================================================================================
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 July 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 registrants common stock outstanding as of close of the
period covered by this report: 8,777,064.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
FARR COMPANY AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998
Part I - Financial Information
Introduction
Condensed Consolidated Financial Statements
Balance Sheets - July 4, 1998 and January 3, 1998
Income Statements for the three months ended July 4, 1998 and June 28, 1997
and for the six months ended July 4, 1998 and June 28, 1997
Statements of Cash Flows for the six months ended July 4, 1998 and June 28,
1997
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
JULY 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 July 4, 1998 and the results of operations for the three and six
months ended July 4, 1998 and June 28, 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 .................................................... July 4, 1998 Jan. 3, 1998
------------ ------------
(Unaudited) (Audited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents .......................... $ 6,618,000 $ 5,109,000
Short term investments ............................. 0 2,031,000
Accounts receivable, less allowance of $367,000
in 1998 and $254,000 in 1997 ................... 21,449,000 20,267,000
Inventories
Raw materials .................................. 4,831,000 4,812,000
Work in process ................................ 3,898,000 3,307,000
Finished goods ................................. 2,313,000 2,690,000
------------ ------------
11,042,000 10,809,000
Prepaid expenses ................................... 917,000 904,000
Income taxes receivable ............................ 366,000 666,000
Deferred tax benefit ............................... 1,221,000 1,221,000
------------ ------------
Total current assets ............................. 41,613,000 41,007,000
------------ ------------
Property, Plant and Equipment, at Cost
Land ............................................... 2,235,000 2,098,000
Buildings and improvements ......................... 17,730,000 17,429,000
Machinery and equipment ............................ 35,884,000 35,935,000
------------ ------------
55,849,000 55,462,000
Less-accumulated depreciation and amortization ..... 38,101,000 37,843,000
------------ ------------
17,748,000 17,619,000
Other ..................................................... 2,894,000 2,202,000
------------ ------------
$ 62,255,000 $ 60,828,000
============ ============
Liabilities & Stockholders' Investment .................... July 4, 1998 Jan. 3, 1998
------------ ------------
Current Liabilities:
Notes/overdraft payable to banks ................... $ 11,000 $ 93,000
Accounts payable ................................... 7,791,000 9,701,000
Accrued liabilities ................................ 7,786,000 8,726,000
Income taxes payable and deferred taxes ............ 722,000 750,000
------------ ------------
Total current liabilities ....................... 16,310,000 19,270,000
------------ ------------
Deferred Income Taxes ..................................... 2,244,000 2,196,000
Other Non-current Liabilites .............................. 1,371,000 855,000
Commitments and Contingencies
Stockholders' Investment:
Common stock,$.10 par value--Authorized 10,000,000 shares
Issued and outstanding--8,796,802 shares at July 4, 1998
and 8,629,131 shares at January 3, 1998 ............... 841,000 827,000
Additional paid-in capital .............................. 11,904,000 11,785,000
Cumulative translation adjustments ...................... (1,853,000) (1,749,000)
Retained earnings:
Balance beginning of year ............................. 27,644,000 20,269,000
Net income for the period ............................. 3,794,000 7,375,000
------------ ------------
Balance at end of period .............................. 31,438,000 27,644,000
------------ ------------
Total stockholders' investment ...................... 42,330,000 38,507,000
------------ ------------
$ 62,255,000 $ 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 Six Months Ended
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net Sales .............................. $30,434,000 $31,569,000 $62,423,000 $61,910,000
Cost of Sales .......................... 22,534,000 22,993,000 46,317,000 45,443,000
------------------------- -------------------------
Gross Margin ........................... 7,900,000 8,576,000 16,106,000 16,467,000
Selling, general and administrative .. 5,056,000 5,643,000 10,338,000 10,785,000
Interest expense ..................... 28,000 58,000 64,000 133,000
Interest income ...................... (62,000) (18,000) (130,000) (42,000)
------------------------- -------------------------
Total Expenses ......................... 5,022,000 5,683,000 10,272,000 10,876,000
------------------------- -------------------------
Income Before Income Taxes ............. 2,878,000 2,893,000 5,834,000 5,591,000
Income Taxes ........................... 1,002,000 1,067,000 2,040,000 2,065,000
------------------------- -------------------------
Net Income ............................. $ 1,876,000 $ 1,826,000 $ 3,794,000 $ 3,526,000
========================= =========================
Diluted Earnings per Common Share * .... $0.22 $0.22 $0.45 $0.42
=========================== =========================
Basic Earnings per Common Share ........ $0.23 $0.22 $0.46 $0.43
=========================== =========================
</TABLE>
* Based upon 8,500,624 and 8,392,761 average shares outstanding at July 4,
1998 and June 28, 1997, respectively restated for the 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 ) : July 4, 1998 June 28, 1997
------------ -------------
Operating Activities:
<S> <C> <C>
Net Income ................................................ $ 3,794,000 $ 3,526,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 1,203,000 1,175,000
Provision for loss on accounts receivable ............. 80,000 125,000
Equity in loss of affiliate ........................... 9,000 0
Benefit retirement trust .............................. 525,000 350,000
Change in deferred income taxes ....................... (1,000) 10,000
Exchange gain ......................................... (52,000) (31,000)
Net loss on sale/retirement of P,P & E ................ 3,000 23,000
Changes in assets and liabilities
Inventories ......................................... (304,000) (541,000)
Receivables and prepaid expenses .................... (1,372,000) (832,000)
Accounts payable & accrued expenses ................. (2,930,000) (156,000)
Net change in current income taxes payable .......... 484,000 (297,000)
----------- -----------
Net cash provided by operating activities ............. 1,439,000 3,352,000
----------- -----------
Investing Activities:
Purchases of property, plant and equipment ................ (1,344,000) (967,000)
Redemptions of short term investments ..................... 2,031,000 0
Note receivable - affiliate ............................... (106,000) 0
Investments in joint venture .............................. 0 (100,000)
Purchase of investments, benefits trust ................... (525,000) (404,000)
----------- -----------
Net cash used in investing activities ................. 56,000 (1,471,000)
----------- -----------
Financing Activities:
Proceeds from revolving line of credit,
and long-term borrowings ................................ 0 0
Principal payments on revolving line of credit
and long-term debt borrowings & overdrafts .............. (81,000) (2,349,000)
Treasury stock acquired ................................... (318,000) 0
Proceeds from sale of stock, stock option plans ........... 463,000 93,000
Other ..................................................... 7,000 4,000
----------- -----------
Net cash used in financing activities ................. 71,000 (2,252,000)
----------- -----------
Effect of Exchange Rate Changes on Cash ..................... (57,000) (13,000)
Increase in Cash and Cash Equivalents ....................... 1,509,000 (384,000)
Cash and Cash Equivalents at Beginning of Period ............ 5,109,000 1,997,000
----------- -----------
Cash and Cash Equivalents at End of Period ................ $ 6,618,000 $ 1,613,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FARR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 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 Six Months Ended
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
--------------------------- ---------------------------
BASIC EARNINGS PER SHARE CALCULATION
- ------------------------------------
Earnings:
<S> <C> <C> <C> <C>
Net Income $1,876,000 $1,826,000 $3,794,000 $3,526,000
========================= =========================
Shares:
Weighted average number of
common shares outstanding 8,318,971 8,203,869 8,318,971 8,203,869
========================= =========================
Net Income Per Common Share $ 0.23 $ 0.22 $ 0.46 $ 0.43
========================= =========================
DILUTED EARNINGS PER SHARE CALCULATION
- --------------------------------------
Earnings:
Net Income $1,876,000 $1,826,000 $3,794,000 $3,526,000
========================= =========================
Shares:
Weighted average number of
common shares outstanding 8,318,971 8,203,869 8,318,971 8,203,869
Assuming exercise of options
reduced by the number of shares
which could have been purchased
with the proceeds from exercise
of such options 181,653 188,892 181,653 188,892
------------------------- -------------------------
Weighted average number of common
shares and dilutive common
share equivalents outstanding 8,500,624 8,392,761 8,500,624 8,392,761
========================= =========================
Net Income Per Common Share $ 0.22 $ 0.22 $ 0.45 $ 0.42
========================= =========================
</TABLE>
<PAGE>
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
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net Income $1,876,000 $1,826,000 $3,794,000 $3,526,000
Other Comprehensive income, net of tax
Foreign currency translation
adjustments gain (loss) (339,000) 110,000 (104,000) (162,000)
------------------------ ------------------------
Comprehensive Income $1,537,000 $1,936,000 $3,690,000 $3,364,000
======================== ========================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
FINANCIAL CONDITION
As of July 4, 1998, working capital was $25,303,000 compared to $21,737,000 at
the end of 1997, representing a $3,566,000 increase in total working capital for
the first six months of 1998. The primary components of the change in working
capital during the first half were decreases in accounts payable and accrued
liabilities ($2,878,000) and an increase in accounts receivable ($1,182,000)
partially offset by a net decrease in cash and cash equivalents and short term
investments ($522,000).
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 second quarter was $10,000,000.
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.
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 issued 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 August 12,
1998, the Company has purchased 225,250 shares under the repurchase program.
CASH FLOW
Cash flow generated from operating activities during the first six months
totaled $1,439,000 compared to $3,352,000 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 half increased to $1,344,000 from $967,000
for the same period a year ago. Second half and full year capital expenditures
are anticipated to decrease from 1997 levels as 1997 expenditures for the
Company's headquarters will not reoccur in 1998.
<PAGE>
Results of Operations
- ---------------------
For the second quarter of 1998, the Company's sales of $30,434,000 were down
$1,135,000 or 4 percent from 1997 second quarter sales of $31,569,000. First
half 1998 sales of $62,423,000 were ahead of last year's first half sales of
$61,910,000 by 1 percent. Both the second quarter and first half sales results
reflected the unfavorable impact of unseasonable, mild weather patterns that
dampened after-market sales in the Company's core HVAC business. Continuing
financial problems in the Pacific Rim countries adversely impacted export
business and reduced orders for custom OEM filters also contributed to the
reduction in sales growth during the first half of 1998. In addition, weakening
Canadian foreign currency exchange rates, as compared to last year's level,
reduced our comparable reported first half sales for 1998 by approximately
$500,000.
Foreign subsidiary 1998 first half sales were ahead of last year's first half
sales by 8 percent due to filter house, railroad and air pollution control
products.
Second quarter 1998 net income totaled $1,876,000, up $50,000 or 3 percent from
$1,826,000 in the second quarter last year. First half 1998 net income advanced
to a record high of $3,794,000, representing an increase of 8 percent from last
year's first half net income of $3,526,000. The increase in second quarter
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 income tax rate.
Gross margin as a percent of sales during the second quarter decreased to 26
percent as compared to 27.2 percent during the second quarter of 1997. The
decrease in gross margin is primarily related to a sales mix with lower margin
products.
Selling, general and administrative expenses as a percentage of sales during the
quarter dropped to 16.6 percent compared to 17.9 percent during the second
quarter of 1997. Second quarter spending totaled $5,056,000 compared to
$5,643,000 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 last year's average cash
balances.
The effective tax rate during the second quarter dropped to 35 percent from 37
percent last year due to tax benefits associated with the Company's Foreign
Sales Corporation (FSC) and tax credits realized by the Company's foreign
subsidiaries. Tax rates are expected to increase during the second half as tax
benefits derived from the Company's FSC are expected to decline due to lower
export sales compared to last year.
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.
<PAGE>
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 a significant impact to the Company's financial position
or operating results.
YEAR 2000
The Company has made assessments of its domestic and foreign Year 2000 issues.
The Company's estimate for costs associated with completing remediation programs
to be compliant with Year 2000 issues is not material to the Company's business,
operations or financial condition. The Company's internal business systems,
major customer systems and major vendor systems either are Year 2000 compliant
or are anticipated to be compliant by December 31, 1998.
<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 28, 1998:
Election of two Directors for three year terms:
Votes For Votes Against
--------- -------------
Robert Batinovich 4,615,895 988
A. Frederick Gerstell 4,615,708 1,175
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/ Stephen E. Pegg
- --------------------------
Stephen E. Pegg
Senior Vice President and
Chief Financial Officer
Dated: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
<CASH> 6,618,000
<SECURITIES> 0
<RECEIVABLES> 21,449,000
<ALLOWANCES> 367,000
<INVENTORY> 11,042,000
<CURRENT-ASSETS> 41,613,000
<PP&E> 55,849,000
<DEPRECIATION> 38,101,000
<TOTAL-ASSETS> 62,255,000
<CURRENT-LIABILITIES> 16,310,000
<BONDS> 0
0
0
<COMMON> 841,000
<OTHER-SE> 41,489,000
<TOTAL-LIABILITY-AND-EQUITY> 62,255,000
<SALES> 62,423,000
<TOTAL-REVENUES> 62,423,000
<CGS> 46,317,000
<TOTAL-COSTS> 46,317,000
<OTHER-EXPENSES> 10,208,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,000
<INCOME-PRETAX> 5,834,000
<INCOME-TAX> 2,040,000
<INCOME-CONTINUING> 3,794,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,794,000
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.45
</TABLE>
