UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 1995
Commission File Number: 1-6560
THE FAIRCHILD CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 34-0728587
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Washington Dulles International Airport
300 West Service Road, P.O. Box 10803
Chantilly, Virginia 22021
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(Address of principal executive offices)
(Zip Code)
(703) 478-5800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class April 2, 1995
- ----- ---------------
Class A Common Stock, $.10 Par Value 13,406,109
Class B Common Stock, $.10 Par Value 2,696,886
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16,102,995
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES*
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of April 2, 1995 (Unaudited)
and June 30, 1994 3
Consolidated Statements of Earnings
for the Three and Nine Months Ended
April 2, 1995 and April 3, 1994 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended April 2,
1995 and April 3, 1994 (Unaudited) 7
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
*For purposes of Part I of this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For
purposes of Part II, the term "Company" means The Fairchild Corporation
unless otherwise indicated.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 2, June 30,
ASSETS 1995 1994
- ------ ----------- -----------
(Unaudited) (*)
Current Assets:
Cash and cash equivalents, $4,745 restricted. $ 36,906 $ 102,368
Short-term investments....................... 4,148 6,649
Accounts receivable-trade, less allowances
of $4,151 and $3,468....................... 95,844 74,196
Inventories:
Finished goods............................ 63,150 47,120
Work-in-process........................... 29,953 30,907
Raw materials............................. 14,777 11,988
--------- ---------
107,880 90,015
Prepaid expenses and other current assets.... 27,084 20,128
--------- ---------
Total Current Assets......................... 271,862 293,356
Property, plant and equipment, net of
accumulated depreciation of $110,505 and
$89,688.................................... 174,826 174,147
Net assets held for sale..................... 31,056 36,375
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$34,232 and $29,622......................... 204,837 205,395
Investments and advances - affiliated
companies................................... 73,320 71,532
Prepaid pension assets....................... 59,392 61,628
Long-term investments........................ 12,154 15,458
Other assets................................. 37,458 55,638
--------- ---------
Total Assets................................. $ 864,905 $ 913,529
========= =========
*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
(In thousands)
April 2, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------- ----------- ----------
(Unaudited) (*)
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 41,922 $ 14,978
Accounts payable............................. 40,859 35,271
Accrued interest............................. 11,093 16,936
Other accrued liabilities.................... 76,345 67,686
Income taxes payable......................... -- 12,713
--------- ---------
Total Current Liabilities.................... 170,219 147,584
Long-term debt, less current maturities...... 478,201 522,406
Other long-term liabilities.................. 21,425 25,116
Retiree health care liabilities.............. 49,478 51,189
Noncurrent income taxes...................... 56,215 53,162
Minority interest in subsidiaries............ 24,891 24,552
Redeemable preferred stock of subsidiary..... 16,796 17,552
--------- ---------
Total Liabilities............................ 817,225 841,561
Stockholders' Equity:
Class A common stock, 10 cents par value;
authorized 40,000,000 shares, 19,647,705
shares issued and 13,406,109 shares
outstanding................................ 1,965 1,965
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,696,886
shares issued and outstanding.............. 270 270
Paid-in capital.............................. 66,912 66,775
Retained earnings............................ 24,775 52,736
Cumulative translation adjustment............ 6,882 3,346
Additional minimum liability for pensions,
net of tax................................ (1,405) (1,405)
Treasury Stock, at cost, 6,241,596 shares of
Class A Common Stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 47,680 71,968
--------- ---------
Total Liabilities and Stockholders' Equity... $ 864,905 $ 913,529
========= =========
*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
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, expect per share data)
Three Months Ended Nine Months Ended
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---------- ---------- ---------- ----------
Revenue:
Sales............................. $150,755 $112,836 $398,077 $332,157
Other income (expense), net....... (1,212) 489 (882) 2,366
------- ------- ------- -------
149,543 113,325 397,195 334,523
Costs and Expenses:
Cost of sales..................... 115,021 85,698 301,693 256,182
Selling, general & administrative. 28,093 20,666 76,532 63,164
Research and development.......... 1,029 886 2,910 2,923
Amortization of goodwill.......... 1,529 1,490 4,608 4,566
Restructuring..................... -- -- -- 9,903
Unusual items..................... -- 3,200 -- 3,200
------- ------- ------- -------
145,672 111,940 385,743 339,938
Operating income (loss)............. 3,871 1,385 11,452 (5,415)
Interest expense.................... 17,663 18,202 52,816 55,505
Interest income..................... (823) (1,309) (2,872) (1,929)
------- ------- ------- -------
Net interest expense................ 16,840 16,893 49,944 53,576
Investment income, net.............. 190 43 2,825 7,068
Equity in earnings of affiliates.... (298) (124) 1,863 3,864
Minority interest................... (839) (575) (2,112) (1,764)
Non-recurring income................ -- (23) -- 129,084
------- ------- ------- -------
Earnings (loss) from continuing
operations before taxes........... (13,916) (16,187) (35,916) 79,261
Income tax benefit (provision)...... 3,159 4,992 7,834 (31,140)
------- ------- ------- -------
Earnings (loss) from continuing
operations......................... (10,757) (11,195) (28,082) 48,121
Loss on disposal of discontinued
operations, net................... (184) (259) (234) (317)
------- ------- ------- -------
Earnings (loss) before extraordinary
items and accounting changes...... (10,941) (11,454) (28,316) 47,804
Extraordinary items, net............ 378 (147) 355 (147)
Cumulative effect of change in
accounting for postretirement
benefits, net..................... -- -- -- (8,015)
Cumulative effect of change in
accounting for income taxes, net.. -- -- -- (2,935)
------- ------- ------- -------
Net earnings (loss)................. $(10,563) $(11,601) $(27,961) $ 36,707
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---------- ---------- ---------- ----------
Earnings Per Share
Primary and Fully Diluted:
Earnings (loss) from continuing
operations............................ $ (.67) $ (.69) $ (1.74) $ 2.99
Loss on disposal of discontinued
operations, net....................... (.01) (.02) (.02) (.02)
Extraordinary items, net................ .02 (.01) .02 (.01)
Cumulative effect of change in
accounting for postretirement
benefits, net......................... -- -- -- (.50)
Cumulative effect of change in
accounting for income taxes, net...... -- -- -- (.18)
------- ------- ------- -------
Net earnings (loss)..................... $ (.66) $ (.72) $ (1.74) $ 2.28
======= ======= ======= =======
Weighted average number of shares
used in computing earnings per share:
Primary............................... 16,103 16,103 16,103 16,103
Fully diluted......................... 16,103 16,103 16,103 16,103
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)
(In thousands)
Nine Months Ended
April 2, April 3,
1995 1994
----------- -----------
Cash provided by (used for)
Operations:
Net earnings (loss)..................... $(27,961) $ 36,707
Cumulative effect of accounting changes,
net................................... -- 10,950
Depreciation and amortization........... 28,303 27,191
Accretion of discount on long-term
liabilities........................... 3,209 2,740
Adjustments for other non-cash charges.. 2,112 9,534
Undistributed earnings of affiliates.... (407) (3,864)
Gain on sale of Rexnord................. -- (129,084)
Loss (gain) on sale of fixed assets..... 315 (28)
Changes in assets and liabilities....... (39,629) 15,508
------- -------
Cash used for operations................ (34,058) (30,346)
Investments:
Capital expenditures.................... (13,558) (9,454)
Proceeds received from sale of Rexnord.. -- 178,091
Equity investments of affiliates........ (951) (3,063)
Proceeds received from investment
securities, net....................... 5,805 123
Business acquisitions................... (12,061) --
Proceeds from sale of fixed assets...... 1,102 6,848
Changes in net assets held for sale..... 3,712 (297)
Other, net.............................. -- 101
------- -------
Cash provided by (used for) investments. (15,951) 172,349
Financing:
Issuance of debt........................ 14,417 59,139
Debt repayments, net.................... (31,921) (135,740)
------- -------
Cash used for financing................. (17,504) (76,601)
Effect of exchange rate changes on cash..... 2,051 (336)
Net increase (decrease) in cash............. (65,462) 65,066
Cash and cash equivalents, beginning of
period.................................. 102,368 70,099
------- -------
Cash and cash equivalents, end of period.... $ 36,906 $135,165
======= =======
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)
Note 1 - Financial Statements
The consolidated balance sheet as of April 2, 1995 and the consolidated
statements of earnings and cash flows for the nine months ended April 2, 1995
and April 3, 1994 have been prepared by the Company, 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 April 2, 1995 and for all periods presented have
been made. The balance sheet at June 30, 1994 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 the Company's June 30, 1994 Form
10-K. The results of operations for the period ended April 2, 1995 are not
necessarily indicative of the operating results for the full year. Certain
amounts in prior years' quarterly financial statements have been reclassified
to conform to the current presentation.
Note 2 - Acquisitions
On June 10, 1994, the Company acquired 100% of the Common Stock of
Convac GmbH ("Convac")for approximately $4,700,000. Convac is a leading
designer and manufacturer of high precision state-of-the-art wet processing
tools, equipment and systems required for the manufacture of semiconductor
chips and related products, compact and optical storage discs and liquid
crystal displays. The Company reports the results of Convac as part of its
Industrial Products segment.
On September 9, 1994, the Company acquired all of the outstanding Common
Stock of Scandinavian Bellyloading Company AB ("SBC"). SBC is the designer
and manufacturer of patented cargo loading systems, which are installed in
the cargo area of commercial aircraft. Several major airlines are expected
to equip existing fleets with the SBC system over the next three to four
years. The Company reports the results of SBC as part of its Industrial
Products segment.
On November 28, 1994 Fairchild Communications Services Company
("Fairchild Communications"), a partnership whose partners are indirect
subsidiaries of the Company, completed the acquisition of substantially all
of the telecommunications assets of JWP Telecom, Inc. ("JWP") for
approximately $11,000,000 plus the assumption of approximately $3,000,000 of
liabilities. JWP is a telecommunications system integrator, specializing in
manufacturing, distribution, design, installation and maintenance of voice
and data communications equipment. In the first quarter of Fiscal 1995,
Fairchild Communications acquired all the shared telecommunications assets of
Eaton & Lauth Co., Inc., for approximately $550,000.
Note 3 - Restricted Cash
The Company had approximately $4,745,000 of restricted cash on April 2,
1995 and June 30, 1994, all of which is maintained as collateral for certain
debt facilities.
Note 4 - Summarized Statement of Earnings Information
The following table presents summarized statement of earnings
information on a combined 100% basis of Banner Aerospace, Inc. ("Banner") and
Nacanco Paketleme ("Nacanco"), the Company's principal investments, which are
accounted for using the equity method.
Nine Months Ended
(In thousands) ---------------------------
April 2, April 3,
1995 1994
------------ ------------
Net sales................................. $192,688 $189,479
Gross profit.............................. 65,197 66,672
Earnings from continuing operations....... 6,214 13,482
Net earnings.............................. 6,214 12,493
The Company owns approximately 47.2% of Banner common stock, which is
included in investments and advances-affiliated companies. The Company
recorded equity earnings of $1,627,000 and $1,307,000 from this investment
for the nine months ended April 2, 1995 and April 3, 1994, respectively. At
the close of trading on March 31, 1995, Banner stock was quoted at $4.00 per
share. Based on this price the Company's equity investment in Banner had an
approximate market value of $34,000,000 versus a carrying value of
$51,901,000. The Company does not believe that this decline in market value
is a permanent impairment.
The Company owns approximately 31.9% of Nacanco common stock. The
Company recorded equity earnings of $774,000 and $3,275,000 from this
investment for the nine months ended April 2, 1995 and April 3, 1994,
respectively.
On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord Corporation ("Rexnord") to BTR Dunlop Holdings, Inc.
("BTR")for $22.50 per share. Accordingly, the Company received $181,873,000
in gross proceeds and realized a pre-tax gain on the sale of $129,084,000 for
the nine months ended April 3, 1994. Prior to the sale of Rexnord, the
Company recorded an equity loss of $906,000 on this investment for the nine
month period ended April 3, 1994.
In connection with the sale of its interest in Rexnord, the Company has
placed shares of Banner, with a fair market value of $25,000,000, in escrow
to secure the Company's indemnification of BTR against a contingent
liability. Once the contingent liability is resolved, the escrow will be
released.
Note 5 - Revolving Credit Facility
On August 18, 1994, VSI Corporation's (an indirect subsidiary of the
Company) revolving credit facility was reduced by $9,250,000 to provide a
total available facility of $50,250,000, of which $38,999,000 was available
on April 2, 1995. In addition, (1) the borrowing rate was increased by 1.0%
to generally bear interest at 3.75% over the London Interbank Offer Rate, and
(2) the commitment fee charged on the unused portion of the revolving credit
facility was increased to 1.0%.
Note 6 - Early Extinguishment of Debt
During the nine months ended April 2, 1995, the Company used cash
available to purchase at a discount $7,600,000 of its 12.25% Senior
Subordinated Notes due in 1996 and $6,000,000 of its 12% Intermediate
Subordinated Debentures due in 2001. The purchases and write off of certain
deferred costs associated with the issuance of the securities repurchased
resulted in an extraordinary gain of 355,000, net of a $191,000 tax
provision.
Note 7 - Minority Interests in Consolidated Subsidiaries
The Company includes $23,968,000 and $23,981,000 of minority interest on
its balance sheet at April 2, 1995 and June 30, 1994, respectively, which is
represented by the Series C Preferred Stock of Fairchild Industries, Inc.
("FII"), a majority owned subsidiary. The Series C Preferred Stock has an
annual dividend requirement of $4.25 per share through July 21, 1999 and
$7.00 per share thereafter. During the nine months ended April 2, 1995, the
Company purchased 300 shares of FII's Series C Preferred Stock. Effectively,
there were 557,260 and 557,560 shares authorized, issued and outstanding at
April 2, 1995 and June 30, 1994, respectively.
Note 8 - Redeemable Preferred Stock of Subsidiary
The Company has classified the outstanding shares of Series A Preferred
Stock of FII as a long-term liability. The Series A Preferred Stock has a
mandatory redemption value of $45.00 per share and an annual dividend
requirement of $3.60 per share. During the nine months ended April 2, 1995,
the Company repurchased 16,800 shares of FII's Series A Preferred Stock.
Effectively, there were 403,901 and 420,701 shares authorized, issued and
outstanding at April 2, 1995 and June 30, 1994, respectively.
Note 9 - Equity Securities
The Company had 13,406,109 shares of Class A Common Stock and 2,696,886
shares of Class B Common Stock outstanding at April 2, 1995. Class A Common
Stock is traded on both the New York and Pacific Stock Exchange while there
is no public market for the Class B Common Stock. Shares of Class A Common
Stock are entitled to one vote per share and cannot be exchanged for Class B
Common Stock. 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.
Note 10 - Earnings Per Share
Primary and fully diluted earnings per share are computed by dividing
net income available to common stockholders by the weighted average number of
shares and share equivalents outstanding during the period. To compute the
incremental shares resulting from stock options and warrants for primary
earnings per share, the average market price of the Company's stock during
the period is used. To compute the incremental shares resulting from stock
options and warrants for fully diluted earnings per share, the greater of the
ending market price or the average market price of the Company's stock is
used.
In computing primary and fully diluted earnings per share for the three
and nine months ended April 2, 1995 and April 3, 1994, the conversion of
options and warrants was not assumed, as the effect was anti-dilutive.
Note 11 - Commitments and Contingencies
Lease Guaranties
- ----------------
In connection with the sale of Metro Credit Corporation, the Company
remained contingently liable as a guarantor of the payment and performance of
obligations of third party lessees under aircraft leases, which call for
aggregate annual base lease payments of approximately $3,454,000 in Fiscal
1995, and approximately $8,806,000 over the remaining 4-year guaranty period.
In each case, the Company has been indemnified by the purchasers and lessees
from any losses related to such guaranties.
CL Motor Freight Claim
- ----------------------
The Workers Compensation Bureau of the State of Ohio is seeking
reimbursement from the Company for approximately $5,400,000 for CL Motor
Freight Inc. ("CL") workers compensation claims which were insured under a
self-insured workers compensation program of CL. The Company has contested
a significant portion of this claim.
Government Claims
- -----------------
Following an investigation by the Inspector General of NASA, the civil
division of the United States Department of Justice alleged improprieties in
years 1982 and 1984 through 1986, in indirect costs rates and labor charging
practices of a former subsidiary of the Company. The Company settled these
claims with the Department of Justice and agreed to pay $5,000,000, payable
in six equal semi-annual installments, with interest at 6.0% per year. The
first installment was made in the second quarter of Fiscal 1995. The unpaid
balance is collateralized by certain excess real estate.
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that FII did not comply with Cost Accounting Standards in
accounting for (i) the 1985 reversion to FII of certain assets of terminated
defined benefit pension plans, and (ii) pension costs upon the closing of
segments of FII's business. The ACO has directed FII to prepare cost impact
proposals relating to such plan terminations and segment closings and,
following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if
such adjustments are made. The Company believes it has properly accounted
for the asset reversions in accordance with applicable accounting standards.
The Company has entered into discussions with the government to attempt to
resolve these pension accounting issues.
Civil Litigation
- ----------------
Maurice Bidermann Litigation
----------------------------
The Company commenced an action in the United States District for the
Southern District of New York, following the breach by Maurice Bidermann
("Bidermann") of an agreement under which Bidermann was to have paid the
Company an aggregate sum of approximately $22,500,000, of which Bidermann
paid $10,000,000. Additional installments, of $5,000,000 each, were due from
Bidermann on December 31, 1992, and June 30, 1993, both of which Bidermann
failed to pay. On July 7, 1993, the United States District Court ordered
Bidermann to pay the Company the full amount of its claim, $12,947,000, plus
interest. Following receipt of the Court's order, Bidermann filed for
protection under Chapter 11 of the United States Bankruptcy Code; however, in
the first quarter of Fiscal 1995, on motion of the Company, the Bankruptcy
Court dismissed Bidermann's Chapter 11 proceedings. Prior to Bidermann's
filing for protection under Chapter 11, and continuing subsequent to the
Bankruptcy Court's dismissal of those proceedings, the Company attached
substantially all assets of Bidermann. In addition, the Company holds shares
and warrants of Bidermann Industries, USA, Inc., all of which shares and
warrants Bidermann had originally agreed to purchase from the Company for
$22,500,000. The collectibility of this judgement, which has been affirmed
by the United States Court of Appeals, will depend in part upon the Company's
ability to realize sufficient amounts from its attachments, and the value of
the shares and warrants held.
Environmental Matters
- ---------------------
The Company and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local 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 the financial
condition of the Company, although the Company has expended, and can be
expected to expend in the future, significant amounts for investigation of
environmental conditions and installation of environmental control
facilities, remediation of environmental conditions and other similar
matters, particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to take
certain corrective action prior or pursuant to any such disposition. In
addition, management has identified several areas of potential contamination
at or from other facilities owned, or previously owned, by the Company, that
may require the Company either to take corrective action or to contribute to
a clean-up. The Company is also a defendant in certain lawsuits and
proceedings seeking to require the Company to pay for investigation or
remediation of environmental matters and has been alleged to be a potentially
responsible party at various "Superfund" sites. Management of the Company
believes that it has recorded adequate reserves in its 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 liability of the
Company, unless such parties are contractually obligated to contribute and
are not disputing such liability.
Other Matters
- -------------
The Company is involved in various other claims and lawsuits incidental
to its business, some of which involve substantial amounts. The Company
either on its own or through its insurance carriers is contesting these
matters.
In the opinion of management, the ultimate resolution of the legal
proceedings, including those discussed above, will not have a material
adverse effect on the financial condition or the future operating results of
the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The Fairchild Corporation (the "Company") was incorporated in October,
1969, under the laws of the State of Delaware. On November, 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the
Company. RHI is the majority owner of Fairchild Industries, Inc. ("FII")
which, in turn, is the 100% owner of VSI Corporation ("VSI"). The Company's
operations are conducted through VSI and RHI. The Company also holds
significant equity interests in Banner Aerospace, Inc. and Nacanco Paketleme
("Nacanco").
RESULTS OF OPERATIONS
The Company currently operates in three principal business segments:
Aerospace Fasteners, Industrial Products and Communications Services. The
following table illustrates the historical sales and operating income of the
Company's continuing operations for the nine month periods ended April 2,
1995 and April 3, 1994.
(In thousands) Three Months Ended Nine Months Ended
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---------- ---------- ---------- ----------
Sales by Business Segment:
Aerospace Fasteners................ $ 56,684 $ 50,619 $162,089 $152,643
Industrial Products................ 59,616 43,208 159,023 123,922
Communications Services............ 34,455 19,009 76,965 55,592
------- ------- ------- -------
Total................................. $150,755 $112,836 $398,077 $332,157
======= ======= ======= =======
Operating Income (loss) by
Business Segment:
Aerospace Fasteners................ $ (3,573) $ (5,177) $ (5,722) $(23,208)
Industrial Products................ 8,067 6,086 17,017 15,983
Communications Services............ 5,172 4,153 13,423 12,198
------- ------- ------- -------
Total................................. 9,666 5,062 24,718 4,973
Corporate administrative expense... (4,140) (3,897) (10,901) (12,082)
Other corporate income (expense)... (1,655) 220 (2,365) 1,694
------- ------- ------- -------
Operating income (loss)............... 3,871 1,385 11,452 (5,415)
Net interest expense.................. (16,840) (16,893) (49,944) (53,576)
Investment income, net................ 190 43 2,825 7,068
Equity in earnings of affiliates...... (298) (124) 1,863 3,864
Minority interest..................... (839) (575) (2,112) (1,764)
Non-recurring items................... -- (23) -- 129,084
------- ------- ------- -------
Earnings (loss) from continuing
operations before income taxes..... (13,916) (16,187) (35,916) 79,261
Income tax benefit (provision)........ 3,159 4,992 7,834 (31,140)
------- ------- ------- -------
Earnings (loss) from continuing
operations......................... $(10,757) $(11,195) $(28,082) $ 48,121
======= ======= ======= =======
General
- -------
Overall sales increased by 33.6% in the third quarter and 19.8% for the
nine month period of Fiscal 1995 compared to sales for the same periods in
Fiscal 1994, which reflected stronger sales performances from all three
business segments.
Operating income increased $2.5 million in the third quarter and $16.9
million for the nine month period of Fiscal 1995 compared to operating income
for the same periods in Fiscal 1994. During the Fiscal 1995 current quarter
and nine month periods, operating losses decreased significantly in the
Aerospace Fasteners segment primarily due to the Fiscal 1994 nine month
period having included a restructuring charge of $9.9 million recorded in the
second quarter of Fiscal 1994 and a $3.2 million charge for earthquake damage
and related business interuption occurring in the third quarter of Fiscal
1994. Operating income was up in both the Industrial Products segment and
the Communications Services segment in both current year periods. (See
discussion below).
Aerospace Fasteners
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Sales in the Aerospace Fasteners segment increased 12.0% in the third
quarter and 6.2% for the nine month period ended April 2, 1995, compared to
the corresponding Fiscal 1994 periods, primarily resulting from aggressive
management efforts during the nine month period to reduce backlog caused by
quality problems and earthquake disruption, which are diminishing.
Operating losses in the Aerospace Fasteners segment decreased $1.6
million in the third quarter and $17.5 million for the Fiscal 1995 nine month
period over the corresponding Fiscal 1994 periods; however, this segment
continues to be affected by soft demand and severe price erosion and higher
quality control costs resulting from customers' requirements. The Fiscal
1995 third quarter loss resulted primarily from excess costs incurred to
reduce the past due sales backlog, which includes many orders of small
quantities at low profit margins. Certain products have yielded negative
margins due to labor inefficiencies and low prices. Management is taking
steps to cancel any such orders remaining in the backlog unless improved
pricing can be negotiated. Management will also continue to reduce the
capacity of the Aerospace Fasteners segment as necessary to bring the
breakeven point in line with demand. These actions may result in further
restructuring charges in the future. A restructuring charge of $9.9 million
was recorded in the prior year second quarter period for nonrecurring costs
related to exiting certain aircraft engine bolt lines and $3.2 million in the
prior year third quarter for earthquake loss (see below).
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered extensive damage from the Southern
California Earthquake. This disruption caused increased costs and reduced
revenues in Fiscal 1994 and has negatively affected Fiscal 1995 as well.
While the Company carries insurance for both business interruption and
property damage caused by earthquakes, the policy has a 5% deductible. The
Company recorded an unusual pretax loss in Fiscal 1994 of $4.0 million ($3.2
million in the nine month period ended April 3, 1994) to cover the currently
estimated net cost of the damages and business interruption caused by the
earthquake. Included in prepaids and other current assets is an insurance
claim receivable of $4.9 million for recoverability of costs related to
business interruption and property damage.
Industrial Products
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Sales in the Industrial Products segment increased 38.0% in the third
quarter and 28.3% in the Fiscal 1995 first nine months, compared to the same
Fiscal 1994 periods. $11.6 million of the net increase in sales in the nine
month period was at the D-M-E Company ("D-M-E"), which provides tooling to
the plastics industry, and reflects customer response to the fast delivery
programs, new products, and growth of the domestic economy. Domestic demand
for tooling for plastics has been strong while foreign demand has shown signs
of improvement principally reflecting the strengthening European economy.
Expansion into selected new foreign markets is being pursued and appears to
have potential. Also included in the Industrial Products segment were sales
from Convac, a semiconductor equipment manufacturing company acquired at the
end of Fiscal 1994, another small acquisition made early in Fiscal 1995 and
Fairchild Data Corporation. The combined sales of these companies was $16.0
million in the third quarter and $34.1 million in the Fiscal 1995 first nine
months.
Operating income in the Industrial Products segment increased 32.6% in
the third quarter and 6.5% in the first nine months of Fiscal 1995, compared
to the same periods in Fiscal 1994. D-M-E operating income increased 24.1%
in the Fiscal 1995 current quarter. The remaining increase in operating
income in the current quarter compared to the Fiscal 1994 third quarter
resulted from an increase at Fairchild Data Corporation and the inclusion of
Convac and another operation acquired in Fiscal 1995. A 24.5% improvement in
operating income at D-M-E for the current nine month period was partially
offset by operating losses from the other operations. The improved results
at D-M-E resulted from a higher sales volume and improved operating margins.
In recent years D-M-E has implemented several cost savings steps, including
overhead reduction and improved inventory management programs, which have
contributed to the higher operating margins. In addition, D-M-E has
continued to implement improved manufacturing methods that have reduced cycle
time and costs.
Communications Services
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Sales in the Communications Services segment increased 81.3% in the
third quarter and 38.4% in the first nine months of Fiscal 1995, compared
with the same periods in Fiscal 1994, primarily due to the inclusion of sales
from the JWP Telecom, Inc., ("JWP") acquisition made during the Fiscal 1995
second quarter, as well as sales to new customers, the addition of
telecommunications franchises in new office buildings, and growth at existing
sites.
Operating income in the Communications Services segment increased 24.5%
in the third quarter and 10.0% in the first nine months of Fiscal 1995,
compared to the same periods in Fiscal 1994 primarily due to increased sales
resulting from the reasons given above and related economies of scale.
Other Expenses/Income
- ---------------------
Corporate Administrative Expense - Corporate administrative expense
increased 6.2% in the Fiscal 1995 third quarter compared to the same Fiscal
1994 quarter primarily due to higher than usual legal fees incurred in
connection with the Bidermann civil litigation. During the Fiscal 1995 nine
month period corporate administrative expense decreased 9.8%. This decline
resulted primarily from cost controls, including a reduction in work force
and wage and salary caps that were in effect for most corporate employees and
sale of the Company airplane during Fiscal 1994.
Other Corporate Income - Other corporate income decreased $1.9 million
in the third quarter and $4.1 million in the nine months ended April 2, 1995,
compared to the same period in the prior year, primarily due to increased
carrying costs and losses reported on net assets held for sale. In addition,
start up costs related to a corporate sponsored joint venture are included in
this category. Gains on corporate real estate sold were recognized in the
prior year nine month period.
Net Interest Expense - Net interest expense decreased 6.8% in the nine
month period ended April 2, 1995, compared to the prior year period, due
primarily to lower borrowings and increased interest income earned on higher
cash and cash equivalents average balances during the Fiscal 1995 nine month
period.
Investment income - net was up slightly in the third quarter, but
decreased by $4.2 million in the first nine months, primarily as a result of
recording larger gains realized on the settlement and liquidation of
investments in Fiscal 1994, compared to Fiscal 1995. Also included in the
Fiscal 1995 nine month period were $.3 million of dividends realized on
participating annuity contracts, compared to $2.8 million in the
corresponding Fiscal 1994 period.
Equity in earnings of affiliates decreased $2.0 million in the nine
month period ended April 2, 1995, compared to the same period of Fiscal 1994.
Earnings from Nacanco, in which the Company holds a 31.9% interest, were down
$2.5 million for the nine months, primarily due to a large tax adjustment
taken during the current year.
Minority interest expense includes dividend expense on FII's Series C
Preferred Stock.
Non-Recurring Income - Non-recurring income in the nine month period
ended April 3, 1994 includes the net pre-tax gain of $129.1 million on the
Company's 43.9% stock interest in Rexnord Corporation, which was sold to BTR
Dunlop Holdings, Inc. for $22.50 per share on December 23, 1993.
Income Taxes - In the third quarter of Fiscal 1995, the Company recorded
a tax benefit of $3.2 million and for the nine months a tax benefit of $7.8
million. The effective tax rate was lower than the Federal statutory rate,
largely due to the amortization of goodwill, which is not deductible for tax
purposes.
Accounting Changes:
- -------------------
1) Postretirement Benefits - Using the immediate recognition method, the
Fiscal 1994 first nine months after-tax charge to earnings for the cumulative
effect of this accounting change was $.5 million, which represents the
unamortized portion of an overstated liability for discontinued operations
which substantially offset the transition obligation for active employees and
retirees of continuing operations. In addition, in the Fiscal 1994 first nine
months, a $7.5 million charge, net of the Company's related tax benefit, was
recorded for the Company's share of Rexnord Corporation's cumulative charge
resulting from this change in accounting.
2) Accounting for Income Taxes - The Company elected the immediate
recognition method and recorded, in the Fiscal 1994 first nine months, a $2.4
million charge, representing the cumulative effect on prior years. This
charge represents deferred taxes related primarily to fixed assets, prepaid
pension expenses, and inventory differences. In addition, a $.5 million
charge was recorded for the Company's share of Rexnord Corporation's
cumulative charge resulting from this change in accounting.
Net Earnings (Loss) - The net earnings (loss) decreased $64.7 million in
the first nine months of Fiscal 1995, compared to the first nine months of
Fiscal 1994, primarily due to the $129.1 million net pre-tax gain recognized
in the Fiscal 1994 six month period. Offsetting the decrease were: (1) the
$16.9 million increase in operating income earned in the first nine months of
Fiscal 1995, (2) the $11.0 million charge, net of tax, for the cumulative
effect of accounting changes, which was recorded in the first nine months of
Fiscal 1994, and (3) a decrease in taxes of $39.0 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 2, 1995, was $101.6 million, which was $44.1
million lower than at June 30, 1994. The primary reasons for this decrease
included a $65.5 million reduction in cash, primarily required to service
debt and meet operating cash requirements during the first nine months, and
a $26.9 million increase in current debt, primarily the result of long term
debt becoming current. These decreases were offset by a $39.5 million
increase in accounts receivable and inventory, reflecting acquisitions,
slower customer payments, and inventory build and increased sales to reduce
backlog, and a reduction in current income taxes payable of $12.7 million,
which was reclassified to noncurrent income taxes.
The Company's principal sources of liquidity are cash generated from
operations and borrowings under its credit agreement. The Company also
expects to generate cash from the sale of certain assets and liquidation of
investments. Net assets held for sale at April 2, 1995 had a book value of
$31.1 million and included two parcels of real estate in California and an 88
acre parcel of real estate located in Farmingdale, New York, which the
Company plans to sell, lease or develop, subject to the resolution of certain
environmental matters and market conditions. In March 1995, the Company sold
one parcel in California for $5.2 million. Included in long-term investments
at April 2, 1995, is a contractual obligation for RHI to receive $16.3
million from an individual, which obligation has a net carrying amount of
$9.2 million. The obligation in part, may be satisfied by 7.1% of the
outstanding common stock of Bidermann Industries USA, Inc., a closely held
company, held by RHI. In addition, the Company has attached substantially
all of the individual's property. The individual filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on July 7, 1993. However, in the
first quarter of Fiscal 1995, on motion of RHI, the Bankruptcy Court
dismissed the Chapter 11 proceedings. The Company believes that liquidation
of assets held or attached by RHI will be sufficient to recover the carrying
amount of this investment. (See Note 10 to the Financial Statements).
Other assets declined $18.2 million, due primarily to reclassifying
noncurrent taxes to the noncurrent tax liability caption on the balance
sheet.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, payment of other liabilities and payment of
dividends on preferred stock.
The level of the Company's capital expenditures varies from year to
year, depending upon the timing of capital spending for new production
equipment, periodic plant and facility expansion, acquisition of high growth
companies, as well as cost reduction and labor efficiency programs. For the
nine month period ended April 2, 1995, capital expenditures, including the
cost of acquisitions, were $25.6 million. The Company anticipates that total
capital expenditures for the fiscal year ending June 30, 1995 will be
approximately $31.6 million.
Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation and remediation
obligations, and litigation settlements and related costs.
The Company expects that cash on hand, cash generated from operations,
borrowings and asset sales, and the ability to refinance portions of its
debt, will be adequate to satisfy cash requirements.
The Company's Credit Agreement requires the Company to comply with
certain financial covenants, including achieving cumulative earnings before
interest, taxes, depreciation and amortization, ("EBITDA Covenant"), and
maintaining certain coverage ratios. The Company was in compliance with the
Credit Agreement as of April 2, 1995. To comply with the minimum EBITDA
Covenant requirements (as amended) the Company's subsidiary, VSI must earn
for the cumulative total of the trailing four quarters, EBITDA as follows:
$75.0 million for the fourth quarter of Fiscal 1995, $76.6 million for the
first quarter of Fiscal 1996, $78.4 million for the second quarter of Fiscal
1996 and $80.1 million for the third quarter of Fiscal 1996. VSI's ability
to meet the minimum requirements under the EBITDA Covenant in Fiscal 1995 is
uncertain, and there can be no assurance that the Company will be able in the
future to comply with the minimum requirements under the EBITDA Covenant and
other financial covenants under the Credit 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 may result, at the option of lenders holding
a majority of the loans, in acceleration of the principal and interest
outstanding, and a termination of the revolving credit line. However, if
necessary, management believes a waiver can be obtained.
The Company's subsidiaries may transfer available cash as dividends to
the Company if the purpose of such dividends is to provide the Company with
funds necessary to meet its debt service requirements under specified notes
and debentures. However, all other dividends from FII to RHI are subject to
certain limitations under the Credit Agreement. As of April 2, 1995, FII was
unable to provide dividends to RHI. The Credit Agreement also restricts FII
from additional borrowings under the Credit Facilities for the payment of any
dividends.
IMPACT OF FUTURE ACCOUNTING CHANGES
Accounting For The Impairment Of Long-Lived Assets
- --------------------------------------------------
And For Long-Lived Assets To Be Disposed Of
- -------------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used for long-lived assets and certain
identifiable intangibles to be disposed of. The Company is currently
analyzing the new standard to determine the timing and effect, if any, on its
consolidated financial statements. SFAS No. 121 is required to be
implemented by the Company on, or before, July 1, 1996.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 11 of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Michael T. Alcox
Senior Vice President and
Chief Financial Officer
By: Christopher Colavito
Vice President and
Controller
Date: May 12, 1995