FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
--------------------------------------
Commission file number 1-892
---------------------------------
THE B.F.GOODRICH COMPANY
------------------------
NEW YORK 34-0252680
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4020 KINROSS LAKES PARKWAY, RICHFIELD, OHIO 44286-9368
- ------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 330-659-7600
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
As of June 30, 1999, there were 74,583,020 shares of common stock outstanding.
There is only one class of common stock.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales $ 1,081.7 $ 1,011.0 $ 2,117.3 $ 1,948.7
Operating Costs and Expenses:
Cost of sales 777.3 732.9 1,517.3 1,416.4
Selling and administrative expenses 166.8 160.7 331.3 304.2
Merger-related and consolidation costs 10.1 - 36.3 -
------------- ------------- -------------- -------------
954.2 893.6 1,884.9 1,720.6
------------- ------------- -------------- -------------
Operating income 127.5 117.4 232.4 228.1
Interest expense (21.4) (21.3) (42.6) (37.1)
Interest income 1.4 0.9 1.9 3.8
Other income (expense) - net (5.8) (1.7) (7.7) (7.2)
------------- ------------- -------------- -------------
Income from continuing operations before
income taxes and Trust distributions 101.7 95.3 184.0 187.6
Income tax expense (37.5) (36.8) (67.9) (72.3)
Distributions on Trust preferred
securities (2.6) (2.6) (5.2) (5.2)
------------- ------------- -------------- -------------
Income from continuing operations 61.6 55.9 110.9 110.1
Income (loss) from discontinued operations - - - (1.6)
------------- ------------- -------------- -------------
Net Income $ 61.6 $ 55.9 $ 110.9 $ 108.5
============= ============= ============== =============
Earnings per share:
Basic
Continuing operations $ 0.83 $ 0.76 $ 1.49 $ 1.50
Discontinued operations - - - (0.02)
------------- ------------- -------------- -------------
Net income $ 0.83 $ 0.76 $ 1.49 $ 1.48
============= ============= ============== =============
Diluted
Continuing operations $ 0.82 $ 0.74 $ 1.48 $ 1.46
Discontinued operations - - - (0.02)
------------- ------------- -------------- -------------
Net income $ 0.82 $ 0.74 $ 1.48 $ 1.44
============= ============= ============== =============
Dividends declared per common share $ 0.275 $ 0.275 $ 0.550 $ 0.550
</TABLE>
See notes to condensed consolidated financial statements.
Page 2
<PAGE>
THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 96.9 $ 31.7
Accounts and notes receivable, less allowances
for doubtful receivables (June 30, 1999:
$23.2; December 31, 1998: $22.6) 678.4 629.0
Inventories 739.7 772.5
Deferred income taxes 151.4 142.1
Prepaid expenses and other assets 36.5 39.2
----------------- ------------------
Total Current Assets 1,702.9 1,614.5
----------------- ------------------
Property, Plant and Equipment 1,264.4 1,255.9
Deferred Income Taxes 13.6 39.7
Prepaid Pension 138.5 148.0
Goodwill 797.6 771.0
Identifiable Intangible Assets 110.8 112.4
Other Assets 266.1 251.1
----------------- ------------------
$ 4,293.9 $ 4,192.6
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank debt $ 39.3 $ 144.1
Accounts payable 330.2 364.4
Accrued expenses 422.1 420.1
Income taxes payable 55.3 59.4
Current maturities of long-term debt
and capital lease obligations 1.8 2.8
----------------- ------------------
Total Current Liabilities 848.7 990.8
----------------- ------------------
Long-term Debt and Capital Lease Obligations 1,189.9 995.2
Pension Obligations 44.3 43.6
Postretirement Benefits Other Than Pensions 333.7 338.1
Other Non-current Liabilities 94.6 101.7
Mandatorily Redeemable Preferred Securities of Trust 123.8 123.6
Shareholders' Equity
Common stock - $5 par value
Authorized 200,000,000 shares; issued 76,432,705
shares at June 30, 1999, and 76,213,081
shares at December 31, 1998 382.2 381.1
Additional capital 548.4 543.7
Income retained in the business 806.7 736.8
Accumulated other comprehensive income (12.5) 3.6
Common stock held in treasury, at cost (1,849,685
shares at June 30, 1999, and 1,846,894 shares
at December 31, 1998) (65.9) (65.6)
----------------- ------------------
Total Shareholders' Equity 1,658.9 1,599.6
----------------- ------------------
$ 4,293.9 $ 4,192.6
================= ==================
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE>
THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 110.9 $ 108.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90.1 79.4
Deferred income taxes 11.5 9.9
Gain on sale of investment (3.2) -
Change in assets and liabilities,
net of effects of acquisitions and
dispositions of businesses:
Receivables (52.7) (19.7)
Inventories 36.3 (35.1)
Other current assets 2.6 7.9
Accounts payable (36.1) (4.3)
Accrued expenses (4.1) (18.6)
Income taxes payable (2.4) 23.9
Other non-current assets and liabilities (8.6) (3.5)
-------------- -------------
Net cash provided by operating activities 144.3 148.4
INVESTING ACTIVITIES
Purchases of property (92.2) (78.3)
Proceeds from sale of property 1.6 4.1
Proceeds from sale of investment 3.5 -
Payments made in connection with acquisitions,
net of cash acquired (36.4) (372.9)
-------------- -------------
Net cash used by investing activities (123.5) (447.1)
FINANCING ACTIVITIES
Net increase (decrease) in short-term debt (101.5) (40.4)
Proceeds from issuance of long-term debt 200.0 433.0
Repayment of long-term debt and capital lease obligations (11.1) (11.0)
Termination of receivable sales program - (40.0)
Proceeds from issuance of capital stock 3.7 20.5
Purchases of treasury stock (0.3) (13.2)
Dividends (40.9) (34.9)
Distributions on Trust preferred securities (5.2) (5.2)
-------------- -------------
Net cash provided by financing activities 44.7 308.8
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (0.3) -
-------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 65.2 10.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31.7 47.0
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 96.9 $ 57.1
============== =============
Supplemental Cash Flow Information:
Income taxes paid $ 62.0 $ 14.9
============== =============
Interest paid, net of amounts capitalized $ 39.3 $ 26.9
============== =============
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A: BASIS OF INTERIM FINANCIAL STATEMENT PREPARATION - The accompanying
unaudited condensed consolidated financial statements of The BFGoodrich Company
("BFGoodrich" or the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1999, are not necessarily indicative of the results that may be achieved for the
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
The Company adopted the provisions of SOP 98-5 - Reporting on the Costs of
Start-up Activities during the first quarter of 1999. Adoption of the SOP did
not have a material impact on the Company's earnings or financial position.
Note B: MERGER- On July 12, 1999, the Company completed its merger with Coltec
Industries Inc ("Coltec"). The merger will be accounted for as a
pooling-of-interests. 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, or 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 Coltec's 5 1/4% Convertible Preferred Securities
received the right to convert each such convertible preferred security into
0.955248 of a share of BFGoodrich common stock, subject to certain adjustments.
Since the merger was not consummated as of June 30, 1999, the results of Coltec
have not been included in the accompanying condensed consolidated financial
statements.
The unaudited pro forma combined financial data is presented for informational
purposes only. They are not necessarily indicative of the results of operations
or of the financial position which would have occurred had the merger been
completed during the periods or as of the date for which the pro forma data are
presented. They are also not necessarily indicative of the Company's future
results of operations or financial position. In particular, the Company expects
to realize significant operating cost savings as a result of the merger. No
adjustment has been included in the pro forma combined financial data for these
anticipated operating cost savings nor for the one-time merger and consolidation
costs expected to be incurred upon consummation of the merger.
5
<PAGE>
The Company is still in the process of reviewing the respective accounting
policies of the two companies to determine if they are consistent or if they
need to be conformed. As a result of this review, the historical financial
statements may need to be restated to conform to those accounting policies that
are most appropriate. No restatements of prior periods have been included in the
unaudited pro forma combined financial data below.
Pro forma per share amounts for the combined company are based on the exchange
ratio of 0.56 of a share of BFGoodrich common stock for each share of Coltec
common stock.
Unaudited Selected Pro Forma Combined Financial Data
----------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Dollars in millions, except per share amounts)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro Forma Combined Statement
of Income Data:
Sales $1,463.4 $1,405.8 $2,875.2 $2,717.9
Income from continuing operations $ 97.5 $ 95.5 $ 174.2 $ 175.0
Income from continuing operations
per diluted common share $ 0.87 $ 0.84 $ 1.56 $ 1.55
Weighted average number of common
shares and assumed conversions
(on a fully diluted basis) (millions) 113.9 115.2 113.6 113.9
</TABLE>
At June 30,
1999
-----------
Pro Forma Combined Balance Sheet Data:
Total assets $5,553.6
Total shareholders' equity $1,423.6
Book value per common share $ 12.93
Note C: MERGER RELATED AND CONSOLIDATION COSTS - During the second quarter of
1999 the Company recorded merger related and consolidation costs of $10.1
million. These costs related primarily to certain executive severance payments
that were no longer contingent on the merger and employee relocation costs.
Merger related and consolidation costs of $26.2 million were also recorded
during the first quarter of 1999. These costs relate 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).
Approximately $18.7 million was paid during the second quarter.
6
<PAGE>
Note D: ACQUISITIONS - In May 1999, the Company's Aerospace segment purchased
the remaining 50 percent interest in a joint venture it did not own. The joint
venture, located in Singapore, overhauls and repairs thrust reversers, nacelles
and nacelle components. The preliminary purchase price of $11.5 million includes
approximately $6 million of goodwill. Results for the year have been included on
a consolidated basis with corresponding adjustments being made to equity income
and minority interests, both of which are included in other income. Goodwill is
being amortized using the straight-line method over 20 years.
In March 1999 the Company's Performance Materials segment acquired a textile
coatings business. The preliminary purchase price of $19.6 million includes
approximately $11 million of goodwill. The purchase price allocation has been
based on preliminary estimates. Goodwill is being amortized using the
straight-line method over 20 years.
Also, in March 1999, the Company's Aerospace segment acquired a developer of
micro-electromechanical systems, which integrate electrical and mechanical
components to form "smart" sensing and control devices. The preliminary purchase
price of $12.0 million includes approximately $9 million of goodwill. The
purchase agreement provides for additional consideration to be paid over the
next six years based on a percentage of net sales. The additional consideration
for the first five years, however, is guaranteed not to be less than $3.5
million. As the $3.5 million of additional consideration is not contingent on
future events, it has been included in the $12.0 million purchase price noted
above. All additional contingent amounts payable under the purchase agreement
will be recorded as additional purchase price when earned and amortized over the
remaining life of the goodwill. Goodwill is being amortized using the
straight-line method over 15 years.
In March 1998, the Company acquired Freedom Chemical Company ("Freedom
Chemical"), a global manufacturer of specialty and fine chemicals that are sold
to a variety of customers who use them to enhance the performance of their
finished products, for approximately $378 million in cash. Goodwill is being
amortized using the straight-line method over 20 years.
7
<PAGE>
Note E: INVENTORIES - Inventories included in the accompanying condensed
consolidated balance sheet consist of:
(Dollars in millions)
-------------------------------
June 30, December 31,
1999 1998
----------- -------------
FIFO or average cost
(which approximates current costs):
Finished products $230.8 $236.0
In process 383.0 416.9
Raw materials and supplies 218.4 189.8
------ ------
832.2 842.7
Less:
Reserve to reduce certain
inventories to LIFO (52.2) (54.1)
Progress payments and advances (40.3) (16.1)
------- -------
Total $739.7 $772.5
======= =======
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 $86.2 million related to design and
development costs on the 717-200 program through June 30, 1999. In addition, the
Company has excess-over-average inventory of $46.4 million related to costs
associated with the production of the flight test inventory and the first
production units. The Company anticipates spending approximately $2 million more
for design and development through August 1999, the aircraft's scheduled Federal
Aviation Administration ("FAA") certification date. If the contract is cancelled
prior to FAA certification, the Company expects substantial recovery of these
costs. If the aircraft is certified and actively marketed, the recovery of these
costs will depend upon the number of aircraft delivered.
NOTE F: BUSINESS SEGMENT INFORMATION - The Company's operations are classified
into two reportable business segments: BFGoodrich Aerospace ("Aerospace") and
BFGoodrich Performance Materials ("Performance Materials"). The Company's two
reportable business segments are managed separately based on fundamental
differences in their operations.
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. Merger
related and consolidation costs are discussed in Note C of these unaudited
condensed consolidated financial statements.
The Company evaluates performance primarily 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.
8
<PAGE>
<TABLE>
<CAPTION>
(Dollars in millions)
Three months ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales
Aerospace $ 770.7 $ 670.1 $1,506.3 $1,355.4
Performance Materials 311.0 340.9 611.0 593.3
-------- -------- --------- ---------
Total Sales $ 1,081.7 $ 1,011.0 $2,117.3 $1,948.7
========= ========= ======== =========
Operating Income
Aerospace $ 108.9 $ 90.9 $ 221.1 $ 178.8
Performance Materials 43.0 40.2 76.2 76.8
---------- ---------- --------- ---------
$ 151.9 $ 131.1 $ 297.3 $ 255.6
Corporate General and
Administrative Expenses (14.3) (13.7) (28.6) (27.5)
Merger related and
Consolidation Costs (10.1) - (36.3) -
---------- ----------- ---------- ----------
Total Operating Income $ 127.5 $ 117.4 $ 232.4 $ 228.1
========== =========== ========== ==========
</TABLE>
June 30, 1999 December 31, 1998
--------------- -----------------
Assets
Aerospace $2,437.5 $2,372.5
Performance Materials 1,416.0 1,369.5
Corporate 440.4 450.6
--------- ---------
Total Assets $4,293.9 $4,192.6
========= =========
9
<PAGE>
NOTE G: EARNINGS PER SHARE - The computation of basic and diluted earnings
per share for income from continuing operations is as follows:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations
for basic earnings per share - income
available to common shareholders $61.6 $55.9 $110.9 $110.1
===== ===== ====== ======
Denominator:
Denominator for basic earnings per
share - weighted-average shares 74.5 73.4 74.5 73.1
----- ----- ------ ------
Effect of dilutive securities:
Stock options and warrants 0.7 1.0 0.5 1.0
Convertible Notes - 0.9 - 1.0
----- ----- ------- -------
Dilutive potential common shares 0.7 1.9 0.5 2.0
----- ----- ------- -------
Denominator for diluted earnings per
share - adjusted weighted-average shares
and assumed conversions 75.2 75.3 75.0 75.1
===== ===== ======= =======
Per share income from continuing operations:
Basic $ .83 $ .76 $ 1.49 $ 1.50
===== ===== ======= =======
Diluted $ .82 $ .74 $ 1.48 $ 1.46
===== ===== ======= =======
</TABLE>
NOTE H: COMPREHENSIVE INCOME
Total comprehensive income consists of the following:
(Total dollars in millions) Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $61.6 $55.9 $110.9 $108.5
Other Comprehensive Income/
Unrealized translation adjustments
during period (6.1) 1.8 (16.1) (0.7)
----- ----- ----- ------
Total Comprehensive Income $55.5 $57.7 $ 94.8 $107.8
==== ==== ===== =====
10
<PAGE>
Accumulated other comprehensive income consists of the following (dollars in
millions):
June 30, December 31,
1999 1998
-------- ------------
Cumulative unrealized translation adjustments $(11.9) $ 4.2
Minimum pension liability adjustment (0.6) (0.6)
----- -----
$(12.5) $ 3.6
===== =====
Note I: CONTINGENCIES - There are pending or threatened against BFGoodrich or
its subsidiaries various claims, lawsuits and administrative proceedings, all
arising from the ordinary course of business with respect to commercial, product
liability and environmental matters, which seek remedies or damages. BFGoodrich
believes that any liability that may finally be determined with respect to
commercial and product liability claims, should not have a material effect on
the Company's consolidated financial position or results of operations. 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.
The Company and its subsidiaries are generators of both hazardous wastes and
non-hazardous wastes, the treatment, storage, transportation and disposal of
which are subject to various laws and governmental regulations. Although past
operations were in substantial compliance with the then-applicable regulations,
the Company has been designated as a potentially responsible party ("PRP") by
the U.S. Environmental Protection Agency ("EPA") in connection with
approximately 47 sites. The Company believes it may have continuing liability
with respect to not more than 21 of these federal 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 June 30, 1999, the Company has recorded in Accrued expenses and in Other
Non-current Liabilities a total of $56.1 million to cover future environmental
expenditures, principally for remediation of the aforementioned sites and other
environmental matters.
The Company believes that it has adequately reserved for all of the above sites
based on currently available information. Management believes that it is
reasonably possible that additional costs may be incurred beyond the amounts
accrued as a result of new information. However, the amounts, if any, cannot be
estimated and management believes that they would not be material to the
Company's financial condition but could be material to the Company's results of
operations in a given period.
11
<PAGE>
Note J: 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
----------------------------------
MERGER
- ------
On July 12, 1999, the Company completed the acquisition of Coltec Industries Inc
("Coltec") pursuant to a merger accounted for as a pooling of interests. 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
exchanged for 0.56 shares of BFGoodrich common stock. Since the merger was not
consummated as of June 30, 1999, the results of Coltec are not included in the
accompanying analysis of the Company's financial position and results of
operations.
The Company has identified merger related and consolidation costs of
approximately $200 million that will be recorded during the third quarter. The
Company expects to pay most of this amount during the third quarter as well.
These costs consist primarily of personnel related items (severance and change
in control benefits), costs associated with the consolidation of headquarters
facilities, litigation settlement costs and other merger related transaction
expenses.
The Company also expects to incur additional merger related and consolidation
costs in future quarters related to the reorganization of operating facilities
and for the relocation of personnel, some of which will most likely be recorded
during the third quarter in addition to the $200 million of costs currently
identified and noted above. The Company expects to achieve costs savings of up
to $60 million per year by 2002.
TOTAL COMPANY
- -------------
SECOND QUARTER OF 1999 COMPARED WITH
SECOND QUARTER OF 1998
Sales during the quarter ended June 30, 1999, increased by $70.7 million, or 7.0
percent, over sales during the same period last year. Sales increased by 15
percent for Aerospace and decreased by 9 percent for Performance Materials as
compared to the 1998 second quarter. The reasons for these fluctuations as
compared to last year are discussed by segment below.
Cost of sales as a percent of sales decreased from 72.5 percent in 1998 to 71.9
percent in 1999. The decrease is a result of the Company's efforts to improve
productivity and to lower manufacturing and material costs.
12
<PAGE>
Selling and administrative costs as a percent of sales decreased from 15.9
percent in 1998 to 15.5 percent in 1999. This is due primarily to higher sales
volumes with only a slight increase in spending.
Merger related and consolidation costs of $10.1 million were recorded during the
second quarter of 1999. These costs relate primarily to severance benefits to
certain executives that were no longer contingent on the merger and employee
relocation costs incurred during the quarter
Excluding merger related and consolidation costs, operating income increased
$20.2 million, or 17.2 percent, from $117.4 million in 1998 to $137.6 million in
1999. Operating income increased by $18.0 million in the Aerospace Segment and
by $2.8 million in the Performance Materials Segment. Operating income by
segment is discussed in greater detail below.
Interest expense-net decreased $0.4 million from $20.4 million in 1998 to $20.0
million in 1999.
Other expense-net increased $4.1 million from $1.7 million in the second quarter
of 1998 to $5.8 million in the first quarter of 1999. Included within the 1998
first quarter amount was approximately $4 million of income related to the final
settlement of Company owned life insurance policies that had been previously
terminated.
The Company's effective tax rate decreased from 38.5 percent to 37.0 percent,
quarter to quarter. The reduced effective tax rate between quarters is primarily
due to expected additional benefits from the Company's foreign, state and local
tax planning during 1999.
FIRST SIX MONTHS OF 1999 COMPARED WITH
FIRST SIX MONTHS OF 1998
Sales during the first six months of 1999 increased by $168.6 million, or 9
percent, over sales during the same period last year. Sales increased by 11.1
percent for Aerospace and 3.0 percent for Performance Materials as compared to
1998. The reasons for these increases are discussed by segment below.
Cost of sales as a percent of sales decreased from 72.7 percent in 1998 to 71.7
percent in 1999. The decrease is a result of the Company's efforts to improve
productivity and to lower manufacturing and material costs.
Selling and administrative costs as a percent of sales remained at 15.6 percent
for each of the periods.
Merger related and consolidation costs of $36.3 million were recorded during the
first six months of 1999. Of these costs, $10.1 million was incurred in the
second quarter and is described above. The remaining $26.2 million was recorded
during the first quarter and relates 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). Approximately $18.7
million was paid during the second quarter. The Company expects annualized
savings of approximately $15.0 million from these actions, of which
approximately $7.0 million is expected to be realized during the second half of
this year.
13
<PAGE>
Excluding merger related and consolidation costs, operating income increased
$40.6 million, or 17.8 percent, from $228.1 million in 1998 to $268.7 million in
1999. Operating income increased by $42.3 million in the Aerospace Segment and
decreased slightly in the Performance Materials Segment ($0.6 million).
Operating income by segment is discussed in greater detail below.
Interest expense-net increased $7.4 million, or 22.2 percent, from $33.3 million
in 1998 to $40.7 million in 1999. Most of this increase is due to increased
indebtedness that resulted from the purchase of Freedom Chemical late in March
1998 as well as from subsequent acquisitions to date.
Other expense-net increased $0.5 million from $7.2 million in the first six
months of 1998 to $7.7 million in the first six months of 1999. The increase is
primarily attributable to the gain on the sale of the Company's remaining
interest in DTM during the first quarter of 1999 ($3.2 million) that reduced
other expense-net, as compared to the income recorded in 1998 related to
terminated Company-owned life insurance policies ($4.0 million) that resulted in
a greater reduction in other expense-net than was experienced in 1999.
The Company's effective tax rate decreased from 38.5 percent to 37.0 percent,
period to period. The reduced effective tax rate between periods is primarily
due to expected additional benefits from the Company's foreign, state and local
tax planning during 1999.
The Company recognized a $1.6 million after-tax charge during the first quarter
of 1998 related to a business previously divested and reported as a discontinued
operation.
14
<PAGE>
BUSINESS SEGMENT PERFORMANCE
- ----------------------------
<TABLE>
<CAPTION>
Segment Analysis
----------------
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in Millions) 1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Aerospace $ 770.7 $ 670.1 $ 1,506.3 $ 1,355.4
Performance Materials 311.0 340.9 611.0 593.3
----------------------------------------------------------------------------------------------------------------------
Total $1,081.7 $ 1,011.0 $ 2,117.3 $ 1,948.7
----------------------------------------------------------------------------------------------------------------------
Operating Income:
Aerospace $ 108.9 $ 90.9 $ 221.1 $ 178.8
Performance Materials 43.0 40.2 76.2 76.8
----------------------------------------------------------------------------------------------------------------------
Total Reportable Segments 151.9 131.1 297.3 255.6
Merger Related and (10.1) - (36.3) -
Consolidation Costs
Corporate (14.3) (13.7) (28.6) (27.5)
----------------------------------------------------------------------------------------------------------------------
Total $ 127.5 $ 117.4 $ 232.4 $ 228.1
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's operations are classified into two reportable business segments:
BFGoodrich Aerospace ("Aerospace") and BFGoodrich Performance Materials
("Performance Materials"). Aerospace consists of four business groups:
Aerostructures; Landing Systems; Sensors and Integrated Systems; and
Maintenance, Repair and Overhaul ("MRO"). They serve commercial, military,
regional, business and general aviation markets.
Performance Materials consists of three business groups: Textile and Coatings
Solutions; Polymer Additives and Specialty Plastics; and Consumer Specialties.
These groups provide materials for a wide range of end use market applications
including textiles, coatings, food & beverage, personal care, pharmaceuticals,
graphic arts, industrial piping, plumbing and transportation.
The Performance Materials Segment was previously reported as the Specialty
Chemicals Segment consisting of two groups: Specialty Additives and Specialty
Plastics. Last year, the Company reorganized this segment into the three groups
noted above and renamed the segment. Previously reported amounts for the segment
have been reclassified into the three groups noted above.
Corporate includes general corporate administrative costs and Advanced
Technology Group research expenses. Segment operating income is total segment
revenue reduced by operating expenses directly identifiable with that business
segment. Merger related and consolidation costs are presented separately and are
discussed above (see "Merger" discussion).
15
<PAGE>
An expanded analysis of sales and operating income by business segment follows.
Aerospace
- ---------
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
% %
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Sales
Aerostructures $323.2 $282.4 14.4 $ 633.4 $ 585.0 8.3
Landing Systems 165.3 143.5 15.2 328.1 286.4 14.6
Sensors and Integrated Systems 145.5 139.8 4.1 298.0 280.0 6.4
MRO 136.7 104.4 30.9 246.8 204.0 21.0
----- ----- ------- ------
Total Sales $770.7 $670.1 15.0 $1,506.3 $1,355.4 11.1
===== ===== ======= =======
Operating Income
Aerostructures $46.7 $ 43.3 7.9 $ 97.4 $ 82.8 17.6
Landing Systems 24.7 16.3 51.5 48.8 32.2 51.6
Sensors and Integrated Systems 26.2 25.3 3.6 55.5 53.3 4.1
MRO 11.3 6.0 88.3 19.4 10.5 84.8
------ ------ ------ -------
Total Operating Income $108.9 $ 90.9 19.8 $ 221.1 $ 178.8 23.7
===== ===== ======= =======
Operating Income as a
Percent of Sales
Aerostructures 14.4 15.3 15.4 14.2
Landing Systems 14.9 11.4 14.9 11.2
Sensors and Integrated Systems 18.0 18.1 18.6 19.0
MRO 8.3 5.7 7.9 5.1
Total Aerospace 14.1 13.6 14.7 13.2
</TABLE>
16
<PAGE>
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
- -----------------------------------------------------
Sales of BFGoodrich Aerospace increased $100.6 million, or 15.0 percent, in the
second quarter of 1999, from $670.1 million in the second quarter of 1998 to
$770.7 million in the second quarter of 1999. Approximately $80 million of the
increase related to increased volumes in each of the Segment's groups reflecting
higher demand in most markets and the PW4000 settlement and approximately $20
million was from acquisitions.
Aerospace operating income increased $18.0 million, or 19.8 percent, from $90.9
million during the second quarter of 1998 to $108.9 million for the 1999 second
quarter. This growth principally reflects the impact of higher sales volumes,
the PW4000 settlement and the mix between OEM sales and aftermarket sales.
Aftermarket sales are generally more profitable than OEM sales.
In recent months, Boeing, a significant customer, has made public announcements
concerning expected reductions in its production of new commercial aircraft,
particularly for the 747 program, commencing in the latter part of 1999. While,
generally speaking, a downturn in OEM production has a negative impact on
operating income, the Company believes that it will experience continued growth
in demand for higher-margin aftermarket aerospace products and achieve improved
operating margins from its MRO businesses.
Aerostructures Group
- ---------------------
Sales for the second quarter of 1999 increased $40.8 million, or 14.4 percent,
from $282.4 million in the second quarter of 1998 to $323.2 million in the
second quarter of 1999. The increase resulted from the PW4000 settlement ($60
million), an increase in commercial aftermarket sales ($11 million), offset
by reduced sales to commercial OEMs due to a scheduled slowdown ($31 million).
Operating income for the Aerostructures Group in the second quarter of 1999 was
$46.7 million compared with $43.3 million for the second quarter of 1998, a $3.4
million, or 7.9 percent increase. The increase is primarily due to increased
aftermarket sales and settlement of the PW4000 claim.
Landing Systems Group
- ----------------------
Sales increased $21.8 million, or 15.2 percent, from $143.5 million in the 1998
second quarter to $165.3 million in the second quarter of 1999. The increase
is attributable to higher volume ($15 million) and an acquisition that was made
during the fourth quarter of 1998 ($7 million). The volume growth principally
came from higher aftermarket demand for commercial and military landing gear
components and wheels and brakes products.
Operating income increased $8.4 million, or 51.5 percent, from $16.3 million in
the 1998 second quarter to $24.7 million in the second quarter of 1999. This
improvement largely reflects increased demand for landing gear and aftermarket
demand for wheels and brakes products ($8 million). A favorable sales mix in
addition to lower OEM sales incentives related to wheels and brakes products
also contributed to the Group's higher operating income.
Sensors and Integrated Systems Group
- ---------------------------------------
Sales increased $5.7 million, or 4.1 percent, from $139.8 million in the second
quarter of 1998 to $145.5 million in the 1999 second quarter. This increase
reflects higher volumes of sensors and avionics products and integrated fuel
systems.
17
<PAGE>
The Sensors and Integrated Systems Group's second quarter of 1999 operating
income of $26.2 million increased $0.9 million, or 3.6 percent, from $25.3
million in the second quarter of 1998. This increase reflects the impact of
higher sales volumes, especially for higher-margin aftermarket avionics and
sensors products, partially offset by higher spending for research and
development costs.
MRO Group
- ---------
Sales increased $32.3 million, or 30.9 percent, from $104.4 million in the
second quarter of 1998 to $136.7 million in the second quarter of 1999. This
increase reflects higher demand for airframe, component and landing gear
maintenance services ($20 million) as well as the acquisition of the remaining
50 percent of a joint venture and the subsequent consolidation of the joint
venture's results ($12 million).
Operating income in the second quarter of this year increased $5.3 million, or
88.3 percent, from $6.0 million in 1998 to $11.3 million in 1999. The
significant increase in operating income over the comparable period last year
was a direct result of the higher demand for component and landing gear
maintenance services noted above, as well as from the acquisition and
consolidation of a previously 50 percent owned joint venture that was accounted
for under the equity method.
FIRST SIX MONTHS OF 1999 COMPARED WITH FIRST SIX MONTHS OF 1998
- ---------------------------------------------------------------
Sales of BFGoodrich Aerospace increased $150.9 million, or 11.1 percent, in the
first half of 1999, from $1,355.4 million in the first half of 1998 to $1,506.3
million in the first half of 1999. Each Group posted higher revenue compared to
the same period a year ago, including the PW 4000 settlement discussed above.
Aerospace operating income rose $42.3 million, or 23.7 percent, from $178.8
million during the first half of 1998 to $221.1 million for the 1999 first half.
This growth principally reflects the impact of higher sales volumes and the PW
4000 settlement. Operating income margins increased primarily due to the
favorable mix of aftermarket sales to OEM sales.
Aerostructures Group
- ---------------------
Sales for the first half of 1999 increased $48.4 million, or 8.3 percent, from
$585.0 million in the first half of 1998 to $633.4 million in the first half
1999. Aftermarket sales as well as a settlement with Pratt & Whitney on the
PW4000 contract contributed to the increase, more than offsetting lower sales in
the Group's OEM products.
Operating income for the Aerostructures Group in the first half of 1999 was
$97.4 million compared with $82.8 million for the first half of 1998, a 17.6
percent increase. This increase, as well as the increase in operating income
margins, was primarily due to increased aftermarket sales.
Landing Systems Group
- ---------------------
Sales increased 14.6 percent, from $286.4 million in the 1998 first half to
$328.1 million in the first half of 1999. Approximately $28 million of the
increase came from volume increases while $14 million resulted from an
acquisition made late in 1998. The volume growth principally came from higher
aftermarket demand for commercial and military landing gear components and
wheels and brakes.
18
<PAGE>
The Group's operating income increased $16.5 million, or 51.6 percent, from
$32.2 million in the 1998 first half to $48.8 million in the first half of 1999.
This improvement largely reflects the benefit from higher volumes of landing
gear and wheels and brakes after-market products. A favorable sales mix in
addition to lower OEM sales incentives related to wheels and brakes products
contributed to the Group's higher operating income and margins.
Sensors and Integrated Systems Group
- --------------------------------------
Sales increased $18.0 million, or 6.4 percent, from $280.0 million in the first
half of 1998 to $298.0 million in 1999 first half. This increase reflects higher
volumes of sensors, avionics products and integrated fuel systems.
The Group's operating income of $55.5 million during the first six months of
1999 increased $2.2 million, or 4.1 percent, over the same period in 1998. This
increase reflects the impact of higher sales volumes, especially for
higher-margin aftermarket sensors products, partially offset by higher spending
for research and development costs.
MRO Group
- ---------
Sales increased $42.8 million, or 21.0 percent, from $204.0 million in the first
half of 1998 to $246.8 million in the first half of 1999. This increase
reflects higher demand for airframe and component maintenance services as well
as the acquisition of the remaining balance of a joint venture business in the
Asia Pacific region.
The Group's operating income in the first half of this year was $19.4 million
compared with $10.5 million for the same period a year ago, an increase of $8.9
million, or 84.8 percent. This significant increase over the comparable prior
year period reflects higher demand for airframe and component maintenance
services as well as the results of the acquisition of the joint venture business
in Asia.
19
<PAGE>
Performance Materials
- ---------------------
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
% %
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Sales
Textile and Coatings Solutions $159.6 $179.3 (11.0) $313.3 $300.5 4.3
Polymer Additives and Specialty
Plastics 106.1 108.7 (2.4) 211.6 219.0 (3.4)
Consumer Specialties 45.3 52.9 (14.4) 86.1 73.8 16.7
------ ------ ------ ------
Total Sales $311.0 $340.9 (8.8) $611.0 $593.3 3.0
====== ====== ====== ======
Operating Income
Textile and Coatings Solutions $ 13.6 $ 20.6 (34.0) $ 21.9 $ 36.3 (39.7)
Polymer Additives and Specialty
Plastics 17.6 12.1 45.5 36.8 27.4 34.3
Consumer Specialties 11.8 7.5 57.3 17.5 13.1 33.6
----- ------ ------ ------
Total Operating Income $ 43.0 $ 40.2 7.0 $ 76.2 $ 76.8 (0.8)
====== ====== ====== ======
Operating Income as a
Percent of Sales
Textile and Coatings Solutions 8.5 11.5 7.0 12.1
Polymer Additives and Specialty
Plastics 16.6 11.1 17.4 12.5
Consumer Specialties 26.0 14.2 20.3 17.8
Total Performance Materials 13.8 11.8 12.5 12.9
</TABLE>
SECOND QUARTER OF 1999 COMPARED WITH SECOND QUARTER OF 1998
- -----------------------------------------------------------
Sales for the second quarter were $311.0 million vs. $340.9 million from a year
ago. This 8.8 percent decline in sales was driven primarily by reduced volumes,
particularly in the Textile and Coatings Solutions Group ($15 million), and
unfavorable pricing throughout the Segment ($13 million).
Second quarter operating income for the Performance Materials Segment increased
$2.8 million, or 7.0 percent, from $40.2 million in 1998 to $43.0 million in
1999. Sharply reduced variable costs, primarily raw materials (approximately $15
million) and manufacturing efficiencies/overhead cost controls (approximately $7
million) helped offset the impact of reduced prices (prices were down 4 percent
versus 1998) and volumes. In addition, 1999 operating income included a one-time
favorable settlement ($2 million) from a patent infringement lawsuit.
20
<PAGE>
Textile and Coatings Solutions Group
- -------------------------------------
Sales in the Group decreased $19.7 million (11.0 percent) from the prior year,
driven by a decline in volume ($14 million), continued price erosion
($7 million) and unfavorable mix ($5 million), partially offset by the favorable
impact of a 1999 acquisition ($6 million). All of the Group's major businesses
continue to have lower volumes and prices versus a year ago, due primarily to an
overall industry slump, with the largest competitors fighting to retain and/or
gain market share, sparking additional downward pressure on prices.
Operating income for the Group decreased $7.0 million, or 34.0 percent from
$20.6 million in the second quarter of 1998 to $13.6 million in the second
quarter of 1999. Lower raw material costs helped to partially offset the impact
of the volume and price declines.
Polymer Additives and Specialty Plastics Group
- ----------------------------------------------
Second quarter sales were $2.6 million (2.4 percent) lower than the prior
year, driven primarily by price reductions resulting from competition, industry
consolidation, and general economic softness in Europe. Volume was very strong
for the Group's TempRite(R) high heat-resistant plastics products, due to
continuing strength in the construction market. Strength in the Group's
plumbing, fire sprinkler and industrial piping markets more than offset volume
declines seen in other markets, particularly in the Estane(R) thermoplastic
polyurethane (TPU) products.
Operating income for the Group increased $5.5 million, or 45.5 percent, as lower
raw material costs and the margins from increased TempRite(R) demand
significantly exceeded volume weakness and price pressures in the Group's other
products.
Consumer Specialties Group
- ---------------------------
Sales were down $7.6 million (14.4 percent) compared to the prior year, with
volumes down approximately $6 million and prices down approximately $2 million.
The largest declines occurred in the Group's pharmaceutical applications
markets, which continue to experience weakness in Eastern Europe due to economic
conditions and competitive pricing. In addition, second quarter 1998 performance
was extremely strong, driving a portion of the negative variance. Despite the
sales decline, operating income was up $4.3 million (57.3 percent) driven by
favorable manufacturing and overhead cost controls combined with a one-time
favorable settlement ($2 million) from a patent infringement lawsuit.
FIRST SIX MONTHS OF 1999 COMPARED WITH FIRST SIX MONTHS OF 1998
- ---------------------------------------------------------------
During the first six months of 1999, sales for the Performance Materials Segment
increased $17.7 million (3.0 percent) from $593.3 million in 1998 to $611.0
million in 1999. Acquisitions (primarily Freedom Chemical, which was acquired in
March of 1998) accounted for $69 million, partially offset by the impact of
unfavorable volumes, prices, and mix ($51 million). Volume for many of the
Segment's products was down due to industry softness, consolidation and intense
competition. Inexpensive imports and localized areas of foreign economic
weakness have put additional pressure on pricing, causing prices to be down more
than 3 percent as compared with the first six months of 1998.
21
<PAGE>
Operating income for the Segment is down $0.6 million (0.8 percent), with 1999
first half earnings of $76.2 million versus 1998 first half earnings of $76.8
million. This nearly flat income performance was achieved by offsetting the
previously mentioned price and volume declines with significantly reduced raw
material costs, increased manufacturing productivity, overhead cost controls and
the favorable patent infringement settlement noted above.
Textile and Coatings Solutions Group
- ------------------------------------
Sales increased $12.8 million (4.3 percent) from the prior year, driven by
acquisitions ($49 million), principally Freedom, partially offset by volume ($21
million) and price declines ($10 million) and an unfavorable mix ($6 million).
Despite sales increases in all of the Group's major businesses, mostly as a
result of acquisitions, operating income for the Group decreased by $14.4
million (39.7 percent), with the largest portion of the decrease attributable to
the ongoing downturn in the Group's textile business as noted above in the
quarterly comments.
Polymer Additives and Specialty Plastics Group
- ---------------------------------------------------
First half sales were $7.4 million (3.4 percent) lower than the prior year,
driven primarily by price reductions ($9 million), offset by volume increases
($2 million). The price reductions impacted most of the Group's products, while
the volume increase was driven by the Group's TempRite(R) high heat-resistant
plastics products.
Operating income for the Group increased $9.4 million, or 34.3 percent, as a
result of a favorable mix, cost controls, and lower raw material costs which
offset reduced volumes and prices in the Group's other products.
Consumer Specialties Group
- ----------------------------
Sales were up $12.3 million (16.7 percent) compared to the first half 1998,
driven by the Freedom acquisition ($20 million) and partially offset by volume
($6 million) and price ($1 million) declines (see discussion within quarterly
comments for additional detail). Operating income was up $4.4 million (33.6
percent) driven by manufacturing efficiencies, overhead cost controls, and
a one-time favorable settlement from a patent infringement lawsuit.
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
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.
22
<PAGE>
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:
Information systems 85%
Production and facilities equipment 80%
Products 97%
The Company expects that its remediation efforts in the areas noted above will
be substantially completed by September 30, 1999. Certain of the Company's
acquired operations in Europe and in Asia are not expected to be substantially
completed with their remediation efforts until October 31, 1999, however.
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 $57 million, of which approximately $49 million has been incurred
through June 30, 1999. The Company capitalized approximately $35 million and
expensed approximately $14 million of the $49 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 and testing 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 - 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 plans include potentially
23
<PAGE>
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.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Current assets less current liabilities increased $230.5 million from December
31, 1998 to June 30, 1999. The increase resulted from a significant increase in
cash and accounts receivable as well as a significant reduction in short-term
indebtedness. The Company expects to have adequate cash flow from operations and
has the credit facilities (described in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and in the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 1999) to satisfy its operating
requirements and capital spending programs and to finance growth opportunities
as they arise.
The Company's debt-to-capitalization ratio was 40.8 percent at June 30, 1999,
compared with 39.8 percent at December 31, 1998. For purposes of this ratio, the
Trust preferred securities are treated as capital.
During the first quarter of 1999, the Company made several changes to its
committed domestic and European credit facilities. The Company extended the
maturity of its existing $300 million five-year revolver to February 18, 2004.
The Company also entered into a new $300 million short-term revolver with
certain banks that expires March 14, 2000. In addition, the Company increased
the size of its committed European multi-currency facility, which expires August
19, 2003, from $75 million to $125 million.
On May 5, 1999, the company issued $200 million in Notes due 2009 with a coupon
interest rate of 6.60 percent. Net proceeds will be used to repay short-term
indebtedness and for general corporate purposes. The Company also entered into
an interest rate swap agreement that effectively converts the interest rate on
the Notes to a floating rate based on LIBOR.
Cash Flows
Cash flow from operating activities in the first six months of 1999 was $4.1
million less than the same period last year. EBITDA, excluding merger related
and consolidation costs, increased from $300.3 million in the first six months
of 1998 to $351.1 million in the first six months of 1999.
24
<PAGE>
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 this year in conjunction with its efforts to be Year 2000
compliant. The financial institutions in which the Company has relationships
have transitioned to the Euro successfully as well 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 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.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
--------------------------------------------------------------
We believe this document includes certain forward-looking statements, as defined
in the Private Securities Litigation Reform Act of 1995, that involve risk and
uncertainty. 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.
25
<PAGE>
With respect to Aerospace, 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. 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. A change in levels of defense spending could curtail or enhance
prospects in the Company's military business. If the trend towards increased
outsourcing or reduced number of suppliers in the airline industry changes, it
could affect the Company's business. If the Boeing 717 program is not as
successful as anticipated, it could adversely affect the Company's business. If
the Company is unable to continue to acquire and develop new systems and
improvements, it could affect future growth rates. 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. 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.
With respect to Performance Materials, if the expected growth in volume does not
materialize, results could be adversely impacted. Expected sales increases in
the Far East and Latin America could be adversely impacted by recent turmoil in
financial markets in those regions. If demand does not increase during the
second half of 1999 as anticipated or cost reduction benefits do not
materialize, the results of the Performance Materials Segment could be adversely
affected. If cost benefits from continued integration of recent acquisitions and
realignment activities do not occur as expected, results could be adversely
impacted. Revenue growth in various businesses may not materialize as expected.
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.
With respect to the entire Company, if outside vendors are unable to make their
computer systems Year 2000 compliant in time, or if the magnitude of the Year
2000 issue is greater than presently anticipated, it could have a material
adverse impact on the Company. If there are unexpected developments with respect
to environmental matters involving the Company, it could have an adverse effect
upon the Company. 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. If the Company's state and local
tax planning is not as effective as anticipated, the Company's effective tax
rate could increase.
26
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As a result of recent air emissions sampling conducted for the Company at its
textile chemical plant in Charlotte, North Carolina, a question has arisen
regarding the facility's compliance with applicable federal and state
environmental air pollution statutes and regulations and permit conditions. The
Company has notified and met with relevant governmental authorities about the
potential problem and will continue to cooperate with authorities on a voluntary
basis to resolve this matter. The Company has installed a control device to
reduce all types of emissions. It is possible that Mecklenburg County, North
Carolina, may seek a fine in excess of $100,000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant held a Special Meeting of Shareholders on April 9, 1999 to vote
on the merger with Coltec Industries Inc, at which time the merger was approved.
The holders of 54,533,760 shares of common stock voted in favor of the merger;
2,135,673 shares voted against the merger; and 438,589 shares abstained from
voting.
The registrant also held its Annual Meeting of Shareholders on April 19, 1999.
As described in the 1999 Proxy Statement, the following actions were taken:
- The eleven nominees for directors were elected.
- The appointment of Ernst & Young LLP as independent auditors for the
year 1999 was ratified.
- The Stock Option Plan was reauthorized, allowing stock options to be
granted through April 19, 2004 and making 5,000,000 additional
shares available for grant.
27
<PAGE>
The votes were as follows:
For Director:
Number of Number of
Shares Shares
Voted For Vote Withheld
----------- ---------------
David L. Burner 61,994,903 1,829,174
Diane C. Creel 62,344,021 1,480,056
George A. Davidson, Jr. 62,384,248 1,439,829
James J. Glasser 62,298,590 1,525,487
Jodie K. Glore 62,208,388 1,615,689
Douglas E. Olesen 62,222,742 1,601,335
Richard de J. Osborne 62,170,022 1,654,055
Alfred M. Rankin, Jr. 62,328,236 1,495,841
Robert H. Rau 62,183,073 1,641,004
James R. Wilson 62,242,379 1,581,698
A. Thomas Young 62,389,149 1,434,928
For ratification of independent auditors:
62,912,494 shares voted for; 560,801 shares voted against; and 350,782
shares abstained from voting.
For reauthorization of Stock Option Plan:
52,086,695 shares voted for; 3,997,493 shares voted against; 801,096 shares
abstained from voting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule - June 30, 1999
(b) Reports on Form 8-K -
Filed on May 4, 1999 related to the issuance of a preliminary
injunction enjoining the proposed merger of the Company with
Coltec Industries Inc.
Filed on April 20, 1999 related to the issuance of a press
release containing the Company's first quarter results.
Filed on April 12, 1999 regarding the results of the Company's
and Coltec's shareholders' votes regarding the merger of the two
companies.
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 12, 1999 The B.F.Goodrich Company
/S/LAURENCE A. CHAPMAN
----------------------------
Laurence A. Chapman
Senior Vice President and
Chief Financial Officer
/S/ROBERT D. KONEY, JR.
----------------------------
Robert D. Koney, Jr.
Vice President & Controller
(Chief Accounting Officer)
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet and the Condensed Consolidated
Statement of Income of this Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 96,900
<SECURITIES> 0
<RECEIVABLES> 701,600
<ALLOWANCES> 23,200
<INVENTORY> 739,700
<CURRENT-ASSETS> 1,702,900
<PP&E> 2,354,100
<DEPRECIATION> 1,089,700
<TOTAL-ASSETS> 4,293,900
<CURRENT-LIABILITIES> 848,700
<BONDS> 1,189,900
123,800
0
<COMMON> 382,200
<OTHER-SE> 1,276,700
<TOTAL-LIABILITY-AND-EQUITY> 4,293,900
<SALES> 2,117,300
<TOTAL-REVENUES> 2,117,300
<CGS> 1,517,300
<TOTAL-COSTS> 1,517,300
<OTHER-EXPENSES> 36,300
<LOSS-PROVISION> 1,500
<INTEREST-EXPENSE> 42,600
<INCOME-PRETAX> 184,000
<INCOME-TAX> 67,900
<INCOME-CONTINUING> 110,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,900
<EPS-BASIC> 1.49
<EPS-DILUTED> 1.48
</TABLE>
