<PAGE> 1
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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission file number 0-19703
Farrel Corporation
(Exact name of registrant as specified in its charter)
Delaware 22-2689245
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Main Street, Ansonia, Connecticut, 06401
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 736-5500
---------------------------------------------------
(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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT August 9, 1996
----- -----------------------------
<S> <C>
Common Stock (Voting), $.01 par value 5,967,757
</TABLE>
<PAGE> 2
Farrel Corporation
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1996
and July 2, 1995 4
Consolidated Statements of Cash Flows -
Six Months ended June 30, 1996
and July 2, 1995 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Exhibit 11 - Computation of Earnings Per Share 10
Part II. Other Information 11
</TABLE>
Page 2 of 12
<PAGE> 3
Part I - Financial Information
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,946 $ 4,066
Accounts receivable, net of allowance for
doubtful accounts of $206 and $102,
respectively 10,102 23,536
Inventory 17,183 12,836
Other current assets 2,630 1,553
-------- --------
Total current assets 32,861 41,991
Property, plant and equipment - net
of accumulated depreciation of $7,886 and
$7,136, respectively 9,836 9,676
Other Assets 1,406 1,745
-------- --------
Total Assets $ 44,103 $ 53,412
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,567 $ 14,303
Accrued expenses & taxes payable 791 2,822
Advances from customers 4,154 3,936
Accrued installation & warranty costs 1,398 1,623
Short - term debt 194 194
-------- --------
Total current liabilities 15,104 22,878
Long - term debt 292 388
Postretirement benefit obligation 1,310 1,332
Other long-term obligations 696 696
Deferred income taxes 309 304
Commitments and contingencies -- --
-------- --------
Total Liabilities 17,711 25,598
-------- --------
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
Cumulative translation adjustment (660) (646)
Treasury stock 174,349 and 151,349 shares at June
30, 1996 and December 31, 1995, respectively (896) (837)
Retained earnings 8,938 10,287
Minimum Pension Liability (346) (346)
-------- --------
Total Stockholders' Equity 26,392 27,814
-------- --------
Total Liabilities and Stockholders' Equity $ 44,103 $ 53,412
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 3 of 12
<PAGE> 4
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 2, June 30, July 2,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 13,196 $ 17,113 $ 31,061 $ 27,151
Cost of sales 10,378 12,261 23,884 20,031
---------- ---------- ---------- ----------
Gross margin 2,818 4,852 7,177 7,120
Operating expenses:
Selling 1,800 1,857 3,337 3,622
General & administrative 2,449 2,419 4,360 4,455
Research & development 519 641 1,042 1,165
---------- ---------- ---------- ----------
Total operating expenses 4,768 4,917 8,739 9,242
---------- ---------- ---------- ----------
Operating (loss) (1,950) (65) (1,562) (2,122)
Interest (expense)/income, net (4) 74 39 177
Other income/(expense), net 68 20 (23) (32)
---------- ---------- ---------- ----------
(Loss)/income before income taxes (1,886) 29 (1,546) (1,977)
(Benefit)/provision for income taxes (716) 19 (557) (743)
---------- ---------- ---------- ----------
Net (loss)/income $ (1,170) $ 10 $ (989) $ (1,234)
========== ========== ========== ==========
Per share data:
Net (loss)/income per common share $ (0.20) $ 0.00 $ (0.17) $ (0.21)
========== ========== ========== ==========
Average shares outstanding 5,972,757 6,054,300 5,977,713 6,044,299
========== ========== ========== ==========
Dividends per share $ 0.00 $ 0.00 $ 0.06 $ 0.20
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 4 of 12
<PAGE> 5
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 30, July 2,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (989) $ (1,234)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 836 734
Decrease in accounts receivable 13,365 7,721
(Increase) in inventory (4,288) (7,174)
(Decrease)/increase in accounts payable (5,720) 525
Increase in customer advances 197 6,429
(Decrease) in accrued expenses & taxes (2,749) (1,367)
(Decrease) in accrued installation and warranty costs (223) (477)
(Decrease) in deferred income taxes (130) (288)
Other 20 (461)
-------- --------
Total adjustments 1,308 5,642
-------- --------
Net cash provided by operating activities 319 4,408
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (911) (822)
-------- --------
Net cash (used in) investing activities (911) (822)
Cash flows from financing activities:
Repayment of short-term borrowings 0 (1,072)
Repayment of long-term borrowings (95) (99)
Used for repurchase of common stock (59) (89)
Used for dividends paid (360) (1,209)
-------- --------
Net cash (used in) financing activities (514) (2,469)
Effect of foreign currency exchange rate changes on cash (14) 1
-------- --------
Net (decrease)/increase in cash and cash equivalents (1,120) 1,118
Cash and cash equivalents - Beginning of period 4,066 9,384
-------- --------
Cash and cash equivalents - End of period $ 2,946 $ 10,502
======== ========
Income taxes paid $ 684 $ 1,079
======== ========
Interest paid $ 29 $ 55
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 5 of 12
<PAGE> 6
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 June 30, 1996, the consolidated
results of its operations for the three and six-month periods ended June 30,
1996 and July 2, 1995, and its consolidated cash flows for the six-month periods
ended June 30, 1996 and July 2, 1995. These results are not necessarily
indicative of results to be expected for the full fiscal year. The 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, 1995.
NOTE 2 - INVENTORY
Inventory is comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
(In thousands)
<S> <C> <C>
Stock and raw materials .............. $ 8,835 $ 4,485
Work-in process ...................... 8,348 8,351
------- -------
Total ................................ $17,183 $12,836
======= =======
</TABLE>
Page 6 of 12
<PAGE> 7
PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JULY 2, 1995
Net sales for the first six months of fiscal 1996 were $31.1 million
compared to $27.2 million for the same period of 1995. The increase in net sales
is largely due to the timing of when customer orders shipped in each respective
period, were received. Management believes the markets served by the Company's
products remain extremely competitive. Far Eastern markets are particularly
competitive and difficult to penetrate. Management further believes the Company
operates, at least to some extent, in markets still experiencing the
after-effects of recessions in Western Europe and to ongoing political and
economic instability in Eastern Europe and the Middle East. Management is
encouraged by the improved level of order intake and backlog, however, it does
not anticipate major improvements in its primary markets in the next six months.
The Company's ability to increase net sales in a financial reporting
period depends upon the timing of when orders for the Company's products are
received. The Company received $53.9 million in orders during the first six
months of 1996, including several individually large contracts, compared to
$43.2 million during the comparable period of 1995. The increase is attributed
to more aggressive marketing efforts and more competitive pricing. 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 fiscal
quarters during which market conditions were flat. Thus, the cyclical nature of
industry demand and, therefore, order intake, can affect the Company's quarterly
results of operations. Backlog considered firm by management at June 30, 1996
was $52.5 million compared to $29.7 million at December 31, 1995 and $55.2
million at the end of the second quarter of 1995. Firm backlog as of August 5,
1996 was $59.0 million. There can be no assurance that the recent higher backlog
levels are representative of a sustained economic recovery in the Company's
primary markets.
Gross margin in the first six months of fiscal 1996 was $7.2 million
compared to $7.1 million for the same period of 1995 while the margin
percentage declined to 23.1% from 26.2%. The decrease in margin percentage is
largely attributed to the mix of products sold in the two periods and to stiff
competition. The Company is pursuing the machinery rebuild market more
aggressively to increase market share, and has accepted lower margins in the
near term to do so. The after-effects of long recessionary periods and the
extremely competitive conditions previously discussed continue to exert pressure
on the level of margin percentage achieved, a trend which is expected to
continue in the foreseeable future.
Operating expenses incurred in the first six months of 1996 declined
approximately $.5 million in total compared to 1995, largely attributed to the
elimination of selected executive and staff positions in the US and Europe and
to continuing efforts to strictly control expenses. The Company has capitalized
approximately $.6 million and $.8 million of third party costs as of June 30,
1996 and December 31, 1995, respectively. These costs were incurred to identify,
negotiate and contract with several acquisition candidates, primarily outside
the United States. It is possible that efforts related to individual acquisition
candidates may prove unsuccessful in the near term, at
Page 7 of 12
<PAGE> 8
which point the capitalized costs would be charged to current operations.
Approximately $.3 million of such costs have been charged to administration
expense during the current year which has partially offset other savings.
The impact of foreign currency on the consolidated results of
operations for the first six months of 1996 compared to the same period of 1995
was not material. The income tax rate, as a percentage of pre-tax loss in 1996
and 1995 was 36.1% and 37.6%, respectively.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JULY 2, 1995.
Net sales for the second quarter of fiscal 1996 were $13.2 million,
compared to the $17.1 million reported for the same period of 1995. Order intake
in the second quarter of 1996 improved to $36.3 million compared to the first
quarter of 1996 with $17.6 million and to the second quarter of 1995 with $22.6
million.
The reasons for variations in sales, orders and backlog levels
comparing the second quarters of 1996 and 1995 are the same as those previously
discussed.
Gross margin in the second quarter of the current year was $2.8 million
compared to $4.9 million in the second quarter of 1995 and the margin percentage
decreased to 21.4% from 28.4%, respectively. The variation in margin dollars and
percentage is attributed to those reasons previously discussed. It is also due
to the reduced production volume in the second quarter of 1996 compared to 1995,
the impact of which had a negative effect on margin dollars and percentage for
the first half of 1996 compared to 1995.
Total operating expenses incurred during the second quarters of 1996
and 1995 were stable at $4.8 million and $4.9 million, respectively. This
decline is attributed to lower compensation costs resulting from eliminated
positions in earlier periods and to lower research and development costs as the
Company has curtailed the operation of its laboratory in the United Kingdom with
greater reliance placed on domestic personnel to operate it as needed. These
savings were partially offset by expensed capitalized acquisition costs in the
current quarter.
The impact of foreign currency on the consolidated results of
operations for the second quarter of 1996 compared to 1995 was not material. The
tax rate in the second quarter of 1996 and 1995 was 38.0% and 65.5%. The 1995
rate was due to the relatively small level of pre-tax income and the effect of
consolidating domestic income with a foreign loss.
MATERIAL CONTINGENCIES
In 1995 the Company settled litigation against USM Corporation, Emhart
Corporation and certain of their affiliates regarding responsibility for
environmental conditions at the Ansonia and Derby, CT facilities ("Facilities")
at the time of the Company's acquisition of the business from USM in May 1986.
Pursuant to the 1995 settlement agreement with the Company, The Black and Decker
Corporation, a Fortune 150 company, which acquired USM in 1989, has assumed full
responsibility for all investigation and any remediation of pre-1986
contamination at the Facilities in accordance with a consent decree entered into
between Black and Decker and the Connecticut Department of Environmental
Protection. An environmental assessment of the Facilities is currently being
conducted. Although this assessment is not complete, on the basis of preliminary
data now available there is no reason to believe that any activities which might
be required as a result of the
Page 8 of 12
<PAGE> 9
findings of the assessment will have a material effect upon the capital
expenditures, earnings or the competitive position of the Company.
LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES
Working capital and the working capital ratio at June 30, 1996 was
$17.8 million and 2.2 to 1, respectively, compared to $19.1 million and 1.8 to
1, respectively, at December 31, 1995. The Company paid a dividend of $.06 per
share in the first quarter of 1996 from 1995 earnings. The Company's ability to
pay dividends in the future is limited under its credit facility.
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 balances, cash generated by operations,
progress payments from customers and with borrowings under its bank credit
facilities. The Company made capital expenditures of $.9 and $.8 million during
the first six months of 1996 and 1995, respectively.
The Company has a worldwide multi-currency credit facility with a major
U.S. bank in an amount up to $20.0 million for direct borrowings and letters of
credit and up to (pound)3.0 million for foreign exchange contracts. The facility
contains limitations on direct borrowings and letters of credit combined based
upon stipulated levels of accounts receivable, inventory and backlog. The
facility contains covenants specifying minimum and maximum thresholds for
operating results and selected financial ratios. There were $10.3 million and
$8.3 million of letters of credit outstanding at June 30, 1996 and December 31,
1995, respectively. The facility expires on December 31, 1999.
The Company anticipates that its cash balances, operating cash flows
and available credit lines will be adequate to fund its anticipated capital
commitments and working capital requirements for at least the next twelve
months.
Page 9 of 12
<PAGE> 10
Exhibit 11
FARREL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- -------------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Primary
Net (loss)/income applicable to common stock $ (1,170) $ 10 $ (989) $ (1,234)
========== ========== ========== ==========
Weighted average number of common shares outstanding during the
period 5,972,757 6,042,898 5,977,713 6,044,299
Stock option and purchase plans 0 11,402 0 0
---------- ---------- ---------- ----------
Total common and common equivalent shares outstanding 5,972,757 6,054,300 5,977,713 6,044,299
Net (loss)/income per common and common equivalent share
- primary $ (0.20) $ 0.00 $ (0.17) $ (0.21)
========== ========== ========== ==========
Fully Diluted
Net (loss)/income applicable to common stock $ (1,170) $ 10 $ (989) $ (1,234)
========== ========== ========== ==========
Weighted average number of common shares outstanding during
the period 5,972,757 6,042,898 5,977,713 6,044,299
Stock option and purchase plans 0 11,402 0 0
---------- ---------- ---------- ----------
Total common and common equivalent shares outstanding 5,972,757 6,054,300 5,977,713 6,044,299
========== ========== ========== ==========
Net (loss)/income per common and common equivalent share
- fully diluted $ (0.20) $ 0.00 $ (0.17) $ (0.21)
========== ========== ========== ==========
</TABLE>
Page 10 of 12
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 2 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held on May 15, 1996, during which Rolf K.
Liebergesell was elected as a director by a vote of 5,012,212 with 65,427
withheld. Howard J. Aibel, and James A. Purdy were elected as directors,
each by a vote of 5,012,421 with 65,218 withheld. Charles S. Jones, Glenn
J. Angiolillo and Alberto Shaio continued as directors. In addition, the
selection of the Company's independent accountant, Ernst & Young, was
ratified by a vote of 5,070,379 for ratification, 6,260 against
ratification and 1,000 abstentions.
ITEM 5 - OTHER EVENTS
Effective June 25, 1996, Harold J. Wilson resigned as President of the
Company for family reasons. Rolf K. Liebergesell has been re-appointed as
President of the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 - (Regulation S-K) Computation of Earnings Per Share.
See Page 10.
Reports on Form 8-K
No Reports on Form 8-K were filed by the registrant during the periods
covered by this report.
Page 11 of 12
<PAGE> 12
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: August 9, 1996 /s/ Rolf. K. Liebergesell
--------------- -----------------------------------
ROLF K. LIEBERGESELL
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND CHAIRMAN OF THE BOARD
DATE: August 9, 1996 /s/ Catherine M. Boisvert
--------------- -------------------------
CATHERINE M. BOISVERT
VICE PRESIDENT AND CONTROLLER
(CHIEF ACCOUNTING OFFICER)
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Farrel Corporation as of June 30, 1996 and for the six
months then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,946
<SECURITIES> 0
<RECEIVABLES> 10,102
<ALLOWANCES> 206
<INVENTORY> 17,183
<CURRENT-ASSETS> 32,861
<PP&E> 17,722
<DEPRECIATION> 7,886
<TOTAL-ASSETS> 44,103
<CURRENT-LIABILITIES> 15,104
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 26,331
<TOTAL-LIABILITY-AND-EQUITY> 44,103
<SALES> 31,061
<TOTAL-REVENUES> 31,061
<CGS> 23,884
<TOTAL-COSTS> 23,884
<OTHER-EXPENSES> 8,634
<LOSS-PROVISION> 105
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> (1,546)
<INCOME-TAX> 557
<INCOME-CONTINUING> (989)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (989)
<EPS-PRIMARY> ($0.17)
<EPS-DILUTED> ($0.17)
</TABLE>
