................................................................................
................................................................................
UNITED STATES
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 Quarterly Period ended September 28, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-4723
FARR COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-1288401
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2221 Park Place, El Segundo, CA 90245
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 536-6300
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 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 ( )
Number of shares of registrants common stock outstanding as of close of the
period covered by this report: 3,800,820.
................................................................................
................................................................................
<PAGE>
PART I - FINANCIAL INFORMATION
FARR COMPANY AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
Part I - Financial Information
INTRODUCTION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets - September 28, 1996 and December 30, 1995
Income Statements for the three months ended September 28, 1996 and
September 30, 1995 and for the nine months ended September 28, 1996 and
September 30, 1995
Statements of Cash Flows for the nine months ended September 28, 1996
and September 30, 1995
Notes to Condensed Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS
Part II - Other Information
EXHIBITS
<PAGE>
FARR COMPANY AND SUBSIDIARIES
INTRODUCTION TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
The Condensed Consolidated Financial Statements included herein have
been prepared by the Company without audit, and include all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial position as of September 28, 1996 and the results of operations for
the three and nine months ended September 28, 1996 and September 30, 1995
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
<CAPTION>
(Unaudited) (Audited)
Assets Sep. 28, 1996 Dec. 30, 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................... $ 1,682,000 $ 812,000
Accounts receivable, less allowance of $298,000 in 1996
and $214,000 in 1995 ................................ 20,483,000 20,077,000
Inventories
Raw materials ....................................... 5,889,000 6,392,000
Work in process ..................................... 3,534,000 5,119,000
Finished goods ...................................... 3,545,000 3,926,000
----------- -----------
12,968,000 15,437,000
Prepaid expenses .................................... 1,108,000 622,000
Deferred tax benefit ................................ 1,396,000 1,980,000
----------- -----------
Total current assets ............................ 37,637,000 38,928,000
----------- -----------
Property, Plant and Equipment at cost
Land .................................................... 2,095,000 2,094,000
Buildings and improvements .............................. 15,201,000 15,231,000
Machinery and equipment ................................. 34,249,000 33,829,000
----------- -----------
51,545,000 51,154,000
Less-accumulated depreciation and amortization .......... 35,988,000 34,748,000
----------- -----------
15,557,000 16,406,000
Other ...................................................... 307,000 236,000
----------- -----------
$ 53,501,000 $ 55,570,000
============ ============
<FN>
The accompanying notes are an integral part of these balance sheets.
</FN>
</TABLE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities and Stockholders' Investment
<CAPTION>
(Unaudited) (Auditded)
Sep. 28, 1996 Dec. 30,1995
------------- ------------
<S> <C> <C>
Current Liabilities:
Notes/overdraft payable to banks ........................ $ 666,000 $ 432,000
Current portion of long-term debt ....................... 21,000 664,000
Accounts payable ........................................ 8,031,000 8,875,000
Accrued liabilities ..................................... 8,236,000 8,248,000
Income taxes payable and deferred taxes ................. 478,000 526,000
----------- -----------
Total current liabilities ........................... 17,432,000 18,745,000
----------- -----------
Long-Term Debt, Net of Current Portion ..................... 4,468,000 9,412,000
Deferred Income Taxes ...................................... 2,328,000 2,628,000
Other Non-current Liabilites ............................... 99,000 0
Commitments and Contingencies
Stockholders' Investment:
Common stock, $.10 par value--Authorized 10,000,000 shares
Outstanding--3,800,820 shares at September 28, 1996 and
3,793,336 shares at December 30, 1995 ................ 363,000 362,000
Additional paid-in capital ............................... 11,765,000 11,668,000
Cumulative translation adjustments ....................... (1,605,000) (1,624,000)
Retained earnings:
Balance beginning of year .............................. 14,379,000 11,255,000
Net income for the period .............................. 4,272,000 3,124,000
----------- -----------
Balance at end of period ............................... 18,651,000 14,379,000
----------- -----------
Total stockholders' investment ...................... 29,174,000 24,785,000
----------- -----------
$ 53,501,000 $ 55,570,000
============ ============
<FN>
The accompanying notes are an integral part of these balance sheets.
</FN>
</TABLE>
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sep. 28, 1996 Sep. 30, 1995 Sep. 28, 1996 Sep. 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales ................................ $29,951,000 $28,444,000 $92,386,000 $84,379,000
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales .......................... 22,418,000 21,692,000 69,627,000 64,275,000
Selling, general and administrative .... 4,781,000 5,142,000 15,140,000 15,286,000
Interest expense ....................... 145,000 426,000 563,000 1,484,000
----------- ----------- ----------- -----------
Total Costs and Expenses ................. 27,344,000 27,260,000 85,330,000 81,045,000
----------- ----------- ----------- -----------
Income Before Income Taxes ............... 2,607,000 1,184,000 7,056,000 3,334,000
Income Taxes ............................. 1,012,000 458,000 2,784,000 1,300,000
----------- ----------- ----------- -----------
Net Income ............................... $ 1,595,000 $ 726,000 $ 4,272,000 $ 2,034,000
=========== =========== =========== ===========
Earnings per Common Share * $ 0.43 $ 0.20 $ 1.16 $ 0.55
=========== =========== =========== ===========
<FN>
* Based upon 3,691,886 and 3,694,362 average shares outstanding at
September 28, 1996 and September 29, 1995, respectively.
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Cash Provided by ( Used in ) : Nine Months Ended
Sep. 28, 1996 Sep. 30, 1995
------------- -------------
<S> <C> <C>
Operating Activities:
Net Income ................................................. $ 4,272,000 $ 2,034,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................ 1,784,000 2,248,000
Benefit retirement trust ................................. 99,000 0
Provision for loss on accounts receivable ................ 99,000 114,000
Change in deferred income taxes .......................... 319,000 711,000
Net (gain) loss on sale/retirement of P,P & E ............ 25,000 (23,000)
Net (gain) loss from investments ......................... 0 (115,000)
Decrease (increase) in inventories ....................... 2,484,000 (981,000)
Decrease (increase) in receivables and prepaid expenses .. (976,000) 335,000
Decrease in accounts payable & accrued expenses .......... (866,000) (84,000)
Net change in current income taxes payable ............... (86,000) (9,000)
Exchange gain ............................................ (12,000) (5,000)
----------- -----------
Net cash provided by operating activities ................ 7,142,000 4,225,000
----------- -----------
Investing Activities:
Purchases of property, plant and equipment ............... (896,000) (674,000)
Proceeds from sale of property, plant and equipment ...... 0 23,000
Proceeds from sale of investments ........................ 0 501,000
Purchase of investments, benefits trust .................. (126,000) 0
----------- -----------
Net cash used in investing activities .................... (1,022,000) (150,000)
----------- -----------
Financing Activities:
Proceeds from revolving line of credit,
and long-term borrowings ............................... 8,434,000 240,000
Principal payments on revolving line of credit
and long-term debt borrowings & overdrafts ............. (13,790,000) (4,280,000)
Principal payments received on notes ..................... 6,000 61,000
Proceeds from sale of stock, stock option plans .......... 98,000 167,000
Long-term note receivable ................................ 0 (174,000)
----------- -----------
Net cash used in financing activities .................... (5,252,000) (3,986,000)
----------- -----------
Effect of Exchange Rate Changes on Cash ...................... 1,000 37,000
Increase (Decrease) in Cash and Cash Equivalents ............. 870,000 126,000
Cash and Cash Equivalents at Beginning of Period ............. 812,000 127,000
----------- -----------
Cash and Cash Equivalents at End of Period ............... $ 1,682,000 $ 253,000
=========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
FARR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
(Unaudited)
NOTE A.
- -------
Other than Notes Payable and Long-term Debt, and Commitments and
Contingencies, there have been no significant changes in the Company's policies,
practices or position from that described in the notes to the Consolidated
Financial Statements included in the 1995 Annual Report to Stockholders which
was incorporated by reference in the Annual Report on Form 10-K for the year
ended December 30, 1995.
NOTE B. - NOTES PAYABLE AND LONG-TERM DEBT
- ------------------------------------------
The Company's $2,155,000 term credit facility lending commitment
previously scheduled to be funded in August 1996 to replace the Company's
existing Holly Springs, Mississippi Industrial Bonds will not be utilized. The
redemption of the bonds were funded from availability under the Company's $10
million revolving credit facility.
On September 24, 1996, the Company amended its revolving credit
facility. Under terms of the amendment, the provision requiring security
collateral was eliminated and the credit line was reduced to $10 million
commensurate with the Company's borrowing needs. In addition, the financial
covenant requiring a minimum consolidated liabilities to tangible new worth
ratio of 1.50 to 1.0 was reduced to 1.25 to 1.0.
As of September 28, 1996, the Company's weighted average interest rate
on short term borrowings was 8.0 percent.
NOTE C. - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
During July 1996, the Company's Board of Directors and Compensation
Committee approved a $875,000 lump sum payment to the Company's Chairman and
Chief Executive Officer covering his salary and certain incentives from April
1994 through June 1996. The lump sum payment was paid in July 1996 and was
covered by reserves previously established during the periods from April 1994 to
June 1996. Beginning in July 1996, the approved Chairman and Chief Executive
Officer's annual base salary of $246,000 will be paid concurrent with the month
it is earned on a prorata basis.
NOTE D. - EMPLOYEE BENEFIT PLANS
- --------------------------------
Effective January 1, 1996, the Company established a supplemental
executive savings plan ("SESP") which provides benefits to certain employees
whose benefits under the defined contribution plan are reduced as a result of
limitations imposed by the Internal Revenue Code.
The Company has established a Rabbi trust to fund benefit payments
under its SESP. Trust assets are irrevocable to the Company but are subject to
creditor claims under certain conditions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Third quarter sales increased to $29,951,000 from $28,444,000 during
the same period last year, representing a 5 percent increase. The increase in
sales was primarily attributable to the Company's Heating, Ventilating and Air
Conditioning, Custom OEM, Railroad and Engine markets.
Sales for the first nine months of 1996 advanced to $92,386,000, an
improvement of 9 percent, or $8,007,000 over 1995's first nine months sales of
$84,379,000. The majority of the improvement was attributable to increased sales
in the Company's Custom OEM, Heating Ventilating and Air Conditioning, Filter
House and International Markets.
Operating profit (income before income taxes and interest expense) for
the third quarter was $2,752,000 an increase of 71 percent, or $1,142,000 from
$1,610,000 for the same period a year ago. Operating profit for the first nine
months of 1996 increased 58 percent to $7,619,000 from $4,818,000 during the
same period a year ago. The increased operating profit principally reflected
strong sales gains and improved operating efficiencies.
The third quarter operating profit as a percent of sales increased to
9.2 percent compared to 5.7 percent during the same period a year ago. The first
nine months operating profit as a percent of sales increased to 8.2 percent
compared to 5.7 percent during the same period a year ago. These percentage
improvements primarily reflect a trend of a lower percentage of selling, general
and administrative expenses relative to the increase in sales volume, as the
amount of selling general and administrative expenses was kept approximately the
same as last year's third quarter on higher sales volume. In addition, a
favorable sales mix of higher margin products during 1996 helped lower the
quarter and nine month cost of sales percentages.
Interest expense during the third quarter decreased to $145,000
compared to $426,000 for the third quarter last year. Interest expense during
the first nine months decreased to $563,000 from $1,484,000 for the same period
a year ago. Both third quarter and nine month interest expense declined as a
result of lower borrowing interest rates combined with reduced debt levels.
The income tax rate for the first nine months of 1996 and the same
period last year remained at approximately 39 percent.
Third quarter net income of $1,595,000 increased 120 percent or
$869,000 over the $726,000 for the same period last year. The first nine month's
net income increased to $4,272,000 from $2,034,000, representing an increase of
$2,238,000 or a 110 percent improvement over the same period last year. Both the
third quarter and nine month results reflect improved sales and sales margin
contribution, improved manufacturing efficiencies and reduced interest expense
compared to the same periods a year ago.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities during the first nine months
totaled $7,142,000 compared to $4,225,000 for the first nine months a year ago.
Cash flows from operating activities increased from last year's first nine
months due to increased income and decreased working capital requirements. The
primary decrease in working capital was related to decreased inventories that
was partially offset by increased accounts receivable due to increased sales
volume.
Cash flows used in investing activities during the first nine months
was $1,022,000. Last year cash flows used $150,000 during the first nine months
as the Company received $501,000 from the disposition of certain investments.
First nine months 1996 capital expenditures of $896,000 increased over the same
period last year by $222,000. Overall, capital expenditures continue to be
maintained at low levels to conserve capital resources but are anticipated to
increase modestly over the last quarter of the year.
Cash used in financing activities totaled $5,252,000 in the first nine
months compared to $3,986,000 for the same period a year ago as surplus cash was
used to pay down debt.
As of September 28, 1996, working capital totaled $20,205,000 compared
to $20,183,000 at the end of 1995, representing a $22,000 increase in total
working capital for the first nine months of 1996. The increase in working
capital was accounted for by decreases in inventories ($2,469,000) and income
taxes payable and deferred taxes ($236,000), partially offset by a net decrease
in accounts payables and accrued expenses ($856,000), a decrease in the short
term bank debt ($409,000), and net increases in accounts receivable ($976,000)
and cash ($870,000).
Due to increased sales during the first nine months, net accounts
receivable increased to $20,483,000 from $20,077,000 as of December 30, 1995.
Inventories decreased primarily as a result of a decrease in work in process
related to the completion and shipment of several large gas turbine filter house
jobs and improved inventory turnover rates.
The Company's current portion of long term debt decreased due to the
early retirement of its Jonesboro, Arkansas and Holly Springs, Mississippi
Industrial Redevelopment Bonds and the restructure and payoff of its prior
revolving and term loan credit facilities under a new revolving credit facility
obtained in February, 1996.
On September 24, 1996, the Company amended its revolving credit
facility. Under terms of the amendment, the provision requiring security
collateral was eliminated and the credit line was reduced to $10 million
commensurate with the Company's borrowing needs. In addition, the financial
covenant requiring a minimum consolidated liabilities to tangible new worth
ratio of 1.50 to 1.0 was reduced to 1.25 to 1.0. Surplus borrowing availability
under the Company's $10 million domestic revolving credit facility at the end of
September, 1996 was approximately $5.5 million.
The Company's operations continue to generate cash flow levels required
to maintain planned operating levels, to provide for capital replacement, and to
service and liquidate long-term debt. Additionally, the Company has access to
lines of credit sufficient for its current operations.
<PAGE>
PART II. - OTHER INFORMATION
Item 6.a. Exhibits
The following are being filed with this Quarterly Report on Form 10-Q.
- - Exhibit 11 Earnings per share calculation. (unaudited)
- - Exhibit 27 Financial Data Schedule.
-------------------
Copies of Exhibits are available, on prepayment of 15 cents per page, by writing
to the Secretary of the Company at the address set forth on the cover page of
this Form 10-Q.
<PAGE>
PART II - OTHER INFORMATION
(Continued)
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 hereunto duly authorized.
FARR COMPANY
-----------------------------
(Registrant)
November 12, 1996 /s/ Kenneth W. Gerstner
----------------------------
Kenneth W. Gerstner
Senior Vice President
Chief Financial Officer
<PAGE>
<TABLE>
Exhibit 11
FARR COMPANY AND SUBSIDIARIES
EARNINGS PER SHARE CALCULATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 28, 1996 September 30, 1995 September 28, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
EARNINGS:
- ---------
<S> <C> <C> <C> <C>
Net Income ................................ $1,595,000 $ 726,000 $4,272,000 $2,034,000
========== ========== ========== ==========
Shares
Weighted average number of
common shares outstanding ............. 3,627,840 3,685,914 3,627,840 3,685,914
========== ========== ========== ==========
Net Income Per Common Share ............... $ 0.44 $ 0.20 $ $1.18 $ 0.55
========== ========== ========== ==========
EARNINGS ASSUMING FULL DILUTION:
- --------------------------------
Net Income ................................ $1,595,000 $ 726,000 $4,272,000 $2,034,000
========== ========== ========== ==========
Shares
Weighted average number of
common shares outstanding ............. 3,627,840 3,685,914 3,627,840 3,685,914
Assuming exercise of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options ......... 64,046 8,448 64,046 8,448
---------- ---------- ---------- ----------
Total shares ...................... 3,691,886 3,694,362 3,691,886 3,694,362
========== ========== ========== ==========
Net Income Per Common Share
Assuming Full Dilution .................. $ 0.43 $ 0.20 $ 1.16 $ 0.55
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 1,682,000
<SECURITIES> 0
<RECEIVABLES> 20,781,000
<ALLOWANCES> 298,000
<INVENTORY> 12,968,000
<CURRENT-ASSETS> 37,637,000
<PP&E> 51,545,000
<DEPRECIATION> 35,988,000
<TOTAL-ASSETS> 53,501,000
<CURRENT-LIABILITIES> 17,432,000
<BONDS> 0
0
0
<COMMON> 363,000
<OTHER-SE> 28,816,000
<TOTAL-LIABILITY-AND-EQUITY> 53,501,000
<SALES> 92,386,000
<TOTAL-REVENUES> 92,386,000
<CGS> 69,627,000
<TOTAL-COSTS> 69,627,000
<OTHER-EXPENSES> 15,140,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 563,000
<INCOME-PRETAX> 7,056,000
<INCOME-TAX> 2,784,000
<INCOME-CONTINUING> 4,272,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,272,000
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
