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, 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 June 30, 2000 is as follows:
8,831,000 shares of Common Stock
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FAIRFIELD MANUFACTURING COMPANY, INC.
Form 10-Q
June 30, 2000
Part I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements:
Consolidated Balance Sheets, June 30, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statements of Operations for the three and
six months ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statement of Stockholder's Equity
(Deficit) for the six months ended June 30, 2000 5
(Unaudited)
Consolidated Statements of Cash Flows for the six
months ended June 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
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FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2000 1999
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $22,239 $13,639
Trade receivables, less allowance of $700 20,933 19,664
Inventory 24,270 22,507
Other current assets 1,701 3,348
Total current assets 69,143 59,158
Property, plant and equipment, net of
accumulated depreciation of $107,791
and $103,562 in 2000 and
1999, respectively 65,609 70,426
Other assets:
Excess of investment over net
assets acquired, less
accumulated amortization of
$17,492 and $16,689 in
2000 and 1999, respectively 46,867 47,670
Deferred financing costs, less
accumulated amortization
of $698 and $1,226 in 2000 and
1999, respectively 2,752 3,024
Total other assets 49,619 50,694
Total assets $184,371 $180,278
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Accounts payable $10,173 $8,801
Due to parent 1,748 750
Accrued liabilities 22,960 24,384
Deferred income taxes 1,367 1,367
Total current liabilities 36,248 35,302
Accrued retirement costs 15,537 16,526
Deferred income taxes 6,670 7,393
Other long-term liabilities 1,150 2,300
Long-term debt 110,000 110,000
Commitments and contingencies
11-1/4% Cumulative exchangeable
preferred stock 48,329 48,234
Stockholder's equity (deficit):
Common stock: par value $.01 per
share, 10,000,000 shares authorized,
8,831,000 and 8,691,000 issued and
outstanding in 2000 and 1999, respectively 88 87
Additional paid-in capital 48,409 46,250
Accumulated deficit (82,060) (85,814)
Total stockholder's deficit (33,563) (39,477)
Total liabilities and stockholder's deficit $184,371 $180,278
The accompanying notes are an integral part of these consolidated financial
statements.
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FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30
(In thousands)
(Unaudited)
Three months Six months ended
ended June 30,
June 30,
2000 1999 2000 1999
Net sales $43,205 $56,966 $85,581 $117,365
Cost of sales 36,374 45,022 71,286 92,363
Selling, general and
administrative expenses 3,212 4,259 6,952 8,598
Operating income 3,619 7,685 7,343 16,404
Interest expense, net 2,470 3,325 4,928 6,151
Other (income) expense, net (6,498) (998) (9,486) (997)
Income before income taxes 7,647 5,358 11,901 11,250
Provision for income taxes 3,366 2,417 5,239 5,074
Net income before extraordinary item 4,281 2,941 6,662 6,176
Loss on early extinguishment of debt,
net of taxes -- 1,401 -- 1,401
Net income 4,281 1,540 6,662 4,775
Preferred stock dividends and
discount accretion (1,454) (1,454) (2,908) (2,908)
Net income available to common
stockholder $2,827 86 3,754 1,867
The accompanying notes are an integral part of these consolidated financial
statements.
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FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Six Months Ended June 30, 2000
(In thousands)
(Unaudited)
Additional Stock-
Common Paid-in Accumulated Holder's
Stock Capital Deficit Equity (Deficit)
Balance, December 31, 1999 $87 $46,250 $(85,814) $(39,477)
Capital contribution 1 2,159 -- 2,160
Preferred stock dividends -- -- (2,812) (2,812)
Preferred stock discount -- -- (96) (96)
accretion
Net income -- -- 6,662 6,662
Balance, June 30, 2000 $88 $48,409 $(82,060) $(33,563)
The accompanying notes are an integral part of these consolidated financial
statements.
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FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
(In thousands)
(Unaudited)
2000 1999
Operating Activities:
Net income $6,662 $4,775
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 6,683 6,784
Deferred income taxes (723) (659)
Accrued retirement costs (989) (119)
Other long-term liabilities (1,150) --
Loss on early extinguishment of debt -- 1,401
Changes in working capital:
Trade receivables (1,269) 4,565
Inventory (1,763) 3,209
Other current assets 1,647 (583)
Accounts payable 3,229 (1,416)
Due to parent 998 (1,051)
Accrued liabilities (1,425) (1,852)
Net cash provided by operating activities 11,900 15,054
Investing Activities:
Additions to property, plant and equipment, net (2,648) (5,655)
Net cash used by investing activities (2,648) (5,655)
Financing Activities:
Capital contributions, principally under tax
sharing agreement 2,160 2,170
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 -- (1,428)
Payment of preferred stock dividends (2,812) (2,812)
Net cash used by financing activities (652) (6,470)
Cash and Cash Equivalents:
Increase in cash and cash equivalents 8,600 2,929
Beginning of period 13,639 2,822
End of period $22,239 $5,751
Supplemental Disclosures:
Cash paid for:
Interest $5,138 $9,335
Federal taxes to parent under tax sharing
agreement (Note 2) 3,810 5,120
Non-cash investing and financing activities:
Additions to property, plant and equipment
included in accounts payable at end of period $462 $233
Preferred stock dividends accrued 1,677 1,677
The accompanying notes are an integral part of these consolidated financial
statements.
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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 June 30, 2000 and the results of operations
and cash flows for the six months ended June 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 $2,160 and $2,170 during the six months ended June 30, 2000
and 1999, respectively. The Company issued 140,000 and 132,000 shares of
common stock to Lancer during the six months ended June 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:
June 30, 2000 December 31, 1999
Raw materials $2,609 $2,421
Work in process 10,662 9,102
Finished goods 11,024 10,984
24,295 22,507
Less: excess of FIFO cost over LIFO cost 25 --
$24,270 $22,507
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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 damages of the fire, including the costs of clean-up and
business interruption, were covered by current 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, of which $8.5 million was reimbursed by the insurance
carrier through the second quarter of 2000. The business interruption
portion of the claim was $16.5 million, of which $15.0 million was
reimbursed by the insurance carrier through 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.
Subsequent to the end of the second 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 relates to final settlement of the business interruption portion of
the claim and $0.4 million relates 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.
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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Development
The Company finalized the claim with its insurance carrier relating to the
June 12, 1999 fire - see Note 4 to the financial statements.
Results of Operations
Net sales for the three months ended June 30, 2000 were $43.2 million, a
decrease of $13.8 million, or 24.2%, from the same period in 1999. For the
six months ended June 30, 2000, the Company's net sales decreased by $31.8
million, or 27.1%, to $85.6 million compared to $117.4 million for the six
months ended June 30, 1999. The decrease in sales for the three and six
months ended June 30, 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. The Company has also
experienced pricing pressure due to the depreciation of the Euro and other
foreign currencies against the dollar along with a softening in mining and
agriculture.
Cost of sales for the three months ended June 30, 2000 decreased by $8.6
million, to $36.4 million, compared to $45.0 million, for the same period
in 1999. For the first half of 2000, cost of sales were $71.3 million, or
83.3% of net sales, compared to $92.4 million, or 78.7% of net sales, for
the first half of 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 lower sales volume, unfavorable product
mix, and pricing pressure.
Selling, general and administrative expenses ("SG&A"), including goodwill
amortization, were $3.2 million, or 7.4% of net sales, for the three months
ended June 30, 2000, compared to $4.3 million, or 7.5% of net sales for the
same period in 1999. For the six months ended June 30, 2000, SG&A
decreased by $1.6 million, or 19.1%, to $7.0 million compared to $8.6
million for the six months ended June 30, 1999. The reduction in SG&A for
the six months ended June 30, 2000, reflects a lower employee bonus accrual
and the reversal of approximately $1.2 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 June 30, 2000 decreased
52.9% to $3.6 million, or 8.4% of net sales, compared to $7.7 million, or
13.5% of net sales, for the comparable 1999 period. For the six months
ended June 30, 2000, the Company's earnings from operations were $7.3
million, or 8.6% of net sales, compared to $16.4 million, or 14.0% of net
sales for the first six months of 1999.
Interest expense, net in the second quarter of 2000 decreased 25.7% to $2.5
million compared to $3.3 million for the comparable 1999 period. For the
first half of 2000 and 1999, interest expense, net was $4.9 million and
$6.2 million, respectively. This decrease reflects lower debt balances in
the first half of 2000 versus the first half of 1999, lower average
interest rates due to the refinancing in 1999 and a higher level of short-
term investments.
The Company recorded $6.5 million of business interruption insurance
recovery for the three months ended June 30, 2000 and $1.0 million for the
comparable 1999 period. The Company recorded $9.5 million and $1.0 million
of other income pertaining to business interruption insurance recovery
through June 30, 2000 and June 30, 1999, respectively, see Note 4 to the
financial statements.
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The Company had income before income taxes of $7.6 million in the second
quarter of 2000 compared to $5.4 million in the second quarter of 1999.
For the six months ended June 30, 2000, the Company's income before income
taxes was $11.9 million compared to $11.3 million for the comparable 1999
period.
Net income available to common stockholder was $2.8 million for the second
quarter of 2000 compared to net income available to common stockholder of
$0.1 million for the same period in 1999, which included a $1.4 million
loss on early extinguishment of debt. For the first six months, net income
available to common stockholder was $3.8 million and $1.9 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 six months ended June 30, 2000 was
$11.9 million, a decrease of $3.2 million compared with the same period in
1999 when net cash provided by operations was $15.1 million. This decrease
reflects lower sales volume, lower accounts receivable turnover net of
accounts payable, and lower inventory turnover due to the lower sales
volume. Working capital less cash at June 30, 2000 increased to $10.7
million from $10.2 million at December 31, 1999.
Capital expenditures for manufacturing equipment, machine tools, and
building improvements totaled $2.6 million and $5.7 million during the
first six months of 2000 and 1999, respectively, exclusive of $0.5 million
and $0.2 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.
Net cash used by financing activities was $0.7 million during the second
quarter of 2000 compared to net cash used by financing activities of $6.5
million in the second 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 repayments of long term debt. 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.
At June 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
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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 June 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.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(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 August 14, 2000.
FAIRFIELD MANUFACTURING COMPANY, INC.
By: /s/ Richard A.Bush
Richard A. Bush
Vice President and Chief Financial Officer
