UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 1995
Commission File Number: 1-3102
FAIRCHILD INDUSTRIES, INC.
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(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 2, 1995
- ----- ---------------
Common Stock, $100.00 par value 1,400
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES*
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of April 2, 1995 (Unaudited) and
June 30, 1994 3
Consolidated Statements of Earnings
for the Three and Nine Months Ended
April 2, 1995 and April 3, 1994
(Unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
April 2, 1995 and April 3, 1994
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
*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
(In thousands)
<CAPTION>
April 2, June 30,
ASSETS 1995 1994
- ------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................... $ 1,078 $ 2,468
Accounts receivable-trade, less allowances
of $2,760 and $2,135....................... 88,399 68,364
Inventories:
Finished goods............................ 61,692 46,358
Work-in-process........................... 25,712 28,418
Raw materials............................. 10,490 10,120
------- -------
97,894 84,896
Prepaid expenses and other current assets.... 12,698 29,353
------- -------
Total Current Assets......................... 200,069 185,081
Property, plant and equipment, net of
accumulated depreciation of $105,309 and
$85,563.................................... 158,620 157,301
Net assets held for sale..................... 29,812 34,515
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$33,261 and $28,864........................ 194,551 195,929
Prepaid pension assets....................... 15,569 17,795
Other assets................................. 23,219 26,855
------- -------
Total Assets................................. $621,840 $617,476
======= =======
*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
(In thousands)
<CAPTION>
April 2, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current
maturities of long-term debt........... $ 16,539 $ 12,735
Accounts payable......................... 34,899 32,372
Due to affiliated companies.............. 45,978 52,250
Accrued interest......................... 2,992 6,836
Other accrued liabilities................ 66,463 57,515
------- -------
Total Current Liabilities................ 166,871 161,708
Long-term debt, less current maturities.. 217,860 224,132
Other long-term liabilities.............. 13,770 16,412
Retiree health care liabilities.......... 47,549 49,200
Noncurrent income taxes.................. 16,458 26,576
------- -------
Total Liabilities........................ 462,508 478,028
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, 2,256
and 2,025 issued and outstanding;
liquidation value of $100,000 per share 225,600 202,500
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 $100.00 per
share, 1,400 shares authorized,
issued, and outstanding................ 140 140
Paid-in capital.......................... 2,390 2,390
Accumulated deficit...................... (119,019) (111,855)
Cumulative translation adjustment........ 7,094 3,146
------- -------
Total Stockholders' Equity............... 140,220 120,336
------- -------
Total Liabilities and Stockholders'
Equity................................. $621,840 $617,476
======= =======
*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)
(In thousands)
<CAPTION>
Three Months Ended Nine Months Ended
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Sales............................... $138,912 $112,836 $373,395 $332,157
Other income, net................... 198 485 1,555 701
------- ------- ------- -------
139,110 113,321 374,950 332,858
Costs and Expenses:
Cost of sales....................... 106,918 85,698 284,425 256,182
Selling, general & administrative... 21,932 17,641 60,038 53,851
Research and development............ 1,029 886 2,910 2,923
Amortization of goodwill............ 1,456 1,437 4,395 4,406
Restructuring....................... -- -- -- 9,903
Unusual items....................... -- 3,200 -- 3,200
------- ------- ------- -------
131,335 108,862 351,768 330,465
Operating income....................... 7,775 4,459 23,182 2,393
Interest expense....................... 9,122 8,299 26,052 22,466
Interest income........................ (46) (103) (126) (282)
------- ------- ------- -------
Net interest expense................... 9,076 8,196 25,926 22,184
Investment income...................... -- 379 278 3,179
Equity in earnings of affiliates....... 198 96 611 346
Minority interest...................... (50) 18 (149) 16
------- ------- ------- -------
Loss from continuing operations before
taxes................................ (1,153) (3,244) (2,004) (16,250)
Income tax provision (benefit)......... 1,286 (828) 2,034 (3,346)
------- ------- ------- -------
Loss from continuing operations........ (2,439) (2,416) (4,038) (12,904)
Loss on disposal of discontinued
operations, net...................... (200) -- (200) --
------- ------- ------- -------
Loss before accounting changes......... (2,639) (2,416) (4,238) (12,904)
Cumulative effect of change in
accounting for postretirement
benefits, net........................ -- -- -- (252)
Cumulative effect of change in
accounting for income taxes, net..... -- -- -- (11,486)
------- ------- ------- -------
Net loss............................... (2,639) (2,416) (4,238) (24,642)
Series A Preferred Dividends........... 383 383 1,147 1,147
Series C Preferred Dividends........... 593 593 1,780 1,780
------- ------- ------- -------
Net loss after Preferred Dividends..... $ (3,615) $ (3,392) $ (7,165) $(27,569)
======= ======= ======= =======
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)
(In thousands)
<CAPTION>
Nine Months Ended
April 2, April 3,
1995 1994
------------ ------------
<S> <C> <C>
Cash provided by (used for)
Operations:
Net loss................................ $ (4,238) $(24,642)
Cumulative effect of accounting changes,
net................................... -- 11,738
Depreciation and amortization........... 26,149 24,119
Accretion of discount on long-term
liabilities........................... 2,345 2,740
Adjustments for other non-cash charges.. 149 7,772
Undistributed earnings of affiliates.... (261) (346)
Loss on sale of fixed assets............ 322 341
Changes in assets and liabilities....... (20,431) (12,093)
------- -------
Cash provided by operations............. 4,035 9,629
Investments:
Capital expenditures.................... (13,156) (9,380)
Business acquisitions................... (11,550) --
Changes in net assets held for sale..... 3,712 (715)
Other, net.............................. 1,704 480
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Cash used for investments............... (19,290) (9,615)
Financing:
Issuance of debt........................ 6,755 97,878
Debt repayments, net.................... (15,495) (94,471)
Issuance of Series B preferred stock.... 23,100 4,000
Dividends............................... (2,926) (2,926)
Other, net.............................. -- 144
------- -------
Cash provided by financing.............. 11,434 4,625
Effect of exchange rate changes on cash..... 2,431 (304)
Net increase (decrease) in cash............. (1,390) 4,335
Cash and cash equivalents, beginning of
period.................................. 2,468 --
------- -------
Cash and cash equivalents, end of period.... $ 1,078 $ 4,335
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of April 2, 1995, and the consolidated
statements of earnings and cash flows for the nine months ended April 2, 1995
and April 3, 1994 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at April 2, 1995, and for all periods presented
have been made. The balance sheet at June 30, 1994, was condensed from
audited financial statements as of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1994, Form
10-K. The results of operations for the period ended April 2, 1995 are not
necessarily indicative of the operating results for the full year. Certain
amounts in prior years' quarterly financial statements have been reclassified
to conform to the current presentation.
Note 2 - Acquisitions
On November 28, 1994, Fairchild Communications Services Company
("Fairchild Communications"), a partnership whose partners are indirect
subsidiaries of the Company, completed the acquisition of substantially all
of the telecommunications assets of JWP Telecom, Inc., ("JWP") for
approximately $11,000,000 plus the assumption of approximately $3,000,000 of
liabilities. JWP is a telecommunications system integrator, specializing in
manufacturing, distribution, design, installation and maintenance of voice
and data communications equipment. In the first quarter of Fiscal 1995,
Fairchild Communications acquired all the shared telecommunications assets of
Eaton & Lauth Co., Inc. for approximately $550,000.
Note 3 - Revolving Credit Facility
On August 18, 1994, the Company's revolving credit facility was reduced
by $9,250,000 to provide a total available facility of $50,250,000, of which
$38,999,000 was available on April 2, 1995. In addition, (1) the borrowing
rate was increased by 1.0% to generally bear interest at 3.75% over the
London Interbank Offer Rate and (2) the commitment fee charged on the unused
portion of the revolving credit facility was increased to 1.0%.
Note 4 - 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 2, 1995 and June 30, 1994.
<PAGE>
Note 5 - Commitments and Contingencies
Lease Guaranties
- ----------------
In connection with the sale of Metro Credit Corporation, the Company
remained contingently liable as a guarantor of the payment and performance of
obligations of third party lessees under aircraft leases, which call for
aggregate annual base lease payments of approximately $3,454,000 in Fiscal
1995, and approximately $8,806,000 over the remaining 4-year guaranty period.
In each case, the Company has been indemnified by the purchasers and lessees
from any losses related to such guaranties.
Government Claims
- -----------------
Following an investigation by the Inspector General of NASA, the civil
division of the United States Department of Justice alleged improprieties in
years 1982 and 1984 through 1986, in indirect costs rates and labor charging
practices of a former subsidiary of the Company. The Company settled these
claims with the Department of Justice and agreed to pay the government
$5,000,000, payable in six equal semi-annual installments, with interest at
6.0% per year. The first installment was made in the second quarter of
Fiscal 1995. The unpaid balance is collateralized by certain excess real
estate.
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that the Company did not comply with Cost Accounting Standards
in accounting for (i) the 1985 reversion to the Company 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 the
Company to prepare cost impact proposals relating to such plan terminations
and segment closings and, following receipt of such cost impact proposals,
may seek adjustments to contract prices. The ACO alleges that substantial
amounts will be due if such adjustments are made. The Company believes it
has properly accounted for the asset reversions in accordance with applicable
accounting standards. The Company has entered into discussions with the
government to attempt to resolve these pension accounting issues.
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.
<PAGE>
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'S DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Fairchild Industries, Inc. (the "Company") is incorporated under the
laws of the State of Delaware and is the successor corporation to Fairchild
Industries, Inc., a corporation incorporated in Maryland in 1936, pursuant to
a merger effective on May 4, 1987. The Company is a subsidiary of RHI
Holdings, Inc. ("RHI") which is in turn a wholly-owned subsidiary of The
Fairchild Corporation ("TFC").
RESULTS OF OPERATIONS
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 2, 1995 and April 3,
1994.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners................ $ 56,684 $ 50,619 $162,089 $152,643
Industrial Products................ 47,773 43,208 134,341 123,922
Communications Services............ 34,455 19,009 76,965 55,592
------- ------- ------- -------
Total................................. $138,912 $112,836 $373,395 $332,157
======= ======= ======= =======
Operating Income (loss) by
Business Segment:
Aerospace Fasteners................ $ (3,573) $ (5,177) $ (5,722) $(23,208)
Industrial Products................ 7,586 6,086 18,246 15,983
Communications Services............ 5,172 4,153 13,423 12,198
------- ------- ------- -------
Total................................. 9,185 5,062 25,947 4,973
Corporate administrative expense... (1,223) (872) (3,032) (2,769)
Other corporate income (expense)... (187) 269 267 189
------- ------- ------- -------
Operating income...................... 7,775 4,459 23,182 2,393
Net interest expense.................. (9,076) (8,196) (25,926) (22,184)
Investment income..................... -- 379 278 3,179
Equity in earnings of affiliates, net
of minority interest................ 148 114 462 362
------- ------- ------- -------
Loss from continuing operations before
income taxes........................ (1,153) (3,244) (2,004) (16,250)
Income tax provision (benefit)........ 1,286 (828) 2,034 (3,346)
------- ------- ------- -------
Loss from continuing operations....... $ (2,439) $ (2,416) $ (4,038) $(12,904)
======= ======= ======= =======
</TABLE>
General
- -------
Overall sales increased by 23.1% in the third quarter and 12.4% for the
Fiscal 1995 nine month period compared to sales for the same periods in
Fiscal 1994, which reflected stronger sales performances from all three
business segments.
Operating income increased $3.3 million in the third quarter and $20.8
million for the Fiscal 1995 nine month period compared to operating income
for the same periods in Fiscal 1994. Operating losses decreased
significantly in the Aerospace Fasteners segment primarily due to the Fiscal
1994 nine month period having included a restructuring charge of $9.9 million
recorded in the second quarter of Fiscal 1994 and a $3.2 million charge for
earthquake damage and related business interruption occurring in the third
quarter of Fiscal 1994. Operating income was up in both the Industrial
Products segment and the Communications Services segment in both current year
periods. (See discussion below.)
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment increased 12.0% in the third
quarter and 6.2% for the nine month period ended April 2, 1995, compared to
the corresponding Fiscal 1994 periods, primarily resulting from aggressive
management efforts during the nine month period to reduce backlog caused by
quality problems and earthquake disruption, which are diminishing.
Operating losses in the Aerospace Fasteners segment decreased $1.6
million in the third quarter and $17.5 million for the Fiscal 1995 nine month
period over the corresponding Fiscal 1994 periods; however, this segment
continues to be affected by soft demand and severe price erosion and higher
quality control costs resulting from customers' requirements. The Fiscal
1995 third quarter loss resulted primarily from excess costs incurred to
reduce the past due sales backlog, which includes many orders of small
quantities at low profit margins. Certain products have yielded negative
margins due to labor inefficiencies and low prices. Management is taking
steps to cancel any such orders remaining in the backlog unless improved
pricing can be negotiated. Management will also continue to reduce the
capacity of the Aerospace Fasteners segment as necessary to bring the
breakeven point in line with demand. These actions may result in further
restructuring charges in the future. A restructuring charge of $9.9 million
was recorded in the prior year second quarter period for nonrecurring costs
related to exiting certain aircraft engine bolt lines and $3.2 million in the
prior year third quarter for earthquake loss (see below).
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered extensive damage from the Southern
California Earthquake. This disruption caused increased costs and reduced
revenues in Fiscal 1994 and has negatively affected Fiscal 1995 as well.
While the Company carries insurance for both business interruption and
property damage caused by earthquakes, the policy has a 5% deductible. The
Company recorded an unusual pretax loss in Fiscal 1994 of $4.0 million ($3.2
million in the nine month period ended April 3, 1994) to cover the currently
estimated net cost of the damages and business interruption caused by the
earthquake. Included in prepaids and other current assets is an insurance
claim receivable of $4.9 million for recoverability of costs related to
business interruption and property damage.
Industrial Products
- -------------------
Sales in the Industrial Products segment increased 10.6% in the third
quarter and 8.4% in the Fiscal 1995 first nine months, compared to the same
Fiscal 1994 periods. $11.6 million of the net increase in sales in the nine
month period was at D-M-E Company ("D-M-E"), which provides tooling to the
plastics industry, and reflects customer response to the fast delivery
programs, new products, and growth of the domestic economy. Domestic demand
for tooling for plastics has been strong while foreign demand has shown signs
of improvement principally reflecting the strengthening European economy.
Expansion into selected new foreign markets is being pursued and appears to
have potential. Also included in the Industrial Products segment were sales
from Fairchild Data Corporation, which declined $1.2 million from the prior
year nine month period, but, improved $1.1 million in the Fiscal 1995 third
quarter compared to the prior year.
Operating income in the Industrial Products segment increased 24.6% in
the third quarter and 14.2% in the first nine months of Fiscal 1995, compared
to the same periods in Fiscal 1994. A 24.5% increase in operating income,
during the first nine months, at D-M-E was partially offset by the inclusion
of Fairchild Data Corporation, which reported an operating loss in the Fiscal
1995 nine month period, but did report positive earnings in the third quarter
of Fiscal 1995. The improved results at D-M-E resulted from a higher sales
volume and improved operating margins. In recent years D-M-E has implemented
several cost savings steps, including overhead reduction and improved
inventory management programs, which have contributed to the higher operating
margins. In addition, D-M-E has continued to implement improved
manufacturing methods that have reduced cycle time and costs.
Communications Services
- -----------------------
Sales in the Communications Services segment increased 81.3% in the
third quarter and 38.4% in the first nine months of Fiscal 1995, compared
with the same periods in Fiscal 1994, primarily due to the inclusion of sales
from the JWP Telecom, Inc., ("JWP") acquisition made during the Fiscal 1995
second quarter, as well as sales to new customers, the addition of
telecommunications franchises in new office buildings, and growth at existing
sites.
Operating income in the Communications Services segment increased 24.5%
in the third quarter and 10.0% in the first nine months of Fiscal 1995,
compared to the same periods in Fiscal 1994 primarily due to increased sales
resulting from the reasons given above and related economies of scale.
Other Expenses/Income
- ---------------------
Corporate Administrative Expense - Corporate administrative expense
increased 40.3% in the Fiscal 1995 third quarter and 9.5% in the Fiscal 1995
nine month periods. This increase in Fiscal 1995 was primarily the result of
a greater percentage of staff time being spent on the Company's operations,
therefore, less time was billed to the parent companies, RHI and TFC. Also,
costs were allocated from TFC to the Company which was not done in the prior
year periods. Management believes that the corporate administrative expense
of the Company would be higher if it operated as a separate independent
entity.
Other Corporate Income - Other corporate income decreased $.5 million
in the third quarter and increased slightly in the nine month period ended
April 2, 1995. The current third quarter decrease resulted primarily from
increased carrying costs on assets held for sale.
Net Interest Expense - In the third quarter and nine months ended April
2, 1995, net interest expense increased $.9 million and $3.7 million,
respectively. The prior year nine month period included a $3.8 million
reduction in interest expense on intercompany borrowings, which resulted from
reducing the rate from 12.23% to approximate market rates since January 1,
1993.
Investment Income - Investment income of $.4 million and $3.2 million
was recorded in the third quarter and first nine months of Fiscal 1994,
respectively, resulting primarily from dividends realized on participating
annuity contracts.
Income Taxes - In the first nine months of Fiscal 1995, the Company
recorded a tax provision of $2.0 million on a pretax loss of $2.0 million.
A tax provision resulted rather than a tax benefit largely due to the
amortization of goodwill, which is not deductible for tax purposes.
Accounting Changes:
- -------------------
1) Postretirement Benefits - Using the immediate recognition method,
the Fiscal 1994 first nine months charge to earnings representing the
cumulative effect of this accounting change was immaterial. The unamortized
portion of an overstated liability of $10.7 million for discontinued
operations substantially offset the transition obligation of $10.9 million
for active employees and retirees of continuing operations.
2) Accounting for Income Taxes - The Company elected the immediate
recognition method and recorded a $11.5 million charge in the first nine
months of Fiscal 1994, representing the cumulative effect on prior years.
This charge represents deferred taxes related primarily to differences
between the tax basis and book basis of fixed assets, prepaid pension
expenses, and inventory.
Net Loss - Net losses decreased $20.4 million in the first nine months
of Fiscal 1995, compared to the first nine months of Fiscal 1994, primarily
due to: (1) the $20.8 million increase in operating income in the first nine
months of Fiscal 1995, and (2) the $11.7 million charge, net of tax, for the
cumulative effect of accounting changes which were recorded in the first nine
months of Fiscal 1994, partially offset by (3) higher net interest expense,
lower investment income and higher taxes in Fiscal 1995.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 2, 1995, was $33.2 million, which was $9.8
million higher than at June 30, 1994. Receivables and inventory increased
$33.0 million, primarily the result of acquisitions, slower customer
payments, inventory build and increased sales to reduce backlog. This
increase was offset partially by a $16.7 million reduction in prepaid
expenses and other current assets reflecting (1) current taxes being
reclassified to noncurrent and (2) a $1.8 million reduction in the earthquake
insurance claim receivable. Accrued other liabilities increased $8.9
million, primarily the result of acquisitions.
The Company's principal sources of liquidity are cash generated from
operations and borrowings under its credit agreement. The Company also
expects to generate cash from the sale of certain assets. Net assets held
for sale at April 2, 1995 had a book value of $29.8 million and included two
parcels of real estate in California and an 88 acre parcel of real estate
located in Farmingdale, New York, which the Company plans to sell, lease or
develop, subject to the resolution of certain environmental matters and
market conditions. In March 1995, the Company sold one parcel in California
for $5.2 million.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, payment of other liabilities and payment of
dividends on preferred stock.
The level of the Company's capital expenditures varies from year to
year, depending upon the timing of capital spending for new production
equipment, periodic plant and facility expansion, acquisition of building
telecommunications assets, as well as cost reduction and labor efficiency
programs. For the nine month period ended April 2, 1995, capital
expenditures, including the cost of acquisitions, were $24.7 million. The
Company anticipates that total capital expenditures, including the cost of
acquisitions, for the fiscal year ending June 30, 1995 will be approximately
$30.8 million.
Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation and remediation
obligations, and litigation settlements and related costs.
The Company expects that cash on hand, cash generated from operations,
borrowings, 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. During the nine months ended April 2, 1995, RHI made equity
contributions to the Company totaling $23.1 million.
The Company's Credit Agreement requires the Company to comply with
certain financial covenants, including achieving cumulative earnings before
interest, taxes, depreciation and amortization, ("EBITDA Covenant"), and
maintaining certain coverage ratios. The Company was in compliance with the
Credit Agreement as of April 2, 1995. To comply with the minimum EBITDA
Covenant requirements (as amended), the Company's subsidiary, VSI Corporation
("VSI"), must earn for the cumulative total of the trailing four quarters,
EBITDA as follows: $75.0 million for the fourth quarter of Fiscal 1995,
$76.6 million for the first quarter of Fiscal 1996, $78.4 million for the
second quarter of Fiscal 1996, and $80.1 million for the third quarter of
Fiscal 1996. VSI's ability to meet the minimum requirements under the EBITDA
Covenant in Fiscal 1995 is uncertain, and there can be no assurance that the
Company will be able in the future to comply with the minimum requirements
under the EBITDA Covenant and other financial covenants under the Credit
Agreement. Noncompliance with any of the financial covenants, without cure
or waiver, would constitute an event of default under the Credit Agreement.
An event of default resulting from a breach of a financial covenant may
result, at the option of lenders holding a majority of the loans, in
acceleration of the principal and interest outstanding, and a termination of
the revolving credit line. However, if necessary, management believes a
waiver can be obtained.
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 2, 1995, 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 The Impairment Of Long-Lived Assets
- --------------------------------------------------
And For Long-Lived Assets To Be Disposed Of
- -------------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used for long-lived assets and certain
identifiable intangibles to be disposed of. The Company is currently
analyzing the new standard to determine the timing and effect, if any, on its
consolidated financial statements. SFAS No. 121 is required to be
implemented by the Company on, or before, July 1, 1996.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 5 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 12, 1995
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