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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19703
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Farrel Corporation
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(Exact name of registrant as specified in its charter)
Delaware 22-2689245
- -------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Main Street, Ansonia, Connecticut, 06401
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(Address of principal executive offices) (Zip Code)
(203) 736-5500
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(Registrant's telephone number, including area code)
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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 8, 2002
- --------------------------------------------------------------------------------
Common Stock (Voting), $.01 par value 5,228,461
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Farrel Corporation
Index
Page
----
Part I. Item 1 - Financial Information
Consolidated Balance Sheets -
September 29, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three and nine months ended September 29, 2002
and September 30, 2001 4
Consolidated Statements of Cash Flows -
Nine months ended September 29, 2002
and September 30, 2001 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15
Item 4 - Controls and Procedures 15
Part II. Other Information 16
Signatures 17
Exhibits -
Exhibit 11 - Statement re computation of per share earnings
Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
Page 2 of 19
Part I - Item 1 - Financial Information
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 29, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $8,467 $5,579
Accounts receivable, net of allowance for
doubtful accounts of $91 and $179, respectively 6,426 9,416
Inventory 14,147 10,554
Deferred income taxes 423 423
Other current assets 701 873
------- -------
Total current assets 30,164 26,845
Property, plant and equipment - net of accumulated
depreciation of $16,578 and $14,995, respectively 7,372 8,101
Deferred income taxes 827 764
Other assets 166 256
------- -------
Total Assets $38,529 $35,966
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $5,242 $4,393
Accrued expenses & taxes payable 1,104 1,482
Advances from customers 6,601 3,452
Accrued warranty costs 870 1,004
Current portion of long - term debt 729 680
------- -------
Total current liabilities 14,546 11,011
Long - term debt 546 1,019
Postretirement benefit obligation 1,059 1,076
Minimum pension liability 3,421 3,155
Commitments and contingencies -- --
------- -------
Total Liabilities 19,572 16,261
------- -------
Stockholders' Equity:
Preferred stock, par value $100, 1,000,000
shares authorized, no shares issued -- --
Common stock, par value $.01,
10,000,000 shares authorized,
6,142,106 shares issued 61 61
Paid in capital 19,295 19,295
Treasury stock, 913,645 shares at
September 29, 2002 and December 31, 2001 (2,530) (2,530)
Retained earnings 8,032 9,120
Accumulated other comprehensive loss (5,901) (6,241)
------- -------
Total Stockholders' Equity 18,957 19,705
------- -------
Total Liabilities and Stockholders' Equity $38,529 $35,966
======= =======
See Accompanying Notes to Consolidated Financial Statements
Page 3 of 19
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and share data)
-----------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Net sales $12,676 $15,847 $29,696 $39,282
Cost of sales 9,235 11,422 22,185 29,967
--------- --------- --------- ---------
Gross margin 3,441 4,425 7,511 9,315
Operating expenses:
Selling 1,074 1,030 3,042 3,592
General & administrative 1,607 1,634 5,168 4,956
Research & development 278 265 808 1,085
--------- --------- --------- ---------
Total operating expenses 2,959 2,929 9,018 9,633
--------- --------- --------- ---------
Operating income (loss) 482 1,496 (1,507) (318)
Interest income 27 36 83 124
Interest expense (24) (39) (77) (117)
Other income (expense), net 11 (63) 196 (112)
--------- --------- --------- ---------
Income (loss) before income taxes 496 1,430 (1,305) (423)
Provision (benefit) for income taxes 148 507 (426) (166)
--------- --------- --------- ---------
Net income (loss) $348 $923 $(879) $(257)
========= ========= ========= =========
Per share data:
Basic and Diluted income (loss) per
common share $0.07 $0.18 $(0.17) $(0.05)
========= ========= ========= =========
Average shares outstanding:
Basic 5,228,461 5,228,461 5,228,461 5,228,999
========= ========= ========= =========
Diluted 5,276,863 5,228,461 5,228,461 5,228,999
========= ========= ========= =========
Dividends per share $0.00 $0.00 $0.04 $0.00
========= ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements
Page 4 of 19
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
-----------------
September 29, September 30,
2002 2001
------------- -------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(879) ($257)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Gain on disposal of fixed assets -- (182)
Depreciation and amortization 1,202 1,272
Decrease in accounts receivable 3,261 7,352
(Increase) in inventory (3,169) (2,042)
Decrease (increase) in prepaid pension costs 74 (367)
Increase in accounts payable 654 160
Increase (decrease) in customer advances 3,015 (1,406)
(Decrease) in accrued expenses & taxes (418) (452)
(Decrease) in accrued warranty costs (160) (305)
Increase in deferred income taxes -- 39
Increase in other 184 210
------ ------
Total adjustments 4,643 4,279
------ ------
Net cash provided by operating activities 3,764 4,022
------ ------
Cash flows from investing activities:
Proceeds from disposal of fixed assets -- 484
Purchases of property, plant and equipment (117) (358)
------ ------
Net cash (used in) provided by investing activities (117) 126
Cash flows from financing activities:
Repayment of long-term borrowings (529) (2,264)
Bank borrowings -- 1,817
Purchase of treasury stock -- (5)
Dividends paid (209) --
------ ------
Net cash (used in) financing activities (738) (452)
Effect of foreign currency exchange rate changes on cash (21) (44)
------ ------
Net increase in cash and cash equivalents 2,888 3,652
Cash and cash equivalents - Beginning of period 5,579 2,486
------ ------
Cash and cash equivalents - End of period $8,467 $6,138
====== ======
Income taxes paid $50 $33
====== ======
Interest paid $79 $118
====== ======
See Accompanying Notes to Consolidated Financial Statements
Page 5 of 19
Farrel Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the U.S. for complete financial statements. In
the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly in accordance with accounting
principles generally accepted in the U.S., the consolidated financial position
of Farrel Corporation ("Farrel" or "the Company") as of September 29, 2002, and
the consolidated results of its operations and its cash flows for the three
and/or nine month periods ended September 29, 2002 and September 30, 2001. These
results are not necessarily indicative of results to be expected for the full
fiscal year. For further information, the statements should be read in
conjunction with the financial statements and notes thereto, included in the
Company's Form 10-K for the year ended December 31, 2001.
Note 2 - Inventory
Inventory is comprised of the following:
September 29, December 31,
2002 2001
------------- ------------
(In thousands)
Stock and raw materials ........ $6,729 $6,444
Work-in process ................ 7,418 4,110
------- -------
Total .......................... $14,147 $10,554
======= =======
Note 3 - Comprehensive Income (Loss)
The components of other comprehensive income (loss) are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands)
Net income (loss) .......................... $348 $923 $(879) $(257)
Foreign currency translation adjustments ... 211 374 641 (114)
------ ------ ------ ------
Other comprehensive income (loss) .......... $559 $1,297 $(238) $(371)
====== ====== ====== ======
Accumulated other comprehensive loss consists of the following:
September 29, December 31,
2002 2001
------------- ------------
(In thousands)
Foreign currency translation
adjustments .................. $(779) $(1,420)
Minimum pension liability .......... (5,122) (4,821)
------- -------
Accumulated other comprehensive
Loss ......................... $(5,901) $(6,241)
======= =======
Page 6 of 19
Note 4 - Segment Information
The Company's operations are considered one operating segment. The
Company's products consist of new machines, aftermarket and spare parts and
repair related services. The Company's products and services are sold to
commercial manufacturers in the plastic and rubber industries. The
manufacturing, assembly and distribution of the Company's products are
essentially the same.
Note 5 - Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
statements No. 142 (Goodwill and Other Intangible Assets) and No. 143
(Accounting for Asset Retirement Obligations). Statement No. 142 was adopted by
the Company on January 1, 2002. The Company must adopt Statement No. 143 no
later than January 2003. Statement No. 142 changed the accounting for Goodwill
and other intangible assets, such that those assets whose life is determined to
be indefinite are not subject to amortization. These assets shall be tested for
impairment at least annually, and the value will need to be written down if the
fair value is less than the carrying value. The adoption of Statement No. 142
did not have a significant effect on the Company's financial position or results
of operations. Statement No. 143 requires that a liability must be recognized
for an asset retirement obligation related to long lived tangible assets. The
liability shall be recorded at fair value. The Company anticipates the adoption
of Statement No. 143 will not have a significant effect on its financial
position or results of operations.
In August 2001, the FASB issued Statement No. 144 (Accounting for the
Impairment or Disposals of Long-lived Assets). The Company adopted Statement No.
144 on January 1, 2002. This statement requires an impairment loss to be
recognized if the carrying value of a long-lived asset (asset group) is not
recoverable and exceeds its fair value. Long-lived assets (asset group) shall be
tested for impairment whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. The adoption of this statement did
not have an effect on the Company's financial position or results of operations.
Note 6 - Foreign Currency Contracts
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Company adopted on January 1,
2001. The Statement provides a new method of accounting for derivatives and
hedges. The adoption of this Statement did not have a significant effect on the
Company's results of operations or financial position.
The Company has entered into foreign exchange forward contracts which are
designated as fair value hedges of accounts receivable and future receivables
related to customer orders in backlog. The Company, from time to time, enters
into foreign exchange forward contracts to hedge certain firm commitments that
are denominated in currencies other than the Company's operating currencies.
At September 29, 2002, all of the Company's foreign exchange forward
contracts were designated as fair value hedges. As such, there were no charges
to the statement of operations related to these contracts. At September 29,
2002, the difference between the spot rate and the contract rate for the foreign
exchange forwards was a net unrealized loss of approximately $30,000.
Note 7 - Bank Credit Arrangements
In June 2001, the Company entered into a new worldwide multi-currency
credit facility with a major U.S. bank. This facility includes a $10 million
revolving credit facility for direct borrowings and letters of credit. The
facility contains a sub-limit that caps the amount of direct borrowings the
Company can make at $5 million. The revolving credit facility, as amended in
August 2002, expires on June 15, 2004. The facility contains limits on direct
borrowings and issuance of letters of credit based upon stipulated percentages
of accounts receivable and inventory. The facility, as amended, also contains
covenants specifying minimum and/or maximum thresholds for operating results,
selected financial ratios and backlog. The backlog covenant requires that end of
month backlog will not be less than $20 million for
Page 7 of 19
more than two consecutive months. The Company did not achieve the backlog
covenant as of the end of January and February 2002; however, the bank waived
the non-compliance. There can be no assurance that the Company will achieve the
thresholds required under the covenants in the future. The agreement contains
certain restrictions on investments, borrowings and the sale of assets. Dividend
declarations or payments are allowed under this credit facility as long as there
exists under the credit facility no Event of Default (as defined in the credit
facility) or no condition which upon giving notice or lapse of time or both,
would become an Event of Default. The Company has approximately $2.7 million of
letters of credit issued under its credit facility on September 29, 2002.
In June 2001, the Company also entered into a term loan for (pound)1.4
million (approximately $2 million) as part of this credit facility. The proceeds
of this loan were used to repay an existing term loan of the same amount. The
new term loan is repayable in monthly installments of (pound)38,888
(approximately $61,000) through June 2004. The term loan has an interest rate of
LIBOR plus 2.7%. At September 29, 2002 and December 31, 2001, there were $1.3
million and $1.7 million, respectively, outstanding under the term loan.
Note 8 - Pension
At December 31, 2001, the Company was required to record a minimum pension
liability related to the pension plan of its U.K. subsidiary since under
Financial Accounting Standards Board Statement No. 87 ("FAS 87"), which
prescribes the U.S. accounting for pension plans, the plan was underfunded. At
December 31, 2001, under FAS 87 this plan was underfunded by approximately $2.6
million, as a result of which the Company was required to take a charge against
stockholders' equity of $4.2 million. At December 31, 2002, the Company will be
required to reflect the results of a FAS 87 computation as of that date in its
financial statements. Based upon the decline in the plan's assets in 2002
described below, the Company expects that an additional charge to reduce
stockholders' equity will be required at December 31, 2002, and that such charge
will be significant.
For the period January 1, 2002 to September 29, 2002, the assets in the
plan declined in value by approximately $2,400,000. The majority of 2002 loss
was incurred in June 2002 as a result of the decline in the stock market. The
trustees of the plan moved the plan assets out of equities in July and are
reviewing the long-term investment strategy of the plan. In addition, in January
2002, the U.K. subsidiary officially informed the plan trustees that effective
the end of the first quarter of 2002, the U.K. employees would no longer accrue
additional benefits under this pension plan for future service. Beginning in
2002, the U.K. subsidiary, as required under U.K. law, offered a defined
contribution plan to its employees.
Benefits paid by the pension plan were $808,000, $1,017,000 and $965,000
in 1999, 2000 and 2001, respectively. At September 29, 2002, total assets in the
plan were approximately $20.2 million. The value of the plan assets currently
significantly exceeds the historical benefits paid for the past few years. Under
laws governing the funding of U.K. defined benefit pension plans, the pension
plan of the Company's U.K. subsidiary must be 90% funded on a non-wind up basis
as computed under such funding rules by 2005 and 100% funded on a non-wind up
basis as computed under such funding rules by 2012. On November 6, 2002, the
plan was approximately 82% funded.
In July 2002, the Company, the plan trustees and the plan's actuary began
discussing the appropriate means of ensuring the long term funding of the plan,
including among other things an assessment of the U.K. subsidiary's business
prospects and cash position, the securitization of the U.K. subsidiary's assets,
a parent company guarantee, increasing contributions to the plan, or other
assurances, in order to avoid a determination by the actuary that the trustees
should wind up the plan. Under the rules of the plan, the trustees are to wind
up the plan if they receive actuarial advice that the actual and expected
Company contributions are so low as to prejudice seriously the long term
financial position of the plan. On a wind up basis the amount of underfunding of
the plan is computed differently than, and would be substantially greater than,
the amount reflected in the financial statements. Additionally, on a wind up
basis, the underfunding must be paid down within a short time period. On
November 8, 2002, the Company received a preliminary funding computation from
the plan's actuary. Based upon this funding computation the actuary is
recommending that the Company make monthly contributions to the plan of
approximately (pound)51,000 ($80,000). The actuary must finalize the funding
Page 8 of 19
computation by November 30, 2002, and the Company and the trustees of the plan
must agree to a contribution rate by February 2003. The Company is currently
contributing (pound)36,000 ($56,000) a month to the plan.
Note 9 - Subsequent Event
On November 8, 2002, the Company purchased for $650,000 certain assets of
the mixer business of Skinner Engine Company, which is currently in bankruptcy.
The assets consist primarily of inventory, tooling and fixtures and engineering
and technical data. The bankruptcy court approved the purchase.
Page 9 of 19
PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS
Safe Harbor Statements Under Private Securities Litigation Reform Act of 1995
Certain statements contained in the Company's public documents, including
this report and in particular, this "Management's Discussion and Analysis of
Financial Condition and Results of Operations", may be forward looking and may
be subject to a variety of risks and uncertainties. Various factors could cause
actual results to differ materially from these statements. These factors
include, but are not limited to, pricing pressures from competitors and/or
customers; continued economic and political uncertainty in certain of the
Company's markets; the Company's ability to maintain and increase gross margin
levels; the Company's ability to generate positive cash flow; changes in
business conditions, in general, and, in particular, in the businesses of the
Company's customers and competitors; the Company's access to adequate financing
at competitive rates and other factors which might be described from time to
time in the Company's filings with the Securities and Exchange Commission.
Results of Operations
Nine Months Ended September 29, 2002 Compared To The Nine Months Ended September
30, 2001
Net sales for the nine month period ended September 29, 2002, were $29.7
million compared to $39.3 million for the nine month period ended September 30,
2001, a decrease of $9.6 million. The decrease is primarily a result of lower
sales of new machines of approximately $8.5 million and after-market parts and
field service of approximately $0.7 million. The timing of the Company's sales,
particularly new machines sales, is highly dependent on when an order is
received, the amount of lead time from receipt of order to delivery and specific
customer requirements. The Company operates in markets which are extremely
competitive with cyclical demand. Many of the Company's customers and markets
operate at less than full capacity and certain markets remain particularly
competitive and are subject to local economic events.
Orders received for the nine month period ended September 29, 2002, were
$40.7 million compared to $34.0 million for the nine month period ended
September 30, 2001.
The Company's products are primarily supplied to manufacturers and
represent capital commitments for new plants, expansion or modernization. In the
case of major equipment orders, up to 12 months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which time economic conditions in various geographic markets of the world
impact the Company's level of order intake. Many of the Company's traditional
customers and markets are operating with excess capacity thereby reducing the
number of projects for plant expansion and modernization. The Company is
experiencing increased pricing pressures from competitors in an overall smaller
market. Until recently, the value of the Euro versus the U.S. dollar and British
pound sterling had decreased significantly since it was introduced which
resulted in increased pricing pressures. Although it would be expected that a
stronger Euro would benefit the Company from a competitive standpoint, the
Company cannot be certain that it will alleviate any of the current pricing
pressures in the market place. Demand for capital expenditures remains weak.
Further, the cyclical nature of industry demand and, therefore, the timing of
order intake may effect the Company's quarterly results of operations. The
Company's ability to maintain and increase net sales depends upon a
strengthening and stability in the Company's traditional markets and its ability
to control costs to effectively compete in its current markets. There can be no
assurance that the current level of orders will continue, that market conditions
will not worsen, or that improvements in the Company's traditional markets will
lead to increased orders for the Company's products.
Page 10 of 19
The level of backlog considered firm by management at September 29, 2002,
was $30.2 million compared to $18.1 million at December 31, 2001, and $22.5
million at September 30, 2001. Substantially all of the backlog as of September
29, 2002, is scheduled for shipment in the next 12 months.
Gross margin for the nine month period ended September 29, 2002, was $7.5
million compared to $9.3 million for the nine month period ended September 30,
2001, a decrease of $1.8 million. The decrease in gross margin is a result of
lower sales. The gross margin as a percent of sales for the nine month period
ended September 29, 2002, was 25.3% compared to 23.7% for the nine month period
ended September 30, 2001. The increase in gross margin as a percent of sales is
primarily due to (i) sales of after-market related items representing a larger
percent of total sales in 2002 versus 2001 and (ii) higher gross profit margins
on new machine sales. After-market items such a spare parts typically have
higher gross profit percents than new machine sales. The increase in gross
margin as a percent of sales for new machines in 2002 versus 2001 is due to
changes in sales mix of new machines.
Operating expenses for the nine month period ended September 29, 2002,
were $9.0 million compared to $9.6 million for the nine month period ended
September 30, 2001, a decrease of $0.6 million. The selling and research and
development components of operating expenses decreased primarily due to lower
employee compensation and related expenses. The general and administrative
component of operating expenses increased primarily due to higher pension
related costs.
Interest income for the nine month period ended September 29, 2002, was
$83,000 compared to $124,000 for the nine month period ended September 30, 2001,
a decrease of $41,000. The decrease is primarily due to lower interest rates.
Interest expense for the nine month period ended September 29, 2002, was
$77,000 compared to $117,000 for the nine month period ended September 30, 2001,
a decrease of $40,000. The decrease is due to lower borrowings and lower
interest rates.
Other income, net for the nine month period ended September 29, 2002, was
$196,000 compared to other expense, net of $112,000 for the nine month period
ended September 30, 2001. Other income for the period ended September 29, 2002
includes approximately $167,000 received by the Company as a result of the
demutualization of an insurance provider used by the Company.
The Company provides for income taxes at the statutory rates in effect in
each tax jurisdictions in which income is earned or losses generated, adjusted
for permanent differences in determining income for financial reporting and
income tax purposes. The effective income tax rate was 32.6% for the nine month
period ended September 29, 2002, compared to 39.2% for the nine month period
ended September 29, 2001. The effective tax rate varies among periods due to the
change in the proportion and amount of income and losses generated in different
taxing jurisdictions.
Three Months Ended September 29, 2002 Compared to The Three Months Ended
September 30, 2001
Net sales for the three months ended September 29, 2002, were $12.7
million compared to $15.8 million for the three month period ended September 30,
2001, a decrease of $3.2 million. The decrease is primarily a result of lower
sales of new machines of $3.4 million and in-house repair services of $0.4
million, offset to some extent by increased sales of after-market parts and
field service.
Orders received for the three month period ended September 29, 2002, were
$11.3 million compared to $10.9 million for the three month period ended
September 30, 2001.
The Company's sales, orders and backlog levels varied when comparing the
two quarters due to market conditions and the nature of the industry in which
the Company operates as more fully discussed in the results of operations for
the nine month period on page 10.
Gross margin for the three month period ended September 29, 2002, was $3.4
million compared to $4.4 million for the three month period ended September 30,
2001, a decrease of $1.0 million. The
Page 11 of 19
decrease in gross margin is a result of lower sales. The gross margin as a
percent of sales for the three month period ended September 29, 2002, was 27.1%
compared to 27.9% for the three month period ended September 30, 2001. The
decrease in the gross margin as a percent of sales is due to changes in sales
mix.
Operating expenses for the three month period ended September 29, 2002,
were $3.0 million compared to $2.9 million for the three month period ended
September 30, 2001.
Interest income for the three month period ended September 29, 2002, was
$27,000 compared to $36,000 for the three month period ended September 30, 2001,
a decrease of $9,000. The decrease is primarily due to lower interest rates.
Interest expense for the three month periods ended September 29, 2002, was
$24,000 compared to $39,000 for the three month period ended September 30, 2001,
a decrease of $15,000. The decrease is primarily due to lower borrowings and
lower interest rates.
Other income, net for the three month period ended September 29, 2002, was
$11,000 compared to other expense, net of $63,000 for the three month period
ended September 30, 2001. Other expense, net in 2001 included the write off of
deferred debt financing costs.
The Company provides for income taxes at the statutory rates in effect in
each tax jurisdiction in which income is earned or losses are generated,
adjusted for permanent differences in determining income for financial reporting
and income tax purposes. The effective income tax rate was 29.8% for the three
month periods ended September 29, 2002, compared to 35.5% for the three months
ended September 30, 2001. The effective tax rate varies among periods due to the
change in the proportion and amount of income and losses generated in different
tax jurisdictions.
Material Contingencies
Pursuant to a settlement agreement entered into in 1995 between the
Company and Black & Decker Corporation ("Black & Decker"), Black & Decker agreed
to assume full responsibility for the investigation and remediation of any
pre-May 12, 1986 environmental contamination at the Company's Ansonia and former
Derby, Connecticut facilities, as required by the Connecticut Department of
Environmental Protection ("DEP"). Black & Decker has conducted a preliminary
environmental assessment of the facilities. On the basis of the preliminary data
now available there is no reason to believe that any activities which might be
required as a result of the findings of the assessment will have a material
effect upon the capital expenditures, results of operations or the competitive
position of the Company.
Liquidity and Capital Resources; Capital Expenditures
Working capital and the working capital ratio at September 29, 2002 were
$15.6 million and 2.1 to 1, respectively, compared to $15.8 million and 2.4 to 1
at December 31, 2001, respectively. During the nine months ended September 29,
2002, the Company paid a dividend of $0.04 per share.
Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, the timing of recording such sales may cause the
balances in accounts receivable and/or inventory to fluctuate dramatically
between quarters and may result in significant fluctuations in cash provided by
operations. Historically, the Company has not experienced significant problems
regarding the collection of accounts receivable. The Company also generally has
financed its operations with cash generated by operations, progress payments
from customers and borrowings under its bank credit facilities. Management
anticipates that its cash balances, operating cash flows and available credit
line will be adequate to fund anticipated capital commitments and working
capital requirements for at least the next twelve months. The Company made
capital expenditures of $117,000 and $358,000 during the nine month periods
ended September 29, 2002 and September 30, 2001, respectively.
Page 12 of 19
On November 8, 2002, the Company purchased for $650,000 certain assets of
the mixer business of Skinner Engine Company, which is currently in bankruptcy.
The assets consist primarily of inventory, tooling and fixtures and engineering
and technical data. The bankruptcy court approved the purchase.
In June 2001, the Company entered into a new worldwide multi-currency
credit facility with a major U.S. bank. This facility includes a $10 million
revolving credit facility for direct borrowings and letters of credit. The
facility contains a sub-limit that caps the amount of direct borrowings the
Company can make at $5 million. The revolving credit facility, as amended in
August 2002, expires on June 15, 2004. The facility contains limits on direct
borrowings and issuances of letters of credit based upon stipulated percentages
of accounts receivable and inventory. The facility, as amended, also contains
covenants specifying minimum and/or maximum thresholds for operating results,
selected financial ratios and backlog. The backlog covenant requires that end of
month backlog will not be less than $20 million for more than two consecutive
months. The Company did not achieve the backlog covenant as of the end of
January and February 2002; however, the bank waived the non-compliance. There
can be no assurance that the Company will achieve the required thresholds in the
future. The agreement contains certain restrictions on investments, borrowings
and the sale of assets. Dividend declarations or payments are allowed under this
credit facility as long as there exists under the credit facility no Event of
Default (as defined in the credit facility) or no condition which, upon giving
of notice or lapse of time or both, would become an Event of Default. The
Company has approximately $2.7 million of letters of credit issued under its
credit facility on September 29, 2002.
In June 2001, the Company also entered into a term loan for (pound)1.4
million (approximately $2 million) as part of this credit facility. The proceeds
of this loan were used to repay an existing term loan of the same amount. The
new term loan is repayable in monthly installments of (pound)38,888
(approximately $61,000) through October 2004. The term loan has an interest rate
of LIBOR plus 2.7%. At September 29, 2002 and December 31, 2001, there were $1.3
million and $1.7 million, respectively, outstanding under the term loan.
At December 31, 2001, the Company was required to record a minimum pension
liability related to the pension plan of its U.K. subsidiary since under
Financial Accounting Standards Board Statement No. 87 ("FAS 87"), which
prescribes the U.S. accounting for pension plans, the plan was underfunded. At
December 31, 2001, under FAS 87 this plan was underfunded by approximately $2.6
million, as a result of which the Company was required to take a charge against
stockholders' equity of $4.2 million. At December 31, 2002, the Company will be
required to reflect the results of a FAS 87 computation as of that date in its
financial statements. Based upon the decline in the plan's assets in 2002
described below, the Company expects that an additional charge to reduce
stockholders' equity will be required at December 31, 2002, and that such charge
will be significant.
For the period January 1, 2002 to September 29, 2002, the assets in the
plan declined in value by approximately $2,400,000. The majority of 2002 loss
was incurred in June 2002 as a result of the decline in the stock market. The
trustees of the plan moved the plan assets out of equities in July and are
reviewing the long-term investment strategy of the plan. In addition, in January
2002, the U.K. subsidiary officially informed the plan trustees that effective
the end of the first quarter of 2002, the U.K. employees would no longer accrue
additional benefits under this pension plan for future service. Beginning in
2002, the U.K. subsidiary, as required under U.K. law, offered a defined
contribution plan to its employees.
Benefits paid by the pension plan were $808,000, $1,017,000 and $965,000
in 1999, 2000 and 2001, respectively. At September 29, 2002, total assets in the
plan were approximately $20.2 million. The value of the plan assets currently
significantly exceeds the historical benefits paid for the past few years. Under
laws governing the funding of U.K. defined benefit pension plans, the pension
plan of the Company's U.K. subsidiary must be 90% funded on a non-wind up basis
as computed under such funding rules by 2005 and 100% funded on a non-wind up
basis as computed under such funding rules by 2012. On November 6, 2002, the
plan was approximately 82% funded.
In July 2002, the Company, the plan trustees and the plan's actuary began
discussing the appropriate means of ensuring the long term funding of the plan,
including among other things an assessment of the U.K. subsidiary's business
prospects and cash position, the securitization of the U.K.
Page 13 of 19
subsidiary's assets, a parent company guarantee, increasing contributions to the
plan, or other assurances, in order to avoid a determination by the actuary that
the trustees should wind up the plan. Under the rules of the plan, the trustees
are to wind up the plan if they receive actuarial advice that the actual and
expected Company contributions are so low as to prejudice seriously the long
term financial position of the plan. On a wind up basis the amount of
underfunding of the plan is computed differently than, and would be
substantially greater than, the amount reflected in the financial statements.
Additionally, on a wind up basis, the underfunding must be paid down within a
short time period. On November 8, 2002, the Company received a preliminary
funding computation from the plan's actuary. Based upon this funding computation
the actuary is recommending that the Company make monthly contributions to the
plan of approximately (pound)51,000 ($80,000). The actuary must finalize the
funding computation by November 30, 2002, and the Company and the trustees of
the plan must agree to a contribution rate by February 2003. The Company is
currently contributing (pound)36,000 ($56,000) a month to the plan.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
statements No. 142 (Goodwill and Other Intangible Assets) and No. 143
(Accounting for Asset Retirement Obligations). Statement No. 142 was adopted by
the Company on January 1, 2002. The Company must adopt statement No. 143 no
later than January 2003. Statement No. 142 changed the accounting for Goodwill
and other intangible assets, such that those assets whose life is determined to
be indefinite are not subject to amortization. These assets shall be tested for
impairment at least annually, and the value will need to be written down if the
fair value is less than the carrying value. The adoption of Statement No. 142
did not have a significant effect on the Company's financial position or results
of operations. Statement No. 143 requires that a liability must be recognized
for an asset retirement obligation related to long lived tangible assets. The
liability shall be recorded at fair value. The Company anticipates the adoption
of Statement No. 143 will not have a significant effect on its financial
position or results of operations.
In August 2001, the FASB issued statement No. 144 (Accounting for the
Impairment or Disposals of Long-lived Assets). The Company adopted statement No.
144 on January 1, 2002. This statement requires an impairment loss to be
recognized if the carrying value of a long-lived asset (asset group) is not
recoverable and exceeds its fair value. Long-lived assets (asset group) shall be
tested for impairment whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. The adoption of this statement did
not have an effect on the Company's financial position or results of operations.
Page 14 of 19
Part 1 - Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency
and interest rates. The Company manufactures many of its products and components
in the United Kingdom and purchases many components in foreign markets.
Approximately 50% of the Company's revenue is generated from foreign markets.
The Company manages its risk of foreign currency rate changes by maintaining
foreign currency bank accounts in currencies in which it regularly transacts
business and the use of foreign exchange forward contracts. The Company does not
enter into derivative contracts for trading or speculative purposes.
The Company's cash equivalents and short-term investments and its
outstanding debt bear variable interest rates. The rates are adjusted to market
conditions. Changes in the market rate effects interest earned and paid by the
Company. The Company does not use derivative instruments to offset the exposure
to changes in interest rates. Changes in the interest rates related to these
items are not expected to have a material impact on the Company's results of
operations.
Part 1 - Item 4 - Controls and Procedures
Within 90 days prior to the filing of this quarterly report, an evaluation
was performed under the supervision and with the participation of the Company's
management, including the CEO and CFO, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures were effective as of September
29, 2002. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation.
Page 15 of 19
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS None
ITEM 2 - CHANGES IN SECURITIES N/A
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N/A
ITEM 5 - OTHER INFORMATION N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 11 (Regulation S-K) Computation of Earnings Per Share. Attached
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 Attached
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 Attached
b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the registrant during the periods
covered by this report.
Page 16 of 19
SIGNATURES
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.
FARREL CORPORATION
------------------
REGISTRANT
DATE: 11/11/02 /s/ Rolf K Liebergesell
-------------------- -----------------------
ROLF K. LIEBERGESELL
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND CHAIRMAN OF THE BOARD
DATE 11/11/02 /s/ Walter C Lazarcheck
-------------------- -----------------------
WALTER C. LAZARCHECK
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
Page 17 of 19
CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF
1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rolf K Liebergesell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farrel Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Rolf K Liebergesell
- ------------------------------------------
Rolf K Liebergesell
Chairman of the Board of Directors
and Chief Executive Officer
November 11, 2002
Page 18 of 19
CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF
1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Walter C Lazarcheck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farrel Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Walter C Lazarcheck
- -----------------------------------------
Walter C Lazarcheck
Vice President
and Chief Financial Officer
November 11, 2002
Page 19 of 19