UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 October 2, 1994
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
incorporation or organization) Identification No.)
Washington Dulles International Airport
300 West Service Road, P.O. Box 10803
Chantilly, Virginia 22021
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(703) 478-5800
----------------------------------------------------
(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 October 2, 1994
- ----- ---------------
Class A Common Stock, $.10 Par Value 13,406,109
Class B Common Stock, $.10 Par Value 2,696,886
----------
16,102,995
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES*
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of October 2, 1994 (Unaudited)
and June 30, 1994 3
Consolidated Statements of Earnings
for the Three Months Ended
October 2, 1994 and October 3,
1993 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
October 2, 1994 and October 3,
1993 (Unaudited) 7
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
*For purposes of Part I of this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For
purposes of Part II, the term "Company" means The Fairchild Corporation
unless otherwise indicated.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
October 2, June 30,
ASSETS 1994 1994
- ------ ----------- -----------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $4,745 restricted. $ 78,556 $ 102,368
Short-term investments....................... 5,461 6,649
Accounts receivable-trade, less allowances
of $3,492 and $3,468....................... 77,863 74,196
Inventories:
Finished goods............................ 51,019 47,120
Work-in-process........................... 30,356 30,907
Raw materials............................. 14,774 11,988
--------- ---------
96,149 90,015
Prepaid expenses and other current assets.... 27,642 20,128
--------- ---------
Total Current Assets......................... 285,671 293,356
Property, plant and equipment, net of
accumulated depreciation of $96,706 and
$89,688.................................... 171,754 174,147
Net assets held for sale..................... 36,827 36,375
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$31,152 and $29,622......................... 204,218 205,395
Investments and advances - affiliated
companies................................... 73,966 71,532
Prepaid pension assets....................... 60,696 61,628
Long-term investments........................ 15,458 15,458
Other assets................................. 54,910 55,638
--------- ---------
Total Assets................................. $ 903,500 $ 913,529
========= =========
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
October 2, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1994
- ------------------------------------- ----------- ----------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 14,628 $ 14,978
Accounts payable............................. 36,919 35,271
Accrued interest............................. 11,533 16,936
Other accrued liabilities.................... 64,771 67,686
Income taxes payable......................... -- 12,713
--------- ---------
Total Current Liabilities.................... 127,851 147,584
Long-term debt, less current maturities...... 521,048 522,406
Other long-term liabilities.................. 23,737 25,116
Retiree health care liabilities.............. 50,270 51,189
Noncurrent income tax........................ 72,759 53,162
Minority interest in subsidiaries............ 24,618 24,552
Redeemable preferred stock of subsidiary..... 17,264 17,552
--------- ---------
Total Liabilities............................ 837,547 841,561
Stockholders' Equity:
Class A common stock, 10 cents par value;
authorized 40,000,000 shares, 19,647,705
shares issued and 13,406,109 shares
outstanding................................ 1,965 1,965
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,696,886
shares issued and outstanding.............. 270 270
Paid-in capital.............................. 66,827 66,775
Retained earnings............................ 46,051 52,736
Cumulative translation adjustment............ 3,964 3,346
Additional minimum liability for pensions,
net of tax................................ (1,405) (1,405)
Treasury Stock, at cost, 6,241,596 shares of
Class A Common Stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 65,953 71,968
--------- ---------
Total Liabilities and Stockholders' Equity... $ 903,500 $ 913,529
========= =========
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, expect per share data)
<CAPTION>
Three Months Ended
October 2, October 3,
1994 1993
---------- -----------
(*)
<S> <C> <C>
Revenue:
Sales............................. $121,393 $110,491
Other income (expense), net....... (171) 1,775
------- -------
121,222 112,266
Costs and Expenses:
Cost of sales..................... 89,140 87,529
Selling, general & administrative. 23,001 22,151
Research and development.......... 968 1,066
Amortization of goodwill.......... 1,530 1,557
------- -------
114,639 112,303
Operating income (loss)............. 6,583 (37)
Interest expense.................... 17,754 19,659
Interest income..................... (1,139) (669)
------- -------
Net interest expense................ 16,615 18,990
Investment income, net.............. 342 1,743
Equity in earnings of affiliates.... 2,380 2,048
Minority interest................... (658) (605)
------- -------
Loss from continuing operations
before taxes...................... (7,968) (15,841)
Income tax benefit.................. (1,308) (4,690)
------- -------
Loss from continuing operations..... (6,660) (11,151)
Loss on disposal of discontinued
operations, net................... (25) (29)
------- -------
Loss before the cumulative effect of
accounting changes................ (6,685) (11,180)
Cumulative effect of change in
accounting for postretirement
benefits, net..................... -- (8,015)
Cumulative effect of change in
accounting for income taxes, net.. -- (2,935)
------- -------
Net loss............................ $ (6,685) $(22,130)
======= =======
* Restated for the inclusion of a division previously included in net assets
held for sale. (See Note 1).
The accompanying Notes to Consolidated Financial Statements are an integral
art of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended
October 2, October 3,
1994 1993
---------- -----------
(*)
<S> <C> <C>
Earnings Per Share
Primary and Fully Diluted:
Loss from continuing operations before
the cumulative effect of accounting
changes............................. $ (.42) $ (.69)
Cumulative effect of change in
accounting for postretirement
benefits, net....................... -- (.50)
Cumulative effect of change in
accounting for income taxes, net.... -- (.18)
------- -------
Net Loss.............................. $ (.42) $ (1.37)
======= =======
Weighted average number of shares
used in computing earnings per share:
Primary............................. 16,103 16,103
Fully diluted....................... 16,103 16,103
* Restated for the inclusion of a division included in net assets held for
sale. (See Note 1).
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<CAPTION>
Three Months Ended
October 2, October 3,
1994 1993
----------- -----------
(*)
<S> <C> <C>
Cash provided by (used for)
Operations:
Net loss................................ $ (6,685) $(22,130)
Cumulative effect of accounting changes,
net................................... -- 10,950
Depreciation and amortization........... 8,927 9,260
Accretion of discount on long-term
liabilities........................... 800 795
Adjustments for other non-cash charges.. 658 605
Adjustments for non-cash credits........ (2,380) (2,048)
Loss (gain) on sale of fixed assets..... 11 (357)
Changes in assets and liabilities....... (20,096) (12,079)
------- -------
Cash used for operations................ (18,765) (15,004)
Investments:
Capital expenditures.................... (3,510) (2,898)
Equity investments of affiliates........ (320) --
Proceeds received from investment
securities............................ 1,644 739
Business acquisitions................... (550) --
Proceeds from sale of fixed assets...... 10 6,527
Other, net.............................. (483) 50
------- -------
Cash provided by (used for) investments. (3,209) 4,418
Financing:
Issuance of debt........................ 940 58,516
Debt repayments, net.................... (2,915) (44,392)
------- -------
Cash provided by (used for) financing... (1,975) 14,124
Effect of exchange rate changes on cash..... 137 151
Net increase (decrease) in cash............. (23,812) 3,689
Cash, beginning of period................... 102,368 70,099
------- -------
Cash, end of period......................... $ 78,556 $ 73,788
======= =======
* Restated for the inclusion of a division previously included in net assets
held for sale. (See Note 1).
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of October 2, 1994 and the
consolidated statements of earnings and cash flows for the three months ended
October 2, 1994 and October 3, 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 October 2, 1994 and for all
periods presented have been made. The balance sheet at June 30, 1994 was
condensed from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1994 Form
10-K. The results of operations for the period ended October 2, 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.
The Fiscal 1994 first quarter data presented vary from the amounts
previously reported in the Form 10-Q dated October 3, 1993, and have been
restated due to the Company's decision not to sell a division, which was
previously included in net assets held for sale, and not included in the
results of operations. Sales from the division were $4,141,000 in the first
quarter of Fiscal 1994. Earnings from the division had no material effect
during this period.
Note 2 - Acquisitions
On June 10, 1994, the Company's Industrial Products segment acquired
100% of the Common Stock of Convac GmbH for approximately $4,700,000. Convac
GmbH is a leading designer and manufacturer of high precision state-of-the-
art wet processing tools, equipment and systems required for the manufacture
of semiconductor chips and related products, compact and optical storage
discs and liquid crystal displays.
On September 9, 1994, the Company's Industrial Products segment acquired
all of the outstanding Common Stock of Scandinavian Bellyloading Company AB
("SBC"). SBC is the designer and manufacturer of patented cargo loading
systems which are installed in the cargo area of commercial aircraft.
Several major airlines are expected to equip existing fleets with the SBC
system over the next three to four years.
Note 3 - Restricted Cash
The Company had approximately $4,745,000 of restricted cash on October
2, 1994 and June 30, 1994, all of which is maintained as collateral for
certain debt facilities.
Note 4 - Summarized Statement of Earnings Information
The following table presents summarized statement of earnings
information on a combined 100% basis of Banner Aerospace, Inc. ("Banner") and
Nacanco Paketleme ("Nacanco"), the Company's principal investments, which are
accounted for using the equity method.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) ----------------------------
October 2, October 3,
1994 1993
------------ ------------
<S> <C> <C>
Net sales................................. $77,143 $78,981
Gross profit.............................. 25,639 26,338
Earnings from continuing operations....... 8,044 9,399
Net earnings.............................. 8,044 9,303
</TABLE>
On October 2, 1994, the Company owned approximately 47.2% of Banner
common stock, which is included in investments and advances-affiliated
companies. The Company recorded equity earnings of $228,000 and $830,000
from this investment for the three months ended October 2, 1994 and October
3, 1993, respectively. At the close of trading on September 30, 1994, Banner
stock was quoted at $5.625 per share. Based on this price the Company's
equity investment in Banner had an approximate market value of $47,813,000
versus a carrying value of $50,652,000. The Company believes this decline in
market value is temporary.
On October 2, 1994, the Company owned approximately 33.0% of Nacanco
common stock. The Company recorded equity earnings of $2,249,000 and
$2,616,000 from this investment for the three months ended October 2, 1994
and October 3, 1993, respectively.
On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord Corporation ("Rexnord") to BTR Dunlop Holdings, Inc.
("BTR"). Prior to the sale of Rexnord, the Company recorded an equity loss
of $1,167,000 on this investment for the three month period ended October 3,
1993.
In connection with the sale of its interest in Rexnord, the Company has
placed shares of Banner, with a fair market value of $25,000,000, in escrow
to secure the Company's indemnification of BTR against a contingent
liability. Once the contingent liability is resolved, the escrow will be
released.
Note 5 - Revolving Credit Facility
On August 18, 1994, VSI Corporation's (an indirect subsidiary of the
Company) revolving credit facility was reduced by $9,250,000 to provide a
total available facility of $50,250,000, all of which was available on
October 2, 1994. In addition, (1) the borrowing rate was increased by 1.0%
to generally bear interest at 3.75% over the London Interbank Offer Rate, and
(2) the commitment fee charged on the unused portion of the revolving credit
facility was increased to 1.0%.
Note 6 - Minority Interests in Consolidated Subsidiaries
The Company includes $23,981,000 of minority interest on its balance
sheet at October 2, 1994 and June 30, 1994, which is represented by the
Series C Preferred Stock of Fairchild Industries, Inc. ("FII"), a majority
owned subsidiary. The Series C Preferred Stock has an annual dividend
requirement of $4.25 per share through July 21, 1999 and $7.00 per share
thereafter.
Note 7 - Redeemable Preferred Stock of Subsidiary
The Company has classified the outstanding shares of Series A Preferred
Stock of FII as a long-term liability. The Series A Preferred Stock has a
mandatory redemption value of $45.00 per share and an annual dividend
requirement of $3.60 per share. During the three months ended October 2,
1994, the Company repurchased 6,400 shares of FII's Series A Preferred Stock.
Effectively, there were 414,301 and 420,701 shares authorized, issued and
outstanding at October 2, 1994 and June 30, 1994, respectively.
Note 8 - Equity Securities
The Company had 13,406,109 shares of Class A Common Stock and 2,696,886
shares of Class B Common Stock outstanding at October 2, 1994. Class A
Common Stock is traded on both the New York and Pacific Stock Exchange while
there is no public market for the Class B Common Stock. Shares of Class A
Common Stock are entitled to one vote per share and cannot be exchanged for
Class B Common Stock. Shares of Class B Common Stock are entitled to ten
votes per share and can be exchanged, at any time, for shares of Class A
Common Stock on a share for share basis.
Note 9 - Earnings Per Share
Primary and fully diluted earnings per share are computed by dividing
net income available to common stockholders by the weighted average number of
shares and share equivalents outstanding during the period. To compute the
incremental shares resulting from stock options and warrants for primary
earnings per share, the average market price of the Company's stock during
the period is used. To compute the incremental shares resulting from stock
options and warrants for fully diluted earnings per share, the greater of the
ending market price or the average market price of the Company's stock is
used.
In computing primary and fully diluted earnings per share for the three
months ended October 2, 1994 and October 3, 1993, the conversion of options
and warrants was not assumed, as the effect was anti-dilutive.
<PAGE>
Note 10 - 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 1995, and
approximately $10,533,000 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.
CL Motor Freight Claim
- ----------------------
The Workers Compensation Bureau of the State of Ohio is seeking
reimbursement from the Company for approximately $5,400,000 for CL Motor
Freight Inc. ("CL") workers compensation claims which were insured under a
self-insured workers compensation program of CL. The Company has contested
a significant portion of this claim.
Government Claims
- -----------------
Following an investigation by the Inspector General of NASA, the civil
division of the United States Department of Justice alleged improprieties in
years 1982 and 1984 through 1986, in indirect costs rates and labor charging
practices of a former subsidiary of the Company. The Company 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 Negotiation 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 FII's business. The ACO has directed FII to prepare cost impact
proposals relating to such plan terminations and segment closings and,
following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if
such adjustments are made. The Company believes it has properly accounted
for the asset reversions in accordance with applicable accounting standards.
The Company has entered into discussions with the government to attempt to
resolve these pension accounting issues.
Civil Litigation
- ----------------
Maurice Bidermann Litigation
----------------------------
The Company commenced an action in the United States District for the
Southern District of New York, following the breach by Maurice Bidermann
("Bidermann") of an agreement under which Bidermann was to have paid the
Company an aggregate sum of approximately $22,500,000, of which Bidermann
paid $10,000,000. Additional installments, of $5,000,000 each, were due from
Bidermann on December 31, 1992, and June 30, 1993, both of which Bidermann
failed to pay. On July 7, 1993, the United States District Court ordered
Bidermann to pay the Company the full amount of its claim, $12,947,000, plus
interest. Following receipt of the Court's order, Bidermann filed for
protection under Chapter 11 of the United States Bankruptcy Code; however,
subsequent to the 1994 fiscal year, on motion of the Company, the Bankruptcy
Court dismissed Bidermann's Chapter 11 proceedings. Prior to Bidermann's
filing for protection under Chapter 11, and continuing subsequent to the
Bankruptcy Court's dismissal of those proceedings, the Company attached
substantially all assets of Bidermann. In addition, the Company holds shares
and warrants of Bidermann Industries, USA, Inc., all of which shares and
warrants Bidermann had originally agreed to purchase from the Company for
$22,500,000. The collectibility of this judgement, which has been affirmed
by the United States Court of Appeals, will depend in part upon the Company's
ability to realize sufficient amounts from its attachments, and the value of
the shares and warrants held.
Environmental Matters
- ---------------------
The Company and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local environmental
laws and regulations concerning, among other things, the discharge of
materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials. To date, such
laws and regulations have not had a material effect on the financial
condition of the Company, although the Company has expended, and can be
expected to expend in the future, significant amounts for investigation of
environmental conditions and installation of environmental control
facilities, remediation of environmental conditions and other similar
matters, particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to take
certain corrective action prior or pursuant to any such disposition. In
addition, management has identified several areas of potential contamination
at or from other facilities owned, or previously owned, by the Company, that
may require the Company either to take corrective action or to contribute to
a clean-up. The Company is also a defendant in certain lawsuits and
proceedings seeking to require the Company to pay for investigation or
remediation of environmental matters and has been alleged to be a potentially
responsible party at various "Superfund" sites. Management of the Company
believes that it has recorded adequate reserves in its financial statements
to complete such investigation and take any necessary corrective actions or
make any necessary contributions. No amounts have been recorded as due from
third parties, including insurers, or set off against any liability of the
Company, unless such parties are contractually obligated to contribute and
are not disputing such liability.
Other Matters
- -------------
The Company is involved in various other claims and lawsuits incidental
to its business, some of which involve substantial amounts. The Company
either on its own or through its insurance carriers is contesting these
matters.
In the opinion of management, the ultimate resolution of the legal
proceedings, including those discussed above, will not have a material
adverse effect on the financial condition or the future operating results of
the Company.
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The Fairchild Corporation (the "Company") was incorporated in October,
1969, under the laws of the State of Delaware. The Company changed its name
from Banner Industries, Inc. to The Fairchild Corporation on November 15,
1990. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI
is the majority owner of Fairchild Industries, Inc. ("FII") which, in turn,
is the 100% owner of VSI Corporation ("VSI"). The Company's operations are
conducted through VSI and RHI. RHI also holds significant equity interests
in Banner Aerospace, Inc. and Nacanco Paketleme ("Nacanco").
RESULTS OF OPERATIONS
The Company currently operates in three principal business segments:
Aerospace Fasteners, Industrial Products and Communications Services. The
following table illustrates the historical sales and operating income of the
Company's continuing operations for the three month periods ended October 2,
1994 and October 3, 1993.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
October 2, October 3,
1994 1993
---------- ----------
(*)
<S> <C> <C>
Sales by Business Segment:
Aerospace Fasteners................ $ 52,132 $ 51,578
Industrial Products................ 49,319 40,770
Communications Services............ 19,942 18,143
------- -------
Total................................. $121,393 $110,491
======= =======
Operating Income (loss) by
Business Segment:
Aerospace Fasteners................ $ 1,171 $ (6,377)
Industrial Products................ 4,911 4,994
Communications Services............ 4,422 3,931
------- -------
Total................................. 10,504 2,548
Corporate administrative expense... (3,158) (4,460)
Other corporate income (expense)... (763) 1,875
------- -------
Operating income (loss)............... 6,583 (37)
Net interest expense.................. (16,615) (18,990)
Investment income, net................ 342 1,743
Equity in earnings of affiliates...... 2,380 2,048
Minority interest..................... (658) (605)
------- -------
Earnings (loss) from continuing
operations before income taxes..... (7,968) (15,841)
Income tax benefit.................... 1,308 4,690
------- -------
Earnings (loss) from continuing
operations......................... $ (6,660) $(11,151)
======= =======
* Restated for the inclusion of a division which was previously included in
net assets held for sale. (See Note 1).
</TABLE>
<PAGE>
General
- -------
Overall sales increased by 9.9% in the first quarter of Fiscal 1995
compared to sales for the same period in Fiscal 1994, due to sales increases
in all three business segments.
Operating income increased $6.6 million in the first quarter of Fiscal
1995 compared to operating income for the same period in Fiscal 1994.
Operating income increased significantly in the Aerospace Fasteners and
Communications Services segments and was down slightly in the Industrial
Products segment in the Fiscal 1995 first quarter compared to Fiscal 1994.
Other corporate income also decreased (see discussion below).
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment increased 1.1% in the Fiscal
1995 quarter compared to Fiscal 1994 quarter, primarily resulting from the
very aggressive management efforts during the quarter to reduce backlog
previously delayed primarily due to quality problems and earthquake
disruption, which are diminishing.
Operating income in the Fiscal 1995 quarter increased $7.5 million over
the Fiscal 1994 quarter; however this segment continues to be affected by
reduced demand and price erosion and higher quality control costs resulting
from customers' intensified quality requirements.
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 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 $8.9 million for
recoverability of costs related to business interruption and property damage.
Industrial Products
- -------------------
Sales in the Industrial Products segment increased 21.0% in the Fiscal
1995 first quarter compared to the Fiscal 1994 first quarter. Over 9% of the
increase in sales in the current quarter period was at the D-M-E Company 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 and Convac GmbH, a semiconductor equipment manufacturing company
acquired at the end of Fiscal 1994.
Operating income in the Industrial Products segment decreased slightly
in the first quarter of Fiscal 1995 compared to the same period in Fiscal
1994. The inclusion of Fairchild Data Corporation and Convac GmbH, which
reported operating losses in the Fiscal 1995 quarter, was partially offset by
a 21.4% increase in operating income at the D-M-E Company. The improved
results at D-M-E resulted from a higher sales volume and improved operating
margins. In recent years this operation 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 9.9% in the
Fiscal 1995 first quarter compared to the same period in Fiscal 1994,
primarily due to the inclusion of sales from a small acquisition and 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 12.5%
in the Fiscal 1995 first quarter compared to the same period in Fiscal 1994,
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 quarter of Fiscal 1995 was slightly higher than the return on sales in
the comparable period of Fiscal 1994.
Other Expenses/Income
- ---------------------
Corporate Administrative Expense - Corporate administrative expense
decreased by 29.2% in the first quarter of Fiscal 1995, compared to the
Fiscal 1994 period. This decline resulted primarily from cost controls,
including a reduction in work force and wage and salary caps that were in
effect for most corporate employees and sale of the Company aircraft during
Fiscal 1994.
Other Corporate Income - Other corporate income decreased $2.6 million
in the first quarter ended October 2, 1994, compared to the same period in
the prior year, primarily due to recognizing gains on corporate real estate
sold in the prior year first quarter.
Net Interest Expense - Net interest expense decreased 12.5% in the first
quarter ended October 2, 1994, compared to the prior year period, primarily
due to lower borrowings and significantly higher amounts of cash and cash
equivalents during the Fiscal 1995 first quarter period.
Investment income - net was lower in the first three months, primarily
as a result of gains realized on the settlement and liquidation of
investments in Fiscal 1994 compared to Fiscal 1995. Also included in the
Fiscal 1995 three month period were $.3 million of dividends realized on
participating annuity contracts compared to $.9 million in the Fiscal 1994
nine month period.
Equity in earnings of affiliates increased $.3 million in the first
quarter compared to the Fiscal 1994 period and reflected continued strong
earnings from Nacanco, in which the Company holds a 33.0% interest. The
Fiscal 1994 first quarter included a $2.9 million, net of tax, restructuring
charge for Rexnord Corporation, prior to the Company selling its interest in
Rexnord Corporation. The current year period includes no earnings or losses
for Rexnord Corporation.
Minority interest expense includes dividend expense on FII's Series C
Preferred Stock.
Income Taxes - In the first quarter of Fiscal 1995, the Company recorded
a tax benefit of $1.3 million. The effective tax rate was lower than the
Federal statutory rate, largely due to the amortization of goodwill which is
not deductible for tax purposes.
Accounting Changes:
1) Postretirement Benefits - Using the immediate recognition method, the
Fiscal 1994 first quarter after-tax charge to earnings for the cumulative
effect of this accounting change was $.5 million, which represents the
unamortized portion of an overstated liability for discontinued operations
which substantially offset the transition obligation for active employees and
retirees of continuing operations. In addition, in the Fiscal 1994 first
quarter, a $7.5 million charge, net of the Company's related tax benefit, was
recorded for the Company's share of Rexnord Corporation's cumulative charge
resulting from this change in accounting.
2) Accounting for Income Taxes - The Company elected the immediate
recognition method and recorded, in the Fiscal 1994 first quarter, a $2.4
million charge representing the cumulative effect on prior years. This
charge represents deferred taxes related primarily to fixed assets, prepaid
pension expenses, and inventory differences. In addition, a $.5 million
charge was recorded for the Company's share of Rexnord Corporation's
cumulative charge resulting from this change in accounting.
Net Earnings (Loss) - The net loss decreased $15.4 million in the first
quarter of Fiscal 1995 compared to the first quarter of Fiscal 1994,
primarily due to: (1) the $6.6 million increase in operating income earned
in the first quarter of Fiscal 1995, and (2) the $11.0 million charge, net of
tax, for the cumulative effect of accounting changes which was recorded in
the first quarter of Fiscal 1994.
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at October 2, 1994, was $157.8 million which was $12.0
million higher than at June 30, 1994. The primary reasons for this increase
included $9.8 million increase in receivables and inventory, reflecting
efforts to reduce backlog, an increase in prepaid and other current assets of
$7.5 million, reflecting a reclassification of current deferred taxes, plus
a $8.3 million reduction in accrued interest and other accrued liabilities
and a reduction in current income taxes payable of $12.7 million, which was
reclassified to noncurrent income taxes. These increases were partially
offset by a $23.8 million reduction in cash, primarily required by FII and
VSI to service debt and meet operating cash requirements during the first
quarter.
The Company's principal sources of liquidity are cash generated from
operations and borrowings under its credit agreement. The Company also
expects to generate cash from the sale of certain assets and liquidation of
investments. Net assets held for sale at October 2, 1994 had a book value of
$36.8 million and included 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, lease or develop, subject to the resolution of certain
environmental matters and market conditions. Included in long-term
investments at October 2, 1994, is a contractual obligation for RHI to
receive $12.9 million from an individual which has a net carrying amount of
$9.3 million. The obligation in part, may be satisfied by 7.1% of the
outstanding common stock of Bidermann Industries USA, Inc., a closely held
company, held by RHI. In addition, the Company has attached substantially
all of the individual's property. The individual filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on July 7, 1993. However, in the
first quarter of Fiscal 1995, on a motion by RHI, the Bankruptcy Court
dismissed the Chapter 11 proceedings. The Company believes that liquidation
of assets held or attached by RHI will be sufficient to recover the carrying
amount of this investment. (See Note 10 to the Financial Statements).
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, payment of other liabilities and payment of
dividends on preferred stock.
The level of the Company's capital expenditures varies from year to
year, depending upon the timing of capital spending for new production
equipment, periodic plant and facility expansion, acquisition of high growth
companies, as well as cost reduction and labor efficiency programs. For the
three month period ended October 2, 1994, capital expenditures, including the
cost of acquisitions, were $4.1 million. The Company anticipates that total
capital expenditures for the fiscal year ending June 30, 1995 will be
approximately $19.6 million.
Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation, remediation obligations,
litigation settlements and related costs.
The Company expects that cash on hand, cash generated from operations,
borrowings and asset sales, and the ability to refinance portions of its
debt, will be adequate to satisfy cash requirements.
The Company's Credit Agreement requires the Company to comply with
certain financial covenants, including achieving cumulative earnings before
interest, taxes, depreciation and amortization, ("EBITDA Covenant"), and
maintaining certain coverage ratios. The Company was in compliance with the
Credit Agreement as of October 2, 1994. To comply with the minimum EBITDA
Covenant requirements (as amended) the Company's subsidiary, VSI must earn
for the cumulative total of the trailing four quarters, EBITDA as follows:
$70.4 million for the second quarter of Fiscal 1995, $72.1 million for the
third quarter of Fiscal 1995, $75.0 million for the fourth quarter of Fiscal
1995, $76.6 million for the first 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 an acceleration of the principal and interest
outstanding, and a termination of the revolving credit line. If necessary,
management believes a waiver can be obtained.
The Company's subsidiaries may transfer available cash as dividends to
the Company if the purpose of such dividends is to provide the Company with
funds necessary to meet its debt service requirements under specified notes
and debentures. All other dividends from FII to RHI are subject to certain
limitations under the Credit Agreement. As of October 2, 1994, FII was
unable to provide dividends to RHI. The Credit Agreement also restricts FII
from additional borrowings under the Credit Facilities for the payment of any
dividends.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 10 of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Michael T. Alcox
Senior Vice President and
Chief Financial Officer
By: Christopher Colavito
Vice President and
Controller
Date: November 14, 1994
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