Certain statements contained in the Company's public documents, including this report and in particular, in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" may be forward looking and may be subject to a variety of risks and uncertainties. Various factors could cause actual results to differ materially from these statements. These factors include, but are not limited to, pricing pressures from competitors and/or customers; continued economic and political uncertainty in certain of the Company's markets; the Company's ability to maintain and increase gross margin levels; the Company's ability to generate positive cash flow; changes in business conditions, in general, and, in particular, in the businesses of the Company's customers and competitors; and other factors which might be described from time to time in the Company's filings with the Securities and Exchange Commission.
Net sales for the nine month period ended September 30, 2001, were $39.3 million compared to $44.3 million for the nine month period ended October 1, 2000, a decrease of $5.0 million. The decrease is primarily a result of lower sales in North America of $12.9 million partially offset by an increase in new machine sales in Europe. The timing of the Company's sales, particularly new machines sales, is highly dependent on when an order is received, the amount of lead time from receipt of order to delivery and specific customer requirements. The Company operates in markets which are extremely competitive with cyclical demand. Many of the Company's customers and markets operate at less than full capacity and certain remain particularly competitive and are subject to local economic events.
Orders received for the nine month period ended September 30, 2001, were $34.0 million compared to $44.8 million for the nine month period ended October 1, 2000. The decline in incoming orders is due to weak market conditions faced by the Company.
The Company's products are primarily supplied to manufacturers and represent capital commitments for new plants, expansion or modernization. In the case of major equipment orders, up to 12 months are required to complete the manufacturing process. Accordingly, revenues reported in the statement of operations may represent orders received in the current or previous periods during which time economic conditions in various geographic markets of the world impact the Company's level of order intake. Many of the Company's traditional customers and markets are operating with excess capacity thereby reducing the number of projects for plant expansion and modernization. The Company is experiencing increased pricing pressures from competitors in an overall smaller market. In addition, since its inception, the decline in the value of the Euro versus the U.S. dollar and British pound sterling has increased pricing pressures. Over the longer term, these conditions are resulting in customer orders with lower margins and lost business. Further, the cyclical nature of industry demand and, therefore, the timing of order intake may effect the Company's quarterly results of operations. The Company's ability to maintain and increase net sales depends upon a strengthening and stability in the Company's traditional markets and its ability to control costs to effectively compete in its current markets. There can be no assurance that the current level of orders will continue, that market conditions will not worsen, or that improvements in the Company's traditional markets will lead to increased orders for the Company's products.
The level of backlog considered firm by management at September 30, 2001, was $22.5 million compared to $27.7 million at December 31, 2000, and $29.9 million at October 1, 2000. Of the $22.5 million in backlog as of September 30, 2001, approximately $16 million is scheduled to be shipped by December 31, 2001. Such shipments are subject to various factors, such as customer requests for changes or manufacturing delays, which could result in shipments being delayed beyond December 31, 2001.
Gross margin for the nine month period ended September 30, 2001, was $9.3 million compared to $10.1 million for the nine month period ended October 1, 2000, a decrease of $0.8 million. The decrease in gross margin is a result of lower sales. The gross margin as a percent of sales for the nine month period ended September 30, 2001, was 23.7% compared to 22.9% for the nine month period ended October 1, 2000. The increase in gross margin as a percent of sales is primarily due to a change in sales mix.
Operating expenses for the nine month period ended September 30, 2001, were $9.6 million compared to $12.5 million for the nine month period ended October 1, 2000, a decrease of $2.8 million primarily due to lower employee compensation and related expenses of approximately $1.9 million, travel expenses of $0.4 million and professional fees of $0.5 million.
Interest income for the nine month period ended September 30, 2001, was $124,000 compared to $185,000 for the nine month period ended October 1, 2000, a decrease of $61,000. The decrease is primarily due to lower average cash balances available for investing and lower interest rates.
Interest expense for the nine month period ended September 30, 2001, was $117,000 compared to $208,000 for the nine month period ended October 1, 2000, a decrease of $91,000. The decrease is primarily due to lower borrowings.
The Company provides for income taxes at the statutory rates in effect in each tax jurisdiction in which income is earned or losses generated, adjusted for permanent differences in determining income for financial reporting and income tax purposes. The effective income tax benefit was 39% for the nine month period ended September 30, 2001, compared to 30% for the nine month period ended October 1, 2000. The effective tax rate varies among periods due to the change in the proportion and amount of income and losses generated in different taxing jurisdictions.
Three Months Ended September 30, 2001 Compared to The Three Months Ended October 1, 2000
Net sales for the three months ended September 30, 2001, were $15.8 million compared to $17.5 million for the three month period ended October 1, 2000, a decrease of $1.6 million. The decrease is primarily a result of lower sales in North America of $6.1 million partially offset by an increase in new machine sales in Europe.
Orders received for the three month period ended September 30, 2001, were $10.9 million compared to $11.7 million for the three month period ended October 1, 2000.
The Company's sales, orders and backlog levels varied when comparing the two quarters due to market conditions and the nature of the industry in which the Company operates as more fully discussed in the results of operations for the nine month period on page 8.
Gross margin for the three month period ended September 30, 2001, was $4.4 million compared to $4.1 million for the three month period ended October 1, 2000, an increase of $0.4 million. The increase in gross margin is a result of a change in sales mix and lower manufacturing related overhead costs. The gross margin as a percent of sales for the three month period ended September 30, 2001, was 27.9% compared to 23.3% for the three month period ended October 1, 2000. The increase in the gross margin as a percent of sales is primarily due to a change in sales mix and lower manufacturing related overhead costs.
Operating expenses for the three month period ended October 1, 2001, were $2.9 million compared to $4.1 million for the three month period ended October 1, 2000, a decrease of $1.1 million primarily due to lower employee compensation and benefit costs of approximately $0.8 million, and lower travel expenses and professional fees.
Interest income for the three month period ended September 30, 2001, was $36,000 compared to $37,000 for the three month period ended October 1, 2000.
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Interest expense for the three month period ended September 30, 2001, was $39,000 compared to $64,000 for the three months ended October 1, 2000. The decrease is primarily due to lower borrowings.
The Company provides for income taxes at the statutory rates in effect in each tax jurisdiction in which income is earned or losses are generated, adjusted for permanent differences in determining income for financial reporting and income tax purposes. The effective income tax rate was 35% for the three month period ended September 30, 2001, compared to (71%) for the three month period ended October 1, 2000. The effective tax rate varies among periods due to the change in the proportion and amount of income and losses generated in different tax jurisdictions.
Material Contingencies
In February 1995, the Company and Black & Decker Corporation ("Black & Decker") entered into a Settlement Agreement pursuant to which Black & Decker agreed to assume full responsibility for the investigation and remediation of any pre-May 12, 1986 environmental contamination at the Company's Ansonia and Derby, Connecticut facilities, as required by the Connecticut Department of Environmental Protection ("DEP"). A preliminary environmental assessment of the Company's properties in Ansonia and Derby, Connecticut has been conducted by Black & Decker. Although the assessment is still being evaluated by the DEP, on the basis of the preliminary data now available there is no reason to believe that any remediation activities which might be required as a result of the findings of the assessment will have a material effect upon the capital expenditures, results of operations or the competitive position of the Company.
Liquidity and Capital Resources; Capital Expenditures
Working capital and the working capital ratio at September 30, 2001 were $14.9 million and 2.1 to 1, respectively, compared to $14.3 million and 1.9 to 1 at December 31, 2000, respectively. During the nine months ended September 30, 2001, the Company paid no dividends.
Due to the nature of the Company's business, many sales are of a large dollar amount. Consequently, the timing of recording such sales may cause the balances in accounts receivable and/or inventory to fluctuate dramatically between quarters and may result in significant fluctuations in cash provided by operations. Historically, the Company has not experienced significant problems regarding the collection of accounts receivable. The Company has also generally financed its operations with cash generated by operations, progress payments from customers and borrowings under its bank credit facilities. Management anticipates that its cash balances, operating cash flows and available credit line will be adequate to fund anticipated capital commitments and working capital requirements for at least the next twelve months. The Company made capital expenditures of $358,000 and $605,000 during the nine month periods ended September 30, 2001 and October 1, 2000, respectively.
In June 2001, the Company entered into a new worldwide multi-currency credit facility with a major US bank. This facility includes a $10 million revolving credit facility for direct borrowings and letters of credit. The facility contains a sub-limit that caps the amount of direct borrowings the Company can make at $5 million. The revolving credit facility expires on June 15, 2003. The facility contains limits on direct borrowings and issuance's of letters of credit based upon stipulated percentages of accounts receivable and inventory. The facility also contains covenants specifying minimum and/or maximum thresholds for operating results, selected financial ratios and backlog. There can be no assurance that the Company will achieve the required thresholds in the future. The agreement contains certain restrictions on investments, borrowings and the sale of assets. Dividend declarations or payments are allowed under this credit facility as long as there exists under the credit facility no Event of Default (as defined in the credit facility) or no condition which, upon giving of notice or lapse of time or both, would become an Event of Default. The Company's old credit facility was terminated except in relation to approximately $0.8 million of letters of credit which had previously been posted under that facility and continue to be outstanding on September 30, 2001. The Company has approximately $2.0 million of letters of credit posted under its new facility on September 30, 2001.
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The Company also entered into a term loan for £1.4 million (approximately $2 million) as part of this credit facility. The proceeds of this loan were used to repay an existing term loan of the same amount. The new term loan is repayable in monthly installments of £38,888 through October 2004. The term loan has an interest rate of LIBOR plus 2.7%. At September 30, 2001 and December 31, 2000, there were $1.9 million and $2.4 million, respectively, outstanding under a term loan.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which the Company was required to adopt on January 1, 2001. The Statement provides a new method of accounting for derivatives and hedges. The adoption of this Statement did not have a significant effect on the Company's results of operations or financial position.
Item 2 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency and interest rates. The Company manufactures many of its products and components in the United Kingdom and purchases many components in foreign markets. Approximately 50% of the Company's revenue is generated from foreign markets. The Company manages its risk to foreign currency rate changes by maintaining foreign currency bank accounts in currencies in which it regularly transacts business and the use of foreign exchange forward contracts. The Company does not enter into derivative contracts for trading or speculative purposes.
The Company's cash equivalents and short-term investments and its outstanding debt bear variable interest rates. The rates are adjusted to market conditions. Changes in the market rate effects interest earned and paid by the Company. The Company does not use derivative instruments to offset the exposure to changes in interest rates. Changes in the interest rates related to these items are not expected to have a material impact on the Company's results of operations.
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| PART II - OTHER INFORMATION | |
| ITEM 1 - LEGAL PROCEEDINGS | None |
| ITEM 2 - CHANGES IN SECURITIES | N/A |
| ITEM 3 - DEFAULTS UPON SENIOR SECURITIES | N/A |
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS | N/A |
| ITEM 5 - OTHER INFORMATION | N/A |
| ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K | |
| Exhibit 11 (Regulation S-K) Computation of Earnings Per Share. | Attached |
| Reports on Form 8-K | |
No Reports on Form 8-K were filed by the registrant during the periods covered by this report.
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Exhibit 11
FARREL CORPORATION
------------------
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------
(In thousands, except per share and share data)
----------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) applicable to common stock .. $ 923 $ (133) $ (257) $ (1,745)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - Basic earnings per share 5,228,461 5,250,061 5,228,999 5,250,061
Effect of dilutive stock and purchase options -- -- -- --
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding - Diluted earnings per share 5,228,461 5,250,061 5,228,999 5,250,061
=========== =========== =========== ===========
Net income (loss) per common share-
Basic ....................................... $ 0.18 $ (0.03) $ (0.05) $ (0.33)
=========== =========== =========== ===========
Fully diluted ............................... $ 0.18 $ (0.03) $ (0.05) $ (0.33)
=========== =========== =========== ===========
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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.
FARREL CORPORATION
REGISTRANT
| DATE: 11/13/01 | /s/ Rolf K. Liebergesell |
| ROLF K. LIEBERGESELL |
| CHIEF EXECUTIVE OFFICER, |
| PRESIDENT AND CHAIRMAN OF THE BOARD
|
| DATE: 11/13/01 | /s/ Walter C. Lazarcheck |
| WALTER C. LAZARCHECK |
| VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER |
| (CHIEF ACCOUNTING OFFICER) |
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