SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 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 No.: 33-62598
Fairfield Manufacturing Company, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 63-0500160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
U. S. 52 South, Lafayette, IN 47903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 474-3474
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
The number of shares outstanding of each of the issuer's classes of common
stock as of September 30, 1996 is as follows:
7,775,000 shares of Common Stock
FAIRFIELD MANUFACTURING COMPANY, INC.
Form 10-Q
September 30, 1996
PART I - FINANCIAL INFORMATION
Page
Number
Item 1 - Financial Statements:
Consolidated Balance Sheets, December 31, 1995 and 3
September 30, 1996 (Unaudited)
Consolidated Statements of Operations for the three and 4
nine months ended September 30, 1995 and 1996
(Unaudited)
Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 1995 and 1996 (Unaudited)
Consolidated Statement of Stockholder's Equity for the nine 6
months ended September 30, 1996 (Unaudited)
Notes to Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of Financial 9-10
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K. Reference is 10
made to Exhibit Index, beginning on page 11 herein.
Reports on Form 8-K, none.
SIGNATURE 10
EXHIBIT INDEX 11-15
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, September 30,
1995 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,324 $ 5,406
Trade receivables, less allowance of $600 24,328 24,009
in 1995 and 1996
Inventories 24,912 18,611
Other 897 805
Total current assets 54,461 48,831
Property, plant and equipment, net 71,056 71,697
Other assets:
Excess of investment over net assets 54,098 52,898
acquired, less accumulated
amortization of $10,261 in 1995 and
11,461 in 1996
Deferred financing costs, less 3,540 3,027
accumulated amortization of $1,685
in 1995 and $2,198 in 1996
Total other assets 57,638 55,925
Total assets $183,155 $176,453
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,000 $ 3,750
Due to parent 807 219
Accounts payable 11,150 14,246
Accrued liabilities 17,524 16,278
Deferred income taxes 4,700 4,700
Total current liabilities 37,181 39,193
Accrued retirement costs 14,758 14,758
Deferred income taxes 11,258 9,798
Long-term debt 110,000 99,250
Stockholder's equity:
Common stock:
Par value $.01 per share, 10,000,000 77 78
shares authorized, 7,676,000 issued
and outstanding in 1995 and
7,775,000 in 1996
Paid in capital 35,209 36,526
Retained deficit (25,328) (23,150)
Total stockholder's equity 9,958 13,454
Total liabilities and stockholder's $183,155 $176,453
equity
The accompanying notes are an integral part
of the consolidated financial statements.
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1995 1996 1995 1996
Net sales $ 50,307 $ 45,864 $140,329 $146,789
Cost of sales 38,218 120,731
40,129 111,727
Gross profit 10,178 7,646 28,602 26,058
Selling, general and 3,259 3,822 9,890 11,621
administrative
expenses
Amortization of excess of
investment over net 410 400 1,230 1,200
assets acquired
Operating income 6,509 3,424 17,482 13,237
Interest expense, net 3,158 2,760 9,286 8,478
Amortization of deferred 156 171 491 513
financing costs
Other expense, net
22 32 59 65
Income before income 3,173 461 7,646 4,181
taxes
Provision for income taxes
1,429 248 3,442 2,003
Net income $ 213 $2,178
$1,744 $4,204
Income per share data:
Net income per common share $0.03
$0.26 $0.77 $0.28
Weighted average 6,835,592 7,752,250 5,487,356 7,701,590
common shares
outstanding
The accompanying notes are an integral part
of the consolidated financial statements.
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the nine For the nine
months ended months ended
September 30, September 30,
1995 1996
Cash flows from operating activities:
Net income $ 4,204 $ 2,178
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 9,393 9,993
Decrease in deferred income taxes (292) (1,460)
Changes in assets and liabilities:
(Increase) decrease in trade (7,783) 319
receivables
Decrease in receivable from parent 1,097 -
(Increase) decrease in inventories (6,381) 6,301
(Increase) decrease in other assets (315) 92
(Decrease) in payable due to parent - (588)
Increase in accounts payable 4,008 1,292
Increase (decrease) in accrued 1,675 (2,340)
liabilities
Increase in accrued retirement costs 191 1,094
Net cash provided by operating 5,797 16,881
activities
Cash flows from investing activities:
Additions to plant and equipment (9,607) (7,117)
Cash flows from financing activities:
Proceeds from additional capital 1,866 1,318
contribution
Proceeds from issuance/borrowings of 11,000 5,000
long-term debt
Payment of debt issuance costs (340) -
Payment of long-term debt (10,000) (15,000)
Net cash provided by (used in) 2,526 (8,682)
financing activities
Net (decrease) increase in cash and (1,284) 1,082
cash equivalents
Cash and cash equivalents:
Beginning of period 1,450 4,324
End of period $ 166 $ 5,406
Supplemental schedule of cash flow
information:
Cash paid for:
Interest $11,682 $11,270
Taxes to parent $ 900 $ 2,200
Non cash investing activities:
Additions to plant and equipment
included in accounts payable at
September 30, 1995 and 1996 of
$2,131 and $1,804, respectively,
are excluded from the change in
accounts payable and additions to
plant and equipment above.
The accompanying notes are an integral part of the consolidated financial
statements.
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)
(Unaudited)
Additional Stock-
Common Paid-in Accumulated holder's
Equity
Stock Capital Deficit
Balance, December 31, $ 77 $35,209 $(25,328) $ 9,958
1995
Issuance of Common Stock 1 (1) - -
Capital contribution - 1,318 - 1,318
Net Income 2,178 2,178
- -
Balance, September 30, $36,526 $(23,150) $13,454
1996 $ 78
The accompanying notes are an integral part
of the consolidated financial statements.
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Information:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-
X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared under generally accepted accounting principles
have been condensed or omitted pursuant to such regulations. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of Fairfield Manufacturing Company, Inc.'s
(the "Company's") financial position, results of operations and cash flows have
been included. The results for the three and nine months ended September 30,
1995 and 1996 are not necessarily indicative of the results to be expected for
the full year or for any interim period.
2. Parent Company of Registrant:
The Company was acquired by Central Alabama Grain Company, Inc. ("CAG"), a
wholly owned subsidiary of Lancer Industries Inc. ("Lancer"), in a purchase
transaction on August 21, 1989. On March 31, 1995, the Company merged with and
into CAG, with CAG continuing as the surviving corporation of the mergers.
Concurrent with the mergers, CAG changed its name to Fairfield Manufacturing
Company, Inc.
3. Inventories:
Inventories consist of the following:
(In thousands) December 31, September 30,
1995 1996
Raw materials $ 4,039 $ 3,790
Work in process 10,978 7,858
Finished goods 10,350 7,837
25,367 19,485
Less: excess of FIFO cost over LIFO (455) (874)
cost
$ 24,912 $ 18,611
4. Income per Common Share:
Net income per common share is based on the weighted average number of common
shares outstanding during the period, which, for the three and nine months ended
September 30, 1995 was 6,835,592 and 5,487,356, respectively, and for the three
and nine months ended September 30, 1996 was 7,752,250 and 7,701,590,
respectively. The increase in the weighted average common shares outstanding is
due to the Company issuing 84,000 additional shares of its common stock on
December 31, 1995, 25,000 shares on March 31, 1996, 51,000 shares on June 30,
1996, and 23,000 shares on September 30, 1996, to Lancer in consideration of
certain capital contributions made by Lancer to the Company pursuant to the Tax
Sharing Agreement.
5. Debt:
In connection with the refinancing of certain indebtedness, the Company entered
into a loan agreement (as amended, the "Loan Agreement") with a senior lending
institution which provided for a revolving credit facility (the "Revolving
Credit Facility") and a term loan (the "Term Loan"). In order to meet future
business demands, the Company amended the Credit Agreement during March 1995.
The Term Loan amortization, as amended, is payable quarterly through December
1999. In connection with the amendment, the Revolving Credit Facility
commitment was increased from $15,000,000 to $20,000,000 and at the option of
the Company may be increased by an additional $5,000,000 and matures December
1999.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's net sales for the three months ended September 30, 1996 were $45.9
million, a decrease of $4.4 million, or 8.8%, compared to the three months ended
September 30, 1995. For the nine months ended September 30, 1996, the Company's
net sales were $146.8 million, an increase of $6.5 million, or 4.6%, compared to
the same period in 1995. The year-to-date increase in sales volume of the
Company's products are the result of additional outsourcing by captive gear
manufacturers, continued growth in sales of products and applications developed
over the last few years, increases in manufacturing capabilities, and
improvements in the markets served by our customers.
The backlog of orders to be shipped in the next six months was, as of September
30, 1996, $75.1 million, down from $98.1 million one year earlier. The lower
backlog at September 30, 1996 results primarily from reduced factory lead times.
The Company's gross profit in the third quarter of 1996 was $7.6 million, or
16.7% of net sales, compared to $10.2 million, or 20.2% of net sales, for the
third quarter of 1995. For the first nine months of 1996, gross profit was
$26.1 million, or 17.8% of net sales, compared to $28.6, or 20.4% of net sales
for the comparable period in 1995. The decreased profit percentage resulted
primarily from reduced inventory and increases in material and manufacturing
costs.
Selling, general and administrative expense ("SG&A") was $3.8 million, or 8.3%
of net sales, for the three months ended September 30, 1996, compared to $3.3
million, or 6.5% of net sales, in the comparable 1995 period. For the nine
months ended September 30, 1996, the Company's SG&A was $11.6 million, or 7.9%
of net sales versus $9.9 million, or 7.1% of net sales for the first nine months
of 1995. The increase in SG&A expense from 1995 for both the three and nine
month represents an investment for future business growth as well as the write-
off of a $.5 million cancellation charge due to a customer filing Chapter 11.
Earnings from operations for the three months ended September 30, 1996 were $3.4
million, or 7.5% of net sales compared to $6.5 million, or 12.9% of net sales
for the comparable 1995 period. For the nine months ended September 30, 1996,
the Company's earnings from operations were $13.2 million, or 9.0% of net sales,
compared to $17.5 million, or 12.5% of net sales for the first nine months of
1995.
Interest expense in the third quarters of 1996 and 1995 was $2.8 million and
$3.2 million, respectively. For the first nine months of 1996 and 1995,
interest expense was $8.5 million and $9.3 million, respectively. Interest
expense decreased predominantly due to a lower average debt balance driven by
reduced inventories during the three and nine months ended September 30, 1996
versus the comparable 1995 periods.
The Company's income before income taxes was $.5 million for the third quarter
of 1996, compared to $3.2 million for the comparable 1995 period. For the nine
months ended September 30, 1996, the Company's income before income taxes was
$4.2 million compared to $7.6 million for the comparable 1995 period.
The Company's net income was $0.2 million for the third quarter of 1996 as
compared to $1.7 million for the comparable 1995 period. For the first nine
months of 1996, net income was $2.2 million compared to $4.2 million for the
first nine months of 1995.
Liquidity and Capital Resources
The Company's liquidity requirements have been met by funds provided by
operations and short-term borrowings under its Loan Agreement.
Net cash provided by operations for the nine months ended September 30, 1996 was
$16.9 million, an increase of $11.1 million compared with net cash provided by
operations of $5.8 million in the comparable 1995 period. The favorable
comparison to the prior-year period was due to improved cash availability from
working capital changes, primarily a $13.4 million reduction in inventory from
September 30, 1995 to September 30, 1996 due to improved manufacturing cycle
times.
Capital expenditures for various machine tools, equipment and building
improvement items totaled $8.9 million and $11.7 million during the first nine
months of 1996 and 1995, respectively. Of the $8.9 million in 1996, $1.8
million has been funded by an increase in accounts payable in the balance sheet
versus $2.1 million of the $11.7 million of capital expenditures in 1995. The
capital expenditures for both 1996 and 1995 were principally targeted at
increasing capacity and productivity to meet heightened customer demand.
The Company believes that the amounts available under the existing credit
facilities and cash flow from operations will provide adequate liquidity for the
foreseeable future.
PART II - OTHER INFORMATION
Item 5. Other Information
Effective September 12, 1996, Angus C. Littlejohn, Jr. resigned from the
Company's Board of Directors.
Item 6. Exhibits and Reports on Form 8K
(a) See Exhibit Index.
(b) No reports on form 8-K have been filed during the last quarter of the
period covered by this report.
SIGNATURE
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.
FAIRFIELD MANUFACTURING
COMPANY, INC.
Dated: November 8, 1996 By: /s/ RICHARD A. BUSH
Richard A. Bush
Vice President Finance
EXHIBIT INDEX
Exhibit No. Description
(2) (a) Articles of Merger and related Plan of Merger under
the state of Indiana of the Company, with and into CAG
dated March 31, 1995, incorporated by reference from
Exhibit 2(a) to the Company's Form 10-K as filed with
the Securities and Exchange Commission on March 22,
1995 (the "1994 Form 10-K").
(2) (b) Certificate of Ownership and Merger, merging the
Company into CAG, incorporated by reference from
Exhibit 2(b) to the 1994 Form 10-K.
(3) (a) Restated Certificate of Incorporation of the Company,
Inc. formally known as CAG, incorporated by reference
from Exhibit 3(b) to the 1994 Form 10-K.
(3) (c) By-Laws of CAG, incorporated by reference from Exhibit
3(c) to the 1994 Form 10-K.
(4) (a) Indenture, dated as of July 7, 1993, between the
Company and First Fidelity Bank, National Association,
New York, as trustee, incorporated by reference from
Exhibit 4(a) to the Company's Form 10-Q as filed with
the Securities and Exchange Commission on August 16,
1993 (the "Second Quarter 1993 Form 10-Q").
(4) (b) Supplemental Indenture No. 1, dated March 31, 1995,
between CAG as successor-in-interest to the Company
and First Fidelity Bank, National Association, as
trustee, incorporated by reference from Exhibit 4(b)
to the 1994 Form 10-K.
(9) Voting Trust Agreement
Not Applicable.
(10) (a) Loan Agreement, dated as of July 7, 1993, among the
Company, the lenders named therein and General
Electric Capital Corporation, as agent, incorporated
by reference from Exhibit 10(a) to the Second Quarter
1993 Form 10-Q.
(10) (b) Amended and Restated Warrant Agreement, dated as of
July 7, 1993, among the Company, Mitsui Nevitt Capital
Corporation and Principal Mutual Life Insurance
Company, incorporated by reference from Exhibit 10(b)
to the Second Quarter 1993 Form 10-Q.
(10) (c) Security Agreement, dated as of July 7, 1993, between
the Company and General Electric Capital Corporation,
as agent, incorporated by reference from Exhibit 10(c)
to the Second Quarter 1993 Form 10-Q.
(10) (d) Security Agreement, dated as of July 7, 1993, between
T-H Licensing, Inc. ("T-H Licensing") and General
Electric Capital Corporation, as agent, incorporated
by reference from Exhibit 10(d) to the Second Quarter
1993 Form 10-Q.
(10) (e) Stock Pledge Agreement, dated as of July 7, 1993,
between the Company and General Electric Capital
Corporation, as agent, incorporated by reference from
Exhibit 10(e) to the Second Quarter 1993 Form 10-Q.
(10) (f) Stock Pledge Agreement, dated as of July 7, 1993,
between Fairfield Holdings, Inc. ("Fairfield
Holdings") and General Electric Capital Corporation,
as agent, incorporated by reference from Exhibit 10(f)
to the Second Quarter 1993 Form 10-Q.
(10) (g) Trademark Security Agreement, dated as of July 7,
1993, between the Company and General Electric Capital
Corporation, as agent, incorporated by reference from
Exhibit 10(g) to the Second Quarter 1993 Form 10-Q.
(10) (h) Trademark Security Agreement, dated as of July 7,
1993, between T-H Licensing and General Electric
Capital Corporation, as agent, incorporated by
reference from Exhibit 10(h) to the Second Quarter
1993 Form 10-Q.
(10) (i) Patent Security Agreement, dated as of July 7, 1993,
between the Company and General Electric Capital
Corporation, as agent, incorporated by reference from
Exhibit 10(i) to the Second Quarter 1993 Form 10-Q.
(10) (j) Patent Security Agreement, dated as of July 7, 1993,
between T-H Licensing and General Electric Capital
Corporation, as agent, incorporated by reference from
Exhibit 10(j) to the Second Quarter 1993 Form 10-Q.
(10) (k) Subsidiary Guaranty, dated as of July 7, 1993, between
T-H Licensing and General Electric Capital
Corporation, as agent, incorporated by reference from
Exhibit 10(k) to the Second Quarter 1993 Form 10-Q.
(10) (l) Mortgage, Assignment of Leases, Rents and Profits,
Security Agreement and Fixture Filing, dated as of
July 7, 1993, between the Company and General Electric
Capital Corporation, as agent, incorporated by
reference from Exhibit 10(l) to the Second Quarter
1993 Form 10-Q.
(10) (m) Collection Account Agreement, dated as of July 7,
1993, among the Company and General Electric Capital
Corporation, and acknowledged by Bank One, Lafayette,
N.A., incorporated by reference from Exhibit 10(m) to
the Second Quarter 1993 Form 10-Q.
(10) (n) Used Machinery Account Agreement, dated as of July 7,
1993, among the Company and General Electric Capital
Corporation, and acknowledged by Bank One, Lafayette,
N.A., incorporated by reference from Exhibit 10(n) to
the Second Quarter 1993 Form 10-Q.
(10) (o) Quitclaim Grant of Security Interest, dated as of July
7, 1993, between the Company and General Electric
Capital Corporation, as agent, incorporated by
reference from Exhibit 10(o) to the Second Quarter
1993 Form 10-Q.
(10) (p) Supplemental Quitclaim Grant of Security Interest
(Patents only), dated as of July 7, 1993, between the
Company and General Electric Capital Corporation, as
agent, incorporated by reference from Exhibit 10(p) to
the Second Quarter 1993 Form 10-Q.
(10) (q) First Amendment to Loan Agreement, dated as of
September 30, 1994, among the Company, the lenders
named therein and General Electric Capital
Corporation, as agent, incorporated by reference from
Exhibit 10(q) to Fairfield's Form 10-Q as filed with
the Securities and Exchange Commission on November 14,
1994.
(10) (r) Second Amendment to Loan Agreement, dated as of
March 30, 1995, among the Company, the lenders named
therein and General Electric Capital Corporation, as
agent, incorporated by reference from Exhibit 10(r) to
the 1994 Form 10-K.
(10) (s) Third Amendment to Loan Agreement, dated as of March
31, 1995, among the Company, the lenders named therein
and General Electric Capital Corporation, as agent,
incorporated by reference from Exhibit 10(s) to the
1994 Form 10-K.
(10) (t) First Amendment to Mortgage Assignment of Leases,
Rents and Profits, Security Agreement and Fixture
Filing, dated as of March 31, 1995, between the
Company and General Electric Capital Corporation, as
agent, incorporated by reference from Exhibit 10(t) to
the 1994 Form 10-K.
(10) (u) Stock Pledge Agreement, dated as of March 31, 1995,
between Lancer and General Electric Capital
Corporation, as agent, incorporated by reference from
Exhibit 10(u) to the 1994 Form 10-K.
(10) (v) Amended and Restated Security Agreement, dated as of
March 31, 1995, between the Company and General
Electric Capital Corporation, as agent, incorporated
by reference from Exhibit 10(v) to the 1994 Form 10-K.
(10) (w) The Employment and Non-Competition Agreement, dated as
of January 1, 1992, between the Company and W. B.
Lechman, as amended on February 22, 1994 and December
19, 1995, incorporated by reference from Exhibit 10(w)
to the Company's Form 10-K as filed with the
Securities and Exchange Commission on March 15, 1996
(the "1995 Form 10-K").
(10) (x) The Fairfield Manufacturing Company, Inc. Equity
Participation Plan, dated August 21, 1989,
incorporated by reference from Exhibit 10(x) to the
1995 Form 10-K.
(10) (y) The Collective Bargaining Agreement, ratified October
28, 1995, between the Company and United Auto Workers'
Local 2317, incorporated by reference from Exhibit
10(y) to the 1995 Form 10-K.
(10) (z) The Tax Sharing Agreement, dated as of July 18, 1990,
between the Company and Lancer, incorporated by
reference from Exhibit 10(z) to the 1995 Form 10-K.
(10) (aa) The Fairfield Manufacturing Company, Inc. (1992)
Supplemental Executive Retirement Plan, incorporated
by reference from Exhibit 10(aa) to the 1995 Form 10-
K.
(10) (bb) Letter Agreement, dated December 29, 1989, granting
exclusive license from T-H Licensing, to the Company,
incorporated by reference from Exhibit 10(bb) to the
1995 Form 10-K.
(11) Statement re computation of per share earnings.
Not Applicable.
(15) Letter re unaudited interim financial information.
Not Applicable.
(18) Letter re change in accounting principles.
Not Applicable.
(19) Report furnished to security holders.
Not Applicable.
(22) Published report regarding matters submitted to vote
of security holders.
Not Applicable.
(23) Consents of experts and counsel.
Not Applicable.
(24) Power of attorney.
Not Applicable.
(27) Financial Data Schedule
(99) Additional exhibits.
Not Applicable.
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