65
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended January 2, 2000
Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State or other jurisdiction of I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(703) 478-5800
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 ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Title of Class January 2, 2000
Class A Common Stock, $0.10 Par Value 22,270,316
Class B Common Stock, $0.10 Par Value 2,621,652
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of January 2, 2000
(Unaudited) and June 30, 1999 3
Consolidated Statements of Earnings (Unaudited) for the Three
and Six Months ended January 2, 2000 and December 27, 1998 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Six Months ended January 2, 2000 and December 27, 1998 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Iem 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
All references in this Quarterly Report on Form 10-Q to the terms ``we,''
``our,'' ``us,'' the ``Company'' and ``Fairchild'' refer to The Fairchild
Corporation and its subsidiaries. All references to ``fiscal'' in connection
with a year shall mean the 12 months ended June 30.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 2, 2000 (Unaudited) and June 30, 1999
(In thousands)
ASSETS
January 2, June 30,
2000 1999
CURRENT ASSETS:
Cash and cash equivalents, $57,409 and $ 83,812 $ 54,860
$15,752 restricted
Short-term investments 7,824 13,094
Accounts receivable-trade, less allowances 115,165 130,121
of $4,501 and $6,442
Inventories:
Finished goods 134,503 137,807
Work-in-process 31,355 38,316
Raw materials 10,676 14,116
176,534 190,239
Prepaid expenses and other current assets 75,024 73,926
Total Current Assets 458,359 462,240
Property, plant and equipment, net of
accumulated
depreciation of $115,868 and $103,556 184,914 184,065
Net assets held for sale 19,969 21,245
Cost in excess of net assets acquired
(goodwill), less accumulated amortization of
$46,415 and $40,307
424,916 447,722
Investments and advances, affiliated 12,567 31,791
companies
Prepaid pension assets 64,103 63,958
Deferred loan costs 14,228 13,077
Real estate investment 96,043 83,791
Long-term investments 27,129 15,844
Other assets 4,895 5,053
TOTAL ASSETS $ 1,307,123 $ 1,328,786
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 2, 2000 (Unaudited) and June 30, 1999
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
January 2, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
CURRENT LIABILITIES:
Bank notes payable and current maturities of $ 28,096 $ 28,860
long-term debt
Accounts payable 37,762 72,271
Accrued liabilities:
Salaries, wages and commissions 39,455 43,095
Employee benefit plan costs 4,413 5,204
Insurance 9,867 14,216
Interest 7,021 7,637
Other accrued liabilities 64,593 50,984
125,349 121,136
Net current liabilites of discontinued
operations 7,181 10,999
Total Current Liabilities 198,388 233,266
LONG-TERM LIABILITES:
Long-term debt, less current maturities 496,084 495,283
Other long-term liabilities 24,579 25,904
Retiree health care liabilities 45,928 44,813
Noncurrent income taxes 124,566 121,961
Minority interest in subsidiaries 58 59
TOTAL LIABILITIES 889,603 921,286
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value;
authorized 40,000 shares, 29,923 (29,754
in June) shares issued and 22,270 (22,259
in June) shares outstanding
2,983 2,975
Class B common stock, $0.10 par value;
authorized 20,000 shares, 2,622 shares
issued and outstanding
262 262
Paid-in capital 230,712 229,038
Retained earnings 263,060 252,030
Cumulative other comprehensive income (3,946) (2,703)
Treasury stock, at cost, 7,653 (7,496 in (75,551) (74,102)
June) shares of Class A common stock
TOTAL STOCKHOLDERS' EQUITY 417,520 407,500
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,307,123 $1,328,786
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended January 2, 2000 and December 27, 1998
(In thousands, except per share data)
Three Six Months Ended
Months
Ended
01/02/00 12/27/98 01/02/00 12/27/98
REVENUE:
Net sales $152,244 $151,181 $316,753 $299,720
Other income, net
2,782 350 7,610 769
155,026 151,531 324,363 300,489
COSTS AND EXPENSES:
Cost of goods sold
114,372 133,119 235,734 246,986
Selling, general & administrative
35,377 27,272 67,205 55,446
Amortization of goodwill
3,012 1,360 6,108 2,638
Restructuring --
3,040 - 6,057
155,801 161,751 315,104 305,070
OPERATING INCOME (LOSS)
(775) (10,220) 9,259 (4,581)
Interest expense
12,119 7,770 24,328 15,206
Interest income
(822) (476) (1,557) (1,059)
Net interest expense
11,297 7,294 22,771 14,147
Investment income
1,998 (1,027) 2,878 834
Nonrecurring gain
- - 28,003 -
Earnings (loss) from continuing (10,074) (17,894)
operations before taxes (18,541) 17,369
Income tax (provision) benefit
3,866 6,724 (5,266) 6,433
Equity in earnings (loss) of (872)
affiliates, net 652 (1,073) 1,689
Minority interest, net
- 2,338 - 2,135
Earnings (loss) from continuing
operations (7,080) (8,827) 11,030 (7,637)
Gain (loss) on disposal of
discontinued operations, net - (9,180) - (9,180)
NET EARNINGS (LOSS) $(7,080) $(18,007) $ 11,030 $(16,817)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments (1,434) 2,306 (3,082) 7,552
Unrealized holding changes on
securities arising during the period 6,845 27,633 1,839 (2,755)
Other comprehensive income (loss)
5,411 29,939 (1,243) 4,797
COMPREHENSIVE INCOME (LOSS) $(1,669) $ 11,932 $ 9,787 $ (12,020)
BASIC AND DILUTED EARNINGS PER SHARE:
Earnings (loss) from continuing $ (0.28) $ (0.40) $ 0.44 $ (0.35)
operations
Gain (loss) on disposal of
discontinued operations, net - (0.42) - (0.41)
NET EARNINGS $ (0.28) $ (0.82) $ 0.44 $ (0.76)
Other comprehensive income (loss),
net of tax:
Foreign currency translation $ (0.06) $ 0.11 $ (0.12) $ 0.34
adjustments
Unrealized holding changes on
securities arising during the period 0.28 1.26 0.07 (0.12)
Other comprehensive income (loss)
0.22 1.37 (0.05) 0.22
COMPREHENSIVE INCOME (LOSS) $ (0.06) $ 0.55 $ 0.39 $ (0.54)
Weighted average shares outstanding:
Basic 24,889 21,872 24,882 22,129
Diluted 24,889 21,872 24,977 22,129
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six (6) Months Ended January 2, 2000 and December 27, 1998
(In thousands)
For the
Six Months
Ended
01/02/00 12/27/98
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 11,030 $(16,817)
Depreciation and amortization 19,738 11,476
Accretion of discount on long-term
liabilities 1,923 2,578
Deferred loan fee amortization 577 388
Net gain on divestiture of investment in
affiliate (25,747) -
Net gain on divestiture of subsidiary (2,256) -
Gain on sale of investments (2,851) -
Undistributed loss (earnings) of
affiliates, net 1,651 (777)
Minority interest - (2,135)
Change in assets and liabilities (50,810) (6,808)
Non-cash charges and working capital
changes of discontinued operations (12,049) (8,559)
Net cash (used for) operating activities (58,794) (20,654)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds received from (used for)
investments 1,351 (15,648)
Purchase of property, plant and equipment (16,575) (13,574)
Net proceeds from divestiture of
subsidiaries 61,906 60,397
Net proceeds from sale of affiliate
investment 43,103 -
Changes in net assets held for sale 4,419 3,335
Real estate investment (11,087) (16,163)
Equity investment in affiliates (2,441) -
Other, net - 238
Investing activities of discontinued
operations 7,100 (223)
Net cash provided by investing activities 87,776 18,362
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 161,846 55,777
Debt repayments (161,178) (69,375)
Issuance of Class A common stock 168 182
Purchase of treasury stock (622) (22,101)
Financing activities of discontinued
operations - 121
Net cash (used for) provided by financing
activities 214 (35,396)
Effect of exchange rate changes on cash (244) 4,150
Net change in cash and cash equivalents 28,952 (33,538)
Cash and cash equivalents, beginning of
the year 54,860 49,601
Cash and cash equivalents, end of the $ 83,812 $ 16,063
period
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
1.FINANCIAL STATEMENTS
The consolidated balance sheet as of January 2, 2000 and the consolidated
statements of earnings and cash flows for the six months ended January 2, 2000
and December 27, 1998 have been prepared by us, without audit. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at January 2, 2000, and for all periods presented, have been made.
The balance sheet at June 30, 1999 was condensed from the audited financial
statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in our June 30, 1999 Annual Report on Form 10-K. The results of operations for
the period ended January 2, 2000 are not necessarily indicative of the operating
results for the full year. Certain amounts in the prior year's quarterly
financial statements have been reclassified to conform to the current
presentation.
2.DIVESTITURES
On December 1, 1999, we disposed of substantially all of the assets and
certain liabilities of our Dallas Aerospace subsidiary to United Technologies
Inc. for approximately $57.0 million. No gain or loss was recognized from this
transaction, as the proceeds received approximated the net carrying value of the
assets. Approximately $37.0 million of the proceeds from this disposition is
required to be used to reduce indebtedness, unless our senior lenders approve
and we otherwise determine.
On September 3, 1999, we completed the disposal of our Camloc Gas Springs
division to a subsidiary of Arvin Industries Inc. for approximately $2.7
million. In addition, we received $2.4 million from Arvin Industries for a
covenant not to compete. We recognized a $2.3 million nonrecurring gain from
this disposition.
On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to
American National Can Group, Inc. for approximately $48.2 million. In the six
months ended January 2, 2000, we recognized a $25.7 million nonrecurring gain
from this divestiture. We also agreed to provide consulting services over a
three-year period, at an annual fee of approximately $1.5 million. We used the
net proceeds from the disposition to reduce our indebtedness.
3.DISCONTINUED OPERATIONS
In 1998, we adopted a formal plan to dispose of Fairchild Technologies.
Based on this plan, we have sold a majority of Fairchild Technologies'
businesses, including most of its intellectual property, through a series of
transactions. On April 14, 1999, we disposed of Fairchild Technologies
photoresist deep-ultraviolet track equipment machines, spare parts and testing
equipment to Apex Co., Ltd. in exchange for 1,250,000 shares of Apex stock
valued at approximately $5.1 million. On June 15, 1999, we received $7.9
million from Suess Microtec AG and the right to receive 350,000 shares of Suess
Microtec stock (or at least approximately $3.5 million) by September 2000 in
exchange for certain inventory, fixed assets, and intellectual property of
Fairchild Technologies' semiconductor equipment group. On May 1, 1999, we sold
Fairchild CDI for a nominal amount. In July 1999, we received approximately $7.1
million from Novellus Systems, Inc. in exchange for Fairchild Technologies' Low-
K dielectric product line and certain intellectual property. We have been
exploring several alternative transactions regarding the disposition of
Fairchild Technologies' optical disc equipment group and we expect to dispose of
this unit prior to April 2000.
As of January 2, 2000, we have a remaining accrual of $4.5 million, net of
an income tax benefit of $3.3 million, for our current estimate of the remaining
losses in connection with the disposition of Fairchild Technologies. While we
believe that $4.5 million is a reasonable estimate for the remaining losses to
be incurred from Fairchild Technologies, there can be no assurance that this
estimate is adequate.
4.PRO FORMA FINANCIAL STATEMENTS
The following table sets forth the derivation of the unaudited pro forma
results, representing the impact of our acquisition of Kaynar Technologies
(April 1999), our merger with Banner Aerospace (April 1999), and our
dispositions of Dallas Aerospace (December 1999), Solair (December 1998) and the
investment in Nacanco (July 1999), as if these transactions had occurred at the
beginning of each of our fiscal periods. The pro forma information is based on
the historical financial statements of these companies, giving effect to the
aforementioned transactions. In preparing the pro forma data, certain
assumptions and adjustments have been made which increase interest expense based
on revised debt structures; increase goodwill amortization expense for the
acquisition of Kaynar Technologies; and reduce minority interest as a result of
our merger with Banner Aerospace. The unaudited pro forma information is not
intended to be indicative of either future results of our operations or results
that might have been achieved if these transactions had been in effect since the
beginning of these fiscal periods.
For the six months ended: Jan. 2, Dec. 27,
2000 1998
Net sales $ 295,059 $ 340,391
Gross profit 76.963 91,386
Net earnings (loss) (7,039) 70
Net earnings, per basic and diluted share $ (0.28) $ 0.00
5.EQUITY SECURITIES
We had 22,270,316 shares of Class A common stock and 2,621,652 shares of
Class B common stock outstanding at January 2, 2000. Class A common stock is
traded on both the New York and Pacific Stock Exchanges. There is no public
market for the Class B common stock. The shares of Class A common stock are
entitled to one vote per share and cannot be exchanged for shares of Class B
common stock. The shares of Class B common stock are entitled to ten votes per
share and can be exchanged, at any time, for shares of Class A common stock on a
share-for-share basis. For the six months ended January 2, 2000, 34,657 shares
of Class A common stock were issued as a result of the exercise of stock
options. In accordance with the terms of our acquisition of Special-T, as
amended, we issued 44,079 restricted shares of our Class A common stock during
the six months ended January 2, 2000, as additional merger consideration. In
addition, our Class A common stock outstanding was reduced as a result of 67,000
shares purchased during the first six months of fiscal 2000, which are
considered as treasury stock for accounting purposes.
During the six months ended January 2, 2000, we issued 96,027 deferred
compensation units pursuant to our stock option deferral plan, as a result of
the exercise of 214,891 stock options. Each deferred compensation unit is
represented by one share of our treasury stock and is convertible into one share
of Class A common stock after a specified period of time.
6.RESTRICTED CASH
On January 2, 2000 and June 30, 1999, we had restricted cash of $57,409 and
$15,752, respectively, all of which is maintained as collateral for certain debt
facilities and escrow arrangements.
7.EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
01/02/2000 12/27/1998 01/02/2000 12/27/1998
Basic earnings per share:
Earnings from continuing $ (7,080) $ (8,827) $ 11,030 $ (7,637)
operations
Common shares outstanding 24,889 21,872 24,882 22,129
Basic earnings from $ (0.28) $ (0.40) $ 0.44 $ (0.35)
continuing operations per share
Diluted earnings per share:
Earnings from continuing $ (7,080) $ (8,827) $ 11,030 $ (7,637)
operations
Common shares outstanding 24,889 21,872 24,882 22,129
Options antidilutive antidilutive 2 antidilutive
Warrants antidilutive antidilutive 93 antidilutive
Total shares outstanding 24,889 21,872 24,977 22,129
Diluted earnings from $ (0.28) $ (0.40) $ 0.44 $ (0.35)
continuing operations per share
Stock options entitled to purchase 1,855,960 shares of Class A common stock
were antidilutive and not included in the earnings per share calculation for the
six months ended January 2, 2000. These shares could be dilutive in subsequent
periods. For the three-months ended January 2, 2000, and the periods ended
December 27, 1998, the computation of diluted loss from continuing operations
per share excluded the effect of incremental common shares attributable to the
potential exercise of common stock options outstanding and warrants outstanding,
because its effect was antidilutive.
8.RESTRUCTURING CHARGES
In the six months ended January 2, 2000, we recorded $6.1 million of
restructuring charges as a result of the continued integration of Kaynar
Technologies into our aerospace fasteners segment. All of the charges recorded
during the current six months were a direct result of product and plant
integration costs incurred as of January 2, 2000. These costs were classified as
restructuring and were the direct result of formal plans to move equipment,
close plants and to terminate employees. Such costs are nonrecurring in nature.
Other than a reduction in our existing cost structure, none of the restructuring
charges resulted in future increases in earnings or represented an accrual of
future costs. As of January 2, 2000, the majority of the integration plans have
been executed. During the next six months, we expect to incur additional
restructuring charges for product integration costs at our aerospace fasteners
segment. We anticipate that our integration process will be substantially
complete by the end of fiscal 2000.
9.CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer, based upon the advice of
the United States Defense Contract Audit Agency, alleged that a former
subsidiary of ours did not comply with Federal Acquisition Regulations and Cost
Accounting Standards in accounting for (i) the 1985 reversion of certain assets
of terminated defined benefit pension plans, and (ii) pension costs upon the
closing of segments of our former subsidiaries business. In January, we paid the
government $1.1 million to settle these pension accounting issues.
Environmental Matters
Our operations are subject to stringent government imposed environmental
laws and regulations concerning, among other things, the discharge of materials
into the environment and the generation, handling, storage, transportation and
disposal of waste and hazardous materials. To date, such laws and regulations
have not had a material effect on our financial condition, results of
operations, or net cash flows, although we have expended, and can be expected to
expend in the future, significant amounts for the investigation of environmental
conditions and installation of environmental control facilities, remediation of
environmental conditions and other similar matters, particularly in our
aerospace fasteners segment.
In connection with our plans to dispose of certain real estate, we must
investigate environmental conditions and we may be required to take certain
corrective action prior or pursuant to any such disposition. In addition, we
have identified several areas of potential contamination at or from other
facilities owned, or previously owned, by us, that may require us either to take
corrective action or to contribute to a clean-up. We are also a defendant in
certain lawsuits and proceedings seeking to require us to pay for investigation
or remediation of environmental matters and we have been alleged to be a
potentially responsible party at various "superfund" sites. We believe that we
have recorded adequate reserves in our financial statements to complete such
investigation and take any necessary corrective actions or make any necessary
contributions. No amounts have been recorded as due from third parties,
including insurers, or set off against, any environmental liability, unless such
parties are contractually obligated to contribute and are not disputing such
liability.
As of January 2, 2000, the consolidated total of our recorded liabilities
for environmental matters was approximately $9.1 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $16.3 million.
Other Matters
On January 12, 1999, AlliedSignal made indemnification claims against us
for $18.9 million, arising from the disposition to AlliedSignal of Banner
Aerospace's hardware business. We believe that the amount of the claim is far in
excess of any amount that AlliedSignal is entitled to recover from us.
We are involved in various other claims and lawsuits incidental to our
business. We, either on our own or through our insurance carriers, are
contesting these matters. In the opinion of management, the ultimate resolution
of the legal proceedings, including those mentioned above, will not have a
material adverse effect on our financial condition, future results of operations
or net cash flows.
10.CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited financial statements separately show The Fairchild
Corporation and the subsidiaries of The Fairchild Corporation. These financial
statements are provided to fulfill public reporting requirements and separately
present guarantors of the 10 3/4% senior subordinated notes due 2009 issued by
The Fairchild Corporation (the "Parent Company"). The guarantors are composed
primarily of our domestic subsidiaries, excluding Fairchild Technologies, a real
estate development venture, and certain other subsidiaries.
COnsolidating Balance Sheet
January 2, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
Cash $ 66 $ 73,693 10,053 - $ 83,812
Market securities 71 7,753 - - 7,824
Accounts Receivable (including
intercompany)
less allowances 3,283 67,473 44,409 - 115,165
Inventory, net - 129,434 47,100 - 176,534
Prepaid and other current
assets 511 68,827 5,686 - 75,024
Total current assets 3,931 347,180 107,248 - 458,359
Inventory in Subsidiaries 965,362 - - (965,362) -
Net fixed assets 554 138,755 45,605 - 184,914
Net assets held for sale - 19,969 - - 19,969
Investment in affiliates 1,300 11,267 - - 12,567
Goodwill 5,303 384,837 34,776 - 424,916
Deferred loan costs 13,652 25 551 - 14,228
Prepaid pension assets - 64,103 - - 64,103
Real estate investment - - 96,043 - 96,043
Long-term investments - 27,129 - - 27,129
Other assets 16,818 (12,279) 356 - 4,895
Total assets $1,006,920 $ 980,986 $ 284,579 $ (965,362) $ 1,307,123
Bank notes payable &
current maturities of debt $ 2,250 $ 2,229 $ 23,617 $ - $ 28,096
Accounts payable (including
intercmopany) 97 20,164 17,501 - 37,762
Other accrued expense (18,352) 122,634 21,067 - 125,349
Net current liabilities of
discontinued operations - - 7,181 - 7,181
Total current liabilities (16,005) 145,027 69,366 - 198,388
Long-term debt, less current
maturities 481,893 8,761 5,430 - 496,084
Other long-term liabilities 405 16,526 7,648 - 24,579
Noncurrent intome taxes 123,107 1,226 233 - 124,566
Retiree health care liabilities - 41,250 4,678 - 45,928
Minority interest in
subsidiaries - 9 49 - 58
Total liabilities 589,400 212,799 87,404 - 889,603
Class A common stock 2,783 200 5,084 (5,084) 2,983
Class B common stock 262 - - - 262
Paid-in-capital 3,813 226,899 243,405 (243,405) 230,712
Retained earnings 486,353 540,567 (46,987) (716,873) 263,060
Cumulative other comprehensive
income (764) 1,145 (4,327) - (3,946)
Treasury stock, at cost (74,927) (624) - - (75,551)
Total stockholders' 417,520 768,187 197,175 (965,362) 417,520
equity
Total liaabilities &
stockholders' equity $1,006,920 $ 980,986 $ 284,579 $ (965,362) $ 1,307,123
CONSOLIDATING STATEMENT OF EARNINGS
For the Six Months Ended
January 2, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
Net Sales $ $ 234,852 $ 83,451 $ (1,550) $ 316,753
Cost and expenses
Cost of sales - 175,728 61,556 (1,550) 235,734
Selling, general &
administrative 2,380 45,577 11,638 - 59,595
Restructuring - 6,057 - - 6,057
Amortization of goodwill 257 5,345 506 - 6,108
2,637 232,707 73,700 (1,550) 307,494
Operating income (loss) (2,637) 2,145 9,751 - 9,259
Net interest expense 24,888 (5,907) 3,790 - 22,771
Investment (income) loss, net - (2,878) - - (2,878)
Intercompany dividends - - 714 (714) -
Nonreucrring income on
disposition of subsidiary - - (28,003) - (28,003)
Earnings (loss) before taxes (27,525) 10,930 33,250 714 17,369
Income tax (provision)
benefit (4,644) (120) (502) - (5,266)
Equity in earnings of
affiliates and subsidiaries 43,199 (1,073) - (43,199) (1,073)
Earnings (loss) from
continuing operations 11,030 9,737 32,748 (42,485) 11,030
Earnings (loss) from
disposal of discontinued
operations - - 374 (374) -
Net earnings (loss) $ 11,030 $ 9,737 $ 33,122 $ (42,859) $ 11,030
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended
January 2, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
Cash Flows from Operating
Activities:
Net earnings (loss) $ 11,030 $ 9,737 $ 33,122 $ (42,859) $ 11,030
Depreciation and
amortization 349 15,175 4,214 - 19,738
Amortization of deferred
loan fees 577 - - - 577
Accretion of discount
on long-term liabilities 1,923 - - - 1,923
(Gain) on sale of affiliate
investment and divestiture of
subsidiary - - (28,003) - (28,003)
(Gain) on sale of investments - (2,851) - - (2,851)
Undistributed loss (earnings)
of affiliates - 1,651 - - 1,651
Change in assets and
liabilities (15,046) (72,871) (5,752) 42,859 (50,810)
Non-cash charges and working
capital changes of
discontinued operations - - (12,049) - (12,049)
Net cash (used for) provided
by operating activities (1,167) (49,159) (8,468) - (58,794)
Cash Flows from Investing
Activities:
Net proveeds from (used for)
investments - 1,351 - - 1,351
Purchase of property, plant
and equipment (5) (11,932) (4,638) - (16,575)
Equity investment in
affiliates - (2,441) - - (2,441)
Net proceeds from sale
of affiliate investment and
divestiture of subsidiaries - 57,000 48,009 - 105,009
Real estate investment - - (11,087) - (11,087)
Change in net assets held
for sale - 4,419 - - 4,419
Investing activities of
discontinued operations - - 7,100 - 7,100
Net cash (used for) provided
by investing activities (5) 48,397 39,384 - 87,776
Cash Flows from Financing Activities:
Proceeds from issuance
of debt 45,600 110,459 5,787 - 161,846
Debt repayment and
repurchase of debentures
(including intercompany),
net (44,557) (77,208) (39,413) - (161,178)
Issuance of Class A
common stock 168 - - - 168
Purchase of treasury
stock - (622) - - (622)
Net cash (used for) provided by
financing activities 1,211 32,629 (33,626) - 214
Effect of exchange rate
changes on cash - 33 (277) - (244)
Net change in cash and
cash equivalents 39 31,900 (2,987) - 28,952
Cash and cash equivalents,
beginning of the year 27 41,793 13,040 - 54,860
Cash and cash equivalents,
end of the year $ 66 $ 73,693 $ 10,053 $ - $ 83,812
CONSOLIDATING BALANCE SHEET
June 30, 1999
Parent Non Fairchild
Company GuarantorsGuarantors Eliminations Historical
Cash $ 27 $ 41,793 $ 13,040 $ - $ 54,860
Market securities 71 13,023 - - 13,094
Accounts Receivable
(including intercompany), 549 52,929 76,643 - 130,121
less allowances
Inventory, net (182) 145,080 45,341 - 190,239
Prepaid and other current
assets 1,297 69,000 3,629 - 73,926
Total current assets 1,762 321,825 138,653 - 462,240
Investment in Subsidiaries 841,744 - - (841,744) -
Net fixed assets 611 137,852 45,602 - 184,065
Net assets held for sale - 21,245 - - 21,245
Investments in affiliates 1,300 13,135 17,356 - 31,791
Goodwill 5,533 402,595 39,594 - 447,722
Deferred loan costs 13,029 26 22 - 13,077
Prepaid pension assets - 63,958 - - 63,958
Real estate investment - - 83,791 - 83,791
Long-term investment - 15,844 - - 15,844
Other assets 16,244 (11,865) 674 - 5,053
Total assets $880,223 $ 964,615 $ 325,692 $ (841,744) $ 1,328,786
Bank notes payable & current
maturities of debt $ 2,250 $ 2,548 $ 24,062 $ - $ 28,860
Accounts payable
(including intercompany) 972 12,824 58,475 - 72,271
Other accrued expenses 7,272 99,669 14,195 - 121,136
Net current liabilities
of discontinued operations - - 10,999 - 10,999
Total current liabilities 10,494 115,041 107,731 - 233,266
Long-term debt, less current
maturities 480,850 9,908 4,525 - 495,283
Other long-term liabilities 405 18,138 7,361 - 25,904
Noncurrent income taxes (19,026) 140,749 238 - 121,961
Retiree health care
liabilities - 40,189 4,624 - 44,813
Minority interest in
subsidiaries - 9 50 - 59
Total liabilities 472,723 324,034 124,529 - 921,286
Class A common stock 2,775 200 5,085 (5,085) 2,975
Class B common stock 262 - - - 262
Paid-in-capital 2,138 226,900 263,058 (263,058) 229,038
Retained earnings 477,191 413,483 (65,043) (573,601) 252,030
Cumulative other comprehensive
income (764) (2) (1,937) - (2,703)
Treasury stock, at cost (74,102) - - - (74,102)
Total stockholders'
equity 407,500 640,581 201,163 (841,744) 407,500
Total liabilities & stockholders'
equity $880,223 $ 964,615 $ 325,692 $ (841,744) $ 1,328,786
CONSOLIDATING STATEMENT OF EARNINGS
For the Six Months Ended
December 27, 1998
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
Net Sales $ - $ 222,755 $ 77,707 $ (742) $ 299,720
Costs and expenses
Cost of sales - 190,352 57,376 (742) 246,986
Selling, general &
administrative 2,009 39,299 13,369 - 54,677
Amortization of goodwill 120 2,022 496 - 2,638
2,129 231,673 71,241 (742) 304,301
Operating income (loss) (2,129) (8,918) 6,466 - (4,581)
Net interest expense 10,672 2,519 956 - 14,147
Investment (income) loss,
net - (834) - - (834)
Nonreucrring income on
disposition of subsidiary - - - - -
Earnings (loss) before taxes (12,801) (10,603) 5,510 - (17,894)
Income tax (provision)
benefit 3,033 3,692 (292) - 6,433
Equity in earnings of
affiliates and subsidiaries (6,419) (919) 2,608 6,419 1,689
Minority interest - 2,135 - - 2,135
Earnings (loss) from
continuing operation (16,187) (5,695) 7,826 6,419 (7,637)
Earnings (loss) from disposal
of discontinued operations - 2,316 (11,496) - (9,180)
Extraordinary items - - - - -
Net earnings (loss) $(16,187) $ (3,379) $ (3,670) $ 6,419 $ (16,817)
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended
December 27, 1998
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
Cash Flows from Operating Activities:
Net earnings (loss) $(16,187) $(3,379) $ (3,670) $ 6,419 $ (16,817)
Depreciation and
amortization 151 6,612 4,713 - 11,476
Amortizatin of deferred loan
fees 388 - - - 388
Accretion of discount on
long-term liabilities 2,578 - - - 2,578
Undistributed loss (earnings)
of affiliates - (777) - - (777)
Minority interest - (2,135) - - (2,135)
Change in assets and liabilities 15,294 (36,503) 20,820 (6,419) (6,808)
Non-cash charges and working
capital changes
of discontinued operations - - (8,559) - (8,559)
Net cash (used for) provided by
operating activities 2,224 (36,182) 13,304 - (20,654)
Cash Flows from Investing Activities:
Net proceeds received from
(used for) investments - (15,648) - - (15,648)
Purchase of property, plane
and equipment (27) (9,122) (4,425) - (13,574)
Net proceeds from divestiture
of subsidiary - 60,397 - - 60,397
Real estate investment - - (16,163) - (16,163)
Change in net assets held
for sale - 3,335 - - 3,335
Other changes, net - 238 - - 238
Investing activities of
discontinued operations - - (223) - (223)
Net cash (used for) provided
by investing activities (27) 39,200 (20,811) - 18,362
Cash Flows from Financing Activities:
Proceeds from issuance of debt - 44,600 11,177 - 55,777
Debt repayment and repurchase
of debentures(including
intercompany), net (2,250) (59,800) (7,325) - (69,375)
Issuance of Class A common
stock 53 129 - - 182
Purchase of treasury stock - (22,101) - - (22,101)
Financing activities of
discontinued operations - - 121 - 121
Net cash (used for) provided by
financing activities (2,197) (37,172) 3,973 - (35,396)
Effect of exchange rate changes
on cash - - 4,150 - 4,150
Net change in cash - (34,154) 616 - (33,538)
Cash and cash equivalents,
beginning of the year - 42,175 7,426 - 49,601
Cash and cash equivalents,
end of year $ - $ 8,021 $ 8,042 $ - $ 16,063
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation was incorporated in October 1969, under the laws
of the State of Delaware, under the name of Banner Industries, Inc. On November
15, 1990, we changed our name from Banner Industries, Inc. to The Fairchild
Corporation. We are the owner of 100% of RHI Holdings, Inc. and Banner
Aerospace, Inc. RHI is the owner of 100% of Fairchild Holding Corp. Our
principal operations are conducted through Fairchild Holding and Banner
Aerospace.
The following discussion and analysis provide information which management
believes is relevant to assessment and understanding of our consolidated results
of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
GENERAL
We are a leading worldwide aerospace and industrial fastener manufacturer
and distribution logistics manager and, through Banner Aerospace, an
international supplier to airlines and general aviation businesses, distributing
a wide range of aircraft parts and related support services. Through internal
growth and strategic acquisitions, we have become one of the leading suppliers
of fasteners to aircraft OEMs, such as Boeing, Lockheed Martin, Northrop
Grumman, and the Airbus consortium of Aerospatiale, DaimlerChrysler Aerospace,
British Aerospace and CASA.
Our aerospace business consists of two segments: aerospace fasteners and
aerospace distribution. The aerospace fasteners segment manufactures and markets
high performance fastening systems used in the manufacture and maintenance of
commercial and military aircraft. The aerospace distribution segment stocks and
distributes a wide variety of aircraft parts to commercial airlines and air
cargo carriers, fixed-base operators, corporate aircraft operators and other
aerospace companies.
CAUTIONARY STATEMENT
Certain statements in this financial discussion and analysis by management
contain certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our financial
condition, results of operation and business. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These forward-
looking statements are identified by their use of terms and phrases such as
``anticipate,'' ``believe,'' ``could,'' ``estimate,'' ``expect,'' ``intend,''
``may,'' ``plan,'' ``predict,'' ``project,'' ``will'' and similar terms and
phrases, including references to assumptions. These forward-looking statements
involve risks and uncertainties, including current trend information,
projections for deliveries, backlog and other trend projections, that may cause
our actual future activities and results of operations to be materially
different from those suggested or described in this Quarterly Report on Form 10-
Q. These risks include: product demand; our dependence on the aerospace
industry; reliance on Boeing and the Airbus consortium of companies; customer
satisfaction and quality issues; labor disputes; competition, including recent
intense price competition; our ability to integrate and realize anticipated
synergies relating to the acquisition of Kaynar Technologies Inc.; our ability
to achieve and execute internal business plans; worldwide political instability
and economic growth; and the impact of any economic downturns and inflation,
including recent weaknesses in the currency, banking and equity markets of
countries in South America and in the Asia/Pacific region.
If one or more of these risks or uncertainties materializes, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected. Given these uncertainties, users of
the information included in this financial discussion and analysis by
management, including investors and prospective investors are cautioned not to
place undue reliance on such forward-looking statements. We do not intend to
update the forward-looking statements contained in this Quarterly Report, even
if new information, future events or other circumstances have made them
incorrect or misleading.
RESULTS OF OPERATIONS
Business Transactions
The following summarizes certain business combinations and transactions
which significantly affect the comparability of the period to period results
presented in this Management's Discussion and Analysis of Results of Operations
and Financial Condition.
Fiscal 2000 Transactions
On December 1, 1999, we disposed of substantially all of the assets and
certain liabilities of our Dallas Aerospace subsidiary to United Technologies
Inc. for approximately $57.0 million. No gain or loss was recognized from this
transaction, as the proceeds received approximated the net carrying value of
these assets. Approximately $37.0 million of the proceeds from this disposition
is required to be used to reduce indebtedness, unless our senior lenders approve
and we otherwise determine.
On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to
American National Can Group, Inc. for approximately $48.2 million. In the six
months ended January 2, 2000, we recognized a $25.7 million nonrecurring gain
from this divestiture. We also agreed to provide consulting services over a
three-year period, at an annual fee of approximately $1.5 million. We used the
net proceeds from the disposition to reduce our indebtedness.
On September 3, 1999, we completed the disposal of our Camloc Gas Springs
division to a subsidiary of Arvin Industries Inc. for approximately $2.7
million. In addition, we received $2.4 million from Arvin Industries for a
covenant not to compete. We recognized a $2.3 million nonrecurring gain from
this disposition.
Fiscal 1999 Transactions
On December 31, 1998, Banner Aerospace consummated the sale of Solair,
Inc., its largest subsidiary in the rotables group of the aerospace distribution
segment, to Kellstrom Industries, Inc., in exchange for approximately $60.4
million in cash and a warrant to purchase 300,000 shares of common stock of
Kellstrom. In December 1998, Banner Aerospace recorded a $19.3 million pre-tax
loss from the sale of Solair. This loss was included in cost of goods sold, as
it was primarily attributable to the bulk sale of inventory at prices below its
carrying amount.
On February 22, 1999, we used available cash to acquire 77.3% of SNEP S.A.
By June 30, 1999, we had purchased significantly all of the remaining shares of
SNEP. The total amount paid was approximately $8.0 million, including $1.1
million of debt assumed, in a business combination accounted for as a purchase.
The total cost of the acquisition exceeded the fair value of the net assets of
SNEP by approximately $4.3 million, which is preliminarily being allocated as
goodwill, and amortized over 40 years using the straight-line method. SNEP is a
French manufacturer of precision machined self-locking nuts and special threaded
fasteners serving the European industrial, aerospace and automotive markets.
On April 8, 1999, we acquired the remaining 15% of the outstanding common
and preferred stock of Banner Aerospace, Inc. not already owned by us, through
the merger of Banner Aerospace with one of our subsidiaries. Under the terms of
the merger with Banner Aerospace, we issued 2,981,412 shares of our Class A
common stock to acquire all of Banner Aerospace's common and preferred stock
(other than those already owned by us). Banner Aerospace is now our wholly-owned
subsidiary.
On April 20, 1999, we completed the acquisition of all the capital stock of
Kaynar Technologies Inc. for approximately $222 million and assumed
approximately $103 million of Kaynar Technologies debt, the majority of which
was refinanced at closing. In addition, we paid $28 million for a covenant not
to compete from the largest preferred shareholder of Kaynar Technologies. The
total cost of the acquisition exceeded the fair value of the net assets of
Kaynar Technologies by approximately $269.7 million, which is preliminarily
being allocated as goodwill, and amortized over 40 years using the straight-line
method. The acquisition was financed with existing cash, the sale of $225
million of 10 3/4% senior subordinated notes due 2009 and proceeds from a new
bank credit facility.
On June 18, 1999, we completed the acquisition of Technico S.A. for
approximately $4.1 million and assumed approximately $2.2 million of Technico's
existing debt. The total cost of the acquisition exceeded the fair value of the
net assets of Technico by approximately $2.9 million, which is preliminarily
being allocated as goodwill, and amortized over 40 years using the straight-line
method. The acquisition was financed with additional borrowings from our credit
facility.
Consolidated Results
We currently report in two principal business segments: aerospace fasteners
and aerospace distribution. The results of the Gas Springs division, prior to
its disposition, were included in the Corporate and Other classification. The
following table illustrates the historical sales and operating income of our
operations for the three and six months ended January 2, 2000 and December 27,
1998, respectively.
Actual Segment Results
(In thousands) Three Six Months Ended
Months
Ended
1/2/2000 12/27/1998 1/2/2000 12/27/1998
Sales by Segment:
Aerospace Fasteners $124,143 $102,764 $258,563 $199,322
Aerospace Distribution 28,101 46,838 57,451 97,366
Corporate and Other - 1,579 739 3,032
TOTAL SALES $152,244 $151,181 $316,753 $299,720
Operating Results by
Segment:
Aerospace Fasteners (a) $ 2,915 $ 10,647 $ 11,790 $ 18,477
Aerospace Distribution 2,082 (17,285) 4,339 (15,567)
Corporate and Other (5,772) (3,582) (6,870) (7,491)
OPERATING INCOME (LOSS) $ (775) $(10,220) $ 9,259 $(4,581)
(a) - Includes restructuring charges of $3.0 million and $6.1 million in the
three and six months ended January 2, 2000, respectively.
The following table illustrates sales and operating income of our
operations by segment, on an unaudited pro forma basis, for the three and six
months ended January 2, 2000 and December 27, 1998, respectively, as if we had
operated in a consistent manner in each of the reported periods. The pro forma
results represent the impact of our acquisition of Kaynar Technologies (April
1999), our merger with Banner Aerospace (April 1999), and our dispositions of
Dallas Aerospace (December 1999) and Solair (December 1998), as if these
transactions had occurred at the beginning of each of our fiscal periods. The
pro forma information is based on the historical financial statements of these
companies, giving effect to the aforementioned transactions. The pro forma
information is not necessarily indicative of the results of operations, that
would actually have occurred if the transactions had been in effect since the
beginning of fiscal 1999, nor are they necessarily indicative of our future
results.
Pro Forma Segment Results
(In thousands) Three Six
Months Months
Ended Ended
1/2/2000 12/27/1998 1/2/200012/27/1998
Sales by Segment:
Aerospace Fasteners $124,143 $152,531 $258,563 $ 303,199
Aerospace Distribution 17,551 16,805 35,757 34,160
Corporate and Other - 1,579 739 3,032
TOTAL SALES $141,694 $ 170,915 $295,059 $ 340,391
Operating Results by
Segment:
Aerospace Fasteners $ 2,915 $ 15,641 $ 11,790 $ 29,745
Aerospace Distribution 923 746 2,261 1,523
Corporate and Other (5,759) (3,582) (6,843) (7,491)
OPERATING INCOME (LOSS) $(1,921) $ 12,805 $ 7,208 $ 23,777
Net sales of $152.2 million in the second quarter of fiscal 2000 increased
by $1.1 million compared to sales of $151.2 million in the second quarter of
fiscal 1999. Net sales of $316.8 million in the first six months of fiscal 2000
increased by $17.0 million, or 5.7%, compared to sales of $299.7 million in the
first six months of fiscal 1999. The improvement is attributable primarily to
the increase in revenues provided by the acquisition of Kaynar Technologies,
offset partially from the dispositions of Solair and Dallas Aerospace. On a pro
forma basis, net sales decreased 17.1% and 13.3% for the three and six months
ended January 2, 2000, respectively, compared to the same periods ended December
27, 1998, reflecting weakening demand for our products by the domestic aerospace
manufacturers and distributors.
Gross margin as a percentage of sales was 24.9% and 11.9% in the second
quarter of fiscal 2000 and fiscal 1999 and 25.6% and 17.6% for the first six
months of fiscal 2000 and fiscal 1999, respectively. Included in cost of goods
in the periods ended December 27, 1998, was a charge of $19.3 million that was
recognized in the aerospace distribution segment from the bulk sale of inventory
at prices below its carrying amount. Excluding this charge, gross margin as a
percentage of sales would have been 24.7% and 24.0% in the three and six months
ended December 1998, respectively. The higher margins in the fiscal 2000 period
are attributable to cost improvement initiatives, offset partially by lower
prices. In addition, our aerospace fasteners segment also benefited as a result
of the acquisition of Kaynar Technologies and efficiencies achieved from the
integration process of facilities.
Selling, general & administrative expense as a percentage of sales was
23.2% and 18.0% in the second quarter of fiscal 2000 and 1999, respectively, and
21.2% and 18.5% in the first six months of fiscal 2000 and 1999, respectively.
The increase is due primarily to our decision to maintain our sales and
marketing infrastructure on lower sales volume.
Other income increased $6.8 million in the first six months of fiscal 2000,
compared to the first six months of fiscal 1999. The increase is due primarily
to $3.1 million of income recognized from the disposition of non-core property
during the current period and a $0.8 million increase in rental income.
In the six months ended January 2, 2000, we recorded $6.1 million of
restructuring charges as a result of the continued integration of Kaynar
Technologies into our aerospace fasteners segment. All of the charges recorded
during the current six months were a direct result of product and plant
integration costs incurred as of January 2, 2000. These costs were classified as
restructuring and were the direct result of formal plans to move equipment,
close plants and to terminate employees. Such costs are nonrecurring in nature.
Other than a reduction in our existing cost structure, none of the restructuring
charges resulted in future increases in earnings or represented an accrual of
future costs. As of January 2, 2000, the majority of the integration plans have
been executed. During the next six months, we expect to incur additional
restructuring charges for product integration costs at our aerospace fasteners
segment. We anticipate that our integration process will be substantially
complete by the end of fiscal 2000.
Operating income for the three and six months ended January 2, 2000
improved by $9.4 million and $13.8 million, respectively, as compared to the
same periods of the prior year. The increase in the current periods is due
primarily to a charge of $19.3 million that was recognized in December 1998,
from the bulk sale of inventory at prices below carrying amount, offset
partially by $6.1 million of restructuring charges recognized through January 2,
2000.
Net interest expense increased $8.6 million in the first six months of
fiscal 2000, compared to the first six months of fiscal 1999. We expect the
trend of reporting increased interest expense to continue throughout fiscal
2000, as a result of additional debt we incurred to finance the acquisition of
Kaynar Technologies.
Nonrecurring income of $28.0 million in the six months ended January 2,
2000 resulted from the disposition of our investment in Nacanco Paketleme and
the disposition of our Camloc Gas Springs division.
An income tax provision of $5.3 million in the first six months of fiscal
2000 represented a 30.3% effective tax rate on pre-tax earnings from continuing
operations. The tax provision was slightly lower than the statutory rate because
of lower tax rates at some of our foreign operations.
Comprehensive income (loss) includes foreign currency translation
adjustments and unrealized holding changes in the fair market value of available
for-sale investment securities. Since June 30, 1999, foreign currency
translation adjustments decreased by $3.1 million in the six months ended
January 2, 2000. The fair market value of unrealized holding gains on investment
securities we own increased by $1.8 million in the six months ended January 2,
2000.
Segment Results
Aerospace Fasteners Segment
Sales in our Aerospace Fasteners segment increased by $21.4 million in the
second quarter of fiscal 2000 and $59.2 million in the first six months of
fiscal 2000, as compared to the same periods of fiscal 1999, reflecting growth
from acquisitions, offset partially by weakened demand for our products in the
commercial aerospace industry. On January 2, 2000, backlog was $201 million
compared to $220 million at June 30, 1999. On a pro forma basis, sales decreased
by 14.7% in the first six months of fiscal 2000, as compared to the same period
of the prior year. Our operations in the United States continue to be negatively
impacted by reduced bookings caused by inventory reduction efforts at Boeing and
its rippling effect on pricing created by excess capacity in the marketplace.
Operating income decreased by $7.7 million and $6.7 million in the second
quarter and first six months of fiscal 2000, respectively, compared to the
fiscal 1999 periods. Included in our current quarter and six months results are
restructuring charges of $3.0 million and $6.1 million, respectively, incurred
due to the integration of Kaynar Technologies into our Aerospace Fasteners
business. Excluding restructuring charges, operating income decreased by $4.7
million and $0.6 million in the second quarter and first six months of fiscal
2000, respectively, compared to the fiscal 1999 periods, reflecting reduced
margins due to pricing pressures, offset partially by cost improvement
initiatives and acquisitions made during fiscal 1999. Operating expenses
continue to be reviewed at all operations as management attempts to reduce
operating costs to improve margins in the short term, without being detrimental
to operating income on a long term basis. On a pro forma basis and excluding
restructuring charges, operating income decreased by $11.9 million for the six
months ended January 2, 2000, compared to the six months ended December 27,
1998, due to lower sales levels associated with the weak commercial aerospace
industry.
We believe the demand for aerospace fasteners in fiscal 2000 will remain
stable in Europe and will continue to be soft in the United States commercial
aerospace market. We anticipate that the negative impact on us of Boeing's
inventory reduction program will diminish in the latter part of calendar 2000.
We believe that our merger integration savings and production efficiency
improvements will partially offset the weakening demand for our products.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $18.7 million, or
40.0%, in the second quarter and $39.9 million, or 41.0%, in the first six
months of fiscal 2000, compared to the fiscal 1998 periods. The decrease was due
to the loss of revenues as a result of the disposition of Solair and Dallas
Aerospace. On a pro forma basis, sales increased $1.5 million, or 4.7%, in the
current six-month period.
Operating income increased by $19.4 million in the second quarter and $19.9
million in the fiscal 2000 six-month period, compared to the fiscal 1999
periods. Included in the prior year periods, was a charge of $19.3 million
attributable to the bulk sale of Solair inventory at prices below the carrying
amount of inventory. On a pro forma basis, operating income increased 48.5% in
the first six months ended January 2, 2000, compared to the first six months
ended December 27, 1998, reflecting increases in margins and a reduction in
corporate overhead.
Corporate and Other
The Corporate and Other classification included the Camloc Gas Springs
division, prior to its disposition, and corporate activities. The group reported
a decrease in sales in the second quarter and first six months of fiscal 2000,
compared to the fiscal 1999 periods, as a result of the disposition of the
Camloc Gas Springs division in September 1999. An operating loss of $6.9 million
in the first six months of fiscal 2000 was a $0.6 million improvement, compared
to the operating loss of $7.5 million reported in the first six months of fiscal
1999. The current period included other income of $6.9 million due primarily to
income recognized from the disposition of non-core property.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of January 2, 2000 and June 30, 1999 amounted to
$941.7 million and $931.6 million, respectively. The changes in capitalization
included an increase of $10.0 million in equity due primarily to our reported
net earnings, offset partially by a reduction in comprehensive income. Debt
remained the same and reflected a $31.7 million decrease in term loan borrowing,
as a result of the proceeds received from the divestiture of Nacanco, offset by
an increase in revolving loan facilities used to support our operations.
We maintain a portfolio of investments classified primarily as
available-for-sale securities, which had a fair market value of $27.6 million at
January 2, 2000. The market value of these investments increased $1.8 million in
the six months ended January 2, 2000. While there is risk associated with market
fluctuations inherent in stock investments, and because our portfolio is not
diversified, large swings in its value should be expected.
We have an 88-acre site in Farmingdale, New York, which we are developing
as a shopping center. We invested approximately $11.1 million into this project
in the six months ended January 2, 2000. We estimate funding of approximately
$11.2 million is needed to complete construction on the portions of the property
currently under development.
Net cash used by operating activities for the six months ended January 2,
2000 and December 27, 1998 was $58.8 million and $20.7 million, respectively.
The primary use of cash for operating activities in the first six months of
fiscal 2000 was a $43.3 million increase in inventories and a $22.9 million
decrease in accounts payable and other accrued liabilities, offset partially by
a $15.0 million decrease in accounts receivable. The primary use of cash for
operating activities in the first six months of fiscal 1999 was a $47.5 million
decrease in accounts payable and accrued liabilities, and increases in
inventories of $20.1 million, offset partially by a $13.6 million decrease in
accounts receivable and a $30.2 million increase in other non-current
liabilities.
Net cash provided by investing activities for the six months ended January
2, 2000 and December 27, 1998, amounted to $87.8 million and $18.4 million,
respectively. In the first six months of fiscal 2000, the primary source of cash
from investing activities was $105.0 million of net proceeds received from the
dispositions of Dallas Aerospace, Nacanco and the Camloc Gas Springs division,
offset partially by capital expenditures of $16.5 million. In the first six
months of fiscal 1999, the primary source of cash from investing activities was
$57.0 million of net proceeds received from the disposition of Solair, offset
partially by $16.0 million used for capital expenditures.
Net cash provided by (used for) financing activities for the six months
ended January 2, 2000 and December 27, 1998, amounted to $0.2 million and
$(35.4) million, respectively. Cash provided by financing activities in the
first six months of fiscal 2000 included $161.9 million of proceeds from the
issuance of debt and $0.2 million from the issuance of stock, offset by $161.2
million repayment of debt and a $0.6 million purchase of treasury stock. Cash
used for financing activities in the first six months of fiscal 1999 included a
$69.4 million repayment of debt and a $22.1 million purchase of treasury stock,
offset partially by a $55.8 million net increase of additional debt.
Our principal cash requirements include debt service, capital expenditures,
acquisitions, real estate development, and payment of other liabilities. Other
liabilities that require the use of cash include postretirement benefits,
environmental investigation and remediation obligations, and litigation
settlements and related costs. We expect that cash on hand, cash generated from
operations, cash from borrowings and additional financing and asset sales will
be adequate to satisfy our cash requirements in fiscal 2000.
Our credit agreement requires us to comply with financial covenants at the
end of each quarter, including:
Maintaining an interest coverage ratio
Maintaining a minimum consolidated fixed charge coverage ratio
Maintaining a ratio of consolidated debt to earnings before interest,
taxes, depreciation and amortization
Maintaining a ratio of senior debt to earnings before interest, taxes,
depreciation and amortization
On January 2, 2000, we were in compliance with the credit agreement.
Because of the recent downturn in the aerospace industry, our ability to meet
these covenants is uncertain and there can be no assurance that we will be able
to comply with these covenants in our next fiscal quarter ending April 2, 2000
or the future. Noncompliance with any of the financial covenants without cure or
waiver would constitute an event of default under the credit agreement. An event
of default resulting from a breach of a financial covenant can result, at the
option of lenders holding a majority of the loans, in an acceleration of the
principal and interest outstanding, and a termination of the revolving credit
line. We are having ongoing conversations with our bankers to determine if they
will be willing to grant a waiver or amendment in the event of default. We are
uncertain if our bankers are willing to grant a waiver or amendment in the event
of default.
Discontinued Operations
In 1998, we adopted a formal plan to dispose of Fairchild Technologies.
Based on this plan, we have sold a majority of Fairchild Technologies'
businesses, including most of its intellectual property, through a series of
transactions. On April 14, 1999, we disposed of Fairchild Technologies
photoresist deep-ultraviolet track equipment machines, spare parts and testing
equipment to Apex Co., Ltd. in exchange for 1,250,000 shares of Apex stock
valued at approximately $5.1 million. On June 15, 1999, we received $7.9
million from Suess Microtec AG and the right to receive 350,000 shares of Suess
Microtec stock (or at least approximately $3.5 million) by September 2000 in
exchange for certain inventory, fixed assets, and intellectual property of
Fairchild Technologies' semiconductor equipment group. On May 1, 1999, we sold
Fairchild CDI for a nominal amount. In July 1999, we received approximately $7.1
million from Novellus Systems, Inc. in exchange for Fairchild Technologies' Low-
K dielectric product line and certain intellectual property. We have been
exploring several alternative transactions regarding the disposition of
Fairchild Technologies' optical disc equipment group and we expect to dispose of
this unit prior to April 2000.
As of January 2, 2000, we have a remaining accrual of $4.5 million, net of
an income tax benefit of $3.3 million, for our current estimate of the remaining
losses in connection with the disposition of Fairchild Technologies. While we
believe that $4.5 million is a reasonable estimate for the remaining losses to
be incurred from Fairchild Technologies, there can be no assurance that this
estimate is adequate.
Uncertainty of the Spin-Off
In order to focus our operations on the aerospace industry, we have been
considering for some time distributing to our stockholders certain of our assets
via distribution of all of the stock of a new entity, which may own all or a
part of our non-aerospace operations. Depending upon the composition of the
assets and liabilities to be included in the spin-off, our ability to consummate
the spin-off, if we should choose to do so, may be contingent, among other
things, on attaining certain milestones under our credit facility, or waivers
thereof, and all necessary governmental and third party approvals. There is no
assurance that we will be able to reach such milestones or obtain the necessary
waivers from our lenders. In addition, we may encounter unexpected delays in
effecting the spin-off, and we can make no assurance as to the timing thereof,
or as to whether the spin-off will ever occur.
Depending on the ultimate structure and timing of the spin-off, it may be a
taxable transaction to our stockholders and could result in a material tax
liability to us as well as our stockholders. The amount of the tax to us is
uncertain, and if the tax is material to us, we may elect not to consummate the
spin-off. Because circumstances may change and provisions of the Internal
Revenue Code of 1986, as amended, may be further amended from time to time, we
may, depending on various factors, restructure or delay the timing of the spin-
off to minimize the tax consequences to us and our stockholders, or elect not to
consummate the spin-off. Under the spin-off, the newly created entity may
assume certain of our liabilities, including contingent liabilities, and may
indemnify us for such liabilities. If this entity is unable to satisfy
liabilities assumed in connection with the spin-off, we may have to satisfy such
liabilities.
Year 2000
To date, we have not experienced any material problems as a result of the
Year 2000 turnover. We do not anticipate that we will have any operating or
system problems in connection with the leap year date of February 29, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes and amends a number of existing accounting standards. It
requires that all derivatives be recognized as assets and liabilities on the
balance sheet and measured at fair value. The corresponding derivative gains or
losses are reported based on the hedge relationship that exists, if any.
Changes in the fair value of derivative instruments that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133, are
required to be reported in earnings. Most of the general qualifying criteria
for hedge accounting under SFAS 133 were derived from, and are similar to, the
existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts."
SFAS 133 describes three primary types of hedge relationships: fair value hedge,
cash flow hedge, and foreign currency hedge. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137 to defer the required
effective date of implementing SFAS 133, from fiscal years beginning after June
15, 1999 to fiscal years beginning after June 15, 2000. We will adopt SFAS 133
in fiscal 2001, and are currently evaluating the financial statement impact.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, which include interest rate swaps. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
Expected Fiscal Year 2008 (a)
Maturity Date
Interest Rate Swaps:
Variable to Fixed 100,000
Average cap rate 6.49%
Average floor rate 6.24%
Weighted average rate 6.95%
Fair Market Value (777)
(a) - On February 17, 2003, the bank with which we entered into the interest
rate swap agreement will have a one-time option to elect to cancel this
agreement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 9 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2. Changes in Securities and Use of Proceeds
Our stock option deferral plan allows officers and directors who are
accredited investors to defer the gain upon exercise of stock options by
receiving deferred compensation units instead of shares of stock. The deferred
compensation units may be deemed securities issued by the company. The shares
issued to an officer or director upon expiration of the deferral period (in
exchange for deferred compensation units) have been registered pursuant to a
registration statement on form S-8. Under our stock option deferral plan, an
aggregate of 50,310 deferred compensation units were issued in November 1999 to
the following directors: Phillip David (15,862 deferred compensation units),
Harold Harris (15,762 deferred compensation units), and Herbert Richey (18,666
deferred compensation units).
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of our Stockholders was held on November 18, 1999. Five
matters of business were held to vote for the following purposes:
Proposal 1 - to elect ten directors for the ensuing year;
Proposal 2 - to amend the Director Stock Option Plan, to permit deferment of
compensation;
Proposal 3 - to approve the material terms of the performance goal for the
fiscal 2000 incentive compensation award for the President and Chief Operating
Officer;
Proposal 4 - to approve the material terms of the performance goal for the
fiscal 2000 incentive compensation award for the Chief Executive Officer;
Proposal 5 to approve an amendment to the material terms of the performance goal
for the fiscal 2000 incentive compensation awards for the Chief Executive
Officer and for the President and Chief Operating Officer, by restricting the
payment of certain "extraordinary transaction" bonuses in fiscal 2000.
The following tables provide the results of shareholder voting on each
proposal, expressed in number of shares:
Proposal 1
Directors: Votes For Votes
Withheld
Melville R. Barlow
42,128,852 3,829,236
Mortimer M. Caplin
42,124,877 3,833,211
Philip David
42,128,132 3,829,956
Robert E. Edwards
42,126,904 3,831,184
Steven L. Gerard
42,130,352 3,827,736
Harold J. Harris
42,125,632 3,832,456
Daniel Lebard
42,130,582 3,827,506
Herbert S. Richey
42,123,022 3,835,066
Eric I. Steiner
42,087,141 3,870,947
Jeffrey J. Steiner
41,155,407 4,802,681
Votes For Votes Abstain Non-Vote
Against
Proposal 2
40,188,631 5,739,984 29,473 -
Proposal 3
33,388,235 8,383,989 1,178,361 3,007,503
Proposal 4
33,381,145 8,388,543 1,180,897 3,007,503
Proposal 5
30,329,423 - - 15,628,665
Item 5. Other Information
Articles have appeared in the French press reporting an inquiry by a French
magistrate into certain allegedly improper business transactions involving Elf
Acquitaine, a French petroleum company, its former chairman and various third
parties, including Maurice Bidermann. In connection with this inquiry, the
magistrate has made inquiry into allegedly improper transactions between Mr.
Steiner and that petroleum company. In response to the magistrate's request that
Mr. Steiner appear in France as a witness, Mr. Steiner submitted written
statements concerning the transactions and appeared in person before the
magistrate and others. The magistrate has put Mr. Steiner under examination (mis
en examen) with respect to this matter and imposed a surety (caution) of ten
million French francs which has been paid. Mr. Steiner has not been charged.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits:
*10.1 Amendment No. 1, dated as of November 29, 1999 to the Credit Agreement
dated as of April 20, 1999.
10.2 Asset Purchase Agreement dated as of October 22, 1999, among The
Fairchild Corporation, Banner Aerospace, Inc., Dallas Aerospace, Inc.,
and United Technologies Corporation, acting through its Pratt & Whitney
Division (incorporated by reference to the Registrant's Report on Form 8-
K dated December 13, 1999).
*27 Financial Data Schedules.
* - Filed herewith
(b)Reports on Form 8-K:
On October 26, 1999, and on December 13, 1999, as amended, we filed a
Form 8-K to report on Item 5 and Item 7 regarding the disposition of Dallas
Aerospace, Inc. The December 13, 1999 Form 8-K includes unaudited pro forma
consolidated statements of earnings for the year ended June 30, 1999 and for
the three months ended October 3, 1999, and unaudited pro forma consolidated
balance sheet as of October 3, 1999, giving effect to the disposition of
Dallas Aerospace.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to the signed on its behalf by the undersigned
hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By:
Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date:February 16, 2000