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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of November 4, 1996, 8,021,097 shares of Registrant's Common Stock, $0.01
par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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September 28, December 30,
1996 1995
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(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 201 $ 200
Accounts receivable, less allowances of $1,938 and $1,985 at
September 28, 1996 and December 30, 1995, respectively,
for doubtful accounts and sales returns and allowances 28,576 24,211
Inventories 26,870 23,156
Prepaid and refundable income taxes 978 1,702
Prepaid expenses and other current assets 2,348 2,371
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Total current assets 58,973 51,640
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Property, plant and equipment, net of depreciation and amortization
of $30,509 and $25,552 at September 28, 1996
and December 30, 1995, respectively 83,782 79,156
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Other assets:
Goodwill, net of amortization 6,452 6,589
Deferred financing costs 373 461
Other assets 151 271
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Total assets $ 149,731 $ 138,117
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 932 $ 878
Current portion of capital lease obligations 1,312 1,249
Accounts payable 15,510 14,127
Accrued expenses 8,180 4,606
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Total current liabilities 25,934 20,860
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Long-term debt, less current portion 39,076 37,082
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Capital lease obligations, net of current portion 7,044 8,036
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Deferred income taxes 10,961 10,523
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Other long-term liabilities 3,574 3,766
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Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation
preference $1,000 per share, 50,000 shares authorized.
No shares issued and outstanding. -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares authorized;
8,021,097 shares issued and outstanding as of
September 28, 1996 and December 30, 1995, respectively 80 80
Additional paid-in capital 41,876 41,687
Retained earnings 22,524 17,397
Cumulative translation adjustment (1,338) (1,314)
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Total stockholders' equity 63,142 57,850
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Total liabilities and stockholders' equity $ 149,731 $ 138,117
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1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
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Sept. 28, Sept. 30, Sept. 28, Sept. 30,
1996 1995 1996 1995
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(Unaudited) (Unaudited)
Net sales $ 46,436 $ 37,984 $140,715 $125,302
Cost of products sold 35,685 30,640 109,355 97,134
------ ------ ------- ------
Gross margin 10,751 7,344 31,360 28,168
Selling, general and administrative expenses 6,698 5,714 20,620 18,861
------ ------ ------- ------
Operating income 4,053 1,630 10,740 9,307
Other expenses:
Interest expense, net 1,062 864 3,022 2,806
Other, net 7 17 66 35
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Income before provision for income taxes 2,984 749 7,652 6,466
Provision for income taxes 985 251 2,525 2,166
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Net income $ 1,999 $ 498 $ 5,127 $ 4,300
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Earnings per common share (Note 1) $ 0.24 $ 0.06 $ 0.62 $ 0.52
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Average shares outstanding (Note 1) 8,324 8,297 8,314 8,295
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2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended Nine Months Ended
---------------------- ---------------------
Sept. 28, Sept. 30, Sept. 28, Sept. 30,
1996 1995 1996 1995
----------- ---------- ----------- ---------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 1,999 $ 498 $ 5,127 $ 4,300
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,566 1,355 5,194 4,621
Deferred income taxes 288 121 741 451
Stock option compensation expense 61 56 189 173
Changes in operating assets and liabilities:
Accounts receivable (net) 810 (718) (4,365) 1,657
Inventories (3,323) (2,894) (3,714) (1,025)
Prepaid expenses and other assets (113) (120) 564 (16)
Accounts payable and accrued expenses 1,411 5,953 4,957 877
Other long-term liabilities (52) (270) (192) (472)
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Net cash provided by operating
activities 2,647 3,981 8,501 10,566
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Cash flows from investing activities:
Net purchase of property, plant and equipment (2,666) (4,445) (9,581) (9,908)
--------- -------- --------- -------
Net cash used for investing
activities (2,666) (4,445) (9,581) (9,908)
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Cash flows from financing activities:
Repayments of capital leases (315) (295) (929) (871)
Repayment of term debt (221) (205) (652) (603)
Capitalization of financing costs -- -- (14) --
Net borrowings on revolving line of credit 500 1,000 2,700 1,000
Proceeds from exercise of stock options -- -- -- 44
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Net cash provided by financing
activities (36) 500 1,105 (430)
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Effect of exchange rates on cash (6) (40) (24) (367)
Net decrease in cash and cash equivalents (61) (4) 1 (139)
Cash and cash equivalents, beginning of period 262 200 200 335
--------- -------- --------- -------
Cash and cash equivalents, end of period $ 201 $ 196 $ 201 $ 196
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3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Quaker Fabric Corporation
and Subsidiaries (the "Company") as of September 28, 1996 and December 30, 1995
and the results of their operations and cash flows for the three months and nine
months ended September 28, 1996 and September 30, 1995. The unaudited
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to those rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 30, 1995. Certain reclassifications have been made to the
prior year financial statements for consistent presentation with the current
year.
EARNINGS PER COMMON SHARE
Earnings per common share is computed using the weighted average number of
common shares and common share equivalents outstanding during the period. See
Note 2 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the last-in, first-out
(LIFO) method.
Inventories at September 28, 1996 and December 30, 1995 consisted of the
following:
SEPTEMBER 28, DECEMBER 30,
1996 1995
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(In thousands)
Raw materials $10,126 $10,028
Work in process 8,032 8,087
Finished goods 8,628 5,591
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Inventory at FIFO 26,786 23,706
LIFO Reserve (Premium) (84) 550
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Inventory at LIFO $26,870 $23,156
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4
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 1. "Fiscal 1995" ended December 30, 1995 and "Fiscal 1996"
will end January 4, 1997. The first nine months of Fiscal 1995 and Fiscal 1996
ended September 30, 1995 and September 28, 1996, respectively.
RESULTS OF OPERATIONS - Quarterly Comparison
Net sales for the third quarter of Fiscal 1996 increased $8.4 million, or
22.3%, to $46.4 million from $38.0 million for the third quarter of Fiscal 1995.
The average gross sales price per yard increased 3.6%, to $4.02 for the third
quarter of Fiscal 1996 from $3.88 for the third quarter of Fiscal 1995. This
increase was due to changes in product sales mix. The gross volume of fabric
sold increased 13.2%, to 10.0 million yards for the third quarter of Fiscal 1996
from 8.9 million yards for the third quarter of Fiscal 1995. The Company sold
25.1% more yards of middle to better-end fabrics and 2.6% fewer yards of
promotional-end fabrics in the third quarter of Fiscal 1996 than in the third
quarter of Fiscal 1995. The average gross sales price per yard of middle to
better-end fabrics increased by 3.0%, to $4.40 in the third quarter of Fiscal
1996 as compared to $4.27 in the third quarter of Fiscal 1995. The average gross
sales price per yard of promotional-end fabric increased by 0.9%, to $3.39 in
the third quarter of Fiscal 1996 as compared to $3.36 in the third quarter of
Fiscal 1995. Gross fabric sales within the United States increased 7.0%, to
$32.2 million in the third quarter of Fiscal 1996 from $30.1 million in the
third quarter of Fiscal 1995. Foreign and Export sales increased 89.8%, to $8.1
million in the third quarter of Fiscal 1996 from $4.3 million in the third
quarter of Fiscal 1995. Gross yarn sales increased 63.2%, to $7.0 million in the
third quarter of Fiscal 1996 from $4.3 million in the same period of Fiscal
1995.
The gross margin percentage for the third quarter of Fiscal 1996 increased
to 23.2% as compared to 19.3% for the third quarter of Fiscal 1995. The increase
in gross profit margin was primarily due to 1.) improved absorption of fixed
overhead costs because of higher production volume and 2.) improvements in the
Company's manufacturing efficiencies.
Selling, general and administrative expenses increased to $6.7 million for
the third quarter of Fiscal 1996 from $5.7 million for the third quarter of
Fiscal 1995. Selling, general and administrative expenses as a percentage of net
sales decreased to 14.4% in the third quarter of Fiscal 1996 from 15.0% in the
third quarter of Fiscal 1995. The increase in selling, general and
administrative expenses was due to increases in sales commissions, labor and
fringe benefits, and sampling expenses. The decrease in the selling, general and
administrative expenses as a percentage of net sales is attributable to the
allocation of fixed selling costs over a higher sales base.
Interest expense was $1.1 million for the third quarter of Fiscal 1996, an
increase of $0.2 million compared to the third quarter of Fiscal 1995. Lower
interest rates were offset by higher levels of borrowing on the Company's senior
debt facility and higher commitment fees associated with the increased borrowing
availability added in the fourth quarter of 1995.
5
The effective tax rate decreased to 33.0% for the third quarter of Fiscal
1996 from 33.5% for the third quarter of Fiscal 1995. The decrease in the
effective tax rate is due primarily to a reduction in the Company's effective
state income tax rate.
Net income for the third quarter of Fiscal 1996 increased to $2.0 million,
or $0.24 per share, from $0.5 million, or $0.06 per share, for the third quarter
of Fiscal 1995. For a discussion of "Earnings Per Share," see Note 2 to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 30, 1995.
RESULTS OF OPERATIONS - Nine-month Comparison
Net sales for the first nine months of Fiscal 1996 increased $15.4 million
or 12.3%, to $140.7 million from $125.3 million for the first nine months of
Fiscal 1995. The average gross sales price per yard increased 4.1%, to $4.04 for
the first nine months of Fiscal 1996 from $3.88 for the first nine months of
Fiscal 1995. This increase was principally due to an increase in Foreign and
Export sales which have higher-than-average selling prices. The gross volume of
fabric sold increased 6.4%, to 30.9 million yards for the first nine months of
Fiscal 1996 from 29.1 million yards for the first nine months of Fiscal 1995.
The Company sold 16.2% more yards of middle to better-end fabrics and 6.7% fewer
yards of promotional-end fabrics in the first nine months of Fiscal 1996 as in
the first nine months of Fiscal 1995. The average gross sales price per yard of
middle to better-end fabrics increased by 3.3%, to $4.42 in the first nine
months of Fiscal 1996 as compared to $4.28 in the first nine months of Fiscal
1995. The average gross sales price per yard of promotional-end fabric increased
by 2.4%, to $3.42 in the first nine months of Fiscal 1996 as compared to $3.34
in the first nine months of Fiscal 1995. Gross fabric sales within the United
States increased 2.2%, to $100.8 million in the first nine months of Fiscal 1996
compared to $98.6 million for the first nine months of Fiscal 1995. Foreign and
Export sales increased 69.9%, to $24.2 million in the first nine months of
Fiscal 1996 from $14.2 million in the first nine months of Fiscal 1995. Gross
yarn sales increased 23.5%, to $18.8 million in the first nine months of Fiscal
1996 from $15.2 million in the same period of Fiscal 1995.
The gross margin percentage of 22.3% for the first nine months of Fiscal
1996 was 20 basis points lower than the gross margin percentage for the similar
period of Fiscal 1995. With the exception of the first quarter of Fiscal 1996,
when the Company's gross margin performance was 470 basis points lower than the
comparable period of Fiscal 1995, increases in the Company's manufacturing
efficiencies have resulted in an improvement in the Company's gross margin
performance during Fiscal 1996, in comparison to the corresponding period of
Fiscal 1995.
Selling, general and administrative expenses increased to $20.6 million for
the first nine months of Fiscal 1996 from $18.9 million for the first nine
months of Fiscal 1995. Selling, general and administrative expenses as a
percentage of net sales decreased to 14.7% in the first nine months of Fiscal
1996 from 15.1% in the first nine months of Fiscal 1995. The increase in
selling, general and administrative expenses was primarily due to increases in
sales commissions, and labor and fringes related to the Company's higher sales
volume during the period. The decrease as a percentage of net sales was due to a
reduction in fixed costs during the period such as expenses associated with the
Company's Mexican warehouse and sampling expense.
Interest expense was $3.0 million for the first nine months of Fiscal 1996,
an increase of $0.2 million compared to the first nine months of Fiscal 1995.
Lower interest rates were offset
6
by higher levels of borrowing on the Company's senior debt facility and higher
commitment fees associated with the increased borrowing availability added in
the fourth quarter of 1995.
The effective tax rate decreased to 33.0% for the first nine months of
Fiscal 1996 from 33.5% for the first nine months of Fiscal 1995. The decrease in
the effective tax rate is due primarily to a reduction in the Company's
effective state income tax rate.
Net income for the first nine months of Fiscal 1996 increased to $5.1
million, or $0.62 per share, from $4.3 million, or $0.52 per share, for the
first nine months of Fiscal 1995. For a discussion of "Earnings Per Share," see
Note 2 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and capital
requirements through a combination of equipment leasing, borrowings, and
internally generated funds. The Company's capital requirements have arisen
principally in connection with expansion of the Company's production capacity,
the equipment modernization program the Company has been executing to reduce
manufacturing costs, and increased working capital needs arising out of the
growth in the Company's sales.
In December 1995, the Company amended its unsecured credit facility with
several banks (the "Credit Agreement") and increased the facility to $50.0
million. As of September 28, 1996, the Company had $7.1 million outstanding
under the Credit Agreement and unused availability of $42.4 million, net of
outstanding letters of credit. Management believes that this facility will
provide sufficient funding for the Company's capital expenditure and working
capital needs for the foreseeable future. For a discussion of the "Credit
Agreement," see Note 5 to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 30, 1995.
Net capital expenditures for the first nine months of Fiscal 1995 were $9.9
million. Capital expenditures during the first nine months of Fiscal 1996 used
$9.6 million of cash. Capital expenditures for 1996 were funded principally by
internally generated cash flows. Management anticipates that capital
expenditures will be approximately $13.0 million in Fiscal 1996 and will include
the acquisition of additional manufacturing equipment.
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits - 27.0 Financial Data Schedule
(B) There were no reports on Form 8-K filed during the three
months ended September 28, 1996.
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
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 thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: November 4, 1996 By: /s/ Paul J. Kelly
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Paul J. Kelly
Vice President - Finance
and Treasurer
9