SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 2, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-19703
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Farrel Corporation
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(Exact name of registrant as specified in its charter)
Delaware 22-2689245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Main Street, Ansonia, Connecticut, 06401
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(Address of principal executive offices) (Zip Code)
(203) 736-5500
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(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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT May 9, 2000
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Common Stock (Voting), $.01 par value 5,250,061
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Farrel Corporation
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Index
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Page
Part I. Financial Information
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Consolidated Balance Sheets -
April 2, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
Three Months Ended April 2, 2000
and April 4, 1999 4
Consolidated Statements of Cash Flows -
Three Months ended April 2, 2000
and April 4, 1999 5
Notes to Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 11
Exhibit 11 - Computation of Earnings Per Share 12
Part II. Other Information 13
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Page 2 of 14
Part I - Financial Information
FARREL CORPORATION
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CONSOLIDATED BALANCE SHEETS
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(In thousands, except share data)
April 2, December 31,
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2000 1999
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ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents ....................... $ 7,496 $ 6,069
Accounts receivable, net of allowance for
doubtful accounts of $179 and $185,
respectively ................................. 8,479 15,027
Inventory ....................................... 15,661 11,975
Other current assets ............................ 1,338 1,374
-------- --------
Total current assets .............. 32,974 34,445
Property, plant and equipment - net
of accumulated depreciation of $13,465 and
$13,186, respectively ........................ 10,435 10,995
Prepaid pension costs ........................... 3,280 2,881
Other assets .................................... 494 541
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Total assets ................................. $ 47,183 $ 48,862
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................. $ 6,907 $ 7,837
Accrued expenses & taxes ..................... 928 2,157
Advances from customers ...................... 6,451 4,015
Accrued installation & warranty costs ........ 1,545 1,629
Short - term debt ............................ 1,273 1,292
-------- --------
Total current liabilities .................... 17,104 16,930
Long - term debt ................................ 2,546 2,584
Postretirement benefit obligation ............... 1,135 1,138
Long term pension obligation .................... 1,026 1,030
Deferred income taxes ........................... 1,369 1,316
Commitments and contingencies ................... -- --
-------- --------
Total liabilities ............................ 23,180 22,998
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Stockholders' equity:
Preferred stock, par value $100, 1,000,000 ... -- --
shares authorized, no shares issued
Common stock, par value $.01,
10,000,000 shares authorized,
6,142,106 shares issued ................ 61 61
Paid in capital .............................. 19,295 19,295
Treasury stock, 892,045 shares at
April 2, 2000 and December 31, 1999 ..... (2,513) (2,513)
Retained earnings ............................ 8,253 9,943
Accumulated other comprehensive expense ...... (1,093) (922)
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Total stockholders' equity .............. 24,003 25,864
-------- --------
Total liabilities and stockholders' equity ......... $ 47,183 $ 48,862
======== ========
See Accompanying Notes to Consolidated Financial Statements
Page 3 of 14
FARREL CORPORATION
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CONSOLIDATED STATEMENTS OF OPERATIONS
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(In thousands, except per share data)
Three Months Ended
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April 2, April 4,
2000 1999
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(unaudited) (unaudited)
Net Sales .......................... $ 11,437 $ 13,294
Cost of sales ...................... 9,360 10,890
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Gross margin ....................... 2,077 2,404
Operating expenses:
Selling ........................ 1,587 1,710
General & administrative ....... 2,122 2,222
Research & development ......... 437 383
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Total operating expenses ........... 4,146 4,315
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Operating loss ..................... (2,069) (1,911)
Interest income .................... 85 235
Interest expense ................... (72) (176)
Gain from sale of real estate ...... -- 1,879
Other expense, net ................. (110) (103)
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Loss before income taxes ........... (2,166) (76)
Benefit (provision) for income taxes 686 (41)
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Net loss .......................... ($ 1,480) ($ 117)
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Per share data:
Basic and Diluted net loss
per common share ............... ($ 0.28) ($ 0.02)
=========== ===========
Average shares outstanding:
Basic ........................... 5,250,061 5,812,676
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Diluted ......................... 5,250,061 5,812,676
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Dividends declared ................. $ 0.04 $ 0.16
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See Accompanying Notes to Consolidated Financial Statements
Page 4 of 14
FARREL CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
Three Months Ended
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April 2, April 4,
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2000 1999
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(Unaudited) (Unaudited)
Cash flows from operating activities:
Net Income/(loss) .................................... ($1,480) ($ 117)
Adjustments to reconcile net (loss)/income to net
cash provided by/(used in) operating activities:
Gain on disposal of fixed assets ................... 0 (1,884)
Depreciation and amortization ...................... 521 519
Decrease in accounts receivable .................... 6,477 8,016
Increase in inventory .............................. (3,642) (2,743)
Increase in prepaid pension costs .................. (400) --
Decrease in accounts payable ....................... (876) (5,072)
Increase in customer advances ...................... 2,451 1,367
Decrease in accrued expenses & taxes ............... (1,207) (415)
Decrease in accrued installation and warranty costs (74) (77)
Increase/(decrease) in deferred income taxes ....... 44 (5)
Other .............................................. 7 (520)
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Total adjustments .................................. 3,301 (814)
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Net cash provided by/(used in) operating activities 1,821 (931)
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Cash flows from investing activities:
Proceeds from disposal of fixed assets ............. -- 2,449
Purchases of property, plant and equipment ......... (135) (513)
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Net cash (used in)/provided by investing activities (135) 1,936
Cash flows from financing activities:
Proceeds from short-term borrowing, net ............ -- 874
Dividends paid ..................................... (210) (951)
Purchase of treasury stock ......................... -- (1,272)
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Net cash used by financing activities .............. (210) (1,349)
Effect of foreign currency exchange rate changes on cash (49) (30)
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Net increase (decrease) in cash and cash equivalents ... 1,427 (374)
Cash and cash equivalents - Beginning of period .... 6,069 5,786
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Cash and cash equivalents - End of period .......... $ 7,496 $ 5,412
======= =======
Income taxes paid ...................................... $ 78 $ 1,057
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Interest paid .......................................... $ 1 $ 6
======= =======
See Accompanying Notes to Consolidated Financial Statements
Page 5 of 14
FARREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly, in accordance with generally
accepted accounting principles, the consolidated financial position of Farrel
Corporation ("Farrel" or "the Company") as of April 2, 2000, and the
consolidated results of its operations and cash flows for the three months ended
April 2, 2000 and April 4, 1999. These results are not necessarily indicative of
results to be expected for the full fiscal year. These statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report and Form 10-K for the year ended December 31, 1999.
NOTE 2 - INVENTORY
Inventory is comprised of the following:
April 2, December 31,
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2000 1999
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(In thousands)
Stock and raw materials....... $ 7,403 $ 7,934
Work-in process .............. 8,258 4,041
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Total ........................ $15,661 $11,975
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NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss, for the three-month periods
ended are as follows:
April 2, April 4,
2000 1999
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(In thousands)
Net loss ............................... $(1,480) $ (117)
Foreign currency translation adjustments (171) (319)
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Comprehensive loss ..................... $(1,651) $ (436)
======= =======
The components of accumulated other comprehensive expense, net of
related tax, are as follows:
April 2, December 31,
2000 1999
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(In thousands)
Minimum pension liability .............. $ (613) $ (613)
Foreign currency translation adjustments (480) (309)
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Accumulated other comprehensive expense $(1,093) $ (922)
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NOTE 4 - SEGMENT INFORMATION
The Company's operations are considered one operating segment. The
Company's products consist of new machines, spares and repair related services.
The Company's products and services are sold to commercial manufacturers in the
plastic and rubber industries. The manufacturing, assembly and distribution of
the Company's products are essentially the same.
NOTE 5 - GAIN FROM SALE OF REAL ESTATE
During January 1999, the Company completed the sale of excess real
estate held for sale for $2.4 million. The Company recorded a gain of $1.9
million from the sale.
Page 6 of 14
NOTE 6 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which must be adopted effective
January 1, 2001. The Statement provides a new method of accounting for
derivatives and hedges. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB 101"). SAB 101 contains the SEC staff's views in applying
generally accepted accounting principles related to revenue recognition in
financial statements. SAB 101 includes requirements for when shipments may be
recorded as revenue when the terms of the sale include customer acceptance
provisions or an obligation of the seller to install the product. The provisions
of this bulletin are effective in the second quarter of 2000. The Company is
reviewing the requirements of SAB 101 which could create a timing difference in
when the Company recognizes revenue and has not yet determined the full impact
of SAB 101 on its consolidated financial statements. The impact, however, could
be material, on both a quarterly and annual basis, on the Company's statement of
operations should the Company determine it needs to change its accounting for
revenue recognition. Such a change could result in significant portions of its
revenue being recognized in accounting periods significantly later than it
historically would have been recognized.
Page 7 of 14
PART I - ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
Safe Harbor Statements under Private Securities Litigation Reform Act of 1995
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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; 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.
Results of Operations
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Three Months Ended April 2, 2000 Compared To The Three Months Ended April 4,
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1999
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Net sales for the three month period ended April 2, 2000, were $11.4
million compared to $13.3 million for the three month period ended April 4,
1999, a decrease of $1.9 million. The decrease in net sales is a result of
continued weak market conditions faced by the Company. 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 our customers and markets
operate at less than full capacity and the European and Far East markets are
particularly competitive and are subject to local economic events.
Orders received for the three month period ended April 2, 2000, were
$11.0 million compared to $17.2 million for the three month period ended April
4, 1999. The decline in incoming orders is due to the 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 economic conditions in various geographic markets of the world
impact our 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.
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 our ability
to control costs to effectively compete in the 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 April 2, 2000,
was $28.3 million compared to $28.9 million at December 31, 1999, and $37.0
million at April 4, 1999. Firm backlog as of May 9, 2000, was $36.0 million.
Gross margin for the three month period ended April 2, 2000, was $2.1
million compared to $2.4 million for the three month period ended April 4, 1999.
The margin percentage of 18.2% for the three month period ended April 2, 2000,
was approximately the same as the three month period ended April 4, 1999. The
gross margin for the three month period ended April 2, 2000, reflects benefit of
reduced
Page 8 of 14
manufacturing overheads as a result of the consolidation, completed in mid 1999,
of the Company's U.K. operations from two facilities to one. These savings were
offset by lower margins received on sales due to weak market conditions.
Operating expenses for the three month period ended April 2, 2000,
were $4.1 million compared to $4.3 million for the three month period ended
April 4, 1999, a decrease of $0.2 million. The decrease is due to lower employee
compensation and benefit costs.
Interest expense for the three month period ended April 2, 2000, was
$72,000 compared to $176,000 for the three month period ended April 4, 1999, a
decrease of $104,000. The decrease is due to lower average 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 income tax rate for the three month period ended
April 2, 2000, was 31.7%. For the three month period ended April 4, 1999, the
Company recorded a consolidated tax provision as a result of earning taxable
income in the United States, at a higher tax rate, and incurring losses in the
United Kingdom at a lower tax rate. The effective tax rate varies among periods
due to the change in the amount of income and losses generated in different tax
jurisdictions.
Material Contingencies
- ----------------------
In February 1995, the Company and 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"). As part of the settlement, the Company transferred by quit
claim deed a vacant surfaced parking lot to the City of Ansonia. As required by
the Settlement Agreement, environmental assessments of the Ansonia and Derby
properties are being conducted by Black & Decker.
On January 19, 1999, the Company sold all of its Derby, Connecticut,
real estate and facilities. By the terms of that sale, the purchaser committed
to cooperate with Black & Decker in any additional investigation of the Derby
property and any remediation of that property that might be required by the DEP.
In addition, the Company has been named as an additional insured on a $5.0
million environmental policy obtained by the purchaser and the purchaser is
obligated to name the Company as an additional insured on any and all other
environmental insurance policies obtained by the purchaser related to the Derby
property.
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, financial position or the competitive
position of the Company. This forward looking statement could, however, be
influenced by any findings of environmental contamination attributable to
post-May 12, 1986 activities.
Liquidity and Capital Resources; Capital Expenditures
- -----------------------------------------------------
Working capital and the working capital ratio at April 2, 2000, were
$15.9 million and 1.9 to 1, respectively, compared to $17.5 million and 2.0 to 1
at December 31, 1999, respectively. During the first quarter of 2000, the
Company paid a dividend of $0.04 per share. The Company has also declared a
dividend of $0.04 per share of common stock to be paid in the second quarter of
2000. The Company's ability to pay dividends in the future is generally limited
under its credit facility described below to the aggregate of 25% of net income
during the most recently completed four fiscal quarters after deducting (a)
distributions previously made and (b) purchases by the Company of its common
stock during the same period, without the consent of and/or waiver by the
Company's bank. The Company has received a waiver from its bank with respect to
the dividend declared in the second quarter of 2000.
Page 9 of 14
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, with progress
payments from customers and with 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 $0.1 million and $0.5 million during the
first quarters of fiscal 2000 and 1999, respectively.
The Company has a worldwide multi-currency credit facility with a
major U.S. bank. Interest varies based upon prevailing market interest. The
facility contains combined limits on direct borrowings and letters of credit
based upon stipulated percentages of accounts receivable, inventory and backlog.
The facility also contains covenants specifying minimum and maximum operating
thresholds for operating results and selected financial ratios. The agreement
contains certain restrictions on the making of investments, on borrowings and on
the sale of assets. At April 2, 2000, the maximum revolver borrowing and/or
letter of credit issuance available under the facility to the Company and
subsidiaries based upon the borrowing base formula was $13.7 million. There were
$2.9 million and $3.8 million of letters of credit outstanding at April 2, 2000
and December 31, 1999, respectively. At April 2, 2000 and December 31, 1999,
there were $3.8 million and $3.9 million, respectively, outstanding under the
term loan portion of the facility.
In fiscal 2000, new legal minimum funding guidelines for U.K. pension
plans became effective in the U.K. These guidelines are significantly different
than prior guidelines. As a result, the Company expects it will need to make
approximately $950,000 of contributions to its U.K. pension plan in Fiscal 2000.
Approximately $300,000 of contributions were made in the quarter ended April 2,
2000, with the remaining amount to be made in monthly payments throughout the
remainder of the year. In recent years prior to fiscal 2000, the Company was not
required to and did not make contributions to its U.K. pension plans.
Year 2000
- ---------
The Company undertook a year 2000 readiness project to address the
impact and risks related to the ability of the Company's computer hardware,
computer programs, equipment with embedded computer chips and critical suppliers
to operate and function properly during the transition to the year 2000 and
thereafter.
The Company has not experienced any significant operational problems
related to the year 2000. The total amount expended, relating to the Company's
internal information systems was approximately $1.0 million. Other expenses,
primarily manufacturing and office equipment replacement and employee costs of
the year 2000 readiness project were not material. During the first quarter of
2000, the Company applied software changes for year 2000 issues which occurred.
The Company continues to monitor its operations for year 2000 issues.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which must be adopted effective
January 1, 2001. The Statement provides a new method of accounting for
derivatives and hedges. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
Page 10 of 14
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB 101"). SAB 101 contains the SEC staff's views in applying
generally accepted accounting principles related to revenue recognition in
financial statements. SAB 101 includes requirements for when shipments may be
recorded as revenue when the terms of the sale include customer acceptance
provisions or an obligation of the seller to install the product. The provisions
of this bulletin are effective in the second quarter of 2000. The Company is
reviewing the requirements of SAB 101 which could create a timing difference in
when the Company recognizes revenue and has not yet determined the full impact
of SAB 101 on its consolidated financial statements. The impact, however, could
be material, on both a quarterly and annual basis, on the Company's statement of
operations should the Company determine it needs to change its accounting for
revenue recognition. Such a change could result in significant portions of its
revenue being recognized in accounting periods significantly later than it
historically would have been recognized.
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 amount
of foreign exchange forward contracts are not considered material to the
Company's financial position or its operations.
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.
Page 11 of 14
Exhibit 11
FARREL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
-------------------------------------
Three Months Ended
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April 2, April 4,
2000 1999
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Net loss applicable to
common stock ............................... ($ 1,480) ($ 117)
========= ===========
Weighted average number of common
shares outstanding - Basic earnings per share 5,250,061 5,812,676
Effect of dilutive stock and purchase options -- --
--------- -----------
Weighted average number of common
shares outstanding - Diluted earnings per share 5,250,061 5,812,676
========= ===========
Net loss per common
share - Basic ............................... ($ 0.28) ($ 0.02)
========= ===========
share - Fully diluted ....................... ($ 0.28) ($ 0.02)
========= ===========
Page 12 of 14
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 (Regulation S-K) Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule
Reports on Form 8-K
No Reports on Form 8-K were filed by the registrant during the periods
covered by this report.
Page 13 of 14
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
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REGISTRANT
DATE: May 16, 2000 /s/ Rolf K. Liebergesell
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ROLF K. LIEBERGESELL
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN OF THE BOARD
DATE: May 16, 2000 /s/ Walter C. Lazarcheck
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WALTER C. LAZARCHECK
VICE PRESIDENT/CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
Page 14 of 14