<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) February 18, 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)
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
-----------------
Not Applicable
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
Item 5. Other Events
- ------- ------------
The registrant is filing its 1998 audited Financial Statements.
Item 7. Financial Statements and Exhibits
- ------- ---------------------------------
23(a) Consent of Ernst & Young LLP
23(b) Consent of Deloitte & Touche LLP
Exhibit 27 Financial Data Schedule
Exhibit 99 Reports of Independent Auditors
Consolidated Statement of Income for the years ended December
31,1998, 1997 and 1996
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
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 hereunto duly authorized.
THE B.F.GOODRICH COMPANY
By /s/Nicholas J. Calise
--------------------------------
Nicholas J. Calise, Secretary
Dated: February 25, 1999
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated February
5, 1999, with respect to the consolidated financial statements of The BFGoodrich
Company included in this Current Report (Form 8-K), 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 Plus March 15, 1993
Savings Plan for Wage Employees -- Form S-8
333-03293 The B.F.Goodrich Company Stock Option Plan -- Form S-8 May 8, 1996
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 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, May 29, 1998
Rohr, Inc. 1989 Stock Incentive Plan and
Rohr, Inc. 1995 Stock Incentive Plan -- Form S-8
</TABLE>
ERNST & YOUNG LLP
Cleveland, Ohio
February 23, 1999
<PAGE> 1
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements on
Form S-3 (No. 333-03343) and Form S-8 (Nos. 2-88940, 33-20421, 33-29351,
33-49052, 33-59580, 333-03293, 333-19697, 333-53877, 333-53879 and 333-53881) 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 February 24, 1999.
DELOITTE & TOUCHE LLP
San Diego, California
February 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF THIS FORM
8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,700
<SECURITIES> 0
<RECEIVABLES> 651,600
<ALLOWANCES> 22,600
<INVENTORY> 772,500
<CURRENT-ASSETS> 1,614,500
<PP&E> 2,298,100
<DEPRECIATION> 1,042,200
<TOTAL-ASSETS> 4,192,600
<CURRENT-LIABILITIES> 990,800
<BONDS> 995,200
123,600
0
<COMMON> 381,100
<OTHER-SE> 1,218,500
<TOTAL-LIABILITY-AND-EQUITY> 4,192,600
<SALES> 3,950,800
<TOTAL-REVENUES> 3,950,800
<CGS> 2,853,100
<TOTAL-COSTS> 2,853,100
<OTHER-EXPENSES> 10,500
<LOSS-PROVISION> 5,800
<INTEREST-EXPENSE> 79,000
<INCOME-PRETAX> 384,900
<INCOME-TAX> 146,300
<INCOME-CONTINUING> 228,100
<DISCONTINUED> (1,600)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 226,500
<EPS-PRIMARY> 3.07
<EPS-DILUTED> 3.02
</TABLE>
<PAGE> 1
EXHIBIT 99
REPORT OF 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 Statements of Income, Shareholders' Equity and Cash Flows
for each of the three years in the period ended December 31, 1998. 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 audits. We did not audit the financial statements as of and for the year
ended July 31, 1996 of Rohr, Inc., which statements reflect total sales
constituting 27 percent of total consolidated sales for 1996. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Rohr, Inc. for 1996,
is based solely on the report 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 report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1996, the report of other
auditors, the 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
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.
ERNST & YOUNG LLP
Cleveland, Ohio
February 5, 1999
<PAGE> 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.
DELOITTE & TOUCHE LLP
San Diego, California
September 11, 1997
<PAGE> 3
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....................................................... $3,950.8 $3,373.0 $2,845.8
Operating costs and expenses:
Cost of sales............................................. 2,853.1 2,454.7 2,042.5
Charge for MD-90 contract................................. -- 35.2 --
Selling and administrative costs.......................... 610.4 556.0 481.8
Restructuring costs and asset impairment.................. 10.5 -- 11.2
Merger-related costs...................................... -- 77.0 --
-------- -------- --------
3,474.0 3,122.9 2,535.5
-------- -------- --------
OPERATING INCOME............................................ 476.8 250.1 310.3
Interest expense............................................ (79.0) (73.0) (89.3)
Interest income............................................. 5.2 12.0 4.2
Gain on issuance of subsidiary stock........................ -- 13.7 --
Other income (expense)--net................................. (18.1) 15.0 (30.8)
-------- -------- --------
Income from continuing operations before income taxes and
Trust distributions....................................... 384.9 217.8 194.4
Income tax expense.......................................... (146.3) (94.1) (68.4)
Distributions on Trust preferred securities................. (10.5) (10.5) (10.5)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS........................... 228.1 113.2 115.5
Income (loss) from discontinued operations -- net of
taxes..................................................... (1.6) 84.3 58.4
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS........................... 226.5 197.5 173.9
Extraordinary losses on debt extinguishment -- net of
taxes..................................................... -- (19.3) --
-------- -------- --------
NET INCOME.................................................. $ 226.5 $ 178.2 $ 173.9
======== ======== ========
BASIC EARNINGS PER SHARE:
Continuing operations..................................... $ 3.09 $ 1.59 $ 1.74
Discontinued operations................................... (.02) 1.19 .87
Extraordinary losses...................................... -- (.27) --
-------- -------- --------
Net income................................................ $ 3.07 $ 2.51 $ 2.61
======== ======== ========
DILUTED EARNINGS PER SHARE:
Continuing operations..................................... $ 3.04 $ 1.53 $ 1.65
Discontinued operations................................... (.02) 1.13 .83
Extraordinary losses...................................... -- (.25) --
-------- -------- --------
Net income................................................ $ 3.02 $ 2.41 $ 2.48
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
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................................. $ 31.7 $ 47.0
Accounts and notes receivable............................. 629.0 532.6
Inventories............................................... 772.5 652.6
Deferred income taxes..................................... 142.1 132.4
Prepaid expenses and other assets......................... 39.2 36.7
-------- --------
Total Current Assets.............................. 1,614.5 1,401.3
Property.................................................... 1,255.9 1,065.1
Deferred Income Taxes....................................... 39.7 86.0
Prepaid Pension............................................. 148.0 148.3
Goodwill.................................................... 771.0 546.2
Identifiable Intangible Assets.............................. 112.4 51.1
Other Assets................................................ 251.1 195.9
-------- --------
Total Assets...................................... $4,192.6 $3,493.9
======== ========
CURRENT LIABILITIES
Short-term bank debt...................................... $ 144.1 $ 192.8
Accounts payable.......................................... 364.4 327.6
Accrued expenses.......................................... 420.1 411.3
Income taxes payable...................................... 59.4 --
Current maturities of long-term debt and capital lease
obligations............................................ 2.8 3.2
-------- --------
Total Current Liabilities......................... 990.8 934.9
Long-term Debt and Capital Lease Obligations................ 995.2 564.3
Pension Obligations......................................... 43.6 39.6
Postretirement Benefits Other Than Pensions................. 338.1 343.7
Other Non-current Liabilities............................... 101.7 65.7
Commitments and Contingent Liabilities...................... -- --
Mandatorily Redeemable Preferred Securities of Trust........ 123.6 123.1
SHAREHOLDERS' EQUITY
Common stock-$5 par value
Authorized, 200,000,000 shares; issued, 76,213,081
shares in 1998 and 73,946,160 shares in 1997.......... 381.1 369.7
Additional capital........................................ 543.7 500.7
Income retained in the business........................... 736.8 591.5
Accumulated other comprehensive income.................... 3.6 (3.5)
Unearned portion of restricted stock awards............... -- (.7)
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........................ 1,599.6 1,422.6
-------- --------
Total Liabilities and Shareholders' Equity........ $4,192.6 $3,493.9
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
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.................................................. $226.5 $178.2 $173.9
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary losses on debt extinguishment............ -- 19.3 --
Depreciation and amortization.......................... 165.4 138.8 139.8
Deferred income taxes.................................. 27.8 33.2 29.0
Net gains on sale of businesses........................ -- (138.8) (4.5)
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....................................... (2.5) (41.7) (36.9)
Inventories....................................... (70.7) (53.3) (29.9)
Other current assets.............................. 1.0 1.1 2.0
Accounts payable.................................. -- 26.0 7.2
Accrued expenses.................................. (13.1) 86.2 6.2
Income taxes payable.............................. 61.9 (11.2) (19.5)
Other non-current assets and liabilities.......... (46.2) (28.2) (14.3)
------ ------ ------
Net cash provided by operating activities................... 356.6 209.6 265.5
------ ------ ------
INVESTING ACTIVITIES
Purchases of property....................................... (208.5) (159.9) (197.1)
Proceeds from sale of property.............................. 4.2 8.5 8.8
Proceeds from sale of businesses............................ -- 395.9 28.9
Sale of short-term investments.............................. -- 8.0 --
Payments made in connection with acquisitions, net of cash
acquired.................................................. (427.2) (133.4) (107.9)
------ ------ ------
Net cash provided (used) by investing activities............ (631.5) 119.1 (267.3)
------ ------ ------
FINANCING ACTIVITIES
Net (decrease) increase in short-term debt.................. (52.6) 68.9 122.5
Proceeds from issuance of long-term debt.................... 433.0 150.0 71.1
Repayment of long-term debt and capital lease obligations... (8.6) (543.0) (155.5)
Cash collateral for receivable sales program................ -- 5.0 13.5
Termination of receivable sales program..................... (40.0) -- --
Proceeds from issuance of capital stock..................... 26.7 14.8 11.2
Purchases of treasury stock................................. (13.3) (9.7) (.1)
Dividends................................................... (75.7) (59.5) (58.8)
Distributions on Trust preferred securities................. (10.5) (10.5) (10.5)
Other....................................................... -- 1.1 1.3
------ ------ ------
Net cash provided (used) by financing activities............ 259.0 (382.9) (5.3)
------ ------ ------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... 0.6 (2.2) (.7)
------ ------ ------
Net Decrease in Cash and Cash Equivalents................... (15.3) (56.4) (7.8)
Cash and Cash Equivalents at Beginning of Year(1)........... 47.0 103.4 144.9
------ ------ ------
Cash and Cash Equivalents at End of Year.................... $ 31.7 $ 47.0 $137.1
====== ====== ======
</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 from
August 1, 1996 to December 31, 1996, which are not reflected in the 1996
column above (see Note D).
See Notes to Consolidated Financial Statements.
<PAGE> 6
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED UNEARNED
COMMON STOCK INCOME OTHER PORTION OF
THREE YEARS ENDED --------------- ADDITIONAL RETAINED IN COMPREHENSIVE RESTRICTED TREASURY
DECEMBER 31, 1998 SHARES AMOUNT CAPITAL THE BUSINESS INCOME STOCK AWARDS STOCK TOTAL
----------------- ------ ------ ---------- ------------ ------------- ------------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995...... 33.113 $165.6 $536.8 $375.7 $(57.6) $(16.2) $(28.3) $ 976.0
Net income..................... 173.9 173.9
Other comprehensive income:
Unrealized translation
adjustments................ (3.7) (3.7)
Minimum pension liability
adjustment................. 40.8 40.8
--------
Total comprehensive income..... 211.0
Employee award programs........ 0.600 3.0 19.0 7.2 (1.8) 27.4
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...... 70.530 352.7 444.0 490.8 (20.5) (9.0) (32.2) 1,225.8
Net income..................... 178.2 178.2
Other comprehensive income:
Unrealized translation
adjustments, net of
reclassification adjustment
for loss included in net
income of $2.3............. (7.6) (7.6)
Minimum pension liability
adjustment................. (1.8) (1.8)
--------
Total comprehensive income..... 168.8
Employee award programs........ 0.826 4.1 12.8 8.3 (0.7) 24.5
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...... 73.946 369.7 500.7 591.5 (3.5) (0.7) (35.1) 1,422.6
Net income..................... 226.5 226.5
Other comprehensive income:
Unrealized translation
adjustments................ 5.9 5.9
Minimum pension liability
adjustment................. 1.2 1.2
--------
Total comprehensive income..... 233.6
Employee award programs........ 1.032 5.2 30.9 0.7 (0.7) 36.1
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...... 76.213 $381.1 $543.7 $736.8 $ 3.6 $ -- $(65.6) $1,599.6
====== ====== ====== ====== ====== ====== ====== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A 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.
In the event that 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 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.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
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 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 an interest rate swap agreement, 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. Each interest rate swap is matched as a hedge against a specific
debt instrument and has the same notional amount and maturity as the related
debt instrument principal. Interest rate swap agreements are generally entered
into at the time the related floating rate debt is issued in order to convert
the floating rate to a fixed rate. 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 enters into foreign currency forward contracts (principally
against the British pound, Italian lira, Spanish peseta, French franc, Dutch
gilder and U.S. dollar) to hedge the net receivable/payable position arising
from trade sales and purchases and intercompany transactions by its European
businesses. Foreign
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
European 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 gilder) to eliminate foreign
exchange risk on intercompany loans between 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
research and development expenditures from continuing operations in 1998, 1997
and 1996 were $182.7 million, $141.2 million and $137.5 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 issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years beginning after
June 15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
The Company has not yet determined what the effect of Statement No. 133
will be on its earnings and financial position and has not yet determined the
timing or method of adoption. However, the Statement could increase volatility
in earnings and comprehensive income.
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5 -- Reporting on the Costs of Start-Up
Activities (the SOP). The SOP is effective for the Company in 1999 and would
require the write-off of any amounts deferred within the balance sheet related
to start-up activities, as defined within the SOP. The Company has reviewed the
provisions of this SOP and does not believe its adoption will have a material
adverse impact on earnings or on its financial condition.
NOTE B 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 $.19 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 $.80 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.
A summary of the results of discontinued operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Sales:
CAO..................................................... $ -- $98.0 $160.6
SC&A.................................................... -- -- 316.8
----- ----- ------
$ -- $98.0 $477.4
Pretax income from operations:
CAO..................................................... $ -- $16.1 $ 21.0
SC&A(1)................................................. -- -- 27.0
----- ----- ------
-- 16.1 48.0
Income tax expense........................................ -- (5.8) (19.6)
----- ----- ------
Net income from operations................................ -- 10.3 28.4
Gains on sale of discontinued operations:
CAO(2).................................................. -- 14.5 --
SC&A(3)................................................. -- 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 $ 58.4
===== ===== ======
</TABLE>
- ---------------
(1) Includes $6.4 million gain on the sale of a business in 1996.
(2) Net of $7.8 million of income taxes.
(3) Net of $22.8 million of income taxes; includes provision of $7.9 million for
operating losses during the phase-out period.
NOTE C PENDING MERGER (UNAUDITED)
On November 22, 1998, the Company and Coltec Industries, Inc. ("Coltec"), a
Pennsylvania company, entered into an Agreement and Plan of Merger ("Merger
Agreement"). Under the terms of the Merger Agreement, upon consummation of the
Merger, each share of Coltec common stock issued and outstanding
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
immediately prior to the effective time of the Merger shall be converted into
the right to receive 0.56 of a share of BFGoodrich common stock. The Merger will
be accounted for as a pooling of interests, and as such, future consolidated
financial statements will include Coltec's financial data as if Coltec had
always been a part of BFGoodrich. The Merger is expected to close in early April
of 1999.
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.
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>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro Forma Combined Statement of Income Data:
Sales............................................ $5,454.9 $4,687.9 $4,005.5
Income from continuing operations................ 350.4 208.1 170.1
Income from continuing operations per diluted
common share.................................. 3.08 1.86 1.57
Weighted average number of common shares and
assumed conversions (on a fully diluted basis)
(millions).................................... 113.9 112.1 109.8
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Pro Forma Combined Balance Sheet Data:
Total assets.............................................. $5,293.5
Total shareholders' equity................................ 1,299.3
Book value per common share............................... 11.84
</TABLE>
NOTE D OTHER ACQUISITIONS AND DISPOSITIONS
Acquisitions
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 (the term Company is used to refer to BFGoodrich including 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. Accordingly, all
prior period Consolidated Financial Statements and notes thereto were restated
to include the results of operations, financial position and cash flows 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
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 Note E).
There were no transactions between BFGoodrich and Rohr prior to the
combination. Certain reclassifications were made to Rohr's financial statements
to conform to BFGoodrich's presentation.
The Company recognized pretax merger-related costs of $105.0 million ($86.0
million after tax, or $1.15 per diluted share). 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 $.22 per diluted share) which
have been reported as an extraordinary item (see Note F). Of the $86.0 million
after-tax merger-related costs above, $7.9 million was recorded by BFGoodrich
and $78.1 million was recorded by Rohr.
The following acquisitions were recorded using the purchase method of
accounting. Their results of operations, which are not material, have been
included in the Consolidated Financial Statements since their respective dates
of acquisition.
In March 1998, the Company acquired Freedom Chemical Company for
approximately $378 million in cash. Freedom Chemical is a leading 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.
Freedom Chemical has leadership positions as a supplier of specialty chemical
additives used in personal-care, food and beverage, pharmaceutical, textile,
graphic arts, paints, colorants and coatings applications and as chemical
intermediates. The Company also acquired a small textile manufacturer and a
small manufacturer of energetic materials systems during 1998.
During 1997, the Company acquired five businesses for cash consideration of
$133.4 million in the aggregate, which includes $65.3 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
polyurethanes and is located in the United Kingdom. The remaining acquisition is
a small Performance Materials business.
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.
Dispositions
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 ($16.4 million after tax)
reported in Other income (expense) -- net.
NOTE E IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
The Aerostructures Group's fourth quarter special charge in 1998 of $10.5
million before tax ($6.5 million after tax, or $.09 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
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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, expected to be completed by the fourth quarter of 1999, 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 impairment charge resulted from management's review of the
business for possible disposition. The entire asset impairment 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.
In 1997, the Company recognized a $35.2 million pretax charge ($21.0
million after tax, or $.28 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.
In 1996, the Company recognized a $7.2 million pretax impairment charge on
its Arkadelphia, Arkansas, facility. Also during 1996, the Company recognized a
$4.0 million pretax charge for a voluntary early retirement program for eligible
employees of the Performance Materials Segment.
NOTE F EXTRAORDINARY ITEMS
During 1997, the Company incurred an extraordinary charge of $19.3 million
(net of a $13.1 million income tax benefit), or $.25 per diluted share, to
extinguish certain indebtedness previously held by Rohr. Costs incurred include
debt premiums and other direct costs associated with the extinguishment of the
related debt. The Company used a combination of existing cash funds and proceeds
from new lower-cost long-term debt to extinguish the debt. Of the $19.3 million,
$2.6 million (net of a $1.8 million income tax benefit) was incurred during the
third quarter in connection with Rohr's 9.33 percent Senior Notes and 9.35
percent Senior Notes. The remaining $16.7 million (net of an $11.3 million
income tax benefit) relates to debt extinguishment costs incurred in connection
with the Rohr merger during the fourth quarter for refinancing Rohr's 11.625
percent Senior Notes, 9.25 percent Subordinated Debentures, 7.00 percent
Convertible Subordinated Debentures and 7.75 percent Convertible Subordinated
Notes.
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G 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.............................. $228.1 $113.2 $115.5
Effect of dilutive securities:
7.75% Convertible Notes............................... -- .9 1.9
------ ------ ------
Numerator for diluted earnings per share--income
from continuing operations available to common
stockholders after assumed conversions........... $228.1 $114.1 $117.4
====== ====== ======
Denominator:
Denominator for basic earnings per
share--weighted-average shares..................... 73.7 71.0 66.6
Effect of dilutive securities:
Stock options and warrants......................... .7 1.6 1.4
Contingent shares.................................. .1 .7 .5
7.75% Convertible Notes............................ .5 1.3 2.4
------ ------ ------
Dilutive potential common shares...................... 1.3 3.6 4.3
------ ------ ------
Denominator for diluted earnings per
share--adjusted weighted-average shares and
assumed conversions.............................. 75.0 74.6 70.9
====== ====== ======
Per share income from continuing operations:
Basic............................................ $ 3.09 $ 1.59 $ 1.74
====== ====== ======
Diluted.......................................... $ 3.04 $ 1.53 $ 1.65
====== ====== ======
</TABLE>
NOTE H ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
Amounts billed.............................................. $610.0 $490.6
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................................. 13.0 34.1
------ ------
$651.6 $553.9
Less allowance for doubtful accounts...................... (22.6) (21.3)
------ ------
Total.................................................. $629.0 $532.6
====== ======
</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.
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
"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.
NOTE I 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......................................... $236.0 $173.4
In process................................................ 416.9 411.2
Raw materials and supplies................................ 189.8 161.4
------ ------
842.7 746.0
Reserve to reduce certain inventories to LIFO basis......... (54.1) (57.5)
Progress payments and advances.............................. (16.1) (35.9)
------ ------
Total.................................................. $772.5 $652.6
====== ======
</TABLE>
At December 31, 1998 and 1997, approximately 28 percent and 27 percent,
respectively, of inventory was valued by the LIFO method.
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
---------------------------- ----------------------------------------------
DELIVERED UN- UN- (3)FIRM
TO FILLED FILLED (2)CONTRACT UN-FILLED (5)YEAR
CONTRACT AIRLINES ORDERS OPTIONS QUANTITY DELIVERED ORDERS COMPLETE
-------- --------- ------ ------- ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PW4000 for the A300/A310
and MD-11(4).......... 287 10 9 325 303 19 2000
737-700................. 167 952 1,078 1,000 212 488 2002
717-200................. -- 115 100 300 1 54 2007
Others..................
In-process inventory
related to long-term
contracts.............
In-process inventory not
related to long-term
contracts.............
Balance at December 31,
1998..................
<CAPTION>
IN-PROCESS INVENTORY
------------------------------------
PRE- EXCESS
PRO- PRO- OVER-
CONTRACT DUCTION DUCTION AVERAGE TOTAL
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C>
PW4000 for the A300/A310
and MD-11(4).......... $ 10.7 $ 8.0 $ 26.0 $ 44.7
737-700................. 8.5 -- 3.6 12.1
717-200................. 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.
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 $83.0 million related to
design and development costs on the 717-200 program through December 31, 1998.
In addition, the Company has excess-over-average inventory of $30.3 million
related to costs associated with the production of the flight test inventory and
the first production units. The Company expects to spend approximately $4.0
million more for preproduction costs through mid-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 amount
of these costs and initial production start-up costs recovered by the Company
will depend upon the number of aircraft delivered.
In 1993, the Company revised its contract with Pratt & Whitney on the
PW4000 for A300/A310 and MD-11 programs. The revised contract provides that if
Pratt & Whitney accepts delivery of less than 500 units from 1993 through 2003,
an "equitable adjustment" will be made. Recent market projections on the PW4000
contract indicate that less than 500 units will be delivered. The Company has
submitted a "request of equitable adjustment" to the customer and believes it
will achieve a recovery such that there should not be a material adverse effect
on the financial position, liquidity or results of operations of the Company. If
the Company does not receive the equitable adjustment it believes it is entitled
to, it is possible that there may be a material adverse effect on earnings in a
given period. At December 31, 1998, the Company had $49.2 million of contract
costs ($44.7 million of in-process and $4.5 million of finished products) in
inventory for the PW4000 program.
NOTE J 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,
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>
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
Other debt, maturing to 2015 (interest rates from 3.0% to
11.625%).................................................. 28.0 26.8
------ ------
988.8 556.3
Capital lease obligations (Note K).......................... 6.4 8.0
------ ------
Total............................................. $995.2 $564.3
====== ======
</TABLE>
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
MTN Notes Payable The Company has periodically issued long-term debt
securities in the public markets through a medium term note program (referred to
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
$26.8 million long-term borrowing into fixed rate debt with an interest rate
swap.
IDRBs The industrial development revenue bonds maturing in 2023 were issued
to finance the construction of a hangar facility in 1993. Property acquired
through the issuance of these bonds secures the repayment of the bonds.
Aggregate maturities of long-term debt, exclusive of capital lease
obligations, during the five years subsequent to December 31, 1998, are as
follows (in millions): 1999--$.8; 2000--$1.0; 2001--$202.6; 2002--$0.7 and
2003 -- $0.7.
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, $863.3 million of income retained in the business and additional
capital was free from such limitations at December 31, 1998.
NOTE K 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>
CAPITAL NONCANCELABLE
LEASES OPERATING LEASES
------- ----------------
(IN MILLIONS)
<S> <C> <C>
1999....................................................... $2.6 $ 32.7
2000....................................................... 2.1 28.7
2001....................................................... 1.8 23.2
2002....................................................... 1.5 17.6
2003....................................................... 1.0 12.8
Thereafter................................................. 1.4 20.6
---- ------
Total minimum payments..................................... 10.4 $135.6
======
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>
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Net rent expense from continuing operations consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals............................................ $36.8 $28.2 $26.0
Contingent rentals......................................... .3 3.9 2.9
Sublease rentals........................................... (.1) (.1) (.1)
----- ----- -----
Total............................................ $37.0 $32.0 $28.8
===== ===== =====
</TABLE>
NOTE L PENSIONS AND POSTRETIREMENT BENEFITS
The Company has several noncontributory defined benefit pension plans
covering substantially all 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.
The following table sets forth the status of the Company's funded defined
benefit pension plans and unfunded defined benefit postretirement plans as of
December 31, 1998 and 1997, and the amounts recorded in the Consolidated Balance
Sheet at these dates. This table excludes accrued pension costs for unfunded,
non-qualified pension plans of $37.2 million in 1998 and $73.2 million in 1997,
and the related projected benefit obligations of $48.0 million in 1998 and $82.2
million in 1997.
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<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........................................ $1,251.9 $1,146.8 $ 326.9 $ 312.4
Service cost................................... 22.4 19.8 2.8 2.2
Interest cost.................................. 89.6 90.3 21.5 23.7
Amendments..................................... 2.1 (1.4) -- --
Actuarial (gains) losses....................... 36.9 98.4 (1.2) 15.9
Acquisitions................................... 4.6 -- 3.3 --
Benefits paid.................................. (97.5) (102.0) (28.9) (27.3)
-------- -------- ------- -------
Projected benefit obligation at end of year.... $1,310.0 $1,251.9 $ 324.4 $ 326.9
-------- -------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $1,263.1 $1,121.8 $ -- $ --
Actual return on plan assets................... 168.1 178.9 -- --
Acquisitions................................... 4.6 -- -- --
Company contributions.......................... 25.4 64.4 28.9 27.3
Benefits paid.................................. (97.5) (102.0) (28.9) (27.3)
-------- -------- ------- -------
Fair value of plan assets at end of year....... $1,363.7 $1,263.1 $ -- $ --
-------- -------- ------- -------
FUNDED STATUS (UNDERFUNDED)
Funded status.................................. $ 53.7 $ 11.2 $(324.4) $(326.9)
Unrecognized net actuarial loss................ 67.5 101.6 (37.9) (36.6)
Unrecognized prior service cost................ 36.0 40.0 (5.8) (6.3)
Unrecognized net transition obligation......... 9.5 9.6 -- --
-------- -------- ------- -------
Prepaid (accrued) benefit cost................. $ 166.7 $ 162.4 $(368.1) $(369.8)
======== ======== ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost........................... $ 166.7 $ 163.6 $ -- $ --
Accrued benefit liability...................... -- (1.2) (368.1) (369.8)
-------- -------- ------- -------
Net amount recognized.......................... $ 166.7 $ 162.4 $(368.1) $(369.8)
======== ======== ======= =======
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.
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<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.......................... $ 22.4 $19.8 $23.8 $ 2.8 $ 2.2 $ 2.4
Interest cost......................... 89.6 90.3 82.9 21.5 23.7 22.7
Expected return on plan assets........ (102.6) (96.4) (85.6) -- -- --
Amortization of prior service cost.... 5.9 6.3 5.4 (0.5) (0.5) (0.6)
Amortization of transition
obligation......................... 0.1 0.1 0.5 -- -- --
Recognized net actuarial (gain)
loss............................... 5.4 5.1 5.7 (1.3) (1.0) (1.7)
------- ----- ----- ----- ----- -----
Benefit cost.......................... 20.8 25.2 32.7 22.5 24.4 22.8
Curtailment (gain)/loss............... -- 5.4 -- -- (2.5) --
------- ----- ----- ----- ----- -----
$ 20.8 $30.6 $32.7 $22.5 $21.9 $22.8
======= ===== ===== ===== ===== =====
</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 POINT 1 PERCENTAGE POINT
INCREASE DECREASE
------------------ ------------------
<S> <C> <C>
Effect on total of service and interest cost
components in 1998......................... $ 1.5 million $ 1.3 million
Effect on postretirement benefit obligation
as of December 31, 1998.................... $18.2 million $15.9 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. The Company generally matches 1 dollar for each 1 dollar of
employee contributions invested in BFGoodrich common stock, and 50 cents for
each dollar of eligible employee contributions invested in other available
investment options (up to 6 percent of eligible earnings). For 1998, 1997 and
1996, Company contributions amounted to $16.5 million, $15.3 million and $15.9
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 determined based on
various percentages of eligible earnings and a profit sharing formula.
NOTE M INCOME TAXES
Income from continuing operations before income taxes and Trust
distributions as shown in the Consolidated Statement of Income consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Domestic......................................... $ 361.3 $199.9 $167.1
Foreign.......................................... 23.6 17.9 27.3
-------- ------ ------
Total.................................. $ 384.9 $217.8 $194.4
======== ====== ======
</TABLE>
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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......................................... $ (89.8) $(52.2) $(25.8)
Foreign......................................... (10.1) (5.8) (9.0)
State........................................... (18.6) (2.9) (4.6)
------- ------ ------
(118.5) (60.9) (39.4)
------- ------ ------
Deferred:
Federal......................................... (27.4) (31.3) (27.6)
Foreign......................................... (1.0) (1.3) .8
State........................................... .6 (.6) (2.2)
------- ------ ------
(27.8) (33.2) (29.0)
------- ------ ------
Total................................... $(146.3) $(94.1) $(68.4)
======= ====== ======
</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 59.3
Tax credit and net operating loss carryovers............. 91.8 95.6
Other.................................................... 51.8 44.4
------ ------
Total deferred income tax assets................. 365.8 391.3
------ ------
Deferred income tax liabilities:
Tax over book depreciation............................... (90.8) (72.3)
Tax over book intangible amortization.................... (40.3) (17.2)
Pensions................................................. (41.0) (47.7)
Other.................................................... (11.9) (35.7)
------ ------
Total deferred income tax liabilities............ (184.0) (172.9)
------ ------
Net deferred income taxes................................ $181.8 $218.4
====== ======
</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 over an
extended period of time and, as a result, will be realized for tax purposes over
those future periods and beyond. 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.
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.................. (.2) -- (1.0)
Amortization of nondeductible goodwill...................... 1.3 .9 1.0
Difference in rates on consolidated foreign subsidiaries.... .7 (.1) (.4)
State and local taxes, net of federal benefit............... 3.0 1.3 2.5
Tax exempt income from foreign sales corporation............ (1.6) (3.3) (.1)
QUIPS distributions......................................... (.8) (1.7) (1.9)
Nondeductible merger-related costs.......................... -- 9.2 --
Other items................................................. .6 1.9 .1
---- ---- ----
Effective income tax rate................................... 38.0% 43.2% 35.2%
==== ==== ====
</TABLE>
The Company has not provided for U.S. federal and foreign withholding taxes
on $133.7 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 $6.4 million.
NOTE N 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.
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.
Performance Materials consists of three business groups: Textile and
Industrial Coatings, Polymer Additives and Specialty Plastics, and Consumer
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 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.
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.......................................... $2,755.2 $2,468.3 $2,021.4
Performance Materials.............................. 1,195.6 904.7 824.4
-------- -------- --------
Total Sales................................ $3,950.8 $3,373.0 $2,845.8
======== ======== ========
OPERATING INCOME
Aerospace.......................................... $ 386.4 $ 260.3 $ 253.6
Performance Materials.............................. 145.8 128.2 109.5
-------- -------- --------
532.2 388.5 363.1
Corporate General and Administrative Expenses(2)... (55.4) (138.4) (52.8)
-------- -------- --------
Total Operating Income..................... $ 476.8 $ 250.1 $ 310.3
======== ======== ========
ASSETS
Aerospace.......................................... $2,372.5 $2,347.0 $2,169.2
Performance Materials.............................. 1,369.5 877.3 784.6
Corporate.......................................... 450.6 269.6 626.0
-------- -------- --------
Total Assets............................... $4,192.6 $3,493.9 $3,579.8
======== ======== ========
CAPITAL EXPENDITURES
Aerospace.......................................... $ 134.1 $ 81.9 $ 64.6
Performance Materials.............................. 70.6 73.2 97.5
Corporate.......................................... 3.8 4.8 35.0
-------- -------- --------
Total Capital Expenditures................. $ 208.5 $ 159.9 $ 197.1
======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSE
Aerospace.......................................... $ 87.3 $ 82.6 $ 79.3
Performance Materials.............................. 75.3 48.2 39.0
Corporate.......................................... 2.8 8.0 21.5
-------- -------- --------
Total Depreciation and Amortization........ $ 165.4 $ 138.8 $ 139.8
======== ======== ========
GEOGRAPHIC AREAS
NET SALES
United States................................... $2,631.7 $2,307.8 $1,989.7
Europe(1)....................................... 843.8 723.7 525.2
Other Foreign................................... 475.3 341.5 330.9
-------- -------- --------
Total...................................... $3,950.8 $3,373.0 $2,845.8
======== ======== ========
PROPERTY
United States................................... $1,104.8 $ 947.3 $1,015.1
Europe.......................................... 148.3 116.5 108.3
Other Foreign................................... 2.8 1.3 18.6
-------- -------- --------
Total...................................... $1,255.9 $1,065.1 $1,142.0
======== ======== ========
</TABLE>
- ---------------
(1) European sales in 1998, 1997 and 1996 included $262.3 million, $418.9
million and $248.5 million, respectively, of sales to customers in France.
Sales were allocated to geographic areas based on where the product was
shipped to.
(2) Corporate general and administrative expenses in 1997 include merger costs
of $77.0 million.
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In 1998, 1997 and 1996, sales to Boeing, solely by the Aerospace Segment,
totaled 14 percent, 14 percent and 13 percent, respectively, of consolidated
sales. Sales to Boeing include sales to McDonnell Douglas which merged with
Boeing in 1997.
NOTE O 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 P SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
BALANCE CHARGED BALANCE
BEGINNING TO COSTS AT END
OF YEAR AND EXPENSE OTHER DEDUCTIONS (1) OF YEAR
--------- ----------- ----- -------------- --------
ACCOUNTS RECEIVABLE ALLOWANCE (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998............... $21.3 $ 5.8 $ .9(2) $ (5.4) $22.6
Year ended December 31, 1997............... 26.2 15.6 .7(2)
(2.1)(3) (19.1) 21.3
Year ended December 31, 1996............... 24.7 6.0 2.9(2) (7.4) 26.2
</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........................................................ $ 50.2 $ 41.8
Buildings and improvements.................................. 666.0 632.9
Machinery and equipment..................................... 1,417.2 1,215.7
Construction in progress.................................... 164.7 125.0
--------- ---------
$ 2,298.1 $ 2,015.4
Less allowances for depreciation and amortization........... (1,042.2) (950.3)
--------- ---------
Total............................................. $ 1,255.9 $ 1,065.1
========= =========
</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 $3.5 million in 1998, $5.3
million in 1997 and $6.3 million in 1996. Amounts charged to expense for
depreciation and amortization from continuing operations during 1998, 1997 and
1996 were $128.0 million, $111.3 million and $101.2 million, respectively.
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
GOODWILL
Accumulated amortization.................................... $100.2 $ 71.4
====== ======
IDENTIFIABLE INTANGIBLE ASSETS
Accumulated amortization.................................... $ 29.3 $ 26.0
====== ======
</TABLE>
Amortization of goodwill and identifiable intangible assets from continuing
operations was $37.4 million, $22.2 million and $20.1 million in 1998, 1997 and
1996, respectively.
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
ACCRUED EXPENSES
Wages, vacations, pensions and other employment costs....... $149.4 $164.9
Postretirement benefits other than pensions................. 30.0 26.1
Taxes, other than federal and foreign taxes on income....... 53.7 42.3
Accrued environmental liabilities........................... 18.8 18.0
Accrued interest............................................ 34.9 27.0
Other....................................................... 133.3 133.0
------ ------
Total............................................. $420.1 $411.3
====== ======
</TABLE>
FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's accounting policies with
respect to financial instruments are described in Note A.
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 debt.
<TABLE>
<CAPTION>
1998 1997
-------- ------
(IN MILLIONS)
<S> <C> <C>
Long-term debt (including current portion)
Carrying Amount........................................... $ 998.0 $567.5
Fair Value................................................ $1,183.5 $605.6
</TABLE>
Off balance sheet derivative financial instruments at December 31, 1998 and
1997, held for purposes other than trading, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
CONTRACT/ FAIR CONTRACT/ FAIR
NOTIONAL AMOUNT VALUE NOTIONAL AMOUNT VALUE
--------------- ----- --------------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate swaps.................. $26.8 $(2.1) $25.5 $(1.3)
Foreign currency forward contracts... 4.2 -- 12.2 (.1)
Foreign currency swap agreements..... -- -- .7 --
</TABLE>
At December 31, 1998, the Company had one interest rate swap agreement,
wherein the Company pays a fixed rate of interest and receives a LIBOR-based
floating rate.
Foreign currency forward contracts mature over the next two months
coincident with the anticipated settlement of accounts receivable and accounts
payable in Europe. No additional cash requirements are necessary with respect to
outstanding agreements.
The counterparties to each of these agreements are major commercial banks.
Management believes that losses related to credit risk are remote.
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized foreign currency translation................... $ 4.2 $ (1.7) $ 5.9
Minimum pension liability................................. (0.6) (1.8) (26.4)
------ ------ ------
Total........................................... $ 3.6 $ (3.5) $(20.5)
====== ====== ======
</TABLE>
NOTE Q 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....... $ 232.0 $ 70.1 $ 46.4
Goodwill and identifiable intangible assets acquired... 315.4 75.8 81.7
Cash paid.............................................. (427.2) (133.4) (107.9)
------- ------- -------
Liabilities assumed or created......................... $ 120.2 $ 12.5 $ 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).............. 68.0 81.5 88.6
Income taxes paid...................................... 27.6 145.9 34.8
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 R 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.
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
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 S COMMON STOCK
During 1998, 1997 and 1996, 1,031,870; 826,388 and 600,057 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, 18,588,004 shares of common stock were issued in
connection with the merger with Rohr (see Note D). During 1998, 1,235,051 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, 754,717 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, 2,006,868 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 627,539; 53,137 and 52,949 shares of treasury stock in
1998, 1997 and 1996, respectively, and reissued none in 1998; 5,000 in 1997 and
22,500 shares in 1996, in connection with the Stock Option Plan and other
employee stock ownership plans. In 1998, 1997 and 1996, 15,333; 19,900 and
60,400 shares, respectively, of common stock previously awarded to employees
were forfeited and restored to treasury stock.
As of December 31, 1998, there were 5,598,814 shares reserved for future
issuance under the Stock Option Plan.
NOTE T PREFERRED SECURITIES OF TRUST
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 Trust, but only to the extent the Trust has funds legally available
for such distributions. The only source of funds for the Trust to make
distributions to preferred security holders is the payment by the Company of
interest on the Junior
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 Trust.
NOTE U STOCK OPTION PLAN
At December 31, 1998, the Company had stock-based compensation plans
described below that include the pre-merger plans of Rohr. Effective with the
merger, outstanding Rohr options were assumed by the Company and converted to
fully-vested options to purchase BFGoodrich common stock at a ratio of .7 of one
share of BFGoodrich common stock for each 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 3,200,000
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.
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)........................................ 4.7 5.2 5.0
</TABLE>
The assumptions used were comparable for BFGoodrich's and Rohr's stock
options, except that for the Rohr options, the dividend yield assumption was
zero and the volatility factor was 43.8 percent in 1997 and 43.1 percent in
1996. 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 1998, 1997 and 1996 were $10.62, $7.59 and $7.28,
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
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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................................... $226.5 $178.2 $173.9
Pro forma..................................... 221.3 170.6 172.8
Earnings per share:
Basic
As reported................................ $ 3.07 $ 2.51 $ 2.61
Pro forma.................................. 3.00 2.40 2.59
Diluted
As reported................................ $ 3.02 $ 2.41 $ 2.48
Pro forma.................................. 2.95 2.30 2.45
</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.
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..................... 4,018.0 $29.25
Granted.............................................. 990.7 41.92
Exercised............................................ (871.6) 28.56
Forfeited............................................ (80.2) 35.46
Expired.............................................. (2.1) 38.04
-------
Outstanding at end of year........................... 4,054.8 32.27
=======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 WEIGHTED-AVERAGE
(OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE
---------------------------- -------- ----------------
<S> <C> <C>
Outstanding at beginning of year.................... 4,943.8 $25.16
Granted............................................. 846.7 40.51
Exercised........................................... (1,661.1) 22.44
Forfeited........................................... (97.1) 33.96
Expired............................................. (14.3) 43.64
--------
Outstanding at end of year.......................... 4,018.0 29.25
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 WEIGHTED-AVERAGE
(OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE
---------------------------- ------- ----------------
<S> <C> <C>
Outstanding at beginning of year..................... 4,212.6 $22.96
Granted.............................................. 1,612.2 28.85
Exercised............................................ (842.4) 21.33
Forfeited............................................ (96.4) 26.64
Expired.............................................. (54.2) 39.24
-------
Outstanding at end of year........................... 4,831.8 24.96
=======
</TABLE>
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
WEIGHTED-
OPTIONS OPTIONS WEIGHTED- AVERAGE
OUTSTANDING EXERCISEABLE AVERAGE REMAINING
GRANT (IN (IN EXERCISE CONTRACTUAL
DATE THOUSANDS) THOUSANDS) PRICE LIFE (YEARS)
----- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C>
1998............................... 943.3 217.6 $41.94 9.0
1997............................... 741.2 490.5 40.58 8.2
1996............................... 735.3 611.6 33.66 7.1
1995............................... 753.1 753.1 21.58 6.2
1994............................... 161.5 161.5 18.26 5.1
All other.......................... 720.4 720.5 23.95 2.5
------- -------
Total.................... 4,054.8 2,954.8
======= =======
</TABLE>
Stock options in the "All other" category were outstanding at prices ranging
from $15.00 to $45.18.
During 1998, 1997 and 1996, restricted stock awards for 500; 9,761 and
26,103 shares, respectively, were made under the Stock Option Plan. During 1998,
1997 and 1996, stock awards for 4,977; 5,500 and 25,400 restricted shares,
respectively, were forfeited. 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, $0.1 million, $1.8 million and $1.9 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
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 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.
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. The Company believes that
any liability
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
that may finally be determined with respect to commercial and product liability
claims, should not have a material effect on the Company's consolidated
financial position or results of operations. The Company is also involved in
legal proceedings as a plaintiff involving contract, patent protection,
environmental and other matters. Gain contingencies, if any, are recognized when
realized.
At December 31, 1998, the Company was a party to various obligations
assumed or issued by others, including guarantees of debt and lease obligations,
principally relating to businesses previously disposed. The aggregate contingent
liability, should the various third parties fail to perform, is approximately
$35.1 million. The Company has not previously been required to assume any
responsibility for these financial obligations as a result of defaults and is
not currently aware of any existing conditions which would cause a financial
loss. As a result, the Company believes that risk of loss relative to these
contingent obligations is remote.
The Company and its subsidiaries are generators of both hazardous 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 43 sites, most of which related to businesses previously
discontinued. The Company believes it may have continuing liability with respect
to not more than 19 sites.
The Company initiates corrective and/or preventive environmental projects
of its own to ensure safe and lawful activities at its current operations. 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 past and existing operating sites. This process includes
investigation of National Priority List sites, where the Company is considered a
PRP, review of remediation methods and negotiation with other PRPs and
governmental agencies.
At December 31, 1998, the Company has recorded in Accrued Expenses and in
Other Non-current Liabilities a total of $57.4 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.
In addition, the Company expects to incur capital expenditures and future
costs for environmental, health and safety improvement programs. These
expenditures relate to anticipated projects to change process systems or to
install new equipment to reduce ongoing emissions, improve efficiencies and
promote greater worker health and safety. These expenditures are customary
operational costs and are not expected to have a material adverse effect on the
financial position, liquidity or results of operations of the Company.
At December 31, 1998, approximately 19 percent of the Company's labor force
was covered by collective bargaining agreements. Approximately 4 percent of the
labor force is covered by collective bargaining agreements that will expire
during 1999.
