realize tax benefits associated
with a portion of its domestic net operating losses, together with certain
other tax benefits, that were previously subject to an established
valuation allowance. Accordingly, the Company reversed approximately $2.2
million from its deferred tax valuation allowance during the first nine
months of fiscal 1997. The remaining valuation allowance at August 3, 1997
is approximately $2.4 million. The Company continues to believe that it is
more likely than not that it will not realize the benefits of its Irish net
operating loss carryforwards, certain domestic net operating loss
carryforwards, a portion of its foreign tax credits, and other deferred tax
assets totaling approximately $1.6 million.
Income (loss) before taxes for the nine months ended August 3, 1997 and
August 4, 1996 and income taxes for the same periods are shown below:
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------------
August 3, 1997 August 4, 1996
-------------------- -------------------
Thousands of dollars
<S> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES:
Domestic operations $ 510 6,657
Foreign operations (1,441) 1,950
==================== ===================
Total consolidated $ (931) 8,607
==================== ===================
INCOME TAX PROVISION (BENEFIT):
Domestic operations
Current $ 10 296
Deferred (2,141) 2,006
-------------------- -------------------
Total domestic (2,131) 2,302
Foreign operations
Current 347 583
Deferred - -
-------------------- -------------------
Total foreign 347 583
-------------------- -------------------
Total consolidated $ (1,784) 2,885
==================== ===================
</TABLE>
<PAGE>
The Company's effective tax rate differs from the U.S.statutory rate of
34% as summarized below:
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------------
August 3, 1997 August 4, 1996
-------------------- ------------------
Thousands of dollars
<S> <C> <C>
Income tax provision (benefit) at
statutory rate $ (317) 2,926
Non-deductible expenses 308 130
Reversal of valuation allowance for deferred tax
benefits (2,219) -
Effect of differing tax rates in foreign countries 504 (64)
Other (60) (107)
==================== ==================
Income tax provision (benefit), as reported $ (1,784) 2,885
==================== ==================
</TABLE>
4. On January 5, 1997, a fire occurred at the Company's leased garment
manufacturing plant in Galway, Ireland. The fire destroyed or damaged
certain inventory and manufacturing equipment owned by the Company. In
addition, the Company's other Irish facility located in Kiltimagh was
adversely affected because of its dependency on the operations of the
Galway facility. As a result of the fire, the Company recorded a
non-recurring charge (after tax) of $2.5 million in the first quarter of
fiscal 1997. During the second quarter of 1997, the Company received $1.1
million of insurance proceeds related to the fire.
On July 25, 1997, the Company sold its Irish operations to a company
comprised of the former management of the Irish operations. In conjunction
with the sale, the Company entered into a long-term supply agreement
whereby the purchaser will produce garments for Farah U.K. at the Kiltimagh
facility. In addition to the long-term supply agreement, the Company
expects to utilize contractors to meet future production requirements for
Farah U.K. No gain or additional loss was recognized on the final
disposition of the Irish operations.
5. On June 5, 1997, the Company entered into an Amended and Restated Credit
Agreement. The Credit Agreement provides up to $75 million of credit
through July 1, 2001 for the Company's United States and United Kingdom
operations for either borrowings or letters of credit. The Credit Agreement
is collateralized by substantially all assets of Farah U.S.A., Farah U.K.,
and Value Slacks and is guaranteed by its parent company (Farah
Incorporated) and each of Farah U.S.A.'s domestic affiliates. Such
guarantees are collateralized by substantially all of the assets of the
related affiliates. A term loan of $10 million is included in the $75
million of credit provided by the Credit Agreement. The term loan is
payable in 47 monthly installments of $208,333, plus interest, with the
48th and final monthly installment equal to the unpaid principal balance of
the loan. The term loan matures on July 1, 2001. The Credit Agreement
states that the interest rate on outstanding borrowings will be prime
(8 1/2% at August 3, 1997) plus 1/2% for borrowings and 1/6% per month for
letters of credit. The Company may also from time to time convert all or
part of the loan outstanding under the Credit Agreement into a loan based
on the Libor Rate. Upon conversion, the interest rate would be the Libor
rate, plus 2.75%. The conversion to and continued applicability of the
Libor Rate is conditioned upon specific notification requirements, a
minimum of $5 million of Libor Rate loans outstanding, and various other
requirements. Under the Credit Agreement, an unused credit line fee is
charged on the unused portion of the line when borrowings decrease below
$17.5 million. The Credit Agreement restricts certain additional
indebtedness and requires the maintenance of minimum tangible net worth,
minimum working capital and maximum capital expenditures. Maximum capital
expenditures for fiscal 1997 under the Credit Agreement are $30 million.
6. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share."
SFAS 128 will supersede APB Opinion No. 15, "Earnings Per Share." SFAS 128
requires dual presentation of basic and diluted earnings per share on the
face of the income statement for entities with complex capital structures.
SFAS 128 is effective for annual and interim periods ending after December
15, 1997. Earlier application is not permitted. Implementation of SFAS 128
would not have had a material impact on the Company's earnings per share
for the third quarter of fiscal 1997 or the nine months ended August 3,
1997.
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------------------- -----------------------------------
1997 1996 1997 1996
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Farah U.S.A. 74.3 % 73.6 % 76.3 % 73.6 %
Farah International 18.4 18.1 17.4 19.0
Value Slacks 7.3 8.3 6.3 7.4
------------ ----------- ------------ ------------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 74.9 74.0 73.2 74.1
------------ ----------- ------------ ------------
Gross profit 25.1 26.0 26.8 25.9
Selling, general and
administrative expenses 26.8 25.4 25.4 25.5
Non-recurring charge - - 1.3 -
------------ ----------- ------------ ------------
Operating income (loss) (1.7) 0.6 0.1 0.4
Other income (expense), net (0.4) 16.2 (0.6) 4.6
------------ ----------- ------------ ------------
Income (loss) before income taxes (2.1) 16.8 (0.5) 5.0
Income tax expense (benefit) (1.5) 4.5 (0.9) 1.7
------------ ----------- ------------ ------------
Net income (loss) (0.6) % 12.3 % 0.4 % 3.3 %
============ =========== ============ ============
</TABLE>
Consolidated sales for the third quarter of fiscal 1997 increased by
$8.3 million (14.8%) compared to the third quarter of fiscal 1996. For the first
nine months of 1997, sales increased by $25.4 million (14.8%) compared to the
same period of 1996. Sales increased during both periods at Farah U.S.A. and
Farah International. At Value Slacks, third quarter sales decreased while sales
for the first nine months of 1997 increased.
Farah U.S.A. sales for the third quarter of fiscal 1997 were $47.8
million compared to $41.2 million in the third quarter of 1996, a 16.0%
increase. Unit sales also increased by 13.1%, while the average per unit
selling price increased by 2.6%. In the first nine months of 1997, Farah
U.S.A. sales were $150.2 million compared to $126.3 million in the same period
of 1996, an 18.9% increase. Unit sales and the average selling price increased
by 17.7% and 1.1%, respectively.
Sales of Savane product increased by 18.9% during the third quarter of
1997 and by 20.1% during the first nine months of the fiscal year, compared to
the same periods in 1996. Substantially all the growth in Savane sales resulted
from increased volume levels in men's shirts and women's casual wear, which were
introduced during the latter part of fiscal 1996. Growth in the men's Deep-Dye
casual products also contributed to the overall increase in Savane sales.
As stated above, Savane sales for the third quarter and first nine
months of 1997 were higher than comparative 1996 levels, but were lower than
expected. Softness in the retail market during the Spring 1997 season had an
adverse effect on overall Savane sales. The average selling price for all
Savane products during the third quarter of 1997 was slightly lower compared
to the same period last year. In addition, the Company anticipated better
sales results from its newly introduced cotton/lycra Savane Golf pant. Finally,
competition in the men's casual wear market continues to be intense, making
it more difficult for the Company to achieve higher prices.
John Henry product sales decreased by approximately $500,000 (14.3%)
during the third quarter and increased by $4.8 million (128.2%) during the first
nine months of fiscal 1997, versus the same periods in 1996. In 1996, the
Company repositioned the John Henry label by introducing it to Sears, with a
"roll-out" program occurring in the third quarter of 1996. Exclusive of this
program, John Henry sales in the third quarter of 1997 were higher compared to
the same period a year ago. Since the "roll-out" to Sears, replenishment
orders have continued to increase, accounting for the overall increase in John
Henry sales.
Sales of Farah product increased by $5.3 million for both the third
quarter and first nine months of fiscal 1997, compared to the same periods in
fiscal 1996. Third quarter sales were 262.7% higher than the same period last
year. Sales for the first nine months of 1997 increased 45.2%, versus 1996.
Late in fiscal 1996, the Company moved its Farah label to the mass-merchant
distribution channel as part of its overall strategy to realign its labels into
three distinct markets. As a result, shipments of the Farah product to
department stores declined significantly in the third quarter of 1996 and were
ultimately eliminated. In the fourth quarter of 1996, the Company began its
initial shipments of Farah product to a major mass-merchant. Since this initial
roll-out, the Company has continued to ship replenishment orders, and as
discussed below, converted an existing private label program with this retailer
to Farah branded product. Continuing with its plan, the Company rolled out
Farah product to a significant number of new stores with this same customer
during the third quarter of 1997.
During the third quarter and first nine months of fiscal 1997, sales of
private label product decreased by $2.9 million (28.9%) and $2.7 million (9.4%),
respectively, when compared to the same periods in fiscal 1996. The transition
of Farah branded product to the mass-merchant distribution channel contributed
to the decline in private label sales during the third quarter and first nine
months of 1997, as a large customer within the mass-merchant distribution
channel converted from private label to Farah branded garments. Additionally,
the number of private label customers has decreased in 1997 as the Company
reduced its volume of business with customers who provided lower gross margins.
Additionally, during the first nine months of 1996, the Company recorded
significant non-recurring private label sales in connection with that year's
Atlanta Summer Olympics.
Sales at Farah International were $11.8 million for the third quarter
of fiscal 1997, a 16.6% increase over third quarter 1996 sales of $10.1 million.
Unit sales and the average selling price per unit were up 10.7% and 5.3%,
respectively. For the first nine months of 1997, Farah International's sales
were $34.3 million, compared to $32.5 million for the same period in 1996, a
5.6% increase. Unit sales for the first nine months of 1997 decreased by 0.1%,
while the average selling price per unit increased by 5.6%, compared to same
period in fiscal 1996.
Farah U.K. sales accounted for 67.7% of third quarter 1997 Farah
International sales and increased by 20.8%, compared to the same period in 1996.
Sales at Farah U.K. represented 64.0% of Farah International sales for the first
nine months of fiscal 1997. Farah U.K. sales increased by 5.3% over that period,
versus the first nine months of 1996. Inventory losses resulting from a fire at
the Company's plant in Galway, Ireland negatively affected sales at Farah U.K.
for the first nine months of fiscal 1997. Third quarter Farah U.K. sales
increased versus the same period last year due partially to the weakness of the
U.S. dollar, relative to the British Pound Sterling. In addition, during the
third quarter of 1997, Farah U.K. shipped orders that had been backlogged due to
the Irish fire earlier in the year.
Farah Australia and Farah New Zealand sales accounted for 31.2% of
third quarter 1997 Farah International sales and increased 9.3%, versus the same
period in 1996. Sales at Farah Australia and Farah New Zealand during the first
nine months of fiscal 1997 made up 34.7% of Farah International sales and
increased 5.7%, compared to the same period in 1996. Increased private label
business and continued consumer acceptance of the Savane wrinkle-free product
contributed to the sales increases for the third quarter and nine months.
Third quarter 1997 sales at Value Slacks were $4.7 million, compared to
$4.6 million in 1996, a 0.3% increase. For the first nine months of the fiscal
year, sales decreased 2.3% from $12.7 million in 1996 to $12.4 million in 1997.
Value Slacks same store sales, exclusive of three satellite sales held during
the second and third quarters of 1996, increased 7.7% and 0.3% during the third
quarter and first nine months of 1997, respectively, compared to the same
periods in 1996. During the first nine months of fiscal 1997, the Company closed
seven low performance stores and opened three new stores at different locations.
Although this net decrease in stores has negatively impacted unit sales, the
average price per unit has increased by more than 18% during the third quarter
and first nine months of 1997 due to changes in product mix.
Gross profit as a percentage of sales was 25.1% and 26.0% during the
third quarter of fiscal 1997 and fiscal 1996, respectively. For the first nine
months of fiscal 1997, gross profit as a percentage of sales was 26.9%, compared
to 25.9% during the same period in 1996.
Farah U.S.A. gross profit as a percentage of sales was 21.1% during the
third quarter of fiscal 1997, compared to 22.4% in the same period in 1996. For
the first nine months of fiscal 1997 and 1996, Farah U.S.A. gross profit as a
percentage of sales was 23.6% and 22.1%, respectively. Costs associated with a
transition to more contract sewing and start-up costs at the Company's new
finishing facilities contributed to a higher cost of sales. Additionally, fabric
performance difficulties with the Company's cotton/lycra Savane Golf pant
resulted in additional production costs and higher than normal third quarter
markdowns. The average sales price per unit at Farah U.S.A. increased by 2.6%
and 1.1% during the third quarter and first nine months of 1997, respectively.
The increases in sales price per unit for the quarter and nine months
partially offset the increased markdowns and the effects of the transitions
in the sewing and finishing areas.
Farah International gross profit as a percentage of sales was 32.9% for
the third quarter of fiscal 1997, compared to 33.7% during the same period in
1996. The third quarter decrease was primarily due to higher markdowns at Farah
U.K. Gross profit as a percentage of sales was comparable during the first nine
months of 1997 and 1996.
Value Slacks gross profit as a percentage of sales increased from 41.3%
in the third quarter of fiscal 1996 to 47.1% in the third quarter of fiscal
1997. Value Slacks gross profit as a percentage of sales for the first nine
months of fiscal 1997 was 47.3%, compared to 45.4% for the same period in 1996.
Value Slacks' transition to a higher volume of first quality merchandise has
decreased promotional markdowns during fiscal 1997. In addition, satellite sales
held in the second and third quarters of 1996 negatively impacted margins as
products were sold at lower than normal selling prices.
Selling, general, and administrative expenses ("SG&A") as a percentage
of sales increased to 26.8% in the third quarter of fiscal 1997 from 25.4% in
the third quarter of 1996. For the first nine months of 1997, SG&A was 25.4% of
sales, compared to 25.5% for the same period in 1996. SG&A as a percentage of
sales at Farah U.S.A. increased 2.6 percentage points during the third quarter
and increased 0.2 percentage points for the first nine months of 1997,
compared to the same periods in 1996. The third quarter 1997 increase in SG&A
as a percentage of sales at Farah U.S.A. was partially attributable to higher
advertising costs incurred in introducing the new Savane Golf, Savane
Womenswear, and Savane Shirt lines. Additionally, general and administrative
expense for the third quarter included costs associated with the move to a new
corporate headquarters.
Value Slacks SG&A as a percentage of sales decreased by 6.1 and 3.1
percentage points during the third quarter and first nine months of 1997,
respectively, when compared to the same periods in 1996. The reductions in SG&A
as a percentage of Value Slacks sales resulted largely from store closings and
from continued cost reduction efforts. Also contributing to the difference
between 1997 and 1996 SG&A as a percentage of sales was the incremental SG&A
incurred in connection with three satellite sales held during the second and
third quarters of 1996.
SG&A as a percentage of sales at Farah International increased by 1.5
and 2.6 percentage points during the third quarter and first nine months of
1997, respectively, compared to the same periods in 1996. The third quarter
increase was primarily attributable to legal fees associated with the sale of
the Company's Irish facilities, the hiring of additional quality assurance
personnel at Farah U.K., and severance payments. These factors, combined with
higher concession and exhibition expenses at Farah U.K., were the primary
components of the increase in SG&A as a percentage of sales for the first nine
months of 1997.
On January 5, 1997, a fire occurred at the Company's leased garment
manufacturing plant in Galway, Ireland, in which certain inventory and
manufacturing equipment owned by the Company were either destroyed or damaged.
In addition, the Company's other Irish facility located in Kiltimagh has been
adversely affected because of its dependency on the operations of the Galway
facility. As a result of the fire and its related impact, the Company recorded a
non-recurring charge (after tax) of $2.5 million in the first quarter of 1997.
There was some shortfall in sales in the Company's United Kingdom operations
during the first six months of fiscal 1997 because of the fire. On July 25,
1997, the Company entered into an agreement to sell its Irish facilities.
Management believes the fire and subsequent sale of its Irish facilities will
not have a long term material impact on Farah's United Kingdom operations.
The Company recorded a tax benefit on consolidated net income for the
first nine months of fiscal 1997, primarily as a result of recognizing $2.2
million of tax benefits previously not recognized. In addition, in the first
quarter of fiscal 1997, the Company did not record a tax benefit on the loss in
connection with the fire at the Irish facility.
Financial Condition
At August 3, 1997, the Company's primary Credit Agreement provided up to
$75 million of credit through July 1, 2001, for the Company's United States and
United Kingdom operations for either borrowings or letters of credit. The Credit
Agreement includes a term loan payable in monthly installments over a 48 month
period. The balance of the term loan was $9.8 million as of August 3, 1997.
Formulas derived from accounts receivable and inventory define borrowing
capacity under the Credit Agreement. The Credit Agreement states that the
interest rate on outstanding borrowings will be prime (8 1/2% at August 3, 1997)
plus 1/2% for borrowings and 1/6% per month for letters of credit. The Company
may also from time to time convert all or part of the loan outstanding under
the Credit Agreement into a loan based on the Libor Rate. Upon conversion,
the interest rate would be the Libor rate, plus 2.75%. The conversion to
and continued applicability of the Libor Rate is conditioned upon specific
notification requirements, a minimum of $5 million of Libor Rate loans
outstanding, and various other requirements. At August 3, 1997, usage under
the Agreement was $40.2 million and the excess credit line available was $19.7
million. The Credit Agreement allows for consolidated capital expenditures of
$30 million in fiscal 1997. As of August 3, 1997, the Company was in compliance
with all covenants pursuant to the Credit Agreement.
Net cash used in operations in the first nine months of fiscal 1997 was
$18.3 million. The largest factor contributing to the use of cash was an
increase in inventories. Production levels were increased in the first nine
months of 1997 in an attempt to better match inventory levels with current
demand. Sales, however, were lower than expected resulting in a net increase in
inventory balances. In addition, $9.2 million in cash was used for capital
expenditures.
Capital expenditures through August 3, 1997 approximated $12.6 million.
Expenditures were mainly for manufacturing equipment, information systems, and
leasehold improvements at the new corporate headquarters. At August 3, 1997, the
Company had commitments for future capital expenditures of approximately $4.6
million.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share." SFAS 128 will supersede APB Opinion No. 15, "Earnings Per Share." SFAS
128 requires dual presentation of basic and diluted earnings per share on the
face of the income statement for entities with complex capital structures. SFAS
128 is effective for annual and interim periods ending after December 15, 1997.
Earlier application is not permitted. Implementation of SFAS 128 would not have
had a material impact on the Company's earnings per share for the third quarter
of fiscal 1997 or the nine months ended August 3, 1997.
Factors Affecting the Company's Business and Prospects
The Company cautions readers that various factors could cause the
actual results of the Company to differ materially from those indicated by
forward-looking statements made from time to time in news releases, reports,
proxy statements, registration statements and other written communications
(including the preceding sections of this Management's Discussion and Analysis),
as well as oral statements made from time to time by representatives of the
Company. Except for historical information, matters discussed in such oral and
written communications are forward-looking statements that involve risks and
uncertainties, including, but not limited to, economic and business conditions
in the U.S. and abroad; the level of demand for apparel products and success of
planned marketing programs; the intensity of competition and the pricing
pressures that may result; changes in labor and import and export regulations;
the ability of the Company to timely and effectively manage production levels
and sourcing; the ability of the Company to access the credit market to finance
capital expenditures; and currency fluctuations.
Last year the Company terminated its shirt licensing agreement with
Oxford and re-introduced wrinkle free shirtings as a significant addition to the
Savane label. Due to timing and sourcing complexities and market acceptance,
risk factors associated with shirts are greater than those associated with the
Company's traditional men's casual wear product lines.
The Company has undertaken several new projects during 1997 including
relocating to a new distribution facility. The Company established a target
date of December 31, 1997 to complete its move to the new distribution facility.
However, based on current discussions with its contractors and suppliers, it is
possible that a delay in moving will occur. The Company may incur significant
additional costs in attempting to meet the original deadline; and if a delay
does occur, the Company may experience disruptions in shipments.
<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 17, 1997
/s/ Russell G. Gibson
Russell G. Gibson
Executive Vice President
Principal Financial Officer
/s/ Polly H. Vaughn
Polly H. Vaughn
Principal Accounting Officer
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-Q INDEX TO EXHIBITS
August 3, 1997
Page
Description Number
Exhibit 11 Statement regarding computation
of net income (loss) per share. 15
Exhibit 27 Financial Data Schedule 16
<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.
<PAGE>
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<PERIOD-END> AUG-03-1997
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0
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