--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 30, 2003 Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State of incorporation or organization) (I.R.S. Employer Identification No.)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Title of Class March 30, 2003
Class A Common Stock, $0.10 Par Value 22,560,489
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 MARCH 30, 2003
Page
PART I.FINANCIAL INFORMATION
Item 1. Independent Accountants' Review Report............... 3
Condensed Consolidated Balance Sheets as of
March 30, 2003 (Unaudited) and June 30, 2002......... 4
Condensed Consolidated Statements of Earnings (Unaudited)
for the Three and Nine Months Ended March 30, 2003 and
March 31, 2002....................................... 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended March 30, 2003 and March 31, 2002 8
Notes to Condensed Consolidated Financial Statements
(Unaudited).......................................... 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................... 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk 27
Item 4. Controls and Procedures.............................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 29
Item 2. Changes in Securities and Use of Proceeds............ 29
Item 5. Other Information.................................... 29
Item 6. Exhibits and Reports on Form 8-K..................... 29
All references in this Quarterly Report on Form 10-Q to the terms "we,"
"our," "us," the "Company" and "Fairchild" refer to The Fairchild Corporation
and its subsidiaries. All references to "fiscal" in connection with a year shall
mean the 12 months ended June 30.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Accountants' Review Report
The Board of Directors
The Fairchild Corporation
We have reviewed the accompanying condensed consolidated balance sheet of The
Fairchild Corporation and consolidated subsidiaries as of March 30, 2003, and
the related condensed consolidated statements of income for the three-month and
nine-month periods ended March 30, 2003 and March 31, 2002, and the condensed
consolidated statements of cash flows for the nine-month periods ended March 30,
2003 and March 31, 2002. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of The Fairchild
Corporation as of June 30, 2002, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated March 28, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of June 30, 2002, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
........./s/ Ernst & Young LLP
May 9, 2003
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 30, 2003 (Unaudited) and June 30, 2002
(In thousands)
ASSETS
3/30/03 6/30/02
-----------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 35,672 $ 14,810
Short-term investments 42,103 966
Accounts receivable, less allowances of $4,642 and $2,577 13,266 12,232
Inventories:
Finished goods 22,110 20,382
Work-in-process 828 1,555
Raw materials 1,169 1,311
-----------------------------------
24,107 23,248
Net current assets of discontinued operations 817 286,769
Prepaid expenses and other current assets 4,555 3,891
-----------------------------------
Total Current Assets 120,520 341,916
-----------------------------------
Property, plant and equipment, net of accumulated
depreciation of $26,136 and $22,228 125,406 119,757
Net noncurrent assets held for sale 8,611 9,928
Net noncurrent assets of discontinued operations 125 384,145
Goodwill 17,438 17,438
Investments and advances, affiliated companies 3,150 3,261
Prepaid pension assets 59,684 64,693
Deferred loan costs 125 10,925
Long-term investments 55,939 5,360
Notes receivable 4,553 11,275
Deferred tax assets - 16,611
Other assets 9,615 6,809
-----------------------------------
TOTAL ASSETS $ 405,166 $ 992,118
-----------------------------------
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 30, 2003 (Unaudited) and June 30, 2002
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
3/30/03 6/30/02
-----------------------------------
CURRENT LIABILITIES:
Bank notes payable and current maturities of long-term debt $ 642 $ 53,879
Accounts payable 7,372 9,456
Accrued liabilities:
Salaries, wages and commissions 15,009 4,625
Employee benefit plan costs 2,159 2,025
Insurance 12,689 10,465
Interest 624 6,365
Other accrued liabilities 19,008 21,294
Current deferred income taxes - 702
Current liabilities of discontinued operations 1,033 69,059
-----------------------------------
Total Current Liabilities 58,536 177,870
-----------------------------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 2,894 437,917
Fair value of interest rate contract 16,737 10,989
Other long-term liabilities 12,450 13,569
Pension liabilities 50,514 -
Retiree health care liabilities 27,165 28,011
Noncurrent deferred income taxes 3,269 -
Noncurrent income taxes 53,629 53,791
Noncurrent liabilities of discontinued operations - 39,749
-----------------------------------
TOTAL LIABILITIES 225,194 761,896
-----------------------------------
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; 40,000 shares authorized,
30,374 (30,354 in June) shares issued and 22,560 (22,540 in June)
shares outstanding; entitled to one vote per share 3,037 3,035
Class B common stock, $0.10 par value; 20,000 shares authorized,
2,622 shares issued and outstanding; entitled to ten votes per share 262 262
Paid-in capital 232,735 232,797
Treasury stock, at cost, 7,814 shares of Class A common stock (76,460) (76,532)
Retained earnings 73,396 94,153
Notes due from stockholders (1,621) (1,831)
Cumulative other comprehensive loss (51,377) (21,662)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 179,972 230,222
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 405,166 $ 992,118
-----------------------------------
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS (Unaudited) For The Three (3) and Nine (9)
Months Ended March 30, 2003 and March 31, 2002
(In thousands, except per share data)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
REVENUE: 03/30/03 03/31/02 03/30/03 03/31/02
---------------------------- -----------------------------
Net sales $ 14,496 $ 19,640 $ 50,562 $ 58,653
Rental revenue 2,277 1,745 6,264 5,383
---------------------------- -----------------------------
16,773 21,385 56,826 64,036
COSTS AND EXPENSES:
Cost of goods sold 11,489 15,080 39,764 46,511
Cost of rental revenue 1,470 1,173 4,027 3,707
Selling, general & administrative 10,248 8,869 53,810 30,567
Other (income) expense, net (935) (504) (1,171) (5,045)
---------------------------- -----------------------------
22,272 24,618 96,430 75,740
OPERATING LOSS (5,499) (3,233) (39,604) (11,704)
Interest expense 2,982 12,354 34,106 37,014
Interest income (785) (1,043) (9,153) (3,371)
---------------------------- -----------------------------
Net interest expense 2,197 11,311 24,953 33,643
Investment income (loss) 118 30 600 (250)
Increase (decrease) in fair market value of interest rate contract 999 1,924 (5,748) (980)
---------------------------- -----------------------------
Loss from continuing operations before taxes (6,579) (12,590) (69,705) (46,577)
Income tax benefit (provision) (117) 5,411 1,299 16,008
Equity in loss of affiliates, net (178) (132) (259) (99)
---------------------------- -----------------------------
Loss from continuing operations (6,874) (7,311) (68,665) (30,668)
Earnings (loss) from discontinued operations, net (763) 7,658 7,826 28,769
Gain on disposal of discontinued operations, net 80 - 40,082 -
Cumulative effect of change in accounting for goodwill - - - (144,600)
---------------------------- -----------------------------
NET EARNINGS (LOSS) $ (7,557) $ 347 $ (20,757) $ (146,499)
---------------------------- -----------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (a) (215) (5,344) 17,302 4,023
Unrecognized actuarial loss on pensions - - (47,516) -
Unrealized holding changes on derivatives 222 15 47 48
Unrealized periodic holding changes on securities 420 (408) 452 (829)
---------------------------- -----------------------------
Other comprehensive income (loss) 427 (5,737) (29,715) 3,242
---------------------------- -----------------------------
COMPREHENSIVE LOSS $ (7,130) $ (5,390) $ (50,472) $ (143,257)
---------------------------- -----------------------------
(a) - In the nine months ended March 30, 2003, foreign currency translation
adjustments include the recognition of foreign currency losses as a result
of the sale of the fastener business.
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS (Unaudited) For The Three (3) and Nine (9)
Months Ended March 30, 2003 and March 31, 2002
(In thousands, except per share data)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: 03/30/03 03/31/02 03/30/03 03/31/02
---------------------------- -----------------------------
Loss from continuing operations $ (0.27) $ (0.29) $ (2.73) $ (1.22)
Earnings (loss) from discontinued operations, net (0.03) 0.30 0.31 1.15
Gain on disposal of discontinued operations, net - - 1.59 -
Cumulative effect of change in accounting for goodwill - - - (5.76)
---------------------------- -----------------------------
NET EARNINGS (LOSS) $ (0.30) $ 0.01 $ (0.83) $ (5.83)
---------------------------- -----------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (a) $ (0.01) $ (0.21) $ 0.69 $ 0.16
Unrecognized actuarial loss on pensions - - (1.89) -
Unrealized holding changes on derivatives 0.01 - - -
Unrealized periodic holding changes on securities 0.02 (0.02) 0.02 (0.03)
---------------------------- -----------------------------
Other comprehensive income (loss) 0.02 (0.23) (1.18) 0.13
---------------------------- -----------------------------
COMPREHENSIVE LOSS $ (0.28) $ (0.22) $ (2.01) $ (5.70)
---------------------------- -----------------------------
Weighted average shares outstanding:
Basic 25,169 25,158 25,165 25,153
---------------------------- -----------------------------
Diluted 25,169 25,158 25,165 25,153
---------------------------- -----------------------------
(a) - In the nine months ended March 30, 2003, foreign currency translation
adjustments include the recognition of foreign currency losses as a result
of the sale of the fastener business.
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Nine (9) Months Ended March 30, 2003 and March 31, 2002
(In thousands)
-----------------------------------
3/30/03 3/31/02
-----------------------------------
Cash flows from operating activities:
Net loss $ (20,757) $ (146,499)
Depreciation and amortization 4,053 3,819
Amortization of deferred loan fees 11,008 1,543
Unrealized holding loss on interest rate contract 5,748 980
Gain on disposal of discontinued operations, net (40,082) -
Undistributed equity in loss of affiliates, net 259 99
Net (gain) loss on sale of property, plant, and equipment (764) 38
Paid-in kind interest income (7,530) (367)
Cumulative effect of change in accounting for goodwill - 144,600
Loss (gain) on sale of investments (558) 599
Change in trading securities (41,238) 2,120
Change in operating assets and liabilities 5,956 (5,152)
Non-cash charges and working capital changes of discontinued operations (20,386) 10,031
-----------------------------------
Net cash provided by (used for) operating activities (104,291) 11,811
Cash flows from investing activities:
Purchase of property, plant and equipment (7,791) (1,264)
Net proceeds received from the sale of property, plant, and equipment - 296
Net cash used for investment securities, net (49,226) (600)
Net proceeds received from the sale of discontinued operations 657,050 -
Equity investment in affiliates (336) (414)
Changes in net assets held for sale 2,012 4,023
Changes in notes receivable 14,252 (4,950)
Investing activities of discontinued operations (2,817) (4,786)
-----------------------------------
Net cash provided by (used for) investing activities 613,144 (7,695)
Cash flows from financing activities:
Proceeds from issuance of debt 71,385 94,286
Debt repayments (559,645) (99,668)
Issuance of Class A common stock 13 -
Loan repayments from stockholders 210 -
-----------------------------------
Net cash used for financing activities (488,037) (5,382)
Effect of exchange rate changes on cash 46 180
-----------------------------------
Net change in cash and cash equivalents 20,862 (1,086)
Cash and cash equivalents, beginning of the year 14,810 13,767
-----------------------------------
Cash and cash equivalents, end of the period $ 35,672 $ 12,681
-----------------------------------
The accompanying Notes to Condensed 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 condensed consolidated balance sheet as of March 30, 2003, and the
condensed consolidated statements of earnings and cash flows for the periods
ended March 30, 2003 and March 31, 2002 have been prepared by us, without audit.
In the opinion of management, all adjustments, necessary to present fairly the
financial position, results of operations and cash flows at March 30, 2003, and
for all periods presented, have been made. These adjustments include
reclassification adjustments to reflect the sale of the fastener business and
APS as discontinued operations. The balance sheet at June 30, 2002 was condensed
from the audited financial statements as of that date.
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the Securities and Exchange Commission's instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in complete financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted. These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in our 2002
Annual Report on Form 10-K, as amended, and restated on Form 8-K. The results of
operations for the period ended March 30, 2003 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. DISCONTINUED OPERATIONS
Fastener Business
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc. for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
In May 2003, we tentatively agreed upon the post-closing adjustment with
Alcoa, based upon the net working capital of our fastener business on December
3, 2002, compared with its net working capital at March 31, 2002. As a result,
we expect to receive $0.1 million from Alcoa.
In connection with the sale, we have deposited with an escrow agent $25
million to secure indemnification obligations we may have to Alcoa. The escrow
period is five years, but funds may be held longer if claims are asserted and
unresolved. The escrow is classified as long-term investments on our balance
sheet. In addition, for a period of five years after the closing, we are
required to maintain our corporate existence, take no action to cause our own
liquidation or dissolution, and take no action to declare or pay any dividends
on our common stock.
The sale of the fastener business has reduced our dependence upon the
aerospace industry. Additionally, the sale has allowed us to eliminate
substantially all of our debt. We used a portion of the proceeds from the sale
to repay our bank debt and to acquire by tender all of our outstanding $225
million 10.75% senior subordinated notes due in April 2009, leaving us with only
$3.5 million of debt outstanding on March 30, 2003. We plan to use the remaining
proceeds from the sale to fund acquisitions.
In the nine months ended March 30, 2003, we recorded a $40.1 million gain
on the disposal of discontinued operations, net of $10.5 million of taxes, as a
result of the sale of the fastener business.
APS
In February 2003, our Board of Directors adopted a formal plan for the sale
of APS, a small operation in our aerospace manufacturing segment, which has been
unprofitable. Based on our formal plan, APS is available for sale immediately,
and we believe that it is probable that we can consummate a sale of APS by
December 2003. Accordingly, the results of APS are being reported as a
discontinued operation.
The results of the fastener business and APS are recorded as earnings from
discontinued operations, the components of which are as follows:
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
03/30/03 03/31/02 03/30/03 (a) 03/31/02
-------------------------------- -------------------------------
Net sales $ 95 $ 133,592 $ 206,659 $ 417,487
Cost of goods sold 314 100,515 156,567 312,816
-------------------------------- -------------------------------
Gross margin (219) 33,077 50,092 104,671
Selling, general & administrative expense 524 23,237 44,193 67,537
Other (income) expense, net - (733) 1,201 (1,136)
-------------------------------- -------------------------------
Operating income (loss) (743) 10,573 4,698 38,270
Net interest expense (income) (5) 425 373 1,090
-------------------------------- -------------------------------
Earnings (loss) from discontinued operations before taxes (738) 10,148 4,325 37,180
Income tax benefit (provision) (25) (2,490) 3,501 (8,411)
-------------------------------- -------------------------------
Net earnings (loss) from discontinued operations $ (763) $ 7,658 $ 7,826 $ 28,769
-------------------------------- -------------------------------
(a) - The results presented for the nine months ended March 30, 2003, reflect
the activity of the fastener business through its sale on December 3, 2002.
The assets and liabilities of the fastener business sold to Alcoa and APS
were reported as assets and liabilities of discontinued operations at March 30,
2003 and June 30, 2002, and were as follows:
March 30, June 30,
2003 2002
-----------------------------------
Current assets of discontinued operations:
Short-term investments $ - $ 87
Accounts receivable 592 98,977
Inventories 225 164,297
Deferred taxes - 11,723
Prepaid expenses and other current assets - 11,685
-----------------------------------
$ 817 $286,769
-----------------------------------
Noncurrent assets of discontinued operations:
Property, plant and equipment $ 71 $ 304,044
Accumulated depreciation (71) (178,318)
Goodwill - 257,111
Notes receivable - 223
Other assets 125 1,085
-----------------------------------
$ 125 $ 384,145
-----------------------------------
Current liabilities of discontinued operations:
Accounts payable (85) (30,470)
Accrued liabilities (948) (38,589)
-----------------------------------
$(1,033) $(69,059)
-----------------------------------
Noncurrent liabilities of discontinued operations:
Retiree health care liabilities $ - (14,640)
Noncurrent deferred income taxes - (20,888)
Other long-term liabilities - (4,221)
-----------------------------------
$ - $(39,749)
-----------------------------------
Total net assets (liabilities) of discontinued operations $ (91) $ 562,106
-----------------------------------
3. CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents and investments at March 30, 2003 consist primarily of
investments in United States government securities and investment grade
corporate bonds, which are recorded at market value. Restricted cash equivalent
investments are classified as short-term or long-term investments depending upon
the length of the restriction period. Investments in common stock of public
corporations are recorded at fair market value and classified as trading
securities or available-for-sale securities. Other short-term investments and
long-term investments do not have readily determinable fair values and consist
primarily of investments in preferred and common shares of private companies and
limited partnerships. A summary of the cash equivalents and investments held by
us follows:
March 30, 2003 June 30, 2002
------------------------------- -------------------------------
Aggregate Aggregate
------------------------------- -------------------------------
Fair Cost Fair Cost
Value Basis Value Basis
------------------------------- -------------------------------
Cash and cash equivalents:
U.S. government securities $ 34,699 $ 34,699 $ - $ -
Money market and other cash funds 973 973 14,810 14,810
------------------------------- -------------------------------
Total cash and cash equivalents $ 35,672 $ 35,672 $ 14,810 $ 14,810
------------------------------- -------------------------------
Short-term investments:
U.S. government securities - restricted $ 7,605 $ 7,605 $ - $ -
Money market funds - restricted 6 6 472 472
Trading securities - corporate bonds 34,048 34,078 - -
Trading securities - equity securities 331 601 355 574
Available-for-sale equity securities 58 200 84 200
Other investments 55 55 55 55
------------------------------- -------------------------------
Total short-term investments $ 42,103 $ 42,545 $ 966 $ 1,301
------------------------------- -------------------------------
Long-term investments:
U.S. government securities - restricted $ 21,015 $ 21,015 $ - $ -
Money market funds - restricted 220 220 - -
Corporate bonds - restricted 22,812 23,095 - -
Available-for-sale equity securities 7,606 10,110 1,074 3,329
Other investments 4,286 4,286 4,286 4,286
------------------------------- -------------------------------
Total long-term investments $ 55,939 $ 58,726 $ 5,360 $ 7,615
------------------------------- -------------------------------
------------------------------- -------------------------------
Total cash equivalents and investments $ 133,714 $ 136,943 $ 21,137 $ 23,727
------------------------------- -------------------------------
On March 30, 2003 and June 30, 2002, we had restricted investments of
$51,658 and $472, respectively, all of which are maintained as collateral for
certain debt facilities, our interest rate contract and escrow arrangements. The
restricted funds are invested in money market funds, U.S. government securities,
or grade AAA or higher corporate bonds.
4. PENSIONS
The sale of our fastener business on December 3, 2002 was considered a
"significant event" under US generally accepted accounting principles. As such,
we were required to re-measure our pension obligations at that date, in addition
to measuring any gain or loss resulting from certain actions taken as a result
of the sale of the fastener business.
Several plan assumptions were changed during the remeasurement of our
pension plan on December 3, 2002. The discount rate was decreased from 7.125% to
6.75% reflecting the drop in bond yields since June 30, 2002. The return on plan
assets was reduced from 9.0% to 8.5% to reflect lower long-term expected return
on plan assets. To recognize mortality improvements, the mortality assumption
was changed from the 1983 Group Annuity Mortality table to the 1994 Group
Annuity Mortality table. The assumed form of payment for our remaining employees
was changed from life annuity to lump sum, to reflect actual experience.
In connection with the agreement under which we sold our fastener business,
we extended vesting of pension benefits to United States fastener employees who
were not already vested. Generally accepted accounting principles in the United
States require us to recognize immediately the costs for the enhanced
termination benefits related to this curtailment event. The pre-tax expense of
this one-time curtailment accounting loss was $8.3 million, which was included
as a partial offset to the net gain on the disposal of discontinued operations.
All United States fastener employees transferring to Alcoa are being
treated by us as having been terminated from our employment, and as such, were
eligible to request immediate distribution of pension benefits in the form of
lump sums. Almost all have done so. In accordance with generally accepted
accounting principles, this caused us to record a one-time, pre-tax settlement
accounting loss of $17.5 million, which was included as a partial offset to the
net gain on disposal of discontinued operations.
We have reviewed our pension plan's funded position to determine if it is
necessary to reflect a pension liability and recognize a reduction in equity. On
December 3, 2002, the accumulated benefit obligation of the pension plan
exceeded the fair value of the plan assets by $17.5 million. Under generally
accepted accounting principles, this caused us to record an additional minimum
pension liability of $50.5 million, and required the recognition of a $47.5
million non-cash reduction to our stockholders' equity. These amounts may change
in the future as the pension plan assets change in value and assumptions change.
Should, in the future, our pension plan's accumulated benefit obligations be
less than the fair value of plan assets, the additional minimum pension
liability and corresponding equity reduction will be reversed.
During the nine months ended March 30, 2003, we contributed $7.4 million of
cash to fund our pension plan in advance of required contributions. Based upon
our actuary's current assumptions and projections, we do not expect additional
cash contributions to the pension plan to be required until 2008.
5. NOTES PAYABLE AND LONG-TERM DEBT
In connection with the sale of the fastener business, we repaid our bank
credit agreement in the United States, all of the outstanding $225 million
senior subordinated notes and our $30,750 term loan agreement. The remaining
$9.9 million of deferred loan fees associated with the bank credit agreement and
senior subordinated notes were expensed as interest expense during the nine
months ended March 30, 2003. At March 30, 2003 and June 30, 2002, notes payable
and long-term debt consisted of the following:
3/30/03 6/30/02
-----------------------------
Short-term notes payable $ 1 $ 18,974
-----------------------------
Bank credit agreement $ - $ 209,450
103/4% Senior subordinated notes due 2009 - 225,000
$30,750 term loan agreement - 30,750
Capital lease obligations 104 607
Other notes payable, collateralized by property, plant and equipment 3,431 7,015
-----------------------------
3,535 472,822
Less: current maturities of long-term debt (641) (34,905)
-----------------------------
Net long-term debt $ 2,894 $ 437,917
-----------------------------
Total debt $ 3,536 $ 491,796
-----------------------------
6. EQUITY SECURITIES
We had 22,560,489 shares of Class A common stock and 2,621,502 shares of
Class B common stock outstanding at March 30, 2003. Class A common stock is
traded on both the New York and Pacific Stock Exchanges. There is no public
market for the Class B common stock. The shares of Class A common stock are
entitled to one vote per share and cannot be exchanged for shares of Class B
common stock. The shares of Class B common stock are entitled to ten votes per
share and can be exchanged, at any time, for shares of Class A common stock on a
share-for-share basis. During the nine months ended March 30, 2003, we issued
4,586 shares of Class A common stock as a result of the exercise of stock
options and issued 15,882 shares of Class A common stock as a result of the pay
out of 15,882 deferred compensation units pursuant to our stock option deferral
plan.
7. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
3/30/03 3/31/02 3/30/03 3/31/02
-------------- -------------- -------------- --------------
Basic earnings per share:
Loss from continuing operations $ (6,874) $ (7,311) $ (68,665) $ (30,668)
-------------- -------------- -------------- --------------
Weighted average common shares outstanding 25,169 25,158 25,165 25,153
-------------- -------------- -------------- --------------
Basic loss from continuing operations per share $ (0.27) $ (0.29) $ (2.73) $ (1.22)
-------------- -------------- -------------- --------------
Diluted earnings per share:
Loss from continuing operations $ (6,874) $ (7,311) $ (68,665) $ (30,668)
-------------- -------------- -------------- --------------
Weighted average common shares outstanding 25,169 25,158 25,165 25,153
Options antidilutive antidilutive antidilutive antidilutive
Warrants N/A antidilutive N/A antidilutive
-------------- -------------- -------------- --------------
Total shares outstanding 25,169 25,158 25,165 25,153
-------------- -------------- -------------- --------------
Diluted loss from continuing operations per share $ (0.27) $ (0.29) $ (2.73) $ (1.22)
-------------- -------------- -------------- --------------
Stock options entitled to purchase 1,990,521 and 1,952,543 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three and nine months ended March 30, 2003, respectively.
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 and nine months ended March 31, 2002, respectively.
Stock warrants entitled to purchase 400,000 shares of Class A common stock were
antidilutive and not included in the earnings per share calculation for the
three and nine months ended March 31, 2002. The stock warrants expired during
fiscal 2002. The stock options could be dilutive in future periods.
8. STOCK OPTIONS
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Statement 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. Previous to Statement 148, the disclosure was required only in
annual financial statements. We adopted this standard for our quarter ended
March 30, 2003.
We are currently accounting for stock options using the intrinsic value
method and are applying APB Opinion No. 25. Accordingly, no compensation cost
has been recognized for the granting of stock options to our employees in the
periods ended March 30, 2003 and March 31, 2002, but the effects are disclosed
below. If stock options granted in the periods ended March 30, 2003 and March
31, 2002, were accounted for based on their fair value as determined under SFAS
123, the pro forma earnings would be as follows:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
03/30/03 03/31/02 03/30/03 03/31/02
---------------------------- ----------------------------
Net earnings (loss), as reported $ (7,557) $ 347 $ (20,757) $ (146,499)
Stock-based employee compensation cost included
in the determination of net earnings (loss), as reported - - - -
Stock-based employee compensation cost that would
have been included in the determination of net earnings (loss),
as reported, if the fair value method was applied to all awards (137) (221) (410) (662)
---------------------------- ----------------------------
Pro forma net earnings (loss) $ (7,694) $ 126 $ (21,167) $ (147,161)
---------------------------- ----------------------------
Basic and diluted earnings (loss) per share:
As reported $ (0.30) $ 0.01 $ (0.83) $ (5.83)
Pro forma $ (0.31) $ 0.01 $ (0.84) $ (5.85)
The weighted average grant date fair value of options granted during the
periods ended March 30, 2003 and March 31, 2002 was $3.07 and $1.62
respectively. The fair value of each option granted is estimated on the grant
date using the Black-Scholes option pricing model. The following significant
assumptions were made in estimating fair value:
For the three and nine months ended March 2003 2002
----------------------------------------
Risk-free interest rate 3.0% - 3.3% 3.6% - 4.7%
Expected life in years 4.95 4.75
Expected volatility 72% 53% - 65%
Expected dividends None None
9. 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.
In connection with our plans to dispose of certain real estate, we must
investigate environmental conditions and we may be required to take certain
corrective action prior or pursuant to any such disposition. In addition, we
have identified several areas of potential contamination related to other
facilities owned, or previously owned, by us, that may require us either to take
corrective action or to contribute to a clean-up. We are also a defendant in
certain lawsuits and proceedings seeking to require us to pay for investigation
or remediation of environmental matters, and we have been alleged to be a
potentially responsible party at various "superfund" sites. We believe that we
have recorded adequate reserves in our financial statements to complete such
investigation and take any necessary corrective actions or make any necessary
contributions. No amounts have been recorded as due from third parties,
including insurers, or set off against, any environmental liability, unless such
parties are contractually obligated to contribute and are not disputing such
liability.
As of March 30, 2003, the consolidated total of our recorded liabilities
for environmental matters was approximately $10.0 million, which represented the
estimated probable exposure for these matters. On March 30, 2003, $4.8 million
of these liabilities were classified as other accrued liabilities and $5.2
million was classified as other long-term liabilities. It is reasonably possible
that our total exposure for these matters could be approximately $13.4 million.
The sales agreement with Alcoa includes an indemnification, subject to
reserves of $8.4 million which were carried on the books of our fastener
business. To date, Alcoa has contacted us concerning potential environmental
claims which, while disputed, could consume approximately $6.0 million of the
indemnification reserve. These environmental claims are not covered by the
environmental accrual on our books as of March 30, 2003.
Other Matters
On January 21, 2003, we and one of our subsidiaries were served with a
third-party complaint in an action brought in New York by a non-employee worker
and his spouse alleging personal injury as a result of exposure to
asbestos-containing products. The defendant, which is one of many defendants in
the action, had purchased a pump business from us, and asserts the right to be
indemnified by us under its purchase agreement. While the purchaser has notified
us of, and claimed a right to indemnity from us against other asbestos-related
claims against it, this is the only instance in which a suit has been instituted
against us. We have not received enough information to assess the impact, if
any, of the other claims.
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 litigation against us, including that mentioned above, will not have a
material adverse effect on our financial condition, future results of operations
or net cash flows.
10.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 our fiscal year beginning on July 1,
2002. Accordingly, we have accounted for the sale of the fastener business and
APS as discontinued operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
This standard requires costs associated with exit or disposal activities to be
recognized when they are incurred and applies prospectively to such activities
initiated after December 31, 2002. Included in selling, general and
administrative expense for the three and nine months ended March 30, 2003, was
$1.1 million of severance expense associated with the downsizing of our
corporate staff. This plan was initiated prior to December 31, 2002.
11.
BUSINESS SEGMENT INFORMATION
We currently report in three principal business segments: aerospace
distribution, aerospace manufacturing and real estate operations. The following
table provides the historical results of our operations for the three and nine
months ended March 30, 2003 and March 31, 2002, respectively.
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
3/30/03 3/31/02 3/30/03 3/31/02
------------------------------- --------------------------------
Revenues
Aerospace Distribution Segment $ 12,231 $ 16,272 $ 43,406 $ 48,324
Aerospace Manufacturing Segment 2,265 3,368 7,156 10,329
Real Estate Operations Segment 2,277 1,745 6,264 5,383
------------------------------- --------------------------------
Total $ 16,773 $ 21,385 $ 56,826 $ 64,036
------------------------------- --------------------------------
Operating Income (Loss)
Aerospace Distribution Segment $ 214 $ 1,202 $ 1,365 $ 2,048
Aerospace Manufacturing Segment (712) (417) (1,408) (1,401)
Real Estate Operations Segment 733 345 2,038 1,074
Corporate and Other (5,734) (4,363) (41,599) (13,425)
------------------------------- --------------------------------
Total $ (5,499) $ (3,233) $ (39,604) $ (11,704)
------------------------------- --------------------------------
Earnings (Loss) From Continuing
Operations Before Taxes
Aerospace Distribution Segment $ 193 $ 1,188 $ 1,286 $ 1,993
Aerospace Manufacturing Segment (779) (537) (1,624) (1,390)
Real Estate Operations Segment 324 (150) 296 (630)
Corporate and Other (6,317) (13,091) (69,663) (46,550)
------------------------------- --------------------------------
Total $ (6,579) $ (12,590) $ (69,705) $ (46,577)
------------------------------- --------------------------------
Assets 3/30/03 6/30/02
-------------------------------
Aerospace Distribution Segment $ 48,530 $ 49,358
Aerospace Manufacturing Segment 10,623 677,164
Real Estate Operations Segment 120,048 120,320
Corporate and Other 225,965 145,276
-------------------------------
Total $ 405,166 $ 992,118
-------------------------------
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. Banner Aerospace, Inc. is a 100% owned subsidiary.
Fairchild Holding Corp. is our indirect 100% owned subsidiary. Fairchild
Holding Corp. is the owner of Fairchild Aerostructures, Inc., and the indirect
owner of 100% of Warthog Inc. Our principal operations are conducted through
Banner Aerospace, Fairchild Aerostructures, and Warthog. Our financial
statements present the results of our former fastener business, and APS, a small
subsidiary being sold, as discontinued operations.
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
Our business consists of three segments: aerospace distribution, aerospace
manufacturing and real estate operations. 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 worldwide. Our aerospace manufacturing segment
primarily manufactures airframe components. Our real estate operations segment
owns and leases a shopping center located in Farmingdale, New York, and owns and
rents two improved parcels located in Southern California.
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc. for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
We are continuing to investigate how best to redeploy our cash in opportunities
which will enable it to build a strong industrial company for the long term.
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: our ability to find, acquire and successfully operate one or more new
businesses; product demand; our dependence on the aerospace industry; customer
satisfaction and quality issues; labor disputes; competition; our ability to
achieve and execute internal business plans; worldwide political instability and
economic growth; military conflicts; reduced airline revenues as a result of the
September 11, 2001 terrorist attacks on the United States, and their aftermath;
the affect on the aerospace industry due to SARS; 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
Business Transactions
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc. for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
In connection with the sale, we have deposited with an escrow agent $25
million to secure indemnification obligations we may have to Alcoa. The escrow
period is five years, but funds may be held longer if claims are asserted and
unresolved. In addition, for a period of five years after the closing, we are
required to maintain our corporate existence, take no action to cause our own
liquidation or dissolution, and take no action to declare or pay any dividends
on our common stock.
The sale of the fastener business has reduced our dependence upon the
aerospace industry. Additionally, the sale has allowed us to eliminate
substantially all of our debt. We used a portion of the proceeds from the sale
to repay our bank debt and to acquire by tender all of our outstanding $225
million 10.75% senior subordinated notes due in April 2009, leaving us with only
$3.5 million of debt outstanding on March 30, 2003. We plan to use the remaining
proceeds from the sale to fund acquisitions.
Recent Developments
In February 2003, our Board of Directors adopted a formal plan for the sale
of APS, a small operation in our aerospace manufacturing segment, which has been
unprofitable. Based on our formal plan, APS is available for sale immediately,
and we believe that it is probable that we can consummate a sale of APS by
December 2003. Accordingly, the results of APS are being reported as a
discontinued operation.
The results of the fastener business and APS are recorded as earnings from
discontinued operations, the components of which are as follows:
(In thousands) Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
03/30/03 03/31/02 03/30/03 (a) 03/31/02
-------------------------------- -------------------------------
Earnings (loss) from discontinued operations before taxes (738) 10,148 4,325 37,180
Income tax benefit (provision) (25) (2,490) 3,501 (8,411)
-------------------------------- -------------------------------
Net earnings from discontinued operations $ (763) $ 7,658 $ 7,826 $ 28,769
-------------------------------- -------------------------------
(a) - The results presented for the nine months ended March 30, 2003, reflect
the activity of the fastener business through its sale on December 3, 2002.
Consolidated Results
On December 3, 2002, we completed the sale of our fasteners business to
Alcoa for $657 million. As a result of this transaction, we recognized a $40.1
million net gain on the disposal of discontinued operations in the nine months
ended March 30, 2003. The results of the fasteners business, during the time we
owned it, have been reclassified to earnings (loss) from discontinued
operations. Selling, general and administrative expense for the nine months
ended March 30, 2003, includes $13.7 million of one-time change of control
payments required under contracts with our top four executives as a result of
the sale of the fastener business, and $10.4 million of bonuses awarded to our
top four executives as a result of the sale of the fasteners business. The top
four executives have relinquished their right to any other future change of
control payments. The proceeds received from the sale have significantly reduced
our debt. Accordingly, we are currently seeking acquisition opportunities.
Because of these events, the discussion below can not be relied upon as a trend
of our future results.
We currently report in three principal business segments: aerospace
distribution, aerospace manufacturing, and real estate operations. The following
table provides the historical sales and operating income of our segments for the
three and nine months ended March 30, 2003 and March 31, 2002, respectively.
(In thousands) Three Months Ended Nine Months Ended
------------------------------- --------------------------------
3/30/03 3/31/02 3/30/03 3/31/02
------------------------------- --------------------------------
Revenues
Aerospace Distribution Segment $ 12,231 $ 16,272 $ 43,406 $ 48,324
Aerospace Manufacturing Segment 2,265 3,368 7,156 10,329
Real Estate Operations Segment 2,277 1,745 6,264 5,383
------------------------------- --------------------------------
Total $ 16,773 $ 21,385 $ 56,826 $ 64,036
------------------------------- --------------------------------
Operating Income (Loss)
Aerospace Distribution Segment $ 214 $ 1,202 $ 1,365 $ 2,048
Aerospace Manufacturing Segment (712) (417) (1,408) (1,401)
Real Estate Operations Segment 733 345 2,038 1,074
Corporate and Other (5,734) (4,363) (41,599) (13,425)
------------------------------- --------------------------------
Total $ (5,499) $ (3,233) $ (39,604) $ (11,704)
------------------------------- --------------------------------
Revenues of $16.8 million in the third quarter of fiscal 2003 decreased by
$4.6 million, or 21.6%, compared to revenues of $21.4 million in the third
quarter of fiscal 2002. Revenues of $56.8 million in the first nine months of
fiscal 2003 decreased by $7.2 million, or 11.3%, compared to revenues of $64.0
million in the first nine months of fiscal 2002. Revenues in the first nine
months of fiscal 2003 were adversely affected by the overall conditions in the
aerospace industry. The aerospace industry is still sluggish following the
events of September 11, 2001 and weakness in the overall economy. The recent,
well publicized, financial difficulties of major commercial airlines and
reduction in travel have affected the demand for products we sell at our
remaining aerospace businesses.
Gross margin as a percentage of sales remained stable in our aerospace
distribution segment and was 26.0% and 25.9% in the first nine months of fiscal
2003 and fiscal 2002, respectively, and 27.9% and 28.2% in the third quarter of
fiscal 2003 and fiscal 2002, respectively. Cost of goods sold, including
inventory adjustments, have exceeded revenues at our remaining aerospace
manufacturing location, reflecting highly competitive pricing pressures.
Gross margin as a percentage of rental revenue at our real estate segment
increased to 35.4 % and 35.7% in the third quarter and first nine months of
fiscal 2003, respectively, as compared to 32.8% and 31.1% in the third quarter
and first nine months of fiscal 2002, respectively. The improved margins
reflected an increase in rental revenue of 30.5% and 16.4% in the third quarter
and first nine months of fiscal 2003, respectively, as compared to the prior
periods.
Selling, general and administrative expense for the nine months ended March
30, 2003, includes $13.7 million of one-time change of control payments required
under contracts with our top four executives as a result of the sale of the
fastener business, and $10.4 million of bonuses awarded to our top four
executives as a result of the sale of the fasteners business. The top four
executives have relinquished their right to any other future change of control
payments. In addition, selling, general and administrative expense for the three
and nine months ended March 30, 2003, includes $1.1 million of severance
expense. Excluding these items, selling, general & administrative expense as a
percentage of revenues was 50.3% for the first nine months of fiscal 2003 as
compared to 47.7% for the first nine months of 2002.
Other income decreased $3.9 million in the first nine months of fiscal
2003, as compared to the first nine months of fiscal 2002. This change primarily
reflects income recognized in the first nine months of fiscal 2002 from the
disposition of future royalty revenues to an unaffiliated third party in
exchange for $4.7 million of promissory notes, offset partially by $0.8 million
of income recognized in the first nine months of fiscal 2003 from the sale of
non-core property.
Operating loss for the nine months ended March 30, 2003, includes the $13.7
million of one-time change of control payments required under contracts with our
top four executives as a result of the sale of the fastener business, and $10.4
million of bonuses awarded to our top four executives as a result of the sale of
the fasteners business. The top four executives have relinquished their right to
any other future change of control payments. In addition, the operating loss for
the three and nine months ended March 30, 2003, includes $1.1 million of
severance expense. With the sale of the fasteners business, we have become a
much smaller company and are currently seeking acquisition opportunities. Costs
at all locations are being strictly monitored, and reduced wherever possible. In
January 2003, we announced a staff reduction of 24% at our corporate
headquarters.
Net interest expense was $25.0 million and $33.6 million for the nine
months ended March 30, 2003 and March 31, 2002, respectively. The results for
the first nine months of fiscal 2003 included an expense of $9.9 million to
write-off deferred loan fees due to the repayment of all our outstanding senior
subordinated notes and our term loan and revolving credit facilities, offset
partially by $6.9 million of interest income recognized from the acceleration of
principal on the repayment of notes due to us from an unaffiliated third party.
As a result of the sale of the fastener business, our debt has been reduced by
$488.3 million since June 30, 2002, to $3.5 million at March 30, 2003. As a
result of our debt reduction, cash interest expense is expected to be
significantly lower in the future.
We recognized investment income of $0.6 million in the nine months ended
March 30, 2003 due to realized gains on investments sold. The results of the
nine months ended March 31, 2002, respectively, reflect $0.3 million of losses
realized on investments sold.
We recognized an expense of $5.7 million and $1.0 million in the first nine
months of 2003 and 2002, respectively, from the fair market value adjustment of
a ten-year $100 million interest rate contract. The fair market value adjustment
of this agreement 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 rate 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 rate
contract will decrease, and we will record income. Declining interest rates have
caused the change in fair market value of the contract.
An income tax benefit of $1.3 million in the first nine months of fiscal
2003 on continuing operations, was lower than the statutory rate, due primarily
to the loss from continuing operations recognized during these periods not being
available to be utilized immediately. An income tax benefit of $16.0 million in
the first nine months of fiscal 2002 represented a 34.4% effective tax rate on
the pre-tax losses from continuing operations.
Earnings (loss) from discontinued operations includes the results of the
fasteners business prior to its sale, and APS. The current period reductions in
earnings reflect us owning the fastener business for only five months in 2003 as
compared to the full nine months in 2002.
In the nine months ended March 30, 2003, we recorded a $40.1 million gain
on the disposal of discontinued operations, net of $10.5 million of taxes, as a
result of the sale of the fastener business.
In the first nine months of fiscal 2002, we recorded a goodwill impairment
charge of $144.6 million from the implementation of SFAS No. 142, presented as a
cumulative effect of change in accounting, as of the beginning of our fiscal
year. Of this amount, $19.3 million relates to our Fairchild Aerostructures
operating unit in our aerospace manufacturing segment and $125.3 million relates
to our fastener business sold to Alcoa on December 3, 2002. No tax effect was
recognized on the change in accounting for goodwill. Instead of amortizing
goodwill and intangible assets deemed to have an indefinite life, goodwill will
be tested for impairment annually, or immediately if conditions indicate that
such an impairment could exist. All of our goodwill has been deemed to have an
indefinite life; and as a result of adopting SFAS No. 142, we ceased amortizing
goodwill.
Other comprehensive income includes foreign currency translation
adjustments, unrecognized actuarial loss on pensions, and unrealized periodic
holding changes in the fair market value of available-for-sale investment
securities. For the nine months ended March 30, 2003, other comprehensive income
included a decrease of $47.5 million due to the recognition of an additional
minimum pension liability, offset partially by an increase of $17.3 million
foreign currency translation adjustments which were realized as part of the sale
of our fasteners business. For the nine months ended March 31, 2002, the foreign
currency translation adjustment resulted in a $4.0 million increase to other
comprehensive income, and was offset partially by a $0.8 million decrease in the
fair market value of unrealized holding gains on investment securities.
Segment Results
Aerospace Distribution Segment
Our aerospace distribution business is an international supplier to the
airlines, corporate aviation, and the military. The business operates from five
locations in the United States and specializes in the distribution of avionics,
airframe accessories, and other components. Products include: navigation and
radar systems, instruments, and communication systems, flat panel technologies
and rotables. The company also overhauls and repairs, landing gear,
pressurization components, instruments, and avionics. Customers include commuter
and regional airlines, corporate aircraft and fixed-base operators, air cargo
carriers, general aviation suppliers and the military. Sales in our aerospace
distribution segment decreased by $4.0 million, or 24.8%, and $4.9 million, or
10.2%, in the third quarter and first nine months of fiscal 2003, respectively,
as compared to the same periods of fiscal 2002. Sales in the nine months ended
March 30, 2003 and March 31, 2002, were adversely affected by the overall
conditions in the aerospace industry, resulting primarily from the events of
September 11, 2001, and the general weakness in the overall economy.
Operating income decreased by $1.0 million in the third quarter and $0.7
million in the first nine months of fiscal 2003, as compared to the same periods
in fiscal 2002. The results for the three and nine months ended March 30, 2003,
reflect the decrease in sales.
Aerospace Manufacturing Segment
Sales in our aerospace manufacturing segment decreased by $1.1 million in
the third quarter, and by $3.2 million in the first nine months of fiscal 2003,
as compared to the same periods of fiscal 2002. The change reflected a reduction
in shipments in the current period due to an overall lower level of demand in
the aerospace industry resulting from the September 11, 2001 terrorist attacks
and the recent financial difficulties of major commercial airlines.
Operating loss increased by $0.3 million in the third quarter and remained
flat in the first nine months of fiscal 2003, as compared to the same periods of
fiscal 2002. The change for the third quarter reflects primarily the decrease in
sales as a result of the downturn in the aerospace industry and $0.3 million of
inventory adjustments recognized in the third quarter.
On December 3, 2002, we sold our fastener business for approximately $657
million in cash to Alcoa Inc. Additionally, in February 2003, we adopted a
formal plan to sell APS. We expect to sell APS by December 2003. Accordingly,
the results of our fastener business and APS have been restated to report them
as discontinued operations.
Real Estate Operations Segment
Our real estate operations segment owns and operates a 451,000 square foot
shopping center located in Farmingdale, New York. We have two tenants that each
occupy more than 10% of the rentable space of the shopping center. Rental
revenue increased slightly in the three months ended March 30, 2003, due to a
slight increase in the amount of space leased to tenants, as compared to the
three months ended March 31, 2002. The weighted average occupancy rate of the
shopping center was 89.5% and 76.9% in the first nine months of 2003 and 2002,
respectively. The average effective annual rental rate per square foot was
$19.05 and $19.48 during the first nine months of 2003 and 2002, respectively.
As of March 30, 2003, approximately 91% of the shopping center was leased.
During the third quarter of fiscal 2002, our real estate segment purchased, for
$5.3 million, a 208,000 square foot manufacturing facility located in Fullerton,
California. The Fullerton property is leased to Alcoa through October 2007, and
is expected to generate revenues and operating income in excess of $0.5 million
per year. Our real estate segment also owns and leases a 102,000 square foot
building in Chatsworth, California. The Chatsworth property is leased through
July 2008, and is expected to generate revenues and operating income
approximating $0.5 million per year.
Rental revenue increased by 30.5% in the third quarter and 16.4% in the
first nine months of fiscal 2003, as compared to the same periods of fiscal
2002. The increase reflects the lease of the Fullerton property and tenants
occupying an additional 66,000 square feet of the shopping center during the
current periods.
Operating income increased by $0.4 million in the third quarter and $1.0
million in the first nine months of fiscal 2003, as compared to the same periods
of fiscal 2002. The improvement in the first nine months of fiscal 2003 reflects
an increase in the weighted-average portion of the shopping center occupied
during fiscal 2003, and the write-off of $0.4 million of tenant improvements in
the first nine months of fiscal 2002.
Corporate
The operating results at corporate for the first nine months of fiscal 2003
includes $13.7 million of one-time change of control payments required under
contracts with our top four executives as a result of the sale of the fastener
business, and $10.4 million of bonuses awarded to our top four executives as a
result of the sale of the fasteners business. The top four executives have
relinquished their right to any other future change of control payments. Other
income at corporate decreased by $4.3 million due primarily to income recognized
in the first nine months of fiscal 2002 from the disposition of future royalty
revenues to an unaffiliated third party in exchange for promissory notes. In
January 2003, we reduced our corporate staff by approximately 24%. Severance
expense associated with the reduction was $1.1 million in our third quarter
ended March 30, 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our combined cash and investment balances increased by $112.6 million to
$133.7 million on March 30, 2003, as compared to $21.1 million on June 30, 2002.
Our debt was reduced by $488.3 million, to $3.5 million on March 30, 2003, as
compared to $491.8 million on June 30, 2002. Total capitalization was $183.5
million and $722.0 million as of March 30, 2003 and June 30, 2002, respectively.
The change in capitalization included the $488.3 million decrease in debt
reflecting the repayment with the proceeds received from the sale of the
fasteners business, and a decrease in equity of $50.3 million. The change in
equity was due primarily to our reported net loss and changes in other
comprehensive income, which included a decrease of $47.5 million, due to the
recognition of the additional minimum pension liability, offset partially by a
$17.3 million increase in foreign currency translation adjustments which were
realized as part of the sale of our fasteners business.
Net cash used for operating activities for the nine months ended March 30,
2003, was $104.3 million. The working capital uses of cash in the first nine
months of fiscal 2003 included $41.2 million of cash used for investments in
trading securities, $7.4 million contributed to fund our pension plan, $13.7
million of one-time change of control payments required under contracts with our
top four executives as a result of the sale of the fastener business, and $10.4
million of bonuses awarded to our top four executives as a result of the sale of
the fasteners business. Net cash provided by operating activities was $11.8
million for the nine months ended March 31, 2002. The primary source of cash
from operating activities in the first nine months of fiscal 2002 included $10.0
million of non-cash charges and net working capital changes of discontinued
operations. Other sources of cash from operating activities included $3.7
million of earnings after deducting non-cash items, including $144.6 million for
the cumulative effect of change in accounting for goodwill, offset partially by
$1.9 million of working capital changes from our continuing operations.
Net cash provided by investing activities for the nine months ended March
30, 2003, was $613.1 million. In the first nine months of fiscal 2003, the
primary source of cash was $657.1 million of proceeds from the sale of our
fastener business and $14.3 million of net cash proceeds from the collection of
notes receivable. Net cash provided by investing activities was offset partially
by $49.2 million of new investments and $7.8 million of capital expenditures,
including the purchase of a manufacturing facility located in Fullerton,
California. Net cash used for investing activities was $7.7 million for the nine
months ended March 31, 2002. In the first nine months of fiscal 2002, the
primary source of cash was $4.0 million provided from the dispositions of
non-core real estate and net assets held for sale, offset by a $5.0 million
increase in notes receivable and $6.1 million of capital expenditures, including
$4.8 million at discontinued operations.
Net cash used by financing activities was $488.0 million for the nine
months ended March 30, 2003, which reflected the repayment of essentially all of
our debt, except for $3.5 million of debt at Fairchild Aerostructures. Net cash
used for financing activities was $5.4 million for the nine months ended March
31, 2002, and included the net proceeds we received from the issuance of
additional debt used to fund operations.
Our principal cash requirements include acquisitions, 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 proceeds received from
dispositions of assets will be adequate to satisfy our cash requirements during
the next twelve months.
We have entered into discussions with a lender to receive a 10-year,
non-recourse, fixed rate, term-loan financing on our shopping center at interest
rates currently approximating 5.8%. We estimate that we will receive
approximately $50.0 million of cash, which we plan to use to fund acquisition
opportunities.
Prior to the sale of our fastener business, the Pension Benefit Guaranty
Corporation had contacted us to understand the impact of the sale of our
aerospace fasteners business on our ability to fund our long-term pension
obligations. The PBGC has expressed concern that our retirement plan will be
underfunded by $86 million after the sale of our aerospace fasteners business.
We have provided the PBGC with information, which represented the underfunding
to be $42 million, using the PBGC plan termination assumptions. During the nine
months ended March 30, 2003, we contributed $7.4 million of cash to fund our
pension plan. Based upon our actuary's assumptions and projections, we do not
expect additional cash contributions to the pension plan to be required until
2008.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 our fiscal year beginning on July 1,
2002. Accordingly, we have accounted for the sale of the fastener business and
APS as discontinued operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
This standard requires costs associated with exit or disposal activities to be
recognized when they are incurred and applies prospectively to such activities
initiated after December 31, 2002.
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, did not
exercise a one-time option to cancel the agreement, and accordingly the
transaction will proceed, based on a fixed LIBOR rate of 6.745% from 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 the fair market value of interest rate
derivatives, of $5.7 million and $1.0 million, in the nine months ended March
30, 2003 and March 31, 2002, 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.
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 maturity date February 19, 2008
-----------------------------------
Type of interest rate contract Variable to Fixed
Variable to fixed contract amount $100,000
Fixed LIBOR rate 6.745%
LIBOR cap rate N/A
Average floor rate N/A
Weighted average forward LIBOR rate 3.11%
Fair market value at March 30, 2003 $(16,737)
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934. These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this quarterly
report, which we refer to as the Evaluation Date. They have concluded that, as
of the Evaluation Date, such controls and procedures were effective at ensuring
that the required information was disclosed on a timely basis in our reports
filed under the Exchange Act.
Changes in Internal Controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended March 30, 2003, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 9 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2. Changes in Securities and Use of Proceeds.
Pursuant to the sale of our fastener business to Alcoa, we have agreed that
the Company may not declare dividends on its common stock for a period of five
years (ending December 3, 2007).
Item 5. Other Information
The Company has been informed by counsel to Mr. Jeffrey Steiner that on
March 17, 2003, a trial commenced in France with respect to charges by French
authorities against thirty-seven defendants, including Mr. Steiner, in the Elf
Bidermann case. Mr. Steiner's counsel has informed the Company that the charges
against Mr. Steiner are that in 1989 and 1990 he allegedly facilitated and
benefited from the misuse of funds at Elf Acquitaine, a French petroleum
company, allegedly committed by a former official of Elf Acquitaine, and/or
Maurice Bidermann, against whom the Company had prevailed in litigation. Mr.
Steiner has informed the Company that these charges are without merit, and that
he will vigorously defend himself against them. The Company had previously
disclosed that an investigation was pending, that the Company had provided a
surety for Mr. Steiner and, since June 1996, has paid his legal expenses
totaling approximately $5 million in connection with these charges, and will
continue to do so, in accordance with Delaware law. Mr. Steiner has undertaken
to repay us the surety and expenses paid by us on his behalf if it is ultimately
determined that Mr. Steiner was not entitled to indemnification under Delaware
law. Delaware law provides that Mr. Steiner would be entitled to indemnification
if it is determined that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and had
no reasonable cause to believe his conduct was unlawful.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*12.1 Certifications required by Section 302 of the Sarbanes-Oxley
Act.
*12.2 Certifications required by Section 906 of the Sarbanes-Oxley
Act.
* Filed herewith.
(b) Reports on Form 8-K:
We filed a report on Form 8-K on January 10, 2003, reporting the same
information that is reported in this Report under Part II, Item 5.
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
Chief Financial Officer, Treasurer
and Senior Vice President, Tax
Date: May 9, 2003