UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended October 3, 1999
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 Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 478-5800
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 threety (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
Title of Class October 3, 1999
Class A Common Stock, $0.10 Par Value 22,198,516
Class B Common Stock, $0.10 Par Value 2,621,652
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of October 3, 1999
(Unaudited) and June 30, 1999 3
Consolidated Statements of Earnings (Unaudited) for the Three
Months ended October 3, 1999 and September 27, 1998 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Three Months ended October 3, 1999 and September 27, 1998 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
All references in this Quarterly Report on Form 10-Q to the terms ''we,''
''our,'' ''us,'' the ''Company'' and ''Fairchild'' refer to The Fairchild
Corporation and its subsidiaries. All references to ''fiscal'' in connection
with a year shall mean the 12 months ended June 30.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 3, 1999 (Unaudited) and June 30, 1999
(In thousands)
<CAPTION>
ASSETS
October 3, June 30,
1999 1999
<S> <C> <C>
(*)
CURRENT ASSETS:
Cash and cash equivalents, $13,982 and
$15,752 restricted $ 53,190 $ 54,860
Short-term investments 6,489 13,094
Accounts receivable-trade, less allowances 123,527 130,121
of $4,334 and $6,442
Inventories:
Finished goods 159,935 137,807
Work-in-process 33,698 38,316
Raw materials 10,699 14,116
204,332 190,239
Prepaid expenses and other current assets 74,373 73,926
Total Current Assets 461,911 462,240
Property, plant and equipment, net of
accumulated
depreciation of $113,030 and $103,556 186,840 184,065
Net assets held for sale 19,899 21,245
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $43,073 and 433,310 447,722
$40,307
Investments and advances, affiliated 16,572 31,791
companies
Prepaid pension assets 64,113 63,958
Deferred loan costs 14,181 13,077
Real estate investment 89,240 83,791
Long-term investments 16,220 15,844
Other assets 5,081 5,053
TOTAL ASSETS $1,307,367$1,328,786
*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
October 3, 1999 (Unaudited) and June 30, 1999
(In thousands)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
October 3, June 30,
1999 1999
<S> <C> <C>
CURRENT LIABILITIES: (*)
Bank notes payable and current maturities
of long-term debt $ 28,192 $ 28,860
Accounts payable 43,096 72,271
Accrued liabilities:
Salaries, wages and commissions 45,287 43,095
Employee benefit plan costs 6,448 5,204
Insurance 10,455 14,216
Interest 13,173 7,637
Other accrued liabilities 53,962 50,984
129,325 121,136
Net current liabilites of discontinued
operations 12,585 10,999
Total Current Liabilities 213,198 233,266
LONG-TERM LIABILITES:
Long-term debt, less current maturities 480,971 495,283
Other long-term liabilities 27,769 25,963
Retiree health care liabilities 45,289 44,813
Noncurrent income taxes 121,107 121,961
TOTAL LIABILITIES 888,334 921,286
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value;
authorized
40,000 shares, 29,820 (29,754 in June)
shares issued and
22,198 (22,259 in June) shares 2,982 2,975
outstanding
Class B common stock, $0.10 par value;
authorized 20,000
shares, 2,622 shares issued and 262 262
outstanding
Paid-in capital 229,732 229,038
Retained earnings 270,140 252,030
Cumulative other comprehensive income (9,357) (2,703)
Treasury stock, at cost, 7,622 (7,496 in (74,726) (74,102)
June) shares
of Class A common stock
TOTAL STOCKHOLDERS' EQUITY 419,033 407,500
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$1,307,367 $1,328,786
*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 STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended October 3, 1999 and September 27, 1998
(In thousands, except per share data)
<CAPTION>
For the Three Months Ended
10/03/99 9/27/98
<S> <C> <C>
REVENUE:
Net sales $164,509 $148,539
Other income, net 4,828 419
169,337 148,958
COSTS AND EXPENSES:
Cost of goods sold 121,362 113,867
Selling, general & administrative 31,828 28,174
Amortization of goodwill 3,096 1,278
Restructuring 3,017 -
159,303 143,319
OPERATING INCOME 10,034 5,639
Interest expense 12,209 7,436
Interest income (735) (583)
Net interest expense 11,474 6,853
Investment income 880 1,861
Nonrecurring income 28,003 -
Earnings from continuing operations before
taxes 27,443 647
Income tax provision (9,132) (291)
Equity in earnings (loss) of affiliates, net (201) 1,037
Minority interest, net - (203)
NET EARNINGS $18,110 $1,190
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (1,648) 5,246
Unrealized holding changes on securities
arising during the period (5,006) (30,388)
Other comprehensive income (loss) (6,654) (25,142)
COMPREHENSIVE INCOME (LOSS) $11,456 $(23,952)
NET EARNINGS PER SHARE:
Basic $ 0.73 $ 0.05
Diluted $ 0.72 $ 0.05
Weighted average shares outstanding:
Basic 24,862 22,401
Diluted 25,026 23,001
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)
For The Three (3) Months Ended October 3, 1999 and September 27, 1998
(In thousands)
<CAPTION>
For the Three Months Ended
10/03/1999 09/27/1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 18,110 $1,190
Depreciation and amortization 9,968 5,538
Amortization of deferred loan fees 413 286
Accretion of discount on long-term
liabilities 897 1,072
Net gain on divestiture of investment in
affiliate (25,747) -
Net gain on divestiture of subsidiary (2,256) -
Loss on sale of property, plant, and
equipment 90 46
Distributed (undistributed) earnings of
affiliates, net 310 226
Minority interest - 203
Change in assets and liabilities (12,154) (9,089)
Non-cash charges and working capital
changes of discontinued operations (10,930) (6,523)
Net cash used for operating activities (21,299) (7,051)
Cash flows from investing activities:
Purchase of property, plant and equipment
(11,879) (6,551)
Net proceeds received from investment
securities (3,933) (3,113)
Net proceeds received from divestiture of
investment in affiliate 43,103 -
Net proceeds received from divestiture of
subsidiary 4,906 -
Changes in real estate investment
(5,329) (2,145)
Changes in net assets held for sale
1,346 288
Other, net
- 156
Investing activities of discontinued
operations 7,100 (165)
Net cash provided by (used for) investing
activities 35,314 (11,530)
Cash flows from financing activities:
Proceeds from issuance of debt
126,691 41,362
Debt repayments
(142,279) (6,282)
Issuance of Class A common stock
90 158
Purchase of treasury stock
(624) (18,657)
Financing activities of discontinued
operations - (15)
Net cash provided by (used for) financing
activities (16,122) 16,566
Effect of exchange rate changes on cash
437 1,842
Net change in cash and cash equivalents
(1,670) (173)
Cash and cash equivalents, beginning of
the year 54,860 49,601
Cash and cash equivalents, end of the
period $53,190 $49,428
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)
(In thousands, except share data)
FINANCIAL STATEMENTS
The consolidated balance sheet as of October 3, 1999 and the consolidated
statements of earnings and cash flows for the three months ended October 3, 1999
and September 27, 1998 have been prepared by us, without audit. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at October 3, 1999, and for all periods presented, have been made.
The balance sheet at June 30, 1999 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 our June 30, 1999 Annual Report on Form 10-K. The results of operations for
the period ended October 3, 1999 are not necessarily indicative of the operating
results for the full year. Certain amounts in the prior year's quarterly
financial statements have been reclassified to conform to the current
presentation.
DIVESTITURES
On September 3, 1999, we completed the disposal of our Camloc Gas Springs
division to a subsidiary of Arvin Industries Inc. for approximately $2.7
million. In addition, we received $2.4 million for a covenant not to compete. We
recognized a $2.3 million nonrecurring gain from this disposition.
On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to
American National Can Group, Inc. for approximately $48.2 million. In the
quarter ended October 3, 1999, we recognized a $25.7 million nonrecurring gain
from this divestiture. We also agreed to provide consulting services over a
three-year period, at an annual fee of approximately $1.5 million. We used the
net proceeds from the disposition to reduce our indebtedness.
DISCONTINUED OPERATIONS
Based on our formal plan for the disposition of Fairchild Technologies, we
have liquidated a significant portion of Fairchild Technologies, mostly
consisting of our semiconductor equipment group through several transactions.
On April 14, 1999, we disposed of our photoresist deep ultraviolet track
equipment machines, spare parts and testing equipment to Apex Co., Ltd. in
exchange for 1,250,000 shares of Apex stock valued at approximately $5.1
million. On June 15, 1999, we received $7.9 million from Suess Microtec AG and
the right to receive 350,000 shares of Suess Microtec stock (or approximately
$3.5 million) by September 2000 in exchange for certain inventory, fixed assets,
and intellectual property our semiconductor equipment group. On May 1, 1999, we
sold Fairchild CDI for a nominal amount. In July 1999, we received approximately
$7.1 million from Novellus in exchange for our Low-K dielectric product line and
certain intellectual property. We are also exploring several alternative
transactions regarding the disposition of our optical disc equipment group, but
we have not made any definitive arrangements for its ultimate disposition.
As of October 3, 1999, we have a remaining accrual of $5.6 million, net of
an income tax benefit of $3.9 million, for our current estimate of the remaining
losses in connection with the disposition of Fairchild Technologies. While we
believe that $5.6 million is a reasonable estimate for the remaining losses to
be incurred from Fairchild Technologies, there can be no assurance that this
estimate is adequate.
PRO FORMA FINANCIAL STATEMENTS
The following table sets forth the derivation of the unaudited pro forma
results, representing the impact of our acquisition of Kaynar Technologies
(completed in April 1999), our merger with Banner Aerospace (completed in April
1999), and our disposition of Solair (completed in December 1998), as if these
transactions had occurred at the beginning of fiscal 1999. The pro forma
information is based on the historical financial statements of these companies,
giving effect to the aforementioned transactions. In preparing the pro forma
data, certain assumptions and adjustments have been made which increase interest
expense based on revised debt structures, increase goodwill amortization expense
for the acquisition of Kaynar Technologies, and reduce minority interest as a
result of our merger with Banner Aerospace. The unaudited pro forma information
is not intended to be indicative of either future results of our operations or
results that might have been achieved if these transactions had been in effect
since the beginning of fiscal 1999.
<TABLE>
<CAPTION>
For the three months ended: Sept. 27,
1998
<S> <C>
Net sales $186,280
Gross profit 47,522
Net earnings 122
Net earnings, per basic and diluted share $ 0.00
</TABLE>
EQUITY SECURITIES
We had 22,198,516 shares of Class A common stock and 2,621,652 shares of
Class B common stock outstanding at October 3, 1999. Class A common stock is
traded on both the New York and Pacific Stock Exchanges. There is no public
market for the Class B common stock. The shares of Class A common stock are
entitled to one vote per share and cannot be exchanged for shares of Class B
common stock. The 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. For the three months ended October 3, 1999, 21,863
shares of Class A common stock were issued as a result of the exercise of stock
options. In accordance with the terms of our acquisition of Special-T, as
amended, we issued 44,079 restricted shares of our Class A common stock during
the three months ended October 3, 1999, as additional merger consideration. In
addition, our Class A common stock outstanding was reduced as a result of 67,000
shares purchased during the quarter, which are considered as treasury stock for
accounting purposes.
During the three months ended October 3, 1999, we issued 67,994 deferred
compensation units pursuant to our stock option deferral plan as a result the
exercise of 127,000 stock options. Each deferred compensation unit is
represented by one share of our treasury stock and is convertible into one share
of our Class A common stock after a specified period of time.
RESTRICTED CASH
On October 3, 1999 and June 30, 1999, we had restricted cash of $13,982 and
$15,752, respectively, all of which is maintained as collateral for certain debt
facilities and escrow arrangements.
EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(In thousands, except per share data) For the Three Months Ended
10/3/99 9/27/98
<S> <C> <C>
Basic earnings per share:
Net earnings $ 18,110 $ 1,190
Weighted average common shares outstanding 24,862 22,401
Basic earnings per share:
Basic earnings from continuing operations
per share $ 0.73 $ 0.05
Diluted earnings per share:
Net earnings $ 18,110 $ 1,190
Weighted average common shares outstanding
24,862 22,401
Options 10 416
Warrants 154 184
Total shares outstanding 25,026 23,001
Diluted earnings from continuing operations
per share $ 0.72 $ 0.05
</TABLE>
Stock options entitled to purchase 1,767,986 shares of Class A common stock
were antidilutive and not included in the earnings per share calculation for the
three months ended October 3, 1999. These shares could be dilutive in subsequent
periods.
RESTRUCTURING CHARGES
In the three months ended October 3, 1999, we recorded $3.0 million of
restructuring charges as a result of the continued integration of Kaynar
Technologies into our aerospace fasteners segment. All of the charges recorded
during the current quarter were a direct result of product integration costs
incurred as of October 3, 1999. These costs were classified as restructuring and
were the direct result of formal plans to close plants and to terminate
employees. Such costs are nonrecurring in nature. Other than a reduction in our
existing cost structure, none of the restructuring charges resulted in future
increases in earnings or represented an accrual of future costs. As of October
3, 1999, the majority of the integration plans have been executed. During the
next nine months, we expect to incur modest additional restructuring charges for
product integration costs at our aerospace fasteners segment. We anticipate that
our integration process will be substantially complete by the end of fiscal
2000.
CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that a former subsidiary of ours did not comply with Federal
Acquisition Regulations and Cost Accounting Standards in accounting for (i) the
1985 reversion of certain assets of terminated defined benefit pension plans,
and (ii) pension costs upon the closing of segments of our former subsidiaries
business. The ACO has directed us 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, however, an
estimate of the possible loss or range of loss from the ACO's assertion cannot
be made. We believe that management of our former subsidiary properly accounted
for the asset reversions in accordance with applicable accounting standards. We
intend to enter into mediation with the government to attempt to resolve these
pension accounting issues.
Environmental Matters
Our operations are subject to stringent government imposed 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 our financial condition, results of
operations, or net cash flows, although we have expended, and can be expected to
expend in the future, significant amounts for the investigation of environmental
conditions and installation of environmental control facilities, remediation of
environmental conditions and other similar matters, particularly in our
aerospace fasteners segment.
In connection with our plans to dispose of certain real estate, we must
investigate environmental conditions and we may be required to take certain
corrective action prior or pursuant to any such disposition. In addition, we
have identified several areas of potential contamination at or from other
facilities owned, or previously owned, by us, that may require us to either to
take corrective action or to contribute to a clean-up. We are also a defendant
in certain lawsuits and proceedings seeking to require us to pay for
investigation or remediation of environmental matters and we have been alleged
to be a potentially responsible party at various "superfund" sites. We believe
that we have recorded adequate reserves in our 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 environmental liability,
unless such parties are contractually obligated to contribute and are not
disputing such liability.
As of October 3, 1999, the consolidated total of our recorded liabilities
for environmental matters was approximately $10.1 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $17.3 million.
Other Matters
On January 12, 1999, AlliedSignal made indemnification claims against us
for $18.9 million, arising from the disposition to AlliedSignal of Banner
Aerospace's hardware business. We believe that the amount of the claim is far in
excess of any amount that AlliedSignal is entitled to recover from us.
We are involved in various other claims and lawsuits incidental to our
business, some of which involve substantial amounts. We, either on our own or
through our insurance carriers, are contesting these matters. In the opinion of
management, the ultimate resolution of the legal proceedings, including those
mentioned above, will not have a material adverse effect on our financial
condition, future results of operations or net cash flows.
CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited financial statements separately show The Fairchild
Corporation and the subsidiaries of The Fairchild Corporation. These financial
statements are provided to fulfill public reporting requirements and separately
present guarantors of the 10 3/4% senior subordinated notes due 2009 issued by
The Fairchild Corporation (the "Parent Company"). The guarantors are primarily
composed of our domestic subsidiaries, excluding Fairchild Technologies, a real
estate development venture, and certain other subsidiaries.
<TABLE>
<CAPTION>
CONSOLIDATING BALANCE SHEET
October 3, 1999 Parent Non Elimi- Fairchild
Company Guarantors Guarantors nations Historical
<S> <C> <C> <C> <C> <C>
Cash $ 74 $ 42,465 $ 10,651 $ - $ 53,190
Short-term investments 71 6,418 - - 6,489
Accounts receivable, less
allowances 1,608 79,196 42,723 - 123,527
Inventory, net - 158,542 45,790 - 204,332
Prepaid and other
current assets 532 67,253 6,588 - 74,373
Total current assets 2,285 353,874 105,752 - 461,911
Investment in
subsidiaries 958,071 - - (958,071) -
Net fixed assets 585 138,816 47,439 - 186,840
Net assets held for sale - 19,899 - - 19,899
Investments in affiliates 1,300 15,272 - - 16,572
Goodwill 5,427 388,279 39,604 - 433,310
Deferred loan costs 13,605 25 551 - 14,181
Prepaid pension assets - 64,113 - - 64,113
Real estate investment - - 89,240 - 89,240
Long-term investments - 16,220 - - 16,220
Other assets 16,881 (12,198) 398 - 5,081
Total assets $998,154 $984,300 $282,984 $(958,071)$1,307,367
Bank notes & current
maturities of debt $ 2,250 $ 2,445 $ 23,497 $ - $ 28,192
Accounts payable - 24,077 19,019 - 43,096
Other accrued expenses (11,740) 118,405 22,660 - 129,325
Net current liabilities
of discontinued
operation - - 12,585 - 12,585
Total current
liabilities (9,490) 144,927 77,761 - 213,198
Long-term debt, less
current maturities 465,893 9,159 5,919 - 480,971
Other long-term
liabilieies 405 19,045 8,258 - 27,708
Noncurrent income taxes 122,313 (1,450) 244 - 121,107
Retiree health care
liabilities - 40,460 4,829 - 45,289
Minority interest in
subsidiaries - 9 52 - 61
Total liabilities 579,121 212,150 97,063 - 888,334
Class A common stock 2,781 201 5,084 (5,084) 2,982
Class B common stock 262 - - - 262
Pain-in-capital 2,834 226,898 232,554 (232,554) 229,732
Retained earnings 488,022 550,894 (48,343)(720,433) 270,140
Cumulative other
comprehensive income (764) (5,219) (3,374) - (9,357)
Treasury stock, at cost (74,102) (624) - - (74,726)
Total stockholders'
equity 419,033 772,150 185,921 (958,071) 419,033
Total liabilities &
stockholders' equity $998,154 $984,300 $282,984 $(958,071)$1,307,367
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENTS OF EARNINGS
For the Three Months Ended Parent Non Elimi- Fairchild
October 3, 1999 Company Guarantors Guarantors nations Historical
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 123,893 $ 41,645 $(1,029)$ 164,509
Cost and expenses
Cost of sales - 91,623 30,768 (1,029) 121,362
Selling, general &
administrative 1,008 20,357 5,635 - 27,000
Restructuring - 3,017 - - 3,017
Amortization of goodwill 128 2,680 288 - 3,096
1,136 117,677 36,691 (1,029) 154,475
Operating income (loss) (1,136) 6,216 4,954 - 10,034
Net interest expense 12,425 (2,569) 1,618 - 11,474
Investment (income)loss,
net - (880) - - (880)
Intercompany dividends - - 117 (117) -
Nonrecurring (income) from
divestitures - - (28,003) - (28,003)
Earnings (loss) before
taxes (13,561) 9,665 31,222 117 27,443
Income tax (provision)
benefit (8,853) (117) (162) - (9,132)
Equity in earnings of
affiliates & subsidiaries 40,524 (201) - (40,524) (201)
Earnings (loss) from
continuting operations 18,110 9,347 31,060 (40,407) 18,110
Earnings (loss) from
discontinued operations - (206) 206 - -
Net earnings (loss) $ 18,110 $ 9,141 $31,266 $(40,407) $18,110
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Three Months Ended Parent Non Elimi- Fairchild
October 3, 1999 Company Guarantors Guarantors nations Historical
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ 18,110 $ 9,141 $ 31,266 $(40,407)$ 18,110
Depreciation & amortization 137 6,980 2,851 - 9,968
Amortizatin of deferred loan
fees 413 - - - 413
Accretion of discount on
long-term liabilities 897 - - - 897
Net (gain) on divestitures - - (28,003) - (28,003)
Loss on sale of PP&E - 70 20 - 90
Undistributed loss of
affiliates - 310 - - 310
Change in assets and
liabilities (4,638) (47,695) (434) 40,613 (12,154)
Non-cash charges and working
capital changes of discontinued - - (10,930) - (10,930)
operations
Net cash (used for) provided by
operating activities 14,919 (31,194) (5,230) 206 (21,299)
Cash Flows from Investing Activities:
Proceeds received from (used
for) investment securities, net - (3,933) - - (3,933)
Purchase of PP&E (5) (9,388) (2,486) - (11,879)
Gross proceeds from divestitures - - 48,009 - 48,009
Change in real estate investment - - (5,329) - (5,329)
Change in net assets held for
sale - 1,346 - - 1,346
Investing activities of
discontinued operations - - 7,100 - 7,100
Net cash (used for) provided by
investing activities (5) (11,975) 47,294 - 35,314
Cash Flows from Financing Activities:
Proceeds from issuance of debt 14,500 110,459 1,732 - 126,691
Debt repayments (including
intercompany), net (29,457) (66,240)(46,582) - (142,279)
Issuance of Class A common
stock 90 - - - 90
Purchase of treasury stock - (624) - - (624)
Net cash (used for) provided by
financing activities (14,867) 43,595 (44,850) - (16,122)
Effect of exchange rate
changes on cash - 40 397 - 437
Net change in cash 47 466 (2,389) 206 (1,670)
Cash, beginning of the year 27 41,793 13,040 - 54,860
Cash, end of period $ 74 $ 42,259 $ 10,651 $206 $53,190
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING BALANCE SHEET
June 30, 1999 Parent Non Elimi- Fairchild
Company Guarantors Guarantors nations Historical
<S> <C> <C> <C> <C> <C>
Cash $ 27 $ 41,793$ 13,040 $- $ 54,860
Short-term investments 71 13,023 - - 13,094
Accounts receivable, less
allowances 549 52,929 76,643 - 130,121
Inventory, ent (182) 145,080 45,341 - 190,239
Prepaid and other current
assets 1,297 69,000 3,629 - 73,926
Total current assets 1,762 321,825 138,653 - 462,240
Investment in subsidiaries 841,744 - - (841,744) -
Net fixed assets 611 137,852 45,602 - 184,065
Net assets held for sale - 21,245 - - 21,245
Investments in affiliates 1,300 13,135 17,356 - 31,791
Goodwill 5,533 402,595 39,594 - 447,722
Deferred loan costs 13,029 26 22 - 13,077
Prepaid pension assets - 63,958 - - 63,958
Real estate investment - - 83,791 - 83,791
Long-term investments - 15,844 - - 15,844
Other assets 16,244 (11,865) 674 - 5,053
Total assets $880,223 $964,615 $325,692 $(841,744)$1,328,786
Bank notes & current
maturities of debt $ 2,250 $ 2,548 $ 24,062 $ - $ 28,860
Accounts payable 972 12,824 58,475 - 72,271
Other accrued expenses 7,272 99,669 14,195 - 121,136
Net current liabilities of
discontinued operations - - 10,999 - 10,999
Total current liabilities 10,494 115,041 107,731 - 233,266
Long-term debt, less
current maturities 480,850 9,908 4,525 - 495,283
Other long-term liabilities 405 18,138 7,361 - 25,904
Noncurrent income taxes (19,026) 140,749 238 - 121,961
Retiree health care
liabilities - 40,189 4,624 - 44,813
Minority interest in
subsidiaries - 9 50 - 59
Total liabilities 472,723 324,034 124,529 - 921,286
Class A common stock 2,775 200 5,085 (5,085) 2,975
Class B common stock 262 - - - 262
Paid-in-capital 2,138 226,900 263,058 (263,058) 229,038
Retained earnings 477,191 413,483 (65,043) (573,601) 252,030
Cumulative other
comprehensive income (764) (2) (1,937) - (2,703)
Treasury stock, at cost (74,102) - - - (74,102)
Total stockholders' equity 407,500 640,581 201,163 (841,744) 407,500
Total liabilities &
stockholders' equity $880,223 $964,615$325,692 $(841,744)$1,328,786
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENTS OF EARNINGS
For the Three Months Ended Parent Non Elimi Fairchild
September 27, 1998 Company Guarantors Guarantors nations Historical
<S> <C> <C> <C> <C> <C>
Net Sales $ - $113,023 $ 35,654 $ (138) $148,539
Costs and expenses
Cost of sales - 87,514 26,491 (138) 113,867
Selling, general &
administrative 777 21,329 5,649 - 27,755
Amortization of goodwill 57 979 242 - 1,278
834 109,822 32,382 (138) 142,900
Operating income (loss) (834) 3,201 3,272 - 5,639
Net interest expense 5,189 1,018 646 - 6,853
Investment (income)loss,
net - (1,861) - - (1,861)
Earnings (loss) before taxes (6,023) 4,044 2,626 - 647
Income tax (provision)
benefit 642 (973) 40 - (291)
Equity in earnings of
affiliates and subsidiaries 6,571 (781) 1,818 (6,571) 1,037
Minority interest - (203) - - (203)
Net earnings (loss) $ 1,190 $ 2,087 $ 4,484 $ (6,571) $ 1,190
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Three Months Ended Parent Non Elimi- Fairchild
September 27, 1998 Company Guarantors Guarantors nations Historical
Cash Flows from Operating Activities:
<S> <C> <C> <C> <C> <C>
Net earnings (loss) $ 1,190 $ 2,087 $ 4,484 $(6,571)$ 1,190
Depreciation & amortization 30 3,705 1,803 - 5,538
Amortizaton of deferred loan
fee 286 - - - 286
Accretion of discount on
long-term liabilities 1,072 - - - 1,072
Loss on sale of PP&E - 15 31 - 46
Distributed earnings of
affiliates - 226 - - 226
Minority interest - 203 - - 203
Change in assets and liabilities 17,832 (18,460) (15,032) 6,571 (9,089)
Non-cash charges and working
capital changes of discontinued - - (6,523) - (6,523)
operations
Net cash (used for) provided by
operating activities 20,410 (12,224) (15,237) - (7,051)
Cash Flows from Investing Activities:
Proceeds received from (used
for) investment securities, net - (3,113) - - (3,113)
Purchase of PP&E (6) (4,466) (2,079) - (6,551)
Change in real estate investment - - (2,145) - (2,145)
Change in net assets held for sale - 288 - - 288
Other (1,905) 2,061 - - 156
Investing activities of
discontinued operations - - (165) - (165)
Net cash (used for) provided by
investing activities (1,911) (5,230) (4,389) - (11,530)
Cash Flows from Financing Activities:
Proceeds from issuance of debt - 14,001 27,361 - 41,362
Debt repayments, net - - (6,282) - (6,282)
Issuance of Class A common
stock 158 - - - 158
Purchase of treasury stock (18,657) - - - (18,657)
Financing activities of
discontinued operations - - (15) - (15)
Net cash (used for) provided by
financing activities (18,499) 14,001 21,064 - 16,566
Effect of exchange rate
changes on cash - - 1,842 - 1,842
Net change in cash - (3,453) 3,280 - (173)
Cash, beginning of the year - 42,175 7,426 - 49,601
Cash, end of the period $ - $ 38,722 $10,706 $ - $49,428
</TABLE>
SUBSEQUENT EVENTS
On October 25, 1999, we announced that we signed a definitive agreement
with United Technologies Corporation to sell substantially all of the assets and
certain liabilities of our Dallas Aerospace, Inc. subsidiary for approximately
$57 million in cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation was incorporated in October 1969, under the laws
of the State of Delaware, under the name of Banner Industries, Inc. On November
15, 1990, we changed our name from Banner Industries, Inc. to The Fairchild
Corporation. We are the owner of 100% of RHI Holdings, Inc. and Banner
Aerospace, Inc. RHI is the owner of 100% of Fairchild Holding Corp. Our
principal operations are conducted through FHC and Banner Aerospace.
The following discussion and analysis provide information which management
believes is relevant to assessment and understanding of our consolidated results
of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
GENERAL
We are a leading worldwide aerospace and industrial fastener manufacturer
and distribution logistics manager and, through Banner Aerospace, an
international supplier to airlines and general aviation businesses, distributing
a wide range of aircraft parts and related support services. Through internal
growth and strategic acquisitions, we have become one of the leading suppliers
of fasteners to aircraft OEMs, such as Boeing, Lockheed Martin, Northrop
Grumman, and the Airbus consortium of Aerospatiale, DaimlerChrysler Aerospace,
British Aerospace and CASA.
Our aerospace business consists of two segments: aerospace fasteners and
aerospace distribution. The aerospace fasteners segment manufactures and markets
high performance fastening systems used in the manufacture and maintenance of
commercial and military aircraft. The aerospace distribution segment stocks and
distributes a wide variety of aircraft parts to commercial airlines and air
cargo carriers, fixed-base operators, corporate aircraft operators and other
aerospace companies.
CAUTIONARY STATEMENT
Certain statements in this financial discussion and analysis by management
contain certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our financial
condition, results of operation and business. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These forward-
looking statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These forward-looking statements
involve risks and uncertainties, including current trend information,
projections for deliveries, backlog and other trend projections, that may cause
our actual future activities and results of operations to be materially
different from those suggested or described in this Quarterly Report on Form 10-
Q. These risks include: product demand; our dependence on the aerospace
industry; reliance on Boeing and the Airbus consortium of companies; customer
satisfaction and quality issues; labor disputes; competition, including recent
intense price competition; our ability to integrate and realize anticipated
synergies relating to the acquisition of Kaynar Technologies Inc.; our ability
to achieve and execute internal business plans; worldwide political instability
and economic growth; and the impact of any economic downturns and inflation,
including recent weaknesses in the currency, banking and equity markets of
countries in South America and in the Asia/Pacific region.
If one or more of these risks or uncertainties materializes, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected. Given these uncertainties, users of
the information included in this financial discussion and analysis by
management, including investors and prospective investors are cautioned not to
place undue reliance on such forward-looking statements. We do not intend to
update these forward-looking statements in this Quarterly Report, even if new
information, future events or other circumstances have made them incorrect or
misleading.
RESULTS OF OPERATIONS
Business Transactions
The following summarizes certain business combinations and transactions
which significantly affect the comparability of the period to period results
presented in this Management's Discussion and Analysis of Results of Operations
and Financial Condition.
Fiscal 2000 Transactions
On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to
American National Can Group, Inc. for approximately $48.2 million. In the
quarter ended October 3, 1999, we recognized a $25.7 million nonrecurring gain
from this divestiture. We also agreed to provide consulting services over a
three-year period, at an annual fee of approximately $1.5 million. We used the
net proceeds from the disposition to reduce our indebtedness.
On September 3, 1999, we completed the disposal of our Camloc Gas Springs
division to a subsidiary of Arvin Industries Inc. for approximately $2.7
million. In addition, we received $2.4 million for a covenant not to compete. We
recognized a $2.3 million nonrecurring gain from this disposition.
Fiscal 1999 Transactions
On December 31, 1998, Banner Aerospace consummated the sale of Solair,
Inc., its largest subsidiary in the rotables group of the aerospace distribution
segment, to Kellstrom Industries, Inc., in exchange for approximately $60.4
million in cash and a warrant to purchase 300,000 shares of common stock of
Kellstrom. In December 1998, Banner Aerospace recorded a $19.3 million pre-tax
loss from the sale of Solair. This loss was included in cost of goods sold as it
was primarily attributable to the bulk sale of inventory at prices below the
carrying amount of inventory.
On February 22, 1999, we used available cash to acquire 77.3% of SNEP S.A.
By June 30, 1999, we had purchased significantly all of the remaining shares of
SNEP. The total amount paid was approximately $8.0 million, including $1.1
million of debt assumed, in a business combination accounted for as a purchase.
The total cost of the acquisition exceeded the fair value of the net assets of
SNEP by approximately $4.3 million, which is preliminarily being allocated as
goodwill, and amortized over 40 years using the straight-line method. SNEP is a
French manufacturer of precision machined self-locking nuts and special threaded
fasteners serving the European industrial, aerospace and automotive markets.
On April 8, 1999, we acquired the remaining 15% of the outstanding common
and preferred stock of Banner Aerospace, Inc. not already owned by us, through
the merger of Banner Aerospace with one of our subsidiaries. Under the terms of
the merger with Banner Aerospace, we issued 2,981,412 shares of our Class A
common stock to acquire all of Banner Aerospace's common and preferred stock
(other than those already owned by us). Banner Aerospace is now our wholly-owned
subsidiary.
On April 20, 1999, we completed the acquisition of all the capital stock of
Kaynar Technologies Inc. for approximately $222 million and assumed
approximately $103 million of Kaynar Technologies existing debt, the majority of
which was refinanced at closing. In addition, we paid $28 million for a covenant
not to compete from Kaynar Technologies largest preferred shareholder. The total
cost of the acquisition exceeded the fair value of the net assets of Kaynar
Technologies by approximately $269.7 million, which is preliminarily being
allocated as goodwill, and amortized over 40 years using the straight-line
method. The acquisition was financed with existing cash, the sale of $225
million of 10 3/4% senior subordinated notes due 2009 and proceeds from a new
bank credit facility.
On June 18, 1999, we completed the acquisition of Technico S.A. for
approximately $4.1 million and assumed approximately $2.2 million of Technico's
existing debt. The total cost of the acquisition exceeded the fair value of the
net assets of Technico by approximately $2.9 million, which is preliminarily
being allocated as goodwill, and amortized over 40 years using the straight-line
method. The acquisition was financed with additional borrowings from our credit
facility.
Consolidated Results
We currently report in two principal business segments: aerospace fasteners
and aerospace distribution. The results of the Gas Springs division, prior to
its disposition, are included in the Corporate and Other classification. The
following table illustrates the historical sales and operating income of our
operations for the three months ended October 3, 1999 and September 27, 1998,
respectively.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
10/3/99 9/27/98
<S> <C> <C>
Sales by Segment:
Aerospace Fasteners $134,420 $ 96,558
Aerospace Distribution 29,350 50,528
Corporate and Other 739 1,453
TOTAL SALES $164,509 $148,539
Operating Results by Segment:
Aerospace Fasteners (a) $ 8,875 $ 7,830
Aerospace Distribution 2,257 1,718
Corporate and Other (1,098) (3,909)
OPERATING INCOME $ 10,034 $ 5,639
(a) - Includes restructuring charges of $3.0 million in the quarter ended
October 3, 1999.
</TABLE>
The following table illustrates sales and operating income of our
operations by segment, on an unaudited pro forma basis, for the three months
ended September 27, 1998, as if we had operated in a consistent manner in each
of the reported periods. The pro forma results represent the impact of our
acquisition of Kaynar Technologies (completed in April 1999), our merger with
Banner Aerospace (completed in April 1999), and our disposition of Solair
(completed in December 1998), as if these transactions had occurred at the
beginning of fiscal 1999. The pro forma information is based on the historical
financial statements of these companies, giving effect to the aforementioned
transactions. The pro forma information is not necessarily indicative of the
results of operations, that would actually have occurred if the transactions had
been in effect since the beginning of fiscal 1999, nor are they necessarily
indicative of our future results.
<TABLE>
<CAPTION>
(In thousands)
9/27/98
<S> <C>
Sales by Segment:
Aerospace Fasteners $150,668
Aerospace Distribution 34,159
Corporate and Other 1,453
TOTAL SALES $186,280
Operating Results by Segment:
Aerospace Fasteners $ 14,104
Aerospace Distribution 1,788
Corporate and Other (3,909)
OPERATING INCOME $ 11,983
</TABLE>
Net sales of $164.5 million in the first quarter of fiscal 2000 increased
by $16.0 million, or 10.8%, compared to sales of $148.5 million in the first
quarter of fiscal 1999. The improvement is attributable primarily to the
increase in revenues provided by the acquisition of Kaynar Technologies offset
partially from the disposition of Solair. On a pro forma basis, net sales
decreased 11.7% for the three months ended October 3, 1999 compared to the same
period ended September 27, 1998, reflecting softness in the United States
commercial aerospace industry.
Gross margin as a percentage of sales was 26.2% and 23.3% for the three
months ended October 3, 1999 and September 27, 1998, respectively. The higher
margins in the fiscal 2000 period are attributable to cost improvement
initiatives, somewhat offset by lower prices. In addition, our Aerospace
Fasteners segment also as a result of the acquisition of Kaynar Technologies and
efficiencies achieved from our merger integration process. Our Aerospace
Distribution segment benefited as a result of the disposition of Solair.
Selling, general & administrative expense as a percentage of sales was
19.3% and 19.0% in the three-month period of fiscal 2000 and 1999, respectively.
Other income increased $4.4 million in the first three months of fiscal
2000, compared to the first three months of fiscal 1999, due primarily to income
recognized from the disposition of non-core property during the current period.
In the three months ended October 3, 1999, we recorded $3.0 million of
restructuring charges as a result of the continued integration of Kaynar
Technologies into our aerospace fasteners segment. All of the charges recorded
during the current quarter were a direct result of product integration costs
incurred as of October 3, 1999. These costs were classified as restructuring and
were the direct result of formal plans to close plants and to terminate
employees. Such costs are nonrecurring in nature. Other than a reduction in our
existing cost structure, none of the restructuring charges resulted in future
increases in earnings or represented an accrual of future costs. As of October
3, 1999, the majority of the integration plans have been executed. During the
next nine months, we expect to incur modest additional restructuring charges for
product integration costs at our aerospace fasteners segment. We anticipate that
our integration process will be substantially complete by the end of fiscal
2000.
Operating income of $10.0 million for the three months ended October 3,
1999 increased by $4.4 million from the comparable prior year first quarter. The
increase in the current period is due primarily to cost improvement initiatives,
the acquisition of Kaynar Technologies, and efficiencies achieved from the
integration of Kaynar Technologies into our Aerospace Fasteners segment, and the
increase in other income, offset partially by restructuring charges incurred in
the current period.
Net interest expense increased $4.6 million in the first quarter of fiscal
2000, compared to the first quarter of fiscal 1999. We expect the trend of
reporting increased interest expense to continue throughout fiscal 2000 as a
result of additional debt we incurred to finance the acquisition of Kaynar
Technologies.
Nonrecurring income of $28.0 million in the three months ended October 3,
1999 resulted from the disposition of our investment in Nacanco Paketleme and
the disposition of our Camloc Gas Springs division.
An income tax provision of $9.1 million in the first three months of fiscal
2000 represented a 33.3% effective tax rate on pre-tax earnings from continuing
operations. The tax provision was slightly lower than the statutory rate because
of lower tax rates at some of our foreign operations.
Comprehensive income (loss) includes foreign currency translation
adjustments and unrealized holding changes in the fair market value of available
for-sale investment securities. Since June 30, 1999, foreign currency
translation adjustments decreased by $1.6 million in the three months ended
October 3, 1999. The fair market value of unrealized holding securities declined
by $5.0 million in the three months ended October 3, 1999 reflecting a decrease
in the market value of our investment portfolio since June 30, 1999.
Segment Results
Aerospace Fasteners Segment
Sales in our Aerospace Fasteners segment increased by $37.9 million in the
first three months of fiscal 2000, as compared to the same period of fiscal
1999, reflecting growth from acquisitions, partially offset by softness in the
United States commercial aerospace industry. Internal growth declined 12.1% in
the current quarter. On October 3, 1999, backlog was $208 million compared to
$220 million at June 30, 1999. On a pro forma basis, including the results from
acquisitions in the prior period, sales decreased by 10.8% in the first three
months of fiscal 2000, as compared to the same period of the prior year,
reflecting a softness in the United States commercial aerospace industry and the
affect of inventory reduction efforts by Boeing.
Operating income improved by $1.0 million, or 13.3%, in the first three
months of fiscal 2000, compared to the fiscal 1999 period. Included in our
current quarter results are restructuring charges of $3.0 million incurred in
the integration of Kaynar Technologies into our Aerospace Fasteners business.
Excluding restructuring charges, operating income increased $4.1 million in the
first three months of fiscal 2000, compared to the fiscal 1999 period reflecting
cost improvement initiatives and acquisitions made during fiscal 1999. On a pro
forma basis and excluding restructuring charges, operating income decreased by
15.7% for the quarter ended October 3, 1999, compared to the quarter ended
September 27, 1998 due to lower sales levels associated with the softness in the
United States commercial aerospace industry.
We believe the demand for aerospace fasteners in fiscal 2000 will increase
slightly in Europe and will continue to be soft in the United States commercial
aerospace market. We anticipate that the negative impact on us of Boeing's
inventory reduction program will subside in the latter part of fiscal 2000. We
expect that our merger integration savings and production efficiency
improvements will offset the softness in the United States commercial aerospace
industry.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $21.2 million, or
41.9%, in the first quarter ended October 3, 1999, compared to the first quarter
ended September 27, 1998, due primarily to the loss of revenues as a result of
the disposition of Solair. On a pro forma basis, sales decreased $4.8 million,
or 14.1%, in the current period.
Operating income increased by 31.4%, in the first quarter ended October 3,
1999, compared to the first quarter ended September 27, 1998, reflecting
increases in margins and a reduction in corporate overhead. On a pro forma
basis, operating income increased 26.2% in the first quarter ended October 3,
1999, compared to the first quarter ended September 27, 1998.
Corporate and Other
The Corporate and Other classification included the Camloc Gas Springs
division, prior to its disposition, and corporate activities. The group reported
a decrease in sales in the first quarter of fiscal 2000, compared to first
quarter of fiscal 1999 as a result of the disposition of Camloc Gas Springs
division in the current period. An operating loss of $1.1 million in the first
three months of fiscal 2000 was a $2.8 million improvement compared to the
operating loss of $3.9 million reported in the first three months of fiscal
1999. The current period included other income of $4.4 million due primarily to
income recognized from the disposition of non-core property.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of October 3, 1999 and June 30, 1999 amounted to
$928.2 million and $931.6 million, respectively. The changes in capitalization
included a decrease of $15.0 million in debt and an increase of $11.5 million in
equity. The decrease in debt was a result of the proceeds received from the
divestiture of Nacanco. The increase in equity was due primarily to our reported
net earnings, offset partially by a reduction in comprehensive income.
We maintain a portfolio of investments classified primarily as available-
for-sale securities, which had a fair market value of $22.7 million at October
3, 1999. The market value of these investments decreased $5.0 million in the
quarter ended October 3, 1999. While there is risk associated with market
fluctuations inherent in stock investments, and because our portfolio is not
diversified, large swings in its value should be expected.
We have an 88-acre site in Farmingdale, New York, which we are developing
as a shopping center. We invested approximately $5.3 million into this project
in the quarter ended October 3, 1999. We estimate funding of approximately $16.0
million is needed to complete the parcels currently under development.
Net cash used by operating activities for the three months ended October 3,
1999 and September 27, 1998 was $21.3 million and $7.1 million, respectively.
The primary use of cash for operating activities in the first quarter of fiscal
2000 was an increase in inventories of $14.1 million. The primary use of cash
for operating activities in the first quarter of fiscal 1999 was an increase in
inventories of $20.8 million and a decrease in accounts payable and accrued
liabilities of $10.8 million, which were partially offset by a $20.7million
decrease in accounts receivable and other current assets.
Net cash provided by (used for) investing activities for the three months
ended October 3, 1999 and September 27, 1998, amounted to $35.3 million and
$(11.5) million, respectively. In the first quarter of fiscal 2000, the primary
source of cash from investing activities was $48.0 million of net proceeds
received from the dispositions of Nacanco and the Camloc Gas Springs division,
partially offset by capital expenditures of $11.9 million. In the first quarter
of fiscal 1999, capital expenditures were the primary use of cash from investing
activities.
Net cash provided by (used for) financing activities for the three months
ended October 3, 1999 and September 27, 1998, amounted to $(16.1) million and
$16.6 million, respectively. Cash used for financing activities in the first
quarter of fiscal 2000 included a $15.0 million net reduction in debt and the
$0.6 million purchase of treasury stock. Cash provided by financing activities
in the first quarter of fiscal 1999 included a $41.4 million net increase from
the issuance of additional debt, offset partially by the repayment of debt and
the $18.7 million purchase of treasury stock.
Our principal cash requirements include debt service, capital expenditures,
acquisitions, real estate development, and payment of other liabilities. Other
liabilities that require the use of cash include postretirement benefits,
environmental investigation and remediation obligations, and litigation
settlements and related costs. We expect that cash on hand, cash generated from
operations, and cash from borrowings and asset sales will be adequate to satisfy
our cash requirements in fiscal 2000.
Discontinued Operations
Based on our formal plan for the disposition of Fairchild Technologies, we
have liquidated a significant portion of Fairchild Technologies, mostly
consisting of our semiconductor equipment group through several transactions.
On April 14, 1999, we disposed of our photoresist deep ultraviolet track
equipment machines, spare parts and testing equipment to Apex Co., Ltd. in
exchange for 1,250,000 shares of Apex stock valued at approximately $5.1
million. On June 15, 1999, we received $7.9 million from Suess Microtec AG and
the right to receive 350,000 shares of Suess Microtec stock (or approximately
$3.5 million) by September 2000 in exchange for certain inventory, fixed assets,
and intellectual property our semiconductor equipment group. On May 1, 1999, we
sold Fairchild CDI for a nominal amount. In July 1999, we received approximately
$7.1 million from Novellus in exchange for our Low-K dielectric product line and
certain intellectual property. We are also exploring several alternative
transactions regarding the disposition of our optical disc equipment group, but
we have not made any definitive arrangements for its ultimate disposition.
As of October 3, 1999, we have a remaining accrual of $5.6 million, net of
an income tax benefit of $3.9 million, for our current estimate of the remaining
losses in connection with the disposition of Fairchild Technologies. While we
believe that $5.6 million is a reasonable estimate for the remaining losses to
be incurred from Fairchild Technologies, there can be no assurance that this
estimate is adequate.
Uncertainty of the Spin-Off
In order to focus our operations on the aerospace industry, we have been
considering for some time distributing to our stockholders certain of our assets
via distribution of all of the stock of a new entity, which may own all or a
part of our non-aerospace operations. We are still in the process of deciding
the exact composition of the assets and liabilities to be included in the spin-
off. Our ability to consummate the spin-off, if we should choose to do so, may
be contingent, among other things, on attaining certain milestones under our
credit facility, or waivers thereof, and all necessary governmental and third
party approvals. There is no assurance that we will be able to reach such
milestones or obtain the necessary waivers from our lenders. In addition, we may
encounter unexpected delays in effecting the spin-off, and we can make no
assurance as to the timing thereof, or as to whether the spin-off will ever
occur.
Depending on the ultimate structure and timing of the spin-off, it may be a
taxable transaction to our stockholders and could result in a material tax
liability to us as well as our stockholders. The amount of the tax to us is
uncertain, and if the tax is material to us, we may elect not to consummate the
spin-off. Because circumstances may change and provisions of the Internal
Revenue Code of 1986, as amended, may be further amended from time to time, we
may, depending on various factors, restructure or delay the timing of the spin-
off to minimize the tax consequences to us and our stockholders, or elect not to
consummate the spin-off. Under the spin-off, the newly created entity may
assume certain of our liabilities, including contingent liabilities, and may
indemnify us for such liabilities. If this entity is unable to satisfy
liabilities assumed in connection with the spin-off, we may have to satisfy such
liabilities.
Year 2000
As the end of the century nears, there is a widespread concern that many
existing data processing devices that use only the last two digits to refer to a
year will not properly recognize a year that begins with the digits "20"
instead of "19." If not properly modified, these data processing devices could
fail, create erroneous results, or cause unanticipated systems failures, among
other problems. In response, we have developed a worldwide Year 2000 readiness
plan that is divided into a number of interrelated and overlapping phases. These
phases include corporate awareness and planning, readiness assessment,
evaluation and prioritization of solutions, implementation of remediation,
validation testing, and contingency planning. Each is discussed below.
Awareness. In the corporate awareness and planning phase, we formed a Year
2000 project group under the direction of our Chief Financial Officer and Chief
Information Officer, identified and designated key personnel within the company
to coordinate our Year 2000 efforts, and retained the services of outside
technical review and modification consultants. The project group prepared an
overall schedule and working budget for our Year 2000 plan. We have completed
this phase of our Year 2000 plan. We evaluate our information technology
applications regularly, and based on such evaluation revise the schedule and
budget to reflect the progress of our Year 2000 readiness efforts. The Chief
Financial Officer and Chief Information Officer regularly report to our
management and to our audit committee on the status of the Year 2000 project.
Assessment. In the readiness assessment phase, we, in coordination with
our technical review consultants, have been evaluating our Year 2000
preparedness in a number of areas, including our information technology
infrastructure, external resources, physical plant and production facilities,
equipment and machinery, products and inventory. We have completed this phase of
our Year 2000 Plan. Pending the completion of all validation testing, we
continue to review on a regular basis all aspects of our Year 2000 preparedness.
In this respect, we have designated officers at each of our business segments to
provide regular assessment updates to our Chief Information Officer and outside
consultants, who have assimilated a range of alternative methods to complete
each phase of our Year 2000 plan and are reporting regularly their findings and
conclusions to our management.
Evaluation. In the evaluation and prioritization of solutions phase, we
seek to develop potential solutions to the Year 2000 issues identified in our
readiness assessment phase, consider those solutions in light of our other
information technology and business priorities, prioritize the various
remediation tasks, and develop an implementation schedule. This phase is largely
complete. However, we will continue to evaluate our Year 2000 readiness status
through December 1, 1999, when all validation testing is anticipated to be
complete. However, identified problems will be corrected as soon as practicable
after identification. To date, we have not identified any major information
technology system or non-information technology system that must be replaced in
its entirety for Year 2000 reasons. We have also determined that most of the
Year 2000 issues identified in the assessment phase can be addressed
satisfactorily through system modifications, component upgrades and software
patches. Thus, we do not presently anticipate incurring any material systems
replacement costs relating to the Year 2000 issues.
Implementation. In the implementation of remediation phase, we, with the
assistance of our technical review and modification consultants, began to
implement the proposed solutions to any identified Year 2000 issues. The
solutions include equipment and component upgrades, systems and software
patches, reprogramming and resetting machines, and other modifications.
Substantially all of the material systems within the aerospace fasteners and
aerospace distribution segments of our business are currently Year 2000 ready.
However, we are continuing to evaluate and implement Year 2000 modifications to
embedded data processing technology in certain manufacturing equipment used in
our aerospace fasteners segment.
Testing. In the validation testing phase, we seek to evaluate and confirm
the results of our Year 2000 remediation efforts. In conducting our validation
testing, we are using, among other things, proprietary testing protocols
developed internally and by our technical review and modification consultants,
as well as testing tools such as Greenwich Mean Time's Check 2000 and SEMATECH's
Year 2000 Readiness Testing Scenarios Version 2.0. The Greenwich tools identify
potential Year 2000-related software and data problems, and the SEMATECH
protocols validate the ability of data processing systems to rollover and hold
transition dates. Testing for both the aerospace fasteners segment and the
aerospace distribution segment is approximately 98 percent complete. To date,
the results of our validation testing have not revealed any new and significant
Year 2000 issues or any ineffective remediation. We have completed testing of
our most critical information technology and related systems.
Contingency Planning. In the contingency planning phase, we, together with
our technical review consultants, are assessing the Year 2000 readiness of our
key suppliers, distributors, customers and service providers. Toward that
objective, we have sent letters, questionnaires and surveys to our business
partners, inquiring about their Year 2000 readiness arrangements. The average
response rate has been approximately 55 percent, including our most significant
business partners have responded to our inquiries. In this phase, we have
evaluated the risks that our failure or the failure of others to be Year 2000
ready would cause a material disruption to, or have a material effect on, our
financial condition, business or operations. So far, we have identified only our
aerospace fasteners MRP system as being both mission critical and potentially at
risk. In mitigation of this concern, we have engaged a consultant to test,
evaluate and implement the manufacturer-designed Year 2000 patches for the
system. We are also developing and evaluating contingency plans to deal with
events arising from significant Year 2000 issues outside of our infrastructure.
In this regard, we are considering the advisability of augmenting our
inventories of certain raw materials and finished products, securing additional
sources for certain supplies and services, arranging for back-up utilities, and
exploring alternate distribution and sales channels, among other things.
The following chart summarizes our progress, by phase and business segment,
in completing the Year 2000 plan:
<TABLE>
<CAPTION>
Percentage of Year 2000 Plan Completed
(By Phase and Business Segment)
Quarter Ended
June Sept. Dec. Mar. June Oct. Work
30, 27, 27, 28, 30, 3, Remaining
1998 1998 1998 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Awareness:
Aerospace 100% 100% 100% 100% 100% 100% 0%
Fasteners
Aerospace 100 100 100 100 100 100 0
Distribution
Assessment:
Aerospace 75 100 100 100 100 100 0
Fasteners
Aerospace 0 50 100 100 100 100 0
Distribution
Evaluation:
Aerospace 0 70 100 100 100 0
Fasteners
Aerospace 20 100 100 100 100 0
Distribution
Implementation:
Aerospace 50 60 90 98 2
Fasteners
Aerospace 40 75 95 98 2
Distribution
Testing:
Aerospace 20 35 90 98 2
Fasteners
Aerospace 30-40 70 90 98 2
Distribution
Contingency
Planning:
Aerospace 0 20 35 90 98 2
Fasteners
Aerospace 25 50 65 90 98 2
Distribution
</TABLE>
The chart below summarizes costs we incurred through October 3, 1999, by
segment, to address Year 2000 issues, and the total costs we reasonably
anticipate incurring during the remainder of 1999 relating to the Year 2000
issue.
<TABLE>
<CAPTION>
(In thousands) Year 2000 Costs as of Anticipated Year 2000 Costs
October 3, 1999 During the Next Three Months
<S> <C> <C>
Aerospace Fasteners $885 $200
Aerospace Distribution $600 $20
</TABLE>
We have funded the costs of our Year 2000 plan from general operating
funds, and all such costs have been deducted from income. To date, the costs
associated with our Year 2000 efforts have not had a material effect on, and
have caused no delays with respect to, our other information technology programs
or projects.
We anticipate that we will complete our Year 2000 preparations by December
1, 1999. Although our Year 2000 implementation, testing and contingency planning
phases are not yet complete, we do not currently believe that Year 2000 issues
will materially affect our business, results of operations or financial
condition. However, in some international markets in which we conduct business,
the level of awareness and remediation efforts by third parties, utilities and
infrastructure managers relating to the Year 2000 issue may be less advanced
than in the United States, which could, despite our efforts, have an adverse
effect on us. If our mission critical systems are not Year 2000 ready, we could
be subject to significant business interruptions, and could be liable to
customers and other third parties for breach of contract, breach of warranty,
misrepresentation, unlawful trade practices and other claims.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes and amends a number of existing accounting standards. It
requires that all derivatives be recognized as assets and liabilities on the
balance sheet and measured at fair value. The corresponding derivative gains or
losses are reported based on the hedge relationship that exists, if any.
Changes in the fair value of derivative instruments that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133, are
required to be reported in earnings. Most of the general qualifying criteria
for hedge accounting under SFAS 133 were derived from, and are similar to, the
existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts."
SFAS 133 describes three primary types of hedge relationships: fair value hedge,
cash flow hedge, and foreign currency hedge. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137 to defer the required
effective date of implementing SFAS 133, from fiscal years beginning after June
15, 1999 to fiscal years beginning after June 15, 2000. We will adopt SFAS 133
in fiscal 2001 and we are currently evaluating the financial statement impact.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, which include interest rate swaps. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
Expected Fiscal Year 2008 (a)
Maturity Date
Interest Rate Swaps:
Variable to Fixed 100,000
Average cap rate 6.49%
Average floor rate 6.24%
Weighted average rate 6.39%
Fair Market Value (2,789)
(a) - On February 17, 2003, the bank that we entered into the interest rate swap
agreement with will have a one-time option to elect to cancel the hedge
agreement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 9 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2. Changes in Securities and Use of Proceeds
The company's stock option deferral plan allows officers and directors who
are accredited investors to defer the gain upon exercise of stock options by
receiving deferred compensation units instead of shares of stock. The deferred
compensation units may be deemed securities issued by the company. The shares
issued to an officer or director upon expiration of the deferral period (in
exchange for deferred compensation units) have been registered pursuant to a
registrations statement on form S-8. Under the company's stock option deferral
plan, an aggregate of 67,994 deferred compensation units were issued in
September 1999 to the following officers: Donald Miller (12,518 deferred
compensation units), Eric Steiner (12,994 deferred compensation units), John
Flynn (8,496 deferred compensation units), and Jeffrey Steiner (33,896 deferred
compensation units).
On September 3, 1999, in accordance with the terms of the Special-T
Acquisition, we issued 44,079 restricted shares of the company's class a common
stock to Robert E. Edwards as additional merger consideration. Information
regarding the Special-T Acquisition is set forth in Footnote 2 (Business
Combinations) of the Consolidated Financial Statements (Unaudited) included in
our Annual Report on Form 10-K for the period ended June 30, 1999.
Item 5. Other Information
Articles have appeared in the French press reporting an inquiry by a French
magistrate into certain allegedly improper business transactions involving Elf
Acquitaine, a French petroleum company, its former chairman and various third
parties, including Maurice Bidermann. In connection with this inquiry, the
magistrate has made inquiry into allegedly improper transactions between Mr.
Steiner and that petroleum company. In response to the magistrate's request that
Mr. Steiner appear in France as a witness, Mr. Steiner submitted written
statements concerning the transactions and appeared in person before the
magistrate and others. Mr. Steiner, who has been put under examination (mis en
examen) by the magistrate, with respect to this matter, has not been charged.
Mr. Steiner appeared before the Tribunal de Grande Instance de Paris to
answer a charge of knowingly benefiting in 1990 from a misuse by Mr. Bidermann
of corporate assets of Societe Generale Mobiliere et Immobiliere, a French
corporation in which Mr. Bidermann is believed to have been the sole
shareholder. Mr. Steiner was assessed a fine of two million French Francs in
connection therewith. Both Mr. Steiner and the prosecutor (parquet) have
appealed the decision.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
*27 Financial Data Schedules.
* - Filed herewith
Reports on Form 8-K:
On August 12, 1999, the Company filed a Form 8-K to report on Item 5 and
Item 7 regarding the disposition of our interest in Nacanco Paketleme.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to the signed on its behalf by the undersigned
hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: November 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> OCT-03-1999
<CASH> 53,190
<SECURITIES> 6,489
<RECEIVABLES> 127,861
<ALLOWANCES> 4,334
<INVENTORY> 204,332
<CURRENT-ASSETS> 461,911
<PP&E> 299,870
<DEPRECIATION> 113,030
<TOTAL-ASSETS> 1,307,367
<CURRENT-LIABILITIES> 213,198
<BONDS> 480,971
0
0
<COMMON> 2,982
<OTHER-SE> 416,051
<TOTAL-LIABILITY-AND-EQUITY> 1,307,367
<SALES> 164,509
<TOTAL-REVENUES> 169,337
<CGS> 121,362
<TOTAL-COSTS> 159,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,474
<INCOME-PRETAX> 27,443
<INCOME-TAX> 9,132
<INCOME-CONTINUING> 18,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,110
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.72
</TABLE>
