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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 December 30, 2001 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 December 30, 2001
Class A Common Stock, $0.10 Par Value 22,527,801
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 DECEMBER 30, 2001
Page
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of December 30, 2001
(Unaudited) and June 30, 2001................................. 3
Condensed Consolidated Statements of Earnings (Unaudited) for
the Three And Six Months ended December 30, 2001 and
December 31, 2000............................................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Six Months ended December 30, 2001 and December 31, 2000... 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 4. Submission of Matters to a Vote of Security Holders........... 27
Item 5. Other Information............................................. 28
Item 6. Exhibits and Reports on Form 8-K.............................. 28
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
December 30, 2001 (Unaudited) and June 30, 2001
(In thousands)
ASSETS
Dec. 30, June 30,
2001 2001
------------------ -----------------
CURRENT ASSETS: (*)
---------------
Cash and cash equivalents, $2,871 and $1,184 restricted $ 13,913 $ 14,951
Short-term investments 1,306 3,105
Accounts receivable-trade, less allowances of $6,057 and $6,951 124,426 121,703
Inventories:
Finished goods 144,269 146,416
Work-in-process 32,546 30,813
Raw materials 12,708 11,758
------------------ -----------------
189,523 188,987
Prepaid expenses and other current assets 67,296 62,163
------------------ -----------------
Total Current Assets 396,464 390,909
Property, plant and equipment, net of accumulated
depreciation of $171,211 and $156,914 141,766 149,108
Net assets held for sale 13,766 17,999
Goodwill 419,149 419,149
Investments and advances in affiliated companies 3,747 2,813
Prepaid pension assets 64,931 65,249
Deferred loan costs 11,934 12,916
Real estate investment 109,204 110,505
Long-term investments 6,914 7,779
Other assets 24,631 33,438
------------------ -----------------
TOTAL ASSETS $ 1,192,506 $ 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
December 30, 2001 (Unaudited) and June 30, 2001
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Dec. 30, June 30,
2001 2001
------------------ -----------------
CURRENT LIABILITIES: (*)
--------------------
Bank notes payable and current maturities of long-term debt $ 27,255 $ 26,528
Accounts payable 51,594 57,625
Accrued liabilities:
Salaries, wages and commissions 26,350 29,894
Employee benefit plan costs 4,946 6,421
Insurance 14,342 13,923
Interest 6,470 7,016
Other accrued liabilities 35,022 38,031
------------------ -----------------
Total Current Liabilities 165,979 179,438
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 473,451 470,530
Fair value of interest rate contract 9,326 6,422
Other long-term liabilities 24,380 25,729
Retiree health care liabilities 40,894 41,886
Noncurrent income taxes 110,333 124,007
------------------ -----------------
TOTAL LIABILITIES 824,363 848,012
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; authorized 40,000 shares, 30,335 shares
issued and
22,528 shares outstanding 3,034 3,034
Class B common stock, $0.10 par value; authorized 20,000
shares, 2,622 shares issued and outstanding 262 262
Paid-in capital 232,820 232,820
Treasury stock, at cost, 7,807 shares of Class A common stock (76,563) (76,563)
Retained earnings 244,096 246,788
Notes due from stockholders (1,768) (1,768)
Cumulative other comprehensive income (33,738) (42,720)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 368,143 361,853
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,192,506 $ 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 Six (6) Months Ended December 30, 2001 and December 31, 2000
(In thousands, except per share data)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
REVENUE: 12/30/01 12/31/00 12/30/01 12/31/00
-------------- -------------- -------------- --------------
Net sales $157,835 $148,100 $322,908 $296,467
Rental revenue 1,664 1,862 3,397 3,530
Other income, net 3,847 1,967 5,184 2,846
-------------- -------------- -------------- --------------
163,346 151,929 331,489 302,843
COSTS AND EXPENSES:
Cost of goods sold 119,329 109,045 243,732 222,636
Cost of rental revenue 1,300 1,271 2,534 2,374
Selling, general & administrative 34,241 33,162 65,997 61,952
Amortization of intangibles - 3,125 - 6,259
-------------- -------------- -------------- --------------
154,870 146,603 312,263 293,221
OPERATING INCOME 8,476 5,326 19,226 9,622
Interest expense 12,451 14,315 25,360 27,298
Interest income (1,881) (244) (2,363) (768)
-------------- -------------- -------------- --------------
Net interest expense 10,570 14,071 22,997 26,530
Investment income (loss) 106 1,004 (280) 624
Increase (decrease) in fair market value of interest rate contract 2,344 (3,075) (2,905) (3,545)
-------------- -------------- -------------- --------------
Earnings (loss) from continuing operations before taxes 356 (10,816) (6,956) (19,829)
Income tax benefit 551 3,990 4,231 7,564
Equity in earnings of affiliates, net - 187 33 181
-------------- -------------- -------------- --------------
NET EARNINGS (LOSS) $ 907 $ (6,639) $ (2,692) $ (12,084)
-------------- -------------- -------------- --------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (3,307) 1,510 9,370 (2,570)
Unrealized holding changes on derivatives 14 - 33 (528)
Unrealized periodic holding changes on securities (269) 2,834 (421) 2,073
-------------- -------------- -------------- --------------
Other comprehensive income (loss) (3,562) 4,344 8,982 (1,025)
-------------- -------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS) $ (2,655) $ (2,295) $ 6,290 $ (13,109)
-------------- -------------- -------------- --------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
NET EARNINGS (LOSS) $ 0.04 $ (0.26) $ (0.11) $ (0.48)
-------------- -------------- -------------- --------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.13) $ 0.06 $ 0.37 $ (0.10)
Unrealized holding changes on derivatives - - - (0.02)
Unrealized periodic holding changes on securities (0.01) 0.11 (0.02) 0.08
-------------- -------------- -------------- --------------
Other comprehensive income (loss) (0.14) 0.17 0.35 (0.04)
-------------- -------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS) $ (0.10) $ (0.09) $ 0.24 $ (0.52)
-------------- -------------- -------------- --------------
Weighted average shares outstanding:
Basic 25,149 25,101 25,149 25,068
-------------- -------------- -------------- --------------
Diluted 25,152 25,101 25,149 25,068
-------------- -------------- -------------- --------------
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
Six (6) Months Ended December 30, 2001 and December 31, 2000
(In thousands)
12/30/01 12/31/00
------------------ -----------------
Cash flows from operating activities:
-------------------------------------
Net earnings $ (2,692) $ (12,084)
Depreciation and amortization 15,089 21,975
Amortization of deferred loan fees 1,018 917
Unrealized holding loss on interest rate contract 2,905 4,356
Undistributed earnings of affiliates, net (33) (181)
Change in assets and liabilities (16,535) (56,215)
------------------ -----------------
Net cash used for operating activities (248) (41,232)
Cash flows from investing activities:
Purchase of property, plant and equipment (7,295) (8,343)
Net proceeds received from the sale of property, plant, and equipment 3,996 132
Net proceeds received from investment securities 1,377 4,040
Real estate investment (375) (1,705)
Equity investment in affiliates (394) (285)
Change in notes receivable (4,555) -
Proceeds received from net assets held for sale 4,187 2,081
------------------ -----------------
Net cash used for investing activities (3,059) (4,080)
Cash flows from financing activities:
Proceeds from issuance of debt 81,964 31,269
Debt repayments (80,046) (6,770)
Issuance of Class A common stock - 551
Net loans to stockholders' - 6
------------------ -----------------
Net cash provided by financing activities 1,918 25,056
Effect of exchange rate changes on cash 351 1,069
------------------ -----------------
Net change in cash and cash equivalents (1,038) (19,187)
Cash and cash equivalents, beginning of the year 14,951 35,790
------------------ -----------------
Cash and cash equivalents, end of the period $ 13,913 $ 16,603
------------------ -----------------
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 December 30, 2001, and the
consolidated statements of earnings and cash flows for the six months ended
December 30, 2001 and December 31, 2000 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 December 30, 2001, 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 December 30, 2001 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 22,527,801 shares of Class A common stock and 2,621,502 shares of
Class B common stock outstanding at December 30, 2001. 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.
3. RESTRICTED CASH
On December 30, 2001 and June 30, 2001, we had restricted cash of $2,871
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 Six Months Ended
----------------------------- -----------------------------
12/30/01 12/31/00 12/30/01 12/31/00
-------------- -------------- -------------- --------------
Basic earnings per share:
Earnings from continuing operations $ 907 $ (6,639) $ (2,692) $ (12,084)
-------------- -------------- -------------- --------------
Common shares outstanding 25,149 25,101 25,149 25,068
-------------- -------------- -------------- --------------
Basic earnings from continuing operations per share $ 0.04 $ (0.26) $ (0.11) $ (0.48)
-------------- -------------- -------------- --------------
Diluted earnings per share:
Earnings from continuing operations $ 907 $ (6,639) $ (2,692) $ (12,084)
-------------- -------------- -------------- --------------
Common shares outstanding 25,149 25,101 25,149 25,068
Options 3 antidilutive antidilutive antidilutive
Warrants antidilutive antidilutive antidilutive antidilutive
-------------- -------------- -------------- --------------
Total shares outstanding 25,152 25,101 25,149 25,068
-------------- -------------- -------------- --------------
Diluted earnings from continuing operations per share $ 0.04 $ (0.26) $ (0.11) $ (0.48)
-------------- -------------- -------------- --------------
Stock options entitled to purchase 1,985,377 and 2,092,616 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three months and six months ended December 30, 2001. Stock
options entitled to purchase 2,197,055 and 2,251,014 shares of Class A common
stock were antidilutive and not included in the earnings per share calculation
for the three months and six months ended December 31, 2000, respectively. Stock
warrants entitled to purchase 389,683 and 392,896 shares of Class A common stock
were antidilutive and not included in the earnings per share calculation for the
three months ended December 30, 2001 and December 31, 2000, respectively. Stock
warrants entitled to purchase 504,396 and 577,989 shares of Class A common stock
were antidilutive and not included in the earnings per share calculation for the
six months ended December 30, 2001 and December 31, 2000, 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 December 30, 2001, the consolidated total of our recorded liabilities
for environmental matters was approximately $13.6 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $17.8 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 six
months ended December 30, 2001 and December 31, 2000, respectively.
Three Months Ended Six Months Ended
------------------------------- -----------------------------
12/30/01 12/31/00 12/30/01 12/31/00
--------------- --------------- --------------- -------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 143,766 $ 128,010 $ 290,856 $ 253,456
Aerospace Distribution Segment 14,069 20,090 32,052 43,011
--------------- --------------- --------------- -------------
TOTAL SALES $ 157,835 $ 148,100 $ 322,908 $ 296,467
--------------- --------------- --------------- -------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 11,848 $ 9,853 $ 26,714 $ 16,852
Aerospace Distribution Segment 391 412 845 1,699
Real Estate Operations Segment (a) 52 (481) 490 83
Corporate and Other Segment (3,815) (4,458) (8,823) (9,012)
--------------- --------------- --------------- -------------
TOTAL OPERATING INCOME (b) $ 8,476 $ 5,326 $ 19,226 $ 9,622
--------------- --------------- --------------- -------------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES:
Aerospace Fasteners Segment $ 11,786 $ 9,264 $ 26,178 $ 15,703
Aerospace Distribution Segment 373 (67) 804 1,661
Real Estate Segment (491) (1,339) (720) (1,604)
Corporate and Other Segment (11,312) (18,674) (33,218) (35,589)
--------------- --------------- --------------- -------------
Total earnings (loss) from continuing operations before taxes $ 356 $ (10,816) $ (6,956) $ (19,829)
--------------- --------------- --------------- -------------
ASSETS BY SEGMENT: 12/30/01 6/30/01
--------------- ---------------
Aerospace Fasteners Segment $ 755,175 $ 579,981
Aerospace Distribution Segment 42,970 46,718
Real Estate Segment 115,693 116,250
Corporate and Other Segment 278,668 466,916
--------------- ---------------
TOTAL ASSETS $ 1,192,506 $ 1,209,865
--------------- ---------------
(a) - Includes rental revenue of $1.7 million and $1.9 million for the three
months ended December 30, 2001 and December 31, 2000, respectively, and $3.4
million and $3.5 million for the six months ended December 30, 2001 and December
31, 2000, respectively.
(b) - Includes goodwill amortization of $3.1 million and $6.3 million for the
three and six months ended December 31, 2000, 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 for the six months ended
December 30, 2001.
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 an
impairment exists at 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 it 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 six months ended December 30, 2001 and December 31, 2000,
respectively:
Three Months Ended Six Months Ended
----------------------------- -----------------------------
12/30/01 12/31/00 12/30/01 12/31/00
-------------- -------------- -------------- --------------
Reported net income (loss) $ 907 $ (6,639) $ (2,692) $ (12,084)
Add back: Goodwill amortization - 3,125 - 6,259
-------------- -------------- -------------- --------------
Adjusted net income (loss) $ 907 $ (3,514) $ (2,692) $ (5,825)
-------------- -------------- -------------- --------------
Basic and Diluted loss per share:
Reported net income (loss) $ 0.04 $ (0.26) $ (0.11) $ (0.48)
Add back: Goodwill amortization - 0.12 - 0.25
-------------- -------------- -------------- --------------
Adjusted net income (loss) $ 0.04 $ (0.14) $ (0.11) $ (0.23)
-------------- -------------- -------------- --------------
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 December 30, 2001, $4.7 million of promissory notes were due to us from
an unaffiliated third party and are recorded in other assets. The promissory
notes earn $1.3 million of annual cash interest and are being accreted to a face
value of $12.2 million though interest income. The promissory notes are secured
by $12.2 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
DECEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- --------------- -------------- --------------
Cash $ 67 $ 7,138 $ 6,708 $ - $ 13,913
Marketable securities 71 1,235 - - 1,306
Accounts receivable (including intercompany), less
allowances 2,441 719,562 92,243 (689,820) 124,426
Inventory, net - 138,973 50,550 - 189,523
Prepaid and other current assets 188 22,516 7,106 37,486 67,296
------------- ------------- --------------- -------------- --------------
Total current assets 2,767 889,424 156,607 (652,334) 396,464
Investment in subsidiaries 899,745 - - (899,745) -
Net fixed assets 493 105,656 35,617 - 141,766
Net assets held for sale - 13,766 - - 13,766
Investments in affiliates 93 3,654 - - 3,747
Goodwill - 386,160 32,989 - 419,149
Deferred loan costs 11,218 19 697 - 11,934
Prepaid pension assets - 64,931 - - 64,931
Real estate investment - - 109,204 - 109,204
Long-term investments (506) 4,472 3,436 (488) 6,914
Other assets 17,806 4,536 2,289 - 24,631
------------- ------------- --------------- -------------- --------------
Total assets $ 931,616 $ 1,472,618 $ 340,839 $(1,552,567) $ 1,192,506
============= ============= =============== ============== ==============
Bank notes payable & current maturities of debt $ 2,250 $ 1,611 $ 23,394 $ - $ 27,255
Accounts payable (including intercompany) 2 897,437 231,453 (1,077,298) 51,594
Other accrued liabilities (30,831) 52,087 28,388 37,486 87,130
------------- ------------- --------------- -------------- --------------
Total current liabilities (28,579) 951,135 283,235 (1,039,812) 165,979
Long-term debt, less current maturities 436,250 3,643 33,558 - 473,451
Fair market value of interest rate contract 9,326 - - - 9,326
Other long-term liabilities 407 19,979 3,994 - 24,380
Noncurrent income taxes 110,962 (629) - - 110,333
Retiree health care liabilities - 36,647 4,247 - 40,894
------------- ------------- --------------- -------------- --------------
Total liabilities 528,366 1,010,775 325,034 (1,039,812) 824,363
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 232,820 478,206 83,966 (562,172) 232,820
Retained earnings 244,095 6,765 (56,669) 49,905 244,096
Cumulative other comprehensive income (456) (21,790) (11,492) - (33,738)
Treasury stock, at cost (76,075) - - (488) (76,563)
------------- ------------- --------------- -------------- --------------
Total stockholders' equity 403,250 461,843 15,805 (512,755) 368,143
------------- ------------- --------------- -------------- --------------
Total liabilities & stockholders' equity $ 931,616 $ 1,472,618 $ 340,839 $(1,552,567) $ 1,192,506
============= ============= =============== ============== ==============
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED DECEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- --------------- -------------- --------------
Revenue:
Net Sales $ - $ 250,231 $ 81,755 $ (9,078) $ 322,908
Rental Revenue - - 3,397 - 3,397
Other Income, net (5) 3,315 1,874 - 5,184
------------- ------------- --------------- -------------- --------------
(5) 253,546 87,026 (9,078) 331,489
Costs and expenses:
Cost of sales - 193,497 59,313 (9,078) 243,732
Cost of rental revenue - - 2,534 - 2,534
Selling, general & administrative 4,626 48,869 12,502 - 65,997
------------- ------------- --------------- -------------- --------------
4,626 242,366 74,349 (9,078) 312,263
------------- ------------- --------------- -------------- --------------
Operating income (loss) (4,631) 11,180 12,677 - 19,226
Net interest expense (including intercompany) (10,215) 30,678 2,534 - 22,997
Investment loss, net - (280) - - (280)
Intercompany dividends - (27) - 27 -
Decrease in market value of interest rate contract (2,905) - - - (2,905)
------------- ------------- --------------- -------------- --------------
Earnings (loss) before taxes 2,679 (19,805) 10,143 27 (6,956)
Income tax (provision) benefit (1,622) 11,999 (6,146) 4,231
Equity in earnings of affiliates and subsidiaries (3,749) 51 - 3,731 33
------------- ------------- --------------- -------------- --------------
Net earnings (loss) $ (2,692) $ (7,755) $ 3,997 $ 3,758 $ (2,692)
============= ============= =============== ============== ==============
CONSOLIDATING CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- --------------- -------------- --------------
Cash Flows from Operating Activities:
--------------------------------------
Net earnings (loss) $ (2,692) $ (7,755) $ 3,997 $ 3,758 $ (2,692)
Depreciation & amortization 21 9,907 5,161 - 15,089
Amortization of deferred loan fees 762 1 255 - 1,018
Unrealized holding loss on interest rate contract 2,904 - - - 2,904
Undistributed (distributed) earnings of affiliates 18 (51) - - (33)
Change in assets and liabilities (6,309) (930) (5,537) 3,758) (16,534)
------------- ------------- --------------- -------------- --------------
Net cash provided by (used for) operating activities (5,296) 1,172 3,876 - (248)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (14) (5,391) (1,890) - (7,295)
Proceeds received from the sale of fixed assets - 3,593 403 - 3,996
Net proceeds received from investment securities - 1,377 - - 1,377
Real estate investment (394) - - - (394)
Equity investment in affiliates - - (375) - (375)
Change in notes receivable - (3,273) (1,282) - (4,555)
Proceeds received from net assets held for sale - 4,187 - - 4,187
------------- ------------- --------------- -------------- --------------
Net cash provided by (used for) investing activities (408) 493 (3,144) - (3,059)
Cash Flows from Financing Activities:
Proceeds from issuance of debt 64,700 17,105 159 - 81,964
Debt repayments, net (59,491) (18,178) (2,377) - (80,046)
------------- ------------- --------------- -------------- --------------
Net cash provided by (used for) financing activities 5,209 (1,073) (2,218) - 1,918
Effect of exchange rate changes on cash - - 351 - 351
------------- ------------- --------------- -------------- --------------
Net change in cash (495) 592 (1,135) - (1,038)
Cash, beginning of the year 562 6,546 7,843 - 14,951
------------- ------------- --------------- -------------- --------------
Cash, end of the period $ 67 $ 7,138 $ 6,708 $ - $ 13,913
============= ============= =============== ============== ==============
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), less
allowances 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 SIX MONTHS ENDED DECEMBER 31, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- --------------- -------------- --------------
Revenue:
Net Sales $ - $ 227,996 $ 72,020 $ (3,549) $ 296,467
Rental Revenue - - 3,530 - 3,530
Other Income, net - 2,011 835 - 2,846
------------- ------------- --------------- -------------- --------------
- 230,007 76,385 (3,549) 302,843
Costs and expenses:
Cost of sales - 175,248 50,937 (3,549) 222,636
Cost of Rental Revenue - 2,374 - 2,374
Selling, general & administrative 3,439 47,437 11,076 - 61,952
Amortization of goodwill 404 2,128 3,727 - 6,259
------------- ------------- --------------- -------------- --------------
3,843 224,813 68,114 (3,549) 293,221
------------- ------------- --------------- -------------- --------------
Operating income (loss) (3,843) 5,194 8,271 - 9,622
Net interest expense (including intercompany) (3,991) 24,899 5,622 - 26,530
Investment income (loss), net - (181) 805 - 624
Decrease in market value of interest rate contract (3,545) - - - (3,545)
------------- ------------- --------------- -------------- --------------
Earnings (loss) before taxes (3,397) (19,886) 3,454 - (19,829)
Income tax (provision) benefit 1,668 9,899 (4,003) - 7,564
Equity in earnings of affiliates and subsidiaries (10,355) 181 - 10,355 181
------------- ----------------------------- -------------- --------------
Net earnings (loss) $ (12,084) $ (9,806) $ (549) $ 10,355 $(12,084)
============= ============================= ============== ==============
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- --------------- -------------- --------------
Cash Flows from Investing Activities:
-------------------------------------
Net earnings (loss) $ (12,084) $ (9,806) $ (549) $ 10,355 $(12,084)
Depreciation & amortization 455 13,073 8,447 - 21,975
Amortization of deferred loan fees 690 1 226 - 917
Unrealized holding loss on interest rate contract 4,356 - - - 4,356
Undistributed (distributed) earnings of affiliates - (181) - - (181)
Change in assets and liabilities (18,556) (16,312) (10,992) (10,355) (56,215)
------------- ------------- --------------- -------------- --------------
Net cash used for operating activities (25,139) (13,225) (2,868) - (41,232)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (158) (5,908) (2,277) - (8,343)
Net proceeds received from investment securities - 4,040 - - 4,040
Equity investment in affiliates (285) - - - (285)
Real estate investment - - (1,705) - (1,705)
Proceeds received from net assets held for sale - 2,081 - - 2,081
Proceeds received from the sale of fixed assets - 132 - - 132
------------- ------------- --------------- -------------- --------------
Net cash provided by (used for) investing activities (443) 345 (3,982) - (4,080)
Cash Flows from Financing Activities:
Proceeds from issuance of debt 25,200 130 5,939 - 31,269
Debt repayments, net - (1,229) (5,541) - (6,770)
Issuance of Class A common stock 551 - - - 551
Loans to stockholders - 6 - - 6
------------- ------------- --------------- -------------- --------------
Net cash provided by (used for) financing activities 25,751 (1,093) 398 - 25,056
Effect of exchange rate changes on cash - - 1,069 - 1,069
------------- ------------- --------------- -------------- --------------
Net change in cash 169 (13,973) (5,383) - (19,187)
Cash, beginning of the year 35 23,063 12,692 - 35,790
------------- ------------- --------------- -------------- --------------
Cash, end of the period $ 204 $ 9,090 $ 7,309 $ - $ 16,603
============= ============= =============== ============== ==============
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 six months ended December 30, 2001 and December 31, 2000,
respectively.
Three Months Ended Six Months Ended
------------------------------- -------------------------------
12/30/01 12/31/00 12/30/01 12/31/00
--------------- --------------- --------------- ---------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 143,766 $ 128,010 $ 290,856 $ 253,456
Aerospace Distribution Segment 14,069 20,090 32,052 43,011
--------------- --------------- --------------- ---------------
TOTAL SALES $ 157,835 $ 148,100 $ 322,908 $ 296,467
--------------- --------------- --------------- ---------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 11,848 $ 9,853 $ 26,714 $ 16,852
Aerospace Distribution Segment 391 412 845 1,699
Real Estate Operations Segment (a) 52 (481) 490 83
Corporate and Other Segment (3,815) (4,458) (8,823) (9,012)
--------------- --------------- --------------- ---------------
TOTAL OPERATING INCOME (b) $ 8,476 $ 5,326 $ 19,226 $ 9,622
--------------- --------------- --------------- ---------------
(a) - Includes rental revenue of $1.7 million and $1.9 million for the three
months ended December 30, 2001 and December 31, 2000, respectively, and $3.4
million and $3.5 million for the six months ended December 30, 2001 and December
31, 2000, respectively.
(b) - Includes goodwill amortization of $3.1 million and $6.3 million for the
three and six months ended December 31, 2000, respectively.
Net sales of $157.8 million in the second quarter of fiscal 2002 increased
by $9.7 million, or 6.6%, compared to sales of $148.1 million in the second
quarter of fiscal 2001. Net sales of $322.9 million in the first six months of
fiscal 2002 increased by $26.4 million, or 8.9%, compared to sales of $296.5
million in the first six months of fiscal 2001. Sales in the second quarter and
first six months of fiscal 2002 reflected strong growth at our aerospace
fasteners segment. Additionally, sales in the second quarter and first six
months of fiscal 2002 were favorably affected by approximately $1.7 million and
$0.2 million due to the foreign currency impact on our European operations from
the Euro strengthening against the U.S. Dollar on a period-to-period basis.
Results for the three and six months ended December 31, 2000, included revenue
of $2.3 million and $5.5 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 increased $12.0
million, or 8.2%, for the three months ended December 30, 2001 and $31.9
million, or 11.0%, for the six months ended December 30, 2001, as compared to
the same periods of the prior year.
Gross margin as a percentage of sales was 24.4% and 26.4% in the second
quarter of fiscal 2002 and fiscal 2001, respectively, and 24.5% and 24.9% in the
first six months of fiscal 2002 and fiscal 2001, respectively. The reduced
margins in the fiscal 2002 periods are attributable primarily to a change in
product mix resulting from the September 11, 2001 terrorist attacks.
Selling, general & administrative expense as a percentage of sales was
21.7% and 22.4% in the second quarter of fiscal 2002 and 2001, respectively, and
20.4% and 20.9% in the first six months of fiscal 2002, respectively. The
improvement in the fiscal 2002 periods was attributable primarily to the
increase in sales and the related economies of scale.
Rental revenue remained stable in the first six months of fiscal 2002,
compared to the first six months of fiscal 2001.
Other income increased $2.4 million in the first six months of fiscal 2002,
compared to the first six months of fiscal 2001, which was due primarily to
income recognized from the disposition of future royalty revenues to an
unaffiliated third party in exchange for $4.7 million promissory notes.
Operating income for the three and six months ended December 30, 2001,
increased by $3.2 million and $9.6 million, respectively, as compared to the
same periods of the prior year. The results for the three and six months ended
December 31, 2000, included goodwill amortization of $3.1 million and $6.3
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 a favorable effect of approximately $0.2
million on operating income at our European operations in the second quarter of
fiscal 2002, as compared to the second quarter of fiscal 2001.
Net interest expense decreased by $3.5 million, to $23.0 million, in the
first six months of fiscal 2002 as compared to the first six months of fiscal
2001. Cash interest expense decreased by $3.3 million in the first six months of
fiscal 2002, as compared to the first six months of fiscal 2001, due primarily
to lower interest rates.
We recognized $0.3 million of investment loss in the first six months of
fiscal 2002, due primarily to realized losses from investments we liquidated. We
recognized $0.6 million of investment income in the first six months of fiscal
2001, due primarily to realized gains from investments we liquidated.
The fair market value of a ten-year $100 million interest rate contract
decreased by $2.9 million in the second quarter of fiscal 2002 and $3.5 million
in the second quarter of 2001. The fair market value of the interest rate
contract decreased by $2.9 million in the first six months of fiscal 2002 and
$3.5 million in the first six months of 2001.
An income tax benefit of $4.2 million in the first six months of fiscal
2002 represented a 60.1% effective tax rate on pre-tax losses from operations.
The tax benefit was higher than the statutory rate, due primarily to lower tax
rates on $9.0 million of earnings generated by our foreign operations which
utilize net operating loss carry forwards. An income tax benefit of $7.6 million
in the first six months of fiscal 2001 represented a 38.1% effective tax rate on
pre-tax losses from continuing operations.
Comprehensive income includes foreign currency translation adjustments,
unrealized holding changes in the fair market value of available-for-sale
investment securities. For the six months ended December 30, 2001, the foreign
currency translation adjustment resulted in a $9.4 million increase, and was
offset partially by a $0.4 million decrease in the fair market value of
unrealized holding gains on investment securities. For the six months ended
December 31, 2000, the foreign currency translation adjustment decreased by $2.6
million, and was offset partially by a $2.1 million increase in the fair market
value of unrealized holding gains on investment securities.
Segment Results
Aerospace Fasteners Segment
Sales in our Aerospace Fasteners segment increased by $15.8 million, or
12.3%, and $37.4 million, or 14.8% in the second quarter and first six months of
fiscal 2002, respectively, as compared to the same periods of fiscal 2001. The
improvement in the current quarter and six months reflected strong internal
growth. Sales at our European operations were favorably affected by
approximately $1.7 million in the second quarter and $0.2 million in the first
six months of fiscal 2002, as compared to the same periods of the prior year,
due to the strengthening of the Euro against the U.S. Dollar. Backlog decreased
by $22.3 million in the first six months to $197.7 million at December 30, 2001,
and includes an increase of approximately $3.3 million from the strengthening of
the Euro against the U.S. Dollar during the six-month period ended December 30,
2001. Our book-to-bill ratio was 91.2% for the first six months of fiscal 2002,
reflecting the stronger level of sales and a softening of new orders following
the September 11, 2001 terrorist attacks.
Operating income increased by $2.0 million, or 20.2%, in the second quarter
and $9.9 million, or 58.5%, in the first six months of fiscal 2002, as compared
to the same periods of fiscal 2001. The improvement in the first six months of
fiscal 2002 was due primarily to the increase in sales and related economies of
scale. On July 1, 2001, we adopted a new accounting pronouncement that does not
require us to amortize goodwill. Goodwill amortization of $2.8 million and $5.7
million was recorded in the second quarter and first six months of fiscal 2001.
Operating expenses continue to be monitored as management attempts to
efficiently reduce operating costs.
Recent 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 last half of fiscal
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 saving through cost reductions and further plant
rationalization.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $6.0 million in
the second quarter and $11.0 million in the first six months of fiscal 2002,
compared to the same periods in fiscal 2001. Results from the prior three months
and six months ended December 31, 2000, included revenue of $2.3 million and
$5.5 million from an operation which was shut down in June 2001. Sales in the
three and six months ended December 30, 2001, were adversely affected due to the
terrorist attacks on September 11, 2001 and have been sluggish since then.
Operating income remained stable in the second quarter of fiscal 2002 and
decreased by $0.9 million in the first six months of fiscal 2002, as compared to
the same periods in fiscal 2001. The results for the six months ended December
30, 2001, were hampered by the reduction in revenue and the related economies of
scale.
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 $1.7 million and $1.9 million for the three months ended December 30,
2001 and December 31, 2000, respectively, and $3.4 million and $3.5 million for
the six months ended December 30, 2001 and December 31, 2000, respectively. As
of December 30, 2001, we have leased approximately 74% of the developed shopping
center.
We reported operating income of $0.1 million and $0.5 million for the
second quarter and first six months of fiscal 2002, respectively, compared to an
operating loss of $0.5 million for the second quarter of fiscal 2001 and
operating income of $0.1 million for the six months ended December 31, 2000. In
the second quarter of fiscal 2002, we recorded a charge of $0.2 million to
write-off specialized tenant improvements associated with a terminated tenancy.
In the second quarter 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 $0.2 million in the first
six months of fiscal 2002, compared to the first six months of fiscal 2001, due
primarily to an increase in royalty income recognized in the first six months of
fiscal 2002. Corporate expenses continue to be closely monitored as management
attempts to efficiently reduce general and administrative costs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of December 30, 2001 and June 30, 2001 amounted to
$868.8 million and $858.9 million, respectively. The six-month change in
capitalization included a $3.6 million increase in debt reflecting cash used by
our operations, and an increase in equity of $6.3 million which was due
primarily to a $9.0 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 $8.2 million at
December 30, 2001. The market value of these investments decreased by $0.4
million in the six months ended December 30, 2001. 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 used for operating activities for the six months ended December
30, 2001 and December 31, 2000 was $0.2 million and $41.2 million, respectively.
Working capital uses of cash from operating activities in the first six months
of fiscal 2002 included a $14.2 million decrease in accounts payable and other
accrued liabilities, a $2.7 million increase in accounts receivable, and a $5.1
million increase in other current assets. The working capital uses of cash were
offset partially by $16.3 million of earnings after deducting non-cash expenses
of $15.1 million for depreciation, $2.9 million from the reduction in the fair
market value of an interest rate contract, and $1.0 million from the
amortization of deferred loan fees. The primary use of cash for operating
activities in the first six months of fiscal 2001 was a $35.9 million decrease
in accounts payable and other accrued liabilities, a $12.6 million increase in
inventories, and an $11.4 million increase in other current assets, offset
partially by a $16.3 million decrease in accounts receivable.
Net cash used for investing activities was $3.1 million and $4.1 million
for the six months ended December 30, 2001, and December 31, 2000, respectively.
In the first six months of fiscal 2002, the primary source of cash was $8.2
million provided from the dispositions of non-core real estate and net assets
held for sale, offset by $7.3 million of capital expenditures and a $4.6
increase in notes receivable. In the first six months of fiscal 2001, the
primary use of cash included capital expenditures of $8.3 million and costs of
$1.7 million for real estate development at our shopping center, offset
partially by $6.1 million of cash provided from the sale of investments and
dispositions of non-core real estate.
Net cash provided by financing activities was $1.9 million and $25.1
million for the six months ended December 30, 2001 and December 31, 2000,
respectively. Cash used for financing activities in the first six months of
fiscal 2002 included $1.9 million of net proceeds from the issuance of
additional debt. Cash provided by financing activities in the first six months
of fiscal 2001, included $24.5 million of net proceeds from the issuance of
additional debt and $0.6 million from the issuance of stock.
At December 30, 2001, $4.7 million of promissory notes were due to us from
an unaffiliated third party and are recorded in other assets. The promissory
notes earn $1.3 million of annual cash interest and are being accreted to a face
value of $12.2 million though interest income. The promissory notes are secured
by $12.2 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 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 December 30, 2001, the interest
coverage ratio was 2.42, which exceeded the minimum requirement of 2.0.
Additionally, the credit agreement restricts annual capital expenditures to $40
million during the life of the facility. For the six months ended December 30,
2001, capital expenditures were $7.3 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
December 30, 2001, 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 for the quarter ended December
30, 2001.
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 an
impairment exists at 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 $2.9 million and $4.4 million, in the six months ended December 30, 2001 and
December 31, 2000, 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% 4.74%
Fair Market Value at December 30, 2001 $27 $(9,326)
(a) - On February 17, 2003, the bank 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.
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. The shares to be issued pursuant to these stock options will be
registered with the Securities and Exchange Commission within a few months. A
description of the stock options was included in our Proxy Statement for the
November 13, 2001 Annual Meeting.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of our Stockholders was held on November 13, 2001. Seven
matters of business were voted upon:
o Proposal 1 - to elect ten directors for the ensuing year;
o Proposal 2 - to approve the issuance of 86,942 stock options to
non-employee directors;
o Proposal 3 - to approve the material terms of the fiscal 2002
performance goals and incentive compensation for the
Senior Vice President, Tax;
o Proposal 4 - to approve the material terms of the fiscal 2002
performance goals and incentive compensation for the Chief
Financial Officer;
o Proposal 5 - to approve the material terms of the fiscal 2002
performance goals and incentive compensation for the
Executive Vice President;
o Proposal 6 - to approve the material terms of the fiscal 2002
performance goals and incentive compensation for the
President;
o Proposal 7 - to approve the material terms of the fiscal 2002
performance goals and incentive compensation for the Chief
Executive Officer.
The following tables provide the results of shareholder voting on each
proposal, expressed in number of votes:
Proposal 1
Directors: Votes For Votes Withheld
---------- ----------- --------------
Melville R. Barlow 42,025,944 3,662,092
Mortimer M. Caplin 42,024,044 3,663,992
Philip David 42,025,044 3,662,992
Robert E. Edwards 42,030,724 3,657,312
Steven L. Gerard 42,027,444 3,660,592
Harold J. Harris 42,022,244 3,665,792
Daniel Lebard 42,025,744 3,662,292
Herbert S. Richey 42,022,244 3,665,792
Eric I. Steiner 40,969,693 4,718,343
Jeffrey J. Steiner 40,964,693 4,723,343
Votes For Votes Against Abstain Non-Vote
---------- ------------- ------- ---------
Proposal 2 41,650,095 3,996,727 41,214 -
Proposal 3 37,250,214 4,183,500 51,151 4,203,171
Proposal 4 37,264,015 4,173,691 47,159 4,203,171
Proposal 5 37,270,310 4,183,250 31,305 4,203,171
Proposal 6 37,252,838 4,183,250 31,305 4,220,643
Proposal 7 37,251,838 4,205,550 27,477 4,203,171
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 she 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
December 30, 2001 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: February 8, 2002