................................................................................
................................................................................
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 June 28, 1997
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: 5,724,580.
................................................................................
................................................................................
<PAGE>
PART I - FINANCIAL INFORMATION
FARR COMPANY AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1997
Part I - Financial Information
Introduction
Condensed Consolidated Financial Statements
Balance Sheets - June 28, 1997 and December 28, 1996
Income Statements for the three months ended June 28, 1997 and
June 29, 1996 and for the six months ended June 28, 1997
and June 29, 1996
Statements of Cash Flows for the six months ended June 28, 1997
and June 28, 1996
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis
Part II - Other Information
Item 4.a. Submission of Matters to a Vote of Security Holders
Item 6.a. Exhibits
<PAGE>
FARR COMPANY AND SUBSIDIARIES
INTRODUCTION TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1997
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 June 28, 1997 and the results of operations
for the three and six months ended June 28, 1997 and June 29, 1996 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)
June 28, 1997 Dec. 28, 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................. $ 1,613,000 $ 1,997,000
Accounts receivable, less allowance of $336,000 in 1997
and $297,000 in 1996 ..................................... 21,037,000 20,551,000
Inventories
Raw materials .............................................. 5,284,000 5,380,000
Work in process ............................................ 4,486,000 3,979,000
Finished goods ............................................. 3,238,000 3,175,000
----------- -----------
13,008,000 12,534,000
Prepaid expenses ........................................... 989,000 790,000
Deferred tax benefit ....................................... 1,807,000 1,807,000
----------- -----------
Total current assets ..................................... 38,454,000 37,679,000
----------- -----------
Property, Plant and Equipment, at Cost
Land ....................................................... 2,103,000 2,107,000
Buildings and improvements ................................. 15,377,000 15,247,000
Machinery and equipment .................................... 34,870,000 34,907,000
----------- -----------
52,350,000 52,261,000
Less-accumulated depreciation and amortization ............ 37,013,000 36,650,000
----------- -----------
15,337,000 15,611,000
Other ........................................................ 852,000 397,000
----------- -----------
$54,643,000 $53,687,000
=========== ===========
</TABLE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities & Stockholders' Investment
<CAPTION>
(Unaudited) (Audited)
June 28, 1997 Dec. 28, 1996
------------- -------------
<S> <C> <C>
Current Liabilities:
Notes/overdraft payable to banks ........................... $ 569,000 $ 874,000
Current portion of long-term debt .......................... 0 23,000
Accounts payable ........................................... 7,463,000 8,665,000
Accrued liabilities ........................................ 8,523,000 7,566,000
Income taxes payable and deferred taxes .................... 449,000 745,000
----------- -----------
Total current liabilities ................................ 17,004,000 17,873,000
----------- -----------
Long-Term Debt, Net of Current Portion ....................... 0 2,068,000
Deferred Income Taxes ........................................ 2,350,000 2,350,000
Other Non-current Liabilites ................................ 622,000 186,000
Commitments and Contingencies
Stockholders' Investment:
Common stock, $.10 par value--Authorized 10,000,000 shares
Issued and outstanding--5,724,580 shares at June 28, 1997
and 5,707,404 shares at December 28, 1996 ................ 555,000 544,000
Additional paid-in capital ................................. 11,685,000 11,603,000
Cumulative translation adjustments ......................... (1,368,000) (1,206,000)
Retained earnings:
Balance beginning of year ................................ 20,269,000 14,379,000
Net income for the period ................................ 3,526,000 5,890,000
----------- -----------
Balance at end of period ................................. 23,795,000 20,269,000
----------- -----------
Total stockholders' investment ......................... 34,667,000 31,210,000
----------- -----------
$54,643,000 $53,687,000
=========== ===========
<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 Six Months Ended
June 28, 1997 June 29, 1996 June 28, 1997 June 29, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales ....................................... $31,569,000 $31,356,000 $61,910,000 $62,435,000
Cost of Sales ................................... 22,993,000 23,284,000 45,443,000 47,209,000
----------- ----------- ----------- -----------
Gross Margin .................................... 8,576,000 8,072,000 16,467,000 15,226,000
Selling, general and administrative expense ... 5,625,000 5,443,000 10,743,000 10,359,000
Interest expense .............................. 58,000 171,000 133,000 418,000
----------- ----------- ----------- -----------
Total Expenses .................................. 5,683,000 5,614,000 10,876,000 10,777,000
----------- ----------- ----------- -----------
Income Before Income Taxes ...................... 2,893,000 2,458,000 5,591,000 4,449,000
Income Taxes .................................... 1,067,000 959,000 2,065,000 1,772,000
----------- ----------- ----------- -----------
Net Income ...................................... $ 1,826,000 $ 1,499,000 $ 3,526,000 $ 2,677,000
=========== =========== =========== ===========
Earnings per Common Share * ..................... $ 0.32 $ 0.27 $ 0.62 $ 0.48
=========== ============ =========== ===========
<FN>
* Based upon 5,632,922 and 5,509,545 average shares outstanding at June 28,
1997 and June 29, 1996, 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>
Year-to-Date
June 28, 1997 June 29, 1996
Cash Provided by (Used in): ------------- -------------
Operating Activities:
<S> <C> <C>
Net Income ................................................ $3,526,000 $2,677,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ......................... 1,175,000 1,209,000
Provision for loss on accounts receivable ............. 125,000 75,000
Benefit retirement trust .............................. 350,000 0
Change in deferred income taxes ....................... 10,000 377,000
Exchange gain ......................................... (31,000) (4,000)
Net loss on sale/retirement of P,P & E ................ 23,000 0
Decrease (increase) in inventories .................... (541,000) 2,048,000
(Increase) in receivables and prepaid expenses ........ (832,000) (1,090,000)
Decrease in accounts payable & accrued expenses ....... (156,000) (573,000)
Net change in current income taxes payable ............ (297,000) 392,000
----------- ----------
Net cash provided by operating activities ............. 3,352,000 5,111,000
----------- ----------
Investing Activities:
Purchases of property, plant and equipment ................ (967,000) (743,000)
Investments in joint venture .............................. (100,000) 0
Purchase of investments, benefits trust ................... (404,000) 0
----------- ----------
Net cash used in investing activities ..................... (1,471,000) (743,000)
----------- ----------
Financing Activities:
Proceeds from revolving line of credit,
and long-term borrowings ................................ 0 8,200,000
Principal payments on revolving line of credit
and long-term debt borrowings & overdrafts .............. (2,349,000) (12,121,000)
Principal payments received on notes ...................... 4,000 2,000
Proceeds from sale of stock, stock option plans ........... 93,000 49,000
---------- ----------
Net cash used in financing activities ..................... (2,252,000) (3,870,000)
---------- ----------
Effect of Exchange Rate Changes on Cash ..................... (13,000) 0
Increase (Decrease) in Cash and Cash Equivalents ............ (384,000) 498,000
Cash and Cash Equivalents at Beginning of Period ............ 1,997,000 812,000
---------- ----------
Cash and Cash Equivalents at End of Period .................. $1,613,000 $1,310,000
========== ==========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
FARR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1997
(Unaudited)
1. 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 1996 Annual Report to Stockholders which was
incorporated by reference in the Annual Report on Form 10-K for the year ended
December 28, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
- -------------------
As of June 28, 1997, working capital was $21,450,000 compared to $19,806,000 at
the end of 1996, representing a $1,644,000 increase in total working capital for
the first half of 1997. The primary components of the change in working capital
during the first half were increases in accounts receivable ($486,000) and
inventories ($474,000), coupled with net decreases in accounts payable and
accrued liabilities ($245,000) and income taxes payable ($296,000).
The increase in accounts receivable is associated with higher sales volume
levels as compared to the fourth quarter growth of 1996. The increase in
inventories is due to a temporary increase for safety stocking levels of several
products whose production lines are being relocated between plants to improve
the Company's overall capacity levels.
Total long-term debt was decreased $2,091,000 during the first half due to the
Company's continuing strong cash flow being generated from operating activities.
Unused borrowing availability under the Company's domestic revolving credit
facility at the end of the first half of 1997 was $10,000,000.
Capital expenditures of $967,000 during the first half increased over the same
period last year by $224,000. Second half capital expenditures are anticipated
to increase over 1996 levels in order to meet increased foreign plant capacity
needs, upgrade machinery and equipment and refurbish the Company's corporate
headquarters.
Operating capital requirements of the Company are anticipated to be provided
through cash flows generated from operating activities and borrowing
availability under the Company's domestic revolving credit facility.
Cash Flow
- ---------
Cash flow from operating activities during the first half totaled $3,352,000
compared to $5,111,000 for the same period a year ago. The decrease in cash flow
from operating activities was related to an increase in working capital
requirements in 1997 as compared to a decrease in working capital requirements
during the same period a year ago.
The Company anticipates that cash and cash equivalent balances will increase
moderately over the remainder of 1997 as cash flow provided by operating
activities will exceed the Company's investing and financing requirements.
<PAGE>
RESULTS OF OPERATIONS
1997 second quarter sales of $31,569,000 increased slightly above 1996's second
quarter sales of $31,356,000. While overall sales volume remained approximately
the same, engineered systems sales declined compared to the same quarter last
year and railroad and engine products sales increased.
Foreign subsidiary sales were up 8 percent during the second quarter due to
railroad, engine and heating, ventilating and air conditioning product sales.
Record second quarter net income totaled $1,826,000, up $327,000 or 22 percent
from $1,499,000 in the second quarter last year. Improved gross margins,
operating efficiencies and lower interest expense were the primary factors
driving the improved net income results. Foreign consolidated subsidiaries net
income totaled approximately 22 percent of our consolidated net income, up from
18 percent during last year's second quarter.
Gross margin as a percentage of sales during the second quarter increased to
27.2 percent, up 1.5 percent from 25.7 percent in the second quarter last year.
The increase in gross margin was related to improved operating efficiencies and
a better sales mix of products with higher margins.
Selling, general and administrative expenses as a percentage of sales during the
second quarter of 1997 and 1996 were 17.8 and 17.4 percent, respectively. Second
quarter spending totaled $5,625,000 compared to $5,443,000 for the same period
last year, reflecting modest increases in marketing and selling expenses.
Interest expense declined to $58,000 during the second quarter compared to
$171,000 last year. The continued decrease in interest expense is related to the
decrease in the Company's long-term debt.
The effective tax rate during the first half of the year dropped to 37 percent
from 39 percent last year due to utilization of foreign tax credits.
On March 3, 1997 the FASB released FASB Statement No. 128, "Earnings Per Share"
(SFAS 128). The new statement is effective for years ending after December 15,
1997. When adopted, SFAS 128 will require restatement of the Company's 1996 and
prior years' earnings per share information. Under the existing reporting
provisions, earnings per share for 1996 and 1995 were $1.06 and $.57,
respectively. Under the provisions of SFAS 128, the Company's basic earnings for
1996 and 1995 would be $1.08 and $.57, respectively.
On June 30, 1997 the FASB released FASB Statement No. 130, "Reporting
Comprehensive Income" (SFAS 130) and FASB Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS 131). The new
statements are effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting comprehensive income and SFAS 131
requires using the management approach of segmentation to disclose operating
segments. Adoption of these standards will not have a material effect on the
Company's financial position or results of operations.
<PAGE>
PART II. - OTHER INFORMATION
Item 4.a. Submission of Matters to a Vote of Security Holders
The following item was submitted for stockholder approval at the Annual
Stockholder Meeting, April 29, 1997:
Election of three Directors for three year terms:
Votes For Votes Against
John J. Kimes 4,762,689 10,543
H. Jack Meany 4,762,989 10,243
Denis R. Brown 4,762,989 10,243
Item 6.a. Exhibits
The following are being filed with this Quarterly Report on Form 10-Q.
- - Exhibit 4.66 Amendment No. 2 dated June 2, 1997, between Farr
Company, as borrower, and Bank of America National
Trust and Savings Association, as lender.
- - 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)
August 6, 1997 /s/ Kenneth W. Gerstner
----------------------------
Kenneth W. Gerstner
Senior Vice President
Chief Financial Officer
Exhibit 4.66
FARR COMPANY AND SUBSIDIARIES
Bank of America
AMENDMENT NO. 2 TO BUSINESS LOAN AGREEMENT
This Amendment No. 2 (the "Amendment") dated as of June 2, 1997, is between
Bank of America National Trust and Savings Association (the "Bank") and Farr
Company (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of February 15, 1996, as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this Amendment shall
have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 In Paragraph 1.2 of the Agreement, the date "June 1, 1999" is substituted
for the date "June 1, 1998."
2.2 Paragraph 8.3 of the Agreement is amended to read in its entirety as
follows:
"8.3 Quick Ratio. To maintain on a consolidated basis a ratio of quick assets to
the sum of current liabilities plus the principal outstanding of the line
of credit under this Agreement of at least 0.70:1.0, to be measured
quarterly.
"Quick assets" means cash, short-term cash investments, net trade receivables,
marketable securities not classified as long term investments."
3. Effect of Amendment. Except as provided in this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America
National Trust and Savings Association Farr Company
By: William R. Cave, Vice President By: Kenneth W. Gerstner
<TABLE>
Exhibit 11
FARR COMPANY AND SUBSIDIARIES
EARNINGS PER SHARE CALCULATIONS
(Unaudited)
As a result of the 3 for 2 stock split distributed on March 28, 1997, per share
amounts for 1996 have been restated to reflect the weighted average number of
shares of common stock outstanding, increased by shares issued for the stock
split. The per share amounts in 1996 are calculated as though the stock split
occurred on the first day of the year.
<CAPTION>
Three Months Ended Six Months Ended
June 28, 1997 June 29, 1996 June 28, 1997 June 29, 1996
------------- ------------- ------------- -------------
BASIC EARNINGS PER SHARE CALCULATION:
<S> <C> <C> <C> <C>
Earnings:
Net Income ................................ $1,826,000 $1,499,000 $3,526,000 $2,677,000
========== ========== ========== ==========
Shares:
Weighted average number of common
common shares outstanding ............. 5,469,246 5,438,484 5,469,246 5,438,484
========== ========== ========== ==========
Net Income Per Common Share ............... $ 0.33 $ 0.28 $ 0.64 $ 0.49
========== ========== ========== ==========
PRIMARY EARNINGS PER SHARE CALCULATION:
Earnings:
Net Income ................................ $1,826,000 $1,499,000 $3,526,000 $2,677,000
========== ========== ========== ==========
Shares
Weighted average number of common
shares outstanding .................... 5,469,246 5,438,484 5,469,246 5,438,484
Assuming exercise of options reduced by
the number of shares which could
have been purchased with the proceeds
from exercise of such options ......... 163,676 71,061 163,676 71,061
--------- ---------- ---------- ----------
Weighted average number of
common shares and dilutive
common share equivalents
outstanding ........................... 5,632,922 5,509,545 5,632,922 5,509,545
========== ========== ========== ==========
Net Income Per Common Share ............... $ 0.32 $ 0.27 $ 0.62 $ 0.48
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JUN-28-1997
<CASH> 1,613,000
<SECURITIES> 0
<RECEIVABLES> 21,037,000
<ALLOWANCES> 336,000
<INVENTORY> 13,008,000
<CURRENT-ASSETS> 38,454,000
<PP&E> 52,350,000
<DEPRECIATION> 37,013,000
<TOTAL-ASSETS> 54,643,000
<CURRENT-LIABILITIES> 17,004,000
<BONDS> 0
0
0
<COMMON> 555,000
<OTHER-SE> 34,112,000
<TOTAL-LIABILITY-AND-EQUITY> 54,643,000
<SALES> 61,910,000
<TOTAL-REVENUES> 61,910,000
<CGS> 45,443,000
<TOTAL-COSTS> 45,443,000
<OTHER-EXPENSES> 10,743,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,000
<INCOME-PRETAX> 5,591,000
<INCOME-TAX> 2,065,000
<INCOME-CONTINUING> 3,526,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,526,000
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
