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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 March 31, 2002 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)
(703) 478-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (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 March 31, 2002
Class A Common Stock, $0.10 Par Value 22,540,021
Class B Common Stock, $0.10 Par Value 2,621,502
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THE FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
Page
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31, 2002
(Unaudited) and June 30, 2001............................. 3
Condensed Consolidated Statements of Earnings (Unaudited)
for the Three And Nine Months ended March 31, 2002 and
April 1, 2001............................................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months ended March 31, 2002 and April 1, 2001 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................... 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 27
Item 2. Changes in Securities and Use of Proceeds................. 27
Item 5. Other Information......................................... 27
Item 6. Exhibits and Reports on Form 8-K.......................... 27
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
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 (Unaudited) and June 30, 2001
(In thousands)
ASSETS
March 31, June 30,
2002 2001
------------------ -----------------
CURRENT ASSETS: (*)
Cash and cash equivalents, $572 and $1,184 restricted $ 13,253 $ 14,951
Short-term investments 1,373 3,105
Accounts receivable-trade, less allowances of $5,895 and $6,951 117,683 121,703
Inventories:
Finished goods 146,359 146,416
Work-in-process 30,438 30,813
Raw materials 11,249 11,758
------------------ -----------------
188,046 188,987
Prepaid expenses and other current assets 68,659 62,163
------------------ -----------------
Total Current Assets 389,014 390,909
Property, plant and equipment, net of accumulated
depreciation of $175,927 and $156,914 138,379 149,108
Net assets held for sale 13,907 17,999
Goodwill 419,149 419,149
Investments and advances, affiliated companies 3,371 2,813
Prepaid pension assets 64,849 65,249
Deferred loan costs 11,419 12,916
Real estate investment 108,390 110,505
Long-term investments 6,731 7,779
Other assets 24,920 33,438
------------------ -----------------
TOTAL ASSETS $ 1,180,129 $ 1,209,865
------------------ -----------------
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 (Unaudited) and June 30, 2001
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
2002 2001
------------------ -----------------
CURRENT LIABILITIES: (*)
Bank notes payable and current maturities of long-term debt $ 26,315 $ 26,528
Accounts payable 48,386 57,625
Accrued liabilities:
Salaries, wages and commissions 28,147 29,894
Employee benefit plan costs 4,422 6,421
Insurance 17,696 13,923
Interest 12,422 7,016
Other accrued liabilities 31,104 38,031
------------------ -----------------
Total Current Liabilities 168,492 179,438
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 466,154 470,530
Fair value of interest rate contract 7,402 6,422
Other long-term liabilities 24,611 25,729
Retiree health care liabilities 40,039 41,886
Noncurrent income taxes 110,521 124,007
------------------ -----------------
TOTAL LIABILITIES 817,219 848,012
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; 40,000 shares
authorized, 30,347 (30,335 in June) shares issued and
22,540 (22,528 in June) shares outstanding 3,035 3,034
Class B common stock, $0.10 par value; 20,000 shares authorized, 2,622 shares
issued and outstanding 262 262
Paid-in capital 232,788 232,820
Treasury stock, at cost, 7,807 shares of Class A common stock (76,532) (76,563)
Retained earnings 244,602 246,788
Notes due from stockholders (1,767) (1,768)
Cumulative other comprehensive income (39,478) (42,720)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 362,910 361,853
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,180,129 $ 1,209,865
------------------ -----------------
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Nine (9) Months Ended March 31, 2002 and
April 1, 2001 (In thousands, except per share data)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
REVENUE: 03/31/02 04/01/01 03/31/02 04/01/01
-------------- -------------- -------------- --------------
Net sales $153,231 $162,358 $476,139 $458,825
Rental revenue 1,625 1,615 5,023 5,145
Other income (expense), net 1,357 (1,178) 6,542 1,668
-------------- -------------- -------------- --------------
156,213 162,795 487,704 465,638
COSTS AND EXPENSES:
Cost of goods sold 115,595 119,871 359,327 342,507
Cost of rental revenue 1,173 981 3,707 3,336
Selling, general & administrative 32,106 32,782 98,105 94,753
Amortization of intangibles - 3,125 - 9,384
-------------- -------------- -------------- --------------
148,874 156,759 461,139 449,980
OPERATING INCOME 7,339 6,036 26,565 15,658
Interest expense 12,788 13,553 38,148 40,851
Interest income (1,052) (741) (3,415) (1,509)
-------------- -------------- -------------- --------------
Net interest expense 11,736 12,812 34,733 39,342
Investment income (loss) 30 4,914 (251) 5,538
Change in fair market value of interest rate contract 1,924 (3,370) (980) (6,915)
-------------- -------------- -------------- --------------
Loss from continuing operations before taxes (2,443) (5,232) (9,399) (25,061)
Income tax benefit 3,081 1,740 7,312 9,304
Equity in earnings (loss) of affiliates, net (132) - (99) 181
-------------- -------------- -------------- --------------
NET EARNINGS (LOSS) $ 506 $ (3,492) $ (2,186) $(15,576)
-------------- -------------- -------------- --------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (5,341) (6,016) 4,023 (8,586)
Unrealized holding changes on derivatives 14 70 48 (482)
Unrealized periodic holding changes on securities (408) (2,966) (829) (893)
-------------- -------------- -------------- --------------
Other comprehensive loss (5,735) (8,912) 3,242 (9,961)
-------------- -------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS) $ (5,229) $(12,404) $ 1,056 $(25,537)
-------------- -------------- -------------- --------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
NET EARNINGS (LOSS) $ 0.02 (0.14) $ (0.09) $ (0.62)
-------------- -------------- -------------- --------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.21) $ (0.24) $ 0.16 $ (0.34)
Unrealized holding changes on derivatives - - - (0.02)
Unrealized periodic holding changes on securities (0.02) (0.12) (0.03) (0.04)
-------------- -------------- -------------- --------------
Other comprehensive loss (0.23) (0.36) 0.13 (0.40)
-------------- -------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS) $ (0.21) $ (0.50) $ 0.04 $ (1.02)
-------------- -------------- -------------- --------------
Weighted average shares outstanding:
Basic 25,158 25,140 25,153 25,114
-------------- -------------- -------------- --------------
Diluted 25,164 25,140 25,153 25,114
-------------- -------------- -------------- --------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Nine (9) Months Ended March 31, 2002 and April 1, 2001
(In thousands)
3/31/02 4/1/01
------------------ -----------------
Cash flows from operating activities:
Net loss $ (2,186) $ (15,576)
Depreciation and amortization 22,659 32,831
Amortization of deferred loan fees 1,543 1,392
Unrealized holding loss on derivatives 980 7,726
Paid-in kind interest income (367) -
Loss (gain) on sale of investments 1,161 (6,340)
Undistributed (earnings) loss of affiliates, net 99 (181)
Change in assets and liabilities (14,458) (56,979)
------------------ -----------------
Net cash provided by (used for) operating activities 9,431 (37,127)
Cash flows from investing activities:
Purchase of property, plant and equipment (9,151) (11,341)
Net proceeds received from the sale of property, plant, and equipment 3,992 3,539
Net proceeds received from investment securities 895 10,414
Real estate investment (322) (1,993)
Equity investment in affiliates (414) (443)
Proceeds received from net assets held for sale 4,023 1,936
Change in notes receivable (4,950) -
------------------ -----------------
Net cash provided by investing activities (5,927) 2,112
Cash flows from financing activities:
Proceeds from issuance of debt 94,286 123,823
Debt repayments (99,668) (107,037)
Issuance of Class A common stock - 714
Net loans to stockholders' - 75
------------------ -----------------
Net cash provided by (used for) financing activities (5,382) 17,575
Effect of exchange rate changes on cash 180 (553)
------------------ -----------------
Net change in cash and cash equivalents (1,698) (17,993)
Cash and cash equivalents, beginning of the year 14,951 35,790
------------------ -----------------
Cash and cash equivalents, end of the period $ 13,253 $ 17,797
------------------ -----------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
1. FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 2002, and the consolidated
statements of earnings and cash flows for the nine months ended March 31, 2002
and April 1, 2001 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 March 31, 2002, and for all periods presented, have been made. The
balance sheet at June 30, 2001 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 2001 Annual Report on Form 10-K. The results of operations for the period
ended March 31, 2002 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.
2. EQUITY SECURITIES
We had 22,540,021 shares of Class A common stock and 2,621,502 shares of
Class B common stock outstanding at March 31, 2002. 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.
During the nine months ended March 31, 2002, we issued 12,220 shares of
Class A common stock as a result of the pay out of 12,220 deferred compensation
units pursuant to our stock option deferral plan. During the nine months ended
March 31, 2002, stock warrants entitled to purchase 400,000 shares of our common
stock expired.
3. RESTRICTED CASH
On March 31, 2002 and June 30, 2001, we had restricted cash of $572 and
$1,184, respectively, all of which is maintained as collateral for certain debt
facilities and escrow arrangements.
4. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
3/31/02 4/1/01 3/31/02 4/1/01
-------------- -------------- -------------- --------------
Basic earnings per share:
Earnings (loss) from continuing operations $ 506 $ (3,492) $ (2,186) $ (15,576)
-------------- -------------- -------------- --------------
Weighted average common shares outstanding 25,158 25,140 25,153 25,114
-------------- -------------- -------------- --------------
Basic earnings (loss) from continuing operations per share $ 0.02 $ (0.14) $ (0.09) $ (0.62)
-------------- -------------- -------------- --------------
Diluted earnings per share:
Earnings (loss) from continuing operations $ 506 $ (3,492) $ (2,186) $ (15,576)
-------------- -------------- -------------- --------------
Weighted average common shares outstanding 25,158 25,140 25,153 25,114
Options 6 antidilutive antidilutive antidilutive
Warrants antidilutive antidilutive antidilutive antidilutive
-------------- -------------- -------------- --------------
Total shares outstanding 25,164 25,140 25,153 25,114
-------------- -------------- -------------- --------------
Diluted earnings (loss) from continuing operations per share $ 0.02 $ (0.14) $ (0.09) $ (0.62)
-------------- -------------- -------------- --------------
Stock options entitled to purchase 2,131,102 and 2,126,154 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three months and nine months ended March 31, 2002,
respectively. Stock options entitled to purchase 2,118,835 and 2,213,936 shares
of Class A common stock were antidilutive and not included in the earnings per
share calculation for the three months and nine months ended April 1, 2001,
respectively. Stock warrants entitled to purchase 273,000 and 340,293 shares of
Class A common stock were antidilutive and not included in the earnings per
share calculation for the three months and nine ended March 31, 2002,
respectively. Stock warrants entitled to purchase 400,000 and 519,091 shares of
Class A common stock were antidilutive and not included in the earnings per
share calculation for the three and nine months ended April 1, 2001,
respectively. These shares could be dilutive in future periods.
5. CONTINGENCIES
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 related to other
facilities owned, or previously owned, by us, that may require us 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 March 31, 2002, the consolidated total of our recorded liabilities
for environmental matters was approximately $12.4 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $16.6 million.
Other Matters
We are involved in various other claims and lawsuits incidental to our
business. 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.
6. BUSINESS SEGMENT INFORMATION
We currently report in three principal business segments: aerospace
fasteners, aerospace distribution and real estate operations. The following
table provides the historical results of our operations for the three and nine
months ended March 31, 2002 and April 1, 2001, respectively.
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
3/31/02 4/1/01 3/31/02 4/1/01
--------------- --------------- --------------- -------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 136,960 $ 140,806 $ 427,815 $ 394,262
Aerospace Distribution Segment 16,271 21,552 48,324 64,563
--------------- --------------- --------------- -------------
TOTAL SALES $ 153,231 $ 162,358 $ 476,139 $ 458,825
--------------- --------------- --------------- -------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 10,155 $ 9,788 $ 36,869 $ 26,641
Aerospace Distribution Segment 1,202 1,725 2,048 3,424
Real Estate Segment (a) 226 (764) 714 (681)
Corporate and Other Segment (4,244) (4,713) (13,066) (13,726)
--------------- --------------- --------------- -------------
TOTAL OPERATING INCOME (b) $ 7,339 $ 6,036 $ 26,565 $ 15,658
--------------- --------------- --------------- -------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
Aerospace Fasteners Segment $ 9,611 $ 9,200 $ 35,789 $ 24,903
Aerospace Distribution Segment 1,188 1,702 1,992 3,362
Real Estate Segment (270) (1,619) (990) (3,223)
Corporate and Other Segment (12,972) (14,515) (46,190) (50,103)
--------------- --------------- --------------- -------------
Total loss from continuing operations before taxes $ (2,443) $ (5,232) $ (9,399) $ (25,061)
--------------- --------------- --------------- -------------
ASSETS BY SEGMENT: 3/31/02 6/30/01
--------------- ---------------
Aerospace Fasteners Segment $ 752,524 $ 579,981
Aerospace Distribution Segment 40,153 46,718
Real Estate Segment 115,551 116,250
Corporate and Other Segment 271,901 466,916
--------------- ---------------
TOTAL ASSETS $ 1,180,129 $ 1,209,865
--------------- ---------------
(a) - Includes rental revenue of $1.6 million for both of the three months
ended March 31, 2002 and April 1, 2001, and $5.0 million and $5.1 million for
the nine months ended March 31, 2002 and April 1, 2001, respectively. (b) -
Includes goodwill amortization of $3.1 million and $9.4 million for the three
and nine months ended April 1, 2001, respectively.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Accounting for Business Combinations."
This statement requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and establishes specific
criteria for the recognition of intangible assets separately from goodwill. We
will follow the requirements of this statement for business acquisitions made
after June 30, 2001. There were no acquisitions during the nine months ended
March 31, 2002.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Accounting for Goodwill and Other
Intangible Assets." This statement requires that goodwill and intangible assets
deemed to have an indefinite life not be amortized. Instead of amortizing
goodwill and intangible assets deemed to have an indefinite life, the statement
requires a test for impairment to be performed annually, or immediately if
conditions indicate that such an impairment could exist. The amortization period
of intangible assets with finite lives will no longer be limited to forty years.
This statement is effective for fiscal years beginning after December 15, 2001,
and permits early adoption for fiscal years beginning after March 15, 2001. We
have adopted SFAS No. 142 on July 1, 2001. As a result of adopting SFAS No. 142,
we will no longer amortize goodwill of approximately $12.5 million per year.
Using the fair value measurement requirement, rather than the undiscounted cash
flows approach, we expect to record an impairment from the implementation of
SFAS No. 142. The initial evaluation of reporting units on a fair value basis,
as required from the implementation of SFAS No. 142, indicates that impairments
exist at the reporting units within our aerospace fasteners segment. Based upon
the initial evaluation, the estimated range of impairment is between $60 million
to $65 million. However, once impairment is determined at a reporting unit, SFAS
No. 142 requires that the amount of goodwill impairment be determined based on
what the balance of goodwill would have been if purchase accounting were applied
at the date of impairment. We have not completed that analysis, but we expect to
complete this analysis prior to June 30, 2002. If the carrying amount of
goodwill exceeds its fair value, an impairment loss must be recognized in an
amount equal to that excess. Once an impairment loss is recognized, the adjusted
carrying amount of goodwill will become the new accounting basis of goodwill.
The actual amount of impairment could be significantly different than the range
provided above. We are currently measuring the amount of impairment of goodwill
to be recorded from adopting this standard.
The following table provides the comparable effects of adoption of SFAS No.
142 for the three and nine months ended March 31, 2002 and April 1, 2001,
respectively:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
3/31/02 4/1/01 3/31/02 4/1/01
-------------- -------------- -------------- --------------
Reported net income (loss) $ 506 $ (3,492) $ (2,186) $ (15,576)
Add back: Goodwill amortization - 3,125 - 9,384
-------------- -------------- -------------- --------------
Adjusted net income (loss) $ 506 $ (367) $ (2,186) $ (6,192)
-------------- -------------- -------------- --------------
Basic and Diluted loss per share:
Reported net income (loss) $ 0.02 $ (0.14) $ (0.09) $ (0.62)
Add back: Goodwill amortization - 0.12 - 0.37
-------------- -------------- -------------- --------------
Adjusted net income (loss) $ 0.02 $ (0.02) $ (0.09) $ (0.25)
-------------- -------------- -------------- --------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and normal operation of a long-lived asset, except
for certain lease obligations. This statement is effective for fiscal years
beginning after June 15, 2002. We are currently evaluating the impact of
adopting this standard.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it retains
the basic requirements of SFAS 121 regarding when and how to measure an
impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144
applies to long-lived assets to be held and used or to be disposed of, including
assets under capital leases of lessees; assets subject to operating leases of
lessors; and prepaid assets. SFAS 144 also expands the scope of a discontinued
operation to include a component of an entity, and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. This statement is effective for fiscal years beginning after December
15, 2001. We are currently evaluating the impact of adopting this standard.
8. NOTES RECEIVABLE
At March 31, 2002, $5.3 million of promissory notes were due to us from an
unaffiliated third party and are recorded in other assets. The promissory notes
earn $1.4 million of annual cash interest and are being accreted to a face value
of $12.8 million though interest income. The promissory notes are secured by
$12.8 million face value of our outstanding 10.75% senior subordinated
debentures due 2009 acquired by the third party. The third party may sell these
debentures for cash provided that it satisfies its obligation under its
promissory notes.
9. CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited consolidating financial statements show separately
The Fairchild Corporation and the subsidiaries of The Fairchild Corporation.
These financial statements are provided to fulfill public reporting
requirements, and present separately the guarantors of the 10 3/4% senior
subordinated notes, due 2009, issued by The Fairchild Corporation. The "parent
company" provides the results of The Fairchild Corporation on an unconsolidated
basis. The guarantors are composed primarily of our domestic subsidiaries,
excluding our shopping center in Farmingdale New York, and certain other
subsidiaries.
CONSOLIDATING BALANCE SHEET
MARCH 31, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
-------------- ------------ ------------ -------------- -------------
Cash and cash equivalents $ 11 $ 5,433 $ 7,809 $ - $ 13,253
Marketable securities 72 1,227 74 - 1,373
Accounts Receivable (including intercompany), less 2,447 671,920 93,597 (650,281) 117,683
allowances
Inventory, net - 137,798 50,248 - 188,046
Prepaid expenses and other current assets 1,080 21,316 6,185 40,078 68,659
-------------- ------------ ------------ -------------- -------------
Total current assets 3,610 837,694 157,913 (610,203) 389,014
Investment in Subsidiaries 894,775 - - (894,775) -
Net fixed assets 485 104,512 33,382 - 138,379
Net assets held for sale - 13,907 - - 13,907
Investments in affiliates 93 3,278 - - 3,371
Goodwill - 386,160 32,989 - 419,149
Deferred loan costs 10,834 18 567 - 11,419
Prepaid pension assets - 64,849 - - 64,849
Real estate investment - - 108,390 - 108,390
Long-term investments 60 3,723 3,436 (488) 6,731
Other assets 17,546 6,446 928 - 24,920
-------------- ------------ ------------ -------------- -------------
Total assets $ 927,403 $1,420,587 $ 337,605 $ (1,505,466) $1,180,129
-------------- ------------ ------------ -------------- -------------
Bank notes payable & current maturities of debt $ 2,266 $ 2,000 $ 22,049 $ - $ 26,315
Accounts payable (including intercompany) - 880,274 202,510 (1,034,398) 48,386
Other accrued expenses (27,184) 54,957 25,940 40,078 93,791
-------------- ------------ ------------ -------------- -------------
Total current liabilities (24,918) 937,231 250,499 (994,320) 168,492
Long-term debt, less current maturities 429,625 3,216 33,313 - 466,154
Fair market value of interest rate contract 7,402 - - - 7,402
Other long-term liabilities 407 19,258 4,946 - 24,611
Noncurrent income taxes 111,122 (733) 132 - 110,521
Retiree health care liabilities - 37,331 2,708 - 40,039
-------------- ------------ ------------ -------------- --------------
Total liabilities 523,638 996,303 291,598 (994,320) 817,219
Class A common stock 3,035 - - - 3,035
Class B common stock 262 - - - 262
Notes due from stockholders (429) (1,338) - - (1,767)
Paid-in-capital 232,788 478,501 108,182 (586,683) 232,788
Retained earnings 244,600 (28,332) (47,691) 76,025 244,602
Cumulative other comprehensive income (447) (24,547) (14,484) - (39,478)
Treasury stock, at cost (76,044) - - (488) (76,532)
-------------- ------------ ------------ -------------- -------------
Total stockholders' equity 403,765 424,284 46,007 (511,146) 362,910
-------------- ------------ ------------ -------------- -------------
Total liabilities & stockholders' equity $ 927,403 $1,420,587 $ 337,605 $ (1,505,466) $1,180,129
-------------- ------------ ------------ -------------- -------------
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED MARCH 31, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
--------------- ----------- ------------ ------------- ------------
Revenue:
Net Sales $ - $ 367,381 $ 123,002 $ (14,244) $ 476,139
Rental Revenue - - 5,023 - 5,023
Other Income, net (5) 4,151 2,396 - 6,542
--------------- ----------- ------------ ------------- ------------
(5) 371,532 130,421 (14,244) 487,704
Costs and expenses:
Cost of sales - 284,524 89,047 (14,244) 359,327
Cost of rental revenue - - 3,707 - 3,707
Selling, general & administrative 6,867 71,921 19,317 - 98,105
--------------- ----------- ------------ ------------- ------------
6,867 356,445 112,071 (14,244) 461,139
--------------- ----------- ------------ ------------- ------------
Operating income (loss) (6,872) 15,087 18,350 - 26,565
Net interest expense (including intercompany) (14,112) 44,859 3,986 - 34,733
Investment income (loss), net 10 (261) - - (251)
Intercompany dividends - 1,577 - (1,577) -
Decrease in market value of interest rate contract 980 - - - 980
--------------- ----------- ------------ ------------- ------------
Earnings (loss) before taxes 6,270 (31,610) 14,364 1,577 (9,399)
Income tax (provision) benefit (4,177) 21,058 (9,569) 7,312
Equity in earnings of affiliates and subsidiaries (4,279) (152) - 4,332 (99)
--------------- ----------- ------------ ------------- ------------
Net earnings (loss) $ (2,186) $ (10,704) $ 4,795 $ 5,909 $ (2,186)
--------------- ----------- ------------ ------------- ------------
CONSOLIDATING CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
--------------- ----------- ------------ ------------- -------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (2,186) $ (10,704) $ 4,795 $ 5,909 $ (2,186)
Depreciation & amortization 30 14,943 7,686 - 22,659
Amortization of deferred loan fees 1,156 2 385 - 1,543
Unrealized holding (gain) loss on derivatives 980 - - - 980
Undistributed (distributed) earnings of affiliates (53) 152 - - 99
Change in assets and liabilities 1,403 (813) (8,345) (5,909) (13,664)
--------------- ----------- ------------ ------------- -------------
Net cash (used for) provided by operating activities 1,330 3,580 4,521 - 9,431
Cash Flows from Investing Activities:
Proceeds received from (used for):
Capital Expenditures (14) (6,627) (2,510) - (9,151)
Investment securities, net - 895 - - 895
Sale of fixed assets - 3,593 399 - 3,992
Equity investment in affiliates (414) (414)
Real estate investment - - (322) - (322)
Proceeds received from net assets held for sale - 4,023 - - 4,023
Change in notes receivable (53) (4,928) 31 - (4,950)
--------------- ----------- ------------ ------------- -------------
Net cash (used for) provided by investing activities (481) (3,044) (2,402) - (5,927)
Cash Flows from Financing Activities:
Proceeds from issuance of debt 78,895 14,913 478 - 94,286
Debt repayments, net (80,295) (16,562) (2,811) - (99,668)
--------------- ----------- ------------ ------------- -------------
Net cash (used for) provided by financing activities (1,400) (1,649) (2,333) - (5,382)
Effect of exchange rate changes on cash - - 180 - 180
--------------- ----------- ------------ ------------- -------------
Net change in cash (551) (1,113) (34) - (1,698)
Cash, beginning of the year 562 6,546 7,843 - 14,951
--------------- ----------- ------------ ------------- -------------
Cash, end of the period $ 11 $ 5,433 $ 7,809 $ - $ 13,253
--------------- ----------- ------------ ------------- -------------
CONSOLIDATING BALANCE SHEET
JUNE 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- --------------- -------------- --------------
Cash $ 562 $ 6,546 $ 7,843 $ - $ 14,951
Marketable securities 71 3,034 - - 3,105
Accounts receivable (including intercompany), net 2,336 628,104 84,599 (593,336) 121,703
Inventory, net - 144,157 44,830 - 188,987
Prepaid and other current assets 287 22,134 7,198 32,544 62,163
------------- ------------- --------------- -------------- --------------
Total current assets 3,256 803,975 144,470 (560,792) 390,909
Investment in subsidiaries 880,945 - - (880,945) -
Net fixed assets 501 112,969 35,638 - 149,108
Net assets held for sale - 17,999 - - 17,999
Investments in affiliates 93 2,720 - - 2,813
Goodwill 15,720 370,440 32,989 - 419,149
Deferred loan costs 11,944 20 952 - 12,916
Prepaid pension assets - 65,249 - - 65,249
Real estate investment - - 110,505 - 110,505
Long-term investments 1,205 3,626 3,436 (488) 7,779
Other assets 2,607 1,335 786 28,710 33,438
------------- ------------- --------------- -------------- --------------
Total assets $ 916,271 $ 1,378,333 $ 328,776 $ (1,413,515) $ 1,209,865
------------- ------------- --------------- -------------- --------------
Bank notes payable & current maturities of debt $ 2,250 $ 1,632 $ 22,646 $ - $ 26,528
Accounts payable (including intercompany) 20 778,541 230,934 (951,870) 57,625
Other accrued liabilities (54,398) 57,839 30,590 61,254 95,285
------------- ------------- --------------- -------------- --------------
Total current liabilities (52,128) 838,012 284,170 (890,616) 179,438
Long-term debt, less current maturities 431,041 5,918 33,571 - 470,530
Fair market value of interest rate contract 6,422 - - - 6,422
Other long-term liabilities 405 21,672 3,652 - 25,729
Noncurrent income taxes 124,466 (587) 128 - 124,007
Retiree health care liabilities - 37,335 4,551 - 41,886
------------- ------------- --------------- -------------- --------------
Total liabilities 510,206 902,350 326,072 (890,616) 848,012
Class A common stock 3,034 - - - 3,034
Class B common stock 262 - - - 262
Notes due from stockholders (430) (1,338) - - (1,768)
Paid-in-capital 232,820 478,207 83,513 (561,720) 232,820
Retained earnings 246,788 25,623 (64,932) 39,309 246,788
Cumulative other comprehensive income (334) (26,509) (15,877) - (42,720)
Treasury stock, at cost (76,075) - - (488) (76,563)
------------- ------------- --------------- -------------- --------------
Total stockholders' equity 406,065 475,983 2,704 (522,899) 361,853
------------- ------------- --------------- -------------- -------------
Total liabilities & stockholders' equity $ 916,271 $ 1,378,333 $ 328,776 $ (1,413,515) $1,209,865
------------- ------------- --------------- -------------- -------------
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED APRIL 1, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------ ---------------- -------------- --------------
Net Sales $ - $349,521 $ 115,126 $ (5,822) $ 458,825
Cost of sales - 267,441 80,888 (5,822) 342,507
Selling, general & administrative 5,191 70,020 16,065 - 91,276
Amortization of goodwill 606 8,034 744 - 9,384
------------- ------------ ---------------- -------------- --------------
5,797 345,495 97,697 (5,822) 443,167
------------- ------------ ---------------- -------------- --------------
Operating income (loss) (5,797) 4,026 17,429 - 15,658
Net interest expense (including intercompany) (6,791) 37,548 8,585 - 39,342
Investment (income) loss, net - (181) (5,357) - (5,538)
FMV Adj of Interest Rate Contract 6,915 - - - 6,915
------------- ------------ ---------------- -------------- --------------
Earnings (loss) before taxes (5,921) (33,341) 14,201 - (25,061)
Income tax (provision) benefit 3,155 15,019 (8,870) - 9,304
Equity in earnings of affiliates and subsidiaries (12,810) 181 - 12,810 181
------------- ------------ ---------------- -------------- --------------
Net earnings (loss) $(15,576) $ (18,141) $ 5,331 $ 12,810 $ (15,576)
------------- ------------ ---------------- -------------- --------------
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 1, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------ ---------------- -------------- --------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (15,576) $ (18,141) $ 5,331 $ 12,810 $ (15,576)
Depreciation & amortization 670 24,426 7,735 - 32,831
Accretion of discount on long-term liabilities - 1,148 227 - 1,375
Amortization of deferred loan fees 1,054 2 336 - 1,392
Unrealized holding (gain) loss on derivatives 7,726 - - - 7,726
Change in assets and liabilities (10,651) (30,296) (11,118) (12,810) (64,875)
------------- ------------ ---------------- -------------- --------------
Net cash (used for) provided by operating activities (16,777) (22,861) 2,511 - (37,127)
Cash Flows from Investing Activities:
Proceeds received from (used for):
Purchase of PP&E - (4,780) (3,022) - (7,802)
Investment securities, net - 10,510 - - 10,510
Equity investment in affiliates (443) - - - (443)
Change in real estate investment - - (1,993) - (1,993)
Change in net assets held for sale - 1,936 - - 1,936
Other changes - (96) - - (96)
------------- ------------ ---------------- -------------- --------------
Net cash (used for) provided by investing activities (443) 7,570 (5,015) - 2,112
Cash Flows from Financing Activities:
Proceeds from issuance of debt 114,174 130 9,519 - 123,823
Debt repayments, net (95,174) (1,792) (10,071) - (107,037)
Issuance of Class A common stock 714 - - - 714
Loans to stockholders 69 6 - - 75
------------- ------------ ---------------- -------------- --------------
Net cash (used for) provided by financing activities 19,783 (1,656) (552) - 17,575
Effect of exchange rate changes on cash - - (553) - (553)
------------- ------------ ---------------- -------------- --------------
Net change in cash 2,563 (16,947) (3,609) - (17,993)
Cash, beginning of the year 35 23,064 12,691 - 35,790
------------- ------------ ---------------- -------------- --------------
Cash, end of the year $ 2,598 $ 6,117 $ 9,082 $ - $ 17,797
------------- ------------ ---------------- -------------- --------------
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 own 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 Fairchild Holding Corp. and Banner
Aerospace.
The following discussion and analysis provide information which management
believes is relevant to the 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 supply chain services provider 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, European Aeronautic Defense and
Space Company, General Electric, Lockheed Martin, and Northrop Grumman.
Our business consists of three segments: aerospace fasteners, aerospace
distribution and real estate operations. The aerospace fasteners segment
manufactures and markets high performance fastening systems used in the
manufacture and maintenance of commercial and military aircraft. Our 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. Our real estate operations
segment owns and operates a shopping center located in Farmingdale, New York.
CAUTIONARY STATEMENT
Certain statements in this financial discussion and analysis by management
contain "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 estimates, that may cause our actual future activities
and results of operations to be materially different from those suggested or
described in this financial discussion and analysis by management. These risks
include: product demand; our dependence on the aerospace industry; reliance on
Boeing and European Aeronautic Defense and Space Company; customer satisfaction
and quality issues; labor disputes; competition; our ability to achieve and
execute internal business plans; worldwide political instability and economic
growth; reduced airline revenues as a result of the September 11, 2001 terrorist
attacks on the United States, and their aftermath; the cost and availability of
electric power to operate our plants; and the impact of any economic downturns
and inflation.
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 the forward-looking statements included in this Quarterly Report, even if
new information, future events or other circumstances have made them incorrect
or misleading.
RESULTS OF OPERATIONS
Consolidated Results
We currently report in three principal business segments: aerospace
fasteners, aerospace distribution and real estate operations. The following
table provides the historical sales and operating income of our segments for the
three and nine months ended March 31, 2002 and April 1, 2001, respectively.
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
3/31/02 4/1/01 3/31/02 4/1/01
--------------- --------------- --------------- ---------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 136,960 $ 140,806 $ 427,815 $ 394,262
Aerospace Distribution Segment 16,271 21,552 48,324 64,563
--------------- --------------- --------------- ---------------
TOTAL SALES $ 153,231 $ 162,358 $ 476,139 $ 458,825
--------------- --------------- --------------- ---------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 10,155 $ 9,788 $ 36,869 $ 26,641
Aerospace Distribution Segment 1,202 1,725 2,048 3,424
Real Estate Segment (a) 226 (764) 714 (681)
Corporate and Other Segment (4,244) (4,713) (13,066) (13,726)
--------------- --------------- --------------- ---------------
TOTAL OPERATING INCOME (b) $ 7,339 $ 6,036 $ 26,565 $ 15,658
--------------- --------------- --------------- ---------------
(a) - Includes rental revenue of $1.6 million in each of the three months ended
March 31, 2002 and April 1, 2001, and $5.0 million and $5.1 million for the nine
months ended March 31, 2002 and April 1, 2001, respectively. (b) - Includes
goodwill amortization of $3.1 million and $9.4 million for the three and nine
months ended April 1, 2001, respectively.
Net sales of $153.2 million in the third quarter of fiscal 2002 decreased
by $9.1 million, or 5.6%, compared to sales of $162.4 million in the third
quarter of fiscal 2001. Net sales of $476.1 million in the first nine months of
fiscal 2002 increased by $17.3 million, or 3.8%, compared to sales of $458.8
million in the first nine months of fiscal 2001. Results for the three and nine
months ended April 1, 2001, included revenue of $0.6 million and $6.0 million,
respectively, from an operation in our aerospace distribution segment which was
shut down in June 2001. Excluding the results of the shut down operation, net
sales would have decreased $8.5 million, or 5.2%, for the three months ended
March 31, 2002 and increased by $31.9 million, or 5.1%, for the nine months
ended March 31, 2002, as compared to the same periods of the prior year. Sales
in the first nine months of fiscal 2002 reflected growth at our aerospace
fasteners segment due to strong order activity prior to September 11, 2001.
Sales in the third quarter of fiscal 2002 were adversely affected by the overall
conditions in the aerospace industry, resulting primarily from the events of
September 11, 2001. Sales in the third quarter and first nine months of fiscal
2002 were unfavorably affected by approximately $2.7 million and $2.5 million,
respectively, from the foreign currency impact on our European operations due to
the U.S. Dollar strengthening against the Euro on a period-to-period basis.
Gross margin as a percentage of sales was 24.6% and 26.2% in the third
quarter of fiscal 2002 and fiscal 2001, respectively, and 24.5% and 25.4% in the
first nine months of fiscal 2002 and fiscal 2001, respectively. The reduced
margins in the fiscal 2002 periods are attributable primarily to a higher volume
of sales of lower margin products.
Selling, general & administrative expense as a percentage of sales was
21.0% and 20.2% in the third quarter of fiscal 2002 and 2001, respectively, and
20.6% and 20.7% in the first nine months of fiscal 2002, respectively. The
change in the fiscal 2002 periods was attributable primarily to the volume of
sales and the related economies of scale.
Rental revenue remained stable in the first nine months of fiscal 2002,
compared to the first nine months of fiscal 2001.
Other income increased $4.9 million in the first nine months of fiscal 2002,
compared to the first nine months of fiscal 2001. The increase was due primarily
to income recognized from the disposition of future royalty revenues to an
unaffiliated third party in exchange for $4.9 million of promissory notes
secured by $12.8 million face value of our outstanding 10.75% senior
subordinated debentures due 2009 acquired by the third party.
Operating income for the three and nine months ended March 31, 2002,
increased by $1.3 million and $10.9 million, respectively, as compared to the
same periods of the prior year. The results for the three and nine months ended
April 1, 2001, included goodwill amortization of $3.1 million and $9.4 million,
respectively, prior to the implementation of a new accounting pronouncement that
eliminates goodwill amortization in the current periods. Changes in foreign
currency resulted in approximately a $0.3 million unfavorable effect on
operating income at our European operations in the third quarter of fiscal 2002,
as compared to the third quarter of fiscal 2001.
Net interest expense decreased by $4.6 million, or 11.7%, and cash interest
expense decreased by $4.1 million in the first nine months of fiscal 2002, as
compared to the first nine months of fiscal 2001, due primarily to lower
interest rates.
We recognized $0.3 million of investment loss in the first nine months of
fiscal 2002. Investment activity included $0.8 million of realized losses from
investments we liquidated and a recognized investment impairment of $0.4
million, offset partially by a $0.6 million increase in the fair market value of
trading securities and $0.4 million of dividend income. We recognized investment
income of $5.5 million in the first nine months of fiscal 2001, due primarily to
recognition of gains on investments liquidated.
We recognized income of $1.9 million in the third quarter of fiscal 2002
and expense of $3.4 million in the third quarter of 2001 from the fair market
value adjustment of a ten-year $100 million interest rate contract. The fair
market value adjustment of the ten-year $100 million interest rate contract
resulted in an expense of $1.0 million in the first nine months of fiscal 2002
and $6.9 million in the first nine months of 2001.
An income tax benefit of $7.3 million in the first nine months of fiscal
2002 was higher than the statutory rate, due primarily to lower tax rates on
$14.3 million of earnings generated by our foreign operations, which utilize net
operating loss carry forwards. An income tax benefit of $9.3 million in the
first nine months of fiscal 2001 represented a 37.1% effective tax rate on
pre-tax losses from continuing operations.
Comprehensive income includes foreign currency translation adjustments and
unrealized holding changes in the fair market value of available-for-sale
investment securities. For the nine months ended March 31, 2002, the foreign
currency translation adjustment resulted in a $4.0 million increase, and was
offset partially by a $0.8 million decrease in the fair market value of
unrealized holding gains on investment securities. For the nine months ended
April 1, 2001, foreign currency translation adjustments decreased by $12.1
million, the fair market value of unrealized holding gains on investment
securities decreased by $0.9 million, and we recorded a $0.5 million decrease in
the fair market value of our $100 million interest rate swap agreement due to
the cumulative effect of the adoption of SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities".
Segment Results
Aerospace Fasteners Segment
Sales in our Aerospace Fasteners segment decreased by $3.8 million, or
2.7%, in the third quarter and increased by $33.6 million, or 8.5% in the first
nine months of fiscal 2002, respectively, as compared to the same periods of
fiscal 2001. The improvement in the nine months reflected internal growth, which
was partially offset by a reduction in deliveries in the third quarter due to
sluggish conditions in the aerospace industry resulting from the September 11,
2001 terrorist attacks. Sales by our European locations were affected
unfavorably by approximately $2.7 million in the third quarter and $2.5 million
in the first nine months of fiscal 2002, as compared to the same periods of the
prior year, due to the strengthening of the U.S. Dollar against the Euro. Our
backlog decreased by $10.3 million in the third quarter of fiscal 2002, to
$187.4 million at March 31, 2002. Our book-to-bill ratio was 92.0% for the first
nine months of fiscal 2002, reflecting the stronger level of shipments and a
softening of new orders following the September 11, 2001 terrorist attacks.
Operating income increased by $0.4 million, or 3.7%, in the third quarter,
and $10.2 million, or 38.4%, in the first nine months of fiscal 2002, as
compared to the same periods of fiscal 2001. The improvement in the first nine
months of fiscal 2002 was due primarily to the increase in sales and related
economies of scale and the adoption, on July 1, 2001, of a new accounting
pronouncement that does not require us to amortize goodwill. Goodwill
amortization of $2.8 million and $8.5 million was recorded in the third quarter
and first nine months of fiscal 2001. During the three months ended March 31,
2001, we reduced our work force by approximately 8.0% and paid $0.5 million in
severance. Operating expenses continue to be monitored as management attempts to
efficiently reduce operating costs.
Announcements by our major customers have reinforced our view that
projected aircraft build rates will be adversely affected by decreased worldwide
demand for travel following September 11, 2001. Accordingly, we believe overall
demand for aerospace fasteners will decrease during the remainder of calendar
2002, and our business will be affected by this decreased demand. Nevertheless,
we also believe the impact on our business will be partially offset by the
supply chain service programs we entered into during the past several years and
by the decrease in fastener inventory available to original equipment
manufacturers and distributors. In addition, we maintain ongoing efforts to
achieve additional savings through cost reductions and further plant
rationalization.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $5.3 million in
the third quarter and $16.2 million in the first nine months of fiscal 2002,
compared to the same periods in fiscal 2001. Results from the prior three months
and nine months ended April 1, 2001, included revenue of $0.6 million and $6.0
million from an operation which was shut down in June 2001. Sales in the three
and nine months ended March 31, 2002 were also adversely affected due to the
terrorist attacks on September 11, 2001 and have been sluggish since then.
Operating income decreased by $0.5 million in the third quarter and $1.4
million in the first nine months of fiscal 2002, as compared to the same periods
in fiscal 2001. The results for the nine months ended March 31, 2002, were
affected by the reduction in revenue. Results from the prior three months and
nine months ended April 1, 2001, included an operating loss of $0.3 million and
$0.7 million from an operation which was shut down in June 2001.
Real Estate Operations Segment
Our real estate operations segment owns and operates a shopping center
located in Farmingdale, New York. Included in operating income was rental
revenue of $1.6 million for each of the three months ended March 31, 2002 and
April 1, 2001, respectively, and $5.0 million and $5.1 million for the nine
months ended March 31, 2002 and April 1, 2001, respectively. As of March 31,
2002, we have leased approximately 82% of the developed shopping center.
We reported operating income of $0.2 million and $0.7 million for the third
quarter and first nine months of fiscal 2002, respectively, compared to an
operating loss of $0.8 million and $0.7 million for the third quarter of fiscal
2001 and nine months ended April 1, 2001. In the three and nine months ended
March 31, 2002, we recorded a charge of $0.1 million and $0.4 million,
respectively, to write-off specialized tenant improvements associated with
terminated tenancies. In the third quarter of fiscal 2001, we recorded a
one-time charge of $1.3 million for road improvements. Additionally, in the
first nine months of fiscal 2001, we recorded a charge of $1.0 million to
write-off specialized tenant improvements associated with a terminated tenancy.
Corporate
The operating loss at corporate was reduced by $0.7 million in the first
nine months of fiscal 2002, compared to the first nine months of fiscal 2001.
This improvement was due primarily to an increase of $3.3 million in royalty
income recognized in the first nine months of fiscal 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of March 31, 2002 and June 30, 2001 amounted to
$855.4 million and $858.9 million, respectively. The nine-month change in
capitalization included a $4.6 million decrease in debt reflecting cash provided
by our operations, and an increase in equity of $1.1 million which was due
primarily to a $3.2 million favorable increase in other comprehensive income,
partially offset by our reported net loss.
We maintain a portfolio of investments classified primarily as
available-for-sale securities, which had a fair market value of $8.1 million at
March 31, 2002. The market value of these investments decreased by $0.2 million
in the nine months ended March 31, 2002. There is risk associated with market
fluctuations inherent in stock investments, and because our portfolio is not
diversified, changes in its value may occur.
Net cash provided by operating activities for the nine months ended March
31, 2002, was $9.4 million. The working capital uses of cash in the first nine
months of fiscal 2002 included a $10.7 million decrease in accounts payable and
other accrued liabilities and a $6.5 million increase in other current assets,
offset partially by a $4.0 million decrease in accounts receivable and a $0.9
million decrease in inventory. The working capital uses of cash were offset by
$16.3 million of earnings after deducting non-cash expenses of $22.7 million for
depreciation, $1.5 million from the amortization of deferred loan fees, and $1.0
million from the reduction in the fair market value of an interest rate
contract. Net cash used for operating activities for the nine months ended April
1, 2001, was $37.1 million. The working capital uses of cash in the first nine
months of fiscal 2001 included a $22.8 million decrease in accounts payable and
other accrued liabilities, a $14.4 million increase in inventories, and a $14.4
million increase in other current assets, offset partially by a $7.4 million
decrease in accounts receivable.
Net cash used for investing activities was $5.9 million for the nine months
ended March 31, 2002. In the first nine months of fiscal 2002, the primary
source of cash was $8.0 million provided from the dispositions of non-core real
estate and net assets held for sale, offset by $9.2 million of capital
expenditures and a $5.0 increase in notes receivable. Net cash provided by
investing activities was $2.1 million for the nine months ended April 1, 2001.
In the first nine months of fiscal 2001, the primary source of cash was $12.4
million provided from the sale of investments and dispositions of non-core real
estate, partially offset by $11.3 million of capital expenditures and $1.7
million for real estate development at our Farmingdale shopping center.
Net cash used by financing activities was $5.4 million for the nine months
ended March 31, 2002 and net cash provided by financing activities was $17.6
million for the nine months ended April 1, 2001. Cash from operations was used
to reduce debt in the nine months ended March 31, 2001. Cash provided by
financing activities in the first nine months of fiscal 2001, included $16.8
million of net proceeds from the issuance of additional debt.
At March 31, 2002, $5.3 million of promissory notes were due to us from an
unaffiliated third party and are recorded in other assets. The promissory notes
earn $1.4 million of annual cash interest and are being accreted to a face value
of $12.8 million though interest income. The promissory notes are secured by
$12.8 million face value of our outstanding 10.75% senior subordinated
debentures due 2009 acquired by the third party. The third party may sell these
debentures for cash provided that it satisfies its obligation under its
promissory notes.
Our principal cash requirements include debt service, capital expenditures,
and the payment of other liabilities including postretirement benefits,
environmental investigation and remediation obligations, and litigation
settlements and related costs. We expect that cash on hand, cash generated from
operations, cash available from borrowings and additional financing, and
proceeds received from dispositions of non-core assets will be adequate to
satisfy our cash requirements during the next twelve months.
We are required under the credit agreement with our lending institutions,
to comply with certain financial and non-financial loan covenants, including
maintaining certain interest and fixed charge coverage ratios and maintaining
certain indebtedness to EBITDA ratios at the end of each fiscal quarter. Our
most restrictive covenant is the interest coverage ratio, which represents the
ratio of EBITDA to interest expense, as defined in the credit agreement. At
March 31, 2002, the interest coverage ratio was 2.32, which exceeded the minimum
requirement of 2.0. Our interest rates vary based upon the consolidated
indebtedness to EBITDA covenant, which represents the ratio of total debt to
EBITDA, as defined in the credit agreement. At March 31, 2002, our indebtedness
to EBITDA ratio increased to 5.42, and will result in a 1/4% increase in our
interest rates under the credit agreement during the next quarter. Additionally,
the credit agreement restricts annual capital expenditures to $40 million during
the life of the facility. For the nine months ended March 31, 2002, capital
expenditures were $9.2 million. Except for assets of our subsidiaries that are
not guarantors of the credit agreement, substantially all of our assets are
pledged as collateral under the credit agreement. The credit agreement restricts
the payment of dividends to our shareholders to an aggregate of the lesser of
$0.01 per share or $0.4 million over the life of the agreement. Noncompliance
with any of the financial covenants without cure or waiver would constitute an
event of default under the credit agreement. An event of default resulting from
a breach of a financial covenant may result, at the option of lenders holding a
majority of the loans, in an acceleration of the principal and interest
outstanding, and a termination of the revolving credit line. At March 31, 2002,
we were in compliance with the covenants under the credit agreement.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Accounting for Business Combinations."
This statement requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and establishes specific
criteria for the recognition of intangible assets separately from goodwill. We
will follow the requirements of this statement for business acquisitions made
after June 30, 2001. There were no acquisitions during the nine months ended
March 31, 2002.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Accounting for Goodwill and Other
Intangible Assets." This statement requires that goodwill and intangible assets
deemed to have an indefinite life not be amortized. Instead of amortizing
goodwill and intangible assets deemed to have an indefinite life, the statement
requires a test for impairment to be performed annually, or immediately if
conditions indicate that such an impairment could exist. The amortization period
of intangible assets with finite lives will no longer be limited to forty years.
This statement is effective for fiscal years beginning after December 15, 2001,
and permits early adoption for fiscal years beginning after March 15, 2001. We
have adopted SFAS No. 142 on July 1, 2001. As a result of adopting SFAS No. 142,
we will no longer amortize goodwill of approximately $12.5 million per year.
Using the fair value measurement requirement, rather than the undiscounted cash
flows approach, we expect to record an impairment from the implementation of
SFAS No. 142. The initial evaluation of reporting units on a fair value basis,
as required from the implementation of SFAS No. 142, indicates that impairments
exist at the reporting units within our aerospace fasteners segment. Based upon
the initial evaluation, the estimated range of impairment is between $60 million
to $65 million. However, once impairment is determined at a reporting unit, SFAS
No. 142 requires that the amount of goodwill impairment be determined based on
what the balance of goodwill would have been if purchase accounting were applied
at the date of impairment. We have not completed that analysis, but we expect to
complete this analysis prior to June 30, 2002. If the carrying amount of
goodwill exceeds its fair value, an impairment loss must be recognized in an
amount equal to that excess. Once an impairment loss is recognized, the adjusted
carrying amount of goodwill will become the new accounting basis of goodwill.
The actual amount of impairment could be significantly different than the range
provided above. We are currently measuring the amount of impairment of goodwill
to be recorded from adopting this standard.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and normal operation of a long-lived asset, except
for certain lease obligations. This statement is effective for fiscal years
beginning after June 15, 2002. We are currently evaluating the impact of
adopting this standard.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it retains
the basic requirements of SFAS 121 regarding when and how to measure an
impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144
applies to long-lived assets to be held and used or to be disposed of, including
assets under capital leases of lessees; assets subject to operating leases of
lessors; and prepaid assets. SFAS 144 also expands the scope of a discontinued
operation to include a component of an entity, and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. This statement is effective for fiscal years beginning after December
15, 2001. We are currently evaluating the impact of adopting this standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In fiscal 1998, we entered into a ten-year interest rate swap agreement to
reduce our cash flow exposure to increases in interest rates on variable rate
debt. The ten-year interest rate swap agreement provides us with interest rate
protection on $100 million of variable rate debt, with interest being calculated
based on a fixed LIBOR rate of 6.24% to February 17, 2003. On February 17, 2003,
the bank with which we entered into the interest rate swap agreement, will have
a one-time option to elect to cancel the agreement or to do nothing and proceed
with the transaction, using a fixed LIBOR rate of 6.715% for the period February
17, 2003 to February 19, 2008.
We did not elect to pursue hedge accounting for the interest rate swap
agreement, which was executed to provide an economic hedge against cash flow
variability on the floating rate note. When evaluating the impact of SFAS No.
133 on this hedge relationship, we assessed the key characteristics of the
interest rate swap agreement and the note. Based on this assessment, we
determined that the hedging relationship would not be highly effective. The
ineffectiveness is caused by the existence of the embedded written call option
in the interest rate swap agreement, and the absence of a mirror option in the
hedged item. As such, pursuant to SFAS No. 133, we designated the interest rate
swap agreement in the no hedging designation category. Accordingly, we have
recognized a non-cash decrease in fair market value of interest rate
derivatives, of $1.0 million and $6.9 million, in the nine months ended March
31, 2002 and April 1, 2001, respectively, as a result of the fair market value
adjustment for our interest rate swap agreement.
The fair market value adjustment of these agreements will generally
fluctuate based on the implied forward interest rate curve for 3-month LIBOR. If
the implied forward interest rate curve decreases, the fair market value of the
interest hedge contract will increase and we will record an additional charge.
If the implied forward interest rate curve increases, the fair market value of
the interest hedge contract will decrease, and we will record income.
In March 2000, the Company issued a floating rate note with a principal
amount of $30,750,000. Embedded within the promissory note agreement is an
interest rate cap. The embedded interest rate cap limits the 1-month LIBOR
interest rate that we must pay on the note to 8.125%. At execution of the
promissory note, the strike rate of the embedded interest rate cap of 8.125% was
above the 1-month LIBOR rate of 6.61%. Under SFAS 133, the embedded interest
rate cap is considered to be clearly and closely related to the debt of the host
contract and is not required to be separated and accounted for separately from
the host contract. We are accounting for the hybrid contract, comprised of the
variable rate note and the embedded interest rate cap, as a single debt
instrument.
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.
(In thousands)
Expected Fiscal Year Maturity Date 2003 2008
------------------------------ --------------------------------------
Type of Interest Rate Contracts Interest Rate Cap Variable to Fixed
Variable to Fixed $30,750 $100,000
Fixed LIBOR rate N/A 6.24% (a)
LIBOR cap rate 8.125% N/A
Average floor rate N/A N/A
Weighted average forward LIBOR rate 2.64% 4.94%
Fair Market Value at March 31, 2002 $23 $(7,402)
(a) - On February 17, 2003, the bank will have a one-time option to elect to
cancel the agreement or to do nothing and continue the arrangement, using a
fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19,
2008.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 5 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2. Changes in Securities and Use of Proceeds
At the Annual Meeting held on November 13, 2001, our Stockholders approved
the issuance of 86,942 stock options (in the aggregate) to non-employee
directors. On February 15, 2002 the shares to be issued pursuant to these stock
options were registered with the Securities and Exchange Commission. A
description of the stock options was included in our Proxy Statement for the
November 13, 2001 Annual Meeting.
Item 5. Other Information
Articles have appeared in the French press reporting an inquiry by a French
magistrate into 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.
Jeffrey Steiner and that petroleum company. In response to the magistrate's
request, Mr. Steiner has submitted written statements concerning the
transactions and appeared in person, in France, before the magistrate and
others. The magistrate put Mr. Steiner under examination (mis en examen) with
respect to this matter and imposed a surety (caution) of ten million French
Francs which has been paid. The examining magistrate has notified Mr. Steiner
that he intends to transmit the dossier to the Republic prosecutor (procureur de
la Republique) for his consideration. However, to date, Mr. Steiner has not been
charged.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended March
31, 2002 for which this report is filed.
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: /s/ JOHN L. FLYNN
John L. Flynn
Senior Vice President and
Chief Financial Officer
Date: May 9, 2002