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 September 27, 1998
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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 November 5, 1997
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Common Stock (Voting), $.01 par value 5,939,486
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Farrel Corporation
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Index
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Page
Part I. Financial Information 3
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Consolidated Balance Sheets -
September 27, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and Nine months ended September 27, 1998
and September 28, 1997 4
Consolidated Statements of Cash Flows -
Nine months ended September 27, 1998
and September 28, 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Exhibit 11 - Computation of Earnings Per Share 14
Part II. Other Information 15
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<TABLE>
<CAPTION>
Part I - Financial Information
FARREL CORPORATION
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CONSOLIDATED BALANCE SHEETS
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(In thousands, except share data)
September 28, December 31,
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1998 1997
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ASSETS (Unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $1,593 $1,447
Accounts receivable, net of allowance for
doubtful accounts of $191 and $179, respectively 17,234 14,423
Inventory 19,972 18,277
Asset purchase agreement receivable 2,946
Other current assets 2,752 2,957
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Total current assets 44,497 37,104
Property, plant and equipment - net
of accumulated depreciation of $11,442 and
$9,786, respectively 11,714 12,416
Goodwill 3,088 5,295
Other Assets 1,781 1,566
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Total Assets $61,080 $56,381
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LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $8,142 $8,317
Accrued expenses & taxes payable 5,463 4,753
Advances from customers 10,917 6,412
Accrued installation & warranty costs 1,761 1,326
Dividend Payable - 951
Short - term debt 1,769 1,527
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Total current liabilities 28,052 23,286
Long - term debt 4,750 5,283
Postretirement benefit obligation 1,177 1,213
Long-term pension obligation 592 592
Deferred income taxes 331 225
Commitments and contingencies - -
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Total Liabilities 34,902 30,599
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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, 199,120 and 199,524 shares at
September 27, 1998 and December 31, 1997, respectively (982) (984)
Retained earnings 7,946 7,776
Accumulated other comprehensive expense (142) (366)
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Total Stockholders' Equity 26,178 25,782
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Total Liabilities and Stockholders' Equity $61,080 $56,381
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See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
FARREL CORPORATION
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CONSOLIDATED STATEMENTS OF OPERATIONS
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(In thousands, except per share and share data)
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Three Months Ended Nine Months Ended
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September 27, September 28, September 27, September 28,
1998 1997 1998 1997
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $21,626 $21,955 $62,556 $64,261
Cost of sales 17,285 16,526 47,879 50,150
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Gross margin 4,341 5,429 14,677 14,111
Operating expenses:
Selling 2,005 1,739 5,683 5,294
General & administrative 2,118 2,111 6,193 5,747
Research & development 396 380 1,080 1,153
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Total operating expenses 4,519 4,230 12,956 12,194
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Operating income/(loss) (178) 1,199 1,721 1,917
Interest income 40 62 98 210
Interest expense (160) (18) (561) (88)
Other income/(expense), net 56 (25) (90) 364
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Income/(loss) before income taxes (242) 1,218 1,168 2,403
Provision/(benefit) for income taxes (40) 506 523 927
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Net income/(loss) ($202) $712 $645 $1,476
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Per share data:
Basic and Diluted income/(loss)
per common share ($0.03) $0.12 $0.11 $0.25
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Average shares outstanding:
Basic 5,942,338 5,942,212 5,942,664 5,942,153
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Diluted 5,942,338 5,944,460 5,948,952 5,944,509
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Dividends per share $0.04 $0.16 $0.08 $0.32
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See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
FARREL CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
Nine Months Ended
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September 27, September 28,
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1998 1997
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(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net Income $645 $1,476
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Gain on disposal of fixed assets (227) (637)
Depreciation and amortization 1,795 1,241
(Increase)/decrease in accounts receivable (2,572) 3,338
(Increase) in inventory (3,775) (2,185)
(Decrease) in accounts payable (339) (1,449)
Increase in customer advances 4,431 28
Increase in accrued expenses & taxes 163 4
Increase (decrease) in accrued installation and 407 (213)
warranty costs
Increase in deferred income taxes 106 123
Increase in other receivable (2,900)
Decrease in Goodwill 2,387
(98) 692
Other
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Total adjustments (622) 942
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Net cash provided by operating activities 23 2,418
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Cash flows from investing activities:
Refund of Shaw asset purchase price 2,701
Proceeds from disposal of fixed assets 647 866
Purchases of property, plant and equipment (1,318) (1,394)
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Net cash provided by (used in) investing activities 2,030 (528)
Cash flows from financing activities:
Repayment of long-term borrowings (663) (102)
Proceeds from short-term borrowings, net 195 -
Issuance of treasury stock 2 -
Used for dividends paid (1,427) (1,903)
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Net cash used in financing activities (1,893) (2,005)
Effect of foreign currency exchange rate changes on cash (14) (141)
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Net increase in cash and cash equivalents 146 (256)
Cash and cash equivalents - Beginning of period 1,447 3,832
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Cash and cash equivalents - End of period $1,593 $3,576
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Income taxes paid $148 $741
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Interest paid $407 $4
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See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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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 September 27, 1998, the consolidated results
of its operations for the three and nine-month periods ended September 27, 1998
and September 28, 1997, and its consolidated cash flows for the nine-month
periods ended September 27, 1998 and September 28, 1997. 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, 1997.
NOTE 2 - INVENTORY
Inventory is comprised of the following:
September 27, December 31,
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1998 1997
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(In thousands)
Stock and raw materials............... $ 9,575 $ 9,459
Work-in process....................... 10,397 8,818
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Total................................. $19,972 $18,277
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NOTE 3 - ASSET PURCHASE
On December 19, 1997, the Company acquired certain assets of the Francis
Shaw Rubber Machinery operations ("Shaw") from EIS Group PLC ("EIS") for
approximately $10.9 million. The Asset Purchase Agreement ("Agreement") provided
for a reduction in the purchase price to the extent that the value of the
closing date inventory was less than the contract amount. During June 1998, the
Company and EIS agreed to a revised inventory valuation as of December 19, 1997.
The inventory value, as per the Agreement, was reduced by approximately $2.7
million and a payment in that amount was received from EIS. Subsequent to
recording the inventory valuation in the preliminary purchase accounting an
additional inventory reduction of approximately $0.9 million was recorded with a
corresponding increase in goodwill.
In addition, if the acquired assets do not generate at least (pound)1.0
million (approximately $1.67 million) of pre-tax profit, as defined, the
Agreement provides for a reduction in the purchase price. Included in total
assets, with a corresponding reduction in goodwill, is an amount due from the
seller calculated under the terms of the Agreement based upon the year to date
results.
The results of operations of Shaw are included in the consolidated
results of operations of the Company for the 1998 periods. The seller (EIS) did
not maintain and the Company was not provided historical financial information
for the Shaw operations. Therefore, the proforma results
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for the nine months ending September 28, 1997 are not available. Based on the
limited information available, the Company estimates that the pro forma revenues
and net income for the nine months ended September 27, 1998, would not vary
materially from the historical amounts recorded in the consolidated statements
of operations.
NOTE 4 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting
Standard No. 130, "Reporting Comprehensive Income". Standard No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of the statement had no impact on the
Company's net income or stockholders equity.
The components of other comprehensive income, for the nine-month
periods ended are as follows:
September 27, September 28,
1998 1997
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(In thousands)
Net income $645 $1,476
Foreign currency translation adjustments 224 (659)
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Other comprehensive income $869 $817
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The components of accumulated other comprehensive expense, net of related
tax, are as follows:
September 27, December 31,
1998 1997
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(In thousands)
Minimum pension liability $(303) $(303)
Foreign currency translation adjustments 161 (63)
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Accumulated other comprehensive expense $(142) $(366)
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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
Certain statements contained in the Company's public documents,
including in 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; assessment of the impact of the Year 2000 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
NINE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
28, 1997
Year to date net sales in 1998 and 1997 were $62.5 million and $64.3
million, respectively. The 1998 amount includes net sales of approximately $9.2
million by Farrel Shaw Limited ("Shaw") which was acquired on December 19, 1997.
Excluding Shaw sales, net sales would have declined $11.0 million during the
nine months ended September 27, 1998 compared to September 28, 1997. This
decrease is largely due to the timing of when customer orders shipped in each
period were received. A substantial portion of the 1997 shipments reflect
several individually large orders received in 1996. Management believes the
Company operates in markets which are extremely competitive. Many of our
customers and markets operate at less than full capacity and certain markets, in
particular, the Far East, remain particularly competitive and are subject to
extreme economic and financial difficulties at this time.
The Company received $59.4 million in orders including approximately
$9.2 million from the newly acquired Shaw operations during the first nine
months of 1998 compared to $53.9 million during the same period of 1997. The
recent level of order intake has been impacted by recent uncertain economic
news, affecting our customer's capital spending plans. Our products are
primarily supplied to manufacturers and represent capital commitments for new
plants, expansion or modernization. Excluding Shaw's order intake, the level of
orders received has decreased by approximately $3.7 million. 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. In addition, the cyclical nature of industry demand and, therefore,
order intake, may affect the Company's quarterly results of operations. The
Company's ability to maintain net sales depends upon stability in the Company's
traditional markets. There can be no assurance that any such level of stability
will lead to orders for the Company's products. Firm backlog at September 27,
1998 was $44.8 million, including $5.9 million at Shaw, compared to $46.5
million at December 31, 1997 and $39.8 million at the end of the third quarter
of 1997. Backlog at November 5, 1998 was $44.0 million.
Page 8 of 16
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Year to date gross margin in 1998 and 1997 was $14.7 million and $14.1
million, respectively. The margin percentage increased to 23.5% from 22.0%
largely due to the mix of products sold in the two periods. The 1998 shipments
include a higher relative proportion of spare parts, rebuild and repair sales
than in 1997 which generate higher margins than the new machine sales. In
addition, 1997 included several large new machine shipments with relatively
lower gross margins.
Year to date operating expenses increased $0.8 million to $13.0 million
in 1998 compared to 1997. The 1998 amount includes selling expenses of $0.5
million and general and administrative expenses of $0.9 million at the newly
acquired Shaw operation. Excluding the impact of the Shaw operation, operating
expenses decreased by $0.6 million to $11.5 million in the nine month period
ended September 27, 1998. The decrease is largely attributed to reductions in
marketing programs, professional fees, insurance and continuing efforts to
steadily reduce expenses. The Company intends to consolidate the operations of
Shaw into manufacturing and administrative facilities in Rochdale, England,
thereby, reducing a portion of the Shaw overhead expenses. The Company expects
the consolidation to be accomplished in the first half of 1999. The Company has
reduced headcount at Shaw to 93 at September 27, 1998 compared to 218 at
December 31, 1997. Research and development costs declined primarily as a result
of reduced headcount.
Year to date interest expense at September 27, 1998, was $0.6 million,
an increase of $0.5 million from 1997. The increase is due to borrowings
associated with the acquisition of the Shaw operations. Interest income was $0.1
million for the nine month period ended September 27, 1998 and $0.2 million for
the nine month period ended September 28, 1997.
Other income, net of other expense, includes approximately $0.3 million
for the nine month period ended September 27, 1998 from the disposal of
machinery and equipment the Company will no longer use and $0.6 million for the
same period in 1997. The impact of foreign currency on the consolidated results
of operations for 1998 compared to 1997 was not significant.
The effective income tax rate in 1998 and 1997 was 44.7% and 38.6%,
respectively. The Company provides for income taxes in the jurisdictions in
which it pays income taxes at the statutory rates in effect in each jurisdiction
adjusted for differences in providing for income taxes for financial reporting
and income tax purposes.
THREE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
28, 1997
Net sales for the third quarter of 1998 were $21.6 million, compared to
the $22.0 million for the third quarter of 1997. Order intake in the third
quarter of 1998 was $9.0 million including approximately $1.5 million from the
Shaw operations, compared to $18.9 million in the third quarter of 1998. Sales,
orders and backlog levels varied when comparing the two quarters due to the same
reasons previously discussed.
Gross margin in the third quarter of the current year was $4.3 million
compared to $5.4 million in the third quarter of 1997 and the margin percentage
decreased to 20.1% from 24.7%, respectively. The third quarter gross margin
percentage decreased due to a higher portion of the quarter's sales being
generated by the Shaw operation. The acquisition of the Shaw assets (acquired
December 1997) included the assumption of sales contracts negotiated by the
seller (EIS), with gross margin percentages lower than the historical levels
earned by Farrel.
Page 9 of 16
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Total operating expenses increased $0.4 million from the third quarter
of 1997 to $4.5 million in the third quarter of 1998. The third quarter includes
selling expenses of $0.2 million and administrative expenses of $0.3 million at
the newly acquired Shaw facilities. Excluding the impact of the Shaw operations,
operating expenses would have declined approximately $0.2 million during the
third quarter of 1998. The changes in operating expenses are due to the reasons
previously discussed.
Interest expense, for the third quarter of 1998, was $0.2 million, an
increase of $0.2 million from the third quarter of 1997. The increase is due to
borrowings associated with the acquisition of the Shaw operations.
Other income, net of other expense in the third quarter of 1998 and 1997
includes approximately $0.1 million for the disposal of excess machinery and
equipment. The impact of foreign currency on the consolidated results of
operations for the third quarter of 1998 compared to 1997 was not significant.
The tax rate in the third quarter of 1998 and 1997 was 16.5% and 41.5%,
respectively. The low tax rate in 1998 is due to the effect of consolidating
pretax income and pretax losses from different tax jurisdictions. The Company
provides for income taxes in the jurisdictions in which it pays for income taxes
at the statutory rates in effect in each jurisdiction adjusted for differences
in providing for income taxes for financial reporting and income tax purposes.
MATERIAL CONTINGENCIES
The Company and The Black & Decker Corporation, in 1995, entered into a
Settlement Agreement pursuant to which Black & Decker agreed to assume full
responsibility for the investigation and remediation of any pre-May, 1986
environmental contamination at the Company's Ansonia and Derby 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. 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,
earnings or the competitive position of the Company. This forward looking
statement could, however, be influenced by the results of any further
investigation which the DEP might require, by DEP's conclusions and requirements
based upon its review of complete information when such is available,
unanticipated discoveries, the possibility that new or different environmental
laws might be adopted and the possibility that further regulatory review or
litigation might become necessary or appropriate.
LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES
Working capital and the working capital ratio at September 27, 1998 were
$16.4 million and 1.6 to 1.0, respectively, compared to $18.4 million and 2.0 to
1.0 at December 31, 1997, respectively. During the first nine months of 1998,
the Company paid dividends totaling $0.08 per share. The Company's ability to
pay dividends in the future is generally limited under its credit facility
described below to the aggregate of (a) 25% of net income during the most
recently completed four fiscal quarters after deducting 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
Page 10 of 16
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the Company's bank. The Company received a waiver from its bank with respect to
dividends paid between April 23, 1997 through June, 1998.
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.
The Company made capital expenditures of $1.3 and $1.4 million during the first
nine months of 1998 and 1997, respectively.
The Company has a worldwide multi-currency credit facility with a major
U.S. bank in an amount of $25.9 million consisting of an $18.5 million revolving
credit facility for direct borrowings and letters of credit and up to (pound)3.0
million for foreign exchange contracts and a five year term loan. The facility
contains limitations on direct borrowings and letters of credit combined based
upon stipulated levels of accounts receivable, inventory and backlog. The
facility also contains covenants specifying minimum and maximum thresholds for
operating results and selected financial ratios. There were $6.5 million and
$7.1 million in direct borrowings under this facility at September 27, 1998, and
December 31, 1997, respectively. There were $5.2 million and $6.0 million of
letters of credit outstanding at September 27, 1998 and December 31, 1997,
respectively. The revolving credit facility expires on December 31, 1999, the
term note matures on December 31, 2002.
Subsequent to the end of the third quarter, the Company executed a
modified extension of its previously announced contract for sale of its Derby,
Connecticut real property. The unconditional contract provides for completion of
the transaction no later than the 30th of December, 1998 for $2.4 million.
YEAR 2000
The Company has instituted 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 year change from December 31, 1999
to January 1, 2000, and to process date information correctly thereafter.
The project is divided into three components - Business Applications,
comprising the Company's internal information systems as well as the readiness
of third party suppliers of goods and services whose Year 2000 readiness could
potentially have significant impact on the Company's operations; Product
Applications, relating to micro-processors within the control equipment sold by
the Company; and Equipment Applications, which relate to micro-processors within
operating equipment utilized in the Company's day to day operations.
The project team is made up of internal resources from various
disciplines, including operations, facility management, product engineering,
management information systems and finance. The major objectives for each
component are to: (1) identify and document Year 2000 items which affect the
Company; (2) inventory systems, machines and process affected by the Year 2000;
(3) assess Year 2000 readiness for identified items; and (4) design and
implement a plan to achieve Year 2000 readiness for significant Year 2000 items.
The identification and inventory of systems, machine and processes has been
completed. The assessment and plan to achieve Year 2000 readiness are at various
stages of completion for each of the three major components.
Page 11 of 16
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The Business Applications component of the Company's Year 2000 plan
relates primarily to the Company's principal internal information system which
consists of a mainframe operated with third party purchased computer software.
The conversion to a Year 2000 compliant version of the software commenced during
the third quarter of 1998. This included the replacement of hardware and
software for one of our UK operations to provide consistency with the US
operation. As of the current date the conversion was completed, however, system
testing will continue into the first-half of 1999. Similar systems for our newly
acquired subsidiary in the UK have not been upgraded due to the planned
consolidation at our other UK operation which has recently been upgraded. The
balance of the Company's computer based information systems consist primarily of
individual work stations and personal computers. Work stations in Engineering
were upgraded in 1997. All personal computer hardware and software has been
tested. Modifications to the equipment are being made and upgrades purchased for
non-Year 2000 ready equipment. The total amount expended in the current and
prior year through September 27, 1998, related to the Company's internal
information system was approximately $0.8 million. Additional expenditures to
complete this phase is estimated to be less than $0.1 million. A significant
portion of these expenditures would have occurred without the Year 2000 issue
and, in general, these expenditures have not been accelerated.
The identification and assessment of critical suppliers of goods and
services is in process. Critical suppliers include suppliers of components used
in the Company's products as well as suppliers of goods and services used in the
Company's operations. Critical suppliers have been identified as suppliers of
goods or services that, if interrupted for an extended period, might impact the
Company's ability to provide goods and services to its customers, satisfy
obligations to its employees and vendors and which might pose a risk of injury
or damage to individuals, property or the environment. Critical suppliers of
goods and services are being contacted to assess their readiness for the Year
2000. Due to the varying degree of impact the Year 2000 may cause and general
uncertainty inherent in the Year 2000 problem, the Company is unable to
determine if third party supplier readiness would materially impact the
Company's results of operations, liquidity or financial condition.
The Product Applications component of the Company's Year 2000 plan
relates primarily to micro-processors within the control equipment sold by the
Company. The Company has identified auxiliary equipment and components which
were supplied with its products and which might pose a risk that the Company's
product will not function properly in the Year 2000. The process is
approximately one third complete. Some supplied components may require
modification or upgrade. Testing is continuing and expected to be completed
before December 31, 1998. The cost of an upgrade or modification may result in a
warranty obligation and charge to results of operations of the Company. The
Company is unable to determine a reasonable estimate at this time. However, some
of the cost may be recovered from the Company's vendors.
Equipment Applications component of the Company's Year 2000 plan relates
to microprocessors within the operating equipment utilized in the Company's day
to day operations. The identification of equipment used in the Company's
operation has been completed. The equipment used in our manufacturing and other
operations are not integrated systems, but consist principally of individual
stand alone machine tools and equipment. Failure of one piece of equipment would
not materially impact operations. Correspondence with the equipment suppliers to
determine Year 2000 readiness is in process and expected to be complete before
the end of December 1998. Individual pieces of equipment have been identified
for replacement. The cost of
Page 12 of 16
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such equipment identified to date for replacement is not significant.
Replacement of all effected equipment is expected to be completed by the middle
of 1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures might have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
critical suppliers of goods and services. The Company believes that with the
completion of the Project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
The above contains forward-looking statements including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" statements of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the safe harbor
statements of the Private Securities Litigation Reform Act of 1995 contained on
page eight of this report.
Taking into account the foregoing, the following are identified as some,
but not all of, important risk factors that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company: the availability and cost of personnel; the ability to
locate and correct all items; and timely responses to and corrections by
third-parties and suppliers. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third-parties and the interconnection of global businesses, the Company
cannot ensure its ability to timely and cost-effectively resolve problems
associated with the Year 2000 issue that may affect its operations and business,
or expose it to third-party liability.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Financial Accounting Standard
No. 130, "Reporting Comprehensive Income". Standard No. 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or stockholder's equity. Statement 130 requires the Company's foreign
currency translation and minimum pension liability which, prior to adoption,
were reported separately in stockholders' equity to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Standard No. 130.
For the nine months ended September 27, 1998 and September 28, 1997,
total comprehensive income amounted to $0.9 million and $0.8 million,
respectively.
ITEM 2 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not
applicable.
Page 13 of 16
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
FARREL CORPORATION
------------------
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------
(In thousands, except per share and share data)
-----------------------------------------------
Three Months Ended Nine Months Ended
-------------------------------------------------------
September 27, June 29, June 28, June 29,
1998 1997 1998 1997
---- ---- ---- ----
Net income applicable to
<S> <C> <C> <C> <C>
common stock ($202) $712 $645 $1,476
=========== ============ ============ ============
Weighted average number of common
shares outstanding - Basic earnings 5,942,338 5,942,212 5,942,664 5,942,153
per share
Effect of dilutive stock and purchase - 2,248 6,288 2,356
options
----------- ------------ ------------ ------------
Weighted average number of common
shares outstanding - Diluted earnings 5,942,338 5,944,460 5,948,952 5,944,509
per share
=========== ============ ============ ============
Net income/(loss) per common
share - Basic ($0.03) $0.12 $0.11 $0.25
=========== ============ ============ ============
share - Fully diluted ($0.03) $0.12 $0.11 $0.25
=========== ============ ============ ============
</TABLE>
Page 14 of 16
<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 - (Regulation S-K) Computation of Earnings Per Share.
See Page 14.
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K
No such reports were filed by the Company during the third quarter of 1998.
Page 15 of 16
<PAGE>
SIGNATURES
----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
FARREL CORPORATION
------------------
REGISTRANT
DATE: 11/10/98 /s/ ROLF K. LIEBERGESELL
------------------------- ------------------------------------
ROLF K. LIEBERGESELL
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND CHAIRMAN OF THE BOARD
DATE: 11/10/98 /s/ CATHERINE M. BOISVERT
------------------------- ------------------------------------
CATHERINE M. BOISVERT
VICE PRESIDENT AND CONTROLLER
(CHIEF ACCOUNTING OFFICER)
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Farrel Corporation as of September 27, 1998 and for the
nine months then ended and is qualified in its entirety by reference to such
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Sep-27-1998
<EXCHANGE-RATE> 1
<CASH> 1,593
<SECURITIES> 0
<RECEIVABLES> 17,425
<ALLOWANCES> 191
<INVENTORY> 19,972
<CURRENT-ASSETS> 44,497
<PP&E> 23,156
<DEPRECIATION> 11,442
<TOTAL-ASSETS> 61,080
<CURRENT-LIABILITIES> 28,052
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 26,117
<TOTAL-LIABILITY-AND-EQUITY> 61,080
<SALES> 62,556
<TOTAL-REVENUES> 62,556
<CGS> 47,879
<TOTAL-COSTS> 47,879
<OTHER-EXPENSES> 12,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 561
<INCOME-PRETAX> 1,168
<INCOME-TAX> 523
<INCOME-CONTINUING> 645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 645
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
