================================================================================
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 April 4, 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 common stock outstanding as of close of the period covered
by this report: 8,638,974.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
FARR COMPANY AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 4, 1998
Part I - Financial Information
Introduction
Condensed Consolidated Financial Statements
Balance Sheets - April 4, 1998 and January 3, 1998
Income Statements for the three months ended April 4, 1998
and March 29, 1997
Statements of Cash Flows for the three months ended April 4, 1998
and March 29, 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
APRIL 4, 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 April 4, 1998 and the results of operations for the three months
ended April 4, 1998 and March 29, 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 consolidated 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>
(Unaudited) (Audited)
Assets Apr. 4, 1998 Jan. 3, 1998
------------ ------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents ................................... $ 6,359,000 $ 5,109,000
Short term investments ...................................... 0 2,031,000
Accounts receivable, less allowance of $326,000 in
1998 and $254,000 in 1997 ............................... 20,269,000 20,267,000
Inventories
Raw materials .......................................... 5,071,000 4,812,000
Work in process ........................................ 4,078,000 3,307,000
Finished goods ......................................... 2,467,000 2,690,000
------------ ------------
11,616,000 10,809,000
Prepaid expenses ............................................ 765,000 904,000
Income taxes receivable ..................................... 666,000 666,000
Deferred tax benefit ........................................ 1,221,000 1,221,000
------------ ------------
Total current assets .................................. 40,896,000 41,007,000
------------ ------------
Property, Plant and Equipment at cost
Land ........................................................ 2,098,000 2,098,000
Buildings and improvements .................................. 17,464,000 17,429,000
Machinery and equipment ..................................... 36,047,000 35,935,000
------------ ------------
55,609,000 55,462,000
Less-accumulated depreciation and amortization .............. 37,799,000 37,843,000
------------ ------------
17,810,000 17,619,000
Other .......................................................... 2,828,000 2,202,000
------------ ------------
$ 61,534,000 $ 60,828,000
============ ============
Liabilities & Stockholders' Investment
Current Liabilities:
Notes/overdraft payable to banks ............................ $ 222,000 $ 93,000
Accounts payable ............................................ 7,358,000 9,701,000
Accrued liabilities ......................................... 8,306,000 8,726,000
Income taxes payable and deferred taxes ..................... 1,429,000 750,000
------------ ------------
Total current liabilities ................................ 17,315,000 19,270,000
------------ ------------
Deferred Income Taxes .......................................... 2,244,000 2,196,000
Other Non-current Liabilities .................................. 1,300,000 855,000
Commitments and Contingencies .................................. -- --
Stockholders' Investment:
Common stock, $.10 par value--Authorized 10,000,000 shares
Issued and outstanding--8,638,974 shares at April 4,
1998 and 8,629,131 shares at January 3, 1998 ............. 552,000 551,000
Additional paid-in capital .................................. 12,075,000 12,061,000
Cumulative translation adjustments .......................... (1,514,000) (1,749,000)
Retained earnings:
Balance beginning of year ................................ 27,644,000 20,269,000
Net income for the period ................................ 1,918,000 7,375,000
------------ ------------
Balance at end of period ................................. 29,562,000 27,644,000
------------ ------------
Total stockholders' investment ........................ 40,675,000 38,507,000
------------ ------------
$ 61,534,000 $ 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
April 4, 1998 March 29, 1997
------------- --------------
<S> <C> <C>
Net Sales ....................................... $ 31,989,000 $ 30,341,000
Cost of Sales ................................... 23,783,000 22,450,000
------------ ------------
Gross Margin .................................... 8,206,000 7,891,000
Selling, general and administrative expense . 5,282,000 5,142,000
Interest expense ............................ 36,000 75,000
Interest income ............................. (68,000) (24,000)
------------ ------------
Total Expenses .................................. 5,250,000 5,193,000
------------ ------------
Income Before Income Taxes ...................... 2,956,000 2,698,000
Income Taxes .................................... 1,038,000 998,000
------------ ------------
Net Income ...................................... $ 1,918,000 $ 1,700,000
============ ============
Diluted Earnings per Common Share * ............. $ 0.23 $ 0.20
============ ============
Basic Earnings per Common Share ................. $ 0.23 $ 0.21
============ ============
</TABLE>
* Based upon 8,476,084 and 8,425,249 average shares outstanding at April 4,
1998 and March 29, 1997, respectively. The average shares outstanding have
been restated to reflect the 3-for-2 stock split declared in April 1998.
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Cash Provided by ( Used in ) : Three Months Ended
April 4, 1998 March 29, 1997
------------- --------------
Operating Activities:
<S> <C> <C>
Net Income ............................................ $ 1,918,000 $ 1,700,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 626,000 579,000
Provision for loss on accounts receivable .......... 40,000 41,000
Benefit retirement trust ........................... 397,000 282,000
Exchange gain (loss) ............................... 16,000 (29,000)
Net loss on sale/retirement of P,P & E ............. -- 4,000
Change in assets and liabilities
Inventories .................................... (730,000) (338,000)
Receivables and prepaid expenses ............... 108,000 (539,000)
Accounts payable & accrued expenses ............ (2,902,000) 277,000
Net change in current income taxes payable ..... 875,000 803,000
----------- -----------
Net cash provided by operating activities .......... 348,000 2,780,000
----------- -----------
Investing Activities:
Purchases of property, plant and equipment ............ (777,000) (473,000)
Redemption of short term investments .................. 2,031,000 --
Issuance of note receivable - affiliate ............... (106,000) --
Purchase of investments, benefits trust ............... (397,000) (282,000)
----------- -----------
Net cash provided by (used in) investing activities 751,000 (755,000)
----------- -----------
Financing Activities:
Proceeds from (payments on) revolving line of credit .. 128,000 (103,000)
Principal payments on revolving line of credit ........ -- (1,065,000)
Treasury stock acquired ............................... (19,000) --
Proceeds from sale of stock, stock option plans ....... 34,000 78,000
Other (Principal payments on notes receivable) ........ 2,000 2,000
----------- -----------
Net cash provided by (used in) financing activities 145,000 (1,088,000)
----------- -----------
Effect of Exchange Rate Changes on Cash ............... 6,000 (35,000)
----------- -----------
Increase in Cash and Cash Equivalents ................. 1,250,000 902,000
Cash and Cash Equivalents at Beginning of Period ...... 5,109,000 1,997,000
----------- -----------
Cash and Cash Equivalents at End of Period ............ $ 6,359,000 $ 2,899,000
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FARR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 4, 1998
(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 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. Earnings per Share Calculation
As a result of the 3-for-2 stock split to be 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.
April 4, 1998 March 29, 1997
------------- --------------
BASIC EARNINGS PER SHARE CALCULATION
------------------------------------
Earnings:
Net Income $1,918,000 $1,700,000
========== ==========
Shares:
Weighted average number of common
shares outstanding 8,273,979 8,200,318
========= =========
Net Income Per Common Share $ 0.23 $ 0.21
========== ==========
DILUTED EARNINGS PER SHARE CALCULATION
--------------------------------------
Earnings:
Net Income $1,918,000 $1,700,000
========== ==========
Shares:
Weighted average number of common
shares outstanding 8,273,979 8,200,318
Assuming exercise of options reduced by
the number of shares which could have
been purchased with the proceeds from
exercise of such options 202,105 224,931
---------- ---------
Weighted average number of common
shares and dilutive common share
equivalents outstanding 8,476,084 8,425,249
========= =========
Net Income Per Common Share $ 0.23 $ 0.20
========== ==========
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.
4. 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.
April 4, 1998 March 29, 1997
------------- --------------
Net Income $1,918,000 $1,700,000
Other Comprehensive income, net of tax
Foreign currency translation
adjustments gain (loss) 235,000 (272,000)
---------- ----------
Comprehensive Income $2,153,000 $1,428,000
========== ==========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
FINANCIAL CONDITION
As of April 4, 1998, working capital was $23,581,000 compared to $21,737,000 at
the end of 1997, representing a $1,844,000 increase in total working capital for
the first three months of 1998. The primary components of the change in working
capital during the first quarter were decreases in accounts payable and accrued
liabilities ($2,763,000) and increases in inventories ($807,000), partially
offset by decreases in cash and short term investments ($781,000) and an
increase in income taxes payable ($679,000).
The decreases in accounts payable and accrued liabilities primarily reflected
large accounts payable payments against open capital expenditure payables as of
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 first quarter was $10,000,000.
Capital expenditures of $777,000 during the first quarter increased over the
same period last year by $304,000. Capital expenditures are anticipated to
decrease from 1997 levels as 1997 expenditures for the Company's headquarters
will not reoccur in 1998.
Current debt maturities and 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 quarter totaled $348,000
compared to $2,780,000 for the same period a year ago. The decrease in cash flow
from operating activities was primarily related to the decreases in accounts
payable and accrued expenses as compared to the same period a year ago.
<PAGE>
Results of Operations
- ---------------------
1998 first quarter sales of $31,989,000 were up $1,648,000 or 5 percent from
1997 first quarter sales of $30,341,000. The increase in sales volume was
related to increased sales in engine, railroad, dust collection and heating,
ventilating and air conditioning products.
Foreign subsidiary sales were up 15 percent during the first quarter due to
railroad and heating, ventilating and air conditioning product sales.
Record first quarter net income totaled $1,918,000, up $218,000 or 13 percent
from $1,700,000 in the first quarter last year. Sales volume and lower effective
tax rates were the primary factors driving the improved net income results.
Foreign consolidated subsidiaries net income totaled approximately 30 percent of
the consolidated net income, up from 21 percent during last year's first
quarter.
Gross margin as a percent of sales during the first quarter decreased slightly
to 25.7 percent as compared to 26 percent during the first quarter of last year.
The decrease was primarily due to FIFO inventory adjustments.
Selling, general and administrative expenses as a percentage of sales during the
first quarter of 1998 dropped to 16.5 percent compared to 16.9 percent during
the first quarter of 1997. First quarter spending totaled $5,282,000 compared to
$5,142,000 for the same period last year, reflecting modest increases in
marketing and selling expenses.
Interest expense decreased to $36,000 during the first quarter compared to
$75,000 last year. The decrease in interest expense is related to the decrease
in long-term debt.
Interest income increased to $68,000, up $44,000 from $24,000 in the first
quarter last year. The increase in interest income is related to the Company's
investment of cash that has increased since the first quarter of 1997.
The effective tax rate during the first quarter dropped to 35 percent from 37
percent last year due to tax benefits associated with the Company's Foreign
Sales Corporation (FSC).
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 have no
significant impact to the Company's financial position or operating results.
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>
FARR COMPANY AND SUBSIDIARIES
List of Exhibits
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
By: /s/ Kenneth W. Gerstner
- -----------------------------
Kenneth W. Gerstner
Senior Vice President
Chief Financial Officer
Dated: May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 6,359,000
<SECURITIES> 0
<RECEIVABLES> 20,269,000
<ALLOWANCES> 326,000
<INVENTORY> 11,616,000
<CURRENT-ASSETS> 40,896,000
<PP&E> 55,609,000
<DEPRECIATION> 37,799,000
<TOTAL-ASSETS> 61,534,000
<CURRENT-LIABILITIES> 17,315,000
<BONDS> 0
0
0
<COMMON> 552,000
<OTHER-SE> 40,123,000
<TOTAL-LIABILITY-AND-EQUITY> 61,534,000
<SALES> 31,989,000
<TOTAL-REVENUES> 31,989,000
<CGS> 23,783,000
<TOTAL-COSTS> 23,783,000
<OTHER-EXPENSES> 5,214,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,000
<INCOME-PRETAX> 2,956,000
<INCOME-TAX> 1,038,000
<INCOME-CONTINUING> 1,918,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,918,000
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
