================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------
FORM 10-Q
--------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period ended September 27, 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 ___________
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Commission file number 0-4723
FARR COMPANY
Incorporated pursuant to the Laws of Delaware State
--------------------
Internal Revenue Service -- Employer Identification Number 95-1288401
2221 Park Place, El Segundo, CA 90245
(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: 5,749,235.
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<PAGE>
PART I - FINANCIAL INFORMATION
FARR COMPANY AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1997
Part I - Financial Information
Introduction
Condensed Consolidated Financial Statements
Balance Sheets - September 27, 1997 and December 28, 1996
Income Statements for the three months ended September 27, 1997 and
September 28, 1996 and for the nine months ended September 27, 1997
and September 28, 1996
Statements of Cash Flows for the nine months ended September 27, 1997
and September 28, 1996
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis
Part II - Other Information
Item 6.a. Exhibits
<PAGE>
FARR COMPANY AND SUBSIDIARIES
INTRODUCTION TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 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 September 27, 1997 and the results of operations for the three
and nine months ended September 27, 1997 and September 28, 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>
FARR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 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>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Assets Sep. 27, 1997 Dec. 28, 1996
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................... $3,876,000 $1,997,000
Short term investments .................................. 2,001,000 0
Accounts receivable, less allowance of $377,000
in 1997 and $297,000 in 1996 .......................... 20,741,000 20,551,000
Inventories
Raw materials ......................................... 4,311,000 5,380,000
Work in process ....................................... 3,621,000 3,979,000
Finished goods ........................................ 2,812,000 3,175,000
----------- -----------
10,744,000 12,534,000
Prepaid expenses ........................................ 1,018,000 790,000
Deferred tax benefit .................................... 1,799,000 1,807,000
----------- -----------
Total current assets ................................ 40,179,000 37,679,000
----------- -----------
Property, Plant and Equipment, at Cost
Land .................................................... 2,098,000 2,107,000
Buildings and improvements .............................. 15,674,000 15,247,000
Machinery and equipment ................................. 35,174,000 34,907,000
----------- -----------
52,946,000 52,261,000
Less-accumulated depreciation and amortization .......... 37,513,000 36,650,000
----------- -----------
15,433,000 15,611,000
Other ..................................................... 1,019,000 397,000
----------- -----------
$56,631,000 $53,687,000
=========== ===========
<FN>
The accompanying notes are an integral part of these balance sheets.
</FN>
</TABLE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Liabilities & Stockholders' Investment Sep. 27, 1997 Dec. 28, 1996
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current Liabilities:
Notes/overdraft payable to banks ......................... $443,000 $874,000
Current portion of long-term debt ........................ 0 23,000
Accounts payable ......................................... 7,572,000 8,665,000
Accrued liabilities ...................................... 8,502,000 7,566,000
Income taxes payable and deferred taxes .................. 598,000 745,000
----------- -----------
Total current liabilities ............................ 17,115,000 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 ............................... 696,000 186,000
Commitments and Contingencies
Stockholders' Investment:
Common stock, $.10 par value--Authorized 10,000,000 shares
Issued and outstanding--5,749,235 shares at
September 27, 1997 and 5,707,404 shares at
December 28, 1996 ...................................... 558,000 544,000
Additional paid-in capital ............................... 11,830,000 11,603,000
Cumulative translation adjustments ....................... (1,605,000) (1,206,000)
Retained earnings:
Balance beginning of year .............................. 20,269,000 14,379,000
Net income for the period .............................. 5,418,000 5,890,000
----------- -----------
Balance at end of period ............................... 25,687,000 20,269,000
----------- -----------
Total stockholders' investment ........................... 36,470,000 31,210,000
----------- -----------
$56,631,000 $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 Nine Months Ended
Sep. 27, 1997 Sep. 28, 1996 Sep. 27, 1997 Sep. 28, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales ....................................... $31,612,000 $29,951,000 $93,522,000 $92,386,000
Cost of Sales ................................... 23,343,000 22,418,000 68,786,000 69,627,000
----------- ----------- ----------- -----------
Gross Margin .................................... 8,269,000 7,533,000 24,736,000 22,759,000
Selling, general and administrative expense ... 5,212,000 4,781,000 15,955,000 15,140,000
Interest expense .............................. 40,000 145,000 173,000 563,000
----------- ----------- ----------- -----------
Total Expenses ............................... 5,252,000 4,926,000 16,128,000 15,703,000
----------- ----------- ----------- -----------
Income Before Income Taxes ...................... 3,017,000 2,607,000 8,608,000 7,056,000
Income Taxes .................................... 1,125,000 1,012,000 3,190,000 2,784,000
----------- ----------- ----------- -----------
Net Income ...................................... $1,892,000 $1,595,000 $5,418,000 $4,272,000
=========== =========== =========== ===========
Earnings per Common Share * ..................... $0.34 $0.29 $0.96 $0.77
=========== =========== =========== ==========
<FN>
* Based upon 5,637,515 and 5,537,829 average shares outstanding at September 27,
1997 and September 28, 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>
Cash Provided by ( Used in ) : Nine Months Ended
Sep. 27, 1997 Sep. 28, 1996
------------- -------------
<S> <C> <C>
Operating Activities:
Net Income ........................................... $5,418,000 $4,272,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ...................... 1,764,000 1,784,000
Provision for loss on accounts receivable .......... 165,000 99,000
Benefit retirement trust ........................... 510,000 99,000
Change in deferred income taxes .................... 18,000 319,000
Exchange gain ...................................... (57,000) (12,000)
Net loss on sale/retirement of P,P & E ............. 25,000 25,000
Decrease in inventories ............................ 1,635,000 2,484,000
Increase in receivables and prepaid expenses ....... (728,000) (976,000)
Decrease in accounts payable & accrued expenses .... (119,000) (866,000)
Net change in current income taxes payable ......... (129,000) (86,000)
---------- ----------
Net cash provided by operating activities ..... 8,502,000 7,142,000
---------- ----------
Investing Activities:
Purchases of property, plant and equipment ........... (1,718,000) (896,000)
Purchases of short term investments .................. (2,001,000) 0
Investments in joint venture ......................... (184,000) 0
Purchase of investments, benefits trust .............. (490,000) (126,000)
---------- ----------
Net cash used in investing activities ......... (4,393,000) (1,022,000)
---------- ----------
Financing Activities:
Proceeds from revolving line of credit,
and long-term borrowings ........................... 0 8,434,000
Principal payments on revolving line of credit
and long-term debt borrowings & overdrafts ......... (2,459,000) (13,790,000)
Principal payments received on notes ................. 7,000 6,000
Proceeds from sale of stock, stock option plans ...... 240,000 98,000
----------- -----------
Net cash used in financing activities ......... (2,212,000) (5,252,000)
----------- -----------
Effect of Exchange Rate Changes on Cash ................ (18,000) 1,000
Increase in Cash and Cash Equivalents .................. 1,879,000 869,000
Cash and Cash Equivalents at Beginning of Period ....... 1,997,000 812,000
----------- -----------
Cash and Cash Equivalents at End of Period ............. $3,876,000 $1,681,000
=========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
Financial Condition
As of September 27, 1997, working capital was $23,064,000 compared to
$19,806,000 at the end of 1996, representing a $3,258,000 increase in total
working capital for the first nine months of 1997. The primary components of the
change in working capital during the first nine months were increases in cash
and short-term investments ($3,880,000) and prepaid expenses ($228,000) coupled
with decreases in notes payable to banks ($431,000) offset by net decrease of
inventories ($1,790,000).
The increase in cash and short term investments was associated with strong
operating results and a decrease in inventory. The decrease in inventory is due
to stronger asset management policies focused at improving inventory turnover.
Total long-term debt was decreased $2,091,000 during the first nine months 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 nine months of 1997 was $10,000,000.
Capital expenditures of $1,718,000 during the first nine months increased over
the same period last year by $822,000. Fourth quarter capital expenditures are
anticipated to increase over 1996 levels in order to 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, on-hand cash balances
and borrowing availability under the Company's domestic revolving credit
facility.
During the third quarter of 1997, the Company reached an agreement for the
merger of privately held Metalcraft Air Filtration, Inc. of Washington, North
Carolina, into Farr Company. Metalcraft Air Filtration, Inc. is a small but
growing company with approximately 15 employees that manufactures high quality
containment filter systems and unique bag-in/bag-out products. Metalcraft's
products are used in such applications as nuclear facilities, hospitals,
chemical process plants, laboratories and other industries requiring unique
solutions to incorporate the utmost safety when handling waste contaminants
filtered from the air in these environments.
This transaction was completed on November 3, 1997, subsequent to the current
quarter.
Cash Flow
Cash flow from operating activities during the first nine months totaled
$8,502,000 compared to $7,142,000 for the same period a year ago. The increase
in cash flow from operating activities was related to an decrease in working
capital requirements in 1997 (excluding cash and investments) and improved net
income levels.
<PAGE>
Results of Operations
1997 third quarter sales of $31,612,000 increased slightly above 1996's third
quarter sales of $29,951,000. The overall sales volume increase of 5.5 percent
was primarily the result of increases in sales of engineered systems, heating,
ventilating and air conditioning and railroad products.
Foreign subsidiary sales for the third quarter were up 15 percent up over the
same period last year due to engineered systems, railroad and heating,
ventilating and air conditioning product sales.
Record third quarter net income totaled $1,892,000, up $297,000 or 19 percent
from $1,595,000 in the third 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
17 percent during last year's third quarter.
Gross margin as a percentage of sales during the third quarter increased to 26
percent, up one percent from 25 percent in the third 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
third quarter of 1997 and 1996 were both 16 percent. Third quarter spending
totaled $5,212,000 compared to $4,781,000 for the same period last year,
reflecting modest increases in marketing and selling expenses.
Interest expense declined to $40,000 during the third quarter compared to
$145,000 last year. The decrease in interest expense is related to the payoff of
the Company's long-term debt during 1997.
The effective tax rate during the first nine months of the year dropped to 37
percent from 39 percent last year due to utilization of foreign tax credits.
<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
By /s/ Kenneth W. Gerstner
-------------------------------
Kenneth W. Gerstner
Senior Vice President and
Chief Financial Officer
Dated: November 7, 1997
<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 Nine Months Ended
Sep. 27, 1997 Sep. 28, 1996 Sep. 27, 1997 Sep. 28, 1996
------------- ------------- ------------- -------------
BASIC EARNINGS PER SHARE CALCULATION:
<S> <C> <C> <C> <C>
Earnings:
Net Income $1,892,000 $1,595,000 $5,418,000 $4,272,000
========== ========== ========== ==========
Shares:
Weighted average number of
common shares outstanding 5,498,179 5,441,760 5,498,179 5,441,760
========== ========== ========== ==========
Net Income Per Common Share $0.35 $0.29 $0.99 $0.78
========== ========== ========== ==========
PRIMARY EARNINGS PER SHARE CALCULATION:
Earnings:
Net Income $1,892,000 $1,595,000 $5,418,000 $4,272,000
========== ========== ========== ==========
Shares
Weighted average number of
common shares outstanding 5,498,179 5,441,760 5,498,179 5,441,760
Assuming exercise of options
reduced by the number of
shares which could have been
purchased with the proceeds
from exercise of such options 139,336 96,069 139,336 96,069
---------- ---------- ---------- ----------
Weighted average number of
common shares and dilutive
common share equivalents
outstanding 5,637,515 5,537,829 5,637,515 5,537,829
========== =========== ========== ==========
Net Income Per Common Share $0.34 $0.29 $0.96 $0.77
========== =========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 3,876,000
<SECURITIES> 0
<RECEIVABLES> 20,741,000
<ALLOWANCES> 377,000
<INVENTORY> 10,744,000
<CURRENT-ASSETS> 40,179,000
<PP&E> 52,946,000
<DEPRECIATION> 37,513,000
<TOTAL-ASSETS> 56,631,000
<CURRENT-LIABILITIES> 17,115,000
<BONDS> 0
0
0
<COMMON> 558,000
<OTHER-SE> 35,912,000
<TOTAL-LIABILITY-AND-EQUITY> 56,631,000
<SALES> 93,522,000
<TOTAL-REVENUES> 93,522,000
<CGS> 68,786,000
<TOTAL-COSTS> 68,786,000
<OTHER-EXPENSES> 15,955,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173,000
<INCOME-PRETAX> 8,608,000
<INCOME-TAX> 3,190,000
<INCOME-CONTINUING> 5,418,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,418,000
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.96
</TABLE>
