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 July 4, 1999
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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
inorporation 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 August 6, 1999
Common Stock (Voting), $.01 par value 5,366,586
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<PAGE>
FARREL CORPORATION
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Index
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Page
Part I. Financial Information
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Consolidated Balance Sheets -
July 4, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
Three and Six Months Ended July 4, 1999
and June 28, 1998 4
Consolidated Statements of Cash Flows -
Six Months ended July 4, 1999
and June 28, 1998 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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Page 2 of 16
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Part I - Financial Information
FARREL CORPORATION
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CONSOLIDATED BALANCE SHEETS
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(In thousands, except share data)
<TABLE>
<CAPTION>
July 4, December 31,
------- ------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 3,305 $ 5,786
Accounts receivable, net of allowance for
doubtful accounts of $255 and $297, respectively 10,822 20,708
Inventory .......................................... 17,715 14,542
Asset purchase agreement receivable ................ 0 5,284
Other current assets ............................... 1,759 1,953
-------- --------
Total current assets ................. 33,601 48,273
Property, plant and equipment - net
of accumulated depreciation of $12,177 and
$11,648, respectively ........................... 11,067 11,614
Goodwill ........................................... 2,311 1,555
Other Assets ....................................... 703 1,281
-------- --------
Total Assets .............................................. $ 47,682 $ 62,723
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................ $ 6,657 $ 14,039
Accrued expenses & taxes payable ................ 2,035 4,284
Advances from customers ......................... 5,236 7,017
Accrued installation & warranty costs ........... 1,628 1,683
Short - term debt ............................... 1,261 1,328
-------- --------
Total current liabilities ........... 16,817 28,351
Long - term debt ................................... 3,153 3,983
Postretirement benefit obligation .................. 1,156 1,171
Long-term pension obligation ....................... 2,429 2,429
Deferred income taxes .............................. 496 488
Commitments and contingencies ...................... -- --
-------- --------
Total Liabilities ................... 24,051 36,422
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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, 755,520 and 202,620 shares at
July 4, 1999 and December 31, 1998, respectively (2,262) (990)
Retained earnings ............................... 8,791 9,576
Accumulated other comprehensive expense ......... (2,254) (1,641)
-------- --------
Total Stockholders' Equity .......... 23,631 26,301
-------- --------
Total Liabilities and Stockholders' Equity ................... $ 47,682 $ 62,723
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 3 of 16
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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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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
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July 4, June 28, July 4, June 28,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales .............................. $ 17,282 $ 24,954 $ 30,576 $ 40,930
Cost of sales .......................... 12,744 18,854 23,634 30,594
----------- ----------- ----------- -----------
Gross margin ........................... 4,538 6,100 6,942 10,336
Operating expenses:
Selling ............................ 1,673 1,946 3,383 3,678
General & administrative ........... 2,197 2,306 4,419 4,075
Research & development ............. 385 366 768 684
----------- ----------- ----------- -----------
Total operating expenses ............... 4,255 4,618 8,570 8,437
----------- ----------- ----------- -----------
Operating income (loss) ................ 283 1,482 (1,628) 1,899
Interest income ........................ 72 6 307 58
Interest expense ....................... (96) (191) (272) (401)
Gain from sale of real estate .......... 0 0 1,879 0
Other income/(expense), net ............ 97 (70) (6) (146)
----------- ----------- ----------- -----------
Income before income taxes ............. 356 1,227 280 1,410
Provision for income taxes ............. 74 490 115 563
----------- ----------- ----------- -----------
Net income ............................. $ 282 $ 737 $ 165 $ 847
=========== =========== =========== ===========
Per share data:
Basic and Diluted income per
common share ......................... $ 0.05 $ 0.12 $ 0.03 $ 0.14
=========== =========== =========== ===========
Average shares outstanding:
Basic ................................ 5,386,586 5,942,582 5,603,086 5,942,582
=========== =========== =========== ===========
Diluted .............................. 5,392,262 5,947,388 5,609,286 5,966,836
=========== =========== =========== ===========
Dividends per share ................. -- $ 0.04 $ 0.16 $ 0.04
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 4 of 16
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FARREL CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
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July 4, June 28,
------- --------
1999 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income ......................................................... $ 165 $ 847
Adjustments to reconcile net income to
net cash provided by/(used in) operating activities:
Gain on disposal of fixed assets ................................. (1,944) (137)
Depreciation and amortization .................................... 1,135 1,175
Decrease in accounts receivable .................................. 9,547 2,110
Increase in inventory ............................................ (3,730) (4,367)
(Decrease)increase in accounts payable ........................... (7,060) 1,669
(Decrease)increase in customer advances .......................... (1,674) 2,133
Decrease in accrued expenses & taxes ............................. (1,917) (189)
(Decrease)increase in accrued installation and warranty costs .... (4) 215
Increase in deferred income taxes ................................ 213 100
Other ............................................................ (571) (953)
------- -------
Total adjustments ................................................ (6,005) 1,756
------- -------
Net cash (used) provided by operating activities ................. (5,840) 2,603
------- -------
Cash flows from investing activities:
Refund of Shaw asset purchase price .............................. 4,401 2,701
Proceeds from disposal of fixed assets ........................... 2,610 160
Purchases of property, plant and equipment ....................... (580) (1,073)
------- -------
Net cash provided by investing activities ........................ 6,431 1,788
Cash flows from financing activities:
Repayment of long-term borrowings ................................ (644) (331)
Purchase of treasury stock ....................................... (1,272) --
Used for dividends paid .......................................... (951) (1,188)
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Net cash used by financing activities ............................ (2,867) (1,519)
Effect of foreign currency exchange rate changes on cash ............. (205) 19
------- -------
Net (decrease) increase in cash and cash equivalents ................. (2,481) 2,891
Cash and cash equivalents - Beginning of period .................. 5,786 1,447
------- -------
Cash and cash equivalents - End of period ........................ $ 3,305 $ 4,338
======= =======
Income taxes paid .................................................... $ 1,082 $ 139
======= =======
Interest paid ........................................................ $ 192 $ 311
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 5 of 16
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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 July 4, 1999, the consolidated
results of its operations for the three and six-month periods ended July 4, 1999
and June 28, 1998, and its consolidated cash flows for the six-month periods
ended July 4, 1999 and June 28, 1998. 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, 1998.
NOTE 2 - INVENTORY
Inventory is comprised of the following:
July 4, December 31,
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1999 1998
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(In thousands)
Stock and raw materials..... $ 6,991 $ 7,279
Work-in process ............ 10,724 7,263
------- -------
Total ...................... $17,715 $14,542
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NOTE 3 - ASSET PURCHASE
On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary of the
Company, acquired certain assets and the operations of the Francis Shaw Rubber
Machinery ("Shaw") operations from EIS Group PLC of the United Kingdom
("Seller"). The purchase and sale agreement ("Agreement") between the Company
and the Seller required subsequent adjustment to the purchase price if the Shaw
operations did not produce a minimum profit, as defined in the Agreement, of
approximately $1.7 million for the year ended December 31, 1998 (the "Profit
Guaranty"). The operations of Shaw produced a loss (as computed under the terms
of the Agreement) of approximately $3.6 million for the year ended December 31,
1998.
Accordingly, the Company recorded a receivable from the Seller at December
31, 1998 of approximately $5.3 million under the terms of the Profit Guaranty
provisions of the Agreement and reduced the purchase price. On May 7, 1999, the
Company received a cash payment of $4.4 million in settlement of its claim under
the Profit Guaranty. The difference between the amount recorded at December 31,
1998 and amount received from the Seller was recorded as an increase in
goodwill.
The Agreement also required the transfer of the pension liability for the
Shaw employees together with the pension assets related to those employees. The
assets for the Shaw employees were transferred to the Company's pension plan on
May 5, 1999. The consolidated financial statements do not include any amounts
related to the transferred Shaw employees as the actuarial amounts have not yet
been determined. The net amount of the actuarially determined excess of the
pension assets compared with the projected benefit obligation for the Shaw
employees will be recorded as an additional purchase price adjustment when
determined.
Page 6 of 16
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NOTE 4 - COMPREHENSIVE INCOME
During the six month period ended July 4,1999, the British Pound Sterling,
the functional currency of the Company's United Kingdom subsidiary, weakened
against the Company's United States Dollar reporting currency; from 1.66 US
dollars at December 31, 1998, to 1.58 at July 4, 1999. The Pound Sterling has
subsequently strengthened to 1.62 as of July 31, 1999.
The impact of the foregoing foreign currency exchange rate fluctuations is
recorded as a foreign currency translation adjustment and is included in other
comprehensive income for the period. The components of other comprehensive
income, for the six-month periods ended are as follows:
July 4, June 28,
1999 1998
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(In thousands)
Net income .................................. $ 165 $ 847
Foreign currency translation adjustments .... (613) 2
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Other comprehensive (loss) income ........... $(448) $ 849
===== =====
The components of accumulated other comprehensive expense, net of related
tax, are as follows:
July 4, December 31,
1999 1998
---- ----
(In thousands)
Minimum pension liability .................. $(1,577) $(1,577)
Foreign currency translation adjustments ... (677) (64)
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Accumulated other comprehensive expense .... $(2,254) $(1,641)
======= =======
NOTE 5 - 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 6 - 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 7 of 16
<PAGE>
PART I - ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING 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 flow; 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
SIX MONTHS ENDED JULY 4, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 28, 1998
Net sales for the six month period ended July 4, 1999 were $30.6 million
compared to $40.9 million during the six month period ended June 28, 1998, a
decrease of $10.3 million. The decrease in net sales is primarily due to lower
new machine sales, which was $7.5 million lower year-to-date 1999 as compared to
the same period in 1998. The timing of the Company's sales, particularly new
machines sales, are highly dependent on when an order is received, lead time and
customer requirements. 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 local economic events.
The Company received $32.2 million in orders during the six months of 1999
compared to $50.3 million during the same period of 1998. Order intake into the
third quarter of 1999 continues to be slow. New machine orders were $12.8
million lower year-to-date 1999 compared to 1998. 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 be recognized in a later
accounting period than the one in which the order was received. In addition, the
cyclical nature of industry demand and, therefore, 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. Firm backlog at July 4, 1999 was $34.4 million compared to
$33.0 million at December 31, 1998 and $56.3 million at June 28, 1998. Firm
backlog as of August 6, 1999 and August 5, 1998 was $34.1 million and $51.8
million, respectively.
Year-to-date gross margin in 1999 and 1998 was $6.9 million and $10.3
million, respectively. The margin percentage decreased to 22.7% from 25.3%. The
decrease in comparative gross margin is attributable to lower sales volume to
absorb fixed manufacturing and assembly costs.
Year-to-date 1999 operating expenses were $8.6 million compared to $8.4
million during 1998. The increase is due to higher employee compensation,
benefit costs and professional services offset by lower selling expenses.
Page 8 of 16
<PAGE>
Year-to-date interest expense for 1999 was $0.3 million, a decrease of $0.1
million from the same period of 1998. The decrease is due to lower borrowings.
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 between financial reporting and income
tax purposes. The effective income tax rate, as a percentage of pre-tax results
of operations, was 41.1% and 39.9% in 1999 and 1998, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 4, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 28, 1998
Net sales for the second quarter of 1999 and 1998 were $17.3 million and
$24.9 million, respectively. Order intake in the second quarter of 1999 was
$15.0 million compared to $20.1 million for the second quarter of 1998. Sales,
orders and backlog levels varied when comparing the two quarters due to the same
reasons previously stated in the results of operations for the six month period
on page 8.
Gross margin in the second quarter of 1999 and 1998 was $4.5 million and
$6.1 million, respectively. The margin percentage increased to 26.2% from 24.4%
due to the mix of products sold in the two periods.
Operating expenses decreased $0.4 million to $4.2 million during the second
quarter 1999 compared to 1998. The decrease is due to the consolidation of the
operations of Shaw into manufacturing and administrative facilities in Rochdale,
England and the same reasons previously stated in the results of operations for
the six month period on page 8.
Interest expense for the second quarter of 1999 was $0.1 million, a
decrease of $0.1 million from 1998. The decrease is due to lower borrowings.
Interest income was $0.1 million for the quarter ended July 4, 1999.
Other income, net of other expense, includes approximately $0.1 million for
the quarter ended July 4, 1999 from the disposal of machinery and equipment the
Company will no longer use and $0.2 million for the same period in 1998. The
impact of foreign currency fluctuations on the consolidated results of
operations for 1998 compared to 1997 was not significant.
The effective income tax rate for the second quarter in 1999 and 1998 was
20.8% and 39.9%, 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.
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, 1986 environmental
contamination at the Company's Ansonia and Derby 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, a
preliminary environmental assessment of the Company's properties in Ansonia and
Derby, Connecticut has been 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 an additional insured on a $5.0 million environmental policy obtained
by the purchaser and the purchaser is obligated to
Page 9 of 16
<PAGE>
name the Company 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, earnings or thecompetitive 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 July 4, 1999 were $16.8
million and 2.0 to 1, respectively, compared to $19.9 million and 1.7 to 1 at
December 31, 1998, respectively. During 1999, the Company paid a dividend of
$.16 per share of common stock. The Company has also declared a dividend of $.04
per share of common stock to be paid in the third quarter of 1999. In addition,
during the first six months of 1999, the Company repurchased 552,900 shares of
common stock in the amount of $1,272,000. These shares are held in treasury. The
Company recently extended its discretionary open market stock program increasing
the amount by $2.5 million. Subsequent to the end of the second quarter the
Company repurchased 80,000 shares of common stock in the amount of $157,500. 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 the Company's bank. The
Company received a waiver from its bank with respect to dividends paid and
declared in 1999.
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 $0.6 million and $1.1 million during the
first half of fiscal 1999 and 1998, respectively.
On May 7, 1999, the Company received a cash payment of $4.4 million
representing settlement of its claim under the Profit Guaranty provision of the
Asset Purchase Agreement for the purchase of the Francis Shaw Rubber Machinery
Business.
The Company has a worldwide multi-currency credit facility with a major
U.S. bank in the amount of $25.0 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 note.
Interest varies based upon prevailing market interest. The facility contains
limits on direct borrowings and letters of credit combined 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 July 4, 1999 and December 31, 1998, there was $4.4 million and $5.3
million, respectively, outstanding under the term loan. There were $4.8 million
and $5.1 million of letters of credit outstanding at July 4, 1999 and December
31, 1998, respectively.
Page 10 of 16
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MARKET FOR REGISTRANT'S COMMON STOCK
The Company's common stock, $0.01 par value ("Common Stock"), has been
publicly traded on the Nasdaq National Market since January 17, 1992 (the date
of the Company's initial public offering) under the symbol "FARL." Nasdaq
listing standards require, among other things, that the market value of public
float of the qualifying outstanding shares of Common Stock of the Company that
are available for trading exceed $5,000,000. Nasdaq may initiate de-list
proceedings if the market value of public float falls below the minimum level
for a period of thirty consecutive business days and is not otherwise restored
to a level in excess of the minimum requirement for at least ten consecutive
business days during a 90-day compliance period.
Prior to July 12, 1999, the market value of public float of the qualifying
outstanding shares of the Company's Common Stock intermittently had fallen below
Nasdaq's $5,000,000 minimum requirement. From the period July 12, 1999 to August
12, 1999, the market value of public float of the qualifying shares of the
Common Stock failed to meet the $5,000,000 minimum requirement. Continuation of
this trend for thirty consecutive business days could subject the Common Stock
to Nasdaq de-list proceedings. If Nasdaq were to de-list the Company's Common
Stock, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to, the market value of the Common Stock and the Company
could have greater difficulty effecting future equity financing.
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 issues which affect the Company; (2)
inventory systems, machines and processes 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 issues. The identification
and inventory of systems, machines 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.
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 was completed
during the fourth quarter of 1998; however, system testing will continue. The
conversion included the replacement of hardware and software for one of the
Company's UK operations to provide consistency with the US operation. Similar
systems for our newly acquired subsidiary in the UK have not been upgraded due
to the consolidation of that facility into the other UK operation which has been
upgraded. The balance of the Company's computer based information systems
consist primarily of individual work stations and personal computers. Work
stations in the Engineering Department 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, related to the Company's
internal information system, was approximately $0.9 million. Additional
expenditures to
Page 11 of 16
<PAGE>
complete this phase are 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 might 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 microprocessors 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
substantially complete. Some supplied components may require modification or
upgrade. The extent of modifications required are dependent on the use and
extent of integration of the Company's equipment at a customer's location. The
Company's efforts are expected to continue to assist the Company's customers to
maximize serviceability of Company supplied equipment. 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, the Company does not expect that these matters
will have a material adverse effect on the Company's financial position or
results of operations and some of the cost might 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 the Company's 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. The expected completion has been
postponed, however, completion is anticipated prior to the year-end. Individual
pieces of equipment have been identified for replacement. The cost of such
equipment identified to date for replacement is not significant. Replacement of
all known effected equipment has been completed.
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 foregoing discussion 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
Page 12 of 16
<PAGE>
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 For Forward-Looking Statements under 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 non-compliant year 2000 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.
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 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
ITEM 2 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency and
interest rates. The Company manufactures many of its products and components in
the United Kingdom and purchases many components in foreign markets.
Approximately 50% of the Company's revenue is generated from foreign markets.
The Company manages its risk to foreign currency rate changes by maintaining
foreign currency bank accounts in currencies in which it regularly transacts
business and the use of foreign exchange forward contracts. The Company
regularly enters into foreign exchange forward and option contracts to hedge
foreign currency transactions. These derivative instruments involve little
complexity and are generally for short periods of less than six months. 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 are not expected to
have a material impact on the Company's results of operations.
Page 13 of 16
<PAGE>
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
--------------------------------------------------
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income applicable to common stock ........... $ 282 $ 737 $ 165 $ 847
========== ========== ========== ==========
Weighted average number of common
shares outstanding - Basic earnings per share.... 5,386,586 5,942,582 5,603,086 5,942,582
Effect of dilutive stock and purchase options.... 5,676 4,806 6,200 24,254
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding - Diluted earnings per share... 5,392,262 5,947,388 5,609,286 5,966,836
========== ========== ========== ==========
Net income per common
share - Basic .................................. $ 0.05 $ 0.12 $ 0.03 $ 0.14
========== ========== ========== ==========
share - Fully diluted .......................... $ 0.05 $ 0.12 $ 0.03 $ 0.14
========== ========== ========== ==========
</TABLE>
Page 14 of 16
<PAGE>
PART II - OTHER INFORMATION
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 Reports on Form 8-K were filed by the registrant during the periods
covered by this report.
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: 8/16/99 /s/ Rolf K. Liebergesell
------------------------- -------------------------------------------
ROLF K. LIEBERGESELL
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN OF THE BOARD
DATE: 8/16/99 /s/ Theodore E. Jenny
------------------------- -------------------------------------------
THEODORE E. JENNY
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF FARREL
CORPORATION AS OF 7/4/99 AND FOR THE QUARTERLY PERIOD THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<CIK> 0000034645
<NAME> FARREL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUL-4-1999
<CASH> 3,305
<SECURITIES> 0
<RECEIVABLES> 11,077
<ALLOWANCES> 255
<INVENTORY> 17,715
<CURRENT-ASSETS> 33,601
<PP&E> 23,244
<DEPRECIATION> 12,177
<TOTAL-ASSETS> 47,682
<CURRENT-LIABILITIES> 16,817
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 23,570
<TOTAL-LIABILITY-AND-EQUITY> 47,682
<SALES> 30,576
<TOTAL-REVENUES> 30,576
<CGS> 23,634
<TOTAL-COSTS> 23,634
<OTHER-EXPENSES> 6,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 272
<INCOME-PRETAX> 280
<INCOME-TAX> 115
<INCOME-CONTINUING> 165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
