================================================================================
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 October 3, 1998
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
Incorporated pursuant to the Laws of Delaware State
-----------------------
Internal Revenue Service -- Employer Identification Number 95-1288401
2201 Park Place, El Segundo, CA 90245
(310) 727-6300
-----------------------
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: 8,850,281.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
FARR COMPANY AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998
Part I - Financial Information
Introduction
Condensed Consolidated Financial Statements
Balance Sheets - October 3, 1998 and January 3, 1998
Income Statements for the three months ended October 3, 1998 and
September 27, 1997 and for the nine months ended October 3, 1998
and September 27, 1997
Statements of Cash Flows for the nine months ended October 3, 1998 and
September 27, 1997
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
OCTOBER 3, 1998
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 October 3, 1998 and the results of operations for the three and
nine months ended October 3, 1998 and September 27, 1997 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
<CAPTION>
Assets Oct. 3, 1998 Jan. 3,1998
------------ -------------
(Unaudited) (Audited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents ....................................... $ 5,239,000 $ 5,109,000
Short term investments .......................................... 0 2,031,000
Accounts receivable, less allowance of $385,000
in 1998 and $254,000 in 1997 ................................ 20,908,000 20,267,000
Inventories
Raw materials ............................................... 4,546,000 4,812,000
Work in process ............................................. 3,745,000 3,307,000
Finished goods .............................................. 2,275,000 2,690,000
------------ ------------
10,566,000 10,809,000
Prepaid expenses ................................................ 972,000 904,000
Income taxes receivable ......................................... 366,000 666,000
Deferred tax benefit ............................................ 1,221,000 1,221,000
------------ ------------
Total current assets ........................................ 39,272,000 41,007,000
------------ ------------
Property, Plant and Equipment, at Cost
Land ............................................................ 2,234,000 2,098,000
Buildings and improvements ...................................... 17,893,000 17,429,000
Machinery and equipment ......................................... 36,208,000 35,935,000
------------ ------------
56,335,000 55,462,000
Less-accumulated depreciation and amortization .................. 38,462,000 37,843,000
------------ ------------
17,873,000 17,619,000
Other ............................................................... 2,750,000 2,202,000
------------ ------------
$ 59,895,000 $ 60,828,000
============ ============
Liabilities & Stockholders' Investment .............................. Oct. 3, 1998 Jan. 3,1998
------------ ------------
Current Liabilities:
Notes/overdraft payable to banks ................................ $ 0 $ 93,000
Accounts payable ................................................ 7,022,000 9,701,000
Accrued liabilities ............................................. 7,310,000 8,726,000
Income taxes payable and deferred taxes ......................... 384,000 750,000
------------ ------------
Total current liabilities ................................... 14,716,000 19,270,000
------------ ------------
Deferred Income Taxes ............................................... 2,244,000 2,196,000
Other Non-current Liabilites ........................................ 1,490,000 855,000
Commitments and Contingencies
Stockholders' Investment:
Common stock, $.10 par value--Authorized 10,000,000 shares
Issued and outstanding--8,870,019 shares at October 3, 1998
and 8,629,131 shares at January 3, 1998 ......................... 825,000 827,000
Additional paid-in capital ........................................ 9,650,000 11,785,000
Cumulative translation adjustments ................................ (2,252,000) (1,749,000)
Retained earnings:
Balance beginning of year ....................................... 27,644,000 20,269,000
Net income for the period ....................................... 5,578,000 7,375,000
------------ ------------
Balance at end of period ........................................ 33,222,000 27,644,000
------------ ------------
Total stockholders' investment .............................. 41,445,000 38,507,000
------------ ------------
$ 59,895,000 $ 60,828,000
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 3, 1998 Sep. 27, 1997 Oct. 3, 1998 Sep. 27, 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Sales ............................. $ 31,011,000 $ 31,612,000 $ 93,434,000 $ 93,522,000
Cost of Sales ......................... 23,114,000 23,343,000 69,431,000 68,786,000
------------ ------------ ------------ ------------
Gross Margin .......................... 7,897,000 8,269,000 24,003,000 24,736,000
Selling, general and administrative 5,112,000 5,242,000 15,450,000 16,027,000
Interest expense .................. 25,000 40,000 89,000 173,000
Interest income ................... (71,000) (30,000) (201,000) (72,000)
------------ ------------ ------------ ------------
Total Expenses ........................ 5,066,000 5,252,000 15,338,000 16,128,000
------------ ------------ ------------ ------------
Income Before Income Taxes ............ 2,831,000 3,017,000 8,665,000 8,608,000
Income Taxes .......................... 1,047,000 1,125,000 3,087,000 3,190,000
------------ ------------ ------------ ------------
Net Income ............................ $ 1,784,000 $ 1,892,000 $ 5,578,000 $ 5,418,000
============ ============ ============ ============
Diluted Earnings per Common Share * ... $ 0.21 $ 0.23 $ 0.66 $ 0.65
============ ============ ============ ============
Basic Earnings per Common Share ....... $ 0.21 $ 0.23 $ 0.67 $ 0.66
============ ============ ============ ============
</TABLE>
* Based upon 8,430,909 and 8,392,329 average shares outstanding at
October 3, 1998 and September 27, 1997, respectively restated for
3 for 2 stock split.
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Year-to-Date
Cash Provided by ( Used in ) : Oct. 3, 1998 Sep. 27, 1997
------------ -------------
Operating Activities:
<S> <C> <C>
Net Income ........................................ $ 5,578,000 $ 5,418,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 1,854,000 1,764,000
Provision for loss on accounts receivable ......... 120,000 165,000
Equity in loss of affiliate ....................... 35,000 0
Benefit retirement trust .......................... 614,000 510,000
Change in deferred income taxes ................... 16,000 18,000
Exchange gain ..................................... (32,000) (57,000)
Net loss on sale/retirement of P,P & E ............ 4,000 25,000
Changes in assets and liabilities
Inventories ..................................... 80,000 1,635,000
Receivables and prepaid expenses ................ (968,000) (728,000)
Accounts payable & accrued expenses ............. (4,128,000) (119,000)
Net change in current income taxes payable ...... 137,000 (129,000)
----------- -----------
Net cash provided by operating activities ......... 3,310,000 8,502,000
----------- -----------
Investing Activities:
Purchases of property, plant and equipment ....... (2,136,000) (1,718,000)
Redemptions (purchases) of short term investments 2,031,000 (2,001,000)
Note receivable - affiliate ...................... (106,000) 0
Investments in joint venture ..................... 0 (184,000)
Purchase of investments, benefits trust .......... (614,000) (490,000)
----------- -----------
Net cash used in investing activities .......... (825,000) (4,393,000)
----------- -----------
Financing Activities:
Principal payments on revolving line of credit
and long-term debt borrowings & overdrafts ..... (93,000) (2,459,000)
Treasury stock acquired .......................... (2,844,000) 0
Proceeds from sale of stock, stock option plans .. 719,000 240,000
Other ............................................ 9,000 7,000
----------- -----------
Net cash used in financing activities .......... (2,209,000) (2,212,000)
----------- -----------
Effect of Exchange Rate Changes on Cash ............ (146,000) (18,000)
Increase in Cash and Cash Equivalents .............. 130,000 1,879,000
Cash and Cash Equivalents at Beginning of Period ... 5,109,000 1,997,000
----------- -----------
Cash and Cash Equivalents at End of Period ....... $ 5,239,000 $ 3,876,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE>
FARR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998
(Unaudited)
1. Other than Common Stock, 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 1997
Annual Report to Stockholders which was incorporated by reference in
the Annual Report on Form 10-K for the year ended January 3, 1998.
2. Common Stock
On June 26, 1998, the Board of Directors authorized a 500,000 share
stock repurchase plan. Under the plan, the Company may purchase from
time to time a cumulative total of 500,000 shares of its common stock
either on the open market or through negotiated transactions. No time
limit has been set for completion of this stock repurchase program.
Shares purchased are planned to be made with existing cash on hand. As
of October 3, 1998, the Company has purchased 233,250 shares under the
repurchase program.
As of October 3, 1998, January 3, 1998 and December 28, 1996 the
Company held in treasury 616,644, 357,834 and 376,586 shares of its
common stock at a cost of $4,035,000, $1,191,000 and $1,399,000,
respectively. Outstanding stock amounts are reflected net of
outstanding treasury shares in the Consolidated Statements of
Stockholder's Investment.
3. On April 28, 1998, the Company's Board of Directors authorized a stock
dividend as a 3-for-2 stock split, payable May 29, 1998 to stockholders
of record on May 8, 1998.
<PAGE>
4. Earnings per Share Calculation
As a result of the 3-for-2 stock split distributed on May 29, 1998, per
share amounts for 1998 and 1997 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
are calculated as though the stock split occurred in the first day of
the year.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 3, 1998 September 27, 1997 October 3, 1998 September 27, 1997
----------------------------------- -----------------------------------
BASIC EARNINGS PER SHARE CALCULATION
Earnings:
<S> <C> <C> <C> <C>
Net Income $1,784,000 $1,892,000 $5,578,000 $5,418,000
============================= =============================
Shares:
Weighted average number of common
shares outstanding 8,303,045 8,222,499 8,313,662 8,208,516
============================= =============================
Net Income Per Common Share $ 0.21 $ 0.23 $ 0.67 $ 0.66
============================= =============================
DILUTED EARNINGS PER SHARE CALCULATION
Earnings:
Net Income $1,784,000 $1,892,000 $5,578,000 $5,418,000
============================= =============================
Shares:
Weighted average number of common
shares outstanding 8,303,045 8,222,499 8,313,662 8,208,516
Assuming exercise of options reduced by
the number of shares which could have
been purchased with the proceeds from
exercise of such options 105,716 195,742 129,450 183,813
----------------------------- -----------------------------
Weighted average number of common
shares and dilutive common share
equivalents outstanding 8,408,761 8,418,241 8,443,112 8,392,329
============================= =============================
Net Income Per Common Share $ 0.21 $ 0.23 $ 0.66 $ 0.65
============================= =============================
</TABLE>
5. During fiscal 1998, the Company adopted Financial Accounting Standard
No.130, "Reporting Comprehensive Income", (SFAS No. 130), which
established standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial
statements.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 3, 1998 September 27, 1997 October 3, 1998 September 27, 1997
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net Income $1,784,000 $1,892,000 $5,578,000 $5,418,000
Other Comprehensive income, net of tax
Foreign currency translation adjustments loss (399,000) (237,000) (503,000) (399,000)
----------------------------- -----------------------------
Comprehensive Income $1,385,000 $1,655,000 $5,075,000 $5,019,000
============================= =============================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
FINANCIAL CONDITION
As of October 3, 1998, working capital was $24,556,000 compared to $21,737,000
at the end of 1997, representing a $2,819,000 increase in total working capital.
The primary components of the change in working capital were decreases in
accounts payable and accrued liabilities ($4,095,000) and an increase in
accounts receivable ($641,000) partially offset by a net decrease in cash and
cash equivalents and short term investments ($1,901,000).
The decreases in accounts payable and accrued liabilities primarily reflected
large accounts payable payments against open capital expenditure payables at
year-end and payments related to accrued employee benefit expenses.
Borrowing availability under the Company's domestic revolving credit facility at
the end of the third quarter was $10,000,000.
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.
On April 28, 1998, the Board of Directors declared a 3-for-2 stock split of its
common stock effected in the form of a 50 percent stock dividend. The stock
dividend was distributed on May 29, 1998, to stockholders of record as of May 8,
1998.
On June 26, 1998, the Board of Directors authorized a 500,000 share stock
repurchase plan. Under the plan, the Company may purchase from time to time a
cumulative total of 500,000 shares of its common stock either on the open market
or through negotiated transactions. No time limit has been set for completion of
this stock repurchase program. Shares purchased are planned to be made with
existing cash on hand and then will be held as treasury shares. As of October 3,
1998, the Company has purchased 233,250 shares under the repurchase program.
CASH FLOW
Cash flow generated from operating activities during the first nine months
totaled $3,310,000 compared to $8,502,000 for the same period a year ago. The
decrease in cash flow from operating activities was primarily related to the
increase in working capital associated with decreases in accounts payable and
accrued liabilities as compared to the same period last year.
Capital expenditures for the first nine months increased to $2,136,000 from
$1,718,000 for the same period a year ago. Fourth quarter and 1998 total capital
expenditures are anticipated to decrease from 1997 levels as 1997 expenditures
for the Company's headquarters will not reoccur in the fourth quarter of 1998.
<PAGE>
Results of Operations
- ---------------------
For the third quarter of 1998, the Company's sales of $31,011,000 were down
$601,000 or 2 percent from 1997 third quarter sales of $31,612,000. Sales for
the first nine months of $93,434,000 were about even with last year's nine month
sales of $93,522,000. Third quarter and 1998 year-to-date sales in the Company's
core HVAC business have been affected by generally soft, industry-wide demand
for domestic environmental filtration products. In addition, continuing global
financial concerns have reduced the Company's domestic export sales.
The soft market conditions for domestic environmental products is anticipated to
be only short term while the global financial concerns remain uncertain as to
their continuing adverse impact on international sales from the Company's
domestic operations. To mitigate the sales impact on current year's earnings,
the Company has already implemented cost reduction measures and has restructured
and strengthened its overseas sales organization by hiring a new vice president
of international sales and marketing. In addition, weakening Canadian foreign
currency exchange rates, as compared to last year's level, reduced comparable
reported nine months sales for 1998 by approximately $969,000.
Foreign subsidiary 1998 nine month sales were ahead of last year's nine month
sales by 4 percent due to filter house, railroad and air pollution control
products.
Third quarter 1998 net income totaled $1,784,000, down by $108,000 or 6 percent
from $1,892,000 in the third quarter last year primarily because of a decrease
in sales volume. Nine months 1998 net income advanced to $5,578,000,
representing an increase of 3 percent from last year's first nine months net
income of $5,418,000. The increase in the nine month income was attributable to
improvements in the Company's Canadian and U.K. operations; overall operating
efficiencies; lower selling, general and administrative expenses; and a decrease
in the Company's effective income tax rate.
Gross margin as a percent of sales during the third quarter decreased to 25.5
percent as compared to 26.2 percent during the third quarter of 1997. The
decrease in gross margin is primarily related to sales mix.
Selling, general and administrative expenses as a percentage of sales during the
quarter dropped to 16.5 percent compared to 16.6 percent during the third
quarter of 1997. Third quarter spending totaled $5,112,000 compared to
$5,242,000 for the same period last year, reflecting decreases in selling and
marketing related expenses associated with lower sales volume and nonrecurring
1997 sales reorganization expenses.
Changes in both interest expense and interest income generally reflect the
Company's stronger cash position as compared to the prior year's lower average
cash balances.
The effective tax rate during the third quarter decreased to 37 percent from
37.3 percent last year. Tax rates are expected to increase during the fourth
quarter of 1998 as tax benefits derived from the Company's Foreign Sales
Corporation are expected to decline due to lower export sales compared to last
year.
<PAGE>
On April 3, 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities". Application of this statement will not have a
significant impact to the Company's financial position or operating results.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. Statement 133
is effective for fiscal years beginning after June 15, 1999. Application of this
statement will not have an impact to the Company's financial position or
operating results.
YEAR 2000
The Company's internal business systems will be Year 2000 (Y2K) compliant by
December 31, 1998. Major customers and suppliers have advised the Company that
their systems either are Year 2000 compliant or are anticipated to be compliant
by December 31, 1998. The Company does not anticipate material or significant
external risks or exposures associated with Year 2000 issues. Unanticipated Year
2000 related problems will be addressed by a Y2K Task Force Team within the
Company. The Company's estimate for external cost including consultants and
software applications used to make the Company's internal business systems Y2K
compliant are not material to the Company's business, operations or financial
condition. The Company does not track internal cost incurred for the Y2K project
that are principally related to payroll costs for its information systems group.
<PAGE>
PART II. - OTHER INFORMATION
Item 6.a. Exhibits
The following are being filed with this Quarterly Report on Form 10-Q.
- - 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
November 13, 1998 /s/ Stephen E. Pegg
------------------------
Stephen E. Pegg
Senior Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 5,239,000
<SECURITIES> 0
<RECEIVABLES> 20,908,000
<ALLOWANCES> 385,000
<INVENTORY> 10,566,000
<CURRENT-ASSETS> 39,272,000
<PP&E> 56,335,000
<DEPRECIATION> 38,462,000
<TOTAL-ASSETS> 59,895,000
<CURRENT-LIABILITIES> 14,716,000
<BONDS> 0
0
0
<COMMON> 825,000
<OTHER-SE> 40,620,000
<TOTAL-LIABILITY-AND-EQUITY> 59,895,000
<SALES> 93,434,000
<TOTAL-REVENUES> 93,434,000
<CGS> 69,431,000
<TOTAL-COSTS> 69,431,000
<OTHER-EXPENSES> 15,249,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,000
<INCOME-PRETAX> 8,665,000
<INCOME-TAX> 3,087,000
<INCOME-CONTINUING> 5,578,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,578,000
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.66
</TABLE>
