................................................................................ ................................................................................ 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 June 28, 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 _____________ 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: 5,724,580. ................................................................................ ................................................................................ PART I - FINANCIAL INFORMATION FARR COMPANY AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 28, 1997 Part I - Financial Information Introduction Condensed Consolidated Financial Statements Balance Sheets - June 28, 1997 and December 28, 1996 Income Statements for the three months ended June 28, 1997 and June 29, 1996 and for the six months ended June 28, 1997 and June 29, 1996 Statements of Cash Flows for the six months ended June 28, 1997 and June 28, 1996 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 FARR COMPANY AND SUBSIDIARIES INTRODUCTION TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 28, 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 June 28, 1997 and the results of operations for the three and six months ended June 28, 1997 and June 29, 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. FARR COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Assets (Unaudited) (Audited) June 28, 1997 Dec. 28, 1996 ------------- ------------- Current Assets: Cash and cash equivalents .................................. $ 1,613,000 $ 1,997,000 Accounts receivable, less allowance of $336,000 in 1997 and $297,000 in 1996 ..................................... 21,037,000 20,551,000 Inventories Raw materials .............................................. 5,284,000 5,380,000 Work in process ............................................ 4,486,000 3,979,000 Finished goods ............................................. 3,238,000 3,175,000 ----------- ----------- 13,008,000 12,534,000 Prepaid expenses ........................................... 989,000 790,000 Deferred tax benefit ....................................... 1,807,000 1,807,000 ----------- ----------- Total current assets ..................................... 38,454,000 37,679,000 ----------- ----------- Property, Plant and Equipment, at Cost Land ....................................................... 2,103,000 2,107,000 Buildings and improvements ................................. 15,377,000 15,247,000 Machinery and equipment .................................... 34,870,000 34,907,000 ----------- ----------- 52,350,000 52,261,000 Less-accumulated depreciation and amortization ............ 37,013,000 36,650,000 ----------- ----------- 15,337,000 15,611,000 Other ........................................................ 852,000 397,000 ----------- ----------- $54,643,000 $53,687,000 =========== =========== FARR COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Liabilities & Stockholders' Investment (Unaudited) (Audited) June 28, 1997 Dec. 28, 1996 ------------- ------------- Current Liabilities: Notes/overdraft payable to banks ........................... $ 569,000 $ 874,000 Current portion of long-term debt .......................... 0 23,000 Accounts payable ........................................... 7,463,000 8,665,000 Accrued liabilities ........................................ 8,523,000 7,566,000 Income taxes payable and deferred taxes .................... 449,000 745,000 ----------- ----------- Total current liabilities ................................ 17,004,000 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 ................................ 622,000 186,000 Commitments and Contingencies Stockholders' Investment: Common stock, $.10 par value--Authorized 10,000,000 shares Issued and outstanding--5,724,580 shares at June 28, 1997 and 5,707,404 shares at December 28, 1996 ................ 555,000 544,000 Additional paid-in capital ................................. 11,685,000 11,603,000 Cumulative translation adjustments ......................... (1,368,000) (1,206,000) Retained earnings: Balance beginning of year ................................ 20,269,000 14,379,000 Net income for the period ................................ 3,526,000 5,890,000 ----------- ----------- Balance at end of period ................................. 23,795,000 20,269,000 ----------- ----------- Total stockholders' investment ......................... 34,667,000 31,210,000 ----------- ----------- $54,643,000 $53,687,000 =========== =========== <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 Six Months Ended June 28, 1997 June 29, 1996 June 28, 1997 June 29, 1996 ------------- ------------- ------------- ------------- Net Sales ....................................... $31,569,000 $31,356,000 $61,910,000 $62,435,000 Cost of Sales ................................... 22,993,000 23,284,000 45,443,000 47,209,000 ----------- ----------- ----------- ----------- Gross Margin .................................... 8,576,000 8,072,000 16,467,000 15,226,000 Selling, general and administrative expense ... 5,625,000 5,443,000 10,743,000 10,359,000 Interest expense .............................. 58,000 171,000 133,000 418,000 ----------- ----------- ----------- ----------- Total Expenses .................................. 5,683,000 5,614,000 10,876,000 10,777,000 ----------- ----------- ----------- ----------- Income Before Income Taxes ...................... 2,893,000 2,458,000 5,591,000 4,449,000 Income Taxes .................................... 1,067,000 959,000 2,065,000 1,772,000 ----------- ----------- ----------- ----------- Net Income ...................................... $ 1,826,000 $ 1,499,000 $ 3,526,000 $ 2,677,000 =========== =========== =========== =========== Earnings per Common Share * ..................... $ 0.32 $ 0.27 $ 0.62 $ 0.48 =========== ============ =========== =========== <FN> * Based upon 5,632,922 and 5,509,545 average shares outstanding at June 28, 1997 and June 29, 1996, respectively. The accompanying notes are an integral part of these statements. </FN> FARR COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Year-to-Date June 28, 1997 June 29, 1996 Cash Provided by (Used in): ------------- ------------- Operating Activities: Net Income ................................................ $3,526,000 $2,677,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization ......................... 1,175,000 1,209,000 Provision for loss on accounts receivable ............. 125,000 75,000 Benefit retirement trust .............................. 350,000 0 Change in deferred income taxes ....................... 10,000 377,000 Exchange gain ......................................... (31,000) (4,000) Net loss on sale/retirement of P,P & E ................ 23,000 0 Decrease (increase) in inventories .................... (541,000) 2,048,000 (Increase) in receivables and prepaid expenses ........ (832,000) (1,090,000) Decrease in accounts payable & accrued expenses ....... (156,000) (573,000) Net change in current income taxes payable ............ (297,000) 392,000 ----------- ---------- Net cash provided by operating activities ............. 3,352,000 5,111,000 ----------- ---------- Investing Activities: Purchases of property, plant and equipment ................ (967,000) (743,000) Investments in joint venture .............................. (100,000) 0 Purchase of investments, benefits trust ................... (404,000) 0 ----------- ---------- Net cash used in investing activities ..................... (1,471,000) (743,000) ----------- ---------- Financing Activities: Proceeds from revolving line of credit, and long-term borrowings ................................ 0 8,200,000 Principal payments on revolving line of credit and long-term debt borrowings & overdrafts .............. (2,349,000) (12,121,000) Principal payments received on notes ...................... 4,000 2,000 Proceeds from sale of stock, stock option plans ........... 93,000 49,000 ---------- ---------- Net cash used in financing activities ..................... (2,252,000) (3,870,000) ---------- ---------- Effect of Exchange Rate Changes on Cash ..................... (13,000) 0 Increase (Decrease) in Cash and Cash Equivalents ............ (384,000) 498,000 Cash and Cash Equivalents at Beginning of Period ............ 1,997,000 812,000 ---------- ---------- Cash and Cash Equivalents at End of Period .................. $1,613,000 $1,310,000 ========== ========== <FN> The accompanying notes are an integral part of these statements. </FN> FARR COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 28, 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. MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES Financial Condition - ------------------- As of June 28, 1997, working capital was $21,450,000 compared to $19,806,000 at the end of 1996, representing a $1,644,000 increase in total working capital for the first half of 1997. The primary components of the change in working capital during the first half were increases in accounts receivable ($486,000) and inventories ($474,000), coupled with net decreases in accounts payable and accrued liabilities ($245,000) and income taxes payable ($296,000). The increase in accounts receivable is associated with higher sales volume levels as compared to the fourth quarter growth of 1996. The increase in inventories is due to a temporary increase for safety stocking levels of several products whose production lines are being relocated between plants to improve the Company's overall capacity levels. Total long-term debt was decreased $2,091,000 during the first half 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 half of 1997 was $10,000,000. Capital expenditures of $967,000 during the first half increased over the same period last year by $224,000. Second half capital expenditures are anticipated to increase over 1996 levels in order to meet increased foreign plant capacity needs, 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 and borrowing availability under the Company's domestic revolving credit facility. Cash Flow - --------- Cash flow from operating activities during the first half totaled $3,352,000 compared to $5,111,000 for the same period a year ago. The decrease in cash flow from operating activities was related to an increase in working capital requirements in 1997 as compared to a decrease in working capital requirements during the same period a year ago. The Company anticipates that cash and cash equivalent balances will increase moderately over the remainder of 1997 as cash flow provided by operating activities will exceed the Company's investing and financing requirements. RESULTS OF OPERATIONS 1997 second quarter sales of $31,569,000 increased slightly above 1996's second quarter sales of $31,356,000. While overall sales volume remained approximately the same, engineered systems sales declined compared to the same quarter last year and railroad and engine products sales increased. Foreign subsidiary sales were up 8 percent during the second quarter due to railroad, engine and heating, ventilating and air conditioning product sales. Record second quarter net income totaled $1,826,000, up $327,000 or 22 percent from $1,499,000 in the second 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 18 percent during last year's second quarter. Gross margin as a percentage of sales during the second quarter increased to 27.2 percent, up 1.5 percent from 25.7 percent in the second 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 second quarter of 1997 and 1996 were 17.8 and 17.4 percent, respectively. Second quarter spending totaled $5,625,000 compared to $5,443,000 for the same period last year, reflecting modest increases in marketing and selling expenses. Interest expense declined to $58,000 during the second quarter compared to $171,000 last year. The continued decrease in interest expense is related to the decrease in the Company's long-term debt. The effective tax rate during the first half of the year dropped to 37 percent from 39 percent last year due to utilization of foreign tax credits. On March 3, 1997 the FASB released FASB Statement No. 128, "Earnings Per Share" (SFAS 128). The new statement is effective for years ending after December 15, 1997. When adopted, SFAS 128 will require restatement of the Company's 1996 and prior years' earnings per share information. Under the existing reporting provisions, earnings per share for 1996 and 1995 were $1.06 and $.57, respectively. Under the provisions of SFAS 128, the Company's basic earnings for 1996 and 1995 would be $1.08 and $.57, respectively. On June 30, 1997 the FASB released FASB Statement No. 130, "Reporting Comprehensive Income" (SFAS 130) and FASB Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131). The new statements are effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting comprehensive income and SFAS 131 requires using the management approach of segmentation to disclose operating segments. Adoption of these standards will not have a material effect on the Company's financial position or results of operations. 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 29, 1997: Election of three Directors for three year terms: Votes For Votes Against John J. Kimes 4,762,689 10,543 H. Jack Meany 4,762,989 10,243 Denis R. Brown 4,762,989 10,243 Item 6.a. Exhibits The following are being filed with this Quarterly Report on Form 10-Q. - - Exhibit 4.66 Amendment No. 2 dated June 2, 1997, between Farr Company, as borrower, and Bank of America National Trust and Savings Association, as lender. - - 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. 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 (Registrant) August 6, 1997 /s/ Kenneth W. Gerstner ---------------------------- Kenneth W. Gerstner Senior Vice President Chief Financial Officer