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 January 2, 1994
Commission File Number: 1-6560
THE FAIRCHILD CORPORATION
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(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
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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 January 2, 1994
- ----- ------------------
Class A Common Stock, $.10 Par Value 13,403,709
Class B Common Stock, $.10 Par Value 2,699,286
----------
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 January 2, 1994 (Unaudited)
and June 30, 1993 3
Consolidated Statements of Earnings
for the Three and Six Months Ended
January 2, 1994 and December 27,
1992 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
January 2, 1994 and December 27,
1992 (Unaudited) 7
Notes to Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 16
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
<CAPTION>
(In thousands)
January 2, June 30,
ASSETS 1994 1993
- ------ ----------- -----------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $4,745 and
$4,200 restricted.......................... $ 174,375 $ 70,099
Short-term investments....................... 5,541 5,425
Accounts receivable-trade, less allowances
of $1,818 and $1,900....................... 66,820 64,423
Inventories:
Finished goods............................ 47,120 51,776
Work-in-process........................... 24,821 30,766
Raw materials............................. 8,748 8,987
--------- ---------
80,689 91,529
Prepaid expenses and other current assets.... 10,539 14,308
--------- ---------
Total Current Assets......................... 337,964 245,784
Property, plant and equipment, net of
accumulated depreciation of $74,672 and
$69,861.................................... 183,511 199,506
Net assets held for sale..................... 31,724 30,124
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$27,277 and $24,694......................... 209,378 216,365
Investments and advances - affiliated
companies................................... 75,682 129,916
Prepaid pension assets....................... 62,734 54,316
Long-term investments........................ 18,348 18,256
Other assets................................. 59,118 66,615
--------- ---------
Total Assets................................. $ 978,459 $ 960,882
========= =========
*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
<CAPTION>
(In thousands)
January 2, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
- ------------------------------------- ----------- ----------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 23,752 $ 66,790
Accounts payable............................. 26,767 29,043
Other accrued liabilities.................... 77,561 79,608
Income taxes payable......................... 28,048 2,560
--------- ---------
Total Current Liabilities.................... 156,128 178,001
Long-term debt, less current maturities...... 546,153 566,491
Other long-term liabilities.................. 24,888 19,009
Retiree health care liabilities.............. 51,765 50,797
Noncurrent income tax........................ 54,251 46,950
Minority interest in subsidiaries............ 25,037 25,037
Redeemable preferred stock of subsidiary..... 17,732 17,732
--------- ---------
Total Liabilities............................ 875,954 904,017
Stockholders' Equity:
Class A common stock, 10 cents par value;
authorized 40,000,000 shares, 19,645,305
shares issued and 13,403,709 shares
outstanding................................ 1,965 1,965
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,699,286
shares issued and outstanding.............. 270 270
Paid-in capital.............................. 66,738 66,737
Retained earnings............................ 84,632 36,914
Cumulative translation adjustment............ 619 2,698
Treasury Stock, at cost, 6,241,596 shares of
Class A Common Stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 102,505 56,865
--------- ---------
Total Liabilities and Stockholders' Equity... $ 978,459 $ 960,882
========= =========
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
TABLE
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
(In thousands) January 2, December 27, January 2, December 27,
1994 1992 1994 1992
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Sales............................. $105,392 $116,548 $211,742 $234,648
Other income - net................ 99 1,299 1,879 4,490
------- ------- ------- -------
105,491 117,847 213,621 239,138
Costs and Expenses:
Cost of sales..................... 81,030 86,883 165,878 173,065
Selling, general & administrative. 19,754 22,990 41,232 45,992
Research and development.......... 585 905 1,291 1,825
Amortization of goodwill.......... 1,519 1,509 3,076 3,000
Restructuring..................... 9,903 1,500 9,903 1,500
------- ------- ------- -------
112,791 113,787 221,380 225,382
Operating income (loss)............. (7,300) 4,060 (7,759) 13,756
Interest expense.................... 17,644 17,699 37,303 35,313
Interest income..................... 49 (615) (620) (1,106)
------- ------- ------- -------
Net interest expense................ 17,693 17,084 36,683 34,207
Investment income - net............. 5,282 570 7,025 437
Equity in earnings of affiliates.... 1,937 1,490 4,018 4,853
Minority interest................... (584) (644) (1,189) (1,162)
Non-recurring income................ 129,107 -- 129,107 --
------- ------- ------- -------
Earnings (loss) from continuing
operations before taxes............ 110,749 (11,608) 94,519 (16,323)
Income tax provision (benefit)...... 40,635 (3,750) 35,793 (5,465)
------- ------- ------- -------
Earnings (loss) from continuing
operations........................ 70,114 (7,858) 58,726 (10,858)
Loss on disposal of discontinued
operations - net.................. (29) (36) (58) (73)
------- ------- ------- -------
Earnings (loss) before extraordinary
items............................. 70,085 (7,894) 58,668 (10,931)
Extraordinary items - net........... -- 23 -- (12,201)
Cumulative effect of change in
accounting for postretirement
benefits.......................... -- -- (8,015) --
Cumulative effect of change in
accounting for income taxes....... -- -- (2,935) --
------- ------- ------- -------
Net earnings (loss)................. $ 70,085 $ (7,871) $ 47,718 $(23,132)
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
(In thousands) January 2, December 27, January 2, December 27,
1994 1992 1994 1992
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Earnings Per Share
Primary and Fully Diluted:
Earnings (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting changes.................. $ 4.35 $ (.49) $ 3.64 $ (.68)
Extraordinary items - net............. -- -- -- (.76)
Cumulative effect of change in
accounting for postretirement
benefits............................ -- -- (.50) --
Cumulative effect of change in
accounting for income taxes......... -- -- (.18) --
------- ------- ------- -------
Net earnings (loss)................... $ 4.35 $ (.49) $ 2.96 $ (1.44)
======= ======= ======= =======
Weighted average number of common
shares and common share equivalents:
Primary............................. 16,103 16,103 16,103 16,114
Fully diluted....................... 16,103 16,103 16,103 16,114
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)
<CAPTION>
(In thousands)
Six Months Ended
January 2, December 27,
1994 1992
----------- -----------
<S> <C> <C>
Cash provided by (used for)
Operations:
Net earnings (loss)..................... $ 47,718 $(23,132)
Depreciation and amortization........... 17,953 15,204
Accretion of discount on long-term
liabilities........................... 1,596 2,014
Adjustments for other non-cash charges.. 19,909 14,863
Adjustments for non-cash credits........ (4,018) (4,853)
Gain on sale of Rexnord investment...... (129,107) --
Gain on sale of fixed assets............ (25) (138)
Changes in assets and liabilities....... 40,562 (979)
------- -------
Cash provided by (used for) operations.. (5,412) 2,979
Investments:
Capital expenditures.................... (5,685) (5,845)
Proceeds from sale of Rexnord investment 178,115 --
Equity investments of affiliates........ (2,700) (19,168)
Proceeds from sale of fixed assets...... 6,555 821
Other - net............................. (1,707) 1,683
------- -------
Cash provided by (used for) investments. 174,578 (22,509)
Financing:
Issuance of debt........................ 58,702 146,551
Debt repayments - net................... (122,661) (126,389)
Purchases of Treasury Shares............ -- (244)
------- -------
Cash provided by (used for) financing... (63,959) 19,918
Effect of exchange rate changes on cash..... (931) (852)
Net increase (decrease) in cash............. 104,276 (464)
Cash, beginning of period................... 70,099 45,946
------- -------
Cash, end of period......................... $174,375 $ 45,482
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of January 2, 1994 and the
consolidated statements of earnings and cash flows for the six months ended
January 2, 1994 and December 27, 1992 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 January 2, 1994 and for all
periods presented have been made. The balance sheet at June 30, 1993 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, 1993 Form
10-K. The results of operations for the period ended January 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.
Note 2 - Sale of Rexnord Corporation
On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord Corporation ("Rexnord") to BTR Dunlop Holdings, Inc.
("BTR") for $22.50 per share. Accordingly, the Company received $181,873,000
in gross proceeds and realized a pre-tax gain on the sale of $129,107,000 for
the quarter ended January 2, 1994. In connection with the sale of its
interest in Rexnord, the Company agreed to place shares of Banner Aerospace,
Inc. ("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. The
financial statements include the Company's equity earnings from Rexnord, as
they relate to the periods presented. (See Note 6).
Note 3 - 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 4 - Restricted Cash
On January 2, 1994, the Company had approximately $4,745,000 of
restricted cash maintained as collateral for certain debt facilities. Total
restricted cash on June 30, 1993 was $4,200,000.
Note 5 - Net Assets Held for Sale
Property, plant and equipment, for which sale is expected to be
completed within one year, is included in net assets held for sale. Sales
from a division included in net assets held for sale, and not included in
results of operations, were $7,579,000 for the six months ended January 2,
1994. The impact from this division's earnings was immaterial.
Net assets held for sale are recorded at estimated net realizable values
which reflect anticipated sales proceeds and carrying costs to be incurred
during the holding period. Interest is not allocated to net assets held for
sale.
Note 6 - Summarized Statement of Earnings Information
The following table presents summarized statement of earnings
information on a combined 100% basis of Rexnord, Banner, and Nacanco
Paketleme ("Nacanco"), the Company's principal investments which are
accounted for using the equity method.
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) ----------------------------
January 2, December 27,
1994 1992
------------ ------------
<S> <C> <C>
Net sales................................. $411,479 $427,386
Gross profit.............................. 129,765 132,416
Earnings from continuing operations....... 11,229 9,252
Extraordinary items....................... -- (27,304)
Cumulative effect of changes in accounting
principles - net........................ (28,080) --
Net loss.................................. (16,851) (18,052)
</TABLE>
On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord. Prior to the sale of Rexnord, the Company recorded
equity earnings (loss) of $(905,000) and $3,752,000 on this investment for
the six month periods ended January 2, 1994 and December 27, 1992,
respectively. Equity loss for the six months ended January 2, 1994 included
an after-tax restructuring of operations charge of $2,938,000, which
represents 43.9% of Rexnord's restructuring charge for the rationalization of
manufacturing capacity, the movement of certain product lines and other costs
related to company-wide employment reductions and the consolidation of
certain manufacturing and administrative functions. These actions are
specifically targeted to improve productivity and increase manufacturing
capacity utilization and administrative efficiency of Rexnord. The net
earnings for the six months ended January 2, 1994 was decreased by recording
the Company's 43.9% share of the cumulative charge which resulted from the
adoption of FASB 106 and FASB 109 at Rexnord (see Note 8 and Note 9).
On January 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 $907,000 and $245,000
from this investment for the six months ended January 2, 1994 and December
27, 1992, respectively. At the close of trading on December 31, 1993, Banner
stock was quoted at $4.50 per share. Based on this price the Company's
equity investment in Banner had an approximate market value of $38,250,000
versus a carrying value of $56,874,000. The Company believes this decline in
market value is temporary.
On January 2, 1994, the Company owned approximately 33.0% of Nacanco
common stock. The Company recorded equity earnings of $3,754,000 and
$102,000 on this investment for the six months ended January 2, 1994 and
December 27, 1992, respectively.
Note 7 - Credit Agreement Amendment
The Company's Credit Agreement requires the Company and its subsidiaries
to comply with certain financial covenants, including achieving cumulative
earnings before interest, taxes, depreciation and amortization, ("EBITDA
Covenant"), and maintaining certain coverage ratios. The Credit Agreement
was amended to relax the EBITDA Covenant to permit compliance as of October
3, 1993 despite the decline in the earnings of the Company's Aerospace
Fasteners segment. To comply with the minimum EBITDA covenant requirements
(as amended and defined) 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 third quarter of Fiscal 1994, $67,000,000 for
the fourth quarter of Fiscal 1994, $73,600,000 for the first quarter of
Fiscal 1995, and $75,360,000 for the second quarter of Fiscal 1995. VSI's
ability to meet the EBITDA covenant in Fiscal 1994 is uncertain and there can
be no assurance that the Company will be able to comply with the financial
covenants in the future. 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 8 - 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". The 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 $534,000.
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.
As a result of Rexnord's adoption of FASB 106, effective July 1, 1993,
the Company recorded an after-tax charge of $7,481,000 to net earnings, which
represents the Company's share of Rexnord's cumulative effect for this change
in accounting, net of the Company's related tax benefit from the charge.
Note 9 - 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 $2,412,000 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
differences.
As a result of Rexnord's adoption of FASB 109 effective July 1, 1993,
the Company recorded an after-tax charge to net earnings of $523,000, which
represents the Company's share of Rexnord's cumulative effect for this change
in accounting.
Note 10 - Minority Interests in Consolidated Subsidiaries
The Company is carrying $24,015,000 of minority interest represented by
the Series C Preferred Stock of Fairchild Industries, Inc. ("FII"), a
majority owned subsidiary, in its balance sheet at January 2, 1994 and June
30, 1993, respectively. 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 11 - 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. There were 424,701 shares authorized, issued
and outstanding at January 2, 1994 and June 30, 1993, respectively.
Note 12 - Equity Securities
The Company had 13,403,709 shares of Class A Common Stock and 2,699,286
shares of Class B Common Stock outstanding at January 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. Cash dividends on Class B Common
Stock are initially limited to 50% of Class A Common Stock dividends.
The Company's equity securities did not change in the six months ended
January 2, 1994. No stock options were exercised during the six month
period.
Note 13 - 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 the 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 the
options and warrants for fully diluted earnings per share, the ending market
price of the Company's stock is used.
In computing earnings per share for the six months ended January 2, 1994
and December 27, 1992, the conversion of options and warrants was not
assumed, as the effect was anti-dilutive.
Note 14 - 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 $13,124,000 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 workers
compensation claims which were insured under a self-insured workers
compensation program of a former subsidiary of the Company, CL Motor Freight
Incorporated. The Company has contested a significant portion of this claim.
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. As a result, VSI is subject to an ongoing investigation, in which the
Company is cooperating, by the Inspector General of the Department of Defense
(the "IG") relating to these tests. 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.
VSI has agreed to plead guilty to a two-count Information under which it
would pay a fine of $230,000, upon acceptance of the plea by a federal court
in the Western District of Washington. The Information alleges that VSI
conspired (i) to submit non-competitive bids for certain contracts for a
single class of aluminum fast rivets, in violation of Section 1 of the
Sherman Act, and (ii) to impede a legitimate function of the Internal Revenue
Service.
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, 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.
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. Prior to
Bidermann's filing for protection under Chapter 11, the Company attached
certain assets of Bidermann, primarily located in France. 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
now been appealed to the United States Court of Appeals, will depend in part
upon the Company's ability to defend its attachments, the value of the shares
and warrants held, or Bidermann's ability to reorganize.
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.
Note 15 - Subsequent Event
On January 17, 1994 the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered damage from the Southern California
earthquake. While the company carries insurance for both business
interruption and property damage caused by earthquakes, the policy has a five
percent deductible. Once reliable estimates of the net cost of the damages
are developed, they will be recorded as an unusual loss in the third quarter
of fiscal 1994.
<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.
RESULTS OF OPERATIONS
On December 23, 1993 the Company consummated the sale of its 43.9% stock
interest in Rexnord Corporation consisting of 8,083,248 shares for $22.50 per
share to BTR Dunlop Holdings, Inc. Accordingly, the Company received $181.9
million in proceeds and realized a pre-tax gain of $129.1 million, net of
expenses, in the second quarter of Fiscal 1994.
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 recorded one-time non-cash charges totaling $10.9 million,
of which $8.0 million was for postretirement benefits and $2.9 million for
the change in accounting for income taxes and these charges are reflected in
the six month period ended January 2, 1994. The charges represent cumulative
effects on prior years of the accounting changes, net of related tax
benefits, including RHI's 43.9% share of Rexnord Corporation's accounting
changes, net of tax. The effect of the changes on pretax income from
continuing operations for the six months ended January 2, 1994 was not
material.
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 and six month periods ended
January 2, 1994 and December 27, 1992.
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
January 2, December 27, January 2, December 27,
1994 1992 1994 1992
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Sales by Business Segment
Aerospace Fasteners................ $ 50,446 $ 62,913 $102,024 $130,069
Industrial Products................ 36,506 37,063 73,135 72,088
Communications Services............ 18,440 16,572 36,583 32,491
------- ------- ------- -------
Total................................. $105,392 $116,548 $211,742 $234,648
======= ======== ======= =======
Operating Income (loss) by
Business Segment
Aerospace Fasteners................ $(11,654) $ 176 $(18,031) $ 4,886
Industrial Products................ 4,366 4,711 8,938 8,728
Communications Services............ 4,114 3,649 8,045 7,123
------- ------- ------- -------
Total................................. (3,174) 8,536 (1,048) 20,737
Corporate administrative expense... (3,725) (5,387) (8,185) (10,358)
Other corporate income (expense)... (401) 911 1,474 3,377
------- ------- ------- -------
Operating income (loss)............... (7,300) 4,060 (7,759) 13,756
Net interest expense.................. (17,693) (17,084) (36,683) (34,207)
Investment income - net............... 5,282 570 7,025 437
Equity in earnings of affiliates...... 1,937 1,490 4,018 4,853
Minority interest..................... (584) (644) (1,189) (1,162)
Non-recurring income.................. 129,107 -- 129,107 --
------- ------- ------- ------
Earnings (loss) from continuing
operations before income taxes..... 110,749 (11,608) 94,519 (16,323)
Income tax provision (benefit)........ 40,635 (3,750) 35,793 (5,465)
------- ------- ------- ------
Earnings (loss) from continuing
operations......................... $ 70,114 $ (7,858) $ 58,726 $(10,858)
======= ======= ======= ======
</TABLE>
General
- -------
Overall sales declined by 9.6% in the second quarter and 9.8% for the
six 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 and reduced order rates from commercial and military
aerospace customers in the Aerospace Fasteners segment. Reduced order rates
were in part due to the sluggish general economy, 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 six month period. Operating income decreased $11.4 million in the second
quarter and $21.5 million for the six month period compared to operating
income for the same periods in Fiscal 1993 and included a restructuring
charge of $9.9 million in the Fiscal 1994 second quarter and six month
periods to further implement the Aerospace Fasteners segment's restructuring
plan. The Fiscal 1993 second quarter and six month period included a
restructuring charge of $1.5 million. Operating income in the Industrial
Products segment was down for the quarter, but was up for the six month
period by 2.4%. In the Communications Services segment operating income was
up for both periods of Fiscal 1994. However, in the Aerospace Fasteners
segment, operating income declined $11.8 million for the quarter and $22.9
million for the six 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 19.8% in the second
quarter and 21.6% for the six month period ended January 2, 1994, compared to
the comparable 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
$11.8 million in the second quarter and $22.9 million for the six month
period ended January 2, 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 has recorded a pretax restructuring charge of $9.9 million
in the second quarter of fiscal 1994 to cover the cost of these 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. In
addition, on January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered damage from the Southern California
earthquake. While the Company carries insurance for both business
interruption and property damage caused by earthquakes, the policy has a five
percent deductible. Once reliable estimates of the net cost of the damages
are developed, they will be recorded as an unusual loss in the third quarter
of Fiscal 1994.
Operating income in the second quarter and six 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 of the quality system at one of the Aerospace
Fasteners segment's plants in the third quarter of Fiscal 1993 negatively
affected sales and operating income in the first six 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. 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 both one time start-up costs and
increased recurring quality costs, which negatively affected the first six
months of Fiscal 1994 operating results and will likely negatively impact the
future profit margins of this segment.
Industrial Products
- -------------------
Sales in the Industrial Products segment decreased 1.5% in the second
quarter due to fewer shipping days in the current year quarter compared to
the prior year quarter. Sales increased 1.5% for the six month period ended
January 2, 1994, compared to the same period in Fiscal 1993. The increase
in sales in the current six month period reflects customer response to the
D-M-E Company's 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 decreased 7.3% in
the second quarter primarily due to lower operating margins resulting from
reduced sales in the current quarter compared to the prior year quarter.
Operating income increased 2.4% for the six month period ended January 2,
1994, compared to the same period in Fiscal 1993. The improved results in
the first six months 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
second quarter and 12.6% for the six month period ended January 2, 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 12.7%
in the second quarter and 12.9% for the six month period ended January 2,
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 six months of Fiscal 1994
approximated the return on sales in the comparable period of Fiscal 1993.
Other Expenses/Income
- ---------------------
Corporate Administrative Expense - Corporate administrative expense
decreased by 30.9% in the second quarter and 21.0% for the first six months
of Fiscal 1994, compared to the Fiscal 1993 periods. 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. Excluding severance payouts,
corporate administrative expense declined over 24.0% for the six month period
compared to the same period in the prior year.
Other Corporate Income - Other corporate income decreased $1.3 million
in the second quarter and $1.9 million for the six month period ended January
2, 1994, compared to the same periods in the prior year, primarily due to the
absence of amortization of overaccrued retiree health care expense in the
Fiscal 1994 periods and recording a favorable pension adjustment in the prior
year periods.
Net Interest Expense - Net interest expense increased 3.6% in the second
quarter and 7.2% for the six month period ended January 2, 1994. The prior
year second quarter and six month period included a favorable adjustment to
interest expense on overaccrued retiree health care accruals.
Investment income - net was higher in the first six months, primarily as
a result of gains realized on the settlement and liquidation of investments
in Fiscal 1994 compared to Fiscal 1993. Also included in the Fiscal 1994 six
month period were $2.8 million of dividends realized on participating annuity
contracts compared to none in the Fiscal 1993 first half.
Equity in earnings of affiliates increased 30.0% in the second quarter,
primarily due to recording equity income of $1.1 million from the Company's
33.0% interest in Nacanco. For the six month period, equity earnings
decreased 17.2%, largely due to recording an equity loss at Rexnord
Corporation which included an after-tax restructuring charge of $2.9 million
in the first quarter of Fiscal 1994.
Minority interest expense increased slightly in Fiscal 1994 and included
a complete six months of dividend expense on the Series C Preferred stock,
issued August 21, 1992 by FII.
Non-Recurring Income - Non-recurring income in Fiscal 1994 includes the
net pre-tax gain of $129.1 million on the Company's 43.9% stock interest in
Rexnord Corporation, which was sold to BTR Dunlop Holdings, Inc. for $22.50
per share on December 23, 1993.
Income Taxes - In the first six months of Fiscal 1994, the Company
recorded a tax provision of 37.9%. The provision tax rate was higher than
the Federal 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
after-tax charge to earnings representing the cumulative effect of this
accounting change was $.5 million. The unamortized portion of an overstated
liability for discontinued operations substantially offset the transition
obligation for active employees and retirees of continuing operations. In
addition, 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.
Accounting for Income Taxes - The Company elected the immediate
recognition method and recorded a $2.4 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. 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.
Extraordinary items - net - in Fiscal 1993 includes an extraordinary
charge of $11.4 million, net of tax, which is 42% of the Rexnord
extraordinary charge related to premiums paid to repurchase debt and the
write off of deferred loan costs. In addition, FII recorded $.8 million, net
of tax, on deferred loan fees written off from the portion of the term loan
repaid.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at January 2, 1994, was $114.1 million higher than at
June 30, 1993. The primary reasons for this increase included an increase in
cash of $104.3 million resulting from the sale of shares of Rexnord
Corporation and a decrease in current debt of $43.0 million, offset partially
by a decrease in inventory of $10.8 million and an increase in the income tax
payable account of $25.5 million reflecting tax recorded on the Rexnord stock
sale.
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 January 2, 1994 had a book value of
$31.7 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 or develop, subject to the resolution of certain
environmental matters and market conditions. Included in long-term
investments at January 2, 1994, is a contractual obligation from an
individual to pay RHI $12.9 million, which has a net carrying amount of $9.3
million. The obligation is collateralized by 7.1% of the outstanding common
stock of Bidermann Industries USA, Inc., a closely held company. In
addition, the Company has attached certain of his property, primarily located
in France. The individual filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on July 7, 1993. The Company believes that its claim in
bankruptcy and liquidation of the collateral will be sufficient to recover
the carrying amount of this investment.
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 six month period ended January 2,
1994, capital expenditures were $5.7 million. The Company anticipates that
total capital expenditures for the fiscal year ending June 30, 1994 will be
approximately $16.0 million.
During the Fiscal 1994 second quarter, 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 lines which were
discontinued.
Investments and advances - affiliated companies decreased $54.2 million,
primarily due to the sale of Rexnord Corporation in the second quarter of
Fiscal 1994, combined with restructuring and accounting change charges
recorded by Rexnord Corporation in the first quarter of Fiscal 1994.
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 with its banks 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 Credit Agreement
was amended to relax the EBITDA Covenant to permit compliance as of October
3, 1993, despite the decline in the earnings of the Company's Aerospace
Fasteners segment. To comply with the minimum EBITDA covenant requirements
(as amended and defined) 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 third quarter of Fiscal 1994, $67.0 million
for the fourth quarter of Fiscal 1994, $73.6 million for the first quarter of
Fiscal 1995, and $75.4 million for the second quarter of Fiscal 1995. VSI's
ability to meet the EBITDA Covenant in Fiscal 1994 is uncertain and there can
be no assurance that the Company will be able to comply with the financial
covenants in the future. 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.
FII may transfer available cash as dividends to RHI 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 January 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.
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 14 of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
On January 7, 1994 the Company filed a Form 8-K to report on Item 2 and
Item 7. The Company reported the sale of 8.1 million shares of the Company's
former 43.9% investment affiliate, Rexnord Corporation, to BTR Dunlop
Holdings, Inc. ("BTR") at a price of $22.50 per share. The Company filed the
following exhibits in conjunction with this Form 8-K:
Exhibits
--------
10(y)(y) Purchase Agreement by and between BTR, RHI and the
Company dated as of December 2, 1993.
99(a) The Company's press release, dated December 23, 1993.
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: February 10, 1994
