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 January 1, 1995
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
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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 1, 1995
- ----- ---------------
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 January 1, 1995 (Unaudited)
and June 30, 1994 3
Consolidated Statements of Earnings
for the Three and Six Months Ended
January 1, 1995 and January 2,
1994 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
January 1, 1995 and January 2,
1994 (Unaudited) 7
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
*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>
January 1, June 30,
ASSETS 1995 1994
- ------ ----------- -----------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $4,745 restricted. $ 68,569 $ 102,368
Short-term investments....................... 4,028 6,649
Accounts receivable-trade, less allowances
of $3,600 and $3,468....................... 75,091 74,196
Inventories:
Finished goods............................ 59,859 47,120
Work-in-process........................... 27,864 30,907
Raw materials............................. 13,436 11,988
--------- ---------
101,159 90,015
Prepaid expenses and other current assets.... 25,917 20,128
--------- ---------
Total Current Assets......................... 274,764 293,356
Property, plant and equipment, net of
accumulated depreciation of $103,142 and
$89,688.................................... 177,497 174,147
Net assets held for sale..................... 37,037 36,375
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$32,702 and $29,622......................... 207,102 205,395
Investments and advances - affiliated
companies................................... 73,268 71,532
Prepaid pension assets....................... 60,921 61,628
Long-term investments........................ 12,280 15,458
Other assets................................. 55,124 55,638
--------- ---------
Total Assets................................. $ 897,993 $ 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>
January 1, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------- ----------- ----------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 15,297 $ 14,978
Accounts payable............................. 40,010 35,271
Other accrued liabilities.................... 86,713 84,622
Income taxes payable......................... -- 12,713
--------- ---------
Total Current Liabilities.................... 142,020 147,584
Long-term debt, less current maturities...... 511,222 522,406
Other long-term liabilities.................. 22,934 25,116
Retiree health care liabilities.............. 49,900 51,189
Noncurrent income taxes...................... 74,958 53,162
Minority interest in subsidiaries............ 24,644 24,552
Redeemable preferred stock of subsidiary..... 17,169 17,552
--------- ---------
Total Liabilities............................ 842,847 841,561
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.............................. 66,850 66,775
Retained earnings............................ 35,338 52,736
Cumulative translation adjustment............ 3,847 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................... 55,146 71,968
--------- ---------
Total Liabilities and Stockholders' Equity... $ 897,993 $ 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 Six Months Ended
January 1, January 2, January 1, January 2,
1995 1994 1995 1994
---------- ---------- ---------- ----------
(*) (*)
<S> <C> <C> <C> <C>
Revenue:
Sales............................. $125,929 $108,830 $247,322 $219,321
Other income, net................. 501 102 330 1,877
------- ------- ------- -------
126,430 108,932 247,652 221,198
Costs and Expenses:
Cost of sales..................... 97,532 82,955 186,672 170,484
Selling, general & administrative. 25,438 20,347 48,439 42,498
Research and development.......... 913 971 1,881 2,037
Amortization of goodwill.......... 1,549 1,519 3,079 3,076
Restructuring..................... -- 9,903 -- 9,903
------- ------- ------- -------
125,432 115,695 240,071 227,998
Operating income (loss)............. 998 (6,763) 7,581 (6,800)
Interest expense.................... 17,399 17,644 35,153 37,303
Interest income..................... (910) 49 (2,049) (620)
------- ------- ------- -------
Net interest expense................ 16,489 17,693 33,104 36,683
Investment income, net.............. 2,293 5,282 2,635 7,025
Equity in earnings of affiliates.... (219) 1,940 2,161 3,988
Minority interest................... (615) (584) (1,273) (1,189)
Non-recurring income................ -- 129,107 -- 129,107
------- ------- ------- -------
Earnings (loss) from continuing
operations before taxes........... (14,032) 111,289 (22,000) 95,448
Income tax benefit (provision)...... 3,367 (40,822) 4,675 (36,132)
------- ------- ------- -------
Earnings (loss) from continuing
operations......................... (10,665) 70,467 (17,325) 59,316
Loss on disposal of discontinued
operations, net................... (25) (29) (50) (58)
------- ------- ------- -------
Earnings (loss) before extraordinary
items and accounting changes...... (10,690) 70,438 (17,375) 59,258
Extraordinary items, net............ (23) -- (23) --
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 earnings (loss)................. $(10,713) $ 70,438 $(17,398) $ 48,308
======= ======= ======= =======
* 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>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
January 1, January 2, January 1, January 2,
1995 1994 1995 1994
---------- ---------- ---------- ----------
(*) (*)
<S> <C> <C> <C> <C>
Earnings Per Share
Primary and Fully Diluted:
Loss from continuing operations before
the cumulative effect of accounting
changes............................. $ (.67) $ 4.37 $ (1.08) $ 3.68
Cumulative effect of change in
accounting for postretirement
benefits, net....................... -- -- -- (.50)
Cumulative effect of change in
accounting for income taxes, net.... -- -- -- (.18)
------- ------- ------- -------
Net Loss.............................. $ (.67) $ 4.37 $ (1.08) $ 3.00
======= ======= ======= =======
Weighted average number of shares
used in computing earnings per share:
Primary............................. 16,103 16,103 16,103 16,103
Fully diluted....................... 16,103 16,103 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>
Six Months Ended
January 1, January 2,
1995 1994
----------- -----------
(*)
<S> <C> <C>
Cash provided by (used for)
Operations:
Net earnings (loss)..................... $(17,398) $ 48,308
Cumulative effect of accounting changes,
net................................... -- 10,950
Depreciation and amortization........... 17,970 18,126
Accretion of discount on long-term
liabilities........................... 1,942 1,596
Adjustments for other non-cash charges.. 2,182 8,959
Adjustments for non-cash credits........ (2,161) (3,988)
Gain on sale of Rexnord................. -- (129,107)
Loss (gain) on sale of fixed assets..... 221 (25)
Changes in assets and liabilities....... (9,198) 40,527
------- -------
Cash used for operations................ (6,442) (4,654)
Investments:
Capital expenditures.................... (8,534) (5,758)
Proceeds received from sale of Rexnord.. -- 178,115
Equity investments of affiliates........ (520) (2,700)
Proceeds received from (used for)
investment securities, net............ 5,799 (208)
Business acquisitions................... (12,061) --
Proceeds from sale of fixed assets...... 365 6,555
Other, net.............................. (895) (2,147)
------- -------
Cash provided by (used for) investments. (15,846) 173,857
Financing:
Issuance of debt........................ 2,893 58,702
Debt repayments, net.................... (14,301) (122,661)
------- -------
Cash used for financing................. (11,408) (63,959)
Effect of exchange rate changes on cash..... (103) (931)
Net increase (decrease) in cash............. (33,799) 104,313
Cash, beginning of period................... 102,368 70,099
------- -------
Cash, end of period......................... $ 68,569 $174,412
======= =======
* 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>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of January 1, 1995 and the
consolidated statements of earnings and cash flows for the six months ended
January 1, 1995 and January 2, 1994 have been prepared by the Company,
without audit. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at January 1, 1995 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 January 1, 1995 are not
necessarily indicative of the operating results for the full year. Certain
amounts in prior years' quarterly financial statements have been reclassified
to conform to the current presentation.
The Fiscal 1994 first six months data presented vary from the amounts
previously reported in the Form 10-Q dated January 2, 1994, 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 $7,579,000 in the first
six months of Fiscal 1994. Earnings from the division had no material effect
during this period.
Note 2 - Acquisitions
On June 10, 1994, the Company acquired 100% of the Common Stock of
Convac GmbH ("Convac")for approximately $4,700,000. Convac 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. The Company reports the results of Convac as part of its
Industrial Products segment.
On September 9, 1994, the Company 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.
The Company reports the results of SBC as part of its Industrial Products
segment.
<PAGE>
On November 28, 1994 Fairchild Communications Services Company
("Fairchild Communications"), a partnership whose partners are indirect
subsidiaries of the Company, completed the acquisition of substantially all
of the telecommunications assets of JWP Telecom, Inc. ("JWP") for
approximately $11,000,000 plus the assumption of approximately $3,000,000 of
liabilities. JWP is a telecommunications system integrator, specializing in
manufacturing, distribution, design, installation and maintenance of voice
and data communications equipment. In the first quarter of Fiscal 1995,
Fairchild Communications acquired all the shared telecommunications assets of
Eaton & Lauth Co., Inc., for approximately $550,000.
Note 3 - Restricted Cash
The Company had approximately $4,745,000 of restricted cash on January
1, 1995 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>
Six Months Ended
(In thousands) ----------------------------
January 1, January 2,
1995 1994
------------ ------------
<S> <C> <C>
Net sales................................. $143,251 $141,497
Gross profit.............................. 49,476 49,167
Earnings from continuing operations....... 7,434 12,442
Net earnings.............................. 7,434 11,838
</TABLE>
On January 1, 1995, 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 $970,000 and $907,000
from this investment for the six months ended January 1, 1995 and January 2,
1994, respectively. At the close of trading on December 30, 1994, 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 $51,320,000. The Company does not believe that
this decline in market value is a permanent impairment.
On January 1, 1995, the Company owned approximately 33.0% of Nacanco
common stock. The Company recorded equity earnings of $1,516,000 and
$3,754,000 from this investment for the six months ended January 1, 1995 and
January 2, 1994, 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")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. Prior to the sale of Rexnord, the Company
recorded an equity loss of $905,000 on this investment for the six month
period ended January 2, 1994.
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, of which $42,357,000 was available
on January 1, 1995. In addition, (1) the borrowing rate was increased by
1.0% to generally bear interest at 3.75% over the London Interbank Offer
Rate, and (2) the commitment fee charged on the unused portion of the
revolving credit facility was increased to 1.0%.
Note 6 - Early Extinguishment of Debt
During the quarter ended January 1, 1995, the Company used cash
available to purchase at a discount $7,600,000 of its 12.25% Senior
Subordinated Notes originally due in 1996. The purchase and write off of
certain deferred costs associated with the issuance of the securities
repurchased resulted in an extraordinary charge of $23,000, net of tax.
Note 7 - Minority Interests in Consolidated Subsidiaries
The Company includes $23,981,000 of minority interest on its balance
sheet at January 1, 1995 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 8 - 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 six months ended January 1, 1995,
the Company repurchased 8,500 shares of FII's Series A Preferred Stock.
Effectively, there were 412,201 and 420,701 shares authorized, issued and
outstanding at January 1, 1995 and June 30, 1994, respectively.
Note 9 - 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 January 1, 1995. 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 10 - 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
and six months ended January 1, 1995 and January 2, 1994, the conversion of
options and warrants was not assumed, as the effect was anti-dilutive.
Note 11 - Commitments and Contingencies
Lease Guaranties
- ----------------
In connection with the sale of Metro Credit Corporation, the Company
remained contingently liable as a guarantor of the payment and performance of
obligations of third party lessees under aircraft leases, which call for
aggregate annual base lease payments of approximately $3,454,000 in Fiscal
1995, and approximately $9,669,000 over the remaining 4-year guaranty period.
In each case, the Company has been indemnified by the purchasers and lessees
from any losses related to such guaranties.
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 settled these
claims with the Department of Justice and agreed to pay $5,000,000, payable
in six equal semi-annual installments, with interest at 6.0% per year. The
first installment was made in the current second quarter period. The unpaid
balance is collateralized by certain excess real estate.
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that 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, in
the first quarter of Fiscal 1995, 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. On November, 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation, 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. The Company 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 January 1,
1995 and January 2, 1994.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
January 1 January 2, January 1, January 2,
1995 1994 1995 1994
---------- ---------- ---------- ----------
(*) (*)
<S> <C> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners................ $ 53,273 $ 50,446 $105,405 $102,024
Industrial Products................ 50,088 39,944 99,407 80,714
Communications Services............ 22,568 18,440 42,510 36,583
------- ------- ------- -------
Total................................. $125,929 $108,830 $247,322 $219,321
======= ======= ======= =======
Operating Income (loss) by
Business Segment:
Aerospace Fasteners................ $ (3,320) $(11,654) $ (2,149) $(18,031)
Industrial Products................ 4,039 4,903 8,950 9,897
Communications Services............ 3,829 4,114 8,251 8,045
------- ------- ------- -------
Total................................. 4,548 (2,637) 15,052 (89)
Corporate administrative expense... (3,603) (3,725) (6,761) (8,185)
Other corporate income (expense)... 53 (401) (710) 1,474
------- ------- ------- -------
Operating income (loss)............... 998 (6,763) 7,581 (6,800)
Net interest expense.................. (16,489) (17,693) (33,104) (36,683)
Investment income, net................ 2,293 5,282 2,635 7,025
Equity in earnings of affiliates...... (219) 1,940 2,161 3,988
Minority interest..................... (615) (584) (1,273) (1,189)
Non-recurring items................... -- 129,107 -- 129,107
------- ------- ------- -------
Earnings (loss) from continuing
operations before income taxes..... (14,032) 111,289 (22,000) 95,448
Income tax benefit (provision)........ 3,367 (40,822) 4,675 (36,132)
------- ------- ------- -------
Earnings (loss) from continuing
operations......................... $(10,665) $ 70,467 $(17,325) $ 59,316
======= ======= ======= =======
* Restated for the inclusion of a division which was previously included in
net assets held for sale. (See Note 1).
</TABLE>
General
- -------
Overall sales increased by 15.7% in the second quarter and 12.8% for the
six month period of Fiscal 1995 compared to sales for the same periods in
Fiscal 1994, which reflected stronger sales performances from all three
business segments.
Operating income increased $7.8 million in the second quarter and $14.4
million for the six month period of Fiscal 1995 compared to operating income
for the same periods in Fiscal 1994. During the Fiscal 1995 current quarter
and six month periods, operating losses decreased significantly in the
Aerospace Fasteners segment. The Fiscal 1994 second quarter and six month
period included a restructuring charge in the Aerospace Fasteners segment of
$9.9 million. Operating income was down in the Industrial Products segment
in both current year periods and declined in the Communications Services
segment in the current second quarter period as a result of recent
acquisitions. (See discussion below).
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment increased 5.6% in the second
quarter and 3.3% for the six month period ended January 1, 1995, compared to
the corresponding Fiscal 1994 periods, primarily resulting from aggressive
management efforts during the quarter to reduce backlog caused by quality
problems and earthquake disruption, which are diminishing.
Operating losses in the Aerospace Fasteners segment decreased $8.3
million in the second quarter and $15.9 million for the Fiscal 1995 six month
period over the corresponding Fiscal 1994 periods; however this segment
continues to be affected by soft demand and price erosion and higher quality
control costs resulting from customers' intensified quality requirements.
The Fiscal 1995 quarter loss resulted primarily from excess costs incurred to
reduce the past due sales backlog, which includes many orders of small
quantities at low profit margins. A restructuring charge of $9.9 million was
recorded in the prior year second quarter and six month periods for
nonrecurring costs related to exiting certain aircraft engine bolt lines.
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 $4.3 million for
recoverability of costs related to business interruption and property damage.
Industrial Products
- -------------------
Sales in the Industrial Products segment increased 25.4% in the second
quarter and 23.2% in the Fiscal 1995 first six months, compared to the same
Fiscal 1994 periods. $8.2 million of the net increase in sales in the six
month period was at the D-M-E Company ("D-M-E"), which provides tooling to
the plastics industry, and reflects customer response to the fast delivery
programs, new products, and growth of the domestic economy. Domestic demand
for tooling for plastics has been strong while foreign demand has shown signs
of improvement principally reflecting the strengthening European economy.
Expansion into selected new foreign markets is being pursued and appears to
have potential. Also included in the Industrial Products segment were sales
from Fairchild Convac ("Convac"), a semiconductor equipment manufacturing
company acquired at the end of Fiscal 1994, and Fairchild Data Corporation.
The combined sales of these two companies was $8.7 million in the second
quarter and $18.0 million in the Fiscal 1995 first six months.
Operating income in the Industrial Products segment decreased 17.6% in
the second quarter and 9.6% in the first six months of Fiscal 1995, compared
to the same periods in Fiscal 1994. A 24.8% increase in operating income,
during the first six months, at D-M-E was offset by the inclusion of Convac,
two other operations recently added and Fairchild Data Corporation, which
reported combined operating losses totaling $1.6 million in the second
quarter, and $2.2 million in the first six months of Fiscal 1995. The
improved results at D-M-E resulted from a higher sales volume and improved
operating margins. In recent years D-M-E has implemented several cost
savings steps, including overhead reduction and improved inventory management
programs, which have contributed to the higher operating margins. In
addition, D-M-E has continued to implement improved manufacturing methods
that have reduced cycle time and costs.
Communications Services
- -----------------------
Sales in the Communications Services segment increased 22.4% in the
second quarter and 16.2% in the Fiscal 1995 first six months, compared with
the same periods in Fiscal 1994, primarily due to the inclusion of sales from
acquisitions 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 decreased 6.9%
in the second quarter and increased 2.6% in the Fiscal 1995 first six months,
compared to the same periods in Fiscal 1994. The decrease in operating
income in the Fiscal 1995 second quarter was primarily due to recognizing
initial costs related to integrating the recent acquisition. These costs
will likely affect the third quarter as well, after which management expects
this acquisition to contribute to growth in sales and operating income.
<PAGE>
Other Expenses/Income
- ---------------------
Corporate Administrative Expense - Corporate administrative expense
decreased by 3.3% in the second quarter and 17.4% in the six month period of
Fiscal 1995, compared to the same Fiscal 1994 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 airplane during Fiscal 1994.
Other Corporate Income - Other corporate income increased $.5 million in
the second quarter, largely due to increased royalty income received during
the quarter, and decreased $2.2 million in the six months ended January 1,
1995, compared to the same period in the prior year, primarily due to
recognizing gains on corporate real estate sold in the prior year six month
period.
Net Interest Expense - Net interest expense decreased 6.8% in the second
quarter and 9.8% in the six month period ended January 1, 1995, compared to
the prior year periods, primarily due to lower borrowings and significantly
higher cash and cash equivalents average balances during the Fiscal 1995
first six month period.
Investment income - net was lower in the second quarter and first six
months, primarily as a result of recording larger gains realized on the
settlement and liquidation of investments in Fiscal 1994, compared to Fiscal
1995. Also included in the Fiscal 1995 six month period were $.3 million of
dividends realized on participating annuity contracts, compared to $2.8
million in the Fiscal 1994 corresponding period.
Equity in earnings of affiliates decreased $2.2 million in the second
quarter and $1.8 million in the six month period ended January 1, 1995,
compared to the same periods of Fiscal 1994. Earnings from Nacanco, in which
the Company holds a 33.0% interest, were down $1.2 million for the six
months, primarily due to a large tax adjustment in the second quarter of
Fiscal 1995.
Minority interest expense includes dividend expense on FII's Series C
Preferred Stock.
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 second quarter of Fiscal 1995, the Company
recorded a tax benefit of $3.4 million and for the six months a tax benefit
of $4.7 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.
<PAGE>
Accounting Changes:
1) Postretirement Benefits - Using the immediate recognition method, the
Fiscal 1994 first six months 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 six
months, 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 six months, 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 earnings (loss) decreased $65.7 million in
the first six months of Fiscal 1995, compared to the first six months of
Fiscal 1994, primarily due to the $129.1 million net pre-tax gain recognized
in the Fiscal 1994 six month period. Partially offsetting the decrease were:
(1) the $14.4 million increase in operating income earned in the first six
months of Fiscal 1995, (2) the $11.0 million charge, net of tax, for the
cumulative effect of accounting changes, which was recorded in the first six
months of Fiscal 1994, and (3) a decrease in taxes of $40.8 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at January 1, 1995, was $132.7 million, which was $13.0
million lower than at June 30, 1994. The primary reasons for this decrease
included a $33.8 million reduction in cash, primarily required to service
debt and meet operating cash requirements during the first six months, and a
$4.7 million increase in accounts payable. These decreases were partially
offset by an $11.1 million increase in inventory, reflecting acquisitions and
efforts to reduce backlog, and a reduction in current income taxes payable of
$12.7 million, which was reclassified to noncurrent income taxes.
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 January 1, 1995 had a book value of
$37.0 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 January 1, 1995, is a contractual obligation for RHI to
receive $15.9 million from an individual, which obligation has a net carrying
amount of $9.2 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 motion of 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
six month period ended January 1, 1995, capital expenditures, including the
cost of acquisitions, were $20.6 million. The Company anticipates that total
capital expenditures for the fiscal year ending June 30, 1995 will be
approximately $31.6 million.
Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation and remediation
obligations, and litigation settlements and related costs.
The Company expects that cash on hand, cash generated from operations,
borrowings 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 January 1, 1995. 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:
$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, and $78.4 million for the second quarter of Fiscal 1996. VSI's ability
to meet the minimum requirements under the EBITDA Covenant in Fiscal 1995 is
uncertain, and there can be no assurance that the Company will be able in the
future to comply with the minimum requirements under the EBITDA Covenant and
other financial covenants under the Credit Agreement. Noncompliance with any
of the financial covenants, without cure or waiver, would constitute an event
of default under the Credit Agreement. An event of default resulting from a
breach of a financial covenant may result, at the option of lenders holding
a majority of the loans, in acceleration of the principal and interest
outstanding, and a termination of the revolving credit line. However, if
necessary, management believes a waiver can be obtained.
<PAGE>
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 January 1, 1995, 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 11 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: February 10, 1995
<TABLE> <S> <C>
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<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JAN-01-1995
<CASH> 68,569
<SECURITIES> 3,638
<RECEIVABLES> 78,691
<ALLOWANCES> 3,600
<INVENTORY> 101,159
<CURRENT-ASSETS> 274,764
<PP&E> 280,639
<DEPRECIATION> 103,142
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<CURRENT-LIABILITIES> 142,020
<BONDS> 511,222
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17,169
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<SALES> 247,322
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