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: March 31, 2000
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 47909
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (765) 772-4000
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 March 31, 2000 is as follows:
8,728,000 shares of Common Stock
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
Form 10-Q
March 31, 2000
Part I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements:
Consolidated Balance Sheets, March 31, 2000
(Unaudited) and
December 31, 1999 3
Consolidated Statements of Operations for the three
months ended
March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statement of Stockholder's Equity
(Deficit) for the three
months ended March 31, 2000 (Unaudited) 5
Consolidated Statements of Cash Flows for the three
months ended
March 31, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and
Results of Operations 9-10
Item 3 - Quantitative and Qualitative Disclosures About 10
Market Risk
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K. 11
SIGNATURE 11
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2000 1999
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $18,912 13,639
Trade receivables, less allowance
of $700 21,016 19,664
Inventory 24,675 22,507
Other current assets 171 3,348
Total current assets 64,774 59,158
Property, plant and equipment, net of
accumulated
depreciation of $106,366 and
$103,562 in 2000 and
1999, respectively 68,104 70,426
Other assets:
Excess of investment over net
assets acquired, less
accumulated amortization of
$17,090 and $16,689 in
2000 and 1999, respectively 47,269 47,670
Deferred financing costs, less
accumulated amortization
of $562 and $1,226 in 2000 and
1999, respectively 2,888 3,024
Total other assets 50,157 50,694
Total assets $183,035 $180,278
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $10,771 $8,801
Due to parent 368 750
Accrued liabilities 26,283 24,384
Deferred income taxes 1,367 1,367
Total current liabilities 38,789 35,302
Accrued retirement costs 14,885 16,526
Deferred income taxes 7,135 7,393
Other long-term liabilities 1,725 2,300
Long-term debt 110,000 110,000
Commitments and contingencies
11-1/4% Cumulative exchangeable preferred
stock 48,281 48,234
Stockholder's equity (deficit):
Common stock: par value $.01 per
share, 10,000,000
shares authorized, 8,728,000 and
8,691,000 issued
and outstanding in 2000 and 1999,
respectively 87 87
Additional paid-in capital 47,020 46,250
Accumulated deficit (84,887) (85,814)
Total stockholder's deficit (37,780) (39,477)
Total liabilities and stockholder's
deficit $183,035 $180,278
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31
(In thousands)
(Unaudited)
2000 1999
Net sales $42,376 $60,399
Cost of sales 34,912 47,341
Selling, general and administrative
expenses 3,740 4,339
Operating income 3,724 8,719
Interest expense, net 2,458 2,825
Other (income) expense, net (2,988) 2
Income before income taxes 4,254 5,892
Provision for income taxes 1,873 2,657
Net income $2,381 $3,235
Preferred stock dividends and discount
accretion (1,454) (1,454)
Net income available to common
stockholder $927 $1,781
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Three Months Ended March 31, 2000
(In thousands)
(Unaudited)
Stock-
Common Additional Holder's
Stock Paid-in Accumulated Equity
Capital Deficit (Deficit)
Balance, December 31, 1999 $87 $46,250 $(85,814) $(39,477)
Capital contribution -- 770 -- 770
Preferred stock dividends -- -- (1,407) (1,407)
Preferred stock discount
accretion -- -- (47) (47)
Net income -- -- 2,381 2,381
Balance, March 31, 2000 $87 $47,020 $(84,887) $(37,780)
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31
(In thousands)
(Unaudited)
2000 1999
Operating Activities:
Net income $2,381 $3,235
Adjustments to reconcile net income to net
cash provided
(used) by operating activities:
Depreciation and amortization 3,341 3,358
Deferred income taxes (258) (345)
Accrued retirement costs (1,641) (1,021)
Other long-term liabilities (575) --
Changes in working capital:
Trade receivables (1,352) 467
Inventory (2,168) (761)
Other current assets 3,177 (8)
Accounts payable 3,735 1,467
Due to parent (382) 844
Accrued liabilities 3,305 (629)
Net cash provided by operating activities 9,563 6,607
Investing Activities:
Additions to property, plant and equipment, net (2,247) (3,568)
Net cash used by investing activities (2,247) (3,568)
Financing Activities:
Capital contributions, principally under tax
sharing agreement 770 1,140
Repayment of long-term debt -- (2,000)
Net change in revolving credit facility -- (1,000)
Payment of preferred stock dividends (2,813) (2,813)
Net cash used by financing activities (2,043) (4,673)
Cash and Cash Equivalents:
Increase (decrease) in cash and cash
equivalents 5,273 (1,634)
Beginning of period 13,639 2,822
End of period $18,912 $1,188
Supplemental Disclosures:
Cash paid for:
Interest $51 $4,677
Federal taxes to parent under tax sharing
agreement (Note 2) 1,520 1,640
Non-cash investing and financing activities:
Additions to property, plant and equipment
included in
accounts payable at end of period $554 $399
Preferred stock dividends accrued 270 270
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
Notes to Consolidated Financial Statements
(In thousands, except share data)
(Unaudited)
1. Interim Financial Information
The accompanying consolidated financial statements have been prepared by
Fairfield Manufacturing Company, Inc. and subsidiaries (the "Company"),
without audit, pursuant to the rules and regulations of the Securities
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to enable a reasonable understanding of the
information presented. These consolidated financial statements should be
read in conjunction with the audited financial statements and the notes
thereto for the year ended December 31, 1999.
In the opinion of management the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's financial position at March 31, 2000 and the results of
operations and cash flows for the three months ended March 31, 2000 and
1999. However, interim financial results are not necessarily indicative of
the results for a full year. Certain prior year information has been
reclassified to conform to current year presentation.
2. Parent Company of Registrant
The Company is wholly-owned by Lancer Industries Inc. ("Lancer").
The Company is included in the consolidated federal income tax return of
Lancer. The Company and Lancer have entered into a Tax Sharing Agreement
under which the Company is required to calculate its current federal income
tax liability on a separate return basis and pay that amount to Lancer. To
the extent such tax liability subsequently reduces Lancer's available tax
benefits, Lancer is required to reimburse the Company in an amount
equivalent to 50% of such reduction by making a capital contribution to the
Company. Lancer made capital contributions to the Company pursuant to this
agreement of $770 and $1,140 during the three months ended March 31, 2000
and 1999, respectively. The Company issued 37,000 and 74,000 shares of
common stock to Lancer during the three months ended March 31, 2000 and
1999, respectively, in recognition of these capital contributions.
3. Inventory
Inventory, which is valued at the lower of last-in, first-out (LIFO) cost
or market, consists of the following:
March 31, 2000 December 31, 1999
Raw materials $2,201 $2,421
Work in process 9,967 9,102
Finished goods 12,520 10,984
24,688 22,507
Less: excess of FIFO cost over LIFO cost 13 --
$24,675 $22,507
<PAGE>
4. Unusual Item
In June 1999, the Company experienced a fire at its manufacturing plant in
Lafayette, Indiana. The fire damaged a portion of the facility and some of
its equipment. As of early January 2000, the Company had completed the
restoration of its physical capabilities to the same level as before the
fire. The Company believes that the damages of the fire, including the
costs of clean-up and business interruption, are covered by current
insurance policies. The Company continues the process of accumulating
costs and preparing an insurance claim as it relates to the clean-up and
business interruption associated with this fire.
From the date of the fire through the end of March 2000, direct costs
associated with the clean-up and repair portion of the claim were $8.4
million, of which $7.8 million has been reimbursed by the insurance
carrier.
Relative to the business interruption portion of the claim, the Company's
insurance carrier had made a preliminary estimate of $10.0 million for the
period from the date of the fire through December 31, 1999. The insurance
carrier has increased this estimate of business interruption losses to
$13.0 million through the first quarter of 2000.
Prior to March 31, 2000, the insurance carrier had funded the preliminary
estimate of $10.0 million. Of the $10.0 million funded, the Company had
determined its minimum probable recovery for the period ended December 31,
1999 was $7.0 million and had recorded that amount as other income through
that date. The Company recognized an additional $3.0 million of business
interruption income during the first quarter of 2000 as, based on new
information, it increased its estimate of the minimum probable recovery
from the date of the fire through March 31, 2000 to $10.0 million.
Subsequent to the end of the first quarter, the insurance carrier funded an
additional $3.0 million based on the revised estimate. The claim is
subject to additional audit, review and negotiation, and final resolution
is not anticipated until mid 2000.
5. Accounting Standards
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," was issued by the Securities and Exchange Commission (SEC)
staff in December 1999. SAB No. 101 summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to revenue
recognition in the financial statements. This issue is currently under
study by the Company and no estimate of its possible effect is presently
available. The Company will apply the accounting and disclosures described
in SAB No. 101 not later than the second quarter of fiscal 2000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net sales for the three months ended March 31, 2000 were $42.4 million, a
decrease of $18.0 million, or 29.8%, from the same period in 1999. The
decrease in sales for the three months ended March 31, 2000 was due to
lower sales volume as the Company believes customers have remained
concerned regarding the Company's restoration of its physical operations to
pre-fire capabilities. The Company has completely restored its plant and
operations to pre-fire capabilities and continues to work with customers
to regain their business as well as identify new markets for growth.
Cost of sales for the three months ended March 31, 2000 decreased by $12.4
million, to $34.9 million, compared to $47.3 million, for the same period
in 1999. Gross margin was 17.6% for the first quarter of 2000 compared to
21.6% in the first quarter of 1999. The decrease in cost of sales compared
to the same period in 1999 was primarily a result of decreased sales volume
during 2000 while the decrease in gross margin is driven by a decrease in
productivity due to lower sales volume as well as unfavorable product
pricing and product mix.
Selling, general and administrative expenses ("SG&A"), including goodwill
amortization, were $3.7 million, or 8.8% of net sales, for the three months
ended March 31, 2000, compared to $4.3 million, or 7.2% of net sales, for
the same period in 1999. The reduction in SG&A for the first quarter of
2000 reflects the reversal of approximately $0.6 million related to the
Incentive Plan for Senior Management as discussed in Note 8 to the
Company's 1999 consolidated financial statements.
Earnings from operations for the three months ended March 31, 2000
decreased 57.3% to $3.7 million, or 8.8% of net sales, compared to $8.7
million, or 14.4% of net sales, for the comparable 1999 period. The
reduction in earnings is directly attributed to the lower sales volume and
production inefficiencies as a result of this lower volume.
Interest expense in the first quarter of 2000 decreased to $2.5 million
from $2.8 million for the first quarter of 1999. This decrease reflects
lower average interest rates in the first quarter of 2000 versus the first
quarter of 1999 and a higher level of short-term investments.
Other (income) expense, net includes $3.0 million from business
interruption income recorded in the first quarter of 2000.
Liquidity and Capital Resources
The Company uses funds provided by operations and short-term borrowings
under its Credit Facility, as described in Note 9 to the Company's 1999
consolidated financial statements, to meet liquidity requirements. Net
cash provided by operations for the three months ended March 31, 2000 was
$9.6 million, an increase of $3.0 million compared with the same period in
1999 when net cash provided by operations was $6.6 million. Working
capital less cash at March 31, 2000 decreased to $7.1 million from $10.2
million at December 31, 1999 reflecting the receipt of additional insurance
proceeds and a greater investment in inventory and receivables with respect
to sales.
Capital expenditures for manufacturing equipment, machine tools, and
building improvements totaled $2.2 million and $3.6 million during the
first three months of 2000 and 1999, respectively, exclusive of $0.6
million and $0.4 million in 2000 and 1999, respectively, which was funded
by accounts payable.
Capital expenditures for both 2000 and 1999 have been primarily for
increased capacity and productivity to gain efficiencies in the
manufacturing process.
<PAGE>
Net cash used by financing activities was $2.0 million during the first
quarter of 2000 compared to net cash used by financing activities of $4.7
million in the first quarter of 1999. Strong operating cash flows and
capital contributions during 2000 and 1999 were used to fund the preferred
stock dividend, revolver pay down and repayment of long-term debt.
Management expects to use cash flows from operations to fund the Company's
planned capital requirements for the remainder of 2000, including capital
expenditures, interest on long-term debt and preferred stock dividends.
The Company's Credit Facilities, as discussed in Note 9 to the Company's
1999 consolidated financial statements, may also be utilized to meet
additional liquidity needs.
Impact of the Year 2000
The Company began the process of assessing the magnitude of the year 2000
on its primary computer systems in 1997. Additionally, the Company began
gathering data, identifying, and developing remediation plans for effected
non-IT systems and equipment.
In conjunction with the internal assessment, the Company also began
evaluation and monitoring key suppliers and customers in regard to their
respective Y2K preparedness and compliance.
As of the date of this filing, the Company has not experienced any internal
problems related to Y2K compliance issues nor has the Company experienced
any disturbances or interruption in its ability to transact business with
its suppliers or customers. The Company, however, continues to monitor its
systems, suppliers, and customers for any unanticipated issues that have
yet to surface.
Information Concerning Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements that are not simply statements of
historical fact (such as when the Company describes what it believes,
expects or anticipates will occur, and other similar statements), may not
be correct, even though the Company currently believes they are
reasonable. The Company does not guarantee that the transactions and
events described in this report will happen as described (or that they
will happen at all). The Company's actual result could differ materially
from those set forth in the forward-looking statements. This report
should be read completely and with the understanding that actual future
results may be materially different from what the Company expects. The
Company will not update these forward-looking statements, even though its
situation will change in the future. Some of the factors that might cause
such a difference include those discussed in the section entitled
"Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Information Concerning Forward-Looking Statements"
contained in the Company's Form 10-K for the year ended December 31, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not own any interest in derivative financial or commodity
instruments as of March 31, 2000. The effect of reasonably possible market
movements in interest rates is not expected to have a material impact on the
Company's future cash flows or earnings.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K
(a) Exhibit No. Description
(27) Financial Data Schedule
(b) No reports 8-K were filed during 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 on May 15, 2000.
FAIRFIELD MANUFACTURING COMPANY, INC.
By: /s/ Richard A.Bush
Richard A. Bush
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FAIRFIELD
2000 FIRST QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FROM 10-Q FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 18,912
<SECURITIES> 0
<RECEIVABLES> 21,716
<ALLOWANCES> (700)
<INVENTORY> 24,675
<CURRENT-ASSETS> 64,774
<PP&E> 174,470
<DEPRECIATION> 106,366
<TOTAL-ASSETS> 183,035
<CURRENT-LIABILITIES> 38,789
<BONDS> 110,000
48,281
0
<COMMON> 87
<OTHER-SE> (37,867)
<TOTAL-LIABILITY-AND-EQUITY> 183,035
<SALES> 42,376
<TOTAL-REVENUES> 42,376
<CGS> 34,912
<TOTAL-COSTS> 38,652
<OTHER-EXPENSES> (2,988)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,458
<INCOME-PRETAX> 4,254
<INCOME-TAX> 1,873
<INCOME-CONTINUING> 2,381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,381
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
