-1-
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: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File 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 June 30, 1996 is as follows:
7,752,000 shares of Common Stock
FAIRFIELD MANUFACTURING COMPANY, INC.
Form 10-Q
June 30, 1996
PART I - FINANCIAL INFORMATION
Page
Number
Item 1 - Financial Statements:
Consolidated Balance Sheets, December 31, 1995 and June 30, 3
1996 (Unaudited)
Consolidated Statements of Operations for the three and six 4
months ended June 30, 1995 and 1996 (Unaudited)
Consolidated Statements of Cash Flows for the six months 5
ended June 30, 1995 and 1996 (Unaudited)
Consolidated Statement of Stockholder's Equity for the six 6
months ended June 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, June 30, 1996
1995
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,324 $ 3,342
Trade receivables, less allowance of $600 24,328 23,730
in 1995 and 1996
Inventories 24,912 19,729
Other 897 640
Total current assets 54,461 47,441
Property, plant and equipment, net 71,056 71,674
Other assets:
Excess of investment over net assets 54,098 53,298
acquired, less accumulated
amortization of $10,261 in 1995 and
11,061 in 1996
Deferred financing costs, less 3,540 3,198
accumulated amortization of $1,685
in 1995 and $2,027 in 1996
Total other assets 57,638 56,496
Total assets $183,155 $175,611
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,000 $ 2,500
Due to parent 807 394
Accounts payable 11,150 13,447
Accrued liabilities 17,524 16,111
Deferred income taxes 4,700 4,700
Total current liabilities 37,181 37,152
Accrued retirement costs 14,758 14,758
Deferred income taxes 11,258 10,225
Long-term debt 110,000 100,500
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
7,752,000 in 1996
Paid in capital 35,209 36,261
Retained deficit (25,328) (23,363)
Total stockholder's equity 9,958 12,976
Total liabilities and stockholder's $183,155 $175,611
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 Six months ended June
June 30, 30,
1995 1996 1995 1996
Net sales $ 47,059 $ 49,585 $ 90,022 $100,925
Cost of sales 71,598 82,513
36,998 40,838
Gross profit 10,061 8,747 18,424 18,412
Selling, general and 3,403 4,161 6,631 7,799
administrative
expenses
Amortization of excess of
investment over net 410 400 820 800
assets acquired
Operating income 6,248 4,186 10,973 9,813
Interest expense, net 3,044 2,804 6,128 5,718
Amortization of deferred 157 186 335 342
financing costs
Other expense, net
(30) 12 37 33
Income before income 3,077 1,184 4,473 3,720
taxes
Provision for income taxes
1,383 772 2,013 1,755
Net income $
$1,694 412 $2,460 $1,965
Income per share data:
Net income per common share
$0.26 $0.05 $0.51 $0.26
Weighted average 6,568,159 7,701,560 4,802,065 7,688,918
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 six For the six
months ended months ended
June 30, 1995 June 30, 1996
Cash flows from operating activities:
Net income $ 2,460 $ 1,965
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 6,269 6,662
Decrease in deferred income taxes (563) (1,033)
Changes in assets and liabilities:
(Increase) decrease in trade receivables (5,954) 598
Decrease in receivable from parent 1,435 -
(Increase) decrease in inventories (6,427) 5,183
(Increase) decrease in other assets (813) 257
(Decrease) in payable due to parent - (413)
Increase in accounts payable 3,792 2,183
Increase (decrease) in accrued 2,225 (2,146)
liabilities
Increase in accrued retirement costs 613 733
Net cash provided by operating 3,037 13,989
activities
Cash flows from investing activities:
Additions to plant and equipment (6,407) (6,024)
Cash flows from financing activities:
Proceeds from additional capital 1,434 1,053
contribution
Proceeds from issuance/borrowings of 6,000 5,000
long-term debt
Payment of debt issuance costs (159) -
Payment of long-term debt (5,000) (15,000)
Net cash provided by (used in) 2,275 (8,947)
financing activities
Net (decrease) in cash and cash (1,095) (982)
equivalents
Cash and cash equivalents:
Beginning of period 1,450 4,324
End of period $ 355 $ 3,342
Supplemental schedule of cash flow
information:
Cash paid for:
Interest $ 6,195 $ 5,921
Taxes to parent $ 200 $ 1,700
Non cash investing activities:
Additions to plant and equipment
included in accounts payable at
June 30, 1995 and 1996 of $3,864
and $114, 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 - 1,053 - 1,053
Net Income 1,965 1,965
- -
Balance, June 30, 1996 $36,261 $(23,363) $12,976
$ 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 six months ended June 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, June 30, 1996
1995
Raw materials $ 4,039 $ 4,302
Work in process 10,978 7,681
Finished goods 10,350 8,480
25,367 20,463
Less: excess of FIFO cost over LIFO (455) (734)
cost
$ 24,912 $ 19,729
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 six months ended
June 30, 1995 was 6,568,159 and 4,802,065, respectively, and for the three and
six months ended June 30, 1996 was 7,701,560 and 7,688,918, respectively. The
increase in the weighted average common shares outstanding is due to the Company
issuing 764,720 additional shares of its common stock on September 30, 1995,
25,000 shares on March 31, 1995, and 51,000 shares on June 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 Credit Agreement (as amended, the "Credit 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 June 30, 1996 were $49.6
million, an increase of $2.5 million, or 5.4%, compared to the three months
ended June 30, 1995. For the six months ended June 30, 1996, the Company's net
sales were $100.9 million, an increase of $10.9 million, or 12.1%, compared to
the same period in 1995. Increased sales volumes 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 June 30,
1996, $76.8 million, down from $136.8 million one year earlier. Due to capacity
constraints in 1995, only $103.1 million of the $136.8 million was shipped by
December 31, 1995. Capital investments made during 1996 and 1995 have
significantly improved production capacity.
The Company's gross profit in the second quarter of 1996 was $8.7 million, or
17.6% of net sales, compared to $10.1 million, or 21.4% of net sales, for the
second quarter of 1995. For the first half of 1996, gross profit was $18.4, or
18.2% of net sales, compared to $18.4, or 20.5% of net sales for the comparable
period in 1995. The decreased profit percentage resulted primarily from slight
increases in material and manufacturing costs.
Selling, general and administrative expense ("SG&A") was $4.2 million, or 8.4%
of net sales, for the three months ended June 30, 1996, compared to $3.4
million, or 7.2% of net sales, in the comparable 1995 period. For the six
months ended June 30, 1996, the Company's SG&A was $7.8 million, or 7.7% of net
sales versus $6.6 million, or 7.4% of net sales for the first half of 1994. The
increase in SG&A expense from 1995 for both the three and six month periods
results principally from the higher sales volume and costs related to new
product introduction 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 June 30, 1996 were $4.2
million, or 8.4% of net sales compared to $6.2 million, or 13.3% of net sales
for the comparable 1995 period. For the six months ended June 30, 1996, the
Company's earnings from operations were $9.8 million, or 9.7% of net sales,
compared to $11.0 million, or 12.2% of net sales for the first six months of
1995.
Interest expense in the second quarters of 1996 and 1995 was $2.8 million and
$3.0 million, respectively. For the first half of 1996 and 1995, interest
expense was $5.7 million and $6.1 million, respectively. Interest expense
decreased predominantly due to a lower average debt balance during the three and
six months ended June 30, 1996 versus the comparable 1995 periods.
The Company's income before income taxes was $1.2 million for the second quarter
of 1996, compared to $3.1 million for the comparable 1995 period. For the six
months ended June 30, 1996, the Company's income before income taxes was $3.7
million compared to $4.5 million for the comparable 1995 period.
The Company's net income was $0.4 million for the second quarter of 1996 as
compared to $1.7 million for the comparable 1995 period. For the first six
months of 1996, net income was $2.0 million compared to $2.5 million for the
first six 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 Credit Agreement.
Net cash provided by operations for the six months ended June 30, 1996 was $14.0
million, an increase of $11.0 million compared with net cash provided by
operations of $3.0 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 an $11.6 million reduction in inventory due
to improved manufacturing cycle times.
Capital expenditures for various machine tools, equipment and building
improvement items totaled $6.1 million and $10.3 million during the first six
months of 1996 and 1995, respectively. Of the $6.1 million in 1996, $.1 million
has been funded by an increase in accounts payable in the balance sheet versus
$3.9 million of the $10.3 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 May 28, 1996, Kenneth A. Burns was appointed to the position of
President and Chief Operating Officer for the Company. Mr. Burns had held the
position of Vice President of Operations since January 1, 1996. Prior to
January 1, 1996, Mr. Burns held executive positions with various manufacturing
companies.
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 the report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIRFIELD MANUFACTURING
COMPANY, INC.
Dated: August 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 Fairfield Manufacturing
Company, Inc. 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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This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
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