16
--------------------------------------------------------------------------------
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 September 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 September 30, 2001
Class A Common Stock, $0.10 Par Value 22,527,801
Class B Common Stock, $0.10 Par Value 2,621,502
--------------------------------------------------------------------------------
THE FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Page
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of September 30, 2001
(Unaudited)and June 30, 2001 .................................. 3
Consolidated Statements of Earnings (Unaudited) for the Three
Months ended September 30, 2001 and October 1, 2000 ............ 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months ended September 30, 2001 and October 1,
2000 ........................................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ........................................ 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk ...... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 25
Item 5. Other Information .............................................. 25
Item 6. Exhibits and Reports on Form 8-K ............................... 25
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
September 30, 2001 (Unaudited) and June 30, 2001
(In thousands)
ASSETS
9/30/01 6/30/01
------------------ -----------------
CURRENT ASSETS: (*)
---------------
Cash and cash equivalents, $1,146 and $1,184 restricted $ 14,335 $ 14,951
Short-term investments 2,633 3,105
Accounts receivable-trade, less allowances of $7,453 and $6,951 129,496 121,703
Inventories:
Finished goods 144,010 146,416
Work-in-process 35,175 30,813
Raw materials 12,246 11,758
------------------ -----------------
191,431 188,987
Prepaid expenses and other current assets 65,114 62,163
------------------ -----------------
Total Current Assets 403,009 390,909
Property, plant and equipment, net of accumulated
depreciation of $166,035 and $156,914 146,861 149,108
Net assets held for sale 13,618 17,999
Goodwill 418,455 419,149
Investments and advances, affiliated companies 3,747 2,813
Prepaid pension assets 65,156 65,249
Deferred loan costs 12,431 12,916
Real estate investment 110,030 110,505
Long-term investments 7,684 7,779
Other assets 20,438 33,438
------------------ -----------------
TOTAL ASSETS $ 1,201,429 $ 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
September 30, 2001 (Unaudited) and June 30, 2001
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
9/30/01 6/30/01
------------------ -----------------
CURRENT LIABILITIES: (*)
--------------------
Bank notes payable and current maturities of long-term debt $ 25,031 $ 26,528
Accounts payable 53,081 57,625
Accrued liabilities:
Salaries, wages and commissions 33,045 29,894
Employee benefit plan costs 5,470 6,421
Insurance 13,177 13,923
Interest 12,641 7,016
Other accrued liabilities 37,169 38,031
------------------ -----------------
Total Current Liabilities 179,614 179,438
LONG-TERM LIABILITES:
Long-term debt, less current maturities 460,529 470,530
Fair value of interest rate contract 11,671 6,422
Other long-term liabilities 25,465 25,729
Retiree health care liabilities 42,605 41,886
Noncurrent income taxes 110,748 124,007
------------------ -----------------
TOTAL LIABILITIES 830,632 848,012
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 243,188 246,788
Notes due from stockholders (1,768) (1,768)
Cumulative other comprehensive income (30,176) (42,720)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 370,797 361,853
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,201,429 $ 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) Months
Ended September 30, 2001 and October 1, 2000
(In thousands, except per share data)
REVENUE: 09/30/01 10/01/00
------------------ ------------------
Net sales $ 165,073 $ 148,367
Rental revenue 1,733 1,668
Other income, net 1,337 879
------------------ ------------------
168,143 150,914
COSTS AND EXPENSES:
Cost of goods sold 124,403 113,591
Cost of rental revenue 1,234 1,103
Selling, general & administrative 31,756 28,790
Amortization of intangibles - 3,134
------------------ ------------------
157,393 146,618
OPERATING INCOME 10,750 4,296
Interest expense 12,909 12,983
Interest income (482) (524)
------------------ ------------------
Net interest expense 12,427 12,459
Investment loss (386) (380)
Change in fair market value of interest rate contract (5,249) (470)
------------------ ------------------
Loss from continuing operations before taxes (7,312) (9,013)
Income tax benefit 3,680 3,574
Equity in earnings (loss) of affiliates, net 33 (6)
------------------ ------------------
NET LOSS $ (3,599) $ (5,445)
------------------ ------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 12,677 (4,080)
Derivative adjustments 19 (528)
Unrealized periodic holding changes on securities (152) (761)
------------------ ------------------
Other comprehensive loss 12,544 (5,369)
------------------ ------------------
COMPREHENSIVE INCOME (LOSS) $ 8,945 $ (10,814)
------------------ ------------------
BASIC AND DILUTED EARNINGS PER SHARE:
NET LOSS $ (0.14) $ (0.22)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 0.50 (0.16)
Derivative adjustments - (0.02)
Unrealized periodic holding changes on securities (0.01) (0.03)
------------------ ------------------
Other comprehensive loss 0.49 (0.21)
------------------ ------------------
COMPREHENSIVE INCOME (LOSS) $ 0.35 $ (0.43)
------------------ ------------------
Weighted average shares outstanding:
Basic 25,149 25,068
------------------ ------------------
Diluted 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 Three (3) Months
Ended September 30, 2001 and October 1, 2000
(In thousands)
9/30/01 10/1/00
------------------ -----------------
Cash flows from operating activities:
Net earnings $ (3,599) $ (5,445)
Depreciation and amortization 7,511 10,950
Amortization of deferred loan fees 503 456
Unrealized holding loss on derivatives 5,249 470
Undistributed (earnings) loss of affiliates, net (33) 9
Change in assets and liabilities (2,368) (31,545)
------------------ -----------------
Net cash provided by (used for) operating activities 7,263 (25,105)
Cash flows from investing activities:
Purchase of property, plant and equipment (4,235) (3,861)
Net proceeds received from the sale of property, plant, and equipment 3,710 -
Net proceeds received from (used for) investment securities (53) 4,759
Real estate investment (211) (1,601)
Equity investment in affiliates (394) -
Proceeds received from net assets held for sale 4,358 2,211
------------------ -----------------
Net cash provided by investing activities 3,175 1,508
Cash flows from financing activities:
Proceeds from issuance of debt 35,896 23,453
Debt repayments (47,394) (2,608)
Issuance of Class A common stock - 194
------------------ -----------------
Net cash provided by (used for) financing activities (11,498) 21,039
Effect of exchange rate changes on cash 444 (416)
------------------ -----------------
Net change in cash and cash equivalents (616) (2,974)
Cash and cash equivalents, beginning of the year 14,951 35,790
------------------ -----------------
Cash and cash equivalents, end of the period $ 14,335 $ 32,816
------------------ -----------------
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 September 30, 2001, and the
consolidated statements of earnings and cash flows for the three months ended
September 30, 2001 and October 1, 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 September 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 June 30, 2001 Annual Report on Form 10-K. The results of operations for
the period ended September 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 September 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 September 30, 2001 and June 30, 2001, we had restricted cash of $1,146
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
---------------------------------
9/30/01 10/1/00
---------------- ---------------
Basic earnings per share:
Loss from continuing operations $ (3,599) $ (5,445)
================ ===============
Common shares outstanding 25,149 25,068
================ ===============
Basic earnings from continuing operations per share $ (0.14) $ (0.22)
================ ===============
Diluted earnings per share:
Earnings from continuing operations $ (3,599) $ (5,445)
================ ===============
Common shares outstanding 25,149 25,068
Options antidilutive antidilutive
Warrants antidilutive antidilutive
---------------- ---------------
Total shares outstanding 25,149 25,068
================ ===============
Diluted earnings from continuing operations per share $ (0.14) $ (0.22)
================ ===============
Stock options entitled to purchase 1,976,226 and 2,283,011 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three months ended September 30, 2001 and October 1, 2000,
respectively. Stock warrants entitled to purchase 400,000 and 650,000 shares of
Class A common stock were antidilutive and not included in the earnings per
share calculation for the three months ended September 30, 2001 and October 1,
2000, respectively. These shares could be dilutive in subsequent 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 September 30, 2001, the consolidated total of our recorded
liabilities for environmental matters was approximately $13.9 million, which
represented the estimated probable exposure for these matters. It is reasonably
possible that our total exposure for these matters could be approximately $18.1
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 months
ended September 30, 2001 and October 1, 2000, respectively.
9/30/01 10/1/00
-----------------------------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 147,090 $ 125,446
Aerospace Distribution Segment 17,983 22,921
-----------------------------------
TOTAL SALES $ 165,073 $ 148,367
-----------------------------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 14,866 $ 6,999
Aerospace Distribution Segment 454 1,287
Real Estate Operations Segment (a) 438 564
Corporate (5,008) (4,554)
-----------------------------------
TOTAL OPERATING INCOME (b) $ 10,750 $ 4,296
-----------------------------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
Aerospace Fasteners Segment $ 14,392 $ 6,439
Aerospace Distribution Segment 431 1,728
Real Estate Operations Segment (a) (229) (265)
Corporate (21,907) (16,915)
-----------------------------------
Total loss from continuing operations before taxes (b) $ (7,313) $ (9,013)
-----------------------------------
TOTAL ASSETS: 9/30/01 6/30/01
-----------------------------------
Aerospace Fasteners Segment $ 849,349 $ 844,693
Aerospace Distribution Segment 58,234 58,643
Real Estate Operations Segment 116,068 116,250
Corporate 177,778 190,279
-----------------------------------
TOTAL ASSETS $ 1,201,429 $ 1,209,865
-----------------------------------
(a) - Includes rental revenue of $1.7 million for both of the three months ended
September 30, 2001 and October 1, 2000. (b) - Includes goodwill amortization of
$3.1 million in the three months ended October 1, 2000.
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 quarter ended September
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
approximately $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 be
its new accounting basis. 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 months ended September 30, 2001 and October 1, 2000,
respectively:
9/30/01 10/01/00
------------------ ------------------
Reported net loss $ (3,599) $ (5,445)
Add back: Goodwill amortization - 3,134
------------------ ------------------
Adjusted net loss $ (3,599) $ (2,311)
------------------ ------------------
Basic and Diluted loss per share:
Reported net loss $ (0.14) $ (0.22)
Add back: Goodwill amortization - 0.13
------------------ ------------------
Adjusted net loss $ (0.14) $ (0.09)
------------------ ------------------
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. 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
FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------ -------------- --------------- -----------
Cash $ 520 $ 6,490 $ 7,325 $ - $ 14,335
Marketable securities 71 2,562 - - 2,633
Accounts Receivable (including intercompany), less
allowances 3,229 731,847 90,336 (695,916) 129,496
Inventory, net - 142,920 48,511 - 191,431
Prepaid and other current assets 288 22,295 6,176 36,355 65,114
------------- ------------ -------------- --------------- -----------
Total current assets 4,108 906,114 152,348 (659,561) 403,009
Investment in Subsidiaries 891,958 - - (891,958) -
Net fixed assets 502 108,445 37,914 - 146,861
Net assets held for sale - 13,618 - - 13,618
Investments in affiliates 93 3,654 - - 3,747
Goodwill - 386,037 32,418 - 418,455
Deferred loan costs 11,585 19 827 - 12,431
Prepaid pension assets - 65,156 - - 65,156
Real estate investment - - 110,030 - 110,030
Long-term investments 969 3,767 3,436 (488) 7,684
Other assets 18,008 1,537 893 - 20,438
------------- ------------ -------------- --------------- -----------
Total assets $ 927,223 $ 1,488,347 $ 337,866 $ (1,552,007) $ 1,201,429
============= ============ ============== =============== ===========
Bank notes payable & current maturities of debt $ 2,250 $ 1,651 $ 21,130 $ - $ 25,031
Accounts payable (including intercompany) 20 893,293 229,870 (1,070,102) 53,081
Other accrued expenses (23,531) 57,476 31,202 36,355 101,502
------------- ------------ -------------- --------------- -----------
Total current liabilities (21,261) 952,420 282,202 (1,033,747) 179,614
Long-term debt, less current maturities 422,741 4,027 33,761 - 460,529
FMV of Interest Rate Contract 11,671 - - - 11,671
Other long-term liabilities 407 20,995 4,063 - 25,465
Noncurrent income taxes 111,335 (587) - - 110,748
Retiree health care liabilities - 38,135 4,470 - 42,605
------------- ------------ -------------- --------------- -----------
Total liabilities 524,893 1,014,990 324,496 (1,033,747) 830,632
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 243,187 17,448 (61,847) 44,400 243,188
Cumulative other comprehensive income (468) (20,959) (8,749) - (30,176)
Treasury stock, at cost (76,075) - - (488) (76,563)
------------ ------------ -------------- --------------- ------------
Total stockholders' equity 402,330 473,357 13,370 (518,260) 370,797
------------- ------------ -------------- --------------- ------------
Total liabilities & stockholders' equity $ 927,223 $ 1,488,347 $ 337,866 $ (1,552,007) $ 1,201,429
============= ============ ============== =============== ===========
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------ -------------- --------------- -----------
Net Sales $ - 128,954 42,367 (4,515) 166,806
Costs and expenses
Cost of sales - 99,620 30,533 (4,515) 125,638
Selling, general & administrative 1,996 22,761 5,661 - 30,418
Amortization of intangibles - - 1 - 1
------------- ------------ -------------- --------------- -----------
1,996 122,381 36,195 (4,515) 156,057
------------- ------------ -------------- --------------- -----------
Operating income (loss) (1,996) 6,573 6,172 - 10,749
Net interest expense (including intercompany) (4,390) 15,441 1,376 - 12,427
Investment (income) loss, net - 386 - - 386
Intercompany dividends - 27 - (27) -
FMV Adj of Interest Rate Contract 5,249 - - - 5,249
------------- ------------ -------------- --------------- -----------
Earnings (loss) before taxes (2,855) (9,281) 4,796 27 (7,313)
Income tax (provision) benefit 1,432 4,653 (2,405) 3,680
Equity in earnings of affiliates and subsidiaries (2,177) 51 - 2,159 33
------------- ------------ -------------- --------------- -----------
Net earnings (loss) $ (3,600) (4,577) 2,391 2,186 (3,600)
============= ============ ============== =============== ===========
CONSOLIDATING CASH FLOWS
FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------ -------------- --------------- -----------
Cash Flows from Operating Activities:
Net earnings (loss) $ (3,600) (4,577) 2,391 2,186 (3,600)
Depreciation & amortization 12 4,955 2,544 - 7,511
Amortization of deferred loan fees 377 1 125 - 503
Unrealized holding (gain) loss on derivatives 5,249 - - - 5,249
Undistributed (distributed) earnings of affiliates 18 (51) - - (33)
Change in assets and liabilities 6,610 (4,456) (2,335) (2,186) (2,367)
------------- ------------ -------------- --------------- -----------
Net cash (used for) provided by operating activities 8,666 (4,128) 2,725 - 7,263
Cash Flows from Investing Activities:
Proceeds received from (used for):
Purchase of PP&E (14) (3,029) (1,192) - (4,235)
Investment securities, net - (53) - - (53)
Sale of PP&E - 3,693 17 - 3,710
Equity investment in affiliates (394) (394)
Change in real estate investment - - (211) - (211)
Change in net assets held for sale - 4,358 - - 4,358
------------- ------------ -------------- --------------- -----------
Net cash (used for) provided by investing activities (408) 4,969 (1,386) - 3,175
Cash Flows from Financing Activities:
Proceeds from issuance of debt 22,700 12,299 897 - 35,896
Debt repayments, net (31,000) (13,196) (3,198) - (47,394)
------------- ------------ -------------- --------------- -----------
Net cash (used for) provided by financing activities (8,300) (897) (2,301) - (11,498)
Effect of exchange rate changes on cash - - 444 - 444
------------- ------------ -------------- --------------- -----------
Net change in cash (42) (56) (518) - (616)
Cash, beginning of the year 562 6,546 7,843 - 14,951
------------- ------------ -------------- --------------- -----------
Cash, end of the year $ 520 $ 6,490 $ 7,325 $ - $ 14,335
============= ============ ============== =============== ===========
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
Net noncurrent assets of discontinued operations - - - - -
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 expenses (54,398) 57,839 30,590 61,254 95,285
Net current liabilities of discontinued operations - - - - -
------------- ------------ -------------- --------------- -----------
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 THREE MONTHS ENDED OCTOBER 1, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------ -------------- --------------- -----------
Net Sales $ - $ 116,058 $ 34,146 $ (1,837) $ 148,367
Cost of sales - 90,824 24,604 (1,837) 113,591
Selling, general & administrative 1,363 22,250 3,733 - 27,346
Amortization of goodwill 202 2,683 249 - 3,134
------------- ------------ -------------- --------------- -----------
1,565 115,757 28,586 (1,837) 144,071
------------- ------------ -------------- --------------- -----------
Operating income (loss) (1,565) 301 5,560 - 4,296
Net interest expense (including intercompany) (2,460) 12,388 2,531 - 12,459
Investment (income) loss, net - 380 - - 380
Fair market value adjustment of Interest Rate Contract 470 - - - 470
------------- ------------ -------------- --------------- -----------
Earnings (loss) before taxes 425 (12,467) 3,029 - (9,013)
Income tax (provision) benefit (169) 4,944 (1,201) - 3,574
Equity in earnings of affiliates and subsidiaries (5,701) (6) - 5,701 (6)
------------- ------------ -------------- --------------- -----------
Net earnings (loss) $ (5,445) $ (7,529) $ 1,828 $ 5,701 $ (5,445)
============= ============ ============== =============== ===========
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- ------------- -------------- --------------- ------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (5,445) $ (7,529) $ 1,828 $ 5,701 $ (5,445)
Depreciation & amortization 232 8,124 2,594 - 10,950
Amortization of deferred loan fees 343 2 111 - 456
Undistributed (distributed) earnings of affiliates - 9 - - 9
Change in assets and liabilities (16,244) (714) (8,416) (5,701) (31,075)
------------- ------------- -------------- --------------- ------------
Net cash (used for) provided by operating activities (21,114) (108) (3,883) - (25,105)
Cash Flows from Investing Activities:
Proceeds received from (used for):
Purchase of PP&E (30) (3,034) (797) - (3,861)
Investment securities, net - 4,759 - - 4,759
Change in real estate investment - - (1,601) - (1,601)
Change in net assets held for sale - 2,211 - - 2,211
------------- ------------- -------------- --------------- ------------
Net cash (used for) provided by investing activities (30) 3,936 (2,398) - 1,508
Cash Flows from Financing Activities:
Proceeds from issuance of debt 21,082 14 2,357 - 23,453
Debt repayments, net - (594) (2,014) - (2,608)
Issuance of Class A common stock 194 - - - 194
------------- ------------- -------------- --------------- ------------
Net cash (used for) provided by financing activities 21,276 (580) 343 - 21,039
Effect of exchange rate changes on cash - - (416) - (416)
------------- ------------- -------------- --------------- ------------
Net change in cash 132 3,248 (6,354) - (2,974)
Cash, beginning of the year 35 23,06 3 12,692 - 35,790
------------- ------------- -------------- --------------- ------------
Cash, end of the year $ 167 $ 26,311 $ 6,338 $ - $ 32,816
============= ============= ============== =============== ============
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 distribution 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 certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our financial
condition, results of operation and business. These statements relate to
analyses and other information, which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions. These forward-looking statements involve risks and
uncertainties, including current trend information, projections for deliveries,
backlog and other trend 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, including recent intense price
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; military actions in Afghanistan; 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 Annual 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 months ended September 30, 2001 and October 1, 2000, respectively.
9/30/01 10/1/00
----------------------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 147,090 $ 125,446
Aerospace Distribution Segment 17,983 22,921
----------------------------
TOTAL SALES $ 165,073 $ 148,367
----------------------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 14,866 $ 6,999
Aerospace Distribution Segment 454 1,287
Real Estate Operations Segment (a) 438 564
Corporate (5,008) (4,554)
----------------------------
TOTAL OPERATING INCOME (b) $ 10,750 $ 4,296
----------------------------
(a) - Includes rental revenue of $1.7 million for both of the three months ended
September 30, 2001 and October 1, 2000. (b) - The three months ended October 1,
2000 includes goodwill amortization of $2.8 million in the aerospace fastener
segment, $0.1 million in the aerospace distribution segment and $0.2 million at
corporate.
Net sales of $165.1 million in the first quarter of fiscal 2002 increased
by $16.7 million, or 11.3%, compared to sales of $148.4 million in the first
quarter of fiscal 2001. Sales in the first quarter of fiscal 2002 reflected
strong growth at our aerospace fasteners segment and were offset partially by
approximately $1.3 million due to the negative foreign currency impact on our
European operations from the U.S. dollar strengthening against the Euro on a
period-to-period basis. Results for the three months ended October 1, 2000,
included revenue of $3.2 million from an aerospace distribution segment
operation which was shut down in June 2001.
Gross margin as a percentage of sales was 24.6% and 23.4% in the first
quarter of fiscal 2002 and fiscal 2001, respectively. The gross margin
improvement in the fiscal 2002 three-month period was attributable primarily to
the increase in sales and the related economies of scale.
Selling, general & administrative expense as a percentage of sales was
19.2% and 19.4% in the first quarter of fiscal 2002 and 2001, respectively. The
improvement in the fiscal 2002 three-month period was attributable primarily to
the increase in sales and the related economies of scale.
Rental revenue remained stable in the first three months of fiscal 2002,
compared to the first three months of fiscal 2001.
Other income increased $0.5 million in the first three months of fiscal
2002, compared to the first three months of fiscal 2001. The increase was due
primarily to $0.7 million of income recognized from the disposition of non-core
property during the three months ended September 30, 2001.
Operating income for the three months ended September 30, 2001, increased
by $6.5 million, or 150.2%, as compared to the same period of the prior year.
The results for the three months ended October 1, 2000, included $3.1 million of
goodwill amortization, prior to the implementation of a new accounting
pronouncement that eliminates goodwill amortization in the current quarter.
Changes in foreign currency resulted in a unfavorable effect of approximately
$0.2 million on operating income at our European operations in the first quarter
of fiscal 2002, as compared to the first quarter of fiscal 2001.
Net interest expense was $12.4 million in the first quarter of fiscal 2002
and first quarter of fiscal 2001. However, cash interest expense decreased by
$1.1 million in the first quarter of fiscal 2002, as compared to the first
quarter of fiscal 2001, due primarily to lower interest rates.
We recognized an investment loss of $0.4 million in the first three months
of fiscal 2002, due primarily to the fair market value change of trading
securities, and $0.4 million in the first three months of fiscal 2001, due
primarily to recognizing realized losses from investments we liquidated.
The fair market value of a ten-year $100 million interest rate contract
decreased by $5.2 million in the first quarter of fiscal 2002 and $0.5 million
in the first quarter of 2001.
An income tax benefit of $3.7 million in the first three months of fiscal
2002 represented a 50.3% 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 $4.4 million of earnings generated by our foreign operations that
utilize net operating loss carry forwards. An income tax benefit of $3.6 million
in the first three months of fiscal 2001 represented a 39.7% effective tax rate
on pre-tax losses from continuing operations. The tax benefit approximated the
statutory rate.
Comprehensive income includes foreign currency translation adjustments,
unrealized holding changes in the fair market value of available-for-sale
investment securities, and the cumulative effect of adoption of SFAS 133,
Accounting for Derivatives. For the three months ended September 30, 2001, the
foreign currency translation adjustment resulted in a $12.7 million increase,
and was offset partially by a $0.2 million decrease 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 $21.6 million, or
17.3%, in the first quarter of fiscal 2002, as compared to the first quarter of
fiscal 2001. The improvement in the current quarter reflected approximately
$22.9 million from strong internal growth. Current quarter sales at our European
operations were negatively affected by approximately $1.3 million due to the
strengthening of the U.S. Dollar against the Euro. Backlog increased by $3.9
million in the first quarter to $222.3 million at September 30, 2001, and
included approximately $3.9 from the strengthening of the Euro against the U.S.
dollar during the three-month period ended September 30, 2001. Our book-to-bill
ratio for the first quarter was 98.7%, reflecting the stronger level of sales.
Operating income was $14.9 million in the first quarter of fiscal 2002, an
increase of $7.9 million as compared to the first quarter of fiscal 2001. The
improvement in the first three months of fiscal 2002 was due primarily to the
increase in sales and higher gross margins, and $0.7 million from the gain
recognized on the sale of non-core property. On July 1, 2001, we adopted a new
accounting pronouncement that does not require us to amortize goodwill. Goodwill
amortization of $2.8 million was recorded in the first three months of fiscal
2001. Operating expenses continue to be monitored as management attempts to
efficiently reduce operating costs.
We are cautiously optimistic that the overall demand for aerospace
fasteners in fiscal 2002 will not decrease significantly despite the recently
announced reductions in commercial aircraft build rates. Projected aircraft
build rates have been adversely affected by decreased worldwide demand for
travel following the September 11, 2001, terrorist attacks that temporarily
halted domestic travel and hampered worldwide travel. The tragic terrorists'
attacks may continue to have a significant impact on the commercial aviation
industry, raising concerns about our ability to maintain a strong order backlog
and level of new orders. A significant amount of cancellations of orders for
aircraft from original equipment manufacturers or reductions in future orders
could adversely impact our results. We continue to monitor events closely and
any significant decline in future bookings will require us to pursue additional
cost reduction initiatives to protect our businesses.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $4.9 million, in
the first quarter of fiscal 2002, compared to the first quarter of fiscal 2001.
Results from the prior three months ended October 1, 2000, included revenue of
$3.2 million from an operation which was shut down in June 2001. Sales in the
three months ended September 30, 2001, were adversely affected due to the
terrorist attacks on September 11, 2001 and have been sluggish since then.
Operating income decreased by $0.8 million in the first quarter of fiscal
2002, compared to the first quarter in fiscal 2001. The results for the three
months ended September 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 for both the three months ended September 30, 2001 and
October 1, 2000. Operating income decreased slightly in the three months ended
September 30, 2001, as compared to the three months ended October 1, 2000. As of
September 30, 2001, we have leased approximately 74% of the developed shopping
center.
Corporate
The operating loss increased by $0.5 million in the first three months of fiscal
2002, compared to the first three months of fiscal 2001 due primarily to an
increase in legal expenses in the first three months of fiscal 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of September 30, 2001 and June 30, 2001 amounted to
$856.4 million and $858.9 million, respectively. The three-month changes in
capitalization included a $11.5 million reduction in debt reflecting cash
provided by our operations and the sale of non-core assets, offset by an
increase in equity of $8.9 million which was due primarily to a $12.5 million
favorable increase in foreign currency translation adjustments and our reported
net loss.
We maintain a portfolio of investments classified primarily as
available-for-sale securities, which had a fair market value of $10.3 million at
September 30, 2001. The market value of these investments decreased by $0.3
million in the three months ended September 30, 2001. There is risk associated
with market fluctuations inherent in stock investments, and because our
portfolio is not diversified, large swings in its value may occur.
Net cash provided by operating activities for the three months ended
September 30, 2001 was $7.3 million and net cash used for operating activities
for the three months ended October 1, 2000 was $25.1 million. The primary source
of cash from operating activities in the first three months of fiscal 2002
included $9.7 million of earnings after deducting non-cash expenses of $7.5
million for depreciation, $5.2 million from the reduction in the fair market
value of an interest rate contract, and $0.5 million from the amortization of
deferred loan fees. The primary use of cash for operating activities in the
first three months of fiscal 2001 was a $22.9 million decrease in accounts
payable and other accrued liabilities, offset partially by a $14.3 million
decrease in accounts receivable.
Net cash provided by investing activities was $3.1 million and $1.5 for the
three months ended September 30, 2001 and October 1, 2000, respectively. In the
first three months of fiscal 2002, the primary source of cash was $8.1 million
provided from the dispositions of non-core real estate and net assets held for
sale, partially offset by $4.2 million of capital expenditures. The primary
source of cash from investing activities in the first three months of fiscal
2001 was $7.0 million of net proceeds received from the sale of investments and
dispositions of non-core real estate, offset partially by capital expenditures
of $4.2 million and investments of $1.0 million in our shopping center.
Net cash used for financing activities for the three months ended September
30, 2001, was $11.5 million. Net cash provided by financing activities for the
three months ended October 1, 2000, was $21.0 million. Cash used for financing
activities in the first three months of fiscal 2002 included a net debt
reduction of $11.5 million. Cash provided by financing activities in the first
quarter of fiscal 2001, included $20.8 million of net proceeds from the issuance
of additional debt.
Our principal cash requirements include debt service, capital expenditures,
and 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 asset
sales 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 September 30, 2001, the interest
coverage ratio was 2.11, 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 three months ended September
30, 2001, capital expenditures were $4.2 million. Except for non-guarantor
assets, 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 September 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 September
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
approximately $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 be
its new accounting basis. 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 $5.2 million and $0.5 million, in the three months ended September 30, 2001
and October 1, 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. In fiscal 2001, we accounted 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 September 30, 2001 $4 $(11,671)
(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 6 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
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. 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
September 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/ MICHAEL T. ALCOX
--------------------
Michael T. Alcox
Senior Vice President and
Chief Financial Officer
Date: November 14, 2001