29
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended April 1, 2001
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
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
----
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of April 1,
2001 (Unaudited) and June 30, 2000.............................. 3
Consolidated Statements of Earnings (Unaudited) for the
Three and Nine Months ended April 1, 2001 and April 2, 2000..... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months ended April 1, 2001 and April 2, 2000....... 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition......................................... 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk....... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 27
Item 5. Other Information.............................................. 27
Item 6. Exhibits and Reports on Form 8-K............................... 27
All references in this Quarterly Report on Form 10-Q to the terms "we,"
"our," "us," the "Company" and "Fairchild" refer to The Fairchild Corporation
and its subsidiaries. All references to "fiscal" in connection with a year shall
mean the 12 months ended June 30.
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 1, 2001 (Unaudited) and June 30, 2000
(In thousands)
ASSETS
April 1, June 30,
2001 2000
------------------ ------------------
CURRENT ASSETS: (*)
---------------
Cash and cash equivalents, $382 and $14,287 restricted $ 17,797 $ 35,790
Short-term investments 5,097 9,054
Accounts receivable-trade, less allowances of $6,399 and $9,598 119,816 127,230
Inventories:
Finished goods 146,925 138,330
Work-in-process 33,720 30,523
Raw materials 13,602 11,006
------------------ ------------------
194,247 179,859
Prepaid expenses and other current assets 88,718 74,231
------------------ ------------------
Total Current Assets 425,675 426,164
Property, plant and equipment, net of accumulated
depreciation of $149,356 and $142,938 155,882 174,137
Net assets held for sale 17,848 20,112
Cost in excess of net assets acquired (Goodwill), less
accumulated amortization of $62,210 and $52,826 422,720 436,442
Investments and advances, affiliated companies 3,752 3,238
Prepaid pension assets 64,498 64,418
Deferred loan costs 13,374 14,714
Real estate investment 110,613 112,572
Long-term investments 7,694 10,084
Other assets 5,930 5,539
------------------ ------------------
TOTAL ASSETS $ 1,227,986 $ 1,267,420
------------------ ------------------
*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
April 1, 2001 (Unaudited) and June 30, 2000
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
April 1, June 30,
2001 2000
------------------ ------------------
CURRENT LIABILITIES:
Bank notes payable and current maturities of long-term debt $ 28,420 $ 28,594
Accounts payable 56,967 62,494
Accrued liabilities:
Salaries, wages and commissions 31,331 38,065
Employee benefit plan costs 7,210 5,608
Insurance 10,050 12,237
Interest 14,273 6,408
Other accrued liabilities 42,261 60,123
------------------ ------------------
Total Current Liabilities 190,512 213,529
------------------ ------------------
LONG-TERM LIABILITES:
Long-term debt, less current maturities 470,679 453,719
Fair market value of interest rate contract 7,726 -
Other long-term liabilities 23,565 26,741
Retiree health care liabilities 44,229 42,803
Noncurrent income taxes 113,910 128,515
------------------ ------------------
TOTAL LIABILITIES 850,621 865,307
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; authorized
40,000 shares, 30,335 (30,079 in June) shares issued and
22,528 (22,430 in June) shares outstanding 3,034 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 232,935 231,190
Treasury stock, at cost, 7,807 (7,649 in June) shares of Class A common stock (76,563) (75,506)
Retained earnings 246,212 261,788
Notes due from stockholders (1,792) (1,867)
Cumulative other comprehensive income (26,723) (16,762)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 377,365 402,113
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,227,986 $ 1,267,420
------------------ ------------------
*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 STATEMENTS OF
EARNINGS (Unaudited) For The Three (3) And Nine
(9) Months Ended April 1, 2001 and April 2, 2000
(In thousands, except per share data)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
4/1/01 4/2/00 4/1/01 4/2/00
------------- ------------- ------------- -------------
REVENUE:
Net sales $162,358 $158,029 $458,825 $474,782
Rental revenue 1,615 1,001 5,145 1,780
Other income, net (1,178) 1,030 1,668 7,861
------------- ------------- ------------- -------------
162,795 160,060 465,638 484,423
COSTS AND EXPENSES:
Cost of goods sold 119,871 117,527 342,507 353,261
Cost of rental revenue 993 586 3,367 866
Selling, general & administrative 32,770 30,739 94,722 97,664
Amortization of goodwill 3,125 3,082 9,384 9,190
Restructuring - 1,399 - 7,456
------------- ------------- ------------- -------------
156,759 153,333 449,980 468,437
OPERATING INCOME 6,036 6,727 15,658 15,986
Interest expense 13,553 13,717 40,851 38,045
Interest income (741) (2,041) (1,509) (3,598)
------------- ------------- ------------- -------------
Net interest expense 12,812 11,676 39,342 34,447
Investment income 4,914 6,272 5,538 9,150
Decrease in fair market value of interest rate contract (3,370) - (6,915) -
Nonrecurring gain - 852 - 28,855
------------- ------------- ------------- -------------
Earnings (loss) from continuing operations before taxes (5,232) 2,175 (25,061) 19,544
Income tax benefit (provision) 1,740 (156) 9,304 (5,422)
Equity in earnings (loss) of affiliates, net - 603 181 (470)
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (3,492) $ 2,622 $ (15,576) $ 13,652
------------- ------------- ------------- -------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (6,016) (3,660) (8,586) (6,742)
Unrealized holding changes on derivatives 70 - (482) -
Unrealized periodic holding changes on securities (2,966) (1,690) (893) 149
------------- ------------- ------------- -------------
Other comprehensive loss (8,912) (5,350) (9,961) (6,593)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (12,404) $ (2,728) $ (25,537) $ 7,059
------------- ------------- ------------- -------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS (Unaudited) For The Three (3) And Nine
(9) Months Ended April 1, 2001 and April 2, 2000
(In thousands, except per share data)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
4/1/01 4/2/00 4/1/01 4/2/00
------------- ------------- ------------- -------------
BASIC EARNINGS PER SHARE:
-------------------------
NET EARNINGS (LOSS) $ (0.14) $ 0.10 $ (0.62) $ 0.55
---------------------------- -----------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.24) $ (0.15) $ (0.34) $ (0.27)
Unrealized holding changes on derivatives - - (0.02) -
Unrealized periodic holding changes on securities (0.12) (0.07) (0.04) 0.01
------------------------------------------------------------
Other comprehensive loss (0.36) (0.22) (0.40) (0.26)
------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (0.50) $ (0.12) $ (1.02) $ 0.29
------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
---------------------------
NET EARNINGS (LOSS) $ (0.14) $ 0.10 $ (0.62) $ 0.54
------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.24) $ (0.15) $ (0.34) $ (0.27)
Unrealized holding changes on derivatives - - (0.02) -
Unrealized periodic holding changes on securities
(0.12) (0.07) (0.04) 0.01
------------------------------------------------------------
Other comprehensive loss (0.36) (0.22) (0.40) (0.26)
------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (0.50) $ (0.11) $ (1.02) $ 0.28
------------------------------------------------------------
Weighted average shares outstanding:
Basic 25,140 24,975 25,114 24,922
------------------------------------------------------------
Diluted 25,140 25,297 25,114 25,416
------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Nine (9) Months Ended April 1, 2001 and April 2, 2000
(In thousands)
4/1/01 4/2/00
------------------ -----------------
Cash flows from operating activities:
-------------------------------------
Net earnings $ (15,576) $ 13,652
Depreciation and amortization 32,831 30,314
Accretion of discount on long-term liabilities 1,375 2,845
Amortization of deferred loan fees 1,392 902
Unrealized holding (gain) loss on derivatives 7,726 -
Net gain on divestiture of investment in affiliates - (26,598)
Net gain on divestiture of subsidiary - (2,256)
Gain on sale of investments (6,340) -
Distributed (undistributed) earnings of affiliates, net (181) 723
Change in assets and liabilities (58,354) (52,293)
Non-cash charges and working capital changes of discontinued operations - (12,535)
------------------ -----------------
Net cash used for operating activities (37,127) (45,246)
Cash flows from investing activities:
-------------------------------------
Purchase of property, plant and equipment (11,341) (24,805)
Net proceeds received from the sale of property, plant, and equipment 3,539 -
Net proceeds received from (used for) investment securities 10,414 13,571
Net proceeds received from divestiture of investment in affiliates - 46,886
Net proceeds received from divestiture of subsidiaries - 61,906
Real estate investment (1,993) (26,419)
Equity investment in affiliates (443) (2,476)
Proceeds received from net assets held for sale 1,936 4,672
Investing activities of discontinued operations - 7,100
------------------ -----------------
Net cash provided by investing activities 2,112 80,435
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of debt 123,823 198,172
Debt repayments (107,037) (201,453)
Issuance of Class A common stock 714 286
Purchase of treasury stock - (486)
Net loans to stockholders' 75 -
------------------ -----------------
Net cash provided by (used for) financing activities 17,575 (3,481)
Effect of exchange rate changes on cash (553) (963)
------------------ -----------------
Net change in cash and cash equivalents (17,993) 30,745
Cash and cash equivalents, beginning of the year 35,790 54,860
------------------ -----------------
Cash and cash equivalents, end of the period $ 17,797 $ 85,605
------------------ -----------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
1. FINANCIAL STATEMENTS
The consolidated balance sheet as of April 1, 2001, and the consolidated
statements of earnings and cash flows for the nine months ended April 1, 2001
and April 2, 2000 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 April 1, 2001, 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 April 1, 2001 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 nine
months ended April 2, 2000 have been prepared to give effect to the dispositions
of Dallas Aerospace (December 1999), Camloc Gas Springs (September 1999) and the
investment in Nacanco (July 1999), as if these transactions 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 July 1, 1999.
Nine Months
Ended
4/2/00
-----------------
Net sales $ 452,349
Gross profit 117,195
Net loss (5,893)
Net loss, per basic and diluted share $ (0.24)
3. EQUITY SECURITIES
We had 22,527,801 shares of Class A common stock and 2,621,502 shares of
Class B common stock outstanding at April 1, 2001. 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 nine months ended April 1, 2001, 97,929 shares of
Class A common stock were issued as a result of the exercise of stock options
and shareholders converted 150 shares of Class B common stock into Class A
common stock.
During the nine months ended April 1, 2001, 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 April 1, 2001 and June 30, 2000, we had restricted cash of $382 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:
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
4/1/01 4/2/00 4/1/01 4/2/00
---------------- --------------- -------------- --------------
Basic earnings per share:
Earnings from continuing operations $ (3,492) $ 2,622 $ (15,576) $ 13,652
================ =============== ============== ==============
Common shares outstanding 25,140 24,975 25,114 24,922
================ =============== ============== ==============
Basic earnings from continuing operations per share $ (0.14) $ 0.10 $ (0.62) $ 0.55
================ =============== ============== ==============
Diluted earnings per share:
Earnings from continuing operations $ (3,492) $ 2,622 $ (15,576) $ 13,652
================ =============== ============== ==============
Common shares outstanding 25,140 24,975 25,114 24,922
Options antidilutive 138 antidilutive 214
Warrants antidilutive 184 antidilutive 280
---------------- --------------- -------------- --------------
Total shares outstanding 25,140 25,297 25,114 25,416
================ =============== ============== ==============
Diluted earnings from continuing operations per share $ (0.14) $ 0.10 $ (0.62) $ 0.54
================ =============== ============== ==============
Stock options entitled to purchase 1,820,014 shares of Class A common stock
were antidilutive and not included in the earnings per share calculation for the
three and nine months ended April 2, 2000. Stock options entitled to purchase
2,118,835 and 2,213,936 shares of Class A common stock were antidilutive and not
included in the earnings per share calculation for the three and nine months
ended April 1, 2001, respectively. Stock warrants entitled to purchase 400,000
and 519,091 shares of Class A common stock were antidilutive and not included in
the earnings per share calculation for the three and nine months ended April 1,
2001, respectively. 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 April 1, 2001, the consolidated total of our recorded liabilities for
environmental matters was approximately $12.0 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $19.1 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.
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 and nine months
ended April 1, 2001 and April 2, 2000, respectively.
Three Months Ended Nine Months Ended
-------------------------- --------------------------
4/1/01 4/2/00 4/1/01 4/2/00
-------------------------- --------------------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $140,806 $138,134 $394,262 $396,697
Aerospace Distribution Segment 21,552 19,895 64,563 77,346
Corporate and Other Segment - - - 739
-------------------------- --------------------------
TOTAL SALES $162,358 $158,029 $458,825 $474,782
-------------------------- --------------------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment (a) $ 9,788 $ 10,466 $ 26,640 $ 22,256
Aerospace Distribution Segment 1,725 1,652 3,424 5,991
Real Estate Segment (b) (764) 382 (681) 816
Corporate and Other Segment (4,713) (5,773) (13,725) (13,077)
-------------------------- --------------------------
TOTAL OPERATING INCOME $ 6,036 $ 6,727 $ 15,658 $ 15,986
-------------------------- --------------------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES:
Aerospace Fasteners Segment (a) $ 9,200 $ 9,915 $ 24,903 $ 20,638
Aerospace Distribution Segment 1,702 1,651 3,362 5,991
Real Estate Segment (b) (1,619) 376 (3,223) 810
Corporate and Other Segment (14,514) (9,767) (50,103) (7,895)
-------------------------- --------------------------
Total earnings (loss) from continuing operations before taxes: $ (5,231) $ 2,175 $(25,061) $ 19,544
-------------------------- --------------------------
TOTAL ASSETS: 4/1/01 6/30/00
--------------------------
Aerospace Fasteners Segment $ 628,621 $ 632,152
Aerospace Distribution Segment 50,301 90,918
Real Estate Segment 114,453 120,092
Corporate and Other Segment 434,611 424,258
--------------------------
TOTAL ASSETS $1,227,986 $1,267,420
--------------------------
(a) - Includes restructuring charges of $1.4 million and $7.5 million in the
three and nine months ended April 2, 2000, respectively.
(b) - Includes rental revenue of $1.6 million and $1.0 million for the three
months ended April 1, 2001 and April 2, 2000, respectively, and $5.1 million and
$1.8 million for the nine months ended April 1, 2001 and April 2, 2000,
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
8. 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 $3.4 million and $6.9 million in the third quarter and first six months of
fiscal 2001, respectively, 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 nine months ended April 1, 2001, we accounted for the
hybrid contract, comprised of variable rate note and the embedded interest rate
cap as a single debt instrument.
9. CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited consolidating 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" provides the results of The Fairchild Corporation on an unconsolidated
basis. The guarantors are composed primarily of our domestic subsidiaries,
excluding Fairchild Technologies, a real estate development venture, and certain
other subsidiaries.
CONSOLIDATING BALANCE SHEET
APRIL 1, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------ ------------ ------------ -------------- ------------
Cash $ 2,598 $ 6,117 $ 9,082 $ - $ 17,797
Marketable securities 71 2,814 2,212 - 5,097
Accounts Receivable (including intercompany), less allowances 1,853 510,824 8,729 (401,590) 119,816
Inventory, net - 145,710 48,538 - 194,248
Prepaid and other current assets 396 29,779 7,770 50,773 88,718
------------ ------------ ------------ -------------- ------------
Total current assets 4,918 695,244 76,331 (350,817) 425,676
Investment in Subsidiaries 888,255 - - (888,255) -
Net fixed assets 440 117,874 37,569 - 155,883
Net assets held for sale - 17,848 - - 17,848
Investments in affiliates 945 2,807 - - 3,752
Goodwill 15,921 376,834 33,503 (3,538) 422,720
Deferred loan costs 12,283 21 1,071 - 13,375
Prepaid pension assets - 64,498 - - 64,498
Real estate investment - - 110,613 - 110,613
Long-term investments 415 4,331 3,436 (488) 7,694
Other assets 17,499 (13,587) 2,015 - 5,927
------------ ------------ ------------ -------------- ------------
Total assets $ 940,676 $1,265,870 $ 264,538 $(1,243,098) $ 1,227,986
============ ============ ============ ============== ============
Bank notes payable & current maturities of debt $ 2,250 $ 1,726 $ 24,444 $ - $ 28,420
Accounts payable (including intercompany) 47 730,261 62,912 (736,253) 56,967
Other accrued expenses (25,848) 58,170 33,392 39,412 105,126
------------ ------------ ------------ -------------- ------------
Total current liabilities (23,551) 790,157 120,748 (696,841) 190,513
Long-term debt, less current maturities 429,691 7,049 33,939 - 470,679
FMV of Interest Rate Contract 7,726 - - - 7,726
Other long-term liabilities 405 18,423 4,736 - 23,564
Noncurrent income taxes 121,016 (1,265) 710 (6,551) 113,910
Retiree health care liabilities - 39,343 4,886 - 44,229
------------ ------------ ------------ -------------- ------------
Total liabilities 535,287 853,707 165,019 (703,392) 850,621
Class A common stock 3,034 - 53 (53) 3,034
Class B common stock 262 - - - 262
Notes due from stockholders (451) (1,341) - - (1,792)
Paid-in-capital 232,935 490,133 188,456 (678,589) 232,935
Retained earnings 246,212 (65,586) (74,744) 140,330 246,212
Cumulative other comprehensive income (528) (10,925) (14,246) (1,024) (26,723)
Treasury stock, at cost (76,075) (118) - (370) (76,563)
------------ ------------ ------------ -------------- ------------
Total stockholders' equity 405,389 412,163 99,519 (539,706) 377,365
------------ ------------ ------------ -------------- ------------
Total liabilities & stockholders' equity $ 940,676 $1,265,870 $ 264,538 $(1,243,098) $ 1,227,986
============ ============ ============ ============== ============
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED APRIL 1, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------ ------------ ------------ -------------- -------------
Net Sales $ - $ 349,521 $ 115,126 $ (5,822) $ 458,825
Costs and expenses
Cost of sales - 267,441 80,888 (5,822) 342,507
Selling, general & administrative 5,191 70,020 16,065 - 91,276
Amortization of goodwill 606 8,034 744 - 9,384
------------ ------------ ------------ -------------- -------------
5,797 345,495 97,697 (5,822) 443,167
------------ ------------ ------------ -------------- -------------
Operating income (loss) (5,797) 4,026 17,429 - 15,658
Net interest expense (including intercompany) (6,791) 37,548 8,585 - 39,342
Investment (income) loss, net - (181) (5,357) - (5,538)
FMV Adj of Interest Rate Contract 6,915 - - - 6,915
------------ ------------ ------------ -------------- -------------
Earnings (loss) before taxes (5,921) (33,341) 14,201 - (25,061)
Income tax (provision) benefit 3,155 15,019 (8,870) - 9,304
Equity in earnings of affiliates and subsidiaries (12,810) 181 - 12,810 181
------------ ------------ ------------ -------------- -------------
Net earnings (loss) $(15,576) $(18,141) $ 5,331 $ 12,810 $ (15,576)
============ ============ ============ ============== =============
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 1, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------ -------------- ---------- --------------- ------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (15,576) $(18,141) $ 5,331 $ 12,810 $ (15,576)
Depreciation & amortization 670 24,426 7,735 - 32,831
Accretion of discount on long-term liabilities - 1,148 227 - 1,375
Amortization of deferred loan fees 1,054 2 336 - 1,392
Unrealized holding (gain) loss on derivatives 7,726 - - - 7,726
Change in assets and liabilities (10,651) (30,296) (11,118) (12,810) (64,875)
------------ ------------ ------------ ------------- --------------
Net cash (used for) provided by operating activities (16,777) (22,861) 2,511 - (37,127)
Cash Flows from Investing Activities:
Proceeds received from (used for):
Purchase of PP&E - (4,780) (3,022) - (7,802)
Investment securities, net - 10,510 - - 10,510
Equity investment in affiliates (443) - - (443)
Change in real estate investment - - (1,993) - (1,993)
Change in net assets held for sale - 1,936 - - 1,936
Other changes - (96) - - (96)
------------ ------------ ------------ ------------- --------------
Net cash (used for) provided by investing activities (443) 7,570 (5,015) - 2,112
Cash Flows from Financing Activities:
Proceeds from issuance of debt 114,174 130 9,519 - 123,823
Debt repayments, net (95,174) (1,792) (10,071) - (107,037)
Issuance of Class A common stock 714 - - - 714
Loans to stockholders 69 6 - - 75
------------ ------------ ------------ ------------- --------------
Net cash (used for) provided by financing activities 19,783 (1,656) (552) - 17,575
Effect of exchange rate changes on cash - - (553) - (553)
------------ ------------ ------------ ------------- --------------
Net change in cash 2,563 (16,947) (3,609) - (17,993)
Cash, beginning of the year 35 23,064 12,691 - 35,790
------------ ------------ ------------ ------------- --------------
Cash, end of the year $ 2,598 $ 6,117 $ 9,082 $ - $ 17,797
============ ============ ============ ============= ==============
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 6,474 - 26,718
Noncurrent income taxes 145,847 (17,525) 193 - 128,515
Retiree health care liabilities - 38,196 4,607 - 42,803
Minority interest in subsidiaries - - 23 - 23
------------- -------------- ------------- -------------- -------------
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 NINE MONTHS ENDED APRIL 2, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- ------------- ------------- --------------
Net Sales $ - $ 349,717 $ 126,853 $ (1,788) $ 474,782
Costs and expenses
Cost of sales - 263,174 91,875 (1,788) 353,261
Selling, general & administrative 3,861 66,859 18,169 - 88,889
Restructuring - 7,456 - - 7,456
Amortization of goodwill 385 8,040 765 - 9,190
------------- ------------- ------------- ------------- --------------
4,246 345,529 110,809 (1,788) 458,796
------------- ------------- ------------- ------------- --------------
Operating income (loss) (4,246) 4,188 16,044 - 15,986
Net interest expense 37,283 (8,568) 5,732 - 34,447
Investment (income) loss, net (6) (9,144) - - (9,150)
Intercompany dividends - - 18,515 (18,515) -
Nonreucrring income on
Disposition of subsidiary - (3,123) (25,732) - (28,855)
------------- ------------- ------------- ------------- --------------
Earnings (loss) before taxes (41,523) 25,023 17,529 18,515 19,544
Income tax (provision) benefit (4,476) (137) (809) - (5,422)
Equity in earnings of
affiliates and subsidiaries 59,651 - - (60,121) (470)
------------- ------------- ------------- ------------- --------------
Net earnings (loss) $ 13,652 $ 24,886 $ 16,720 $ (41,606) $ 13,652
============= ============= ============= ============= ==============
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 2, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------ ------------- ------------- ------------- -------------
Cash Flows from Operating Activities:
Net earnings (loss) $ 13,652 $ 24,886 $ 16,720 $ (41,606) $ 13,652
Depreciation and amortization 478 23,430 6,406 - 30,314
Amortization of deferred loan fees 894 2 6 - 902
Accretion of discount on long-term liabilities - 2,845 - - 2,845
(Gain) on sale of affiliate investment and divestiture of
subsidiary - - (28,854) - (28,854)
Undistributed loss (earnings) of affiliates - 723 - - 723
Change in assets and liabilities 20,001 (103,237) (10,663) 41,606 (52,293)
Non-cash charges and working capital changes
of discontinued operations - - (12,535) - (12,535)
------------ ------------- ------------- ------------- -------------
Net cash (used for) provided by operating activities 35,025 (51,351) (28,920) - (45,246)
------------ ------------- ------------- ------------- -------------
Cash Flows from Investing Activities:
Net proceeds from (used for) investments - 13,571 - - 13,571
Purchase of property, plant and equipment (5) (19,326) (5,474) - (24,805)
Equity investment in affiliates - (2,476) - - (2,476)
Net proceeds from sale of affiliate investements and
divestiture of subsidiaries - 57,000 51,792 - 108,792
Real estate investment - - (26,419) - (26,419)
Proceeds from net assets held for sale - 4,672 - - 4,672
Investing activities of discontinued operations - - 7,100 - 7,100
------------ ------------- ------------- ------------- -------------
Net cash (used for) provided by investing activities (5) 53,441 26,999 - 80,435
------------ ------------- ------------- ------------- -------------
Cash Flows from Financing Activities:
Proceeds from issuance of debt 45,600 110,570 42,002 - 198,172
Debt repayment and repurchase of debentures
(including intercompany), net (80,800) (86,049) (34,604) - (201,453)
Issuance of Class A common stock 286 - - - 286
Purchase of treasury stock - (486) - - (486)
Financing activities of discontinued operations - - - - -
------------ ------------- ------------- ------------- -------------
Net cash (used for) provided by financing activities (34,914) 24,035 7,398 - (3,481)
------------ ------------- ------------- ------------- -------------
Effect of exchange rate changes on cash - 14 (977) - (963)
------------ ------------- ------------- ------------- -------------
Net change in cash and cash equivalents 106 26,139 4,500 - 30,745
Cash and cash equivalents, beginning of the year 27 41,793 13,040 - 54,860
------------ ------------- ------------- ------------- -------------
Cash and cash equivalents, end of the year $ 133 $ 67,932 $ 17,540 $ - $ 85,605
============ ============= ============= ============= =============
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 located 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 and nine months ended
April 1, 2001 and April 2, 2000, respectively. The following table also
illustrates sales and operating income of our operations by segment, on an
unaudited pro forma basis, for the nine months ended April 2, 2000, as if we had
operated in a consistent manner in each of the reported periods. The pro forma
results represent the impact of our dispositions of Dallas Aerospace in December
1999, and Camoloc Gas Springs in September 1999, as if these transactions had
occurred at the beginning of the nine-month period ended April 2, 2000. 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 these transactions had been in effect since the
beginning of fiscal 2000, nor is it necessarily indicative of our future
results.
Three Months Ended Nine Months Ended
--------------------------- ------------------------------------------
4/1/01 4/2/00 4/1/01 4/2/00 4/2/00
Actual Actual Actual Actual Pro Forma
--------------------------- ------------------------------------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 140,806 $ 138,134 $ 394,262 $ 396,697 $ 396,697
Aerospace Distribution Segment 21,552 19,895 64,563 77,346 55,652
Corporate and Other Segment - - - 739 -
--------------------------- ------------------------------------------
TOTAL SALES $ 162,358 $ 158,029 $ 458,825 $ 474,782 $ 452,349
--------------------------- ------------------------------------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment (a) $ 9,788 $ 10,466 $ 26,640 $ 22,256 $ 22,256
Aerospace Distribution Segment 1,725 1,652 3,424 5,991 3,940
Real Estate Operations Segment (b) (764) 382 (681) 816 816
Corporate and Other Segment (4,713) (5,773) (13,725) (13,077) (13,090)
--------------------------- ------------------------------------------
TOTAL OPERATING INCOME $ 6,036 $ 6,727 $ 15,658 $ 15,986 $ 13,922
--------------------------- ------------------------------------------
(a) - Includes restructuring charges of $1.4 million and $7.5 million in the
three and nine months ended April 2, 2000, respectively.
(b) - Includes rental revenue of $1.6 million and $1.0 million for the three
months ended April 1, 2001 and April 2, 2000, respectively, and $5.1 million and
$1.8 million for the nine months ended April 1, 2001 and April 2, 2000,
respectively.
Net sales of $162.4 million in the third quarter of fiscal 2001 increased
by $4.3 million, or 2.7%, compared to sales of $158.0 million in the third
quarter of fiscal 2000. Net sales of $458.8 million in the first nine months of
fiscal 2001 decreased by $16.0 million, or 3.4%, compared to sales of $474.8
million in the first nine months of fiscal 2000. The results for the nine months
ended April 2, 2000, included revenue of $22.4 million, respectively, from
Dallas Aerospace and the Camloc Gas Springs division prior to their respective
dispositions. Additionally, sales in the third quarter and first nine months of
fiscal 2001 were adversely affected by approximately $2.7 million and $19.9
million, respectively, 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 $7.0 million and $26.4 million for the
three and nine months ended April 1, 2001, respectively, as compared to the
three and nine months ended April 2, 2000.
Gross margin as a percentage of sales was 26.2% and 25.6% in the third
quarter of fiscal 2001 and fiscal 2000 and 25.4% and 25.6% for the first nine
months of fiscal 2001 and fiscal 2000, respectively. The reduced margins in the
fiscal 2001 nine-month period were attributable to lower prices and a change in
product mix.
Selling, general & administrative expense as a percentage of sales was
20.2% and 19.5% in the third quarter of fiscal 2001 and 2000, respectively, and
20.6% and 20.6% in the first nine months of fiscal 2001 and 2000, respectively.
Rental revenue increased $3.4 million in the first nine months of fiscal
2001, compared to the first nine months of fiscal 2000 as a result of an
increase in space being leased at our shopping center.
Other income decreased $6.2 million in the first nine months of fiscal 2001,
compared to the first nine months of fiscal 2000. The decrease was due primarily
to $3.1 million of income recognized from the disposition of non-core property
during the nine months ended April 2, 2000, a write-off of approximately $2.3
million of improvements at our shopping center, and a $0.7 million loss
recognized from the disposition of non-core property during the nine months
ended April 1, 2001.
In the nine months ended April 2, 2000, we recorded $7.5 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 April 2, 2000. 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 three and nine months ended April 1, 2001
decreased by $0.7 million and $0.3 million, respectively, as compared to the
same periods of the prior year. The results for the nine months ended April 2,
2000, included $2.1 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 $7.5 million.
Operating income in the third quarter and first nine months of fiscal 2001 was
adversely affected by approximately $0.5 million and $2.6 million, respectively,
due to the foreign currency impact on our European operations. Additionally,
operating income in the first nine months of fiscal 2001 was affected by a
write-off of $2.3 million of shopping center improvements. On a pro forma basis
and excluding the period-to-period foreign currency effect, operating income
increased by $2.3 million for the nine months ended April 1, 2001, as compared
to the nine months ended April 2, 2000.
Net interest expense increased $4.8 million in the first nine months of
fiscal 2001, compared to the first nine months of fiscal 2000. We recognized
interest expense of $2.6 million in the first nine months of fiscal 2001, while
we capitalized $5.5 million of interest expense in the first nine months of
fiscal 2000 from real estate development activities at our shopping center in
Farmingdale, New York.
We recognized investment income of $5.5 million in the first nine months of
fiscal 2001, and $9.2 million in the first nine months of fiscal 2000, due
primarily to recognizing realized gains on investments liquidated.
The fair market value adjustment of a ten-year $100 million interest rate
contract decreased by $3.4 million and $6.9 million in the third quarter and
first nine months of fiscal 2001, respectively.
Nonrecurring income of $28.9 million in the nine months ended April 2, 2000
resulted from the disposition of two of our equity investments, one of which was
Nacanco Paketleme, and the disposition of our Camloc Gas Springs division.
An income tax benefit of $9.3 million in the first nine months of fiscal
2001 represented a 37.1% effective tax rate on pre-tax losses from continuing
operations. The tax benefit approximated the statutory rate. An income tax
provision of $5.4 million in the first nine months of fiscal 2000 represented a
27.7% effective tax rate on pre-tax earnings from continuing operations. The tax
provision was slightly lower than the statutory rate because of lower tax rates
at some of our foreign operations.
Comprehensive income (loss) includes foreign currency translation
adjustments, 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 nine months ended April 1,
2001, foreign currency translation adjustments decreased by $12.1 million, the
fair market value of unrealized holding gains on investment securities decreased
by $0.9 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 in our Aerospace Fasteners segment increased by $2.7 million, or
1.9%, in the third quarter of fiscal 2001 and decreased by $2.4 million, or
0.6%, in the first nine months of fiscal 2001, as compared to the same periods
of fiscal 2000. Sales by our European operations were adversely affected by
approximately $2.7 million in the third quarter and $19.9 million in the first
nine months of fiscal 2001, as compared to the same periods of the prior year,
due to the foreign currency impact from the U.S. dollar strengthening against
the Euro. However, our book-to-bill ratio continues to remain positive, which we
believe indicates an improving market place as compared to the sluggish
conditions we have experienced over the past twelve months.
Operating income decreased by $0.7 million in the third quarter and
increased by $4.4 million in the first nine months of fiscal 2001, compared to
the same periods of fiscal 2000. The increase in the first nine months was due
primarily to productivity improvements from cost reduction efforts completed in
fiscal 2000 and restructuring charges recorded in the first nine months of
fiscal 2000, offset partially by reduced gross margins resulting from pricing
pressures. Operating income for the third quarter and first nine months of
fiscal 2001 was adversely affected by approximately $0.5 million and $2.6
million, respectively, as compared to the same periods of the prior year, due to
the foreign currency impact on our European operations. Included in our prior
nine months results are restructuring charges of $7.5 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.
Our Aerospace Fasteners segment has several manufacturing facilities
located in California. From time-to time these operations have been affected by
an electric power shortage. We are cautiously optimistic that the electric power
shortage in California will be resolved without any major business interruption;
however, unless current tariffs are revised or their continued implementation
stayed, our manufacturing costs may be materially higher. We are pursuing both
long term and short term alternatives to our current electric power purchasing
commitments. We anticipate that the overall demand for aerospace fasteners in
calendar 2001 will continue to improve as the announced increase in aircraft
build rates favorably affect the demand for our products. If the Euro to U.S.
Dollar exchange rate maintains the same ratio that existed on April 1, 2001, we
would expect the fourth quarter of fiscal 2001 to experience little affects from
the foreign currency fluctuations that adversely affected the results of the
first nine months of fiscal 2001.
Aerospace Distribution Segment
Sales in our aerospace distribution segment increased by $1.7 million, or
8.3%, in the third quarter and decreased by $12.8 million, or 16.5%, in the
first nine months of fiscal 2001, compared to the fiscal 2000 periods. Results
from the prior nine months ended April 2, 2000, include revenue of $21.7 million
from Dallas Aerospace, prior to its disposition. On a pro forma basis, sales in
our aerospace distribution segment increased $8.9 million, or 16.0%, in the
first nine months of fiscal 2001, reflecting an overall improvement in demand
for our products.
Operating income increased by $0.1 million in the third quarter and
decreased by $2.6 million in the first nine months of fiscal 2001, compared to
the same periods in fiscal 2000. The results for the nine months ended April 2,
2000, included operating income from Dallas Aerospace, prior to its disposition,
of $2.1 million.
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 $1.6 million and $1.0 million for the three months ended April 1,
2001 and April 2, 2000, respectively, and $5.1 million and $1.8 million for the
nine months ended April 1, 2001 and April 2, 2000, respectively. Rental revenue
was higher in the fiscal 2001 periods due to an increase in the amount of retail
space leased to tenants. As of April 1, 2001, approximately 73% of the developed
shopping center was leased.
We reported an operating loss of $0.8 million for the third quarter of
fiscal 2001 and $0.7 million for the nine months ended April 1, 2001, compared
to operating income of $0.4 million in the third quarter and $0.8 million in the
first nine months of fiscal 2000. In the third quarter of fiscal 2001, we
recorded a one-time charge of $1.3 million for road improvements. In the first
nine months of fiscal 2001, we recorded a charge of $1.0 million to write-off
specialized tenant improvements associated with an eviction of a non-paying
tenant. The results of the periods ended April 1, 2001, were also affected by an
increase in administrative and depreciation expenses 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 $0.7 million in the
first nine months of fiscal 2001, compared to the first nine months of fiscal
2000. The first nine months of fiscal 2000 included $3.1 million of income
recognized from the disposition of non-core property, while the first nine
months of fiscal 2001 included a $0.3 million loss recognized from the
disposition of non-core property.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of April 1, 2001 and June 30, 2000 amounted to
$876.5 million and $884.4 million, respectively. The nine-month changes in
capitalization included a $16.8 million increase in debt reflecting cash used to
support our operations, offset by a reduction in equity of $24.8 million which
was due primarily to a $8.6 million unfavorable decrease in foreign currency
translation adjustments and our reported net loss.
We maintain a portfolio of investments classified primarily as
available-for-sale securities, which had a fair market value of $12.8 million at
April 1, 2001. The market value of these investments increased by $0.9 million
in the nine months ended April 1, 2001. 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 nine months ended April 1,
2001 and April 2, 2000 was $37.1 million and $45.2 million, respectively. The
primary use of cash for operating activities in the first nine months of fiscal
2001 was a $22.8 million decrease in accounts payable and other accrued
liabilities, a $14.4 million increase in inventories, and a $14.4 million
increase in other current assets, offset partially by a $7.4 million decrease in
accounts receivable. The primary use of cash for operating activities in the
first nine months of fiscal 2000 was a $28.2 million increase in inventories and
a $17.9 million decrease in accounts payable and other accrued liabilities,
offset partially by a $8.3 million decrease in accounts receivable.
Net cash provided by investing activities was $2.1 million and $80.4 for
the nine months ended April 1, 2001 and April 2, 2000, respectively. In the
first nine months of fiscal 2001, the primary source of cash was $12.4 million
provided from the sale of investments and dispositions of non-core real estate,
partially offset by $11.3 million of capital expenditures and $1.7 million for
real estate development at our Farmingdale shopping center. In the first nine
months of fiscal 2000, the primary source of cash from investing activities was
$108.8 million of net proceeds received from the dispositions of Dallas
Aerospace, Nacanco and the Camloc Gas Springs division and $13.6 million
received from the sale of investments, offset partially by capital expenditures
of $24.8 million and investments in real estate of $26.4 million.
Net cash provided by financing activities for the nine months ended April
1, 2001 was $17.6 million and net cash used by financing activities was $3.5
million for the nine months ended April 2, 2000. Cash provided by financing
activities in the first nine months of fiscal 2001, included $16.8 million of
net proceeds from the issuance of additional debt. Cash used for financing
activities in the first nine months of fiscal 2000 included a net debt repayment
of $3.3 million and a $0.5 million purchase of treasury stock, offset partially
by $0.3 million from the issuance of stock.
Our working capital requirement has increased in the first nine months of
fiscal 2001, as our aerospace fasteners segment engaged in a new inventory
supply program with a customer, requiring a significant investment in inventory.
Under this program, we must maintain a certain level of inventory to fulfill the
customer's monthly requirements. Sales under the program are expected to
increase in the fourth quarter of fiscal 2001.
Our principal cash requirements include debt service, capital expenditures,
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
available from borrowings and additional financing and asset sales will be
adequate to satisfy our cash requirements during the next twelve months.
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 may 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 April 1, 2001,
we were in full compliance with all the covenants under the credit agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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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 $3.4 million and $6.9 million in the second quarter and first six months of
fiscal 2001, respectively 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 six months ended December 31, 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. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
(In thousands)
Expected Fiscal Year Maturity Date 2003 2008
--------------------- ---------------------
Type of Interest Rate Contracts Interest Rate Cap Variable to Fixed
Variable to Fixed $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 4.89% 5.49%
Fair Market Value at April 1, 2001 $44 $(7,726)
(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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 6 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2. Changes in Securities and Use of Proceeds
At the Annual Meeting held on November 20, 2000, our Stockholders approved
the issuance of 52,500 stock options (in the aggregate) to non-employee
directors. On January 23, 2001, the shares to be issued pursuant to these stock
options were registered with the Securities and Exchange Commission. A
description of the stock options was included in our Proxy Statement for the
November 20, 2000 Annual Meeting.
Item 5. Other Information
Articles have appeared in the French press reporting an inquiry by a French
magistrate into allegedly improper business transactions involving Elf
Acquitaine, a French petroleum company, its former chairman and various third
parties. In connection with this inquiry, the magistrate has made inquiry into
allegedly improper transactions between Mr. Steiner and that petroleum company.
In response to the magistrate's request that Mr. Steiner appear in France as a
witness, Mr. Steiner submitted written statements concerning the transactions
and appeared in person before the magistrate and others. The magistrate has put
Mr. Steiner under examination (mis en examen) with respect to this matter and
imposed a surety (caution) of ten million French francs which has been paid. Mr.
Steiner has not been charged.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended April
1, 2001 for which this report is filed.
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