<PAGE>
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 2, 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.)
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 7, 1997 there were outstanding 10,258,371 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>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
QUARTERS ENDED FEBRUARY 2, 1997 AND FEBRUARY 4, 1996
(Unaudited)
(Thousands of dollars except share
and per share data)
February 2, February 4,
1997 1996
--------------------- -------------------
<S> <C> <C>
Net sales $ 61,938 51,510
Cost of sales 44,502 37,713
--------------------- -------------------
Gross profit 17,436 13,797
Selling, general and administrative expenses 16,001 13,789
Non-recurring charge 2,462 -
--------------------- -------------------
Operating income (loss) (1,027) 8
Other income (expense):
Interest expense (707) (1,365)
Interest income 191 236
Foreign currency transaction gains 111 67
Other, net 42 210
--------------------- -------------------
(363) (852)
Loss before provision for income taxes (1,390) (844)
Provision for income taxes 565 145
--------------------- -------------------
Net loss (1,955) (989)
Retained earnings:
Beginning 8,316 1,560
--------------------- -------------------
Ending $ 6,361 571
===================== ===================
Net loss per share $ (0.19) (0.10)
===================== ===================
Weighted average shares of common stock
outstanding 10,191,103 10,149,070
===================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 2, 1997 AND NOVEMBER 3, 1996
(Unaudited)
(Thousands of dollars except share data)
February 2, November 3,
1997 1996
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,162 3,777
Trade receivables, net 33,577 41,671
Inventories:
Raw materials 13,068 11,404
Work in process 16,947 15,251
Finished goods 36,290 35,378
--------------- ----------------
Total inventories 66,305 62,033
Other current assets 10,099 10,857
--------------- ----------------
Total current assets 114,143 118,338
Note receivable 5,200 5,260
Property, plant and equipment, net 25,371 25,370
Other non-current assets 4,910 4,895
--------------- ----------------
$ 149,624 153,863
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 23,331 20,744
Current installments of long-term debt 1,518 1,288
Trade payables 20,541 24,038
Other current liabilities 13,917 13,737
--------------- ----------------
Total current liabilities 59,307 59,807
Long-term debt, excluding current installments 4,919 4,706
Other non-current liabilities 3,234 3,992
Deferred gain on sale of building 2,710 3,218
Shareholders' equity:
Common stock, no par value, $.01 stated value, 20,000,000 shares
authorized; issued 10,294,646 in 1997 and 10,209,246 in 1996 46,025 46,024
Additional paid-in capital 30,396 29,894
Cumulative foreign currency translation adjustment (1,976) (742)
Minimum pension liability adjustment (1,243) (1,243)
Retained earnings 6,361 8,316
--------------- ----------------
79,563 82,249
Less: Treasury stock, 36,275 shares in 1997 and 1996, at cost 109 109
--------------- ----------------
Total shareholders' equity 79,454 82,140
--------------- ----------------
$ 149,624 153,863
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED FEBRUARY 2, 1997 AND FEBRUARY 4, 1996
(Unaudited)
(Thousands of dollars)
February 2, 1997 February 4, 1996
----------------- ------------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (1,955) (989)
Adjustments to reconcile net loss to net cash from (used in)
operating activities:
Depreciation and amortization 1,256 1,325
Amortization of deferred gain on building sale (508) (508)
Amortization of deferred gain on subsidiary sale (784) -
Non-recurring charge 2,462 -
Deferred income taxes 421 -
Decrease (increase) in:
Trade receivables 9,164 9,767
Inventories (5,147) 5,132
Other current assets 337 (144)
Increase (decrease) in:
Trade payables (3,497) (2,733)
Other current liabilities (1,863) (3,093)
----------------- ------------------
Net cash from (used in) operating activities (114) 8,757
----------------- ------------------
Cash flows used in investing activities:
Purchases of property, plant and equipment (1,837) (667)
----------------- ------------------
Net cash used in investing activities (1,837) (667)
----------------- ------------------
Cash flows from (used in) financing activities:
Net increase (decrease) in short-term debt 2,587 (6,527)
Repayment of long-term debt (366) (603)
Proceeds from sale of common stock 491 -
Other 100 127
----------------- ------------------
Net cash from (used in) financing activities 2,812 (7,003)
----------------- ------------------
Foreign currency translation adjustment (476) (523)
----------------- ------------------
Net increase in cash 385 564
Cash, beginning of quarter 3,777 3,657
----------------- ------------------
Cash, end of quarter $ 4,162 4,221
================= ==================
Supplemental cash flow disclosures:
Interest paid $ 611 1,419
Income taxes paid 161 299
Assets acquired through direct financing
loans or capital leases 809 508
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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 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 $2.4 million and was not material to gross
profit for the first quarter of 1996.
4. 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
and net of insurance proceeds) of $2.5 million in the first quarter of
fiscal 1997.
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
<TABLE>
<CAPTION>
Results of Operations
The following sets forth certain financial data as percentages of net
sales:
First Quarter Ended
-------------- ---- -------------
1997 1996
-------------- -------------
<S> <C> <C>
Net sales:
Farah U.S.A. 76.7% 72.6%
Farah International 16.8 19.4
Value Slacks 6.5 8.0
-------------- -------------
Total net sales 100.0 100.0
Cost of sales 71.8 73.2
-------------- -------------
Gross profit 28.2 26.8
Selling, general and
administrative expenses 25.9 26.8
Non-recurring charge 4.0 0.0
-------------- -------------
Operating income (loss) -1.7 0.0
Other expense, net .6 1.6
-------------- -------------
Loss before income taxes -2.3 -1.6
Income tax expense (benefit) 0.9 0.3
-------------- -------------
Net loss -3.2% -1.9%
============== =============
</TABLE>
Consolidated sales for the first quarter of fiscal 1997 increased by
$10.4 million (20%) compared to the first quarter of fiscal 1996. Sales
increased at Farah U.S.A. and Farah International by 27% and 4%, respectively
and decreased at Value Slacks by 3%.
Farah U.S.A. sales for the first quarter of fiscal 1997 were $47.5
million compared to $37.4 million in the first quarter of 1996. Unit sales
increased 27% while the average unit selling price remained constant. Sales of
Savane product increased 15% in the first quarter of 1997 compared to 1996. This
increase resulted from increases in existing product sales and the introduction
of new lines. Sales of dress Savane product and casual Savane product increased
24% and 18%, respectively, in the first quarter of 1997 compared to 1996. Sales
of women's casual wear and men's shirts, that were not introduced until the
second half of fiscal 1996, also contributed to the growth in the Savane label.
Sales of John Henry and Farah products also increased by 248% and 47%,
respectively. The Company completed a product repositioning in the second half
of 1996, which resulted in increased sales in both labels. Shipments of John
Henry product to Sears began in the third quarter of fiscal 1996, while
shipments of Farah product to a major retailer in the mass merchandising
distribution channel began early in the fourth quarter of 1996. Sales of private
label increased 52% as a result of retailers expanding their lines to include
more private label products.
Farah International sales in the first quarter of 1997 were $10.4
million compared to $10.0 million in the first quarter of 1996. Unit volume
decreased 7% while the average selling price increased 12%. Sales at Farah U.K.
represented 59% of international sales and decreased 2% for the quarter. Sales
in this location were negatively impacted by inventory losses resulting from the
fire in the Company's plant in Ireland, discussed below. Sales at Farah
Australia and New Zealand, represented 39% of total international sales, and
increased 16% in the first quarter of 1997 compared to 1996. Increases in these
countries were mainly attributable to continued market acceptance of the wrinkle
free and private label product.
Value Slacks sales in the first quarter of 1997 were $4.0 million
compared to $4.1 million in the first quarter of 1996, a 3% decrease. Overall
store sales decreased due to the shortened retail period between Thanksgiving
and Christmas and severe weather conditions in the Midwest and Eastern United
States. In addition, sales were adversely affected during the quarter as the
Company transitioned product in the stores from closeouts and irregulars to
first quality goods.
As a percent of sales, gross profit was 28% in the first quarter of
1997 and 27% in the first quarter of 1996.
Farah U.S.A. gross profit as a percent of sales was 26% in the first
quarter of 1997 compared to 22% in the same period of 1996. Fewer promotional
and closeout sales, and cost reduction efforts through better production
planning and sourcing have been the principal factors contributing to the
improvement in gross profit margins. This, combined with increased sales of
Savane products, which generally carry higher margins, have improved the
Company's overall gross profit percentage.
Farah International gross profit as a percent of sales decreased from
34% in the first quarter of 1996 to 32% in the first quarter of 1997. Because of
the damages to inventory from the fire in the Company's Irish facility
discussed below, the Company was unable to deliver certain orders. The Company,
however, continued to incur certain levels of fixed operating costs in
connection with its production facilities, resulting in lower gross profit
margins.
Value Slacks gross profit as a percent of sales decreased from 50% in
the first quarter of 1996 to 46% in the first quarter of 1997. Inventory
shrinkage combined with a lower mix of irregular and closeout sales which
typically carry higher profit margins, contributed to the decrease.
Selling, general and administrative expenses ("SG&A") as a percent of
sales was 26% in the first quarter of 1997, down from 27% in the first quarter
of 1996. SG&A was down 1% at Farah U.S.A., offset partially by an increase of 2%
at both Farah International and Value Slacks. At Farah U.S.A., the decrease in
SG&A was attributable to lower overall expenses resulting from company wide cost
reduction efforts, combined with the favorable effects of fixed costs that did
not increase in relation to the increased sales levels. The increase in SG&A at
Farah International resulted mainly from the effects of translation of expenses
from foreign currencies to the U.S. Dollar. In local currencies, SG&A expenses
were comparable. At Value Slacks, the increase in SG&A resulted from fixed costs
that did not decrease in relation to lower sales.
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 and net of insurance proceeds) of $2.5 million
in the first quarter of fiscal 1997. There was some shortfall in sales in the
Company's United Kingdom operations because of the fire during the first
quarter. Management believes that such effect will continue to some degree into
the second quarter, although it believes there will be no long term material
impact.
The Company recorded tax expense on a consolidated loss in both the
first quarter of 1997 and 1996. The Company's effective tax rate varies with the
mix of income or loss in countries in which the Company conducts its business.
Most significant was that the Company did not provide tax benefits on the loss
in connection with the fire in its Irish facility.
Financial Condition
The Company's primary Credit Agreement provides up to $50 million 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 February 2, 1997, usage under the agreement was approximately
$24.9 million and the excess credit line available was $23.3 million. As of
February 2, 1997 the Company was in compliance with all covenants under the
Credit Agreement. The current Credit Agreement allows for consolidated capital
expenditures for fiscal 1997 of $6,500,000. Capital spending plans for 1997 are
such that management is currently negotiating an increase in this limit.
Net cash used in operations in the first quarter of 1997 was $114,000,
primarily as a result of an increase in inventories and a decrease in trade
payables. Production levels were increased in the first quarter to raise levels
to meet expected demand. The decrease in trade payables resulted mainly from
lower piece goods purchases at the end of the first quarter. Offsetting the cash
used for increased inventories and lower trade payables was a decrease in
accounts receivable. This decrease is consistent with the normal seasonality of
the Company's business.
Capital expenditures through February 2, 1997 approximated $2.6
million. Expenditures were mainly for manufacturing equipment, the construction
of new corporate headquarters, and information systems. As of February 2, 1997,
the Company had commitments for future capital expenditures of approximately $1
million.
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 the 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.
<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 18, 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
FEBRUARY 2, 1997
Page
Description Number
Exhibit 11 Statement regarding computation of 11
net loss per share.
Exhibit 27 Financial Data Schedule 12
<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>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-2-1997
<PERIOD-END> FEB-02-1997
<CASH> 4,162
<SECURITIES> 0
<RECEIVABLES> 34,487
<ALLOWANCES> 910
<INVENTORY> 66,305
<CURRENT-ASSETS> 114,143
<PP&E> 56,975
<DEPRECIATION> 31,604
<TOTAL-ASSETS> 149,624
<CURRENT-LIABILITIES> 59,307
<BONDS> 1,663
0
0
<COMMON> 46,025
<OTHER-SE> 33,429
<TOTAL-LIABILITY-AND-EQUITY> 149,624
<SALES> 61,938
<TOTAL-REVENUES> 61,938
<CGS> 44,502
<TOTAL-COSTS> 35,899
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 707
<INCOME-PRETAX> (1,390)
<INCOME-TAX> 565
<INCOME-CONTINUING> (1,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,955)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
