Newly private Farrel Corp. has a new business model under which its management believes it can make money from machinery sold into China and elsewhere.
Farrel shareholders voted Feb. 22 in favor of a management-led bid to take the company into private ownership. The bid was supported by an undisclosed private equity house, and shareholders will receive $2.75 per share, valuing the company at about $17 million.
Shortly after closing the deal, Alberto Shaio, president and chief executive officer, said the company is making ``very nice profits'' following a rapid turnaround since he took over in 2004.
According to Shaio, Farrel has had strong sales growth and an even more robust increase in profit during that time period. The company reported sales of about $65 million last year, and he said he is confident this year will be Farrel's best ever, with sales approaching $75 million.
The firm makes mixers, single- and twin-screw extruders, compounding machinery, pelletizers, gear pumps and mills. About 60 percent of its sales comes from rubber machinery and the rest from plastics.
The CEO said Farrel's order books are full, with the backlog from order to delivery running about 10-11 months. ``What used to be six to 10 months is now eight to 11 months,'' he said.
Shaio blamed a significant portion of this delay on the suppliers of components such as bearings, motors and gearboxes. He said those components ``are absolutely ridiculous in terms of delivery times.''
Certain products, like forgings, also are on long deliveries, and Shaio blamed the delays on the boom in oil industry spending. Because oil prices are relatively high, he said, oil companies are ordering a lot of new equipment, and that has reduced the spare capacity available for other industries.
New way of business
Shaio said Farrel is in the process of delivering 17 internal mixers to customers in China and is happy with the profit it is making on each unit.
The early deliveries in this series all were assembled in China from a complete kit of parts imported from Farrel's main workshops.
However, Shaio said the key to the company's new business model is that each of the latter machines supplied uses just six components made by Farrel. Those parts are sent from the United Kingdom, with all the other parts sourced and assembled locally in China.
Shaio said the new approach is to focus purely on the six main hard-faced components that make up a mixer. Farrel will keep the design and manufacture of these components in-house, and the company is investing heavily in hard-facing equipment and in developing hard-facing materials and technologies.
Using Chinese companies such as Qingdao Mesnac Co. Ltd. of Qingdao, Farrel will work with these partners to approve the supply chain and then ship them key components for each order.
Each partner chooses how much of the component manufacturing and assembly work it will do in-house and how much it will outsource, Shaio said.
That approach is proving successful, he said, though he would not disclose numbers. He added that the company isn't able to deliver high-quality Farrel machines at the same prices as Chinese competitors.
Shaio declined to name the two main investors in Farrel, but said they are experienced financial businessmen who run a substantial private equity fund. For this acquisition, however, the investment is being made on a personal basis rather than as part of their fund.
Shaio said the investors are assisting in a management buyout, not acquiring Farrel outright. Shaio owns 15 percent of the company; the other five top managers in the business share another 15 percent.
The investors own the remaining 70 percent of the firm.
