<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 12, 1999
THE B.F.GOODRICH COMPANY
(Exact Name of Registrant as Specified in Charter)
New York 1-892 34-0252680
(State or Other Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
3 Coliseum Centre
2550 West Tyvola Road
Charlotte, North Carolina 28217
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (704) 423-7000
<PAGE> 2
ITEM 5. OTHER EVENTS
1. As previously reported by The B.F.Goodrich Company ("BFGoodrich") on its
Current Report on Form 8-K filed July 12, 1999 (as amended by Form 8-K/A
filed September 24, 1999), on July 12, 1999 BFGoodrich completed its
acquisition of Coltec Industries Inc ("Coltec") by way of a merger of a
wholly-owned subsidiary of BFGoodrich into Coltec. Each share of common
stock of Coltec was exchanged for 0.56 shares of common stock of
BFGoodrich. The acquisition was accounted for as a "pooling of interests"
under generally accepted accounting principles.
Although the merger was completed after the date of these financial
statements, the historical results presented herein as Exhibit 99.1 give
effect to the merger as if it had been completed at the beginning of the
earliest period presented. Incorporated herein by reference to Exhibit 99.1
filed herewith are the following:
1. Selected Financial Data
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
3. Consolidated Statement of Income for the years ended December 31,
1998, 1997 and 1996.
4. Consolidated Balance Sheet at December 31, 1998 and 1997.
5. Consolidated Statement of Cash Flows for the years ended December
31, 1998, 1997 and 1996.
6. Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
7. Notes to Consolidated Financial Statements.
The report of Ernst & Young LLP, independent auditors, on these
consolidated financial statements of BFGoodrich at December 31, 1998 and 1997
and for the years ended December 31, 1998, 1997 and 1996 is filed herewith as
part of Exhibit 99.1 and the related consent is filed herewith as Exhibit 23.1.
Both the report and the consent are incorporated herein by reference. The report
of Ernst & Young LLP referred to above as to 1996 is based in part on the report
of Deloitte & Touche LLP, independent accountants, and as to 1998, 1997 and 1996
is based in part on the report of Arthur Andersen LLP, independent accountants.
The reports of Deloitte & Touche LLP and Arthur Andersen LLP are filed herewith
as Exhibits 99.2 and 99.3, respectively. The consents of Deloitte & Touche LLP
and Arthur Andersen LLP are filed herewith as Exhibits 23.2 and 23.3,
respectively. These reports and consents are incorporated herein by reference.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
None.
(b) Pro Forma Financial Information.
None.
(c) Exhibits.
Exhibit 23.1 Consent of Ernst & Young LLP.
Exhibit 23.2 Consent of Deloitte & Touche LLP.
Exhibit 23.3 Consent of Arthur Andersen LLP.
Exhibit 27.1 Financial Data Schedules - 1998
Exhibit 27.2 Financial Data Schedules - 1997
Exhibit 27.3 Financial Data Schedules - 1996
Exhibit 99.1 Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Consolidated Financial Statements at December 31,
1998 and 1997 and for the years ended December 31,
1998, 1997 and 1996 of The B.F.Goodrich Company and
Report of Ernst & Young LLP.
Exhibit 99.2 Independent Auditors Report - Deloitte & Touche LLP
Exhibit 99.3 Independent Auditors Report - Arthur Andersen LLP
3
<PAGE> 4
SIGNATURES
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 hereunto duly authorized.
THE B.F.GOODRICH COMPANY
(Registrant)
Date: December 17, 1999 By: /s/ Laurence A. Chapman
-------------------------------
Laurence A. Chapman
Senior Vice President and
Chief Financial Officer
By: /s/ Robert D. Koney, Jr.
------------------------------
Robert D. Koney, Jr.
Vice President and Controller
(Chief Accounting Officer)
4
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated December 10,
1999, with respect to the consolidated financial statements of The BFGoodrich
Company and subsidiaries included in its Current Report on Form 8-K filed with
the Securities and Exchange Commission for the three years ended December 31,
1998, in the following Registration Statements and in the related Prospectuses:
<TABLE>
<CAPTION>
Registration
Number Description of Registration Statement Filing Date
- ------------ ------------------------------------- -----------
<S> <C> <C>
33-20421 The B.F.Goodrich Company Key Employees' March 1, 1988
Stock Option Plan - Form S-8
2-88940 The B.F.Goodrich Company Retirement Plus April 28, 1989
Savings Plan - Post-Effective Amendment
No. 2 to Form S-8
33-29351 The Rohr Industries, Inc. 1988 Non-Employee June 19, 1989
Director Stock Option Plan - Form S-8
33-49052 The B.F.Goodrich Company Key Employees' June 26, 1992
Stock Option Plan - Form S-8
33-59580 The B.F.Goodrich Company Retirement March 15, 1993
Plus Savings Plan for Wage Employees - Form S-8
333-03293 The B.F.Goodrich Company May 8, 1996
Stock Option Plan - Form S-8
333-03343 Common Stock - Form S-3 May 8, 1996
333-19697 The B.F.Goodrich Company Savings January 13, 1997
Benefit Restoration Plan - Form S-8
333-53877 Pretax Savings Plan for the Salaried Employees May 29, 1998
of Rohr, Inc. (Restated 1994) and Rohr, Inc. Savings
Plan for Employees Covered by Collective Bargaining
Agreements (Restated 1994) - Form S-8
333-53879 Directors' Deferred Compensation Plan - Form S-8 May 29, 1998
333-53881 Rohr, Inc. 1982 Stock Option Plan, May 29, 1998
Rohr, Inc. 1989 Stock Incentive Plan and
Rohr, Inc. 1995 Stock Incentive Plan - Form S-8
333-74987 5 1/4% Convertible Preferred Securities Term Income March 24, 1999
Deferrable Equity Securities - Form S-3
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Registration
Number Description of Registration Statement Filing Date
- ------------ ------------------------------------- -----------
<S> <C> <C>
333-76297 Coltec Industries Inc. 1992 Stock Option Plan April 14, 1999
Coltec Industries Inc. 1994 Stock Option Plan for
Outside Directors - Form S-8
333-77023 The B.F.Goodrich Company Stock Option
Plan - Form S-8 April 26, 1999
</TABLE>
/s/ ERNST & YOUNG LLP
Charlotte, North Carolina
December 10, 1999
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements on Form
S-3 (Nos. 333-03343 and 333-74987) and Form S-8 (Nos. 2-88940, 33-20421,
33-29351, 33-49052, 33-59580, 333-03293, 333-19697, 333-53877, 333-53879,
333-53881, 333-76297 and 333-77023) of The BFGoodrich Company, of our report
dated September 11, 1997, on our audit of Rohr, Inc. for the year ended July 31,
1996, appearing in this Current Report on Form 8-K of The BFGoodrich Company to
be filed with the Securities and Exchange Commission on or about December 10,
1999.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
December 10, 1999
<PAGE> 1
Exhibit 23.3
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to incorporation of our
report dated January 22, 1999, covering our audit of Coltec Industries Inc. for
the years ended December 31, 1998, 1997, and 1996, included in this Form 8-K
into the following The B.F. Goodrich Company Registration Statements and the
related Prospectuses:
<TABLE>
<CAPTION>
Registration
Number Description of Registration Statement Filing Date
- ------------------- ------------------------------------------------- ------------------
<S> <C> <C>
33-20421 The B.F. Goodrich Company Key Employees' Stock March 1, 1988
Option Plan - Form S-8
2-88940 The B.F. Goodrich Company Retirement Plus Savings April 28, 1989
Plan - Post Effective Amendment No. 2 to Form S-8
33-29351 The Rohr Industries, Inc. 1988 Non-Employee June 19, 1989
Director Stock Option Plan - Form S-8
33-49052 The B. F. Goodrich Company Key Employees' Stock June 26, 1992
Option Plan - Form S-8
33-59580 The B.F. Goodrich Company Retirement Plus Savings March 15, 1993
Plan for Wage Employees - Form S-8
333-03293 The B.F. Goodrich Company Stock Option Plan - May 8, 1996
Form S-8
333-03343 Common Stock - Form S-3 May 8, 1996
333-19697 The B.F. Goodrich Company Savings Benefit January 13, 1997
Restoration Plan - Form S-8
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Registration
Number Description of Registration Statement Filing Date
- ------------------- ------------------------------------------------- ------------------
<S> <C> <C>
333-53877 Pretax Savings Plan for the Salaried Employees of May 29, 1998
Rohr, Inc. (Restated 1994) and Rohr, Inc. Savings
Plan for Employees Covered by Collective
Bargaining Agreements (Restated 1994) - Form S-8
333-53879 Directors' Deferred Compensation Plan - Form S-8 May 29, 1998
333-53881 Rohr, Inc. 1982 Stock Option Plan, Rohr, Inc. 1989 May 29, 1998
Stock Incentive Plan and Rohr, Inc. 1995 Stock
Incentive Plan - Form S-8
333-74987 Common Stock and Guarantee - Form S-3 March 24, 1999
333-76297 Coltec Industries Inc 1992 Stock Option Plan and April 14, 1999
Coltec Industries Inc 1994 Stock Option Plan for
Outside Directors - Form S-8
333-77023 The B.F. Goodrich Company Stock Option Plan - April 26, 1999
Form S-8
</TABLE>
/s/ Arthur Andersen LLP
Charlotte, North Carolina,
December 10, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO REFLECT THE
MERGER WITH COLTEC WHICH OCCURRED IN THE THIRD QUARTER OF 1999 AND WAS ACCOUNTED
FOR AS A POOLING OF INTERESTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 SEP-30-1998 JUN-30-1998 MAR-31-1998
<CASH> 53,500 61,100 77,200 81,600
<SECURITIES> 0 0 0 0
<RECEIVABLES> 802,900 845,600 830,300 773,400
<ALLOWANCES> 25,700 24,800 25,500 22,900
<INVENTORY> 967,700 961,100 948,800 885,400
<CURRENT-ASSETS> 2,015,800 2,055,000 2,028,100 1,918,500
<PP&E> 3,002,900 2,939,600 2,886,500 2,749,900
<DEPRECIATION> 1,440,400 1,433,900 1,398,000 1,384,200
<TOTAL-ASSETS> 5,213,000 5,125,400 5,041,400 4,921,400
<CURRENT-LIABILITIES> 1,270,200 1,270,400 1,251,100 1,476,500
<BONDS> 1,572,700 1,602,600 1,594,800 1,548,200
268,900 268,400 268,100 123,200
0 0 0 0
<COMMON> 557,700 561,200 564,400 558,300
<OTHER-SE> 679,700 626,500 575,200 485,100
<TOTAL-LIABILITY-AND-EQUITY> 5,213,000 5,125,400 5,041,400 4,921,400
<SALES> 5,454,800 4,064,500 2,717,900 1,312,100
<TOTAL-REVENUES> 5,454,800 4,064,500 2,717,900 1,312,100
<CGS> 3,919,200 2,932,900 1,971,100 944,300
<TOTAL-COSTS> 3,919,200 2,932,900 1,971,100 944,300
<OTHER-EXPENSES> 10,500 0 0 0
<LOSS-PROVISION> 6,800 5,100 3,400 1,700
<INTEREST-EXPENSE> 134,100 99,500 66,200 31,400
<INCOME-PRETAX> 594,200 451,200 307,800 132,100
<INCOME-TAX> 218,500 168,000 114,300 49,400
<INCOME-CONTINUING> 359,600 271,800 186,600 80,100
<DISCONTINUED> (1,600) (1,600) (1,600) (1,600)
<EXTRAORDINARY> (4,300) (4,300) (4,300) 0
<CHANGES> 0 0 0 0
<NET-INCOME> 353,700 265,900 180,700 78,500
<EPS-BASIC> 3.21 2.41 1.64 0.72
<EPS-DILUTED> 3.14 2.36 1.60 0.70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO REFLECT THE
MERGER WITH COLTEC WHICH OCCURRED IN THE THIRD QUARTER OF 1999 AND WAS ACCOUNTED
FOR AS A POOLING OF INTERESTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 61,700 303,600 246,000 170,300
<SECURITIES> 0 0 0 0
<RECEIVABLES> 677,100 667,500 758,600 744,700
<ALLOWANCES> 24,200 24,100 22,400 26,900
<INVENTORY> 849,700 759,900 762,300 783,000
<CURRENT-ASSETS> 1,769,100 1,882,400 1,864,800 1,803,000
<PP&E> 2,694,100 2,598,200 2,686,600 2,670,700
<DEPRECIATION> 1,341,400 1,332,800 1,395,000 1,380,000
<TOTAL-ASSETS> 4,333,700 4,280,200 4,314,700 4,257,400
<CURRENT-LIABILITIES> 1,182,900 913,100 934,900 956,500
<BONDS> 1,321,900 1,540,600 1,605,600 1,584,700
123,100 123,000 122,900 122,800
0 0 0 0
<COMMON> 554,000 549,900 548,700 551,100
<OTHER-SE> 437,000 447,700 392,400 335,900
<TOTAL-LIABILITY-AND-EQUITY> 4,333,700 4,280,200 4,314,700 4,257,400
<SALES> 4,687,900 3,436,800 2,242,100 1,073,400
<TOTAL-REVENUES> 4,687,900 3,436,800 2,242,100 1,073,400
<CGS> 3,372,700 2,461,000 1,621,000 776,300
<TOTAL-COSTS> 3,372,700 2,461,000 1,621,000 776,300
<OTHER-EXPENSES> 112,200 35,200 0 0
<LOSS-PROVISION> 16,800 12,600 8,400 4,200
<INTEREST-EXPENSE> 127,900 94,200 63,600 31,400
<INCOME-PRETAX> 343,700 315,600 217,500 82,200
<INCOME-TAX> 138,200 116,900 80,900 30,500
<INCOME-CONTINUING> 195,000 190,800 131,400 49,100
<DISCONTINUED> 84,300 84,300 67,500 64,100
<EXTRAORDINARY> (19,300) (2,600) 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 260,000 272,500 198,900 113,200
<EPS-BASIC> 2.41 2.54 1.85 1.05
<EPS-DILUTED> 2.33 2.45 1.77 1.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO REFLECT THE
MERGER WITH COLTEC WHICH OCCURRED IN THE THIRD QUARTER OF 1999 AND WAS ACCOUNTED
FOR AS A POOLING OF INTERESTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 152,100
<SECURITIES> 0
<RECEIVABLES> 746,000
<ALLOWANCES> 28,200
<INVENTORY> 805,800
<CURRENT-ASSETS> 1,806,000
<PP&E> 2,770,400
<DEPRECIATION> 1,413,600
<TOTAL-ASSETS> 4,324,900
<CURRENT-LIABILITIES> 1,071,200
<BONDS> 1,599,100
122,600
0
<COMMON> 540,900
<OTHER-SE> 208,600
<TOTAL-LIABILITY-AND-EQUITY> 4,324,900
<SALES> 4,005,500
<TOTAL-REVENUES> 4,005,500
<CGS> 2,841,000
<TOTAL-COSTS> 2,841,000
<OTHER-EXPENSES> 11,200
<LOSS-PROVISION> 7,500
<INTEREST-EXPENSE> 164,700
<INCOME-PRETAX> 290,700
<INCOME-TAX> 103,200
<INCOME-CONTINUING> 177,000
<DISCONTINUED> 115,500
<EXTRAORDINARY> (30,600)
<CHANGES> 0
<NET-INCOME> 261,900
<EPS-BASIC> 2.49
<EPS-DILUTED> 2.40
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SELECTED FINANCIAL DATA
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales $ 5,454.8 $ 4,687.9 $ 4,005.5 $ 3,761.4 $ 3,601.6
Operating income 683.2 430.9 482.0 395.7 368.8
Income from continuing operations 359.6 195.0 177.0 130.6 103.2
BALANCE SHEET DATA:
Total assets $ 5,213.0 $ 4,333.7 $ 4,324.9 $ 4,229.2 $ 4,250.7
Non-current long-term debt and
capital lease obligations 1,572.7 1,321.9 1,599.1 1,908.5 1,970.5
Mandatorily redeemable preferred
securities of Trust 268.9 123.1 122.6 122.2 --
Total shareholders' equity 1,237.4 991.0 749.4 455.9 386.0
OTHER FINANCIAL DATA:
Total segment operating income $ 777.4 $ 601.0 $ 578.3 $ 523.3 $ 473.7
EBITDA(1) 884.7 700.8 624.0 559.6 507.8
Operating cash flow 499.1 271.2 315.0 312.0 362.4
Capital expenditures 262.0 241.1 241.7 198.3 174.3
Dividends (common and preferred) 75.7 59.5 58.8 61.6 64.6
Distributions on Trust
preferred securities 16.1 10.5 10.5 5.1 --
PER SHARE OF COMMON STOCK:
Income from continuing
operations, diluted $ 3.19 $ 1.75 $ 1.63 $ 1.18 $ .93
Dividends declared 1.10 1.10 1.10 1.10 1.10
Book value 11.28 9.04 7.00 4.37 2.67
RATIOS:
Operating income as a percent
of sales (%) 12.5 9.2 12.0 10.5 10.2
Debt-to-capitalization ratio (%) 53.3 57.7 67.3 77.7 84.5
Dividend payout-common stock (%) 21.4 22.9 22.5 26.8 31.1
OTHER DATA:
Common shareholders of record at
end of year n/a n/a n/a n/a n/a
Common shares outstanding at end
of year (millions) 109.7 109.7 107.1 104.4 103.4
Number of employees at end of year 27,234 25,910 26,113 25,488 26,679
</TABLE>
(1) "EBITDA" as used herein means income from continuing operations before
distributions on Trust preferred securities, income tax expense, net
interest expense, depreciation and amortization and special items.
Special items for 1998, 1997 and 1996 are described on page 5 of this
exhibit to Form 8-K. Special items in 1995 included a net gain of $12.5
million from an insurance settlement; a charge of $17.6 million
primarily related to the closure of a facility in Canada and selected
other work force reductions; a net gain of $2.2 million from the sale
of a business; and a charge of $1.9 million relating to a voluntary
early retirement program. Special items in 1994 included a charge of
$6.4 million attributable to unamortized pension prior service costs
related to a reduction in employment levels and a net gain of $1.6
million on the sale of a business. All amounts within this footnote are
presented net of tax.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
WE BELIEVE THIS MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS. SEE THE LAST SECTION FOR CERTAIN RISKS AND
UNCERTAINTIES.
RESULTS OF OPERATIONS
MERGER
On July 12, 1999, the Company completed its merger with Coltec. The
merger has been 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 Coltec as though
Coltec had always been a part of BFGoodrich. As such, results for the three
years ended December 31, 1998, 1997 and 1996 represent the combined results of
BFGoodrich and Coltec.
As a result of the merger, Coltec became a wholly-owned subsidiary of
the Company. In accordance with the terms of the merger, each share of Coltec
common stock was converted into the right to receive 0.56 shares of BFGoodrich
common stock, totaling 35.5 million shares of BFGoodrich common stock.
In addition, the Company issued options to purchase 3.0 million shares
of BFGoodrich common stock in exchange for options to purchase Coltec common
stock outstanding immediately prior to the merger. These options vest and become
exercisable in accordance with the terms and conditions of the original Coltec
options. Also, as a result of the merger, each 5 1/4% Convertible Preferred
Security issued by Coltec Capital Trust became convertible into 0.955248 of a
share of BFGoodrich common stock, subject to certain adjustments.
2
<PAGE> 3
The following table presents sales, income from continuing operations
and net income for the previously separate companies and the combined amounts
presented within the income statement for the periods presented. The conforming
accounting adjustments conform Coltec's accounting policies to BFGoodrich's
accounting policies, the more significant of which include: (1) Coltec's landing
gear business was changed from percentage of completion contract accounting to
accrual accounting; (2) non-recurring engineering costs that were capitalized
are now expensed unless they are contractually recoverable from the customer;
and (3) Coltec's SFAS 106 transition obligation that was previously deferred and
was being amortized to income over twenty years has now been recognized
immediately upon initial adoption of SFAS 106.
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Sales:
BFGoodrich ................................ $ 3,950.8 $ 3,373.0 $ 2,845.8
Coltec .................................... 1,504.0 1,314.9 1,159.7
---------- --------- ---------
Combined .................................. $ 5,454.8 $ 4,687.9 $ 4,005.5
========== ========= =========
Income from continuing
operations:
BFGoodrich ................................ $ 228.1 $ 113.2 $ 115.5
Coltec .................................... 122.3 94.9 54.6
Conforming accounting
adjustments ............................. 9.2 (13.1) 6.9
---------- --------- ---------
Combined .................................. $ 359.6 $ 195.0 $ 177.0
========== ========= =========
Net Income:
BFGoodrich ................................ $ 226.5 $ 178.2 $ 173.9
Coltec .................................... 118.0 94.9 81.1
Conforming accounting
adjustments ............................. 9.2 (13.1) 6.9
---------- --------- ---------
Combined .................................. $ 353.7 $ 260.0 $ 261.9
========== ========= =========
</TABLE>
The conforming accounting adjustments have also resulted in the
following changes applicable to the Coltec balance sheet accounts: a decrease in
inventories, income taxes payable and accumulated deficit and an increase in
postretirement benefits other than pensions and accrued expenses.
1999 AND 2000 OUTLOOK
In September 1999, the Company revised its earnings per share outlook
to between $3.20 and $3.30 in 1999, compared to $2.91 in 1998, excluding special
items. The revised earnings outlook reflects continued pricing pressure and
higher raw material costs in Performance Materials, and continued softness
across most markets served by the Engineered Industrial Products segment. Other
factors included initial dilution from the Coltec merger and delays in closing
the transaction, which postponed the realization of cost synergies.
Looking ahead to 2000, the Company expects the same market issues that
have affected results in the second half of 1999 to continue. These pressures,
together with a further decline in commercial aircraft production, will most
likely result in relatively flat financial performance in 2000 compared to 1999.
This outlook
3
<PAGE> 4
includes $25 million in annual headquarter cost savings beginning in 2000 and
significant operational savings through consolidation of businesses and
facilities.
TOTAL COMPANY
CONSOLIDATED OPERATIONS The Company achieved strong double-digit sales
and income growth from continuing operations in 1998. Income from continuing
operations climbed 25 percent, excluding the impact of special items as
discussed below. The Company experienced continued strong demand in most
markets served.
BUSINESS SEGMENT PERFORMANCE
SEGMENT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES:
Aerospace $ 3,479.3 $ 3,026.1 $ 2,454.6
Engineered Industrial Products 779.9 757.1 726.5
Performance Materials 1,195.6 904.7 824.4
----------------------------------------------------------------------------------------------------------------
Total $ 5,454.8 $ 4,687.9 $ 4,005.5
================================================================================================================
OPERATING INCOME:
Aerospace $ 500.0 $ 325.8 $ 320.7
Engineered Industrial Products 131.6 147.0 144.1
Performance Materials 145.8 128.2 113.5
----------------------------------------------------------------------------------------------------------------
Total Reportable Segments 777.4 601.0 578.3
Merger Related and
Consolidation Costs (10.5) (77.0) (11.2)
Corporate (83.7) (93.1) (85.1)
----------------------------------------------------------------------------------------------------------------
Total $ 683.2 $ 430.9 $ 482.0
================================================================================================================
</TABLE>
Cost of sales was 71.8 percent of sales in 1998 compared with 72.7
percent in 1997 and 70.9 percent in 1996. Margin improvement in the Aerospace
Segment in 1998 was partially offset by a margin decline in the Engineered
Industrial Products and Performance Materials Segments. Cost of sales in 1997
was also negatively impacted by the MD-90 write-off as compared to 1998 and 1996
levels (see detailed group discussions below).
Selling, general and administrative costs were 15.4 percent of sales in
1998, compared with 16.5 percent in 1997 and 16.8 percent in 1996. The decrease
in 1998 as compared to 1997 was a result of additional long-term incentive
compensation expense in 1997 that resulted from exceeding the Company's three
year targets and achieving a maximum payout under the plan. The leverage that
resulted from the increase in sales at each of the segments also resulted in a
reduction in SG&A costs as a percentage of sales from 1996 to 1997. (See
detailed group discussions below).
Income from continuing operations included various charges or gains
(referred to as special items) which affected reported earnings. Excluding the
effects of special items, income from continuing operations in 1998 was $327.6
million, or
4
<PAGE> 5
$2.91 per diluted share, compared with $261.1 million, or $2.34 per diluted
share in 1997, and $189.2 million, or $1.74 per diluted share in 1996. The
following table presents the impact of special items on earnings per diluted
share.
<TABLE>
<CAPTION>
EARNINGS PER DILUTED SHARE 1998 1997 1996
- -------------------------- ---- ---- ----
<S> <C> <C> <C>
Income from continuing operations $3.19 $1.75 $1.63
Net (gain) loss on sold businesses (.34) (.15) .02
Gain on issuance of subsidiary stock -- (.07) --
MD-90 write-off -- .19 --
Merger-related and consolidation costs .06 .62 .06
Exchange of convertible debt -- -- .03
----- ----- -----
Income from continuing operations,
excluding special items $2.91 $2.34 $1.74
===== ===== =====
</TABLE>
Income from continuing operations for the year ended December 31, 1998
includes $6.5 million ($0.06 per share) for costs associated with the
Aerostructures Group's closure of three facilities and the impairment of a
fourth facility and a $38.5 million ($0.34 per share) gain on the sale of Holley
Performance Products.
Income from continuing operations for the year ended December 31, 1997
includes (i) merger costs of $69.5 million ($0.62 per share) in connection with
the merger with Rohr, Inc., (ii) a net gain of $8.0 million ($0.07 per share)
resulting from an initial public offering of common stock by the Company's
subsidiary, DTM Corporation, (iii) a net gain of $16.4 million ($0.15 per share)
from the sale of a business, and (iv) a charge of $21.0 million ($0.19 per
share) related to the Aerostructures Group's production contract with IAE
International Aero Engines AG to produce nacelles for McDonnell Douglas
Corporation's MD-90 aircraft.
Income from continuing operations for the year ended December 31, 1996
includes (i) a charge of $2.6 million ($0.02 per share) relating to a voluntary
early retirement program, (ii) a net gain of $1.0 million ($0.01 per share) from
the sale of a business, (iii) a loss of $3.1 million ($0.03 per share) on the
sale of a wholly-owned aircraft leasing subsidiary, (iv) a charge of $4.3
million ($0.04 per share) for an impairment write-down on a facility in
Arkadelphia, Arkansas, and (v) a charge of $3.2 million ($0.03 per share) for
the exchange of convertible notes.
MERGER-RELATED AND CONSOLIDATION COSTS The Company has recorded merger related
and consolidation costs during each of the last three years. See additional
discussion in Note D to the Consolidated Financial Statements.
NET INTEREST EXPENSE Net interest expense increased by $12.1 million in 1998.
The increase in interest expense-net is due to increased indebtedness resulting
from acquisitions during the latter part of 1997 and early portion of 1998,
partially offset by savings that resulted from refinancing Rohr's higher cost
debt in late 1997. Net interest expense decreased $44.6 million, from $160.5
million in 1996 to $115.9 million in 1997. The decrease was primarily
attributable to lower debt levels in 1997 as a result of cash generated from
operations and proceeds from the sale of businesses.
ISSUANCE OF SUBSIDIARY STOCK In May 1997, the Company's subsidiary, DTM
Corporation, issued 2,852,191 shares of its authorized but previously unissued
common stock in an initial public offering. The Company recognized a pretax gain
of $13.7 million ($8.0 million after tax, or $.07 per diluted share) in
accordance with the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin 84.
In February 1999, the Company sold its remaining interest in DTM for
approximately $3.5 million. The Company's net investment in DTM approximated
$0.5 million at December 31, 1998. The gain was recorded within Other Income
(Expense) during the first quarter of 1999.
OTHER INCOME (EXPENSE)--NET Excluding the impact of net gains (losses) on sale
of businesses and the exchange of convertible notes in 1996, other income
(expense)
5
<PAGE> 6
net was expense of $19.3 million, $11.4 million and $21.9 million in 1998, 1997
and 1996 respectively. The decrease in expense from 1996 to 1997 was due
primarily to the discontinuation of the Company's retiree life insurance program
in 1997 and the elimination of the costs related thereto. The increase in
expense from 1997 to 1998 relates primarily to increased costs associated with
the Company's executive life insurance program.
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 1997
reflect a gain on the sale of Tremco Incorporated in February 1997 and the
results of operations and gain on the sale of the chlor-alkali and olefins
business in August 1997. Discontinued operations in 1996 reflect the results of
operations and gain on the sale of the Company's automotive original equipment
component businesses in June 1996. For additional information see Note T to the
Consolidated Financial Statements.
EXTRAORDINARY ITEMS The Company has recorded extraordinary items during each of
the last three years, net of tax, related to extinguishment of debt.
ACQUISITIONS
POOLING-OF-INTERESTS
On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by
exchanging 18,588,004 shares of BFGoodrich common stock for all of the common
stock of Rohr. Each share of Rohr common stock was exchanged for .7 of one share
of BFGoodrich common stock. The merger was accounted for as a pooling of
interests, and all prior period financial statements were restated to include
the financial information of Rohr as though Rohr had always been a part of
BFGoodrich.
Prior to the merger, Rohr's fiscal year ended on July 31. For purposes
of the combination, Rohr's financial results for its fiscal year ended July 31,
1997, were restated to the year ended December 31, 1997, to conform with
BFGoodrich's calendar year end. Financial results for Rohr's fiscal years ended
July 31, 1996 and earlier were not restated to conform to BFGoodrich's calendar
year end. For periods prior to 1997, Rohr's fiscal years ended July 31 have been
combined with BFGoodrich's calendar years ended December 31. As a result, Rohr's
results of operations for the period August 1, 1996 to December 31, 1996, do not
appear in the Consolidated Statement of Income and instead are recorded as a
direct adjustment to equity. Rohr's revenues, expenses and net loss for this
five-month period were $341.3 million, $359.3 million and $18.0 million,
respectively. Included in expenses during this period was a $49.3 million pretax
charge ($29.5 million after tax) relating to the McDonnell Douglas MD-90 program
(see discussion under Aerostructures Group).
PURCHASES
The following acquisitions were recorded using the purchase method of
accounting. Their results of operations have been included in the Company's
results since their respective dates of acquisition.
During 1998, the Company acquired a global manufacturer of specialty
and fine chemicals; a manufacturer of flexible graphite and
polytetrafluoroethylene ("PTFE") products; a business that manufactures,
machines and distributes PTFE products; and another business that reprocesses
PTFE compounds. The Company also acquired a manufacturer of sealing products; a
small manufacturer of textile chemicals used for fabric preparation and
finishing; the remaining 20 percent not previously owned of a subsidiary that
produces self-lubricating bearings; and a small manufacturer of energetic
materials systems during 1998. Total consideration aggregated $521.5 million, of
which $308.7 million represented goodwill.
During 1997, the Company acquired seven businesses for cash
consideration of $186.4 million in the aggregate, which included $84.4 million
of goodwill. One of
6
<PAGE> 7
the acquired businesses is a manufacturer of data acquisition systems for
satellites and other aerospace applications. A second business manufactures
diverse aerospace products for commercial and military applications. A third
business is a manufacturer of dyes, chemical additives and durable press resins
for the textiles industry. A fourth business manufactures thermoplastic
polyurethane and is located in the United Kingdom. A fifth business manufactures
flight attendant and cockpit seats and the sixth business is a sheet rubber and
conveyer belt business. The remaining acquisition is a small specialty chemicals
business.
The purchase agreement for the flight attendant and cockpit seat
business includes contingent payments based on earnings levels for the years
ended December 31, 1997-2000. These contingent payments will be recorded as
additional purchase price consideration when made and will be amortized over the
remaining life of the goodwill.
During 1996, the Company acquired five specialty chemicals businesses
for cash consideration of $107.9 million, which included $80.0 million of
goodwill. One of the businesses acquired is a European-based supplier of
emulsions and polymers for use in paint and coatings for textiles, paper,
graphic arts and industrial applications. Two of the acquisitions represented
product lines consisting of water-borne acrylic resins and coatings and
additives used in the graphic arts industry. The fourth acquisition consisted of
water-based textile coatings product lines. The remaining acquisition was a
small supplier of anti-static compounds.
The impact of these acquisitions was not material in relation to the
Company's results of operations. Consequently, pro forma information is not
presented.
DISPOSITIONS
In May 1998, the Company sold the capital stock of its Holley
Performance Products subsidiary for $100 million in cash. The sale resulted in a
pre-tax gain of $58.3 million, net of liabilities retained. The proceeds from
this divestiture were applied toward reducing debt. In 1997, Holley had gross
revenues and operating income of approximately $99.0 million and $8.0 million,
respectively.
During 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 received cash proceeds of $72.5 million which
resulted in a pretax gain of $26.4 million reported within other income
(expense) net.
In December 1996, the Company sold the exhaust systems and components
business of its Stemco division for $11.9 million resulting in a pre-tax gain of
$3.5 million reported within other income (expense) - net. Net sales of the
exhaust systems and components business wer $18.1 million in 1996.
For dispositions accounted for as discontinued operations during 1998,
1997 and 1996 refer to Note T to the Consolidated Financial Statements.
7
<PAGE> 8
1998 COMPARED WITH 1997
AEROSPACE
<TABLE>
<CAPTION>
% OF SALES
--------------------
1998 1997 % CHANGE 1998 1997
---- ---- -------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES
Aerostructures $1,144.2 $1,039.7 10.1
Landing Systems 963.2 765.8 25.8
Sensors and
Integrated Systems 911.3 833.9 9.3
MRO 460.6 386.7 19.1
-------- --------
Total Sales $3,479.3 $3,026.1 15.0
======== ========
OPERATING INCOME
Aerostructures $ 189.1 $ 102.6 84.3 16.5 9.9
Landing Systems 117.9 90.3 30.6 12.2 11.8
Sensors and Integrated
Systems 170.3 133.9 27.2 18.7 16.1
MRO 22.7 (1.0) N/A 4.9 (0.3)
-------- --------
Total Operating
Income $ 500.0 $ 325.8 48.9 14.4 10.8
======== ========
</TABLE>
AEROSTRUCTURES GROUP Aerostructures Group sales for 1998 of $1,144.2
million were $104.5 million, or 10.1 percent, higher than in 1997. Contributing
to the increased sales were higher aftermarket spares sales and accelerated
deliveries on many commercial programs, including the V-2500 (A319/320/321
aircraft) and the start up of production deliveries on the 737-700 program.
These increases were partially offset by reduced deliveries on the A340 program.
The Aerostructures Group's 1998 operating income increased by $86.5
million or 84.3 percent, from $102.6 million in 1997 to $189.1 million in 1998.
Operating income of $102.6 million in 1997 was adversely impacted by a $35.2
million pretax charge on the MD-90 contract. Excluding this special item,
operating income increased in 1998 by $51.3 million, or 37 percent, primarily as
a result of increased sales volume and by the proportionately higher ratio of
aftermarket spares sales to production sales. Aftermarket spare sales generally
carry a higher margin than production sales.
LANDING SYSTEMS GROUP Sales in the Landing Systems Group increased
$197.4 million, or 25.8 percent, from $765.8 million in 1997 to $963.2 million
in 1998. Sales growth reflected higher original-equipment demand for landing
gear and evacuation products, as well as stronger than expected aftermarket
demand for aircraft wheels and brakes. Principal landing gear programs were the
B767 and B737. Landing gear sales volumes also reflected the establishment of a
facility in Seattle to provide fully dressed landing gears to Boeing on the
B747-400 program. Commercial wheel and brake demand was strongest on the A320,
B737, and B747 programs. Evacuation product sales increased on the B747-400 and
A330/A340 programs. The AMI acquisition in June 1997 resulted in approximately
$24 million of additional revenue in 1998 as well. The evacuation systems
business also completed in October 1998 the acquisition of Universal Propulsion
Company ("UPCo") which is expected to enhance the business's safety systems
offerings through its direct thermal inflation technology. UPCo manufactures
energetic materials systems used to activate ejection seats, airplane evacuation
slides and related products.
Operating income in the Landing Systems Group increased $27.6 million,
or 30.6 percent, from $90.3 million in 1997 to $117.9 million in 1998. Higher
sales, a favorable product mix, the AMI acquisition and favorable fluctuations
in foreign exchange rates associated with our Canadian operations benefited the
Group's operating income in 1998. These increases were partially offset by
higher wheel and brake strategic sales incentives, principally for the B777,
B737, and Airbus
8
<PAGE> 9
programs; higher product development costs, offset in part by cost reduction
initiatives in operations; and increased landing gear manufacturing costs
associated with the increase in production to match original-equipment
manufacturers' build rates.
SENSORS AND INTEGRATED SYSTEMS GROUP Sensors and Integrated Systems
Group sales increased $77.4 million, or 9.3 percent, from $833.9 million in 1997
to $911.3 million in 1998. This group serves the large commercial transport;
regional, business and general aviation; military; and space markets. All four
of these markets experienced increased sales during the year.
Demand for sensor and avionics products was particularly strong.
Increased sales of sensor products were driven by rate increases on major Boeing
programs, retrofit of competitors' products on Airbus programs and the
application of products to new regional and business programs such as Embraer
145, Gulfstream V, and Bombardier Global Express. The higher sales of avionics
products was fueled by greater than anticipated acceptance of a new, low cost
collision avoidance product--SkyWatch(R) -- and strong associated sales of the
Company's StormScope(R) line of lightning detectors.
Expansion of the Company's ice protection product line, including new
specialty heated products, also contributed to the results. The Group's sales
performance was further enhanced by higher demand for satellite products
(acquired in the March 1997 purchase of Gulton Data Systems) driven by expansion
of our capabilities and product offerings and by increased demand for aircraft
engine components.
The Group's operating income increased $36.4 million, or 27.2 percent,
from $133.9 million in 1997 to $170.3 million in 1998. The increase reflects the
higher sales volumes, the impact of productivity initiatives, a favorable sales
mix, and new products introduced during the year.
MAINTENANCE, REPAIR AND OVERHAUL (MRO) GROUP The MRO Group's sales
increased $73.9 million, or 19.1 percent, from $386.7 million in 1997 to $460.6
million in 1998. During 1998, the MRO Group achieved higher sales volumes
compared with 1997, successfully replacing the sales which were lost after the
bankruptcy (in early 1998) of Western Pacific Airlines and the termination of an
America West Airlines maintenance contract. New business included long-term
service contracts with, in addition to others, Qantas, Continental, Northwest,
United, and Virgin Atlantic Airlines. Sales improved due to higher volumes in
the airframe and component services businesses. The performance of the component
services business reflects strong demand for wheels and brakes and nacelles
services. New business assisting Boeing in paint and other component services
also contributed to the improved results.
Operating income increased $23.7 million, from $(1.0) million in 1997
to $22.7 million in 1998. Excluding a $11.8 million bad debt charge recognized
in 1997 due to the bankruptcy of Western Pacific Airlines, operating income
increased by $11.9 million. The increased operating income in 1998 was
attributable to improved operating efficiencies in the component services
business and the introduction of new higher-margin specialized services. The
Group also benefited from substantially reduced turnover of the certified
airframe and powerplant mechanics work force in the airframe business, compared
with the prior two years.
Although the Group's operating income margin increased during 1998
compared with 1997 (4.9 percent versus 3.0 percent--excluding the 1997 bad debt
charge), several factors constrained the growth of operating income and margins
in 1998. First, the Group's landing gear services business in Miami completed
the construction of a new world-class service facility (also in the Miami area)
in mid 1998. Much of the second half of 1998 was spent transitioning operations
from the old facility to the new one, during which time duplicate facility costs
and production inefficiencies were incurred. This business also incurred
significant charges to resolve several customer billing disputes, largely from
the prior year. Second, start-up costs were incurred by the Group's airframe
business in connection with a new major customer, resulting from servicing
aircraft new to the business.
9
<PAGE> 10
Finally, the airframe business commenced in 1998 the development of a major new
business system, the implementation of which is expected to be completed by mid
1999. As a result, the business increased inventory valuation reserves and
expensed development-related costs. Excluding the impact of the above charges,
operating income margins in 1998 would have been slightly above 6 percent rather
than 4.9 percent.
ENGINEERED INDUSTRIAL PRODUCTS
(in millions) 1998 1997 % CHANGE
---- ---- --------
Sales $ 779.9 $ 757.1 3.0
Operating Income 131.6 147.0 (10.5)
Operating Income as
Percent of Sales 16.9 19.4
Sales increased $22.8 million, or 3.0 percent, from $757.1 million in
1997 to $779.9 million in 1998. Acquisitions accounted for a $66.0 million
increase in sales between periods, while dispositions reduced sales by $62.0
million. The resulting net increase in sales between periods was due to
increased volumes of compressors, heavy duty wheel-end systems and diesel/gas
engines. Continued economic weakness in Asia and South America and slower growth
in key markets, including pulp and paper, chemical, refining and steel,
adversely affected sales growth.
Operating income decreased $15.4 million, or 10.5 percent, from $147.0
million in 1997 to $131.6 million in 1998. The decrease was primarily
attributable to the divestiture noted above as well as additional warranty and
legal reserves ($12.0 million) that were recorded in 1998.
PERFORMANCE MATERIALS
<TABLE>
<CAPTION>
% OF SALES
COMPARABLE ---------------
1998 1997 % CHANGE % CHANGE 1998 1997
---- ---- -------- -------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
SALES
Textile and
Coatings Solutions $ 606.2 $401.2 51.1 (0.4)
Polymer Additives
and Specialty
Plastics 431.3 420.9 2.5 1.3
Consumer Specialties 158.1 82.6 91.4 6.2
-------- ------
Total $1,195.6 $904.7 32.2 1.0
======== ======
OPERATING INCOME
Textile and
Coatings Solutions $ 63.0 $ 48.6 29.6 8.0 10.4 12.1
Polymer Additives
and Specialty
Plastics 58.8 57.3 2.6 1.6 13.6 13.6
Consumer Specialties 24.0 22.3 7.6 5.8 15.2 27.0
-------- ------
Total $ 145.8 $128.2 13.7 4.8 12.2 14.2
======== ======
</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).
TEXTILE AND COATINGS SOLUTIONS GROUP Sales in the Textile and Coatings
Solutions group decreased 0.4 percent from the prior year. The decrease resulted
from volume shortfalls in the Company's textile markets offset by increased
volumes in the Group's industrial specialty products and increased sales prices
in the Group's coatings products. Domestic textile mills demand has been lower
due to an increase in imports and a general slowdown in the apparel markets. In
addition, the export of fabrics to Asian and European countries slowed in 1998.
The Russian
10
<PAGE> 11
currency crisis and the European Union furniture fabric tariffs all had negative
revenue effects on this Group.
Operating income for the Textile and Coatings Solutions Group increased
by $3.9 million, or 8 percent, in 1998 despite the slight reduction in sales due
to reduced raw material pricing and other manufacturing cost efficiencies.
POLYMER ADDITIVES AND SPECIALTY PLASTICS GROUP Sales in the Polymer
Additives and Specialty Plastics Group increased $5.5 million, or 1.3 percent,
over the prior year. Sales volumes increased in the Group's Estane(R)
thermoplastic polyurethanes (TPU) driven by strength in static control polymers
and European TPU demand and Telene(R) DCPD monomer markets but decreased in the
Group's TempRite(R) high heat resistant plastics due to weakness in middle east
markets as well as increased competition from other materials. Sales prices
remained relatively stable with the exception of some Polymer Additives'
products used for the rubber and polymer industries and Estane(R) TPU, where two
competitors commissioned new U.S. production facilities in 1998.
Operating income increased slightly over the prior year mostly as a
result of increased volume and favorable raw material pricing.
CONSUMER SPECIALTIES GROUP The $5.1 million, or 6.2 percent, increase
in sales in the Consumer Specialties Group was driven by increased volumes in
the Group's pharmaceutical and personal care products. Sales prices generally
increased in all of the Group's product lines.
The 5.8 percent increase in operating income was mainly attributable to
a favorable sales mix and higher volumes.
1997 COMPARED TO 1996
AEROSPACE
Aerospace achieved sales growth of 23 percent over 1996. Aerospace
achieved a 1.6 percent increase in operating income, despite a $35.2 million
charge related to the MD-90 program, a large increase in strategic sales
incentives related to wheels and brakes, and an $11.8 million bad debt write-off
due to a customer's bankruptcy and productivity problems in the MRO Group.
Sales by Group 1997 1996
-------------- ---- ----
(in millions)
Aerostructures $1,039.7 $ 744.4
Landing Systems 765.8 589.2
Sensors and Integrated Systems 833.9 735.6
MRO 386.7 385.4
-------- --------
Total $3,026.1 $2,454.6
======== ========
AEROSTRUCTURES GROUP (ROHR) The group's sales were $1,039.7 million in
1997, a $295.3 million, or 39.7 percent, increase from 1996. Contributing to
increased sales were accelerated delivery rates on most commercial programs,
reflecting increased production rates of commercial aircraft and increased
deliveries of spare parts. The CFM56-5 and V2500 programs (which power the A320
family), A340, RR535-E4 (primarily for the Boeing 757), and MD-90 programs all
reflected significant volume increases.
The Aerostructures Group 1997 operating income of $102.6 million
included a $35.2 million pretax charge on the MD-90 contract. Operating income
increased in 1997 primarily as a result of increased sales. Operating income in
1996 benefited from the recognition of profit on the MD-90 program (1996 MD-90
sales were $68.8 million). In 1997, however, no profit was recognized on MD-90
sales (totaling $109.9 million), adversely affecting margins, in addition to the
$35.2 million pretax charge recognized on that program in 1997, as discussed
below.
11
<PAGE> 12
In 1990, the Company entered into a contract with International Aero
Engines to produce nacelles for The Boeing Company's (formerly the McDonnell
Douglas Corporation's) MD-90 aircraft. Under the terms of the contract, the
Company agreed to recover its preproduction costs, and the higher-than-average
production costs associated with early production shipments, over a specified
number of deliveries. In light of the wide market acceptance of the MD-80
series, which was the predecessor aircraft, the Company believed sufficient
MD-90 aircraft would be sold to allow it to recover its costs.
Starting in 1996, a series of developments created market uncertainties
regarding future sales of the MD-90 aircraft. The most significant of these
developments included: McDonnell Douglas' termination of the MD-XX program and
the doubts this action raised regarding McDonnell Douglas' continued presence in
the commercial aircraft industry; the decision of several large airlines that
had traditionally operated McDonnell Douglas aircraft to order aircraft that
compete with the MD-90; the announced (and subsequently completed) acquisition
of McDonnell Douglas by Boeing, which produces a family of competing aircraft;
the announcement by Delta Air Lines (launch customer for the MD-90) of its
intent to replace its existing fleet of MD-90s and to seek a business resolution
with McDonnell Douglas with respect to its remaining orders for the aircraft;
and the lack of significant new MD-90 orders.
In recognition of these developments, the Company reduced its estimates
of future MD-90 aircraft deliveries in December 1996 to include only deliveries
which were supported by firm orders, options and letters of intent for the
aircraft. Based on its reduced estimate of future aircraft deliveries, the
Company believed that future MD-90 sales would not be sufficient to recover its
contract investment plus the costs it would be required to spend in the future
to complete the contract. As a result, the Company recorded a $49.3 million
pretax charge ($29.5 million after tax) in December of 1996 (this charge did not
impact the income statement; rather, it was recognized as a direct adjustment to
equity as a result of aligning Rohr's fiscal year with BFGoodrich's). In July
1997, the Company further reduced its market estimate of future MD-90 sales to
existing firm aircraft orders (excluding firm orders from Delta Air Lines) and
recorded an additional $35.2 million pretax charge ($21.0 million after tax, or
$.19 per diluted share).
Operating Income (Loss) by Group 1997 1996
-------------------------------- ---- ----
(in millions)
Aerostructures $102.6 $ 97.0
Landing Systems 90.3 87.0
Sensors and Integrated Systems 133.9 104.6
MRO (1.0) 32.1
------ ------
Total $325.8 $320.7
====== ======
LANDING SYSTEMS GROUP The Group's sales were $765.8 million, an
increase of $176.6 million, or 30.0 percent, from 1996. The continued sales
growth in 1997 primarily reflected higher original-equipment volumes of landing
gear and evacuation products and higher wheel and brake replacement sales.
Landing gear programs providing the largest increased volume contribution
included the B737, B767 and MD-11. Key evacuation systems programs included the
B747-400 and the A330/340. Aftermarket demand for commercial wheels and brakes
was also strong, primarily for the B777, B737, B747-400 and A330/340 programs.
In addition, demand for regional, business, and military wheels and brakes
significantly improved during the year, particularly for the F-16 retrofit
program.
Excluding a $14.2 million bad debt charge in 1996, operating income
decreased by $10.9 million from 1996 to 1997. The decrease was primarily
attributable to increased costs on the B737-700 program, higher strategic sales
incentive costs for wheels and brakes, increased engineering costs associated
with the Dash8-400 program and foreign exchange losses associated with our
Canadian facilities; partially offset by greater sales of landing gear and
evacuation slides to the original-equipment market and more aftermarket sales of
wheels and brakes.
12
<PAGE> 13
SENSORS AND INTEGRATED SYSTEMS GROUP The Group's sales were $833.9
million in 1997, an increase of $98.3 million, or 13.4 percent, from 1996. The
increased sales volumes of the Sensors and Integrated Systems Group reflected
increased demand from commercial original-equipment manufacturers for aircraft
engine components and aircraft sensors, principally on the B777 and B747
commercial transport programs and the Embraer and Gulfstream GV regional and
business jet programs. Stronger demand for aftermarket spares also boosted
sales, particularly for aircraft engine components and aircraft sensors and fuel
systems. In addition, the group benefited from the March completion of the
Gulton Data Systems acquisition, a transaction which offset lost sales resulting
from the engine electrical systems business divestiture in June 1997. Gulton
Data Systems sells products primarily to the space industry.
Operating income for the group increased 28.0 percent over 1996 results
due to increased volumes of higher-margin aftermarket spares that were sold to
the commercial markets. Operating income improvement also reflects productivity
initiatives, including business and plant consolidations. In addition, the
income contribution of Gulton Data Systems more than offset the lost income from
the divested engine electrical systems business.
OPERATING MARGIN BY GROUP 1997 1996
------------------------- ---- ----
Aerostructures 9.9% 13.0%
Landing Systems 11.8% 14.8%
Sensors and Integrated Systems 16.1% 14.2%
MRO (0.3)% 8.3%
Total Segment 10.8% 13.1%
MAINTENANCE, REPAIR AND OVERHAUL (MRO) GROUP The Group's sales were
$386.7 million in 1997, an increase of $1.3 million, or 0.3 percent, from 1996.
The group's airframe business posted higher sales during the year. Despite the
negative effects of the UPS strike during the summer of 1997 and productivity
issues throughout the year, the airframe business achieved a 5 percent sales
growth. This growth was due to increased demand for services from airline
customers throughout the year and the addition of two new customers -- United
and Northwest Airlines. Partially offsetting this increase in sales volume was a
decrease in sales volume in the component services business due to reduced
demand from a major customer and, to a lesser extent, the bankruptcy of two
customers early in 1997.
The MRO Group, however, recorded an operating loss in 1997. The group
recognized an $11.8 million bad debt charge related to all amounts receivable
from Western Pacific Airlines. Western Pacific filed for Chapter 11 protection
under the Bankruptcy Code in October 1997. On February 4, 1998, Western Pacific
abruptly ceased its operations, resulting in the bankruptcy court ordering
liquidation of the airline. In addition to the Western Pacific matter, the
airframe business continued to face challenges in retaining skilled technical
workers, as competition for skilled workers significantly increased due to
hiring at Boeing and the airlines. This resulted in higher costs for training
new workers, lower productivity and higher wage and benefit rates for retained
skilled workers. Although turnover of the labor force declined progressively
during 1997, turnover levels at year end were still higher than historical
levels. In addition, lower customer demand and higher operating costs in the
component services business contributed to the operating income decline.
Finally, the group's 1996 sales included approximately $7.0 million of
high-margin product sales by the component services business which are not
normally made by the service businesses.
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<PAGE> 14
ENGINEERED INDUSTRIAL PRODUCTS
(in millions) 1997 1996 % Change
---- ---- --------
Sales $ 757.1 $ 726.5 4.2
Operating Income 147.0 144.1 2.0
Operating Income as Percent of
Sales 19.4 19.8
Sales increased $30.6, or 4.2 percent, from $726.5 million in 1996 to
$757.1 million in 1997. The increase resulted primarily from an increased demand
for compressors and diesel/gas engines, partially offset by lower sales of
automotive components.
Operating income increased by $2.9 million, or 2.0 percent, from $144.1
million in 1996 to $147.0 million in 1997. The increase in operating income
resulted from the increased compressor and diesel/gas engine sales ($10 million)
noted above, offset by additional costs related to international initiatives ($2
million) and by reduced sales of automotive components ($5 million).
PERFORMANCE MATERIALS
Sales increased 10 percent in 1997, to $904.7 million. Excluding
acquisitions, sales increased 7 percent. Segment operating income increased 17
percent, largely reflecting strong volume growth. Adverse foreign exchange
effects tempered the segment's income growth, which would have been 21 percent
excluding the impact of the stronger U.S. dollar.
Sales by Group 1997 1996
-------------- ---- ----
(in millions)
Textile and Coatings Solutions $401.2 $362.6
Polymer Additives and Specialty Plastics 420.9 386.0
Consumer Specialties 82.6 75.8
------ ------
$904.7 $824.4
====== ======
TEXTILE AND COATINGS SOLUTIONS Sales for the Group increased by $38.6
million, or 10.6 percent, from $362.6 million in 1996 to $401.2 million in 1997.
Excluding the negative impact of a stronger dollar during 1997, sales increased
11.5 percent. The increase in sales was attributable to increased volumes and
prices across all product lines, especially in the coatings and industrial
markets served by the Group. Excluding acquisitions, sales increased by 3
percent.
Operating income increased 19 percent during 1997 as compared to 1996.
The increase in operating income was due to increases in volume and price as
well as the impact of acquisitions. These increases were partially offset by the
negative impact of a stronger U.S. dollar. Excluding acquisitions and the impact
of foreign exchange, operating income increased by 19.4 percent.
Operating Income 1997 1996
---------------- ---- ----
(in millions)
Textile and Coatings Solutions $ 48.6 $ 40.7
Polymer Additives and Specialty Plastics 57.3 57.6
Consumer Specialties 22.3 15.2
------ ------
$128.2 $113.5
====== ======
POLYMER ADDITIVES AND SPECIALTY PLASTICS GROUP Sales in 1997 rose 9
percent, from $386.0 million in 1996 to $420.9 million in 1997, despite the
stronger U.S. dollar effects during the year. Adjusted for exchange rate
changes, principally against European currencies, sales increased 13 percent
over 1996. Solid volume gains in the group's TempRite(R) high-heat-resistant
plastics were achieved, most of which were in North America, while significantly
higher volumes for Estane(R)
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<PAGE> 15
thermoplastic polyurethanes occurred in both North America and Europe.
Static-control polymer sales growth was achieved in North America and Asia.
1997 was a transitional year from an operating income perspective.
Operating income declined 0.5 percent from $57.6 million in 1996 to $57.3
million in 1997. The decrease related mostly to volume increases that were more
than offset by start-up costs in connection with investments in domestic and
global expansions in all divisions. The negative foreign exchange impact of the
stronger U.S. dollar and higher raw material costs also reduced operating
income. The group's operating income increased 11.0 percent over 1996 without
the foreign exchange impact. Operating income growth was achieved by the
thermoplastic polyurethane business. Significant operating margin erosion
occurred, however, in the high-heat-resistant plastics business, principally
caused by the significant start-up costs associated with the construction of two
new European plants.
Operating Margin by Group 1997 1996
------------------------- ---- ----
Textile and Coatings Solutions 12.1% 11.2%
Polymer Additives and Specialty Plastics 13.6% 14.9%
Consumer Specialties 27.0% 20.0%
CONSUMER SPECIALTIES GROUP Sales for the Group increased by $6.8
million, or 9 percent, from $75.8 million in 1996 to $82.6 million in 1997.
Excluding the impact of a stronger dollar during 1997, sales increased 14.1
percent. Synthetic thickener sales for personal-care, household and
pharmaceutical applications in Europe and Asia were particularly strong. Selling
prices were also generally higher across all product lines.
Operating income increased $7.1 million, or 46.7 percent, from $15.2
million in 1996 to $22.3 million in 1997 driven by increased volumes and prices,
as well as an improved sales mix. These increases were partially offset by the
negative impact of a stronger U.S. dollar. Excluding the impact of foreign
exchange, operating income increased 66.4 percent.
CAPITAL RESOURCES AND LIQUIDITY Current assets less current liabilities were
$745.6 million at December 31, 1998, compared with $586.2 million a year
earlier--an increase of $159.4 million. The Company's current ratio was 1.59X at
December 31, 1998, compared with 1.50X a year ago. In addition, the quick ratio
was 0.65X at the end of 1998, compared with 0.60X at the end of 1997. These
increases principally reflect the impact of the Company's refinancing
activities. The Company's total debt less cash and cash equivalents was $1,671.2
million at December 31, 1998, compared with $1,458.0 million at
December 31, 1997.
The Company has adequate cash flow from operations to satisfy its
operating requirements and capital spending programs. In addition, the Company
has the credit facilities described in the following paragraphs to finance
growth opportunities as they arise.
SHORT-TERM DEBT
The Company maintains $300.0 million of committed domestic revolving
credit agreements with various banks, expiring in the year 2000. At December 31,
1998, and throughout the year, these facilities were not in use. In addition,
the Company had available formal foreign lines of credit and overdraft
facilities, including the committed European revolver, of $100.2 million at
December 31, 1998, of which $32.5 million was available.
The Company's $75.0 million committed multi-currency revolving credit
facility with various international banks, expires in the year 2003. The Company
intends to use this facility for short- and long-term local currency financing
to support European operations growth. At December 31, 1998, the Company had
borrowed $64.0 million ($37.2 million on a short-term basis and $26.8 million on
a long-term basis) denominated in various European currencies at floating rates.
The Company has effectively converted the $26.8 million long-term debt portion
into fixed-rate debt with an interest rate swap.
15
<PAGE> 16
The Company also maintains $380 million of uncommitted domestic money
market facilities with various banks to meet its short-term borrowing
requirements. As of December 31, 1998, $277 million of these facilities were
unused and available. The Company's uncommitted credit facilities are provided
by a small number of commercial banks that also provide the Company with all of
its domestic committed lines of credit and the majority of its cash management,
trust and investment management requirements. As a result of these established
relationships, the Company believes that its uncommitted facilities are a highly
reliable and cost-effective source of liquidity.
LONG-TERM DEBT
In 1998, the Company issued $100.0 million of 6.45 percent notes due in
2008, $130.0 million of 6.9 percent notes due in 2018, and $200.0 million of 7.0
percent notes due in 2038, primarily for the financing of the Freedom Chemical
acquisition (see Note H to the Consolidated Financial Statements). During 1998,
the Company also issued $300.0 million of 7.5 percent Notes due in 2008,
primarily to reduce indebtedness under its revolving credit facility.
The revolving credit facility provides a commitment of up to $600
million to the Company, up to $125.0 million of which can be used for letters of
credit. At December 31, 1998, $239.5 million of borrowings and $14.2 million of
letters of credit were outstanding under the revolving credit facility, leaving
availability of $346.3 million. The revolving credit facility was terminated
subsequent to the consummation of the merger with Coltec.
Also in 1998, Coltec Capital Trust issued $150.0 million of Convertible
Preferred Securities ("TIDES"), the proceeds of which were used primarily to
reduce indebtedness under the revolving credit facility.
The Company believes that its credit facilities are sufficient to meet
longer-term capital requirements, including normal maturities of long-term debt.
At December 31, 1998, the Company's debt-to-capitalization ratio was
53.3 percent. For purposes of this ratio, the TIDES and QUIPS (see Note R to the
Consolidated Financial Statements) are treated as capital.
EBITDA
EBITDA is income from continuing operations before distributions on
Trust preferred securities, income tax expense, net interest expense,
depreciation and amortization and special items. EBITDA for the Company is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations before
taxes and trust distributions $594.2 $343.7 $290.7
Add:
Net interest expense 128.0 115.9 160.5
Depreciation and amortization 210.2 169.1 152.7
Special items (47.7) 72.1 20.1
------ ------ ------
EBITDA $884.7 $700.8 $624.0
====== ====== ======
</TABLE>
OPERATING CASH FLOWS
Operating cash flows of $499.1 million in 1998 were $227.9 million
higher than in 1997. The increase in operating cash flow was attributable to
higher net earnings (adjusted to exclude non-cash items), which increased $232.6
million between periods.
INVESTING CASH FLOWS
The Company used $679.3 million of cash in 1998 related to investing
activities, primarily in the acquisition of various businesses. In 1997,
investing
16
<PAGE> 17
activities only used cash of $22.8 million, primarily resulting from the sale of
various businesses. The Company expects to acquire additional businesses as
circumstances warrant and as opportunities arise.
FINANCING CASH FLOWS
Financing activities provided the Company with $171.6 million in cash
in 1998, as compared to using cash of $302.7 million in 1997. The Company
increased its borrowings in 1998 to finance the acquisitions discussed above.
Likewise, the Company used the proceeds from the sale of various businesses in
1997 to repay certain higher cost debt. The Company also spent approximately $40
million to terminate a receivables sales program in 1998.
Cash flow from operations has been more than adequate to finance
capital expenditures in each of the past three years. The Company expects to
have sufficient cash flow from operations to finance planned capital spending
for 1999.
CONTINGENCIES
GENERAL
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,
asbestos 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. From
time to time, the Company is also involved in legal proceedings as a plaintiff
involving contract, patent protection, environmental and other matters. Gain
contingencies, if any, are recognized when they are realized.
ENVIRONMENTAL
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"), or similar state
agencies, in connection with several sites.
The Company initiates corrective and/or preventive environmental
projects of its own to ensure safe and lawful activities at its current
operations. It also conducts a compliance and management systems audit program.
The Company believes that compliance with current governmental regulations will
not have a material adverse effect on its capital expenditures, earnings or
competitive position.
The Company's environmental engineers and consultants review and
monitor environmental issues at past and existing operating sites, as well as
off-site disposal sites at which the Company has been identified as a PRP. This
process includes investigation and remedial selection and implementation, as
well as negotiations with other PRPs and governmental agencies.
At December 31, 1998, the Company had recorded in Accrued Expenses and
in Other Non-current Liabilities a total of $129.7 million to cover future
environmental expenditures.
17
<PAGE> 18
The Company believes that its reserves are adequate 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.
ASBESTOS
As of December 31, 1998 and 1997, two subsidiaries of the Company were
among a number of defendants (typically 15 to 40) in approximately 101,400 and
110,000 actions (including approximately 4,700 and 2,400 actions, respectively
in advanced stages of processing) filed in various states by plaintiffs alleging
injury or death as a result of exposure to asbestos fibers. During 1998, 1997
and 1996, these two subsidiaries of the Company received approximately 34,400,
38,200 and 39,900 new actions, respectively. Through December 31, 1998,
approximately 244,000 of the approximately 345,400 total actions brought had
been settled or otherwise disposed.
Payments were made by the Company with respect to asbestos liability
and related costs aggregating $53.7 million in 1998, $59.2 million in 1997, and
$71.3 million in 1996, respectively, substantially all of which were covered by
insurance. Settlements are generally made on a group basis with payments made to
individual claimants over periods of one to four years. Related to payments not
covered by insurance, the Company recorded charges to operations amounting to
$8.0 million in each of 1998, 1997 and 1996.
In accordance with the Company's internal procedures for the processing
of asbestos product liability actions and due to the proximity to trial or
settlement, certain outstanding actions have progressed to a stage where the
Company can reasonably estimate the cost to dispose of these actions. As of
December 31, 1998, the Company estimates that the aggregate remaining cost of
the disposition of the settled actions for which payments remain to be made and
actions in advanced stages of processing, including associated legal costs, is
approximately $116.5 million and the Company expects that this cost will be
substantially covered by insurance.
With respect to the 96,700 outstanding actions as of December 31, 1998,
which are in preliminary procedural stages, as well as any actions that may be
filed in the future, the Company lacks sufficient information upon which
judgments can be made as to the validity or ultimate disposition of such
actions, thereby making it difficult to estimate with reasonable certainty what,
if any, potential liability or costs may be incurred by the Company. However,
the Company believes that its subsidiaries are in a favorable position compared
to many other defendants because, among other things, the asbestos fibers in its
asbestos-containing products were encapsulated. Subsidiaries of the Company
continue to distribute encapsulated asbestos-bearing product in the United
States with annual sales of less than $1.5 million. All sales are accompanied by
appropriate warnings. The end users of such product are sophisticated users who
utilize the product for critical applications where no known substitutes exist
or have been approved.
Insurance coverage of a small non-operating subsidiary formerly
distributing asbestos-bearing products is nearly depleted. Considering the
foregoing, as well as the experience of the Company's subsidiaries and other
defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and given the substantial amount of insurance
coverage
18
<PAGE> 19
that the Company expects to be available from its solvent carriers to cover the
majority of its exposure, the Company believes that pending and reasonably
anticipated future actions are not likely to have a materially adverse effect on
the Company's consolidated results of operations or financial condition, but
could be material to the Company's results of operations in a given period.
Although the insurance coverage which the Company has is substantial, it should
be noted that insurance coverage for asbestos claims is not available to cover
exposures initially occurring on and after July 1, 1984. The Company's
subsidiaries continue to be named as defendants in new cases, some of which
allege initial exposure after July 1, 1984.
The Company has recorded an accrual for its liabilities for
asbestos-related matters that are deemed probable and can be reasonably
estimated (settled actions and actions in advanced stages of processing), and
has separately recorded an asset equal to the amount of such liabilities that is
expected to be recovered by insurance. In addition, the Company has recorded a
receivable for that portion of payments previously made for asbestos product
liability actions and related litigation costs that is recoverable from its
insurance carriers. Liabilities for asbestos-related matters and the receivable
from insurance carriers included in the Consolidated Balance Sheets are as
follows:
(Dollars in millions)
December 31, December 31,
1998 1997
--------- --------
Accounts and notes receivable $95.4 $56.0
Other assets 32.6 16.2
Accrued expenses 89.7 48.1
Other liabilities 22.8 2.7
CERTAIN AEROSPACE CONTRACTS
The Company's Aerostructures Group has a contract with Boeing on the
717-200 program that is subject to certain risks and uncertainties. The Company
has pre-production inventory of $85.6 million related to design and development
costs on the 717-200 program through September 30, 1999. In addition, the
Company has excess-over-average inventory of $49.4 million related to costs
associated with the production of the flight test inventory and the first
production units on this program. The aircraft was certified by the FAA on
September 1, 1999, and Boeing is actively marketing the plane. Recovery of these
costs will depend on the ultimate number of aircraft delivered.
YEAR 2000 COMPUTER COSTS
GENERAL The Year 2000 issue is the result of some computer programs
being written using two digits rather than four to define the applicable year.
The Company's computer equipment and software and devices with embedded
technology that are date-sensitive may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company has assessed how it may be
impacted by the Year 2000 issue and has formulated and commenced implementation
of a comprehensive
19
<PAGE> 20
plan to address all known aspects of the issue.
THE PLAN The Company's plan encompasses its information systems,
production and facilities equipment that utilize date/time oriented software or
computer chips, products, vendors and customers and is being carried out in four
phases: 1) assessment and development of a plan; 2) remediation; 3) testing; and
4) implementation. The Company's plan includes purchasing new information
systems where circumstances warrant.
The Company has made significant progress against its plan and has
completed the following percentages of its total planned remediation efforts in
the areas noted below as of December 31, 1998:
Information systems 70%
Production and facilities equipment 60%
Products 90%
The Company is also reviewing the efforts of its vendors and customers
to become Year 2000 compliant. Letters and questionnaires have been sent to all
critical entities with which the Company does business to assess their Year 2000
readiness. The Company anticipates that its activities will be ongoing for all
of 1999 and will include follow-up telephone interviews and on-site meetings as
considered necessary in the circumstances. Although its review is continuing,
the Company is not currently aware of any vendor or customer circumstances that
may have a material adverse impact on the Company. The Company will be looking
for alternative suppliers where circumstances warrant. The Company can provide
no assurance that Year 2000 compliance plans will be successfully completed by
suppliers and customers in a timely manner.
COST The Company's estimate of the total cost for Year 2000 compliance
is approximately $105 million, of which approximately $80 million has been
incurred through December 31, 1998. The Company capitalized approximately $49
million and expensed approximately $31 million of the $80 million spent to date.
The Company's cost estimates include the amount specifically related to
remedying Year 2000 issues as well as costs for improved systems which are Year
2000 compliant and would have been acquired in the ordinary course but whose
acquisition has been accelerated to ensure compliance by the Year 2000.
Incremental spending has not been, and is not expected to be, material
because most Year 2000 compliance costs include items that are part of the
standard procurement and maintenance of the Company's information systems and
production and facilities equipment. Other non-Year 2000 efforts have not been
materially delayed or impacted by the Company's Year 2000 initiatives.
RISKS The Company believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation, testing and
implementation are not effected in a timely manner with respect to problems that
are identified, there can be no assurance that the Year 2000 issue will not have
a material adverse impact on the Company's results of operations or adversely
affect the Company's relationships with customers, vendors, or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
CONTINGENCY As of September 30, 1999, the Company has developed
contingency plans in the event any of its critical suppliers or service
providers should incur Year 2000 failures in their systems that would cause a
disruption in the Company's ability to conduct business and for system
implementations/upgrades planned for later this year. Some of the areas
addressed in these contingency
20
<PAGE> 21
plans include potentially increasing the staffing of shifts at year-end,
carrying higher-levels of inventory for critical materials, components and
finished goods and using alternate suppliers for critical raw materials. The
Company's view of a "reasonably likely worse case scenario" would entail the
temporary shutdown of a production unit at one or more of the Company's major
manufacturing sites. Although the Company does not anticipate such a scenario
will occur, if it were to occur, the Company believes it would be able to
correct the problem in a timely fashion, alternatively source the production or
satisfy the customer demand from existing inventory. Possible consequences of
these actions may include increased manufacturing and general and administrative
expenses and/or lost revenue. If the Company's contingency plans are not
adequate or its suppliers or customers fail to remedy their own Year 2000
matters, the Company's results of operations and financial condition may be
materially adversely affected.
TRANSITION TO THE EURO
Although the Euro was successfully introduced on January 1, 1999, the
legacy currencies of those countries participating 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 bank accounts and other treasury and
cash management activities.
The Company continues to address 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. Actions taken to date include
the ability to quote its prices; invoice when requested by the customer; and
issue pay checks to its employees on a dual currency basis. The Company has not
yet set conversion dates for its accounting systems, statutory reporting and tax
books, but will do so in 1999 or early in year 2000. The financial institutions
in which the Company has relationships have transitioned to the Euro
successfully and are issuing statements in dual currencies.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which, as amended by FASB Statement No. 137, is required to be adopted in years
beginning after June 15, 2000. The Statement permits early adoptions 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
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<PAGE> 22
timing or method of adoption. However, the Statement could increase volatility
in earnings and comprehensive income.
In September 1999, the EITF reached a consensus on Issue 99-5,
Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements.
The consensus requires design and development costs for products to be sold
under long-term supply arrangements incurred subsequent to December 31, 1999, to
be expensed as incurred unless contractually recoverable. The Company does not
believe the consensus will have a significant effect on its results or financial
position.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This document includes statements that reflect projections or
expectations of our future financial condition, results of operations or
business that are subject to risk and uncertainty. We believe such statements to
be "forward looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. BFGoodrich's actual results may differ materially
from those included in the forward-looking statements. Forward-looking
statements are typically identified by words or phrases such as "believe",
"expect", "anticipate", "intend", "estimate", "are likely to be" and similar
expressions.
Factors that could cause actual results of our Aerospace segment to
differ materially from those discussed in the forward-looking statements
include, but are not limited to, the following:
o The worldwide civil aviation market could be adversely affected if
customers cancel or delay current orders or original-equipment
manufacturers reduce the rate they build or expect to build products for
such customers. Such cancellations, delays or reductions may occur if there
is a substantial change in the health of the airline industry or in the
general economy, or if a customer were to experience financial or
operational difficulties. There have been weak new aircraft orders and
actual cancellation of orders from Asian carriers due to the Asian
financial crisis. There are financial difficulties in Russia and Latin
America as well. If these developments should continue or accelerate, it
could have an adverse effect upon the Company.
o If the decline in future new aircraft build rates is greater than
anticipated, there could be a material adverse impact on the Company. Even
if orders remain strong, original-equipment manufacturers could reduce the
rate at which they build aircraft due to inability to obtain adequate parts
from suppliers and/or because of productivity problems relating to a recent
rapid build-up of the labor force to increase the build rate of new
aircraft. Boeing announced a temporary cessation of production in the fall
of 1997 for these reasons.
o A change in levels of defense spending could curtail or enhance prospects
in the Company's military business.
o If the trend towards increased outsourcing or reduced number of suppliers
in the airline industry changes, it could affect the Company's business.
o If the Boeing 717 program is not as successful as anticipated, it could
adversely affect the Company's business.
o If the Company is unable to continue to acquire and develop new systems and
improvements, it could affect future growth rates.
22
<PAGE> 23
o In the immediate past there has been a higher-than-normal historical
turnover rate of technicians in the MRO business due to hiring by Boeing
and the airlines, although recently the turnover rate has been returning
closer to historical levels. If this trend were again to reverse, it could
have an adverse effect on the Company.
o If the Company does not experience continued growth in demand for its
higher-margin aftermarket aerospace products or is unable to continue to
achieve improved operating margins in its MRO business, it could have an
adverse effect on operating results. Such events could be exacerbated if
there is a substantial change in the health of the airline industry, or in
the general economy, or if a customer were to experience major financial
difficulties. Various industry estimates of future growth of revenue
passenger miles, new original equipment deliveries and estimates of future
deliveries of regional, business, general aviation and military orders may
prove optimistic, which could have an adverse affect on operations.
Factors that could cause actual results of our Engineered Industrial
Products segment to differ materially from those discussed in the
forward-looking statements include, but are not limited to, the following:
o If maintenance schedules are reduced or delayed in the segment's key
customer base, including the petrochemical industry in the US, then results
could be adversely impacted. A significant decline in the price of oil
would also negatively impact the results of the segment.
o The segment could be adversely impacted if capital spending for products
used in the manufacture of industrial products in the US declines.
o If decreases in Federal funding cause orders for large engines to decline
or be delayed, then the results of segment could be adversely impacted.
o The results could be adversely impacted if orders in the
automotive/heavy-duty truck market decline.
Factors that could cause actual results of our Performance Materials
segment to differ materially from those discussed in the forward-looking
statements include, but are not limited to, the following:
o Expected sales increases in the Far East and Latin America could be
adversely impacted by recent turmoil in financial markets in those regions.
o If volume does not increase or cost reduction benefits do not materialize,
the results of the Performance Materials Segment could be adversely
affected.
o If cost benefits from continued integration of recent acquisitions and
realignment activities do not occur as expected, results could be adversely
impacted.
o Revenue growth in various businesses may not materialize as expected.
o The segment may not be able to achieve the $7 million in cost savings in
the second half of 1999 and $15 million in annualized savings in 2000 from
the realignment of the Performance Materials organization.
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<PAGE> 24
Factors that could cause actual results of the entire Company to differ
materially from those discussed in the forward-looking statements include, but
are not limited to, the following:
o 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.
o Future claims against the Company's subsidiaries with respect to asbestos
exposure and insurance and related costs may result in future liabilities
that are significant and may be material.
o If there are unexpected developments with respect to environmental matters
involving the Company, it could have an adverse effect upon the Company.
o The Company anticipates $60 million in annualized savings from the Coltec
merger by 2002. If the Company is unable to achieve these savings, it could
have an adverse impact upon the Company.
o If the Company's state and local tax planning is not as effective as
anticipated, the Company's effective tax rate could increase.
We caution you not to place undue reliance on the forward-looking
statements contained in this document, which speak only as of the date on which
such statements were made. We undertake no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date on which such statements were made or to reflect the occurrence
of unanticipated events.
INTEREST RATE EXPOSURE The table below provides information about the
Company's derivative financial instruments and other financial instruments that
are sensitive to changes in interest rates, including interest rate swaps and
debt obligations. For debt obligations, the table represents principal cash
flows and related weighted average interest rates by expected (contractual)
maturity dates. Notional values are used to calculate the contractual payments
to be exchanged under the contract. Weighted average variable (receive) rates
are based on implied forward rates in the yield curve at December 31, 1998.
EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt
Fixed Rate $5.1 $ 11.4 $178.1 $2.0 $0.8 $1,107.6 $1,305.0 $1,506.4
Avg. Interest Rate 6.5% 7.5% 9.5 0.3% 0.6% 7.1% 7.4%
Variable Rate 144.1 -- 266.3 -- -- -- 410.4 410.4
Avg. Interest Rate 5.2% -- 5.4% -- -- -- 5.3%
Interest Rate Swaps
Variable to Fixed -- 50.0 66.8 190.0 -- -- 306.8 (13.0)
Average Pay Rate -- 5.780% 6.207% 6.151% -- -- 6.103%
Average Receive Rate -- 5.065% 4.228% 5.107% -- -- 4.909%
</TABLE>
FOREIGN CURRENCY EXPOSURE The Company's international operations expose
it to translation risk when the local currency financial statements are
translated to U.S. dollars. As currency exchange rates fluctuate, translation of
the statements of income of international businesses into U.S. dollars will
affect comparability of revenues and expenses between years. The Company hedges
a significant portion of its net investments in international subsidiaries by
financing the purchase and cash flow requirements through local currency
borrowings.
24
<PAGE> 25
The Company also utilizes forward exchange contracts to hedge U.S.
dollar-denominated sales, under long-term contracts, of certain Canadian
subsidiaries. The table below provides information about the Company's Canadian
dollar-denominated forward exchange contracts. The table presents notional
values, fair values and average hedge rates by expected (contractual) maturity
dates. These notional values generally are used to calculate the contractual
payments to be exchanged under the contract.
<TABLE>
<CAPTION>
CURRENCY SOLD CURRENCY RECEIVED 1999 2000 2001 2002 2003 TOTAL
------------- ------------------ ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Forward Contracts:
U.S. Dollar Canadian Dollar
Notional Value 63.8 32.7 24.0 -- -- 120.5
Fair Value (5.7) (3.6) (3.1) -- -- (12.4)
Avg. Hedge Rate 1.392 1.360 1.330 -- -- 1.371
</TABLE>
25
<PAGE> 26
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements of The B.F.Goodrich Company and subsidiaries have been
prepared by management. These statements have been prepared in accordance with
generally accepted accounting principles and, accordingly, include amounts based
upon informed judgments and estimates. Management is responsible for the
selection of appropriate accounting principles and the fairness and integrity of
such statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance that accounting records are reliable for the preparation of
financial statements and for safeguarding assets. The Company's system of
internal controls includes: written policies, guidelines and procedures;
organizational structures, staffed through the careful selection of people that
provide an appropriate division of responsibility and accountability; and an
internal audit program. Ernst & Young LLP, independent auditors, were engaged to
audit and to render an opinion on the Consolidated Financial Statements of The
B.F.Goodrich Company and subsidiaries. Their opinion is based on procedures
believed by them to be sufficient to provide reasonable assurance that the
Consolidated Financial Statements are not materially misstated. The report of
Ernst & Young LLP follows.
The Board of Directors pursues its oversight responsibility for the
financial statements through its Audit Committee, composed of Directors who are
not employees of the Company. The Audit Committee meets regularly to review with
management and Ernst & Young LLP the Company's accounting policies, internal and
external audit plans and results of audits. To ensure complete independence,
Ernst & Young LLP and the internal auditors have full access to the Audit
Committee and meet with the Committee without the presence of management.
/s/ D. L. Burner
Chairman and Chief Executive Officer
/s/ L. A. Chapman
Senior Vice President and Chief Financial Officer
/s/ R. D. Koney, Jr.
Vice President and Controller
26
<PAGE> 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of The BFGoodrich Company:
We have audited the accompanying Consolidated Balance Sheet of The BFGoodrich
Company and subsidiaries as of December 31, 1998 and 1997, and the related
Consolidated Statement of Income, Shareholders' Equity, and Cash Flows for each
of the three years in the period ended December 31, 1998. The consolidated
financial statements give retroactive effect to the mergers of The BFGoodrich
Company and Coltec Industries Inc on July 12, 1999 and The BFGoodrich Company
and Rohr, Inc. on December 22, 1997, which have been accounted for using the
pooling of interests method as described in the notes to the consolidated
financial statements. These financial statements are the responsibility of the
management of The BFGoodrich Company. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Coltec Industries Inc or Rohr, Inc. which statements
reflect total assets constituting 20% for 1998 and 22% for 1997, and total sales
constituting 28% in 1998, 28% in 1997 and 48% in 1996 of the related
consolidated totals. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Coltec Industries Inc and Rohr, Inc., is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The BFGoodrich Company
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, after giving retroactive effect to the mergers of
Coltec Industries Inc and Rohr, Inc., as described in the notes to the
consolidated financial statements, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Charlotte, North Carolina
December 10, 1999
27
<PAGE> 28
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
SALES $5,454.8 $4,687.9 $ 4,005.5
Operating costs and expenses:
Cost of sales 3,919.2 3,372.7 2,841.0
Charge for MD-90 contract -- 35.2 --
Selling and administrative costs 841.9 772.1 671.3
Merger-related and consolidation
costs 10.5 77.0 11.2
-------- -------- ---------
4,771.6 4,257.0 3,523.5
-------- -------- ---------
OPERATING INCOME 683.2 430.9 482.0
Interest expense (134.1) (127.9) (164.7)
Interest income 6.1 12.0 4.2
Gain on issuance of
subsidiary stock -- 13.7 --
Other income (expense)--net 39.0 15.0 (30.8)
-------- -------- ---------
Income from continuing operations
before income taxes and
Trust distributions 594.2 343.7 290.7
Income tax expense (218.5) (138.2) (103.2)
Distributions on Trust preferred
securities (16.1) (10.5) (10.5)
-------- -------- ---------
Income From Continuing Operations 359.6 195.0 177.0
Income (loss) from discontinued
operations -- net of taxes (1.6) 84.3 115.5
-------- -------- ---------
Income Before Extraordinary Items 358.0 279.3 292.5
Extraordinary losses on debt
extinguishment -- net of taxes (4.3) (19.3) (30.6)
-------- -------- ---------
NET INCOME $ 353.7 $ 260.0 $ 261.9
======== ======== =========
BASIC EARNINGS PER SHARE:
Continuing operations $ 3.26 $ 1.81 $ 1.68
Discontinued operations (0.01) 0.78 1.10
Extraordinary losses (0.04) (0.18) (0.29)
-------- -------- ---------
Net income $ 3.21 $ 2.41 $ 2.49
======== ======== =========
DILUTED EARNINGS PER SHARE:
Continuing operations $ 3.19 $ 1.75 $ 1.63
Discontinued operations (0.01) 0.75 1.05
Extraordinary losses (0.04) (0.17) (0.28)
--------- --------- ---------
Net income $ 3.14 $ 2.33 $ 2.40
======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE> 29
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1998 1997
-------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 53.5 $ 61.7
Accounts and notes receivable 777.2 652.9
Inventories 967.7 849.7
Deferred income taxes 162.6 147.6
Prepaid expenses and other assets 54.8 57.2
-------- --------
Total Current Assets 2,015.8 1,769.1
Property 1,562.5 1,352.7
Deferred Income Taxes -- 6.8
Prepaid Pension 193.3 182.7
Goodwill 985.6 704.0
Identifiable Intangible Assets 112.4 51.1
Other Assets 343.4 267.3
-------- --------
Total Assets $5,213.0 $4,333.7
======== ========
CURRENT LIABILITIES
Short-term bank debt $ 144.4 $ 192.8
Accounts payable 456.0 426.4
Accrued expenses 617.0 558.7
Income taxes payable 45.2 --
Current maturities of long-term debt
and capital lease obligations 7.6 5.0
-------- --------
Total Current Liabilities 1,270.2 1,182.9
Long-term Debt and Capital Lease Obligations 1,572.7 1,321.9
Pension Obligations 76.6 68.7
Postretirement Benefits Other Than Pensions 358.5 359.3
Other Non-current Liabilities 328.5 286.8
Deferred Income Taxes 100.2 --
Commitments and Contingent Liabilities -- --
Mandatorily Redeemable Preferred
Securities of Trusts 268.9 123.1
SHAREHOLDERS' EQUITY
Common stock-$5 par value
Authorized, 200,000,000 shares; issued,
111,524,852 shares in 1998 and
110,814,064 shares in 1997 (excluding
14,000,000 shares held by a wholly-owned
subsidiary) 557.7 554.0
Additional capital 883.5 880.3
Accumulated deficit (120.4) (392.9)
Accumulated other comprehensive income (15.1) (11.9)
Unearned compensation (2.7) (3.4)
Common stock held in treasury, at
cost (1,846,894 shares in 1998
and 1,204,022 shares in 1997) (65.6) (35.1)
-------- --------
Total Shareholders' Equity 1,237.4 991.0
-------- --------
Total Liabilities and
Shareholders' Equity $5,213.0 $4,333.7
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE> 30
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1998 1997 1996
------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 353.7 $ 260.0 $261.9
Adjustments to reconcile net
income to net cash provided
by operating activities:
Extraordinary losses on
debt extinguishment 4.3 19.3 30.6
Depreciation and amortization 210.2 177.2 175.8
Deferred income taxes 83.3 57.1 46.4
Net gains on sale of businesses (58.3) (138.8) (71.3)
Charge for exchange of 7.75%
Convertible Notes -- -- 5.3
Asset impairment write-down 6.5 -- 7.2
Change in assets and liabilities, net of effects of acquisitions and
dispositions of businesses:
Receivables (45.2) (47.9) (79.5)
Inventories (79.2) (84.9) (25.1)
Other current assets 2.8 (1.6) 1.4
Accounts payable (6.9) 63.3 7.1
Accrued expenses 35.5 76.3 (9.6)
Income taxes payable 46.0 4.7 (20.1)
Other non-current assets and liabilities (53.6) (113.5) (15.1)
------- -------- -------
Net cash provided by operating activities 499.1 271.2 315.0
------- -------- -------
INVESTING ACTIVITIES
Purchases of property (262.0) (241.1) (241.7)
Proceeds from sale of property 4.2 8.5 8.8
Proceeds from sale of businesses 100.0 395.9 358.0
Sale of short-term investments -- 8.0 --
Payments made in connection with
acquisitions, net of cash acquired (521.5) (194.1) (107.9)
------- -------- -------
Net cash provided (used) by investing activities (679.3) (22.8) 17.2
------- -------- -------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt, net (52.3) 68.9 122.5
Proceeds from issuance of long-term debt 724.5 150.8 613.1
Increase (decrease) in revolving credit facility, net (458.0) 39.5 (196.0)
Repayment of long-term debt and capital lease obligations (33.1) (551.1) (778.1)
Proceeds from sale of receivables, net 12.5 87.5 13.5
Termination of a receivable sales program (40.0) -- --
Proceeds from issuance of convertible preferred securities, net 144.0 -- --
Proceeds from issuance of capital stock 28.8 23.0 11.2
Purchases of treasury stock (64.7) (52.4) (46.5)
Dividends (75.7) (59.5) (58.8)
Distributions on Trust preferred securities (16.1) (10.5) (10.5)
Other 1.7 1.1 1.3
------- ------- -------
Net cash provided (used) by financing activities 171.6 (302.7) (328.3)
------ ------- -------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 0.4 (2.4) (0.7)
------ ------- -------
Net Decrease in Cash and Cash Equivalents (8.2) (56.7) 3.2
Cash and Cash Equivalents at Beginning of Year (1) 61.7 118.4 148.9
------ ------- -------
Cash and Cash Equivalents at End of Year $ 53.5 $ 61.7 $ 152.1
====== ======= =======
</TABLE>
(1) Cash and cash equivalents at the beginning of 1997 does not agree with
the amount at the end of 1996 due to the net cash transactions of Rohr,
Inc. from August 1, 1996 to December 31, 1996, which are not reflected
in the 1996 column above (see Note C).
See Notes to Consolidated Financial Statements.
30
<PAGE> 31
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned
Portion
Accumulated of
Common Stock Other Restricted
Three Years Ended ------------------ Additional Accumulated Comprehensive Stock Treasury
December 31, 1998 Shares Amount Capital Deficit Income Awards Stock Total
- ----------------- -------- ------- ------- -------- ------- ------- ------- -------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 72.300 $ 361.5 $ 979.3 $ (778.5) $ (59.5) $ (18.6) $ (28.3) $ 455.9
Net income 261.9 261.9
Other comprehensive income:
Unrealized translation
adjustments (3.0) (3.0)
Minimum pension liability
adjustment 37.6 37.6
-------
Total comprehensive income 296.5
Repurchase of stock by pooled
company (1.726) (8.6) (37.3) (45.9)
Employee award programs 0.780 3.9 22.0 7.5 (1.8) 31.6
Two-for-one common stock split 33.256 166.3 (166.3)
Contribution to pension plans 0.755 3.8 26.2 30.0
Conversion of 7.75%
Convertible Subordinated
Notes 2.806 14.0 28.3 42.3
Purchases of stock for
treasury (2.1) (2.1)
Dividends (per share--$1.10) (58.8) (58.8)
-------- ------- ------- -------- ------- ------- ------- -------
Balance December 31, 1996 108.171 540.9 852.2 (575.4) (24.9) (11.1) (32.2) 749.5
Net income 260.0 260.0
Other comprehensive income:
Unrealized translation
adjustments, net of
reclassification
adjustment for loss
included in net
income of $2.3 (13.2) (13.2)
Minimum pension liability
adjustment (0.2) (0.2)
-------
Total comprehensive income 246.6
Repurchase of stock by pooled
company (0.831) (4.2) (27.9) (32.1)
Employee award programs 0.884 4.4 12.1 7.7 (0.7) 23.5
Adjustment to conform
Rohr's fiscal year 2.071 10.3 39.6 (18.0) 26.4 58.3
Conversion of 7.75%
Convertible Subordinated
Notes 0.099 0.5 1.0 1.5
Exercise of warrants 0.420 2.1 3.3 5.4
Purchases of stock
for treasury (2.2) (2.2)
Dividends (per share--$1.10) (59.5) (59.5)
-------- ------- ------- -------- ------- ------- ------- --------
Balance December 31, 1997 110.814 554.0 880.3 (392.9) (11.9) (3.4) (35.1) 991.0
Net income 353.7 353.7
Other comprehensive income:
Unrealized translation
adjustments (2.5) (2.5)
Minimum pension
liability adjustment (0.7) (0.7)
Total comprehensive income 350.5
Repurchase of stock by pooled
company (1.602) (8.0) (40.4) (48.4)
Employee award programs 1.078 5.5 31.5 0.7 (0.7) 37.0
Conversion of 7.75%
Convertible Subordinated
Notes 1.235 6.2 12.1 18.3
Purchases of stock
for treasury (29.8) (29.8)
Dividends (per share--$1.10) (81.2) (81.2)
-------- ------- ------- -------- ------- ------- -------- --------
Balance December 31, 1998 111.525 $ 557.7 $ 883.5 $ (120.4) $ (15.1) $ (2.7) $ (65.6) $1,237.4
======== ======= ======= ========- ======= ======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A MERGER
On July 12, 1999, the Company completed its merger with Coltec
Industries Inc ("Coltec"). The merger has been 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 Coltec as though Coltec had always been a part of
BFGoodrich. As such, results for the three years ended December 31, 1998, 1997
and 1996 represent the combined results of BFGoodrich and Coltec.
As a result of the merger, Coltec became a wholly-owned subsidiary of
the Company. In accordance with the terms of the merger agreement, each share of
Coltec common stock was converted into the right to receive 0.56 shares of
BFGoodrich common stock, totaling 35.5 million shares of BFGoodrich common
stock.
In addition, the Company issued options to purchase 3.0 million shares
of BFGoodrich common stock in exchange for options to purchase Coltec common
stock outstanding immediately prior to the merger. These options vest and become
exercisable in accordance with the terms and conditions of the original Coltec
options. Also, the holders of the 5 1/4% Convertible Preferred Securities issued
by Coltec Capital Trust, received the right to convert each such convertible
preferred security into 0.955248 of a share of BFGoodrich common stock, subject
to certain adjustments.
The following table presents sales, income from continuing operations
and net income for the previously separate companies and the combined amounts
presented within the income statement for the periods presented. The conforming
accounting adjustments conform Coltec's accounting policies to BFGoodrich's
accounting policies, the more significant of which include: (1) Coltec's landing
gear business was changed from percentage of completion contract accounting to
accrual accounting; (2) non-recurring engineering costs that were capitalized
are now expensed unless they are contractually recoverable from the customer;
and (3) Coltec's SFAS 106 transition obligation that was previously deferred and
was being amortized to income over twenty years has now been recognized
immediately upon initial adoption of SFAS 106.
32
<PAGE> 33
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
Sales:
<S> <C> <C> <C>
BFGoodrich ........................ $ 3,950.8 $ 3,373.0 $ 2,845.8
Coltec ............................ 1,504.0 1,314.9 1,159.7
---------- ---------- ----------
Combined .......................... $ 5,454.8 $ 4,687.9 $ 4,005.5
========== ========== ==========
Income from continuing
operations:
BFGoodrich ........................ $ 228.1 $ 113.2 $ 115.5
Coltec ............................ 122.3 94.9 54.6
Conforming accounting
adjustments ..................... 9.2 (13.1) 6.9
---------- ---------- ----------
Combined .......................... $ 359.6 $ 195.0 $ 177.0
========== ========== ==========
Net Income:
BFGoodrich ........................ $ 226.5 $ 178.2 $ 173.9
Coltec ............................ 118.0 94.9 81.1
Conforming accounting
adjustments ..................... 9.2 (13.1) 6.9
---------- ---------- ----------
Combined .......................... $ 353.7 $ 260.0 $ 261.9
========== ========== ==========
</TABLE>
The conforming accounting adjustments have also resulted in the
following changes applicable to the Coltec balance sheet accounts: a decrease in
inventories, income taxes payable and income retained in the business and an
increase in postretirement benefits other than pensions and accrued expenses.
During the third quarter of 1999, the Company recorded merger related
and consolidation costs of $204.7 million, of which $8.6 million represents
non-cash asset impairment charges. These costs related primarily to personnel
related costs ($112.2 million), transaction costs ($78.9 million) and
consolidation costs ($13.6 million).
Personnel related costs include severance, change in control and
relocation costs. Personnel related costs associated with the Coltec merger were
$96.4 million, consisting of $61.8 million incurred under change in control
provisions in employment agreements, $29.9 million in employee severance costs
and $4.7 million of relocation costs. Personnel related costs also include
employee severance costs of $5.9 million for reductions in Performance Materials
(approximately 85 positions), $2.1 million for reductions in Engineered
Industrial Products (approximately 125 positions) and $7.8 million for
reductions in Aerospace (approximately 400 positions).
Transaction costs associated with the Coltec merger include investment
banking fees, accounting fees, legal fees, litigation settlement costs,
registration and listing fees and other transaction costs.
Consolidation costs include facility consolidation costs and asset
impairment charges. Consolidation costs associated with the Coltec merger were
$7.1 million, consisting primarily of a $6.6 million non-cash impairment charge
33
<PAGE> 34
for the former BFGoodrich and Aerospace headquarters buildings in Ohio.
Consolidation costs also included a $2.0 million non-cash charge related to the
write-off of the Company's investment in a research and development joint
venture and $1.5 million, $1.7 million and $1.3 million related to realignment
activities at Performance Materials, Engineered Industrial Products and
Aerospace, respectively.
During the first six months of 1999, the Company recorded $36.3 million
of merger related and consolidation costs, $10.1 million of which related to
certain executive severance payments and employee relocation costs related to
the Coltec merger and $26.2 million related to employee termination payments
resulting from realignment of the Performance Materials Segment headquarters
(approximately 140 positions) and the Company's Advanced Technology Group
(approximately 15 positions) as well as from reductions at certain Performance
Materials operating locations (approximately 40 positions).
NOTE B SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements
reflect the accounts of The BFGoodrich Company and its majority-owned
subsidiaries ("the Company" or "BFGoodrich"). Investments in 20- to
50-percent-owned affiliates and majority-owned companies in which investment is
considered temporary are accounted for using the equity method. Equity in
earnings (losses) from these businesses is included in Other income
(expense)-net. Intercompany accounts and transactions are eliminated.
CASH EQUIVALENTS Cash equivalents consist of highly liquid investments
with a maturity of three months or less at the time of purchase.
INVENTORIES Inventories other than inventoried costs relating to
long-term contracts are stated at the lower of cost or market. Certain domestic
inventories are valued by the last-in, first-out (LIFO) cost method. Inventories
not valued by the LIFO method are valued principally by the average cost method.
Inventoried costs on long-term contracts include certain preproduction
costs, consisting primarily of tooling and design costs and production costs,
including applicable overhead. The costs attributed to units delivered under
long-term commercial contracts are based on the estimated average cost of all
units expected to be produced and are determined under the learning curve
concept, which anticipates a predictable decrease in unit costs as tasks and
production techniques become more efficient through repetition. This usually
results in an increase in inventory (referred to as "excess-over average")
during the early years of a contract.
If in-process inventory plus estimated costs to complete a specific
contract exceeds the anticipated remaining sales value of such contract, such
excess is charged to current earnings, thus reducing inventory to estimated
realizable value.
In accordance with industry practice, costs in inventory include
amounts relating to contracts with long production cycles, some of which are not
expected to be realized within one year.
LONG-LIVED ASSETS Property, plant and equipment, including amounts
recorded under capital leases, are recorded at cost. Depreciation and
amortization is computed principally using the straight-line method over the
following estimated useful lives: buildings and improvements, 15 to 40 years;
machinery and equipment, 5 to 15 years. In the case of capitalized lease assets,
amortization is computed over the lease term if shorter. Repairs and maintenance
costs are expensed as incurred.
Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired businesses and is being amortized by the
straight-line method, in most cases over 20 to 40 years. The weighted average
number of years
34
<PAGE> 35
that goodwill is being amortized over is 28 years. Goodwill
amortization is recorded in cost of sales.
Identifiable intangible assets are recorded at cost, or when acquired
as a part of a business combination, at estimated fair value. These assets
include patents and other technology agreements, trademarks, licenses and
non-compete agreements. They are amortized using the straight-line method over
estimated useful lives of 5 to 25 years.
Impairment of long-lived assets and related goodwill is recognized when
events or changes in circumstances indicate that the carrying amount of the
asset, or related groups of assets, may not be recoverable and the Company's
estimate of undiscounted cash flows over the assets remaining estimated useful
life are less than the assets carrying value. Measurement of the amount of
impairment may be based on appraisal, market values of similar assets or
estimated discounted future cash flows resulting from the use and ultimate
disposition of the asset.
REVENUE AND INCOME RECOGNITION For revenues not recognized under the
contract method of accounting, the Company recognizes revenues from the sale of
products at the point of passage of title, which is at the time of shipment.
Revenues earned from providing maintenance service are recognized when the
service is complete.
A significant portion of the Company's sales in the Aerostructures
Group of the Aerospace Segment are under long-term, fixed-priced contracts, many
of which contain escalation clauses, requiring delivery of products over several
years and frequently providing the buyer with option pricing on follow-on
orders. Sales and profits on each contract are recognized primarily in
accordance with the percentage-of-completion method of accounting, using the
units-of-delivery method. The Company follows the guidelines of Statement of
Position 81-1 ("SOP 81-1"), "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts" (the contract method of accounting) except
that the Company's contract accounting policies differ from the recommendations
of SOP 81-1 in that revisions of estimated profits on contracts are included in
earnings under the reallocation method rather than the cumulative catch-up
method.
Profit is estimated based on the difference between total estimated
revenue and total estimated cost of a contract, excluding that reported in prior
periods, and is recognized evenly in the current and future periods as a uniform
percentage of sales value on all remaining units to be delivered. Current
revenue does not anticipate higher or lower future prices but includes units
delivered at actual sales prices. Cost includes the estimated cost of the
preproduction effort (primarily tooling and design), plus the estimated cost of
manufacturing a specified number of production units. The specified number of
production units used to establish the profit margin is predicated upon
contractual terms adjusted for market forecasts and does not exceed the lesser
of those quantities assumed in original contract pricing or those quantities
which the Company now expects to deliver in the periods assumed in the original
contract pricing. Option quantities are combined with prior orders when
follow-on orders are released.
The contract method of accounting involves the use of various
estimating techniques to project costs at completion and includes estimates of
recoveries asserted against the customer for changes in specifications. These
estimates involve various assumptions and projections relative to the outcome of
future events, including the quantity and timing of product deliveries. Also
included are assumptions relative to future labor performance and rates, and
projections relative to material and overhead costs. These assumptions involve
various levels of expected performance improvements. The Company reevaluates its
contract estimates periodically and reflects changes in estimates in the current
and future periods under the reallocation method.
Included in sales are amounts arising from contract terms that provide
for invoicing a portion of the contract price at a date after delivery. Also
included are negotiated values for units delivered and anticipated price
adjustments for contract changes, claims, escalation and estimated earnings in
excess of billing provisions, resulting from the percentage-of-completion method
35
<PAGE> 36
of accounting. Certain contract costs are estimated based on the learning curve
concept discussed under Inventories above.
FINANCIAL INSTRUMENTS The Company's financial instruments recorded on
the balance sheet include cash and cash equivalents, accounts and notes
receivable, accounts payable and debt. Because of their short maturity, the
carrying amount of cash and cash equivalents, accounts and notes receivable,
accounts payable and short-term bank debt approximates fair value. Fair value of
long-term receivables and investments is based on quoted market prices or on the
present value of estimated future cash flows. Fair value of long-term debt is
based on rates available to the Company for debt with similar terms and
maturities.
Off balance sheet derivative financial instruments at December 31,
1998, include interest rate swap agreements, foreign currency forward contracts
and foreign currency swap agreements. Interest rate swap agreements are used by
the Company, from time to time, to manage interest rate risk on its floating
rate debt portfolio and its agreement to sell accounts receivable on a revolving
basis (See Note F). The cost of interest rate swaps is recorded as part of
interest expense and accrued expenses. Fair value of these instruments is based
on estimated current settlement cost.
The Company utilizes forward exchange contracts (principally against
the Canadian dollar, British pound, Italian lira, Spanish peseta, French franc,
Dutch guilder and U.S. dollar) to hedge U.S. dollar - denominated sales of
certain Canadian subsidiaries, the net receivable/payable position arising from
trade sales and purchases and intercompany transactions by its European
businesses. Foreign currency forward contracts reduce the Company's exposure to
the risk that the eventual net cash inflows and outflows resulting from the sale
of products and purchases from suppliers denominated in a currency other than
the functional currency of the respective businesses will be adversely affected
by changes in exchange rates. Foreign currency gains and losses under the above
arrangements are not deferred and are reported as part of cost of sales and
accrued expenses. Foreign currency forward contracts are entered into with major
commercial banks that have high credit ratings. From time to time, the Company
uses foreign currency forward contracts to hedge purchases of capital equipment.
Foreign currency gains and losses for such purchases are deferred as part of the
basis of the asset. Also, the Company has used forward contracts, on a limited
basis, to manage its exchange risk on a portion of its purchase commitments from
vendors of aircraft components denominated in foreign currencies and to manage
its exchange risk for sums paid to a French subsidiary for services. Forward
gains and losses associated with contracts accounted for under contract
accounting are deferred as contract costs.
The Company also enters into foreign currency swap agreements
(principally for the Belgian franc, French franc and Dutch guilder) to eliminate
foreign exchange risk on intercompany loans between the Company's European
businesses.
The fair value of foreign currency forward contracts and foreign
currency swap agreements is based on quoted market prices.
STOCK-BASED COMPENSATION The Company accounts for stock-based employee
compensation in accordance with the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
ISSUANCE OF SUBSIDIARY STOCK The Company recognizes gains and losses on
the issuance of stock by a subsidiary in accordance with the U.S. Securities and
Exchange Commission's ("SEC") Staff Accounting Bulletin 84.
EARNINGS PER SHARE Earnings per share is computed in accordance with
SFAS No. 128, "Earnings per Share."
RESEARCH AND DEVELOPMENT EXPENSE The Company performs research and
development under Company-funded programs for commercial products, and under
contracts with others. Research and development under contracts with others is
performed by the Aerospace Segment for military and commercial products. Total
36
<PAGE> 37
research and development expenditures from continuing operations in 1998, 1997
and 1996 were $240.6 million, $187.7 million and $181.6 million, respectively.
Of these amounts, $63.1 million, $39.4 million and $29.4 million, respectively,
were funded by customers.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which, as amended by FASB Statement No. 137,
is required to be adopted in years beginning after June 15, 2000. The Statement
permits early adoptions 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.
In September 1999, the EITF reached a consensus on Issue 99-5,
Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements.
The consensus requires design and development costs for products to be sold
under long-term supply arrangements incurred subsequent to December 31, 1999, to
be expensed as incurred unless contractually recoverable. The Company does not
believe the consensus will have a significant effect on its results or financial
position.
NOTE C OTHER ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
POOLING-OF-INTERESTS
On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by
exchanging 18,588,004 shares of BFGoodrich common stock for all of the common
stock of Rohr. Each share of Rohr common stock was exchanged for .7 of one share
of BFGoodrich common stock. The merger was accounted for as a pooling of
interests, and all prior period financial statements were restated to include
the financial information of Rohr as though Rohr had always been a part of
BFGoodrich.
Prior to the merger, Rohr's fiscal year ended on July 31. For purposes
of the combination, Rohr's financial results for its fiscal year ended July 31,
1997, were restated to the year ended December 31, 1997, to conform with
BFGoodrich's calendar year end. Financial results for Rohr's fiscal years ended
July 31, 1996 and earlier were not restated to conform to BFGoodrich's calendar
year end. For periods prior to 1997, Rohr's fiscal years ended July 31 have been
combined with BFGoodrich's calendar years ended December 31. As a result, Rohr's
results of operations for the period August 1, 1996 to December 31, 1996, do not
appear in the Consolidated Statement of Income and instead are recorded as a
direct adjustment to equity. Rohr's revenues, expenses and net loss for this
five-month period were $341.3 million, $359.3 million and $18.0 million,
37
<PAGE> 38
respectively. Included in expenses during this period was a $49.3 million pretax
charge ($29.5 million after tax) relating to the McDonnell Douglas MD-90 program
(see discussion under Aerostructures Group).
PURCHASES
The following acquisitions were recorded using the purchase method of
accounting. Their results of operations were included in the Company's results
since their respective dates of acquisition.
During 1998, the Company acquired a global manufacturer of specialty
and fine chemicals; a manufacturer of flexible graphite and
polytetrafluoroethylene ("PTFE") products; a business that manufactures,
machines and distributes PTFE products; and another business that reprocesses
PTFE compounds. The Company also acquired a manufacturer of sealing products; a
small manufacturer of textile chemicals used for fabric preparation and
finishing; the remaining 20 percent not previously owned of a subsidiary that
produces self-lubricating bearings; and a small manufacturer of energetic
materials systems during 1998. Total consideration aggregated $521.5 million, of
which $308.7 million represented goodwill.
During 1997, the Company acquired seven businesses for cash
consideration of $186.4 million in the aggregate, which included $84.4 million
of goodwill. One of the acquired businesses is a manufacturer of data
acquisition systems for satellites and other aerospace applications. A second
business manufactures diverse aerospace products for commercial and military
applications. A third business is a manufacturer of dyes, chemical additives and
durable press resins for the textiles industry. A fourth business manufactures
thermoplastic polyurethane and is located in the United Kingdom. A fifth
business manufactures flight attendant and cockpit seats and the sixth business
is a sheet rubber and conveyer belt business.
The remaining acquisition is a small specialty chemicals business.
The purchase agreement for the flight attendant and cockpit seat
business includes contingent payments based on earnings levels for the years
ended December 31, 1997-2000. These contingent payments will be recorded as
additional purchase price consideration when made and will be amortized over the
remaining life of the goodwill.
During 1996, the Company acquired five specialty chemicals businesses
for cash consideration of $107.9 million, which included $80.0 million of
goodwill. One of the businesses acquired is a European-based supplier of
emulsions and polymers for use in paint and coatings for textiles, paper,
graphic arts and industrial applications. Two of the acquisitions represented
product lines consisting of water-borne acrylic resins and coatings and
additives used in the graphic arts industry. The fourth acquisition consisted of
water-based textile coatings product lines. The remaining acquisition was a
small supplier of anti-static compounds.
The impact of these acquisitions was not material in relation to the
Company's results of operations. Consequently, pro forma information is not
presented.
DISPOSITIONS
In May 1998, the Company sold the capital stock of its Holley
Performance Products subsidiary for $100 million in cash. The sale resulted in a
pre-tax gain of $58.3 million, net of liabilities retained. The proceeds from
this divestiture were applied toward reducing debt. In 1997, Holley had gross
revenues and operating income of approximately $99.0 million and $8.0 million,
respectively.
During 1997, the Company completed the sale of its Engine Electrical
Systems Division, which was part of the Sensors and Integrated Systems Group in
38
<PAGE> 39
the Aerospace segment. The Company received cash proceeds of $72.5 million which
resulted in a pretax gain of $26.4 million reported within other income
(expense) -net.
In December 1996, the Company sold the exhaust systems and components
business of its Stemco division for $11.9 million resulting in a pre-tax gain of
$3.5 million. Such gain is reflected in other income (expense) - net. Net sales
of the exhaust systems and components business were $18.1 million in 1996.
NOTE D MERGER RELATED AND CONSOLIDATION COSTS
The Aerostructures Group's fourth quarter special charge in 1998 of
$10.5 million before tax ($6.5 million after tax, or $.06 per share), relates to
costs associated with the closure of three facilities and an asset impairment
charge. The charge includes $4.0 million for employee termination benefits; $1.8
million related to writing down the carrying value of the three facilities to
their fair value less cost to sell and $4.7 million for an asset impairment
related to an assembly-service facility in Hamburg, Germany.
The employee termination benefits primarily represents severance
payments that will be made to approximately 700 employees (approximately 600
wage and 100 salaried).
The shutdowns will affect a composite bonding facility in Hagerstown,
Maryland and two assembly sites in Heber Springs and Sheridan, Arkansas.
Production work performed at these facilities will be absorbed by the
Aerostructures Group's remaining facilities.
The $1.8 million restructuring charge relates to the write-down of the
Hagerstown, Heber Springs and Sheridan facilities to their fair value less cost
to sell. The carrying amount of the assets related to these three facilities,
net of machinery and equipment that will be transferred to other Aerostructures
facilities, approximated $10.0 million at December 31, 1998. The effect of
suspending depreciation on these assets will approximate $0.9 million annually.
The $4.7 million asset impairment charge resulted from management's
review of the business for possible disposition. The entire charge related to
tangible assets and was based on independent third party appraisals of the
facility's fair value. The charge has been recorded in the restructuring costs
and asset impairment line item within operating income.
During 1997, the Company recognized pretax merger-related costs of
$105.0 million ($86.0 million after tax, or $0.77 per diluted share) in
connection with the Rohr merger. Merger-related costs consisted primarily of
costs of investment bankers, attorneys, accountants, financial printing, debt
extinguishment and payments due under contractual employee arrangements. Of the
$105.0 million, $28.0 million related to debt extinguishment costs ($16.7
million after tax, or $0.15 per diluted share) which have been reported as an
extraordinary item.
Also during 1997, the Company reversed a $10 million accrual related to
a 1995 Aerospace charge primarily related to the closure of a facility in
Canada. During the same year, the Company's Engineered Industrial Products
segment recorded a $10 million charge. This special charge included the costs of
closing its FMD Electronics operations in Roscoe, Illinois and its Ortman Fluid
Power operations in Hammond, Indiana. The special charge also included the costs
to restructure the segment's businesses in Canada and Germany and certain
termination costs related to the relocation of the Delavan Commercial Spray
Technologies headquarters to North Carolina. The third quarter 1997 charge
included costs resulting from cancellation of contractual obligations, asset
writedowns, severance and employee-related costs and other costs to shut down
these facilities that will not benefit future operations.
In 1996, the Company recognized a $7.2 million pretax asset impairment
charge on its Arkadelphia, Arkansas, facility. Also during 1996, the Company
39
<PAGE> 40
recognized a $4.0 million pretax charge for a voluntary early retirement program
for eligible employees of the Performance Materials Segment.
NOTE E EARNINGS PER SHARE
The computation of basic and diluted earnings per share for income from
continuing operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings per
share--income from continuing
operations $ 359.6 $ 195.0 $ 177.0
Effect of dilutive securities:
7.75% Convertible Notes 4.5 .9 1.9
--------- --------- ---------
Numerator for diluted earnings
per share--income from continuing
operations available to common
stockholders after assumed conversions $ 364.1 $ 195.9 $ 178.9
========= ========= =========
Denominator:
Denominator for basic earnings
per share--weighted-average shares 110.2 107.9 105.3
Effect of dilutive securities:
Stock options,warrants and restricted
stock issued 1.1 2.2 1.6
Contingent shares .1 .7 .5
7.75% Convertible Notes .5 1.3 2.4
Convertible preferred securities 2.0 -- --
--------- --------- ---------
Dilutive potential common shares 3.7 4.2 4.5
--------- --------- ---------
Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 113.9 112.1 109.8
========= ========= =========
Per share income from continuing
operations:
Basic $ 3.26 $ 1.81 $ 1.68
========= ========= =========
Diluted $ 3.19 $ 1.75 $ 1.63
========= ========= =========
</TABLE>
NOTE F ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Amounts billed $760.0 $613.7
Recoverable costs and accrued profit on
units delivered but not billed 7.9 10.0
Recoverable costs and accrued profit
on progress completed but not billed 0.5 --
Unrecovered costs and estimated profit
subject to future negotiations 20.2 19.2
Notes and other receivables 14.3 34.2
------ ------
$802.9 $677.1
Less allowance for doubtful accounts (25.7) (24.2)
------ ------
Total $777.2 $652.9
====== ======
</TABLE>
"Recoverable costs and accrued profit on units delivered but not
billed" represents revenue recognized on contracts for amounts not billable to
customers at the balance sheet date. This amount principally represents delayed
payment terms along with escalation and repricing predicated upon deliveries and
final payment after acceptance.
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<PAGE> 41
"Recoverable costs and accrued profit on progress completed but not
billed" represents revenue recognized on contracts based on the
percentage-of-completion method of accounting and is anticipated to be billed
and collected in accordance with contract terms.
"Unrecovered costs and estimated profit subject to future negotiations"
consists of contract tasks completed for which a final price has not been
negotiated with the customer. Amounts in excess of agreed-upon contract prices
are recognized when it is probable that the claim will result in additional
contract revenue and the amounts can be reliably estimated. Included in this
amount are estimated recoveries on constructive change claims related to
government-imposed redefined acceptance criteria on the Grumman F-14 contract.
Management believes that amounts reflected in the financial statements are
reasonable estimates of the ultimate settlements.
In September 1997, the Company and certain of its subsidiaries sold
certain of their U.S. and Canadian customer trade receivables to CNC Finance LLC
(CNC Finance), a wholly owned bankruptcy remote subsidiary of the Company. CNC
Finance entered into a three-year agreement to sell without recourse, on a
revolving basis, an undivided fractional ownership interest in the receivables,
based on the level of eligible receivables, up to a maximum of $95.0 million to
a special purpose entity of a financial institution. At December 31, 1998 and
December 31, 1997, $95.0 million and $82.5 million, respectively, of the
Company's receivables were sold under this agreement and the sale was reflected
as a reduction of accounts receivable in the 1998 and 1997 balance sheet. The
undivided interests were sold at a discount, which was included in interest
expense in the 1998 and 1997 income statement.
NOTE G INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
FIFO or average cost (which approximates current costs):
Finished products $ 289.9 $ 227.0
In process 587.2 586.1
Raw materials and supplies 229.0 206.4
-------- --------
1,106.1 1,019.5
Reserve to reduce certain inventories to LIFO basis (73.4) (79.5)
Progress payments and advances (65.0) (90.3)
-------- --------
Total $ 967.7 $ 849.7
======== ========
</TABLE>
Approximately 31 percent of inventory was valued by the LIFO method in
both 1998 and 1997.
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<PAGE> 42
In-process inventories as of December 31, 1998, which include
significant deferred costs for long-term contracts accounted for under contract
accounting, are summarized by contract as follows (in millions, except
quantities which are number of aircraft):
<TABLE>
<CAPTION>
AIRCRAFT ORDER STATUS(1) COMPANY ORDER STATUS IN-PROCESS INVENTORY
------------------------ ---------------------------------------- --------------------------------
DELIVERED UN- UN- (2) (3)FIRM PRE- EXCESS
TO FILLED FILLED CONTRACT UN-FILLED (5)YEAR PRO- PRO- OVER-
CONTRACT AIRLINES ORDERS OPTIONS QUANTITY DELIVERED ORDERS COMPLETE DUCTION DUCTION AVERAGE TOTAL
- -------- -------- ------ ------- -------- --------- --------- -------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PW4000 for the A300/A310
and MD-11(4) 287 10 9 325 303 19 2000 $ 10.7 $ 8.0 $26.0 $ 44.7
737-700 167 952 1,078 1,000 212 488 2002 8.5 -- 3.6 12.1
717-200 -- 115 100 300 1 54 2007 13.1 83.0 30.3 126.4
Others 71.6 5.3 .8 77.7
------ ------ ----- -----
In-process inventory
related to long-term
contracts $103.9 $96.3 $60.7 260.9
====== ===== =====
In-process inventory not
related to long-term
contracts 156.0
------
Balance at December
31, 1998 $416.9
======
</TABLE>
(1) Represents the aircraft order status as reported by Case and/or other
sources the Company believes to be reliable for the related aircraft
and engine option. The Company's orders frequently are less than the
announced orders shown above.
(2) Represents the number of aircraft used to obtain average unit cost.
(3) Represents the number of aircraft for which the Company has firm
unfilled orders.
(4) Contract quantity represents the lesser of those quantities assumed in
original contract pricing or those quantities which the Company now
expects to deliver in the periods assumed in original contract pricing.
(5) The year presented represents the year in which the final production
units included in the contract quantity are expected to be delivered.
The contract may continue in effect beyond this date.
In-process inventories include significant deferred costs related to
production, pre-production and excess-over-average costs for long-term
contracts. The Company has pre-production inventory of $85.6 million related to
design and development costs on the 717-200 program through September 30, 1999.
In addition, the Company has excess-over-average inventory of $49.4 million
related to costs associated with the production of the flight test inventory and
the first production units on this program. The aircraft was certified by the
FAA on September 1, 1999, and Boeing is actively marketing the plane. Recovery
of these costs will depend on the ultimate number of aircraft delivered.
In 1997, the Company recognized a $35.2 million pretax charge ($21.0
million after tax, or $0.19 per diluted share) to write off that portion of its
contract investment in the McDonnell Douglas MD-90 aircraft program, including
the costs it will be required to spend in the future to complete the contract,
that the Company determined would not be recoverable from future MD-90 sales
represented by firm aircraft orders. In addition, the Company recognized a $49.3
million pretax charge ($29.5 million after tax) in December 1996, related to the
MD-90 program. This charge did not impact the income statement; rather, it was
recognized as a direct adjustment to equity as a result of aligning Rohr's
fiscal year with BFGoodrich's.
NOTE H FINANCING ARRANGEMENTS
SHORT-TERM BANK DEBT At December 31, 1998, the Company had separate
committed revolving credit agreements with certain banks providing for domestic
lines of credit aggregating $300.0 million. Borrowings under these agreements
can be for any period of time until the expiration date and bear interest, at
the Company's option, at rates tied to the banks' certificate of deposit,
42
<PAGE> 43
Eurodollar or prime rates. The lines expire on June 30, 2000, unless extended by
the banks at the request of the Company. Under the agreements, the Company is
required to pay a facility fee of 12 basis points per annum on the total $300.0
million committed line. At December 31, 1998, no amounts were outstanding
pursuant to these agreements.
In addition, the Company had available formal foreign lines of credit
and overdraft facilities, including a committed European revolver, of $100.2
million at December 31, 1998, of which $32.5 million was available.
The Company also maintains uncommitted domestic money market facilities
with various banks aggregating $380.0 million, of which $277.0 million of these
lines were unused and available at December 31, 1998. Weighted-average interest
rates on outstanding short-term borrowings were 5.2 percent and 6.4 percent at
December 31, 1998 and 1997, respectively. Weighted-average interest rates on
short-term borrowings were 5.6 percent, 5.0 percent and 5.9 percent during 1998,
1997 and 1996, respectively.
LONG-TERM DEBT At December 31, 1998 and 1997, long-term debt and
capital lease obligations payable after one year consisted of:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Revolving credit facility $ 239.5 $ 697.5
9.75% senior notes, maturing in 1999 -- 7.5
9.75% senior notes, maturing in 2000 7.4 7.4
9.625% Notes, maturing in 2001 175.0 175.0
MTN notes payable 699.0 269.0
European revolver 26.8 25.5
IDRBs, maturing in 2023, 6.0% 60.0 60.0
7.5% senior notes, maturing in 2008 300.0 --
Other debt, maturing to 2015 (interest
rates from 3.0% to 11.625%) 58.6 72.0
-------- --------
1,566.3 1,313.9
Capital lease obligations (Note I) 6.4 8.0
-------- --------
Total $1,572.7 $1,321.9
======== ========
</TABLE>
REVOLVING CREDIT FACILITY During 1998, the Company used the proceeds
from issuance of its Convertible Preferred Securities and Senior Notes ($435.5
million) to reduce its indebtedness under the revolving credit facility. The
revolving credit facility provides a total commitment of up to $600 million, of
which up to $125.0 million can be issued for letters of credit, $14.2 million of
which were issued at December 31, 1998. Borrowings under the revolving credit
facility bear interest, at the Company's option, at rates tied to the Federal
Reserve certificate of deposit, Eurodollar or prime rates. Letter of credit fees
of 0.5 percent are payable on outstanding letters of credit and a commitment fee
of 0.1875 percent is payable on the unutilized facility. The weighted-average
interest rates on Credit Agreement borrowings were 6.5 percent, 6.7 percent and
6.7 percent during 1998, 1997 and 1996, respectively. The Company has entered
into interest rate swaps to reduce (hedge) the impact of interest rate changes
on the revolving credit facility. The revolving credit facility was terminated
subsequent to the consummation of the merger with Coltec.
SENIOR NOTES In 1998, the Company purchased in the open market $5.0
million of the 9.75 percent senior notes due November 1, 1999. The remaining
$2.5 million that is due in 1999 has been reclassified to short-term. The 9.75
percent notes due 2000 are redeemable at maturity on April 1, 2000. In April
1998, the Company privately placed, with institutional investors, $300.0 million
principal amount of 7.5 percent senior notes due 2008, which are redeemable at a
premium prior to maturity on April 15, 2008.
MTN NOTES PAYABLE The Company has periodically issued long-term debt
securities in the public markets through a medium term note program (referred to
43
<PAGE> 44
as the MTN program), which commenced in 1995. MTN notes outstanding at December
31, 1998, consist entirely of fixed-rate non-callable debt securities. In 1998,
the Company issued $100.0 million of 6.45 percent MTN notes due in 2008, $130.0
million of 6.9 percent MTN notes due in 2018 and $200.0 million of 7.0 percent
notes due in 2038, primarily for the financing of the Freedom Chemical
acquisition (see Note D). During 1997, and in connection with the refinancing of
Rohr's debt, the Company issued $150.0 million of 7.2 percent MTN notes, due in
2027. All other MTN notes outstanding were issued during 1995 and 1996, with
interest rates ranging from 7.3 percent to 8.7 percent and maturity dates
ranging from 2025 to 2046.
EUROPEAN REVOLVER The Company has a $75.0 million committed
multi-currency revolving credit facility with various international banks,
expiring in the year 2003. The Company uses this facility for short and
long-term, local currency financing to support the growth of its European
operations. At December 31, 1998, the Company's long-term borrowings under this
facility were $26.8 million denominated in Spanish pesetas at a floating rate
that is tied to Spanish LIBOR (3.56 percent at December 31, 1998). The Company
has effectively converted the $26.8 million long-term borrowing into fixed rate
debt with an interest rate swap.
IDRBS The industrial development revenue bonds maturing in 2023 were
issued to finance the construction of a hangar facility in 1993. Property
acquired through the issuance of these bonds secures the repayment of the bonds.
Aggregate maturities of long-term debt, exclusive of capital lease
obligations, during the five years subsequent to December 31, 1998, are as
follows (in millions): 1999--$5.6; 2000--$12.4; 2001--$445.2; 2002--$2.7 and
2003--$1.5.
The Company's debt agreements contain various restrictive covenants
that, among other things, place limitations on the payment of cash dividends and
the repurchase of the Company's capital stock. Under the most restrictive of
these agreements, $461.8 million of income retained in the business and
additional capital was free from such limitations at December 31, 1998.
NOTE I LEASE COMMITMENTS
The Company leases certain of its office and manufacturing facilities
as well as machinery and equipment under various leasing arrangements. The
future minimum lease payments from continuing operations, by year and in the
aggregate, under capital leases and under noncancelable operating leases with
initial or remaining noncancelable lease terms in excess of one year, consisted
of the following at December 31, 1998:
<TABLE>
<CAPTION>
NONCANCELABLE
CAPITAL OPERATING
LEASES LEASES
------- --------------
(IN MILLIONS)
<S> <C> <C>
1999 $2.6 $ 39.9
2000 2.1 34.9
2001 1.8 27.9
2002 1.5 21.2
2003 1.0 15.7
Thereafter 1.4 32.8
---- ------
Total minimum payments 10.4 $172.4
======
Amounts representing interest (2.0)
----
Present value of net minimum lease payments 8.4
Current portion of capital lease obligations (2.0)
----
Total $6.4
====
</TABLE>
44
<PAGE> 45
Net rent expense from continuing operations consisted of the following:
1998 1997 1996
---- ---- ----
(IN MILLIONS)
Minimum rentals $45.9 $37.2 $35.7
Contingent rentals .3 3.9 2.9
Sublease rentals (.1) (.1) (.1)
----- ----- -----
Total $46.1 $41.0 $38.5
===== ===== =====
NOTE J PENSIONS AND POSTRETIREMENT BENEFITS
The Company has several noncontributory defined benefit pension plans
covering substantially all eligible employees. Plans covering salaried employees
generally provide benefit payments using a formula that is based on an
employee's compensation and length of service. Plans covering hourly employees
generally provide benefit payments of stated amounts for each year of service.
The Company also sponsors several unfunded defined benefit
postretirement plans that provide certain health-care and life insurance
benefits to eligible employees. The health-care plans are contributory, with
retiree contributions adjusted periodically, and contain other cost-sharing
features, such as deductibles and coinsurance. The life insurance plans are
generally noncontributory.
The Company's general funding policy for pension plans is to contribute
amounts at least sufficient to satisfy regulatory funding standards. The
Company's qualified pension plans were fully funded on an accumulated benefit
obligation basis at December 31, 1998 and 1997. Assets for these plans consist
principally of corporate and government obligations and commingled funds
invested in equities, debt and real estate. At December 31, 1998, the pension
plans held 2.9 million shares of the Company's common stock with a fair value of
$99.8 million.
Amortization of unrecognized transition assets and liabilities, prior
service cost and gains and losses (if applicable) are recorded using the
straight-line method over the average remaining service period of active
employees, or approximately 12 years.
45
<PAGE> 46
The following table sets forth the status of the Company's defined
benefit pension plans and defined benefit postretirement plans as of December
31, 1998 and 1997, and the amounts recorded in the Consolidated Balance Sheet at
these dates.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
CHANGE IN PROJECTED
BENEFIT OBLIGATIONS
Projected benefit
obligation at
beginning of year $1,999.6 $1,815.4 $ 348.9 $ 331.4
Service cost 32.5 29.4 3.0 2.4
Interest cost 141.5 141.6 23.1 25.1
Amendments 20.9 51.3 (1.2) --
Actuarial (gains) losses 63.0 151.7 (0.1) 19.6
Acquisitions 4.6 -- 0.9 --
Foreign currency exchange (1.6) (0.7) -- --
Curtailment gain (loss) (1.2) -- -- --
Benefits paid (177.6) (189.1) (28.9) (29.6)
--------- -------- ------- -------
Projected benefit
obligation at end of year $2,081.7 $1,999.6 $345.7 $348.9
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $2,036.4 $1,825.3 $ -- $ --
Actual return on plan assets 263.3 329.0 -- --
Acquisitions 4.6 -- -- --
Company contributions 60.4 72.1 28.9 27.3
Foreign currency exchange (2.1) (1.0) -- --
Benefits paid (177.6) (189.0) (28.9) (27.3)
--------- -------- ------- -------
Fair value of plan
assets at end of year $2,185.0 $2,036.4 $ -- $ --
-------- -------- ------- -------
FUNDED STATUS (UNDERFUNDED)
Funded status $ 103.3 $ 36.8 $(345.7) $(348.9)
Unrecognized net
actuarial loss (31.8) (0.1) (33.2) (32.0)
Unrecognized prior
service cost 73.7 62.3 (9.6) (8.5)
Unrecognized net
transition obligation 9.3 9.0 -- --
------- ------- ------- -------
Prepaid (accrued)
benefit cost $ 154.5 $ 108.0 $(388.5) $(389.4)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE
STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 179.0 $ 166.9 $ -- $ --
Intangible asset 6.3 9.9 -- --
Accumulated other comprehensive
income 4.5 4.7 -- --
Deferred taxes 1.9 0.9 -- --
Accrued benefit liability (37.2) (74.4) (388.5) (389.4)
------- ------- ------- -------
Net amount recognized $ 154.5 $ 108.0 $(388.5) $(389.4)
======= ======= ======= =======
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 7.0% 7.25% 7.00% 7.25%
Expected return on plan assets 9.0% 9.0% -- --
Rate of compensation increase 3.5% 3.5% -- --
</TABLE>
For measurement purposes, a 6.5 percent annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1999. The rate
was assumed to decrease gradually to 4.75 percent for 2002 and remain at that
level thereafter.
For Coltec plans, the assumptions were comparable to the BFGoodrich
assumptions, except for the rate of compensation increase (4.75 percent in 1998
and 1997) and the rate of increase in the per capita cost of covered health care
(8.1 percent assumed to decrease gradually to 5.0 percent by 2005).
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET
PERIODIC BENEFIT COST:
Service cost $ 32.5 $29.4 $34.3 $ 3.0 $ 2.4 $ 2.8
Interest cost 141.7 141.6 132.9 23.1 25.1 24.6
Expected return on
plan assets (190.6) (207.9) (154.1) -- -- --
Amortization of prior
service cost 26.5 54.6 5.8 (0.5) (1.4) (1.2)
Amortization of
transition obligation 0.1 0.3 0.7 -- -- --
Recognized net
actuarial (gain) loss 5.8 5.5 6.0 (1.3) (1.0) (1.7)
------- ----- ----- ----- ----- -----
Benefit cost 16.0 23.5 25.6 24.3 25.1 24.5
Settlements and curtailments
(gain)/loss (7.8) 6.6 -- -- (2.5) --
------- ----- ----- ----- ----- -----
$ 8.2 $30.1 $25.6 $24.3 $22.6 $24.5
====== ===== ===== ===== ===== =====
</TABLE>
The table below quantifies the impact of a one percentage point change
in the assumed health care cost trend rate.
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT POINT
INCREASE DECREASE
------------- -------------
<S> <C> <C>
Effect on total of service and interest
cost components in 1998 $ 1.7 million $ 1.5 million
Effect on postretirement benefit obligation
as of December 31, 1998 $19.5 million $17.1 million
</TABLE>
The Company also maintains voluntary retirement savings plans for U.S.
salaried and wage employees. Under provisions of these plans, eligible employees
can receive Company matching contributions on up to the first 6 percent of their
eligible earnings. For 1998, 1997 and 1996, Company contributions amounted to
$24.8 million, $23.2 million and $23.2 million, respectively.
In addition, the Company contributed $10.1 million, $8.9 million and
$12.4 million in 1998, 1997 and 1996, respectively, under other defined
contribution plans for employees not covered under the aforementioned defined
benefit pension and voluntary retirement savings plans. Contributions are
47
<PAGE> 48
determined based on various percentages of eligible earnings and a profit
sharing formula.
NOTE K INCOME TAXES
Income from continuing operations before income taxes and Trust
distributions as shown in the Consolidated Statement of Income consists of the
following:
1998 1997 1996
---- ---- ----
(IN MILLIONS)
Domestic $551.0 $311.7 $232.9
Foreign 43.2 32.0 57.8
------ ------ ------
Total $594.2 $343.7 $290.7
====== ====== ======
A summary of income tax (expense) benefit from continuing operations in
the Consolidated Statement of Income is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal $ (99.3) $(61.3) $(26.8)
Foreign (13.6) (12.7) (22.6)
State (22.3) (7.1) (7.4)
------- ------- -------
(135.2) (81.1) (56.8)
------- ------- -------
Deferred:
Federal (75.4) (49.0) (51.7)
Foreign (8.5) (7.5) 7.5
State 0.6 (0.6) (2.2)
------- ------- -------
(83.3) (57.1) (46.4)
------- ------- -------
Total $(218.5) $(138.2) $(103.2)
======= ======= =======
</TABLE>
Significant components of deferred income tax assets and liabilities at
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred income tax assets:
Accrual for postretirement benefits other than pensions $ 128.8 $ 127.8
Inventories 30.7 64.2
Other nondeductible accruals 62.7 69.5
Tax credit and net operating loss carryovers 91.8 99.3
Employee benefits plans 11.6 7.8
Other 60.7 41.6
------- -------
386.3 410.2
Less valuation allowance -- (3.7)
------- -------
Total deferred income tax assets 386.3 406.5
------- -------
Deferred income tax liabilities:
Tax over book depreciation (127.3) (100.0)
Tax over book intangible amortization (40.3) (17.2)
Pensions (41.0) (47.7)
Capital transactions, net (61.8) (27.9)
Other (53.5) (59.3)
------- -------
Total deferred income tax liabilities (323.9) (252.1)
------- -------
Net deferred income taxes $ 62.4 $ 154.4
======= =======
</TABLE>
Management has determined, based on the Company's history of prior
earnings and its expectations for the future, that taxable income of the Company
will more likely than not be sufficient to recognize fully these net deferred
tax assets. In addition, management's analysis indicates that the turnaround
periods for certain of these assets are for long periods of time or are
indefinite. In particular, the turnaround of the largest deferred tax asset
related to accounting for postretirement benefits other than pensions will occur
48
<PAGE> 49
over an extended period of time and, as a result, will be realized for tax
purposes over those future periods. The tax credit and net operating loss
carryovers, principally relating to Rohr, are primarily comprised of federal net
operating loss carryovers of $220.0 million which expire in the years 2005
through 2013, and investment tax credit and other credits of $15.1 million which
expire in the years 2003 through 2014. The remaining deferred tax assets and
liabilities approximately match each other in terms of timing and amounts and
should be realizable in the future, given the Company's operating history.
The valuation allowance in 1997 is attributable to foreign tax credit
carry forwards which were utilized in 1998.
The effective income tax rate from continuing operations varied from
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Corporate-owned life insurance investments (0.1) -- (0.7)
Amortization of nondeductible goodwill 0.8 0.6 0.7
Difference in rates on consolidated foreign
subsidiaries 0.5 0.8 0.4
State and local taxes, net of federal benefit 2.1 0.8 1.7
Tax exempt income from foreign sales corporation (1.0) (2.1) (0.1)
QUIPS distributions (0.5) (1.1) (1.3)
Nondeductible merger-related costs -- 5.9 --
Repatriation of non-U.S. earnings (0.3) (0.3) 0.6
Tax credit utilization (0.2) (0.3) (0.4)
Other items 0.5 0.9 (0.4)
---- ---- ----
Effective income tax rate 36.8% 40.2% 35.5%
==== ==== ====
</TABLE>
The Company has not provided for U.S. federal and foreign withholding
taxes on $207.5 million of foreign subsidiaries' undistributed earnings as of
December 31, 1998, because such earnings are intended to be reinvested
indefinitely. It is not practical to determine the amount of income tax
liability that would result had such earnings actually been repatriated. On
repatriation, certain foreign countries impose withholding taxes. The amount of
withholding tax that would be payable on remittance of the entire amount of
undistributed earnings would approximate $9.8 million.
NOTE L BUSINESS SEGMENT INFORMATION
The Company's operations are classified into three reportable business
segments: BFGoodrich Aerospace ("Aerospace"), BFGoodrich Engineered Industrial
Products ("Engineered Industrial Products") and BFGoodrich Performance Materials
("Performance Materials"). The Company's three reportable business segments are
managed separately based on fundamental differences in their operations.
Aerospace consists of four business groups: Aerostructures; Landing
Systems; Sensors and Integrated Systems; and Maintenance, Repair and Overhaul.
They serve commercial, military, regional, business and general aviation
markets. Aerospace's major products are aircraft engine nacelle and pylon
systems; aircraft landing gear and wheels and brakes; sensors and sensor-based
systems; fuel measurement and management systems; aircraft evacuation slides and
rafts; ice protection systems, and collision warning systems. Aerospace also
provides maintenance, repair and overhaul services on commercial airframes and
components.
Engineered Industrial Products is a single business group. This group
manufactures industrial seals; gaskets; packing products; self-lubricating
bearings; diesel, gas and dual-fuel engines; air compressors; spray nozzles and
vacuum pumps.
Performance Materials consists of three business groups: Textile and
Coatings Solutions, Polymer Additives and Specialty Plastics, and Consumer
49
<PAGE> 50
Specialties. They serve various markets such as personal-care, pharmaceuticals,
printing, textiles, industrial, construction and automotive. Performance
Materials' major products are thermoplastic polyurethane; high-heat-resistant
plastics; synthetic thickeners and emulsifiers; polymer emulsions, resins and
additives, and textile thickeners, binders, emulsions and compounds.
The Company's business is conducted on a global basis with
manufacturing, service and sales undertaken in various locations throughout the
world. Aerospace's products and services and Engineered Industrial Products' and
Performance Materials' products are principally sold to customers in North
America and Europe.
Segment operating income is total segment revenue reduced by operating
expenses identifiable with that business segment. Corporate includes general
corporate administrative costs and Advanced Technology Group research expenses.
50
<PAGE> 51
The Company evaluates performance and allocates resources based on
operating income. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies. There
are no intersegment sales.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
SALES
Aerospace $3,479.3 $3,026.1 $2,454.6
Engineered Industrial Products 779.9 757.1 726.5
Performance Materials 1,195.6 904.7 824.4
-------- -------- --------
Total Sales $5,454.8 $4,687.9 $4,005.5
======== ======== ========
OPERATING INCOME
Aerospace $ 500.0 $ 325.8 $ 320.7
Engineered Industrial Products 131.6 147.0 144.1
Performance Materials 145.8 128.2 113.5
-------- -------- --------
777.4 601.0 578.3
Corporate General and Administrative
Expenses (83.7) (93.1) (85.1)
Merger Related and Consolidation Costs (10.5) (77.0) (11.2)
-------- -------- --------
Total Operating Income $ 683.2 $ 430.9 $ 482.0
======== ======== ========
ASSETS
Aerospace $2,844.9 $2,816.3 $2,548.0
Engineered Industrial Products 404.0 320.6 254.6
Performance Materials 1,380.2 877.3 784.6
Corporate 583.9 319.5 737.7
-------- -------- --------
Total Assets $5,213.0 $4,333.7 $4,324.9
======== ======== ========
CAPITAL EXPENDITURES
Aerospace $ 157.9 $ 128.8 $ 91.5
Engineered Industrial Products 29.6 31.4 13.7
Performance Materials 70.6 73.2 97.5
Corporate 3.9 7.7 39.0
-------- -------- --------
Total Capital Expenditures $ 262.0 $ 241.1 $ 241.7
======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSE
Aerospace $ 106.6 $ 101.3 $ 96.1
Engineered Industrial Products 21.1 15.7 13.9
Performance Materials 75.3 48.2 39.0
Corporate 7.2 12.0 26.8
-------- --------- --------
Total Depreciation and Amortization $ 210.2 $ 177.2 $ 175.8
======== ======== ========
GEOGRAPHIC AREAS
NET SALES
United States $3,795.4 $3,362.1 $2,878.3
Canada 240.5 171.0 174.2
Europe(1) 970.1 802.8 606.1
Other Foreign 448.8 352.0 346.9
-------- -------- --------
Total $5,454.8 $4,687.9 $4,005.5
======== ======== ========
PROPERTY
United States $1,347.1 $ 1,172.4 1,182.4
Canada 53.9 54.8 58.2
Europe 153.6 116.9 108.7
Other Foreign 7.9 8.6 7.5
-------- -------- -------
Total $1,562.5 $1,352.7 $1,356.8
======== ======== ========
</TABLE>
(1) European sales in 1998, 1997 and 1996 included $298.4 million, $431.0
million and $261.1 million, respectively, of sales to customers in
France. Sales were allocated to geographic areas based on where the
product was shipped to.
In 1998, 1997 and 1996, sales to Boeing, solely by the Aerospace
Segment, totaled 16 percent, 14 percent and 13 percent, respectively, of
consolidated sales. Sales to Boeing include sales to McDonnell Douglas which
merged with Boeing in 1997.
51
<PAGE> 52
NOTE M 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.
In February 1999, the Company sold its remaining interest in DTM for
approximately $3.5 million. The Company's net investment in DTM approximated
$0.5 million at December 31, 1998. The gain will be recorded within Other Income
(Expense) during the first quarter of 1999.
NOTE N SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
CHARGED
BALANCE TO COSTS BALANCE
BEGINNING AND AT END
OF YEAR EXPENSE OTHER DEDUCTIONS(1) OF YEAR
--------- -------- ----- ------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE ALLOWANCE
Year ended December 31, 1998 $24.2 $6.8 $ .9 (2) $(6.2) $25.7
Year ended December 31, 1997 28.2 16.8 .7 (2)
(2.1)(3) (19.4) 24.2
Year ended December 31, 1996 28.9 7.5 2.9 (2) (11.1) 28.2
</TABLE>
(1) Write-off of doubtful accounts, net of recoveries
(2) Allowance related to acquisitions
(3) Allowance related to operations that were sold
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
PROPERTY
Land $ 66.0 $ 56.3
Buildings and improvements 820.6 780.3
Machinery and equipment 1,924.8 1,702.0
Construction in progress 191.5 155.5
-------- --------
$3,002.9 $2,694.1
Less allowances for depreciation (1,440.4) (1,341.4)
-------- --------
Total $1,562.5 $1,352.7
======== ========
</TABLE>
Property includes assets acquired under capital leases, principally
buildings and machinery and equipment, of $17.0 million and $33.4 million at
December 31, 1998 and 1997, respectively. Related allowances for depreciation
and amortization are $5.4 million and $15.5 million, respectively. Interest
costs capitalized from continuing operations were $5.1 million in 1998, $6.8
million in 1997 and $7.5 million in 1996.
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
GOODWILL
Accumulated amortization $183.3 $145.4
====== ======
IDENTIFIABLE INTANGIBLE ASSETS
Accumulated amortization $ 29.3 $ 26.0
====== ======
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
ACCRUED EXPENSES
Wages, vacations, pensions and other employment costs $179.9 $199.5
Postretirement benefits other than pensions 30.0 26.1
Taxes, other than federal and foreign taxes on income 56.0 56.0
Accrued environmental liabilities 19.3 18.8
Accrued asbestos liability 89.7 48.1
Accrued interest 44.5 34.1
Other 197.6 176.1
------ ------
Total $617.0 $558.7
====== ======
</TABLE>
FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's accounting policies
with respect to financial instruments are described in Note B.
The carrying amounts of the Company's significant on balance sheet
financial instruments approximate their respective fair values at December 31,
1998 and 1997, except for the Company's long-term receivables, investments and
long-term debt.
<TABLE>
<CAPTION>
1998 1997
------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Long-term receivables and investments $ 50.8 $ 57.6 $ 35.0 $ 42.7
Long-term debt 1,580.6 1,781.9 1,326.9 1,366.2
</TABLE>
Off balance sheet derivative financial instruments at December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ----------------------------
CONTRACT/ CONTRACT/
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------ --------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate swaps $306.8 $(13.0) $430.5 $(4.9)
Foreign currency forward contracts 124.7 (12.4) 174.2 (8.5)
</TABLE>
At December 31, 1998, the Company had interest rate swap agreements
wherein the Company pays a fixed rate of interest and receives a LIBOR-based
floating rate. The agreements have fixed interest rates ranging from 5.78% to
6.40% and maturity dates ranging from January 2000 to October 2002.
In July and August 1999 the Company terminated $280.0 of the interest
rate swaps that existed at December 31, 1998. The fair market value at December
31, 1998 of the terminated swaps was $(9.4).
At December 31, 1998, the Company had $120.5 million of foreign
currency forward contracts denominated in Canadian dollars. These forward
contracts hedge the U.S. dollar-denominated sales of certain Canadian
subsidiaries. These forward contracts have varying maturities with none
exceeding five years. The remaining forward contracts at December 31, 1998
mature over the next two months coincident with the anticipated settlement of
accounts receivable and accounts payable in Europe.
The counterparties to each of these agreements are major commercial
banks. Management believes that losses related to credit risk are remote.
In October 1999 the Company terminated $94.0 of the foreign exchange
forward contracts that existed at December 31, 1998. These forward contracts
related to the hedging of the U.S. dollar-denominated sales of certain Canadian
53
<PAGE> 54
subsidiaries. The fair market value at December 31, 1998 of the terminated
forward contracts was $(21.0).
The Company has an outstanding contingent liability for guaranteed debt
and lease payments of $30.7 million, and for letters of credit of $40.5 million.
It was not practical to obtain independent estimates of the fair values for the
contingent liability for guaranteed debt and lease payments and for letters of
credit without incurring excessive costs. In the opinion of management,
non-performance by the other parties to the contingent liabilities will not have
a material effect on the Company's results of operations or financial condition.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized foreign currency translation $ (10.9) $ (8.4) $ (2.4)
Minimum pension liability (4.2) (3.5) (22.5)
------- ------ ------
Total $ (15.1) $(11.9) $(24.9)
======= ====== ======
</TABLE>
NOTE O SUPPLEMENTAL CASH FLOW INFORMATION
The following tables set forth non-cash financing and investing
activities and other cash flow information.
Acquisitions accounted for under the purchase method are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Estimated fair value of tangible assets acquired $ 266.0 $ 106.2 $ 46.4
Goodwill and identifiable intangible assets
acquired 380.7 105.4 81.7
Cash paid (521.5) (194.1) (107.9)
------- ------- -------
Liabilities assumed or created $ 125.2 $ 17.5 $ 20.2
======= ======= =======
Liabilities disposed of in connection with
sales of businesses $ -- $ 44.2 $ 1.5
Assets acquired in connection with sale of
business -- -- 27.6
Interest paid (net of amount capitalized) 120.7 131.7 163.5
Income taxes paid 45.9 165.2 62.5
Contribution of common stock to pension trust -- -- 30.0
Exchange of 7.75% Convertible Notes -- (1.3) (37.8)
Change in equity due to exchange of 7.75%
Convertible Notes -- 1.5 43.1
</TABLE>
NOTE P PREFERRED STOCK
There are 10,000,000 authorized shares of Series Preferred Stock--$1
par value. Shares of Series Preferred Stock that have been redeemed are deemed
retired and extinguished and may not be reissued. As of December 31, 1998,
2,401,673 shares of Series Preferred Stock have been redeemed, and no shares of
Series Preferred Stock were outstanding. The Board of Directors establishes and
designates the series and fixes the number of shares and the relative rights,
preferences and limitations of the respective series of the Series Preferred
Stock.
CUMULATIVE PARTICIPATING PREFERRED STOCK--SERIES F The Company has
200,000 shares of Junior Participating Preferred Stock-Series F--$1 par value
authorized at December 31, 1998. Series F shares have preferential voting,
dividend and liquidation rights over the Company's common stock. At December 31,
1998, no Series F shares were issued or outstanding and 81,812 shares were
reserved for issuance.
54
<PAGE> 55
On August 2, 1997, the Company made a dividend distribution of one
Preferred Share Purchase Right ("Right") on each share of the Company's common
stock. These Rights replace previous shareholder rights which expired on August
2, 1997. Each Right, when exercisable, entitles the registered holder thereof to
purchase from the Company one one-thousandth of a share of Series F Stock at a
price of $200 per one one-thousandth of a share (subject to adjustment). The one
one-thousandth of a share is intended to be the functional equivalent of one
share of the Company's common stock.
The Rights are not exercisable or transferable apart from the common
stock until an Acquiring Person, as defined in the Rights Agreement without the
prior consent of the Company's Board of Directors, acquires 20 percent or more
of the voting power of the Company's common stock or announces a tender offer
that would result in 20 percent ownership. The Company is entitled to redeem the
Rights at 1 cent per Right any time before a 20 percent position has been
acquired or in connection with certain transactions thereafter announced. Under
certain circumstances, including the acquisition of 20 percent of the Company's
common stock, each Right not owned by a potential Acquiring Person will entitle
its holder to purchase, at the Right's then-current exercise price, shares of
Series F Stock having a market value of twice the Right's exercise price.
Holders of the Right are entitled to buy stock of an Acquiring Person
at a similar discount if, after the acquisition of 20 percent or more of the
Company's voting power, the Company is involved in a merger or other business
combination transaction with another person in which its common shares are
changed or converted, or the Company sells 50 percent or more of its assets or
earnings power to another person. The Rights expire on August 2, 2007.
NOTE Q COMMON STOCK
During 1998, 1997 and 1996, 1.078 million; 0.884 million and 0.780
million shares, respectively, of authorized but unissued shares of common stock
were issued under the Stock Option Plan and other employee stock ownership
plans.
On December 22, 1997, 18.588 million shares of common stock were issued
in connection with the merger with Rohr (see Note C). During 1998, 1.235 million
shares of authorized but previously unissued shares of common stock were issued
upon conversion of Rohr debentures that were extinguished in late 1997.
During 1996, 0.755 million shares ($30.0 million) of authorized but
previously unissued shares of common stock were issued and contributed to the
Company's defined benefit wage and salary pension plans. In addition, 2.007
million shares ($48.0 million) of common stock related to Rohr's pension plans
were contributed during the period between August 1 and December 31, 1996 and,
as a result, are included in equity as part of the adjustment to conform Rohr's
fiscal year.
The Company acquired 0.628 million; 0.053 million and 0.053 million
shares of treasury stock in 1998, 1997 and 1996, respectively, and reissued none
in 1998; 0.005 million in 1997 and 0.023 million shares in 1996, in connection
with the Stock Option Plan and other employee stock ownership plans. In 1998,
1997 and 1996, 0.015 million; 0.020 million and 0.060 million shares,
respectively, of common stock previously awarded to employees were forfeited and
restored to treasury stock.
During 1998, 1997 and 1996, 1.602 million; 1.726 million; and 0.831
million shares, respectively, were repurchased by a pooled company (Coltec).
As of December 31, 1998, there were 5.599 million shares of common
stock reserved for future issuance under the Stock Option Plan.
NOTE R PREFERRED SECURITIES OF TRUSTS
In April 1998, Coltec privately placed with institutional investors
$150 million (3,000,000 shares at liquidation value of $50 per Convertible
Preferred Security) of 5 1/4% Trust Convertible Preferred Securities
55
<PAGE> 56
("Convertible Preferred Securities"). The placement of the Convertible Preferred
Securities was made through Coltec's wholly-owned subsidiary, Coltec Capital
Trust ("Trust"), a newly-formed Delaware business trust. The Convertible
Preferred Securities represent undivided beneficial ownership interests in the
Trust. Substantially all the assets of the Trust are the 5 1/4% Convertible
Junior Subordinated Deferrable Interest Debentures Due April 15, 2028 which were
acquired with the proceeds from the private placement of the Convertible
Preferred Securities. Coltec's obligations under the Convertible Junior
Subordinated Debentures, the Indenture pursuant to which they were issued, the
Amended and Restated Declaration of Trust of the Trust, the Guarantee of Coltec
and the Guarantee of the Company, taken together, constitute a full and
unconditional guarantee by the Company of amounts due on the Convertible
Preferred Securities. The Convertible Preferred Securities are convertible at
the option of the holders at any time into the common stock of the Company at an
effective conversion price of $52 1/3 per share and are redeemable at the
Company's option after April 20, 2001 at 102.63% of the liquidation amount
declining ratably to 100% after April 20, 2004.
On July 6, 1995, BFGoodrich Capital, a wholly owned Delaware statutory
business trust (the "Trust") which is consolidated by the Company, received
$122.5 million, net of the underwriting commission, from the issuance of 8.3
percent Cumulative Quarterly Income Preferred Securities, Series A ("QUIPS").
The Trust invested the proceeds in 8.3 percent Junior Subordinated Debentures,
Series A, due 2025 ("Junior Subordinated Debentures") issued by the Company,
which represent approximately 97 percent of the total assets of the Trust. The
Company used the proceeds from the Junior Subordinated Debentures primarily to
redeem all of the outstanding shares of the $3.50 Cumulative Convertible
Preferred Stock, Series D.
The QUIPS have a liquidation value of $25 per Preferred Security,
mature in 2025 and are subject to mandatory redemption upon repayment of the
Junior Subordinated Debentures. The Company has the option at any time on or
after July 6, 2000, to redeem, in whole or in part, the Junior Subordinated
Debentures with the proceeds from the issuance and sale of the Company's common
stock within two years preceding the date fixed for redemption.
The Company has unconditionally guaranteed all distributions required
to be made by the Trusts, but only to the extent the Trusts have funds legally
available for such distributions. The only source of funds for the Trusts to
make distributions to preferred security holders is the payment by the Company
of interest on the Junior Subordinated Debentures. The Company has the right to
defer such interest payments for up to five years. If the Company defers any
interest payments, the Company may not, among other things, pay any dividends on
its capital stock until all interest in arrears is paid to the Trusts.
NOTE S STOCK OPTION PLAN
At December 31, 1998, the Company had stock-based compensation plans
described below that include the pre-merger plans of Coltec and Rohr. Effective
with the mergers, outstanding Coltec and Rohr options were assumed by the
Company and converted to fully-vested options to purchase BFGoodrich common
stock at a ratio of .56 and .7 of one share of BFGoodrich common stock,
respectively, for each Coltec and Rohr option and at an appropriately revised
exercise price.
The Stock Option Plan, which will expire on April 5, 2001, unless
renewed, provides for the awarding of or the granting of options to purchase
5,000,000 shares of common stock of the Company. Generally, options granted are
exercisable at the rate of 35 percent after one year, 70 percent after two years
and 100 percent after three years. Certain options are fully exercisable
immediately after grant. The term of each option cannot exceed 10 years from the
date of grant. All options granted under the Plan have been granted at not less
than 100 percent of market value (as defined) on the date of grant.
56
<PAGE> 57
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-Free Interest Rate (%) 4.68 5.75 5.39
Dividend Yield (%) 2.8 2.7 2.5
Volatility Factor (%) 31.0 16.2 19.0
Weighted Average Expected Life of the
Options (years) 4.5 4.6 4.5
</TABLE>
The option valuation model requires the input of highly subjective
assumptions, primarily stock price volatility, changes in which can materially
affect the fair value estimate. The weighted-average fair values of stock
options granted during 1999, 1998 and 1997 were $10.36, $6.99 and $6.21,
respectively.
For purposes of the pro forma disclosures required by SFAS 123, the
estimated fair value of the options is amortized to expense over the options'
vesting period. In addition, the grant-date fair value of performance shares
(discussed below) is amortized to expense over the three-year plan cycle without
adjustments for subsequent changes in the market price of the Company's common
stock. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported $353.7 $260.0 $261.9
Pro forma 345.9 250.4 259.2
Earnings per share:
Basic
As reported $ 3.21 $ 2.41 $ 2.49
Pro forma 3.14 2.32 2.46
Diluted
As reported $ 3.14 $ 2.33 $ 2.40
Pro forma 3.04 2.23 2.36
</TABLE>
The pro forma effect on net income for 1996 is not representative of
the pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995. In addition, the pro forma effect on net income in 1997 is not
representative of the pro forma effect on net income in future years because
1997 includes $4.5 million of after-tax compensation expense related to the Rohr
options which became fully vested upon the consummation of the merger with Rohr.
57
<PAGE> 58
A summary of the Company's stock option activity and related
information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 WEIGHTED-AVERAGE
(OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE
---------------------------- ------- ----------------
<S> <C> <C>
Outstanding at beginning of year 6,963.6 $27.90
Granted 1,286.4 41.24
Exercised (1,054.7) 27.63
Forfeited (99.8) 36.17
Expired (2.1) 38.04
-------
Outstanding at end of year 7,093.4 30.18
=======
YEAR ENDED DECEMBER 31, 1997 WEIGHTED-AVERAGE
(OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE
---------------------------- ------- ----------------
Outstanding at beginning of year 7,974.5 $24.57
Granted 1,445.3 39.33
Exercised (2,223.3) 23.38
Forfeited (218.6) 27.07
Expired (14.3) 43.64
--------
Outstanding at end of year 6,963.6 27.90
========
YEAR ENDED DECEMBER 31, 1996 WEIGHTED-AVERAGE
(OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE
---------------------------- ------- ----------------
Outstanding at beginning of year 7,117.9 $23.18
Granted 1,901.2 28.11
Exercised (873.8) 21.29
Forfeited (228.6) 24.47
Expired (54.2) 39.24
-------
Outstanding at end of year 7,862.5 24.44
=======
</TABLE>
The number of options outstanding at the end of 1996 does not agree
with the beginning amount for 1997 due to option activity for Rohr during the
five-month period ended December 31, 1996, not reflected in the 1996 activity
above.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ----------------------------------------
WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE WEIGHTED
RANGE OF OUTSTANDING REMAINING EXERCISE NUMBER EXERCISABLE AVERAGE
EXERCISE PRICES (IN THOUSANDS) CONTRACTUAL LIFE PRICE (IN THOUSANDS) EXERCISE PRICE
- ------------------------- ---------------------- -------------------- ------------- -- ----------------------- ----------------
<C> <C> <C> <C> <C> <C>
$11.96-$19.20 2,051.4 4.7 years $18.05 1,399.6 $17.69
$19.42-$29.82 1,986.0 5.3 years 23.60 1,812.4 23.50
$30.18-$39.88 1,115.5 6.7 years 35.52 539.6 34.10
$40.13-$53.56 1,940.5 8.4 years 41.43 785.5 41.39
------- -----
TOTAL 7,093.4 4,537.1
======= =======
</TABLE>
During 1998, 1997 and 1996, restricted stock awards for 52,886; 66,776
and 181,113 shares, respectively, were made. Restricted stock awards may be
subject to conditions established by the Board of Directors. Under the terms of
the restricted stock awards, the granted stock vests three years after the award
date. The cost of these awards, determined as the market value of the shares at
the date of grant, is being amortized over the three-year period. In 1998, 1997
and 1996, $2.0 million, $3.3 million and $4.0 million, respectively, were
charged to expense for restricted stock awards.
The Stock Option Plan also provides that shares of common stock may be
awarded as performance shares to certain key executives having a critical impact
58
<PAGE> 59
on the long-term performance of the Company. In 1995, the Compensation Committee
of the Board of Directors awarded 566,200 shares and established performance
objectives that are based on attainment of an average return on equity over the
three-year plan cycle ending in 1997. Since the company exceeded all of the
performance objectives established in 1995, an additional 159,445 shares were
awarded to those key executives in 1998. In 1997 and 1996, 5,000 and 14,560
performance shares, respectively were granted to certain key executives that
commenced employment during those years. During 1998, 1997 and 1996, 10,356;
14,400 and 35,000 performance shares, respectively, were forfeited.
Prior to 1998, the market value of performance shares awarded under the
plan was recorded as unearned restricted stock. In 1998, the Company changed the
plan to a phantom performance share plan and issued 207,800 phantom performance
shares. Under this plan, compensation expense is recorded based on the extent
performance objectives are expected to be met. In 1998, 1997 and 1996, $1.7
million, $14.3 million and $8.3 million, respectively, were charged to expense
for performance shares. If the provisions of SFAS 123 had been used to account
for awards of performance shares, the weighted-average grant-date fair value of
performance shares granted in 1998, 1997 and 1996 would have been $45.47, $41.44
and $38.54 per share, respectively.
NOTE T DISCONTINUED OPERATIONS
On August 15, 1997, the Company completed the disposition of its
chlor-alkali and olefins ("CAO") business to The Westlake Group for $92.7
million, resulting in an after-tax gain of $14.5 million, or $.13 per diluted
share. The disposition of the CAO business represents the disposal of a segment
of a business under APB Opinion No. 30 ("APB 30"). Accordingly, the Consolidated
Statement of Income reflects the CAO business (previously reported as Other
Operations) as a discontinued operation, in addition to the following
discontinued operations.
On February 3, 1997, the Company completed the sale of Tremco
Incorporated to RPM, Inc. for $230.7 million, resulting in an after-tax gain of
$59.5 million, or $.53 per diluted share. The sale of Tremco Incorporated
completed the disposition of the Company's Sealants, Coatings and Adhesives
("SC&A") Group which also represented a disposal of a segment of a business
under APB 30.
In June 1996, the Company sold Holley Automotive, Coltec Automotive and
Performance Friction Products to Borg-Warner Automotive, Inc. for $296.5 million
in cash. In December 1996, Coltec sold Farnam Sealing Systems division to
Meillor SA for $20.7 million in cash and a note receivable for $3.0 million. The
sale of these automotive original equipment (OE) components businesses resulted
in an after-tax gain of $37.9 million, or $0.35 per diluted share, net of
liabilities retained, transaction costs and obligations relating to the sales.
The sale of the automotive OE components businesses represented a disposal of
the Company's Automotive Segment. Net sales of the discontinued automotive OE
components businesses were $182.6 million in 1996.
59
<PAGE> 60
A summary of the results of discontinued operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Sales:
Automotive $ -- $ -- $182.6
CAO -- 98.0 160.6
SC&A -- -- 316.8
----- ----- ------
$ -- $98.0 $660.0
===== ===== ======
Net income:
Automotive(1) $ -- $ -- $ 19.2
CAO(2) -- 10.3 12.9
SC&A(3) -- -- 15.5
----- ----- ------
$ -- $10.3 $ 47.6
Gain on sale of discontinued operations:
Automotive(4) $ -- $ -- $ 37.9
CAO(5) -- 14.5 --
SC&A(6) -- 59.5 --
Adjustment to gain of 1993
discontinued operation -- -- 30.0
Adjustment to 1997 gain on the sale of SC&A (1.6) -- --
----- ----- ------
Income (loss) from discontinued operations $(1.6) $84.3 $115.5
===== ===== ======
</TABLE>
(1) Net of income taxes of $10.0 million.
(2) Net of income taxes of $5.8 million and $8.1 million in 1997 and 1996,
respectively.
(3) Includes $6.4 million gain on the sale of a business in 1996.
(4) Net of liabilities retained, transaction costs and income taxes ($25.3
million).
(5) Net of $7.8 million of income taxes.
(6) Net of $22.8 million of income taxes; includes provision of $7.9
million for operating losses during the phase-out period.
NOTE U EXTRAORDINARY ITEMS
During 1998, the Company incurred an extraordinary charge of $4.3
million (net of a $2.2 million income tax benefit), or $0.04 per diluted share,
in connection with early debt repayment.
During 1997, the Company incurred an extraordinary charge of $19.3
million (net of a $13.1 million income tax benefit), or $0.17 per diluted share,
to extinguish certain indebtedness previously held by Rohr.
During 1996, the Company incurred an extraordinary charge of $30.6
million (net of a $20.4 million income tax benefit), or $0.28 per diluted share,
in connection with the redemption of its outstanding 11.25 percent debentures
and substantially all of its outstanding 9.75 percent and 10.25 percent senior
notes.
NOTE V COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have numerous purchase commitments for
materials, supplies and energy incident to the ordinary course of business.
60
<PAGE> 61
CONTINGENCIES
GENERAL
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,
asbestos 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. From
time to time, the Company is also involved in legal proceedings as a plaintiff
involving contract, patent protection, environmental and other matters. Gain
contingencies, if any, are recognized when they are realized.
ENVIRONMENTAL
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"), or similar state
agencies, in connection with several sites.
The Company initiates corrective and/or preventive environmental
projects of its own to ensure safe and lawful activities at its current
operations. It also conducts a compliance and management systems audit program.
The Company believes that compliance with current governmental regulations will
not have a material adverse effect on its capital expenditures, earnings or
competitive position.
The Company's environmental engineers and consultants review and
monitor environmental issues at past and existing operating sites, as well as
off-site disposal sites at which the Company has been identified as a PRP. This
process includes investigation and remedial selection and implementation, as
well as negotiations with other PRPs and governmental agencies.
At December 31, 1998, the Company had recorded in Accrued Expenses and
in Other Non-current Liabilities a total of $129.7 million to cover future
environmental expenditures.
The Company believes that its reserves are adequate 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.
ASBESTOS
As of December 31, 1998 and 1997, two subsidiaries of the Company were
among a number of defendants (typically 15 to 40) in approximately 101,400 and
110,000 actions (including approximately 4,700 and 2,400 actions, respectively
in advanced stages of processing) filed in various states by plaintiffs alleging
injury or death as a result of exposure to asbestos fibers. During 1998, 1997
and 1996, these two subsidiaries of the Company received approximately 34,400,
38,200 and 39,900 new actions, respectively. Through December 31, 1998,
approximately 244,000 of the approximately 345,400 total actions brought had
been settled or otherwise disposed.
61
<PAGE> 62
Payments were made by the Company with respect to asbestos liability
and related costs aggregating $53.7 million in 1998, $59.2 million in 1997, and
$71.3 million in 1996, respectively, substantially all of which were covered by
insurance. Settlements are generally made on a group basis with payments made to
individual claimants over periods of one to four years. Related to payments not
covered by insurance, the Company recorded charges to operations amounting to
$8.0 million in 1998, 1997 and 1996.
In accordance with the Company's internal procedures for the processing
of asbestos product liability actions and due to the proximity to trial or
settlement, certain outstanding actions have progressed to a stage where the
Company can reasonably estimate the cost to dispose of these actions. As of
December 31, 1998, the Company estimates that the aggregate remaining cost of
the disposition of the settled actions for which payments remain to be made and
actions in advanced stages of processing, including associated legal costs, is
approximately $116.5 million and the Company expects that this cost will be
substantially covered by insurance.
With respect to the 96,700 outstanding actions as of December 31, 1998,
which are in preliminary procedural stages, as well as any actions that may be
filed in the future, the Company lacks sufficient information upon which
judgments can be made as to the validity or ultimate disposition of such
actions, thereby making it difficult to estimate with reasonable certainty what,
if any, potential liability or costs may be incurred by the Company. However,
the Company believes that its subsidiaries are in a favorable position compared
to many other defendants because, among other things, the asbestos fibers in its
asbestos-containing products were encapsulated. Subsidiaries of the Company
continue to distribute encapsulated asbestos-bearing product in the United
States with annual sales of less than $1.5 million. All sales are accompanied by
appropriate warnings. The end users of such product are sophisticated users who
utilize the product for critical applications where no known substitutes exist
or have been approved.
Insurance coverage of a small non-operating subsidiary formerly
distributing asbestos-bearing products is nearly depleted. Considering the
foregoing, as well as the experience of the Company's subsidiaries and other
defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and given the substantial amount of insurance
coverage that the Company expects to be available from its solvent carriers to
cover the majority of its exposure, the Company believes that pending and
reasonably anticipated future actions are not likely to have a materially
adverse effect on the Company's results of operations or financial condition,
but could be material to the Company's results of operations in a given period.
Although the insurance coverage which the Company has is substantial, it should
be noted that insurance coverage for asbestos claims is not available to cover
exposures initially occurring on and after July 1, 1984. The Company's
subsidiaries continue to be named as defendants in new cases, some of which
allege initial exposure after July 1, 1984.
The Company has recorded an accrual for its liabilities for
asbestos-related matters that are deemed probable and can be reasonably
estimated (settled actions and actions in advanced stages of processing), and
has separately recorded an asset equal to the amount of such liabilities that is
expected to be recovered by insurance. In addition, the Company has recorded a
receivable for that portion of payments previously made for asbestos product
liability actions and related litigation costs that is recoverable from its
62
<PAGE> 63
insurance carriers. Liabilities for asbestos-related matters and the receivable
from insurance carriers included in the Consolidated Balance Sheets are as
follows:
(Dollars in millions)
December 31, December 31,
1998 1997
------------ ------------
Accounts and notes receivable $95.4 $56.0
Other assets 32.6 16.2
Accrued expenses 89.7 48.1
Other liabilities 22.8 2.7
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 QUARTERS 1997 QUARTERS
------------------------------------------- -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
-------- -------- ------ -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BUSINESS SEGMENT SALES:
Aerospace $ 851.3 $ 852.1 $ 862.4 $ 913.5 $ 660.6 $ 746.5 $ 789.2 $ 829.8
Engineered Industrial Prod. 208.4 212.8 179.4 179.3 190.1 193.8 181.8 191.4
Performance Materials 252.4 340.9 304.8 297.5 222.7 228.4 223.7 229.9
-------- -------- ------ -------- -------- -------- -------- --------
Total Sales $1,312.1 $1,405.8 $1,346.6 $1,390.3 $1,073.4 $1,168.7 $1,194.7 $1,251.1
======== ======== ======== ======== ======== ======== ======== ========
Gross Profit $ 365.8 $ 377.6 $ 384.2 $ 402.3 $ 296.0 $ 323.0 $ 318.3 $ 337.5
======== ======== ======== ======== ======== ======== ======== ========
BUSINESS SEGMENT
OPERATING INCOME:
Aerospace $ 112.6 $ 109.9 $ 128.5 $ 149.0 $ 69.6 $ 83.3 $ 83.2 $ 89.7
Engineered Industrial Prod. 36.0 25.6 35.2 34.8 35.6 39.1 35.8 36.5
Performance Materials 36.6 40.2 37.4 31.6 31.1 31.1 31.8 34.2
Corporate (21.4) (20.3) (20.4) (21.6) (22.0) (23.7) (23.3) (24.1)
Merger-Related and
Consolidation Costs -- -- -- (10.5) -- -- -- (77.0)
-------- -------- ------- -------- -------- ------- -------- --------
Total Operating
Income $ 163.8 $ 155.4 $ 180.7 $ 183.3 $ 114.3 $ 129.8 $ 127.5 $ 59.3
======== ======== ======== ======== ======== ======== ======== ========
INCOME (LOSS) FROM:
Continuing Operations $ 80.1 $ 106.5 $ 85.1 $ 87.9 $ 49.1 $ 82.3 $ 59.4 $ 4.2
Discontinued Operations (1.6) -- -- -- 64.1 3.4 16.8 --
Extraordinary Items -- (4.3) -- -- -- -- (2.6) (16.7)
-------- -------- ------- -------- -------- -------- -------- --------
Net Income (Loss) $ 78.5 $ 102.2 $ 85.1 $ 87.9 $ 113.2 $ 85.7 $ 73.6 $ (12.5)
======== ======== ======== ======== ======== ======== ======== ========
Basic Earnings (Loss)
Per Share:
Continuing operations $ .73 $ .96 $ .77 $ .80 $ .45 $ .77 $ .55 $ .04
Net income (loss) $ .72 $ .92 $ .77 $ .80 $ 1.05 $ .80 $ .69 $ (.11)
Diluted Earnings (Loss)
Per Share:
Continuing operations $ .71 $ .94 $ .76 $ .79 $ .44 $ .74 $ .54 $ .04
Net income (loss) $ .70 $ .90 $ .76 $ .79 $ 1.01 $ .77 $ .67 $ (.11)
</TABLE>
The fourth quarter of 1998 includes a $10.5 million pre-tax loss from a
restructuring charge and a write-down of an impaired asset in the Aerospace
Segment.
The first quarter of 1997 includes a $59.5 million after-tax gain in
discontinued operations from the sale of the SC&A Group. The second quarter
includes a pretax gain of $26.4 million in other income (expense) from the sale
of the Company's engine electrical business and a $13.7 million pretax gain in
other income (expense) on the issuance of a subsidiary's stock. In the third
quarter of 1997, the Company recognized a $35.2 million pretax loss in cost of
sales to write off a portion of the MD-90 contract and recognized a $2.6 million
after-tax charge from the early extinguishment of certain Rohr debt (reported as
an extraordinary item). In the fourth quarter of 1997, the Company recognized
pretax charges of $77.0 million for merger costs and a $16.7 million after-tax
charge for the early extinguishment of certain Rohr debt refinanced in
connection with the merger, also reported as an extraordinary item. Also during
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<PAGE> 64
the fourth quarter of 1997, the Company reversed a $10 million accrual related
to a 1995 Aerospace charge primarily related to the closure of a facility in
Canada. During the same period, the Company's Engineered Industrial Products
segment recorded a $10 million charge.
64
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Exhibit 99.2
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated statements of operations, shareholders' equity,
and cash flows of Rohr, Inc. and its subsidiaries for the year ended July 31,
1996 (such statements are not separately presented). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material aspects, the results of operations and cash flows of Rohr, Inc. and its
subsidiaries for the year ended July 31, 1996, in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
September 11, 1997
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EXHIBIT 99.3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Coltec Industries Inc:
We have audited the consolidated balance sheets of Coltec Industries Inc and
subsidiaries (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, shareholders' equity, cash flows and
comprehensive income for each of the three years in the period ended December
31, 1998 (not presented herein). These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Coltec
Industries Inc and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedules (not presented herein) is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
As discussed in Note 21, the B.F. Goodrich Company will acquire the Company
during 1999 and the combined entity will operate under the name B.F. Goodrich.
/s/ Arthur Andersen LLP
Charlotte, North Carolina,
January 22, 1999.
