................................................................................ ................................................................................ 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 March 30, 1996 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: 3,795,211. ................................................................................ ................................................................................ PART I - FINANCIAL INFORMATION FARR COMPANY AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 30, 1996 INTRODUCTION CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets - March 30, 1996 and December 30, 1995 Income Statements for the three months ended March 30, 1996 and April 1, 1995 Statements of Cash Flows for the three months ended March 30, 1996 and April 1, 1995 Notes to Condensed Consolidated Financial Statements MANAGEMENT'S DISCUSSION AND ANALYSIS FARR COMPANY AND SUBSIDIARIES INTRODUCTION TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 30, 1996 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 March 30, 1996 and the results of operations for the three months ended March 30, 1996 and April 1, 1995 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. FARR COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Assets (Unaudited) (Audited) March 30, 1996 December 30, 1995 -------------- ----------------- Current Assets: Cash and cash equivalents .................... $ 893,000 $ 812,000 Accounts receivable, less allowance of $195,000 in 1996 and $214,000 in 1995 ...... 20,708,000 20,077,000 Inventories .................................. 14,253,000 15,437,000 Prepaid expenses ............................. 679,000 622,000 Deferred tax benefit ......................... 1,381,000 1,980,000 ----------- ----------- Total current assets ........................... 37,914,000 38,928,000 ----------- ----------- Property, Plant and Equipment at cost Land ......................................... 2,092,000 2,094,000 Buildings and improvements ................... 15,147,000 15,231,000 Machinery and equipment ...................... 33,543,000 33,829,000 ----------- ----------- 50,782,000 51,154,000 Less-accumulated depreciation and amortization 34,846,000 34,748,000 ----------- ----------- 15,936,000 16,406,000 Investments & Other ............................ 185,000 236,000 ----------- ----------- $54,035,000 $55,570,000 =========== =========== Liabilities and Stockholders' Investment (Unaudited) (Audited) March 30, 1996 December 30, 1995 -------------- ----------------- Current Liabilities: Notes/overdraft payable to banks ............. $ 271,000 $ 432,000 Current portion of long-term debt ............ 168,000 664,000 Accounts payable ............................. 8,024,000 8,875,000 Accrued liabilities .......................... 8,188,000 8,248,000 Income taxes payable and deferred taxes ...... 798,000 526,000 ----------- ----------- Total current liabilities ...................... 17,449,000 18,745,000 ----------- ----------- Long-Term Debt ................................. 8,360,000 9,412,000 Deferred Income Taxes .......................... 2,328,000 2,628,000 Commitments and Contingencies Stockholders' Investment: Common stock, $.10 par value--Authorized 10,000,000 shares--Outstanding--3,794,211 shares at March 30, 1996 and 3,794,336 shares at December 30, 1995 ................ 362,000 362,000 Additional paid-in capital ................... 11,681,000 11,668,000 Cumulative translation adjustments ........... (1,702,000) (1,624,000) Retained earnings: Balance beginning of year .................... 14,379,000 11,255,000 Net income for the period .................... 1,178,000 3,124,000 ----------- ----------- Balance at end of period ..................... 15,557,000 14,379,000 ----------- ----------- Total stockholders' investment ................. 25,898,000 24,785,000 ----------- ----------- $54,035,000 $55,570,000 =========== =========== <FN> The accompanying notes are an integral part of these balance sheets. </FN> FARR COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) Three Months Ended March 30, 1996 April 1, 1995 -------------- ------------- Net Sales ....................................... $31,079,000 $27,253,000 ----------- ----------- Costs and Expenses: Cost of sales ................................. 23,925,000 20,857,000 Selling, general and administrative ........... 4,916,000 4,833,000 Interest expense .............................. 247,000 565,000 ----------- ----------- Total Cost and Expenses ......................... 29,088,000 26,255,000 ----------- ----------- Income Before Income Taxes ...................... 1,991,000 998,000 Income Taxes .................................... 813,000 365,000 ----------- ----------- Net Income ...................................... $ 1,178,000 $ 633,000 =========== =========== Earnings per Common Share * $0.32 $0.17 =========== =========== * Based upon 3,625,155 and 3,682,943 average shares outstanding at March 30, 1996 and April 1, 1995, respectively. The accompanying notes are an integral part of these statements. FARR COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 30, 1996 April 1, 1995 -------------- ------------- Cash Provided by (Used in): Operating Activities: Net Income ........................................ $1,178,000 $ 633,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................. 638,000 764,000 Provision for loss on accounts receivable ..... 37,000 37,000 Change in deferred income taxes ............... 331,000 206,000 Net (gain) loss on sale/retirement of P,P & E . (20,000) Net (gain) loss from investments .............. (115,000) Decrease (increase) in inventories ............ 1,159,000 (332,000) Decrease (increase) in receivables and prepaid expenses ........................ (772,000) 2,277,000 Increase (decrease) in accounts payable & accrued expenses ............................ (953,000) 142,000 Net change in current income taxes payable .... 292,000 36,000 Exchange gain ................................. 1,000 13,000 ---------- ---------- Net cash provided by operating activities .. 1,911,000 3,641,000 ---------- ---------- Investing Activities: Purchases of property, plant and equipment ........ (143,000) (252,000) Proceeds from sale of property, plant and equipment 20,000 Proceeds from sale of investments ................. 497,000 --------- ---------- Net cash provided by (used in) investing activities ................................. (143,000) 265,000 --------- ---------- Financing Activities: Proceeds from revolving line of credit, and long-term borrowings ........................ 8,200,000 Principal payments on revolving line of credit and long-term debt borrowings & overdrafts ...... (9,900,000) (3,194,000) Principal payments received on notes .............. 1,000 Proceeds from sale of stock, stock option plans ... 13,000 145,000 Long-term note receivable ......................... (174,000) ---------- --------- Net cash used in financing activities ........ (1,686,000) (3,225,000) ---------- ---------- Effect of Exchange Rate Changes on Cash ............. (1,000) Increase in Cash and Cash Equivalents ............... 81,000 683,000 Cash and Cash Equivalents at Beginning of Period .... 812,000 127,000 ---------- ----------- Cash and Cash Equivalents at End of Period ......... $ 893,000 $ 810,000 ========== =========== <FN> The accompanying notes are an integral part of these statements. </FN> FARR COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 30, 1996 (Unaudited) 1. Significant Accounting Policies 2. Inventories 3. Restructuring Costs 4. Gain on Sale of U.S. Plant 5. Common Stock 6. Notes Payable and Long-Term Debt 7. Income Taxes 8. Employee Benefit Plans 9. Stock Options 10. Per Share Amounts 11. Commitments and Contingencies 12. Segment Information MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS First quarter sales increased to $31,079,000 from $27,253,000 during the same period last year, representing a 14 percent increase. The increase in sales was primarily attributable to the Company's Engineered Systems, Heating, Ventilating and Air Conditioning, Custom OEM and International markets. Some of the increase in Engineered Systems sales were related to deliveries scheduled for 1995 that were delayed into the first quarter of 1996. Operating profit increased 43 percent to $2,238,000 from $1,563,000 during the same period a year ago. The increased operating profit principally reflected strong sales gains and improving operating efficiencies except in the area of Engineered Systems products. The first quarter operating profit as a percent of sales increased to 7.2 percent compared to 5.7 percent during the same period a year ago. This percentage improvement primarily reflects a lower percentage of selling, general and administrative expenses relative to the increase in sales volume, as the amount of selling general and administrative expenses remained approximately the same as last year's first quarter. Interest expense during the first quarter decreased to $247,000 from $565,000 for the same period a year ago as a result of lower borrowing rates combined with reduced debt levels decreased interest expense $318,000. First quarter net income increased to $1,178,000 from $633,000, representing an increase of $545,000 or an 86 percent improvement over the same period last year. Earnings per share increased to 32 cents per share from 17 cents per share a year ago. During the first quarter new orders were strong for all product lines except Pollution Control and Engineered Systems. Both lines are commencing the second quarter at lower than anticipated levels but are not viewed as having a significant negative effect on the second quarter. The Company's other product lines are somewhat seasonal with weather being an important factor. It is possible that part of the second quarter expected sales were shifted forward into the first quarter by these varying conditions. In addition, some Engineered Systems' deliveries scheduled for 1995 were delayed and shipped in the first quarter. Accordingly, it is uncertain whether the Company's record performance in the first quarter will continue into subsequent quarters. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities during the quarter totaled $1,911,000 compared to $3,641,000 for the first quarter a year ago. Cash flows from operating activities decreased from last year's first quarter due to increased working capital requirements. The primary increase in working capital was related to accounts receivable and the Company's increase in sales volume and decreases in accounts payable and accrued liabilities. Cash flows used in investing activities during the current quarter were $143,000. Last year cash flows provided $265,000 during the first quarter as the Company received $497,000 from the disposition of certain investments. First quarter 1995 capital expenditures of $143,000 decreased over the same period last year by $109,000. Overall, capital expenditures continue to be maintained at low levels to conserve capital resources but are anticipated to increase modestly over the remainder of the year. Cash used in financing activities totaled $1,686,000 in the current quarter compared to $3,223,000 for the same period a year ago. The total of $1,686,000 was principally used to reduce long-term debt. As of March 30, 1996, working capital totaled $20,465,000 compared to $20,183,000 at the end of 1995, representing a $282,000 increase in total working capital for the first three months of 1996. The increase in working capital was primarily accounted for by increases in accounts receivable ($631,000), decreases in accounts payable and accrued liabilities ($911,000), and a decrease in the current portion of long term debt ($496,000) partially offset by decreases in inventories ($1,184,000) and deferred tax benefits ($585,000). Due to increased business during the first quarter, net accounts receivable increased to $20,708,000 from $20,077,000 as of December 30, 1995. Inventories decreased primarily as a result of a decrease in work in progress related to the completion and shipment of several large gas turbine filter house jobs. The Company's current portion of long term debt decreased due to the early retirement of its Jonesboro, Arkansas Industrial Redevelopment Bonds and the restructure and payoff of its prior revolving and term loan credit facilities under a new revolving credit facility obtained in February, 1996. Surplus borrowing availability under the Company's new domestic revolving credit facility at the end of the first quarter was $9,600,000. The Company's operations continue to generate the cash levels required to maintain planned operating levels, to provide for capital replacement, and to service and liquidate long-term debt. Additionally, the Company has access to lines of credit sufficient for its current operations. PART II. -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Item Description ---- -------------------------------------------- 11 Computation of earnings per common share and common share equivalents. 27 Financial Data Schedule. (b) Reports on Form 8-K None ------------------- 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. 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) May 14, 1996 /s/ Kenneth W. Gerstner -------------------------- Kenneth W. Gerstner Senior Vice President Chief Financial Officer Exhibit 11 FARR COMPANY AND SUBSIDIARIES EARNINGS PER SHARE CALCULATIONS (Unaudited) Three Months Ended March 30, 1996 April 1, 1995 -------------- ------------- Earnings: Net income $1,178,000 $633,000 ========== ========== Shares Weighted average of number common shares outstanding 3,625,155 3,682,943 ========== ========== Net income per common share $0.32 $0.17 ========== ========== Earnings assuming full dilution: Net income $1,178,000 $633,000 ========== ========== Shares Weighted average of number common shares outstanding 3,625,155 3,682,943 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 25,888 4,057 ---------- ---------- 3,651,043 3,687,000 ========== ========== Net income per common share assuming full dilution $0.32 $0.17 ========== ==========