UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
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 3, 1994
Commission File Number: 1-3102
FAIRCHILD INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-0579835
- ------------------------------- -------------------
(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 3, 1994
- ----- --------------
Common Stock, $.01 par value 14,000,000
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES*
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of April 3, 1994 (Unaudited) and
June 30, 1993 3
Consolidated Statements of Earnings
for the Three and Nine Months Ended
April 3, 1994 and March 28, 1993
(Unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
April 3, 1994 and March 28, 1993
(Unaudited) 6
Notes to Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
*For purposes of Part I of this Form 10-Q, the term "Company" means
Fairchild Industries, Inc., and its subsidiaries, unless otherwise
indicated. For purposes of Part II, the term "Company" means Fairchild
Industries, Inc. unless otherwise indicated.
<PAGE>
PART 1. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands)
April 3, June 30,
ASSETS 1994 1993
- ------ ------------- ------------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................... $ 4,335 $ --
Accounts receivable-trade, less allowances
of $1,952 and $1,746....................... 69,672 63,767
Inventories:
Finished goods............................ 45,612 51,776
Work-in-process........................... 27,037 30,766
Raw materials............................. 9,260 8,987
------- -------
81,909 91,529
Prepaid expenses and other current assets.... 20,046 22,698
------- -------
Total Current Assets......................... 175,962 177,994
Property, plant and equipment, net of
accumulated depreciation of $82,382 and
$62,639.................................... 165,602 176,869
Net assets held for sale..................... 28,402 27,808
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$28,063 and $24,149........................ 200,371 208,689
Prepaid pension assets....................... 18,553 15,837
Other assets................................. 29,885 32,813
------- -------
Total Assets................................. $618,775 $640,010
======= =======
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands)
April 3, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
- ------------------------------------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current
maturities of long-term debt........... $ 11,446 $ 50,437
Accounts payable......................... 29,064 28,826
Due to affiliated companies.............. 52,287 2,748
Accrued interest......................... 2,860 7,222
Other accrued liabilities................ 58,216 56,482
------- -------
Total Current Liabilities................ 153,873 145,715
Long-term debt, less current maturities.. 225,788 232,929
Other long-term liabilities.............. 15,312 15,733
Retiree health care liabilities.......... 49,364 49,035
Noncurrent income taxes.................. 26,532 23,950
------- -------
Total Liabilities........................ 470,869 467,362
Redeemable Preferred Stock: $3.60
Cumulative Series A Convertible
Preferred Stock, without par value,
424,701 shares authorized, issued
and outstanding at redemption value
of $45.00 per share.................... 19,112 19,112
Stockholders' Equity:
Series B Preferred Stock, without par
value, 3,000 shares authorized, 2,025
and 1,976 issued and outstanding;
liquidation value of $100,000 per share 202,500 197,600
Series C Cumulative Preferred Stock,
without par value, 558,360 shares
authorized, issued and outstanding;
liquidation value of $45.00 per share.. 24,015 24,015
Common stock, par value of $.01 per
share, 14,000,000 shares authorized,
issued, and outstanding................ 140 140
Paid-in capital.......................... 2,390 2,230
Accumulated deficit...................... (101,534) (73,115)
Cumulative translation adjustment........ 1,283 2,666
------- -------
Total Stockholders' Equity............... 128,794 153,536
------- -------
Total Liabilities and Stockholders'
equity................................. $618,775 $640,010
======= =======
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands) April 3, March 28, April 3, March 28,
1994 1993 1994 1993
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Sales.............................. $112,836 $114,399 $332,157 $349,047
Other income - net................. 485 1,231 701 4,312
------- ------- ------- -------
113,321 115,630 332,858 353,359
Costs and Expenses:
Cost of sales...................... 85,698 86,790 256,182 259,868
Selling, general & administrative.. 17,641 17,967 53,851 55,311
Research and development........... 886 825 2,923 2,650
Amortization of goodwill........... 1,437 1,466 4,406 4,369
Restructuring...................... -- 932 9,903 2,432
Unusual items...................... 3,200 -- 3,200 --
------- ------- ------- -------
108,862 107,980 330,465 324,630
Operating income...................... 4,459 7,650 2,393 28,729
Interest expense...................... 8,299 8,344 22,466 22,700
Interest income....................... (103) (184) (282) (643)
------- ------- ------- -------
Net interest expense.................. 8,196 8,160 22,184 22,057
Investment income - net............... 379 -- 3,179 --
Equity in earnings of affiliates...... 96 136 346 382
Minority interest..................... 18 (16) 16 (205)
------- ------- ------- -------
Earnings (loss) from continuing
operations before taxes............. (3,244) (390) (16,250) 6,849
Income tax benefit (provision)........ 828 (612) 3,346 (3,870)
------- ------- ------- -------
Earnings (loss) from continuing
operations.......................... (2,416) (1,002) (12,904) 2,979
Extraordinary items - net............. -- -- -- (810)
Cumulative effect of change in
accounting for postretirement
benefits............................ -- -- (252) --
Cumulative effect of change in
accounting for income taxes......... -- -- (11,486) --
------- ------- ------- -------
Net earnings (loss)................... (2,416) (1,002) (24,642) 2,169
Series A Preferred Dividends.......... 383 382 1,147 1,331
Series C Preferred Dividends.......... 593 593 1,780 1,566
------- ------- ------- -------
Net loss after Preferred Dividends.... $ (3,392) $ (1,977) $(27,569) $ (728)
======= ======= ======= =======
Dividend to RHI Holdings, Inc. (parent) $ -- $ -- $ -- $ 50,000
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(In thousands)
Nine Months Ended
April 3, March 28,
1994 1993
------------ ------------
<S> <C> <C>
Cash provided by (used for)
Operations:
Net earnings (loss)..................... $(24,642) $ 2,169
Depreciation and amortization........... 24,119 21,387
Accretion of discount on long-term
liabilities........................... 2,740 3,428
Adjustments for other non-cash charges.. 19,510 1,703
Adjustments for non-cash credits........ (346) (382)
Loss on sale of fixed assets............ 341 205
Changes in assets and liabilities....... (12,093) 6,589
------- -------
Cash provided by operations............. 9,629 35,099
Investments:
Capital expenditures.................... (9,380) (9,139)
Business acquisitions................... -- (7,283)
Other - net............................. (235) 1,410
------- -------
Cash used for investments............... (9,615) (15,012)
Financing:
Issuance of debt........................ 97,878 129,270
Debt repayments - net................... (94,471) (102,267)
Issuance of Series B preferred stock.... 4,000 5,000
Issuance of Series C preferred stock.... -- 24,015
Exchange of Series A preferred stock.... -- (25,126)
Dividends............................... (2,926) (52,807)
Other - net............................. 144 --
------- -------
Cash provided by (used for) financing... 4,625 (21,915)
Effect of exchange rate changes on cash..... (304) (1,567)
Net increase in cash........................ 4,335 (3,395)
Cash, beginning of period................... -- 5,015
------- -------
Cash, end of period......................... $ 4,335 $ 1,620
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of April 3, 1994, and the consolidated
statements of earnings and cash flows for the nine months ended April 3, 1994
and March 28, 1993 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 3, 1994, and for all periods presented
have been made. The balance sheet at June 30, 1993, was condensed from
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, 1993, Form
10-K. The results of operations for the period ended April 3, 1994 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
Within the last few years, Fairchild Communications Services Company
("Fairchild Communications"), a partnership whose partners are indirect
subsidiaries of the Company, has completed the acquisition of several small
companies involved in the sale of telecommunications services and equipment
to tenants in commercial office buildings. In the third quarter of Fiscal
1993, Fairchild Communications acquired all the telecommunication assets of
Office Networks, Inc., for approximately $7,300,000.
Note 3 - Net Assets Held for Sale
The Company has decided not to sell a division which previously was
included in net assets held for sale. Accordingly, the Company is recording
the current period's results from this division with the Company's Industrial
Products Segment. Sales from the division formerly included in net assets
held for sale, and not included in results of operations, were $11,487,000
for the nine months ended March 28, 1993. The impact of this division's
earnings on the prior year periods was immaterial.
Net assets held for sale at April 3, 1994 includes several 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 or develop, subject to
the resolution of certain environmental matters and market conditions.
<PAGE>
Note 4 - Credit Agreement Amendment
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 the end of the third quarter of Fiscal 1994.
The Company has negotiated an amendment to the Credit Agreement (i) to
accommodate the unusual loss from the January 17, 1994 Southern California
earthquake, and (ii) to reduce by $5,000,000 the Company's minimum
requirement under the EBITDA Covenant for the duration of the Credit
Agreement. To comply with the minimum EBITDA Covenant requirement (as
amended) the Company's subsidiary, VSI Corporation ("VSI"), must earn for the
cumulative total of the trailing four quarters, EBITDA as follows:
$62,000,000 for the fourth quarter of Fiscal 1994, $68,600,000 for the first
quarter of Fiscal 1995, $70,360,000 for the second quarter of Fiscal 1995,
and $72,200,000 for the third quarter of Fiscal 1995. VSI's ability to meet
the minimum requirement under the EBITDA Covenant in Fiscal 1994 is
uncertain, and there can be no assurance that the Company will be able in the
future to comply with the minimum requirement 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 an acceleration of the principal and interest
outstanding, and a termination of the revolving credit line.
Note 5 - Post Retirement Benefits
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 ("FASB 106"), "Accounting for Postretirement
Benefits Other Than Pensions". This new standard requires that the expected
cost of postretirement benefits be accrued and charged to expense during the
years the employees render the service. This is a significant change from
the Company's previous policy of expensing these costs for active employees
when paid.
The Company elected the immediate recognition method of adoption of FASB
106. The unamortized portion of the overstated liability for discontinued
operations substantially offset the transition obligation for active
employees and retirees of continuing operations, and the charge to net
earnings from the cumulative effect of this accounting change was $252,000.
As a result of the reduction in the liability for discontinued operations,
interest expense accrued on this liability will be lower in future years by
approximately $1,500,000 compared to prior years. However, the adoption of
FASB 106 will cause the postretirement medical expense for continuing
operations to increase by approximately $1,100,000 per year.
Note 6 - Income Taxes
Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109 ("FASB 109"), "Accounting
for Income Taxes".
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior
to the adoption of FASB 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and
expense that were reported in different years in the financial statements and
tax returns and were measured at the tax rate in effect in the year the
difference originated.
As permitted under FASB 109, prior years' financial statements have not
been restated. The Company elected the immediate recognition method and
recorded a $11,486,000 charge representing the prior years' cumulative
effect. This charge represents deferred taxes that had to be recorded
related primarily to fixed assets, prepaid pension expense, and inventory
basis differences.
Note 7 - Unusual Items
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered damage from the Southern California
earthquake. As a result, the Company relocated the Chatsworth manufacturing
operations to its other Southern California facilities. This disruption has
caused increased costs and reduced revenues in the Fiscal 1994 third quarter
and will likely negatively impact the fourth quarter 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 has
recorded an unusual pretax loss in the Fiscal 1994 third quarter for the
Aerospace Fasteners segment of $3,200,000 to cover the estimated net cost of
the damages and business interruption caused by the earthquake. In addition,
an insurance claim of $3,500,000 has been recorded for recoverability of
costs related to business interruption and property damage.
Note 8- Redeemable Preferred Stock
The Company's Series A Preferred Stock has a mandatory redemption value
of $45.00 per share and an annual dividend requirement of $3.60 per share.
There were 424,701 shares of Series A Preferred Stock authorized, issued and
outstanding at April 3, 1994 and June 30, 1993.
Note 9- 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 1994, and
approximately $12,260,000 over the remaining 5-year guaranty period. In each
case, the Company has been indemnified by the purchasers and lessees from any
losses related to such guaranties.
Government Claims
- -----------------
In 1989, the Company learned through its own quality assurance
procedures, and voluntarily disclosed to its customers and the Department of
Defense, that certain units of VSI had not performed certain production lot
tests mentioned in the military specifications for some limited product
lines. The Company does not believe that VSI's level of testing resulted in
shipment of unsafe products or that purchasers were otherwise damaged, and
the government subsequently reduced certain of the test requirements. The
government and the Company have reached an agreement in principle to settle
this matter for $330,000.
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 cost rates and labor charging
practices for a former subsidiary of the Company. The Company entered into
settlement discussions with the Department of Justice to attempt to resolve
these claims and has reached an agreement in principle with the government to
settle this matter for $5,000,000, payable in six equal semi-annual
installments, with interest at 6.0% per year. The unpaid balance will likely
be collateralized by certain excess real estate. If the settlement is not
consummated, the government may initiate suit under the False Claims Act,
seeking treble damages and penalties, and under the Truth in Negotiations
Act, seeking a price reduction on certain contracts and subcontracts.
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 the Company'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, in amounts which the Company cannot determine. 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.
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.
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
RESULTS OF OPERATIONS
During the first quarter of Fiscal 1994, the Company adopted Statements
of Financial Accounting Standards No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions", and No. 109, "Accounting for
Income Taxes", and elected to take one-time non-cash charges totaling $11.7
million, of which $.2 million was for postretirement benefits and $11.5
million for the change in accounting for income taxes. These charges are
reflected in the nine month period ended April 3, 1994, and represent
cumulative effects on prior years of the accounting changes. For the nine
months ended April 3, 1994, the effect of the changes on pretax income from
continuing operations was not material.
The Company currently operates in three principal business segments:
Aerospace Fasteners, Industrial Products and Communications Services. Set
forth below is a comparison of the results from continuing operations of the
Company for the three and nine month periods ended April 3, 1994 and March
28, 1993.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
April 3, March 28, April 3, March 28,
1994 1993 1994 1993
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners................ $ 50,619 $ 60,002 $152,643 $190,071
Industrial Products................ 43,208 37,325 123,922 109,413
Communications Services............ 19,009 17,072 55,592 49,563
------- ------- ------- -------
Total................................. $112,836 $114,399 $332,157 $349,047
======= ======= ======= =======
Operating Income (loss) by
Business Segment:
Aerospace Fasteners................ $ (5,177) $ (1,394) $(23,208) $ 3,492
Industrial Products................ 6,086 5,051 15,983 13,779
Communications Services............ 4,153 3,728 12,198 10,851
------- ------- ------- -------
Total................................. 5,062 7,385 4,973 28,122
Corporate administrative expense... (872) (872) (2,769) (2,601)
Other corporate income............. 269 1,137 189 3,208
------- ------- ------- -------
Operating income...................... 4,459 7,650 2,393 28,729
Net interest expense.................. (8,196) (8,160) (22,184) (22,057)
Investment income..................... 379 -- 3,179 --
Equity in earnings of affiliates - net
of minority interest................ 114 120 362 177
------- ------- ------- -------
Earnings (loss) from continuing
operations before income taxes...... (3,244) (390) (16,250) 6,849
Income tax benefit (provision)....... 828 (612) 3,346 (3,870)
------- ------- ------- -------
Earnings (loss) from continuing
operations.......................... $ (2,416) $ (1,002) $(12,904) $ 2,979
======= ======= ======= =======
</TABLE>
General
- -------
Overall sales declined by 1.4% in the third quarter and 4.8% for the
nine month period compared to sales for the same periods in Fiscal 1993,
primarily caused by price erosion due to excess capacity in the aerospace
fasteners industry, reduced order rates from commercial and military
aerospace customers in the Aerospace Fasteners segment and lower revenues due
to the disruption caused by the earthquake. Reduced order rates were
principally due to reductions in defense spending and reduced build rates of
commercial airplane original equipment manufacturers due to conditions in the
airline industry. The decline in sales at the Aerospace Fasteners segment
was partially offset by sales increases at the Industrial Products and
Communication Services segments in the third quarter and nine month periods.
The Industrial Products segment included sales in the current periods by
Fairchild Data Corporation which had been classified as a discontinued
operation in the prior year periods.
Operating income decreased $3.2 million in the third quarter and $26.3
million for the nine month period compared to operating income for the same
periods in Fiscal 1993 and included a $3.2 million charge for earthquake
damage and related business interruption in the Company's Aerospace Fasteners
segment during the third quarter of Fiscal 1994. A restructuring charge of
$9.9 million was recorded in the Fiscal 1994 nine month period to further
implement the Aerospace Fasteners segment's restructuring plan. The Fiscal
1993 third quarter and nine month periods included restructuring charges of
$0.9 million and $2.4 million, respectively. Operating income in the
Industrial Products and Communications Services segments was up for both
periods of Fiscal 1994. The Industrial Products segment included operating
income in the current periods by Fairchild Data Corporation which had been
classified as a discontinued operation in the prior year periods. However,
in the Aerospace Fasteners segment, operating income declined $3.8 million
for the quarter and $26.7 million for the nine month period compared to the
prior year periods. Other corporate income also decreased (see discussion
below).
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment decreased 15.6% in the third
quarter and 19.7% for the nine month period ended April 3, 1994, compared to
the Fiscal 1993 periods, primarily due to reduced order rates. Ordering
activity remained at low levels both at original equipment manufacturers and
in the replacement market.
The operating income in the Aerospace Fasteners segment decreased by
$3.8 million in the third quarter and $26.7 million for the nine month period
ended April 3, 1994 in relation to the comparable Fiscal 1993 periods. As a
result of the sustained soft worldwide demand for aircraft, aircraft engines,
and the resulting decline in new order rates and prices for aerospace
fasteners, the Company has undertaken further restructuring actions to
further downsize, reduce costs, increase quality, reduce cycle times and
improve margins. These restructuring efforts include discontinuance of
certain aircraft engine bolt product lines, increased cellularization of
manufacturing processes, including extensive retraining of the workforce,
relocation of its New Jersey operations to California and reengineering
certain manufacturing processes and methods to meet increased customer
quality standards.
The Company recorded a pretax restructuring charge of $9.9 million in
the second quarter of Fiscal 1994 to cover the cost of the above mentioned
restructuring activities, including the write down of goodwill and surplus
assets related to certain aircraft engine bolt product lines, severance
benefits and the nonrecurring costs associated with the cellularization and
reengineering of manufacturing processes and methods. Depending on future
demand and prices of aerospace fasteners, the Company may take further
restructuring actions in the future and may record additional restructuring
charges to cover the cost of these activities.
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered damage from the Southern California
earthquake. As a result, the Company has relocated the Chatsworth
manufacturing operations to its other Southern California facilities. This
disruption has caused increased costs and reduced revenues in the Fiscal 1994
third quarter and will likely negatively affect the fourth quarter 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 has recorded an unusual pretax loss in the Fiscal 1994 third quarter
of $3.2 million 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 of $3.5 million for recoverability
of costs related to business interruption and property damage.
Operating income in the third quarter and nine months of Fiscal 1994 was
also affected by (1) reduced demand and price erosion; and (2) higher quality
control costs resulting from customers' intensified quality requirements. A
large customer's disapproval in the third quarter of Fiscal 1993, of the
quality system at one of the Aerospace Fasteners segment's plants negatively
affected sales and operating income in the first nine months of fiscal 1994.
The disapproval resulted in the plant being ineligible to receive new orders,
delayed shipments due to on-site customer inspection of finished product, and
increased quality costs. The segment has implemented a program to comply
with the customer's quality requirements and the plant's quality system was
requalified by the customer during the first quarter of Fiscal 1994. The
quality improvement program requires that the plant reinspect its inventories
and modify certain manufacturing processes and quality procedures at all
major facilities. This program has resulted in one time start-up costs and
increased recurring quality costs, each of which negatively affected the
first nine months of Fiscal 1994 operating results, and will likely
negatively affect the future profit margins of this segment.
<PAGE>
Industrial Products
- -------------------
Sales in the Industrial Products segment increased 15.8% in the third
quarter and 13.3% for the nine month period ended April 3, 1994, compared to
the same periods in Fiscal 1993. The inclusion of Fairchild Data Corporation
sales in Fiscal 1994 accounted for 51.1% and 73.0% of the increase in sales
in this segment in the third quarter and nine month current year periods,
respectively. The increase in sales in the current quarter and nine month
periods at D-M-E Company reflects customer response to the fast delivery
programs, new products, and the improving domestic economy. Domestic demand
for tooling for plastics has been strong while foreign demand has been weak,
reflecting the economic conditions abroad. However, expansion into selected
foreign markets is being pursued and appears to have potential.
Operating income in the Industrial Products segment increased 20.5% in
the third quarter and 16.0% for the nine month period ended April 3, 1994,
compared to the same periods in Fiscal 1993. The inclusion of Fairchild Data
Corporation operating income in Fiscal 1994 accounted for 15.9% and 51.0% of
the increase in operating income in this segment in the third quarter and
nine month current year periods, respectively. The improved results at D-M-E
resulted from a higher sales volume and improved operating margins. The
Industrial Products segment has implemented several cost savings steps,
including overhead reduction and improved inventory management programs,
which have contributed to the higher operating margins. The improvements in
inventory management and delivery systems resulted in faster deliveries,
reduction in inventory, and higher inventory turnover. In addition, D-M-E
Company has continued to implement improved manufacturing methods that have
reduced cycle time and costs.
Communications Services
- -----------------------
Sales in the Communications Services segment increased 11.3% in the
third quarter and 12.2% for the nine month period ended April 3, 1994,
compared to the same periods in Fiscal 1993, primarily due to the inclusion
of sales from acquisitions, the addition of telecommunications franchises in
new office buildings, and growth at existing sites.
Operating income in the Communications Services segment increased 11.4%
in the third quarter and 12.4% for the nine month period ended April 3, 1994,
compared to the same periods in Fiscal 1993, primarily due to increased sales
resulting from the reasons given above and related economies of scale.
Operating income as a percent of sales in the first nine months of Fiscal
1994 approximated the return on sales in the comparable period of Fiscal
1993.
Other Expenses/Income
- ---------------------
Corporate Administrative Expense - The Company's corporate staff
performs work for several corporate entities including The Fairchild
Corporation ("TFC"), RHI Holdings, Inc. ("RHI"), and the Company. Corporate
administrative expense incurred by the Company is invoiced to RHI and to TFC
on a monthly basis and represents the estimated cost of services performed on
behalf of such companies by the Company. The estimated cost is based
primarily on estimated hours spent by corporate employees on functions
related to RHI and to TFC. Management believes that the corporate
administrative expense of the Company would be higher if it operated as a
separate independent entity. Corporate administrative expense was flat in
the third quarter and up 6.6% for the nine month period as compared to the
same periods in the prior year, due to nonrecurring expense incurred for
severance payouts. Excluding severance payouts, corporate administrative
expense for the current nine month period decreased 8.1% compared to the
prior year nine month period.
Other Corporate Income - Other corporate income decreased $0.9 million
in the third quarter and $3.0 million for the nine month period ended April
3, 1994, primarily due to the absence of amortization of over accrued retiree
health care expense in the Fiscal 1994 periods and recording a favorable
pension adjustment in the prior year periods.
Net Interest Expense - In both the third quarter and nine month periods
ended April 3, 1994, net interest expense approximated the prior year
periods.
Investment Income - Net - Investment income includes $2.8 million of
dividends realized on participating annuity contracts. No such dividends
were realized in the Fiscal 1993 first nine months.
Income Taxes - In the first nine months of Fiscal 1994, the Company
recorded a tax benefit of 20.6%. The benefit tax rate was lower than the
statutory rate, largely due to the write off and amortization of goodwill
which is not deductible for tax purposes.
Accounting Changes and Extraordinary Items
- ------------------------------------------
Postretirement Benefits - Using the immediate recognition method, the
charge to earnings representing the cumulative effect of this accounting
change was immaterial. The unamortized portion of an overstated liability
for discontinued operations substantially offset the transition obligation
for active employees and retirees of continuing operations.
Accounting for Income Taxes - The Company elected the immediate
recognition method and recorded a $11.5 million charge representing the
cumulative effect on prior years. This charge represents deferred taxes
related primarily to fixed assets, prepaid pension expense, and inventory
differences.
Extraordinary Item - Net - The extraordinary item in Fiscal 1993
represents the write-off of $1.3 million of deferred loan fees from the
portion of the term loan prepaid, or $.8 million after tax.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 3, 1994, was $10.2 million lower than at June
30, 1993. The primary reasons for this reduction included a $9.6 million
decrease in inventory and a net increase in borrowings from the banks and
affiliated companies of $10.5 million offset partially by higher cash of $4.3
million and accounts receivable of $5.9 million.
The Company's principal sources of liquidity are cash generated from
operations and borrowings under its credit agreement. As a result of certain
amendments to its credit agreement, and the issuance of FII's new Senior
Secured Notes due 1999, $50 million of VSI's revolving credit facility has
been extended from 1994 to 1997.
The Company also expects to generate cash from the sale of certain
assets. Net assets held for sale at April 3, 1994 had a book value of $28.4
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 or develop, subject to the resolution of certain environmental
matters and market conditions.
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 as well as cost reduction
and labor efficiency programs. For the nine month period ended April 3,
1994, capital expenditures were $9.4 million. The Company anticipates that
total capital expenditures for the fiscal year ending June 30, 1994 will be
approximately $16.0 million.
During Fiscal 1994, goodwill was reduced by $4.0 million as a result of
the restructuring charge which included a write down of goodwill related to
certain aircraft engine bolt product lines which were discontinued.
Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation and remediation
obligations, litigation settlements and related costs.
The Company expects that cash on hand, cash generated from operations,
borrowings, asset sales and the ability to refinance portions of its long-
term debt will be adequate to satisfy cash requirements. If such sources are
not adequate, the Company believes that additional capital resources would be
available from RHI, via either new equity contributions or the assumption of
certain of the Company's obligations. However, there can be no assurance
that RHI would make these additional capital resources available to the
Company.
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 the end of the third quarter of Fiscal 1994. The
Company has negotiated an amendment to the Credit Agreement (i) to
accommodate the unusual loss from the January 17, 1994 Southern California
earthquake, and (ii) to reduce by $5.0 million the Company's minimum
requirement under the EBITDA Covenant for the duration of the Credit
Agreement. To comply with the minimum EBITDA Covenant requirements (as
amended) the Company's subsidiary, VSI Corporation ("VSI"), must earn for the
cumulative total of the trailing four quarters, EBITDA as follows: $62.0
million for the fourth quarter of Fiscal 1994, $68.6 million for the first
quarter of Fiscal 1995, $70.4 million for the second quarter of Fiscal 1995
and $72.2 million for the third quarter of Fiscal 1995. VSI's ability to
meet the minimum requirement under the EBITDA Covenant in Fiscal 1994 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 an acceleration of the principal and interest
outstanding, and a termination of the revolving credit line.
Any available cash may be paid as dividends to RHI if the purpose of
such dividends is to provide TFC with funds necessary to meet its debt
service requirements under specified notes and debentures. All other
dividends to RHI are subject to certain limitations under the Credit
Agreement. As of April 3, 1994, the Company was unable to provide dividends
to RHI. The Credit Agreement also restricts additional borrowings under the
Credit Facilities for the payment of any dividends.
IMPACT OF FUTURE ACCOUNTING CHANGES
Accounting for Certain Investments in Debt and Equity Securities
- ----------------------------------------------------------------
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115 ("FASB 115"), "Accounting for
Certain Investments in Debt and Equity Securities". FASB 115 provides new
rules on accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. The Company is required to implement FASB 115 as of the
beginning of Fiscal 1995 or as of the end of Fiscal 1994. The Company
believes the impact of implementing FASB 115 will be immaterial.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 9 of Notes to Consolidated Financial
Statements (Unaudited).
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURE
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 FAIRCHILD INDUSTRIES, INC.
(Registrant) and as its Chief
Financial Officer:
By: Christopher Colavito
Vice President, Controller
and Chief Accounting Officer
By: Michael T. Alcox
Vice President and Chief
Financial Officer
Date: May 13, 1994
