FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998
----------------------------------------
Commission file number 1-892
-----------------------------
THE B.F.GOODRICH COMPANY
NEW YORK 34-0252680
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4020 KINROSS LAKES PARKWAY, RICHFIELD, OHIO 44286-9368
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 330-659-7600
----------------
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 90 days.
Yes X No
-------- --------
As of June 30, 1998, there were 73,987,129 shares of common stock outstanding.
There is only one class of common stock.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------- --------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales $ 1,011.0 $ 846.5 $ 1,948.7 $ 1,610.7
Operating Costs and Expenses:
Cost of sales 732.9 618.1 1,416.4 1,179.3
Selling and administrative expenses 160.7 139.2 304.2 270.9
-------------- -------------- -------------- --------------
893.6 757.3 1,720.6 1,450.2
-------------- -------------- -------------- --------------
Operating income 117.4 89.2 228.1 160.5
Interest expense (21.3) (19.3) (37.1) (38.1)
Interest income 0.9 1.9 3.8 4.1
Other income (expense) - net (1.7) 35.8 (7.2) 32.9
-------------- -------------- -------------- --------------
Income from continuing operations before
income taxes and Trust distributions 95.3 107.6 187.6 159.4
Income tax expense (36.8) (40.5) (72.3) (59.9)
Distributions on Trust preferred securities (2.6) (2.6) (5.2) (5.2)
-------------- -------------- -------------- --------------
Income from continuing operations 55.9 64.5 110.1 94.3
Income (loss) from discontinued operations - 3.4 (1.6) 67.5
-------------- -------------- -------------- --------------
Net Income $ 55.9 $ 67.9 $ 108.5 $ 161.8
============== ============== ============== ==============
Earnings per share:
Basic
Continuing operations $ 0.76 $ 0.91 $ 1.50 $ 1.33
Discontinued operations - 0.05 (0.02) 0.96
-------------- -------------- -------------- --------------
Net income $ 0.76 $ 0.96 $ 1.48 $ 2.29
============== ============== ============== ==============
Diluted
Continuing operations $ 0.74 $ 0.87 $ 1.46 $ 1.28
Discontinued operations - 0.04 (0.02) 0.88
============== ============== ============== ==============
Net income $ 0.74 $ 0.91 $ 1.44 $ 2.16
============== ============== ============== ==============
Dividends declared per common share $ 0.275 $ 0.275 $ 0.550 $ 0.550
</TABLE>
See notes to condensed consolidated financial statements.
Page 2
<PAGE>
THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 57.1 $ 47.0
Accounts and notes receivable, less allowances
for doubtful receivables (June 30, 1998:
$22.8; December 31, 1997: $21.3) 641.4 532.6
Inventories 744.9 652.6
Deferred income taxes 133.8 132.4
Prepaid expenses and other assets 30.8 36.7
---------------- ----------------
Total Current Assets 1,608.0 1,401.3
---------------- ----------------
Property
Land, buildings and machinery and equipment 2,181.9 2,015.4
Allowances for depreciation and amortization (993.5) (950.3)
---------------- ----------------
Total Property 1,188.4 1,065.1
---------------- ----------------
Deferred Income Taxes 74.8 86.0
Prepaid Pension 140.6 148.3
Goodwill 763.3 546.2
Identifiable Intangible Assets 54.6 51.1
Other Assets 221.2 195.9
---------------- ----------------
$ 4,050.9 $ 3,493.9
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank debt $ 153.1 $ 192.8
Accounts payable 353.7 327.6
Accrued expenses 411.5 411.3
Income taxes payable 22.0 -
Current maturities of long-term debt
and capital lease obligations 3.1 3.2
---------------- ----------------
Total Current Liabilities 943.4 934.9
---------------- ----------------
Long-term Debt and Capital Lease Obligations 993.4 564.3
Pension Obligations 42.1 39.6
Postretirement Benefits Other Than Pensions 350.3 343.7
Other Non-current Liabilities 93.4 65.7
Mandatorily Redeemable Preferred Securities of Trust 123.3 123.1
Shareholders' Equity
Common stock - $5 par value
Authorized 200,000,000 shares; issued 75,827,150
shares at June 30, 1998, and 73,946,160
shares at December 31, 1997 379.1 369.7
Additional capital 539.3 500.7
Income retained in the business 659.7 591.5
Accumulated other comprehensive income (4.2) (3.5)
Unearned portion of restricted stock awards - (0.7)
Common stock held in treasury, at cost (1,840,021
shares at June 30, 1998, and 1,204,022 shares
at December 31, 1997) (65.4) (35.1)
Shares in grantor trust (70,541 at June 30, 1998) (3.5) -
---------------- ----------------
Total Shareholders' Equity 1,505.0 1,422.6
---------------- ----------------
$ 4,050.9 $ 3,493.9
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE>
THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 108.5 $ 161.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 79.4 70.7
Deferred income taxes 9.9 17.6
Net gains on sales of businesses - (116.7)
Change in assets and liabilities,
net of effects of acquisitions
and dispositions of businesses:
Receivables (19.7) (63.1)
Inventories (35.1) (5.4)
Other current assets 7.9 2.2
Accounts payable (4.3) 14.8
Accrued expenses (18.6) (10.9)
Income taxes payable 23.9 16.4
Other non-current assets and liabilities (3.5) (10.5)
------------ ------------
Net cash provided by operating activities 148.4 76.9
INVESTING ACTIVITIES
Purchases of property (78.3) (70.9)
Proceeds from sale of property 4.1 5.7
Proceeds from sale of businesses - 303.2
Payments made in connection with acquisitions,
net of cash acquired (372.9) (23.4)
Other - (3.2)
------------ -------------
Net cash (used) provided by investing activities (447.1) 211.4
FINANCING ACTIVITIES
Net decrease in short-term bank debt (40.4) (95.0)
Proceeds from issuance of long-term debt 433.0 -
Repayment of long-term debt and capital lease obligations (11.0) (46.2)
Cash collateral for receivable sales program - 5.0
Termination of receivable sales program (40.0) -
Proceeds from issuance of capital stock 20.5 6.9
Purchases of treasury stock (13.2) (0.3)
Dividends (34.9) (29.6)
Distributions on Trust preferred securities (5.2) (5.2)
------------ -------------
Net cash provided (used) by financing activities 308.8 (164.4)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - (1.0)
------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS 10.1 122.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47.0 103.4
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57.1 $ 226.3
============ =============
Supplemental Cash Flow Information:
Income taxes paid $ 14.9 $ 49.6
============= =============
Interest paid, net of amounts capitalized $ 26.9 $ 37.3
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A: BASIS OF INTERIM FINANCIAL STATEMENT PREPARATION - The accompanying
unaudited condensed consolidated financial statements of The BFGoodrich Company
("BFGoodrich" or the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1998, are not necessarily indicative of the results that may be achieved for
the year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Note B: MERGER WITH ROHR - On December 22, 1997, BFGoodrich completed a merger
with Rohr, Inc. which was accounted for as a pooling of interests. Accordingly,
all prior period consolidated financial statements have been restated to include
the results of operations, financial position and cash flows of Rohr as though
Rohr had always been a part of BFGoodrich. As such, results for the three and
six month periods ended June 30, 1997 combine BFGoodrich and Rohr results for
the same periods.
Note C: DISCONTINUED OPERATIONS - During the 1998 first quarter, the Company
recognized a $1.6 million after-tax charge related to a business previously
divested and reported as a discontinued operation.
Discontinued operations during the first six months of 1997 reflect the gain on
the sale of Tremco Incorporated in February 1997 and earnings from the
chlor-alkali and olefins business that was sold in August 1997.
- 5 -
<PAGE>
Note D: INVENTORY - Inventories included in the accompanying condensed
consolidated balance sheet consist of:
(Dollars in millions)
-------------------------------
June 30, December 31,
1998 1997
------------ --------------
FIFO or average cost
(which approximates
current costs):
Finished products $ 220.2 $ 173.4
In process 409.5 411.2
Raw materials and supplies 191.0 161.4
------- -------
820.7 746.0
Less:
Reserve to reduce certain
inventories to LIFO (58.4) (57.5)
Progress payments and advances (17.4) (35.9)
-------- -------
Total $ 744.9 $ 652.6
======= =======
Note E: ACQUISITION - Late in March 1998, the Company acquired Freedom Chemical
Company ("Freedom Chemical"), a global manufacturer of specialty and fine
chemicals that are sold to a variety of customers who use them to enhance the
performance of their finished products, for approximately $378 million. The
purchase price allocations have been based on preliminary estimates, which may
be revised at a later date. Goodwill is being amortized using the straight-line
method over 20 years.
Note F: DIVESTITURE - During the latter part of the second quarter of 1997, the
Company completed the sale of its Engine Electrical Systems Division, which was
part of the Sensors and Integrated Systems Group in the Aerospace segment. The
Company recorded a pretax gain of $26.4 million ($16.4 million after tax) as a
result of the sale which has been reported within other income.
Note G: PUBLIC OFFERING OF SUBSIDIARY STOCK - In May 1997, the Company's
subsidiary, DTM Corporation ("DTM"), issued 2,852,191 shares of its authorized
but previously unissued common stock in an initial public offering ("IPO"). As a
result of the IPO, the Company's interest declined from approximately 92 percent
to approximately 50 percent (the Company did not sell any of its interest in the
IPO). The Company recognized a pretax gain of $13.7 million ($8.0 million after
tax) in accordance with the SEC's Staff Accounting Bulletin 84. The gain has
been reported within other income in the Condensed Consolidated Statement of
Income.
- 6 -
<PAGE>
NOTE H: EARNINGS PER SHARE - The computation of basic and diluted earnings
per share for income from continuing operations is as follows:
<TABLE>
<CAPTION>
(In millions, except per share amounts) Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations
for basic earnings per share-income
available to common shareholders $55.9 $64.5 $110.1 $94.3
Effect of dilutive securities:
Convertible Notes - 1.5 - 2.8
------ ------ ------- ------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed conversions $55.9 $66.0 $110.1 $97.1
====== ====== ======= ======
Denominator:
Denominator for basic earnings per
share - weighted-average shares 73.4 70.8 73.1 70.8
------ ------ ------- ------
Effect of dilutive securities:
Stock options and warrants 1.0 1.4 1.0 1.4
Contingent shares - .7 - .7
Convertible Notes .9 3.3 1.0 3.2
------ ------ ------- ------
Dilutive potential common shares 1.9 5.4 2.0 5.3
------ ------ ------- ------
Denominator for diluted earnings per
share - adjusted weighted-average shares
and assumed conversions 75.3 76.2 75.1 76.1
====== ====== ======= ======
Per share income from continuing operations:
Basic $ .76 $ .91 $ 1.50 $1.33
====== ====== ======= ======
Diluted $ .74 $ .87 $ 1.46 $1.28
====== ====== ======= ======
</TABLE>
NOTE I: COMPREHENSIVE INCOME - As required, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," in the first quarter of 1998. SFAS No. 130
established new rules for the reporting and display of comprehensive income and
its components. This standard does not impact net income or total shareholders'
equity. SFAS No. 130 requires the change in the Company's minimum pension
liability and foreign currency translation adjustment to be included in other
comprehensive income. The prior periods' financial statements have been
reclassified to conform to these requirements.
- 7 -
<PAGE>
Total comprehensive income consists of the following:
<TABLE>
<CAPTION>
(dollars in millions) Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $55.9 $67.9 $108.5 $161.8
----- ----- ------ ------
Other Comprehensive Income:
Cumulative unrealized translation
adjustments:
Unrealized translation adjustments
during period 1.8 (1.8) (.7) (10.6)
Less reclassification for translation
adjustments included in net
income (net of tax) - - - 1.7
Minimum pension liability adjustment - - - 26.4
------ ------ ------- -------
Other Comprehensive Income 1.8 (1.8) (.7) 17.5
------ ------ ------- -------
Total Comprehensive Income $57.7 $66.1 $107.8 $179.3
====== ====== ======= =======
</TABLE>
Accumulated other comprehensive income consists of the following (dollars in
millions):
June 30, 1998 December 31, 1997
------------ -----------------
Cumulative unrealized translation
adjustments $(2.4) $(1.7)
Minimum pension liability adjustment (1.8) (1.8)
------ ------
$(4.2) $(3.5)
====== ======
Note J: CAPITAL STOCK - During the first six months of 1998, 991,134 shares of
authorized but previously unissued shares of common stock were issued under
employee compensation plans and 889,856 shares of authorized but previously
unissued shares of common stock were issued upon conversion of Rohr debentures
that were extinguished in late 1997. Also, during the first six months of 1998,
620,666 shares of common stock were received and included in treasury stock
along with 15,333 unearned shares that were forfeited and returned to treasury
stock. The increase in treasury stock discussed above related solely to employee
compensation plans.
Note K: INCOME TAXES - The effective tax rates for the second quarter and first
half of 1998 and 1997 were higher than the federal statutory rate principally
due to state and local income taxes.
- 8 -
<PAGE>
Note L: CONTINGENCIES - There are pending or threatened against BFGoodrich or
its subsidiaries various claims, lawsuits and administrative proceedings, all
arising from the ordinary course of business with respect to commercial, product
liability and environmental matters, which seek remedies or damages. BFGoodrich
believes that any liability that may finally be determined with respect to
commercial and product liability claims, should not have a material effect on
the Company's consolidated financial position or results of operations. The
Company is also involved from time to time in legal proceedings as a plaintiff
involving contract, patent protection, environmental and other matters. Gain
contingencies, if any, are recognized when they are realized.
The Company and its subsidiaries are generators of both hazardous wastes and
non-hazardous wastes, the treatment, storage, transportation and disposal of
which are subject to various laws and governmental regulations. Although past
operations were in substantial compliance with the then-applicable regulations,
the Company has been designated as a potentially responsible party ("PRP") by
the U.S. Environmental Protection Agency ("EPA") in connection with 42 sites,
most of which related to previously discontinued businesses and newly acquired
businesses. The company believes it may have continuing liability with respect
to not more than 19 of these federal sites.
Significant liabilities associated with previously discontinued businesses for
the most part arise from four disposal sites. Two of the most significant
variables in determining the Company's ultimate liability are the remediation
method finally adopted for the site and the Company's share of the total site
remediation cost. With respect to three of the fours sites from previously
discontinued businesses, the Company's maximum percentage share of the ultimate
remediation costs is fixed. The percentages range from approximately 12 percent
to approximately 41 percent and appropriate reserves have accordingly been
established. At the fourth site, alternate dispute resolution ("ADR") is under
way to establish the various parties' share of responsibility. The Company's
interim share is 30 percent, which the company believes will likely decrease as
the result of the ADR.
Of the four sites relating to discontinued businesses, two sites are in the
operation and maintenance phase for which costs are reasonably fixed.
Construction at a third site was begun in 1997, but problems with the remedial
design caused work to be discontinued. A modified remedial plan was presented
to the EPA during the second quarter. Discussions aimed at finalizing the
remedy are continuing with the government. Litigation over the government's
past costs at this site is on hold pending finalization of the remedy. Total
site costs are not expected to exceed $15 million of which the Company's 30
percent share has been adequately reserved for. The final site involving
discontinued businesses continues in litigation. Agreement has been reached
with the government for a changed remedy but past government costs of over $22
million continue to be an issue. The Company has accrued for the 12 percent of
the total costs that it expects to incur.
The Company also has two active Superfund sites relating to the Aerostructures
Group. Of these, one site has been in active investigation/remediation/
litigation for over 15 years. As a result, much of the liability at this site
has already been addressed. Depending on the outcome of an appeal by the State
of California of its share of the liability, the Company may not spend much
more on this matter, but a reserve is being retained in the event that the State
of California prevails in its appeal and/or that a settlement between the State
and the potentially responsible parties ("PRPs") can be achieved. The PRPs are
pursuing a contribution action against third-party defendants. No receivable
has been reflected for any potential contributions. The second site is in an
earlier stage, and the Company's percentage share of the total site cost has
not been finally determined. However, its contribution of
- 9 -
<PAGE>
waste to the site was approximately 1 percent, and constitutes less than 2
percent of the waste contributed by the PRP group of which it is a member.
In 1996 the PRP group entered into a Consent Decree with EPA that obligated it
only to pay for part of the remedy and obligated the EPA to seek funds from
other non-participating PRPs. However, there remain some potential liabilities
not fully addressed by the Consent Decree. The EPA's total estimated cost for
this site to all parties is $450 million, but the PRP group is currently only
obligated to perform a portion of the remedy with an estimated cost of $55
million. The group anticipates being able to perform any necessary work at a
lower cost.
The Company has reviewed the environmental liabilities associated with the
acquisition of Freedom Chemical in March 1998. Many of the environmental
liabilities are indemnified by Freedom's predecessors at the various sites.
There are four sites that account for a significant portion of the Freedom
Chemical environmental liabilities. All four sites are current or former
manufacturing sites. The existence of these potential liabilities was reflected
in the negotiations for the acquisition of Freedom Chemical and has been
included in its opening balance sheet.
Although a limited fund for remediation may be available from the former owner
at one of the Freedom Chemical sites, the Company anticipates incurring
additional costs at this site. The Company will continue to monitor this site
as it is still in the investigation phase.
For the remaining three sites, although the remedial design and construction is
being conducted by an indemnitor, the Company will remain liable for a majority
of the cost for long-term operation and maintenance of the remedy which accounts
for the majority of the costs to be incurred by the Company at these sites.
The Company believes that it has adequately reserved for all of the above sites
based on currently available information. Management believes that it is
reasonably possible that additional costs may be incurred beyond the amounts
accrued as a result of new information. However, the amounts, if any, cannot be
estimated and management believes that they would not be material to the
Company's financial condition but could be material to the Company's results of
operations in a given period.
- 10 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
----------------------------------
COMPARISON OF THE SECOND QUARTER AND FIRST SIX MONTHS OF 1998
TO THE SECOND QUARTER AND FIRST SIX MONTHS OF 1997
--------------------------------------------------
TOTAL COMPANY
-------------
Sales during the quarter ended June 30, 1998, were $1.0 billion, an increase of
$164.5 million, or 19 percent, over sales during the same period last year. The
increase is primarily a result of higher volumes in the Aerospace Segment and
acquisitions in the Performance Materials Segment. Sales for Aerospace increased
by 8 percent and for Performance Materials by 49 percent over the 1997 second
quarter.
Operating income during the second quarter of 1998 increased $28.2 million, or
32 percent, over the comparable prior year period. The increase is primarily a
result of higher volumes and a favorable sales mix in the Aerospace Segment and
acquisitions in the Performance Materials Segment. Operating income for
Aerospace improved by 24 percent and Performance Materials by 29 percent.
Operating expenses for Corporate decreased by 10 percent. The Company's
operating income margin for the second quarter of 1998 was 12 percent, compared
with 11 percent for the same period last year.
Sales during the first six months of 1998 were $1.9 billion, an increase of
$338.0 million, or 21 percent, over the first six months of 1997. The increase
in sales is attributable to increased demand in most markets served by the
Aerospace Segment and to volume growth and the impact of acquisitions by the
Performance Materials Segment.
Operating income during the first six months of 1998 increased by $67.6 million,
or 42 percent, over the comparable period last year. The increase reflects
higher volumes and a favorable sales mix in the Aerospace Segment and
acquisitions by the Performance Materials Segment. Corporate expenses decreased
between periods by $2.5 million, or 8 percent. Operating margins have increased
as well to 12 percent during the first six months of 1998 as compared to 10
percent during the same period last year.
- 11 -
<PAGE>
SEGMENT ANALYSIS
----------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) 1998 1997 1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Aerospace $ 670.1 $ 618.1 $ 1,355.4 $ 1,159.6
Performance Materials 340.9 228.4 593.3 451.1
------------------------------------------------------------------------------------------------------------------
Total $ 1,011.0 $ 846.5 $ 1,948.7 $ 1,610.7
==================================================================================================================
Operating Income:
Aerospace $ 90.9 $ 73.3 $ 178.8 $ 128.3
Performance Materials 40.2 31.1 76.8 62.2
------------------------------------------------------------------------------------------------------------------
Total Reportable Segments 131.1 104.4 255.6 190.5
Corporate (13.7) (15.2) (27.5) (30.0)
------------------------------------------------------------------------------------------------------------------
Total $ 117.4 $ 89.2 $ 228.1 $ 160.5
==================================================================================================================
</TABLE>
The Company's operations are classified into two reportable business segments:
BFGoodrich Aerospace ("Aerospace") and BFGoodrich Performance Materials
("Performance Materials"). Aerospace consists of four business groups:
Aerostructures; Landing Systems; Sensors and Integrated Systems; and
Maintenance, Repair and Overhaul ("MRO"). They serve commercial, military,
regional, business and general aviation markets.
The Performance Materials Segment consists of three groups: Textile and
Industrial Coatings; Polymer Additives and Specialty Plastics; and Consumer
Specialties. These groups provide materials for a wide range of end-use market
applications including textiles, coatings, food and beverage, personal care,
pharmaceuticals, graphic arts, industrial piping, plumbing and transportation.
The Performance Materials Segment has previously been reported as the Specialty
Chemicals Segment consisting of two groups: Specialty Additives and Specialty
Plastics. During the second quarter, the Company reorganized this segment into
the three groups noted above and renamed the segment. The reorganization
facilitates the segment's global expansion as well as the rapid integration of
the recent acquisition of Freedom Chemical Company ("Freedom Chemical").
Previously reported amounts for the segment have been reclassified into the
three groups noted above.
Also, due to significant acquisitions subsequent to last year's second quarter,
Performance Materials results have been adjusted to a comparable basis to
provide a better indication of current operating trends. Thus, comparable
results, as presented in the ensuing discussion under the "Comparable % Change"
column, are determined by adjusting 1998 results to exclude the impact of
acquisitions that were not included in the comparable period last year.
- 12 -
<PAGE>
Corporate includes general corporate administrative costs and Advanced
Technology Group research expenses. Segment operating income is total segment
revenue reduced by operating expenses directly identifiable with that business
segment.
An expanded analysis of sales and operating income by business segment follows.
Aerospace
- ---------
Sales by Group (in millions)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 % Change 1998 1997 % Change
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aerostructures $282.4 $262.6 8% $ 585.0 $ 472.5 24%
Landing Systems 143.5 120.8 19% 286.4 236.6 21%
Sensors and Integrated Systems* 139.8 140.1 - 280.0 266.1 5%
MRO 104.4 94.6 10% 204.0 184.4 11%
---------------------------------------------------------------------------------------------------------------
TOTAL $670.1 $618.1 8% $1,355.4 $1,159.6 17%
===============================================================================================================
<FN>
* Excluding the impact of a divestiture and an acquisition, sales increased by
8% and 12% for the three and six-month periods ended June 30, 1998 as compared
to the comparable periods last year, respectively.
</FN>
</TABLE>
Second Quarter 1998 Compared to Second Quarter 1997
- ---------------------------------------------------
The Aerospace Segment's increase in sales over the second quarter of 1997 (10
percent excluding the impact of a divestiture) reflected continued strong demand
in most markets.
The Aerostructures Group's sales increase largely reflects higher demand for
aftermarket spare parts. This increase occurred across many of the group's
programs, including the V2500 and CFM56-5 engine programs that power the
A319/320/321 family of aircraft, and the MD-90 and CF6-80C2 programs.
Original-equipment ("OE") production sales overall were comparable with the
prior year. Higher sales on several commercial programs, including the V2500 and
the start up of production deliveries on the 737-700 program, were offset by
lower demand on the A340 program due to unusually strong sales in the prior
year.
The Landing Systems Group's sales growth reflects higher demand from
original-equipment manufacturers for landing gear and evacuation products,
primarily for the B737-700, B747, B767 and A330/340 programs and the
establishment of a facility in Seattle to provide fully dressed landing gears to
Boeing on the 747-400 program. The increase in sales is also due to higher
aftermarket sales of wheels and brakes and evacuation products.
- 13 -
<PAGE>
The 8 percent increase in sales by the Sensors and Integrated Systems Group over
the 1997 second quarter, excluding a divestiture, which occurred late in the
second quarter of 1997, reflects continued increased demand by
original-equipment manufacturers for sensor products on most major Boeing
programs, as well as on other regional and business programs such as the
EMB-RJ145, Gulfstream V and Global Express programs. The group also experienced
increased aftermarket demand for sensors, avionics and pneumatic deicer
products.
The MRO Group's increase in sales from the prior year quarter reflects higher
sales from the airframe and component services businesses. The airframe business
has successfully replaced the volume reductions that resulted from Western
Pacific Airlines' bankruptcy and a contract termination with America West
Airlines. Increased sales in the Group's component service business reflect
higher demand for wheels and brakes and nacelle maintenance services.
First Six Months 1998 Compared to First Six Months 1997
- -------------------------------------------------------
The Aerospace Segment's increase in sales over the first half of 1997 (19
percent excluding the effects of an acquisition and a divestiture), reflects
continued strong demand in most markets.
The Aerostructures Group's increase occurred for the same reasons as the second
quarter comparison. In addition, the Group benefited from non-recurring sales on
the GE-90 program.
Sales growth in the Landing Systems, Sensors and Integrated Systems (excluding
an acquisition and a divestiture) and MRO Groups occurred for the same reasons
as the second quarter comparison.
- 14 -
<PAGE>
Operating Income by Group (in millions)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 % Change 1998 1997 % Change
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aerostructures $43.3 $31.7 37% $ 82.8 $ 54.2 53%
Landing Systems 16.3 18.1 (10)% 32.2 31.4 3%
Sensors and Integrated Systems* 25.3 19.4 30% 53.3 34.9 53%
MRO 6.0 4.1 46% 10.5 7.8 35%
---------------------------------------------------------------------------------------------------------------
TOTAL $90.9 $73.3 24% $178.8 $128.3 39%
===============================================================================================================
<FN>
* Excluding the impact of a divestiture and an acquisition, operating income
increased by 24% and 47% for the three and six-month periods ended June 30, 1998
as compared to the comparable periods last year, respectively.
</FN>
</TABLE>
Second Quarter 1998 Compared to Second Quarter 1997
- ---------------------------------------------------
Total Aerospace Segment operating income increased from the second quarter of
1997, largely reflecting the impact of a favorable sales mix and higher volumes.
The Aerostructures Group's increase in operating income over the prior year
second quarter was due to higher volume and a favorable mix of higher-margin
aftermarket spare parts sales. Operating income from OE production sales
included profit recognition on the MD-90 program. No profit was recognized on
the MD-90 program in 1997.
Despite higher sales in 1998, the Landing Systems Group had a decrease in
operating income compared with the second quarter of 1997. The income
contribution from higher sales volumes was more than offset by higher
original-equipment strategic sales incentives and substantially higher costs
associated with new product development programs.
Excluding a disposition, the Sensors and Integrated Systems Group's operating
income increased 24 percent over the 1997 second quarter. This significant
increase reflects the effects of higher sales volumes, especially for
higher-margin aftermarket spares products.
Operating income in the MRO Group increased significantly over the comparable
prior year period. The increase in operating income resulted from higher demand
for wheels and brakes and nacelle maintenance services at the components
services business.
- 15 -
<PAGE>
First Six Months 1998 Compared to First Six Months 1997
- -------------------------------------------------------
Total Aerospace Segment operating income increased in the first half of 1998
compared with the first half of 1997, largely reflecting the impact of higher
sales volumes and a favorable sales mix.
The increase in operating income in the Aerostructures, Sensors and Integrated
Systems (excluding an acquisition and a divestiture) and MRO Group's occurred
for the same reasons as the second quarter comparison.
The Landing Systems Group achieved a slight increase in operating income,
despite the solid sales growth over the first half of 1997. The income
contribution from higher sales volumes was mitigated by higher
original-equipment strategic sales incentives and substantially higher costs
related to the Group's new product development programs.
Performance Materials
- ---------------------
Sales by Group (in millions)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
Comparable Comparable
1998 1997 % Change % Change 1998 1997 % Change % Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Textile and
Industrial Coatings $179.3 $103.8 73% 2% $300.5 $202.5 48% 4%
Polymer Additives and
Specialty Plastics 108.7 103.2 5% 4% 219.0 207.1 6% 5%
Consumer Specialties 52.9 21.4 147% 6% 73.8 41.5 78% 5%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $340.9 $228.4 49% 3% $593.3 $451.1 32% 5%
============================================================================================================================
</TABLE>
The following discussion and analysis of fluctuations in sales and operating
income for the Performance Materials Segment excludes the impact of acquisitions
(see Comparable % Change column).
Second Quarter 1998 Compared to Second Quarter 1997
- ---------------------------------------------------
Sales in the Textile and Industrial Coatings Group increased over the prior year
quarter due to a favorable sales mix and higher pricing offset by a slight
decline in volume.
The increase in sales for the quarter in the Polymer Additives and Specialty
Plastics Group related to volume increases, particularly in the Estane
(registered trademark) thermoplastic polyurethane and Telene (registered
trademark) DCPD monomer markets, offset by lower prices in some markets
resulting from increased competition.
The increase in sales for the Consumer Specialties Group over the second quarter
of 1997 was due to higher volumes in personal care markets in the Americas and
in Europe, offset by reduced volumes in the Asia Pacific region.
-16 -
<PAGE>
First Six Months 1998 Compared to First Six Months 1997
- -------------------------------------------------------
The increase in sales for each group during the first half of 1998 over the same
period last year is due to the same reasons affecting the second quarter
results.
Operating Income by Group (in millions)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
Comparable Comparable
1998 1997 % Change % Change 1998 1997 % Change % Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Textile and
Industrial Coatings $20.6 $13.0 58% 16% $36.3 $24.7 47% 19%
Polymer Additives and
Specialty Plastics 12.1 11.9 2% (5)% 27.4 25.7 7% 3%
Consumer Specialties 7.5 6.2 21% 2% 13.1 11.8 11% 1%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $40.2 $31.1 29% 6% $76.8 $62.2 23% 9%
============================================================================================================================
</TABLE>
The following discussion and analysis of fluctuations in sales and operating
income for the Performance Materials Segment excludes the impact of acquisitions
(see Comparable % Change column).
Second Quarter 1998 Compared to Second Quarter 1997
- ---------------------------------------------------
The Textile and Industrial Coatings Group's increase in operating income between
periods resulted from reduced raw material prices across most divisions, a
favorable sales mix and higher pricing offset by higher SG&A and unabsorbed
manufacturing costs related to lower volumes and inventory control measures.
The decrease in operating income for the Polymer Additives and Specialty
Plastics Group was due to costs associated with the start-up of new operations,
higher SG&A costs and lower pricing offset by higher volumes.
The increase in operating income for the Consumer Specialties Group between
periods was due to lower raw material prices, increased volumes and a favorable
sales mix offset by higher SG&A and unabsorbed manufacturing costs related to
lower volumes and inventory control measures.
First Six Months 1998 Compared to First Six Months 1997
- -------------------------------------------------------
The changes in operating income for the first six months of 1998 versus 1997 for
the Textile and Industrial Coatings and Consumer Specialties Groups were due to
the same reasons affecting the second quarter results.
The Polymer Additives and Specialty Plastics Group's increase in operating
income is due to higher volumes primarily in Estane (registered trademark)
thermoplastic polyurethanes and Telene (registered trademark) DCPD monomers
and reduced raw material costs in the Temprite (registered trademark) high heat-
resistant plastic products offset by higher SG&A and unabsorbed
manufacturing costs related to lower volumes and inventory control measures.
- 17 -
<PAGE>
CORPORATE
---------
Second quarter 1998 Corporate expenses decreased $1.5 million to $13.7 million
as compared to the same period last year. Corporate expenses decreased by $2.5
million for the six month period ended June 30, 1998 as compared to the
corresponding period in the previous year. The decreases are largely
attributable to reduced costs associated with the Company's long-term incentive
plan.
INTEREST EXPENSE
----------------
Interest expense increased by $2.0 million to $21.3 million during the second
quarter as compared to the corresponding quarter in 1997. The increase in
interest expense is due to increased indebtedness resulting from the acquisition
of CH Patrick and Freedom Chemical, offset by savings due to the refinancing of
Rohr's higher cost debt in late 1997.
Interest expense declined during the first half of 1998 by $1.0 million, or 3%,
as compared to the same period last year. The decrease is due to the refinancing
of Rohr's higher cost debt with the Company's lower cost debt at the end of
1997, offset by additional interest expense resulting from the acquisition of
Freedom Chemical in late March 1998.
OTHER INCOME/EXPENSE
--------------------
The increase in other expense during the second quarter and the first six months
of 1998 as compared to the comparable periods last year is due to the inclusion
in 1997 of a pre-tax gain of $26.4 million from the sale of the Company's engine
electrical business (see Note F of the condensed consolidated financial
statements) and a $13.7 million pre-tax gain on the issuance of subsidiary stock
(see Note G of the condensed consolidated financial statements).
INCOME TAXES
------------
For the second quarter and first six months of 1998, the Company's effective tax
rate was approximately 38.5 percent. For the same periods last year, the
Company's effective tax rate was approximately 37.5 percent. For each period,
the effective tax rate was higher than the federal statutory rate principally
due to state and local income taxes.
DISCONTINUED OPERATIONS
-----------------------
The Company recognized a $1.6 million after-tax charge during the 1998 first
quarter related to a business previously divested and reported as a discontinued
operation.
- 18 -
<PAGE>
The first half 1997 results reflect the gain on the sale of Tremco Incorporated
in February 1997 and earnings from the chlor-alkali and olefins business that
was sold in August 1997.
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
Current assets less current liabilities increased by $198.2 million from
December 31, 1997 to June 30, 1998. The increase resulted from an increase in
accounts receivable and inventory. The Company's current ratio increased from
1.5X at December 31, 1997 to 1.7X at June 30, 1998, and the quick ratio
increased from .6X at December 31, 1997 to .7X at June 30, 1998. The Company
expects to have adequate cash flow from operations and has the credit facilities
(described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997) to satisfy its operating requirements and capital spending
programs and to finance growth opportunities as they arise.
The Company's debt-to-capitalization ratio was 41.4 percent at June 30, 1998,
compared with 33.0 percent at December 31, 1997. For purposes of this ratio, the
Trust preferred securities are treated as capital.
Cash Flows
Cash flow from operating activities, excluding merger costs, during the first
six months of 1998 was $109.6 million more than the same period last year. The
Company expects to generate positive cash flow in 1998 after satisfying capital
expenditures and the payment of dividends, excluding the effects of acquisitions
and divestitures.
YEAR 2000 COMPUTER COSTS
------------------------
The Company has been addressing the computer and operating system changes that
will be required to ensure functionality of all the Company's computer systems
for the year 2000. The Company has completed, is currently working on or soon
will be engaged in the implementation of several new business systems, replacing
outdated systems. The new systems are already designed to be year 2000
compliant. In other circumstances, the Company will be required to make changes
to existing systems. An analysis of Year 2000 compliance at Freedom Chemical and
CH Patrick has been completed and the Company is currently in the process of
reviewing this analysis and quantifying the costs. The Company estimates that
the cost of Year 2000 compliance will not have a material adverse effect of the
future results of operations or financial condition of the Company.
The Company is also reviewing the efforts being undertaken by its vendors and
customers to become year 2000 compliant to ensure that no business interruption
is experienced at the turn of the century. Although this review is continuing,
the Company is not currently aware of vendor or customer circumstances that may
have a material adverse impact on the Company.
Management has also determined that the Company should have no material exposure
to contingencies related to the Year 2000 issue for the products and services it
has sold. (The foregoing analysis contains forward-looking information. See
cautionary statement at the end of the Management's Discussion and Analysis
section.)
- 19 -
<PAGE>
TRANSITION TO THE EURO
----------------------
The Euro is scheduled to be introduced on January 1, 1999, at which time the
conversion rates between legacy currencies and the Euro will be set for the
eleven participating EMU member countries. However, the legacy currencies in
those countries will continue to be used as legal tender through January 1,
2002. Thereafter, the legacy currencies will be canceled and Euro bills and
coins will be used in the eleven participating countries.
Transition to the Euro creates a number of issues for the Company. Business
issues that must be addressed include product pricing policies and ensuring the
continuity of business and financial contracts. Finance and accounting issues
include the conversion of accounting systems, statutory records, tax books and
payroll systems to the Euro, as well as conversion of bank accounts and other
treasury and cash management activities.
The Company is addressing these transition issues and does not expect the
transition to the Euro to have a material effect on the results of operations or
financial condition of the Company.
NEW ACCOUNTING STANDARDS
------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its issuance. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement No. 133 will be
on its earnings and financial position and has not yet determined the timing or
method of adoption. However, the Statement could increase volatility in earnings
and comprehensive income.
- 20 -
<PAGE>
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
--------------------------------------------------------------
This document includes certain forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, that involves risk and
uncertainty. If outside vendors are unable to make their computer systems year
2000 compliant in time, or if the magnitude of the year 2000 issue is greater
than presently anticipated, it could have a material adverse impact on the
Company. If there were a material decrease in the revenue and profitability of
the Company's businesses, its cash flow may be adversely affected.
Estimating liabilities with respect to environmental matters is difficult due to
numerous variables. Changes can occur in the scope or nature of the remedy
resulting in increased or occasionally decreased costs. The Company's share of
remediation costs may be greater or lesser than assumed due to changes in the
number of other potentially responsible parties, the financial ability or lack
of ability of other potentially responsible parties to contribute to the remedy,
or judicial or other determinations that result in a change in the Company's
share of the liability for a site. Expected indemnification from third parties
may not materialize due to disputes regarding indemnification obligations or
lack of financial resources which can also result in greater financial exposure
to the Company. Furthermore, new sites requiring remediation can be identified
at which the Company may have future liability.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant held its Annual Meeting of Shareholders on April 20, 1998. As
described in the 1998 Proxy Statement, the following actions were taken:
- The thirteen nominees for directors were elected.
- The appointment of Ernst & Young LLP as independent auditors for the
year 1998 was ratified.
- The Certificate of Incorporation was amended to increase the number of
authorized shares of the Company's Common Stock from 100 million to 200
million shares.
- 21 -
<PAGE>
The votes were as follows:
For Director:
Number of Number of
Shares Shares
Voted For Vote Withheld
---------- -------------
Jeannette Grasselli Brown 61,597,309 3,097,456
David L. Burner 61,649,001 3,045,764
Diane C. Creel 61,578,885 3,115,880
George A. Davidson, Jr. 61,572,596 3,122,169
James J. Glasser 61,532,278 3,162,487
Jodie K. Glore 61,625,089 3,069,676
Douglas E. Olesen 61,650,169 3,044,596
Richard de J. Osborne 61,677,842 3,016,923
Alfred M. Rankin, Jr. 61,660,606 3,034,159
Robert H. Rau 61,665,932 3,028,833
D. Lee Tobler 61,618,396 3,076,369
James R. Wilson 61,690,398 3,004,367
A. Thomas Young 61,682,195 3,012,570
For ratification of independent auditors:
64,222,654 shares voted for; 201,146 shares voted against; and 270,965
shares withheld from voting.
For amendment to Certificate of Incorporation:
59,574,395 shares voted for; 4,630,833 shares voted against; 489,537 shares
were withheld from voting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule - June 30, 1998
(b) Reports on Form 8-K - None
- 22 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 12, 1998 The B.F.Goodrich Company
- --------------- ------------------------
/S/LES C. VINNEY
---------------------------------
Les C. Vinney
Senior Vice President and
Chief Financial Officer
/S/ROBERT D. KONEY, JR.
----------------------------------
Robert D. Koney, Jr.
Vice President & Controller
(Chief Accounting Officer)
- 23 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet and the Condensed Consolidated
Statement of Income of this Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 57,100
<SECURITIES> 0
<RECEIVABLES> 664,200
<ALLOWANCES> 22,800
<INVENTORY> 744,900
<CURRENT-ASSETS> 1,608,000
<PP&E> 2,181,900
<DEPRECIATION> 993,500
<TOTAL-ASSETS> 4,050,900
<CURRENT-LIABILITIES> 943,400
<BONDS> 993,400
123,300
0
<COMMON> 379,100
<OTHER-SE> 1,125,900
<TOTAL-LIABILITY-AND-EQUITY> 4,050,900
<SALES> 1,948,700
<TOTAL-REVENUES> 1,948,700
<CGS> 1,416,400
<TOTAL-COSTS> 1,416,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,100
<INCOME-PRETAX> 187,600
<INCOME-TAX> 72,300
<INCOME-CONTINUING> 110,100
<DISCONTINUED> (1,600)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,500
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.44
</TABLE>
