26
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended October 1, 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 April 1, 2001
-------------- -------------
Class A Common Stock, $0.10 Par Value 22,527,801
Class B Common Stock, $0.10 Par Value 2,621,502
AMENDMENT:
The purpose of this amendment is to provide restated financial information and
additional disclosure for Part I, Financial Information. The Company is
improving its results for the three months ended October 1, 2000, by restating a
$0.5 million loss, or $0.02 per share, previously recognized from the cumulative
effect of change in accounting for derivatives to other comprehensive income.
See Note 8 of Part I, Item 1 "Financial Information." The Company is also
enhancing its segment disclosure to reflect the addition of our real estate
segment.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
----
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of October 1, 2000
(Unaudited) and June 30, 2000.............................. 3
Consolidated Statements of Earnings (Unaudited)for the Three
Months ended October 1, 2000 and October 3, 1999........... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months ended October 1, 2000 and October 3, 1999 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.................................... 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk.. 24
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
October 1, 2000 (Unaudited) and June 30, 2000
(In thousands)
ASSETS
October 1, June 30,
2000 2000
------------------ ------------------
(*)
CURRENT ASSETS:
Cash and cash equivalents, $13,907 and $14,287 restricted $ 32,816 $ 35,790
Short-term investments 4,024 9,054
Accounts receivable-trade, less allowances of $10,554 and $9,598 112,908 127,230
Inventories:
Finished goods 136,169 138,330
Work-in-process 30,271 30,523
Raw materials 12,539 11,006
------------------ ------------------
178,979 179,859
Prepaid expenses and other current assets 84,393 74,231
------------------ ------------------
Total Current Assets 413,120 426,164
Property, plant and equipment, net of accumulated
depreciation of $143,496 and $142,938 164,841 174,137
Net assets held for sale 17,590 20,112
Cost in excess of net assets acquired (Goodwill), less
accumulated amortization of $55,921 and $52,826 430,324 436,442
Investments and advances, affiliated companies 3,325 3,238
Prepaid pension assets 64,510 64,418
Deferred loan costs 14,278 14,714
Real estate investment 113,578 112,572
Long-term investments 9,271 10,084
Other assets 5,948 5,539
------------------ ------------------
TOTAL ASSETS $ 1,236,785 $ 1,267,420
================== ==================
<FN>
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 1, 2000 (Unaudited) and June 30, 2000
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
October 1, June 30,
2000 2000
------------------ ------------------
CURRENT LIABILITIES: (*)
- --------------------
Bank notes payable and current maturities of long-term debt $ 26,963 $ 28,594
Accounts payable 50,838 62,494
Accrued liabilities:
Salaries, wages and commissions 32,999 38,065
Employee benefit plan costs 6,080 5,608
Insurance 11,523 12,237
Interest 12,203 6,408
Other accrued liabilities 48,429 60,123
------------------ ------------------
Total Current Liabilities 189,035 213,529
LONG-TERM LIABILITES:
Long-term debt, less current maturities 473,537 453,719
Fair market value of interest rate contract 470 -
Other long-term liabilities 25,592 26,741
Retiree health care liabilities 42,597 42,803
Noncurrent income taxes 113,969 128,515
------------------ ------------------
TOTAL LIABILITIES 845,200 865,307
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; authorized
40,000 shares, 30,290 (30,079 in June) shares issued and
22,430 (22,430 in June) shares outstanding 3,029 3,008
Class B common stock, $0.10 par value; authorized 20,000
Shares, 2,622 shares issued and outstanding 262 262
Paid-in capital 232,494 231,190
Treasury stock, at cost, 7,807 (7,649 in June) shares of Class A common stock (76,545) (75,506)
Retained earnings 256,343 261,788
Notes due from stockholders (1,867) (1,867)
Cumulative other comprehensive income (22,131) (16,762)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 391,585 402,113
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,236,785 $ 1,267,420
================== ==================
<FN>
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended October 1, 2000 and October 3, 1999
(In thousands, except per share data)
Three Months Ended
-------------------------------------
10/01/00 10/03/99
----------------- -----------------
REVENUE:
Net sales $148,367 $164,509
Other income, net 2,516 4,828
----------------- -----------------
150,883 169,337
COSTS AND EXPENSES:
Cost of goods sold 113,591 121,362
Selling, general & administrative 29,862 31,828
Amortization of goodwill 3,134 3,096
Restructuring - 3,017
----------------- -----------------
146,587 159,303
OPERATING INCOME 4,296 10,034
Interest expense 12,983 12,209
Interest income (524) (735)
----------------- -----------------
Net interest expense 12,459 11,474
Investment income (loss) (380) 880
Decrease in fair market value of interest rate contract (470) -
Nonrecurring gain - 28,003
----------------- -----------------
Earnings (loss) from continuing operations before taxes (9,013) 27,443
Income tax benefit (provision) 3,574 (9,132)
Equity in earnings (loss) of affiliates, net (6) (201)
----------------- -----------------
NET EARNINGS (LOSS) $ (5,445) $ 18,110
================= =================
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (4,080) (1,648)
Unrealized holding changes on derivatives arising during the period (528) -
Unrealized holding changes on securities arising during the period (761) (5,006)
----------------- -----------------
Other comprehensive loss (5,369) (6,654)
----------------- -----------------
COMPREHENSIVE INCOME (LOSS) $ (10,814) $ 11,456
================= =================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended October 1, 2000 and October 3, 1999
(In thousands, except per share data)
Three Months Ended
-------------------------------------
10/01/00 10/03/99
----------------- -----------------
BASIC EARNINGS PER SHARE:
NET EARNINGS (LOSS) $ (0.22) $ 0.73
================= =================
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.16) $ (0.07)
Unrealized holding changes on derivatives arising during the period (0.02) -
Unrealized holding changes on securities arising during the period (0.03) (0.20)
----------------- -----------------
Other comprehensive loss (0.21) (0.27)
----------------- -----------------
COMPREHENSIVE INCOME (LOSS) $ (0.43) $ 0.46
================= =================
DILUTED EARNINGS PER SHARE:
NET EARNINGS (LOSS) $ (0.22) $ 0.72
================= =================
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.16) $ (0.07)
Unrealized holding changes on derivatives arising during the period (0.02) -
Unrealized holding changes on securities arising during the period (0.03) (0.20)
----------------- -----------------
Other comprehensive loss (0.21) (0.27)
----------------- -----------------
COMPREHENSIVE INCOME (LOSS) $ (0.43) $ 0.45
================= =================
Weighted average shares outstanding:
Basic 25,068 24,862
Diluted 25,068 25,026
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Three (3) Months Ended October 1, 2000 and October 3, 1999
(In thousands)
For the Three Months Ended
-------------------------------------
10/1/00 10/3/99
------------------ ------------------
Cash flows from operating activities:
Net earnings (loss) $ (5,445) $ 18,110
Depreciation and amortization 10,950 9,968
Accretion of discount on long-term liabilities 205 897
Amortization of deferred loan fees 456 413
Net gain on divestiture of investment in affiliate - (25,747)
Net gain on divestiture of subsidiary - (2,256)
Distributed (undistributed) earnings of affiliates, net 9 310
Change in assets and liabilities (31,280) (12,064)
Non-cash charges and working capital changes of discontinued operations - (10,930)
------------------ ------------------
Net cash used for operating activities (25,105) (21,299)
Cash flows from investing activities:
Purchase of property, plant and equipment (3,861) (11,879)
Net proceeds received from (used for) investment securities 4,759 (3,933)
Net proceeds received from divestiture of investment in affiliate - 43,103
Net proceeds received from divestiture of subsidiary - 4,906
Real estate investment (1,601) (5,329)
Proceeds received from net assets held for sale 2,211 1,346
Investing activities of discontinued operations - 7,100
------------------ ------------------
Net cash provided by investing activities 1,508 35,314
Cash flows from financing activities:
Proceeds from issuance of debt 23,453 126,691
Debt repayments (2,608) (142,279)
Issuance of Class A common stock 194 90
Purchase of treasury stock - (624)
------------------ ------------------
Net cash provided by (used for) financing activities 21,039 (16,122)
Effect of exchange rate changes on cash (416) 437
------------------ ------------------
Net change in cash and cash equivalents (2,974) (1,670)
Cash and cash equivalents, beginning of the year 35,790 54,860
------------------ ------------------
Cash and cash equivalents, end of the period $ 32,816 $ 53,190
================== ==================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
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 October 1, 2000, and the consolidated
statements of earnings and cash flows for the three months ended October 1, 2000
and October 3, 1999 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 October 1, 2000, and for all periods presented, have been made.
The balance sheet at June 30, 2000 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, 2000 Annual Report on Form 10-K. The results of operations for
the period ended October 1, 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. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated statement of earnings for the three
months ended October 3, 1999 have been prepared to give effect to the
dispositions of Dallas Aerospace (December 1999) and the investment in Nacanco
(July 1999), as if these transaction had occurred on July 1, 1999. The unaudited
pro forma information is not intended to be indicative of future results of our
operations or results that might have been achieved if these transactions had
been in effect since the beginning of the three months ended October 3, 1999.
For the three months ended: October 3,
1999
-----------------
Net sales $ 153,365
Gross profit 40,864
Net earnings 786
Net earnings, per basic share $ 0.03
Net earnings, per diluted share $ 0.03
3. EQUITY SECURITIES
We had 22,482,688 shares of Class A common stock and 2,621,652 shares of
Class B common stock outstanding at October 1, 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 three months ended October 1, 2000, 52,966 shares
of Class A common stock were issued as a result of the exercise of stock
options.
During the three months ended October 1, 2000, we issued 132,394 deferred
compensation units pursuant to our stock option deferral plan, as a result of
the exercise of 291,050 stock options. Each deferred compensation unit is
represented by one share of our treasury stock and is convertible into one share
of our Class A common stock after a specified period of time.
4. RESTRICTED CASH
On October 1, 2000 and June 30, 2000, we had restricted cash of $13,907 and
$14,287, respectively, all of which is maintained as collateral for certain debt
facilities and escrow arrangements.
5. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
(In thousands, except per share data) For the Three Months Ended
-----------------------------------
10/1/00 10/3/99
---------------- ---------------
Basic earnings per share:
Net earnings (loss) from continuing operations $ (5,445) $ 18,110
================ ===============
Weighted average common shares outstanding 25,068 24,862
================ ===============
Basic earnings (loss) from continuing operations per share $ (0.22) $ 0.73
================ ===============
Diluted earnings per share:
Net earnings (loss) from continuing operations $ (5,445) $ 18,110
================ ===============
Weighted average common shares outstanding 25,068 24,862
Options antidilutive 10
Warrants antidilutive 154
---------------- ---------------
Total shares outstanding 25,068 25,026
================ ===============
Diluted earnings (loss) from continuing operations per share $ (0.22) $ 0.72
================ ===============
Stock options entitled to purchase 2,283,011 and 1,767,986 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three months ended October 1, 2000 and October 3, 1999,
respectively. Stock warrants entitled to purchase 650,000 shares of Class A
common stock were antidilutive and not included in the earnings per share
calculation for the three months ended October 1, 2000. These shares could be
dilutive in subsequent periods.
6. CONTINGENCIES
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 related to 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 October 1, 2000, the consolidated total of our recorded liabilities
for environmental matters was approximately $13.1 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $19.7 million.
Other Matters
AlliedSignal (now Honeywell International) had asserted indemnification
claims against us in an aggregate amount of $38.8 million, arising from the
disposition of Banner Aerospace's hardware business to AlliedSignal. We claimed
that AlliedSignal owed us approximately $6.8 million. In October 2000, we
reached an agreement with AlliedSignal to settle these claims and as a result of
the settlement no cash changed hands.
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.
7. 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.
In fiscal 1998, we entered into a ten-year interest rate swap agreement to
reduce our cash flow exposure to increases in interest rates on variable rate
debt. The ten-year interest rate swap agreement provides us with interest rate
protection on $100 million of variable rate debt, with interest being calculated
based on a fixed LIBOR rate of 6.24% to February 17, 2003. On February 17, 2003,
the bank will have a one-time option to elect to cancel the agreement or to do
nothing and proceed with the transaction, using a fixed LIBOR rate of 6.715% for
the period February 17, 2003 to February 19, 2008.
We adopted SFAS 133 on July 1, 2000. At adoption, we recorded a decrease of
$0.5 million in the fair market value of our $100 million interest rate swap
agreement within other comprehensive income. The $0.5 million decrease will be
amortized over the remaining life of the interest rate swap agreement using the
effective interest method. The offsetting interest rate swap liability is
separately being reported as a "fair market value of interest rate contract"
within other long-term liabilities. In the statement of earnings we have
recorded the net swap interest accrual as part of interest expense. Unrealized
changes in the fair value of the Swap are recorded net of the current interest
accrual on a separate line entitled "decrease in fair market value of interest
rate derivatives."
We did not elect to pursue hedge accounting for the interest rate swap
agreement, which was executed to provide an economic hedge against cash flow
variability on the floating rate note. When evaluating the impact of SFAS No.
133 on this hedge relationship, we assessed the key characteristics of the
interest rate swap agreement and the note. Based on this assessment, we
determined that the hedging relationship would not be highly effective. The
ineffectiveness is caused by the existence of the embedded written call option
in the interest rate swap agreement, and the absence of a mirror option in the
hedged item. As such, pursuant to SFAS No. 133, we designated the interest rate
swap agreement in the no hedging designation category. Accordingly, we have
recognized a non-cash decrease in fair market value of interest rate derivatives
of $0.4 million in the first quarter of fiscal 2001 as a result of the fair
market value adjustment for our interest rate swap agreement.
The fair market value adjustment of these agreements will generally
fluctuate based on the implied forward interest rate curve for 3-month LIBOR. As
the implied forward interest rate curve decreases, the fair market value of the
interest hedge contract will increase and we will record an additional charge.
As the implied forward interest rate curve increases, the fair market value of
the interest hedge contract will decrease, and we will record income.
In March 2000, the Company issued a floating rate note with a principal
amount of $30,750,000. Embedded within the promissory note agreement is an
interest rate cap. The embedded interest rate cap limits the 1-month LIBOR
interest rate that we must pay on the note to 8.125%. At execution of the
promissory note, the strike rate of the embedded interest rate cap of 8.125% was
above the 1-month LIBOR rate of 6.61%. Under SFAS 133, the embedded interest
rate cap is considered to be clearly and closely related to the debt of the host
contract and is not required to be separated and accounted for separately from
the host contract. For the quarterly period ended October 1, 2000, we accounted
for the hybrid contract, comprised of variable rate note and the embedded
interest rate cap as a single debt instrument.
8. SEGMENT INFORMATION
We currently report in three principal business segments: aerospace
fasteners, aerospace distribution and real estate operations. Since our last
annual report, we are now reporting the results of the real estate operations as
a separate segment. Previously, the results for our real estate operations were
included within the corporate and other classification. The following table
provides the historical results of our operations for the three months ended
October 1, 2000 and October 2, 1999, respectively.
Three Months Ended
--------------------------
10/1/00 10/3/99
--------------------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $125,446 $ 134,420
Aerospace Distribution Segment 22,921 29,350
Corporate and Other Segment - 739
--------------------------
TOTAL SALES $148,367 $ 164,509
--------------------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment (a) $ 6,999 $ 8,875
Aerospace Distribution Segment 1,287 2,257
Real Estate Segment (b) 564 101
Corporate and Other Segment (4,554) (1,199)
--------------------------
TOTAL OPERATING INCOME $ 4,296 $ 10,034
--------------------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
Aerospace Fasteners Segment (a) $ 6,439 $ 8,124
Aerospace Distribution Segment 1,728 (234)
Real Estate Segment (b) (265) 101
Corporate and Other Segment (16,915) 19,452
--------------------------
TOTAL EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES $ (9,013) $ 27,443
--------------------------
TOTAL ASSETS: 10/1/00 6/30/00
--------------------------
Aerospace Fasteners Segment $599,115 $632,152
Aerospace Distribution Segment 50,404 90,918
Real Estate Segment 117,220 120,092
Corporate and Other Segment 470,046 424,258
--------------------------
TOTAL ASSETS $1,236,785 $1,267,420
--------------------------
<FN>
(a) - Includes restructuring charges of $3.0 million in the three October 3,
1999.
(b) - Includes rental revenue of $1.7 million and $0.3 million for the three
months ended October 1, 2000 and October 3, 1999, respectively.
</FN>
9. 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
OCTOBER 1, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ ------------- --------------
Cash $ 167 $ 26,311 $ 6,338 $ - $ 32,816
Marketable securities 71 3,953 - - 4,024
Accounts Receivable (including intercompany), less
allowances 2,127 199,009 1,694 (89,922) 112,908
Inventory, net - 132,116 46,863 - 178,979
Prepaid and other current assets 351 31,748 7,828 44,466 84,393
----------- ------------ ------------ ------------- --------------
Total current assets 2,716 393,137 62,723 (45,456) 413,120
Investment in Subsidiaries 872,629 - - (872,629) -
Net fixed assets 479 125,597 38,765 - 164,841
Net assets held for sale - 17,590 - - 17,590
Investments in affiliates 945 2,380 - - 3,325
Goodwill 16,325 382,690 33,969 (2,660) 430,324
Deferred loan costs 12,957 22 1,299 - 14,278
Prepaid pension assets - 64,510 - - 64,510
Real estate investment - - 113,578 - 113,578
Long-term investments 355 9,404 - (488) 9,271
Other assets 17,562 (13,453) 1,840 (1) 5,948
----------- ------------ ------------ ------------- --------------
Total assets $923,968 $ 981,877 $ 252,174 $(921,234) $ 1,236,785
=========== ============ ============ ============= ==============
Bank notes payable & current maturities of debt $ 2,250 $ 1,791 $ 22,922 $ - $ 26,963
Accounts payable (including intercompany) 221 539,434 63,373 (552,190) 50,838
Other accrued expenses (27,580) 65,789 33,614 39,411 111,234
----------- ------------ ------------ ------------- --------------
Total current liabilities (25,109) 607,014 119,909 (512,779) 189,035
Long-term debt, less current maturities 431,299 8,066 34,168 - 473,533
Fair market value of interest rate contract 474 474
Other long-term liabilities 405 19,605 5,580 - 25,590
Noncurrent income taxes 120,953 (663) 179 (6,500) 113,969
Retiree health care liabilities - 38,258 4,339 - 42,597
----------- ------------ ------------ ------------- --------------
Total liabilities 528,022 672,280 164,175 (519,279) 845,198
Class A common stock 3,029 - 53 (53) 3,029
Class B common stock 262 - - - 262
Notes due from stockholders (520) (1,347) - - (1,867)
Paid-in-capital 209,104 372,455 164,658 (513,723) 232,494
Retained earnings 260,398 (52,192) (63,991) 112,128 256,343
Cumulative other comprehensive income (267) (8,834) (12,721) (307) (22,129)
Treasury stock, at cost (76,060) (485) - - (76,545)
----------- ------------ ------------ ------------- --------------
Total stockholders' equity 395,946 309,597 87,999 (401,955) 391,587
----------- ------------ ------------ ------------- --------------
Total liabilities & stockholders' equity $923,968 $ 981,877 $ 252,174 $(921,234) $1,236,785
=========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ ------------- --------------
Net Sales $ - $ 116,058 $ 34,146 $ (1,837) $ 148,367
Costs and expenses
Cost of sales - 90,824 24,604 (1,837) 113,591
Selling, general & administrative 1,363 22,250 3,733 - 27,346
Amortization of goodwill 202 2,683 249 - 3,134
----------- ------------ ------------ ------------- --------------
1,565 115,757 28,586 (1,837) 144,071
----------- ------------ ------------ ------------- --------------
Operating income (loss) (1,565) 301 5,560 - 4,296
Net interest expense (including intercompany) (2,460) 12,388 2,531 - 12,459
Investment (income) loss, net - 380 - - 380
Fair market value adjustment of Interest Rate Contract 470 - - - 470
----------- ------------ ------------ ------------- --------------
Earnings (loss) before taxes 425 (12,467) 3,029 - (9,013)
Income tax (provision) benefit (169) 4,944 (1,201) - 3,574
Equity in earnings of affiliates and subsidiaries (5,701) (6) - 5,701 (6)
----------- ------------ ------------ ------------- --------------
Net earnings (loss) $ (5,445) $ (7,529) $ 1,829 $ 5,701 $ (5,445)
=========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ ------------- --------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (5,445) $ (7,529) $ 1,828 $ 5,701 $ (5,445)
Depreciation & amortization 232 8,124 2,594 - 10,950
Accretion of discount on long-term liabilities - 205 - - 205
Amortization of deferred loan fees 343 2 111 - 456
Undistributed (distributed) earnings of affiliates - 9 - - 9
Change in assets and liabilities (16,244) (919) (8,416) (5,701) (31,280)
----------- ------------ ------------ ------------- --------------
Net cash (used for) provided by operating activities (21,114) (108) (3,883) - (25,105)
Cash Flows from Investing Activities:
Proceeds received from (used for):
Purchase of PP&E (30) (3,034) (797) - (3,861)
Investment securities, net - 4,759 - - 4,759
Change in real estate investment - - (1,601) - (1,601)
Change in net assets held for sale - 2,211 - - 2,211
----------- ------------ ------------ ------------- --------------
Net cash (used for) provided by investing activities (30) 3,936 (2,398) - 1,508
Cash Flows from Financing Activities:
Proceeds from issuance of debt 21,082 14 2,357 - 23,453
Debt repayments, net - (594) (2,014) - (2,608)
Issuance of Class A common stock 194 - - - 194
----------- ------------ ------------ ------------- --------------
Net cash (used for) provided by financing activities 21,276 (580) 343 - 21,039
Effect of exchange rate changes on cash - - (416) - (416)
----------- ------------ ------------ ------------- --------------
Net change in cash 132 3,248 (6,354) - (2,974)
Cash, beginning of the year 35 23,063 12,692 - 35,790
----------- ------------ ------------ ------------- --------------
Cash, end of the year $ 167 $ 26,311 $ 6,338 $ - $ 32,816
=========== ============ ============ ============= ==============
CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ ------------- --------------
Cash $ 35 $ 23,063 $ 12,692 $ - $ 35,790
Short-term investments 71 8,983 - - 9,054
Accounts Receivable (including intercompany), less
allowances 2,079 82,054 43,097 - 127,230
Inventory, net - 130,634 49,225 - 179,859
Prepaid and other current assets 141 67,624 6,466 - 74,231
----------- ------------ ------------ ------------- --------------
Total current assets 2,326 312,358 111,480 - 426,164
Investment in Subsidiaries 869,958 - - (869,958) -
Net fixed assets 493 131,029 42,615 - 174,137
Net assets held for sale - 20,112 - - 20,112
Investments and advances in affiliates 945 2,293 - - 3,238
Goodwill 16,528 385,156 34,758 - 436,442
Deferred loan costs 13,284 24 1,406 - 14,714
Prepaid pension assets - 64,418 - - 64,418
Real estate investment - - 112,572 - 112,572
Long-term investments 355 9,729 - - 10,084
Other assets 17,592 (13,418) 1,365 - 5,539
----------- ------------ ------------ ------------- --------------
Total assets $921,481 $ 911,701 $ 304,196 $(869,958) $1,267,420
=========== ============ ============ ============= ==============
Bank notes payable & current maturities of debt $ 2,250 $ 2,194 $ 24,150 $ - $ 28,594
Accounts payable (including intercompany) 2,954 46,105 13,435 - 62,494
Other accrued expenses (42,778) 129,106 36,113 - 122,441
Net current liabilities of discontinued operations - - - - -
----------- ------------ ------------ ------------- --------------
Total current liabilities (37,574) 177,405 73,698 - 213,529
Long-term debt, less current maturities 410,691 8,242 34,786 - 453,719
Other long-term liabilities 405 19,839 6,497 - 26,741
Noncurrent income taxes 145,847 (17,525) 193 - 128,515
Retiree health care liabilities - 38,196 4,607 - 42,803
----------- ------------ ------------ ------------- --------------
Total liabilities 519,369 226,157 119,781 - 865,307
Class A common stock 3,008 - 2,090 (2,090) 3,008
Class B common stock 262 - - - 262
Notes due from stockholders (520) (1,347) - - (1,867)
Paid-in-capital 5,158 226,032 249,301 (249,301) 231,190
Retained earnings 469,270 469,183 (58,098) (618,567) 261,788
Cumulative other comprehensive income (46) (7,838) (8,878) - (16,762)
Treasury stock, at cost (75,020) (486) - - (75,506)
----------- ------------ ------------ ------------- --------------
Total stockholders' equity 402,112 685,544 184,415 (869,958) 402,113
----------- ------------ ------------ ------------- --------------
Total liabilities & stockholders' equity $921,481 $ 911,701 $ 304,196 $(869,958) $1,267,420
=========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1999
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ ------------- --------------
Net Sales $ - $ 123,893 $ 41,645 $ (1,029) $ 164,509
Costs and expenses:
Cost of sales - 91,623 30,768 (1,029) 121,362
Selling, general & administrative 1,008 20,357 5,635 - 27,000
Restructuring - 3,017 - - 3,017
Amortization of goodwill 128 2,680 288 - 3,096
----------- ------------ ------------ ------------- --------------
1,136 117,677 36,691 (1,029) 154,475
----------- ------------ ------------ ------------- --------------
Operating income (loss) (1,136) 6,216 4,954 - 10,034
Net interest expense 12,425 (2,569) 1,618 - 11,474
Investment (income) loss, net - (880) - - (880)
Intercompany dividends - - 117 (117) -
Nonreucrring income - - (28,003) - (28,003)
----------- ------------ ------------ ------------- --------------
Earnings (loss) before taxes (13,561) 9,665 31,222 117 27,443
Income tax (provision) benefit (8,853) (117) (162) - (9,132)
Equity in earnings of affiliates and subsidiaries 40,524 (201) - (40,524) (201)
----------- ------------ ------------ ------------- --------------
Earnings (loss) from continuing operations 18,110 9,347 31,060 (40,407) 18,110
Earnings (loss) from disposal of
discontinued operations - 206) 206 - -
----------- ------------ ------------ ------------- --------------
Net earnings (loss) $ 18,110 $ 9,141 $ 31,266 $ (40,407) $ 18,110
=========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1999
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ ------------- --------------
Cash Flows from Operating Activities:
Net earnings (loss) $18,110 $ 9,141 $ 31,266 $ (40,407) $ 18,110
Depreciation & amortization 137 6,980 2,851 - 9,968
Amortization of deferred loan fees 413 - - - 413
Accretion of discount on long-term liabilities 897 - - - 897
Net gain on divestiture of subsidiaries and affiliates - - (28,003) - (28,003)
(Gain) loss on sale of investments - 1,009 - - 1,009
(Gain) loss on sale of PP&E - 70 20 - 90
Undistributed (distributed) earnings of affiliates - 310 - - 310
Change in assets and liabilities (4,638) (48,704) (434) 40,613 (13,163)
Non-cash charges and working capital changes
of discontinued operations - - (10,930) - (10,930)
----------- ------------ ------------ ------------- --------------
Net cash (used for) provided by operating activities 14,919 (31,194) (5,230) 206 (21,299)
----------- ------------ ------------ ------------- --------------
Cash Flows from Investing Activities:
Proceeds received from (used for)
Investment securities, net - (1,486) - - (1,486)
Purchase of PP&E (5) (9,388) (2,486) - (11,879)
Equity investment in affiliates - (2,447) - - (2,447)
Proceeds from divestiture of subsidiaries and
affiliates - - 48,009 - 48,009
Change in real estate investment - - (5,329) - (5,329)
Change in net assets held for sale - 1,346 - - 1,346
Investing activities of discontinued operations - - 7,100 - 7,100
----------- ------------ ------------ ------------- --------------
Net cash (used for) provided by investing activities (5) (11,975) 47,294 - 35,314
----------- ------------ ------------ ------------- --------------
Cash Flows from Financing Activities:
Proceeds from issuance of debt 14,500 110,459 1,732 - 126,691
Debt repayment and repurchase of debentures
(including intercompany), net (29,457) (66,240) (46,582) - (142,279)
Issuance of Class A common stock 90 - - - 90
Purchase of treasury stock - (624) - - (624)
----------- ------------ ------------ ------------- --------------
Net cash (used for) provided by financing activities (14,867) 43,595 (44,850) - (16,122)
----------- ------------ ------------ ------------- --------------
Effect of exchange rate changes on cash - 40 397 - 437
----------- ------------ ------------ ------------- --------------
Net change in cash 47 466 (2,389) 206 (1,670)
Cash, beginning of the year 27 41,793 13,040 - 54,860
----------- ------------ ------------ ------------- --------------
Cash, end of the year $ 74 $ 42,259 $ 10,651 $ 206 $53,190
=========== ============ ============ ============= ==============
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 own 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 Corp. and Banner
Aerospace.
The following discussion and analysis provide information which management
believes is relevant to the 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 supply chain services 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, European Aeronautic Defense and
Space Company, General Electric, Lockheed Martin, and Northrop Grumman.
Our business consists of three segments: aerospace fasteners, aerospace
distribution and real estate operations. The aerospace fasteners segment
manufactures and markets high performance fastening systems used in the
manufacture and maintenance of commercial and military aircraft. Our 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. Our real estate operations
segment owns and operates a shopping center in Farmingdale, New York.
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 estimates, 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
European Aeronautic Defense and Space Company; customer satisfaction and quality
issues; labor disputes; competition, including recent intense price competition;
our ability to achieve and execute internal business plans; worldwide political
instability and economic growth; the cost and availability of electric power to
operate our plants; and the impact of any economic downturns and inflation.
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 these forward-looking statements 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
that 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 July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to
American National Can Group, Inc. for approximately $48.2 million. Our
investment in Nacanco began in November 1987, and throughout the years we
invested approximately $6.2 million in Nacanco. Since the inception of our
investment, we recorded equity earnings of $25.7 million and received cash
dividends of $12.5 million from Nacanco. We recognized a $25.7 million
nonrecurring gain from this divestiture in the nine months ended April 2, 2000.
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. As a result of this disposition, our
interest expense was reduced. However, our equity earnings and dividend proceeds
also significantly decreased. In accordance with our plan to dispose of non-core
assets, the opportunity to dispose of our interest in Nacanco Paketleme
presented us with an excellent opportunity to realize a substantial return on
our investment and allowed us to reduce our then outstanding indebtedness by
approximately 8.6%.
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 pre-tax gain
from this disposition. We decided to dispose of the Camloc Gas Springs division
in order to concentrate our focus on our operations in the aerospace industry.
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
were used to reduce our term indebtedness and our interest expense. As a result
of this transaction, we reported a reduction in revenues of $21.7 million and
operating income of $2.1 million for the nine months ended April 1, 2001, as
compared to the nine months ended April 2, 2000. We estimated that the market
base for the older-type of engines that we were selling was shrinking, and that
we would be required to invest a substantial amount of cash to purchase
newer-type of engines to maintain market share. The opportunity to exit this
business presented us with an opportunity to improve cash flows by reducing our
indebtedness by $37.0 million, and by preserving our cash, which would otherwise
have had to have been invested to upgrade our inventory.
Consolidated Results
We currently report in three principal business segments: aerospace
fasteners, aerospace distribution and real estate operations. The results of
Camloc Gas Springs division, prior to its disposition, were included in the
Corporate and Other classification. The following table provides the historical
sales and operating income of our operations for the three months ended October
1, 2000 and October 3, 1999, respectively. The following table also illustrates
sales and operating income of our operations by segment, on an unaudited pro
forma basis, for the three months ended October 3, 1999, as if we had operated
in a consistent manner in each of the reported periods. The pro forma results
represent the impact of our disposition of Dallas Aerospace in December 1999, as
if this transaction had occurred at the beginning of the three-month period
ended October 3, 1999. 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 transaction had
been in effect since the beginning of fiscal 2000, nor is it necessarily
indicative of our future results.
(In thousands) Pro Forma
Actual Segment Results Segment Results
-------------------------------------
Three Months Ended Three Months Ended
-------------------------------------
10/1/2000 10/3/1999 10/3/1999
------------------ ------------------ -----------------
Sales by Segment:
Aerospace Fasteners $ 125,446 $ 134,420 $ 134,420
Aerospace Distribution 22,921 29,350 18,206
Corporate and Other - 739 739
------------------ ------------------ -----------------
TOTAL SALES $ 148,367 $ 164,509 $ 153,365
================== ================== =================
Operating Results by Segment:
Aerospace Fasteners (a) $ 6,999 $ 8,875 $ 8,875
Aerospace Distribution 1,287 2,257 1,352
Real Estate Segment (b) 564 101 101
Corporate and Other (4,554) (1,199) (1,199)
------------------ ------------------ -----------------
OPERATING INCOME $ 4,296 $ 10,034 $ 9,129
================== ================== =================
<FN>
(a) - Includes restructuring charges of $3.0 million in the three months ended October 3, 1999, respectively.
(b) - Includes rental revenue of $1.7 million and $0.3 million for the three
months ended October 1, 2000 and October 3, 1999, respectively.
</FN>
Net sales of $148.4 million in the first quarter of fiscal 2001 decreased
by $16.1 million, or 9.8%, compared to sales of $164.5 million in the first
quarter of fiscal 2000. The results for the three months ended October 3, 1999,
included $11.8 million of revenue from Dallas Aerospace and Camloc Gas Springs
division prior to their dispositions. Additionally, the first quarter of fiscal
2001 sales were adversely affected by approximately $6.5 million due to the
foreign currency impact on our European operations. On a pro forma basis and
excluding the period-to-period foreign currency effect, net sales increased by
$2.2 million for the three months ended October 1, 2000, compared to the three
months ended October 3, 1999.
Gross margin as a percentage of sales was 23.4% and 26.2% for the first
three months of fiscal 2001 and fiscal 2000, respectively. The reduced margins
in the fiscal 2001 period are attributable to lower prices and a change in
product mix.
Selling, general & administrative expense as a percentage of sales was
20.1% and 19.3% in the first three months of fiscal 2001 and 2000, respectively.
The increase is due primarily to $0.9 million of higher operating costs of our
Farmingdale shopping center as a result of increased rental income.
Other income decreased $2.4 million in the first three months of fiscal
2001, compared to the first three months of fiscal 2000. The decrease is due
primarily to $3.1 million of income recognized from the disposition of non-core
property during the three months ended October 3, 1999 and a $0.3 million loss
recognized from the disposition of non-core property during the three months
ended October 1, 2000, offset partially by a $1.3 million increase in rental
income on our Farmingdale shopping center.
In the three months ended October 3, 1999, we recorded $3.0 million of
restructuring charges as a result of the continued integration of Kaynar
Technologies, acquired in April 1999, into our aerospace fasteners segment. All
of the charges recorded were a direct result of product integration costs
incurred as of October 3, 1999. These costs were classified as restructuring and
were the direct result of formal plans to 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. Our integration
process was completed by June 30, 2000.
Operating income for the first quarter ended October 1, 2000 decreased by
$5.7 million as compared to the first quarter of the prior year. The results for
the three months ended October 3, 1999, included $0.9 million of operating
income from Dallas Aerospace, prior to its disposition and $3.1 million of
income recognized from the disposition of non-core property, offset partially by
restructuring charges of $3.0 million. Operating income for the first quarter of
fiscal 2001 was adversely affected by approximately $1.0 million due to the
foreign currency impact on our European operations, and by a $0.3 million loss
from the disposition of non-core property.
Net interest expense increased $1.5 million in the first three months of
fiscal 2001, compared to the first three months of fiscal 2000 due primarily to
higher interest rates and $0.5 million of non-cash interest expense recognized
on the fair market value adjustment of an interest rate hedge agreement.
We recognized investment income of $0.9 million in the first three months
of fiscal 2000, and an investment loss of $0.4 million in the first three months
of fiscal 2001 due primarily to recognizing realized gains on investments
liquidated.
Nonrecurring pre-tax income of $28.0 million in the three months ended
October 3, 1999 resulted from the disposition of our equity investment in
Nacanco Paketleme and the disposition of our Camloc Gas Springs division.
An income tax benefit of $3.6 million in the first three months of fiscal
2001 represented a 39.7% effective tax rate on pre-tax losses from continuing
operations. The tax benefit approximated the statutory rate.
Comprehensive income (loss) includes foreign currency translation
adjustments, unrealized holding changes in the fair market value of
available-for-sale investment securities, and the cumulative effect of adoption
of SFAS 133, accounting for Derivatives. For the three months ended October 1,
2000, foreign currency translation adjustments decreased by $4.1 million, the
fair market value of unrealized holding gains on investment securities we own
decreased by $0.8 million, and we recorded a $0.5 million decrease in the fair
market value of our $100 million interest rate swap agreement due to the
cumulative effect of adoption of SFAS 133.
We adopted SFAS 133 on July 1, 2000. At adoption, we recorded a decrease of
$0.5 million in the fair market value of our $100 million interest rate swap
agreement within other comprehensive income. The $0.5 million decrease will be
amortized over the remaining life of the interest rate swap agreement using the
effective interest method. The offsetting interest rate swap liability is
separately being reported as a "fair market value of interest rate contract"
within other long-term liabilities. In the statement of earnings we have
recorded the net swap interest accrual as part of interest expense. Unrealized
changes in the fair value of the Swap are recorded net of the current interest
accrual on a separate line entitled "decrease in fair market value of interest
rate derivatives."
Segment Results
Aerospace Fasteners Segment
Sales by our Aerospace Fasteners segment decreased by $9.0 million, or
6.7%, in the first quarter of fiscal 2001, as compared to the same period of
fiscal 2000. Sales from our European operations were adversely affected by
approximately $6.5 million in the first quarter of fiscal 2001, compared to the
first quarter of fiscal 2000, due to the foreign currency impact from the U.S.
dollar strengthening against the Euro. Pricing pressures throughout the
aerospace fasteners market continue to negatively affect revenues. However, our
book-to-bill ratio continues to remain positive indicating an improving market
place as compared to the sluggish conditions we have experienced over the past
twelve months.
Operating income decreased by $1.9 million in the first quarter of fiscal
2001, compared to the first quarter of fiscal 2000 due primarily to reduced
gross margins resulting from pricing pressures, offset partially by cost
reduction efforts in fiscal 2000. Operating income for the first quarter of
fiscal 2001 was adversely affected by approximately $1.0 million due to the
foreign currency impact on our European operations. Included in our prior
quarter results are restructuring charges of $3.0 million due to the integration
of Kaynar Technologies into our Aerospace Fasteners business. Operating expenses
at all operations are being strictly controlled as management attempts to reduce
operating costs to improve operating results in the short-term, without
adversely affecting our future long-term performance.
We believe that the integration savings from the Kaynar merger and
production efficiency improvements will partially offset the current weakened
demand for our products. We anticipate that the overall demand for aerospace
fasteners in fiscal 2001 will improve as OEMs inventory reduction programs
subside and the announced increase in aircraft build rates favorably affect the
demand for our products.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $6.4 million, or
21.9%, in the first three months of fiscal 2001, compared to the first three
months of fiscal 2000. The results for the three months ended October 3, 1999,
included $11.1 million of revenue from Dallas Aerospace, prior to its
disposition. On a pro forma basis, sales in our aerospace distribution segment
increased by $4.7 million, or 25.9%, in the current three-month period,
reflecting an overall improvement in demand for its products.
Operating income decreased by $1.0 million in the first quarter of fiscal
2001, compared to the first quarter of fiscal 2000. The results for the three
months ended October 3, 1999, included $0.9 million of operating income from
Dallas Aerospace, prior to its disposition. On a pro forma basis, operating
income was flat in the first three months ended October 1, 2000, compared to the
first three months ended October 3, 1999 and reflected a reduction in margins
due primarily to the change in product mix.
Real Estate Operations Segment
Our real estate operations segment owns and operates a shopping center
located in Farmingdale, New York. Included in operating income was rental
revenue of $1.7 million and $0.3 million for the three months ended October 1,
2000 and October 3, 1999, respectively. Rental revenue was higher in the fiscal
2001 quarter due to an increase in the amount of retail space leased to tenants.
We reported an operating income of $0.8 million for the first quarter of fiscal
2001, compared to operating income of $0.4 million in the first quarter of
fiscal 2000. Operating income was higher in the fiscal 2001 quarter as a result
of the increase in rental revenue.
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 as a result of the disposition of the Camloc Gas Springs
division in September 1999. The operating loss increased by $2.9 million in the
first three months of fiscal 2001, compared to the first three months of fiscal
2000. The first quarter of fiscal 2000 included $3.1 million of income
recognized from the disposition of non-core property, while the first quarter of
fiscal 2001 included a $0.3 million loss recognized from the disposition of
non-core property. Rental income earned at our shopping center in Farmingdale,
New York increased by $1.4 million in the first quarter of fiscal 2001, compared
to the first quarter of fiscal 2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of October 1, 2000 and June 30, 2000 amounted to
$892.6 million and $884.4 million, respectively. The changes in capitalization
included an $18.7 million increase in debt reflecting cash used to support our
operations, offset partially by a $5.4 million decrease in equity in the three
months ended October 1, 2000 due primarily to our reported net loss and a
reduction in comprehensive income.
We maintain a portfolio of investments classified primarily as
available-for-sale securities, which had a fair market value of $13.3 million at
October 1, 2000. The market value of these investments decreased by $0.8 million
in the three months ended October 1, 2000. There is risk associated with market
fluctuations inherent in stock investments, and because our portfolio is not
diversified, large swings in its value may occur.
Net cash used for operating activities for the three months ended October
1, 2000 and October 3, 1999 was $25.1 million and $21.3 million, respectively.
The primary use of cash for operating activities in the first three months of
fiscal 2001 was a $22.9 million decrease in accounts payable and other accrued
liabilities, offset partially by a $14.3 million decrease in accounts
receivable. The primary use of cash for operating activities in the first
quarter of fiscal 2000 was an increase in inventories of $14.1 million.
Net cash provided by investing activities for the three months ended
October 1, 2000 and October 3, 1999, amounted to $1.5 million and $35.3 million,
respectively. In the first three months of fiscal 2001, the primary source of
cash from investing activities was $7.0 million of net proceeds received from
the sale of investments and dispositions of non-core real estate, offset
partially by capital expenditures of $4.2 million and investments in our
Farmingdale shopping center of $1.0 million. In the first quarter of fiscal
2000, the primary source of cash from investing activities was $48.0 million of
net proceeds received from the dispositions of Nacanco and the Camloc Gas
Springs division, offset partially by capital expenditures of $11.9 million.
Net cash provided by financing activities for the three months ended
October 1, 2000 was $21.0 million and net cash used for financing activities for
the three months ended October 3, 1999 was $16.1 million. Cash provided by
financing activities in the first quarter of fiscal 2001, included $20.8 million
of net proceeds from the issuance of additional debt. Cash used for financing
activities in the first quarter of fiscal 2000 included a $15.0 million net
reduction in debt and the $0.6 million purchase of treasury stock.
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 2001.
We are required under the credit agreement to comply with certain financial
and non-financial loan covenants, including maintaining certain interest and
fixed charge coverage ratios and maintaining certain indebtedness to EBITDA
ratios at the end of each fiscal quarter. Additionally, the credit agreement
restricts annual capital expenditures to $40 million during the life of the
facility. Except for non-guarantor assets, substantially all of our assets are
pledged as collateral under the credit agreement. The credit agreement restricts
the payment of dividends to our shareholders to an aggregate of the lesser of
$0.01 per share or $0.4 million over the life of the agreement. 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. At October 1, 2000,
we were in full compliance with all the covenants under the credit agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In fiscal 1998, we entered into a ten-year interest rate swap agreement to
reduce our cash flow exposure to increases in interest rates on variable rate
debt. The ten-year interest rate swap agreement provides us with interest rate
protection on $100 million of variable rate debt, with interest being calculated
based on a fixed LIBOR rate of 6.24% to February 17, 2003. On February 17, 2003,
the bank will have a one-time option to elect to cancel the agreement or to do
nothing and proceed with the transaction, using a fixed LIBOR rate of 6.715% for
the period February 17, 2003 to February 19, 2008.
We did not elect to pursue hedge accounting for the interest rate swap
agreement, which was executed to provide an economic hedge against cash flow
variability on the floating rate note. When evaluating the impact of SFAS No.
133 on this hedge relationship, we assessed the key characteristics of the
interest rate swap agreement and the note. Based on this assessment, we
determined that the hedging relationship would not be highly effective. The
ineffectiveness is caused by the existence of the embedded written call option
in the interest rate swap agreement, and the absence of a mirror option in the
hedged item. As such, pursuant to SFAS No. 133, we designated the interest rate
swap agreement in the no hedging designation category. Accordingly, we have
recognized a non-cash decrease in fair market value of interest rate derivatives
of $0.4 million in the first quarter of fiscal 2001 as a result of the fair
market value adjustment for our interest rate swap agreement.
The fair market value adjustment of these agreements will generally
fluctuate based on the implied forward interest rate curve for 3-month LIBOR. As
the implied forward interest rate curve decreases, the fair market value of the
interest hedge contract will increase and we will record an additional charge.
As the implied forward interest rate curve increases, the fair market value of
the interest hedge contract will decrease, and we will record income.
In March 2000, the Company issued a floating rate note with a principal
amount of $30,750,000. Embedded within the promissory note agreement is an
interest rate cap. The embedded interest rate cap limits the 1-month LIBOR
interest rate that we must pay on the note to 8.125%. At execution of the
promissory note, the strike rate of the embedded interest rate cap of 8.125% was
above the 1-month LIBOR rate of 6.61%. Under SFAS 133, the embedded interest
rate cap is considered to be clearly and closely related to the debt of the host
contract and is not required to be separated and accounted for separately from
the host contract. For the quarterly period ended October 1, 2000, we accounted
for the hybrid contract, comprised of variable rate note and the embedded
interest rate cap as a single debt instrument.
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 and caps. For interest rate
swaps and caps, 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 Maturity Date 2003 2008
------------------- -------------------
Type of Interest Rate Contracts Interest Rate Cap Variable to Fixed
Variable to Fixed (in thousands) $30,750 $100,000
Fixed LIBOR rate N/A 6.24% (a)
LIBOR cap rate 8.125% N/A
Average floor rate N/A N/A
Weighted average forward LIBOR rate 6.89% 6.81%
Fair Market Value at October 1, 2000 (in thousands) $62 $(1,282)
<FN>
(a) - On February 17, 2003, the bank will have a one-time option to elect to
cancel the agreement or to do nothing and proceed with the transaction,
using a fixed LIBOR rate of 6.715% for the period February 17, 2003 to
February 19, 2008.
</FN>
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: /s/ MICHAEL T. ALCOX
--------------------
Michael T. Alcox
Senior Vice President and
Chief Financial Officer
Date: May 10, 2001