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, 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 September 30, 2000 is as follows:
8,951,000 shares of Common Stock
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
Form 10-Q
September 30, 2000
Part I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements:
Consolidated Balance Sheets, September 30, 2000
(Unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 2000 and 1999 4
(Unaudited)
Consolidated Statement of Stockholder's Equity
(Deficit) for the nine months ended September 30, 2000 5
(Unaudited)
Consolidated Statements of Cash Flows for the nine
months ended September 30, 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 - 11
Item 3 - Quantitative and Qualitative Disclosures About 11
Market Risk
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K. 12
SIGNATURE 12
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2000 1999
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $25,676 $13,639
Trade receivables, less allowance
of $700 19,418 19,664
Inventory 27,160 22,507
Other current assets 54 3,348
Total current assets 72,308 59,158
Property, plant and equipment, net of
accumulated
depreciation of $110,595 and
$103,562 in 2000 and
1999, respectively 63,870 70,426
Other assets:
Excess of investment over net
assets acquired, less
accumulated amortization of
$17,894 and $16,689 in
2000 and 1999, respectively 46,465 47,670
Deferred financing costs, less
accumulated amortization
of $834 and $1,226 in 2000 and
1999, respectively 2,616 3,024
Total other assets 49,081 50,694
Total assets $185,259 $180,278
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Accounts payable $11,966 $8,801
Due to parent 738 750
Accrued liabilities 24,476 24,384
Deferred income taxes 1,367 1,367
Total current liabilities 38,547 35,302
Accrued retirement costs 16,186 16,526
Deferred income taxes 6,676 7,393
Other long-term liabilities 575 2,300
Long-term debt 110,000 110,000
Commitments and contingencies
11-1/4% Cumulative exchangeable
preferred stock 48,377 48,234
Stockholder's equity (deficit):
Common stock: par value $.01 per
share, 10,000,000
shares authorized, 8,951,000 and
8,691,000 issued
and outstanding in 2000 and 1999,
respectively 90 87
Additional paid-in capital 48,377 46,250
Accumulated deficit (83,569) (85,814)
Total stockholder's deficit (35,102) (39,477)
Total liabilities and stockholder's
deficit $185,259 $180,278
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE 3>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30
(In thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
Net sales $36,290 $49,076 $121,871 $166,441
Cost of sales 30,847 39,052 102,132 131,414
Selling, general and
administrative expenses 3,183 4,132 10,135 12,731
Operating income 2,260 5,892 9,604 22,296
Interest expense, net 2,360 2,580 7,289 8,732
Other (income) expense, net (1) (3,289) (9,487) (4,287)
Income (loss) before income taxes (99) 6,601 11,802 17,851
Provision for income taxes (44) 2,977 5,195 8,051
Net income (loss) before
extraordinary item (55) 3,624 6,607 9,800
Loss on early extinguishment of debt,
net of taxes -- -- -- 1,401
Net income (loss) (55) 3,624 6,607 8,399
Preferred stock dividends and
discount accretion (1,454) (1,454) (4,362) (4,362)
Net income (loss) available to
common stockholder $(1,509) 2,170 2,245 4,037
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 Nine Months Ended September 30, 2000
(In thousands)
(Unaudited)
Addition 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 3 2,127 -- 2,130
Preferred stock dividends -- -- (4,219) (4,219)
Preferred stock discount -- -- (143) (143)
accretion
Net income -- -- 6,607 6,607
Balance, September 30, 2000 $90 $48,377 $(83,569) $ (35,102)
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
(In thousands)
(Unaudited)
2000 1999
Operating Activities:
Net income $6,607 $8,399
Adjustments to reconcile net income to net
cash provided
(used) by operating activities:
Depreciation and amortization 10,025 10,126
Deferred income taxes (717) (1,046)
Accrued retirement costs (340) 729
Other long term liabilities (1,725) --
Loss on early extinguishment of debt -- 1,401
Changes in working capital:
Trade receivables 246 6,034
Inventory (4,653) 3,785
Other current assets 3,294 (4,568)
Accounts payable 5,010 817
Due to parent (12) 507
Accrued liabilities 1,498 626
Net cash provided by operating activities 19,233 26,810
Investing Activities:
Additions to property, plant and equipment, net (3,701) (7,472)
Proceeds from involuntary conversion -- 3,190
Net cash used by investing activities (3,701) (4,282)
Financing Activities:
Capital contributions, principally under tax
sharing agreement 2,130 3,440
Proceeds of long-term debt -- 97,750
Repayment of long-term debt -- (101,150)
Net change in revolving credit facility -- (1,000)
Premium paid on early retirement of bonds -- (1,427)
Payment of preferred stock dividends (5,625) (5,625)
Net cash used by financing activities (3,495) (8,012)
Cash and Cash Equivalents:
Increase in cash and cash equivalents 12,037 14,516
Beginning of year 13,639 2,822
End of period $25,676 $17,338
Supplemental Disclosures:
Cash paid for:
Interest $5,335 $9,586
Federal taxes to parent under tax sharing
agreement (Note 2) 4,780 6,390
Non-cash investing and financing activities:
Additions to property, plant and equipment
included in
accounts payable at end of period $474 $945
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 and
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 September 30, 2000 and the results of
operations and cash flows for the nine months ended September 30, 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 $2,130 and $3,440 during the nine months ended September 30,
2000 and 1999, respectively. The Company issued 260,000 and 190,000 shares
of common stock to Lancer during the nine months ended September 30, 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:
September 30, 2000 December 31, 1999
Raw materials $2,923 $2,421
Work in process 11,747 9,102
Finished goods 12,529 10,984
27,199 22,507
Less: excess of FIFO cost over
LIFO cost (39) --
$27,160 $22,507
<PAGE>
4. Other Income Non-recurring 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 damages of the fire, including the costs of clean-up and
business interruption, were covered by insurance policies and, during the
quarter ended June 30, 2000, the Company and its insurance carrier agreed
to a final settlement of the resulting claims.
Direct costs associated with the clean-up and repair portion of the claim
were $8.9 million. The business interruption portion of the claim was
$16.5 million. During the third quarter, the insurance carrier paid the
Company $1.9 million, representing all remaining amounts due under the
final settlement of the insurance claim. Of the $1.9 million funded, $1.5
million related to final settlement of the business interruption portion of
the claim and $0.4 million related to final settlement of the clean-up and
repair portion of the claim. The $1.5 million related to business
interruption was included in other income during the second quarter of
2000.
Prior to final settlement with its insurance carrier, the Company had
determined its minimum probable recovery for business interruption at the
end of each quarter and had recorded those amounts as other income. The
amounts recorded by quarter are as follows: June 30, 1999 - $1.0 million,
September 30, 1999 - $3.3 million, December 31, 1999 - $2.7 million and
March 31, 2000 - $3.0 million. The Company recognized $6.5 million of
business interruption insurance recovery during the second quarter of 2000
in conjunction with the final settlement of business interruption losses.
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 fourth quarter of fiscal 2000 as required
by SAB No. 101B.
6. Subsequent Events
On October 3, 2000, the Company, through its wholly owned subsidiary T-H
Licensing Inc., acquired 75.77% of Atlas Gears Limited ("Atlas") for $4.5
million. The consummation of the business combination will be accounted
for using the purchase method.
Atlas, headquartered in Mumbai with manufacturing facilities located in
Belgaum, India, manufactures custom gears primarily for the agricultural,
off-road, and light commercial vehicle markets in India.
In connection with the Atlas acquisition, the Company amended its credit
agreement with its senior lenders, among other things, to obtain the
consent of the lenders to the acquisition. In addition, the Company's
senior lenders have guaranteed approximately $6.0 million of available
loans. Pursuant to the amendment to the credit agreement, the Company is
obligated to repay any amounts paid by its lenders in respect of this
guaranty.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Development
On October 3, 2000, the Company, through its wholly owned subsidiary T-H
Licensing Inc., acquired 75.77% of Atlas Gears Limited ("Atlas") for $4.5
million. The consummation of the business combination will be accounted
for using the purchase method.
Atlas, headquartered in Mumbai with manufacturing facilities located in
Belgaum, India, manufactures custom gears primarily for the agricultural,
off-road, and light commercial vehicle markets in India.
In connection with the Atlas acquisition, the Company amended its credit
agreement with its senior lenders, among other things, to obtain the
consent of the lenders to the acquisition. In addition, the Company's
senior lenders have guaranteed approximately $6.0 million of available
loans. Pursuant to the amendment to the credit agreement, the Company is
obligated to repay any amounts paid by its lenders in respect of this
guaranty.
Results of Operations
Net sales for the three months ended September 30, 2000 were $36.3 million,
a decrease of $12.8 million, or 26.1%, from the same period in 1999. Net
sales for the nine months ended September 30, 2000 were $121.9 million
compared to $166.4 million for the nine months ended September 30, 1999, a
decrease of $44.5 million. The decrease in sales for the three and nine
months ended September 30, 2000 was due to lower sales volume as the
Company believes customers have remained cautious 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. The Company has also
experienced pricing pressure due to the depreciation of the Euro and other
foreign currencies against the dollar along with softening in its mining
and agriculture equipment markets.
Cost of sales for the three months ended September 30, 2000 decreased by
$8.3 million, to $30.8 million, compared to $39.1 million, for the same
period in 1999. For the nine months ended September 30, 2000, cost of
sales were $102.1 million or 83.8% of net sales, compared to $131.4
million, or 79.0% of net sales, for the nine months ended September 30,
1999. The decrease in cost of sales resulted primarily from the decrease
in sales volume whereas the increase in cost of sales as a percentage of
sales resulted from production inefficiencies due to the lower sales
volume, unfavorable product mix, and pricing pressure.
Selling, general and administrative expenses ("SG&A"), including goodwill
amortization, were $3.2 million, or 8.8% of net sales, for the three months
ended September 30, 2000, compared to $4.1 million, or 8.4% of net sales
for the same period in 1999. For the nine months ended September 30, 2000,
SG&A decreased by $2.6 million, or 20.4%, to $10.1 million compared to
$12.7 million for the nine months ended September 30, 1999. The reduction
in SG&A for the nine months ended September 30, 2000, reflects a lower
employee incentive compensation provision and the reversal of approximately
$1.7 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 September 30, 2000
decreased 61.6% to $2.3 million, or 6.2% of net sales, compared to $5.9
million, or 12.0% of net sales, for the comparable 1999 period. For the
nine months ended September 30, 2000, the Company's earnings from
operations were $9.6 million, or 7.9% of net sales, compared to $22.3
million, or 13.4% of net sales for the first nine months of 1999.
<PAGE>
Interest expense, net in the third quarter of 2000 decreased to $2.4
million compared to $2.6 million for the third quarter of 1999. For the
first nine months of 2000 and 1999, interest expense was $7.3 million and
$8.7 million, respectively. This decrease reflects lower debt, lower
average interest rates and a higher level of short-term investments in the
nine months of 2000 versus the nine months of 1999.
The Company recorded $9.5 million and $4.3 million of other income
pertaining to business interruption insurance recovery through September
30, 2000 and September 30, 1999, respectively. Of the $4.3 million
recorded through September 30, 1999, $3.3 million was recorded in the third
quarter. The Company recorded the entire $9.5 million in the first and
second quarters of 2000.
The Company had a net loss before income taxes of $0.1 million in the third
quarter of 2000 compared to net income of $6.6 million in the third quarter
of 1999. For the nine months ended September 30, 2000, the Company's
income before income taxes was $11.8 million compared to $17.9 million for
the comparable 1999 period.
The Company's net loss was $0.1 million for the third quarter of 2000
compared to net income of $3.6 million for the third quarter of 1999. For
the first nine months of 2000, net income was $6.6 million compared to $8.4
million for the first nine months of 1999.
Net loss available to common stockholder was $1.5 million for the third
quarter of 2000 compared to net income available to common stockholder of
$2.2 million for the same period in 1999. For the first nine months net
income available to common stockholder was $2.2 million and $4.0 million in
2000 and 1999, respectively.
Liquidity and Capital Resources
As described in Note 9 to the Company's 1999 consolidated financial
statements, the Company uses funds provided by operations and short-term
borrowings under its Credit Facility to meet liquidity requirements. Net
cash provided by operations for the nine months ended September 30, 2000
was $19.2 million, a decrease of $7.6 million compared with the same period
in 1999 when net cash provided by operations was $26.8 million. This
decrease reflects lower sales volume, lower profitability, lower accounts
receivable turnover net of accounts payable, and lower inventory turnover
due to the lower sales volume. The lower inventory turnover is also
attributed to an increase in the investment in work in process and finished
goods inventory to capture short lead time opportunities. Working capital
less cash at September 30, 2000 decreased to $8.1 million from $10.2
million at December 31, 1999.
Capital expenditures for manufacturing equipment, machine tools, and
building improvements totaled $3.7 million and $7.5 million during the
first nine months of 2000 and 1999, respectively, exclusive of $0.5 million
and $0.9 million in 2000 and 1999, respectively, which was funded by
accounts payable. Capital expenditures for 1999 were primarily for
increased capacity and productivity to gain efficiencies in the
manufacturing process while capital expenditures in 2000 have been
primarily for replacement equipment.
Net cash used by financing activities was $3.5 million through the third
quarter of 2000 compared to net cash used by financing activities of $8.0
million through the third quarter of 1999. Strong operating cash flows and
capital contributions during 2000 and 1999 were used to fund the preferred
stock dividend and revolver pay down. On May 19, 1999, the Company issued
$100 million of 9-5/8% Senior Subordinated Notes due 2008. The proceeds of
the offering were used by the Company as follows; 1) approximately $68.6
million was used to redeem the 11-3/8% Senior Subordinated Notes due 2001;
2) approximately $27.7 million was used to reduce outstanding amounts under
its Credit Facility and; 3) approximately $3.7 million was used to pay the
fees and expenses of the offering.
<PAGE>
At September 30, 2000, the Company has $19.6 million available under its
$20.0 million Revolving Credit Facility since letters of credit of
approximately $0.4 million have been issued under this facility. The
Company also has the option to increase the Revolving Credit Facility an
additional $20.0 million in $5.0 million increments, subject to certain
conditions.
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 above and in Note 9 to the
Company's 1999 consolidated financial statements, may also be utilized to
meet additional liquidity needs.
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 results 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 September 30, 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 8-K
(a) Exhibit No. Description
(10.1) First Amendment, dated as of October 6, 2000, an
Amended and Restated Loan Agreement, dated as of
December 30, 1999, between Fairfield Manufacturing
Company, Inc., the financial institutions party as
lenders and General Electric Capital Corporation as
administrative agent.
(27.1) 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 November 14, 2000.
FAIRFIELD MANUFACTURING COMPANY, INC.
By: /s/ Richard A.Bush
Richard A. Bush
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
