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1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended July 31, 1997 Commission File Number 1-6101
ROHR, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-1607455
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
850 LAGOON DRIVE, CHULA VISTA, CALIFORNIA 91910
(Address of principal executive offices)
(619) 691-4111
(Telephone No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1 par value New York Stock Exchange
Pacific Stock Exchange
The Stock Exchange, London
7% Convertible Subordinated New York Stock Exchange
Debentures due 2012 Pacific Stock Exchange
The Stock Exchange, London
7-3/4% Convertible Subordinated New York Stock Exchange
Notes due 2004
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
At September 5, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, based on market quotations as of that date, was
approximately $682,076,515.
As of September 5, 1997, there were 25,366,613 shares of the Registrant's common
stock outstanding.
Documents Incorporated by Reference:
------------------------------------
Portions of the following documents are incorporated into this report by
reference:
1. Part II Registrant's Annual Report to Shareholders for fiscal year
ended July 31, 1997.
2. Part III Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the
close of the fiscal year.
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<PAGE>
TABLE OF CONTENTS
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Part I.
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Page
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Item 1. Business...................................................... 1
General..................................................... 1
Products.................................................... 2
Contracts................................................... 4
Subcontractors.............................................. 5
Program Funding............................................. 6
Principal Customers......................................... 6
Backlog..................................................... 6
Competition................................................. 7
Raw Materials and Suppliers................................. 8
Employees................................................... 8
Environmental Matters....................................... 8
Research and Development.................................... 9
Patents and Proprietary Information......................... 9
Manufacturing............................................... 9
Overhaul and Repair Facilities.............................. 10
Miscellaneous............................................... 10
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Additional
Item Executive Officers of the Registrant.......................... 15
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 17
Item 6. Selected Financial Data....................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk........................................... 17
Item 8. Financial Statements and Supplementary Data................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 17
Part III.
Item 10. Directors and Executive Officers of the Registrant............ 18
Compliance with Section 16(a) of the Securities Exchange
Act of 1934................................................ 18
Item 11. Executive Compensation........................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 18
Item 13. Certain Relationships and Related Transactions................ 18
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 19
SIGNATURES
Signature Page................................................ 26
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PART 1
ITEM 1. BUSINESS
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General
Rohr, Inc., (the "Company"), incorporated in Delaware in 1969, is the
successor to a business originally established in 1940 under the name of Rohr
Aircraft Corporation. The Company, a leading aerospace supplier, provides
nacelle and pylon systems integration, design, development, manufacturing, and
support services to the aerospace industry worldwide. The Company focuses its
efforts on the market for commercial aircraft which seat 70 or more passengers.
Its principal products include nacelles, which are the aerodynamic structures or
pods that surround an aircraft's engines; thrust reversers, which are part of
the nacelle system and assist in the deceleration of jet aircraft after landing;
pylons (sometimes referred to as struts) which are the structures that attach
the jet engines or the propulsion system to the aircraft; noise suppression
systems; engine components; and structures for high-temperature environments. In
addition, the Company conducts product research and development in advanced
composites and metals, high-temperature materials, acoustics, and manufacturing
processes for existing and future applications.
The Company sells products and services to the major commercial airframe
manufacturers (Boeing and McDonnell Douglas, which have merged, and Airbus) and
to the five major jet engine manufacturers (General Electric, Pratt & Whitney,
Rolls-Royce, CFM International, and International Aero Engines). In addition,
the Company on several programs provides customer and product support directly
to over 200 airline operators and service centers around the world, including
on-site field services and the sale of spare parts. The Company also overhauls
and repairs nacelles and thrust reversers for airlines operating virtually
anywhere in the world.
The Company has over 50 years of experience in the aerospace industry.
Originally, the Company operated as a subcontractor to the airframe
manufacturers, building parts to the customer's design. Later, it began to
build to its own designs based on customer specifications. Eventually, the
Company also began operating as a subcontractor to the engine manufacturers who
then provided the engine with nacelle to the airframe manufacturers. In the
1980s, the Company significantly expanded its role in many newer programs by
becoming a systems integrator for nacelle systems with responsibility for the
integration and management of the design, tooling, manufacture, and delivery of
complete nacelle systems, directing the efforts of international consortia in
some cases. As a result of this range of experience, the Company can provide
many different levels of service to its customers depending upon their needs.
The Company can build to the customer's design, assist in that design, or assume
total responsibility for design, manufacture, integration and product support.
In addition, over the last several years, the Company has expanded its services
to the airlines through the direct sale of spare parts, the provision of
technical support and training, and the operation of repair and overhaul
facilities.
1
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Products
General. The Company designs and manufactures nacelle systems, nacelle
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components, pylons or struts, non-rotating components for jet engines, and other
components for commercial and military aircraft. A nacelle system generally
includes the nose cowl or inlet, fan cowl, nozzle systems and thrust reverser.
The nacelle houses electrical, mechanical, fluid, and pneumatic systems together
with various panels, firewalls, and supporting structures; the aircraft engine
(which is provided by the customer); and purchased or customer-furnished engine
equipment such as electrical generators, starters, fuel pumps and oil coolers.
The Company also performs engine build-ups ("EBU") by assembling nacelle systems
and the related electrical, mechanical, fluid and pneumatic systems onto core
aircraft engines.
Commercial. The Company has become a systems integrator, with
----------
responsibility for the integration and management of the design, tooling,
manufacture, and delivery of the complete nacelle or pylon system, including in
some cases sale of spare parts directly to the aircraft operator.
The Company has full systems integration responsibility for the complete
nacelle with thrust reverser, and performs substantial manufacturing for the
McDonnell Douglas MD-80, the Pratt & Whitney PW4000 series engine option for the
McDonnell Douglas MD-11 and the Airbus A310 and A300-600. In some cases, while
retaining full systems integration responsibility for the nacelle and thrust
reverser, the Company has subcontracted certain major components. These programs
include the CFM International CFM56-5 nacelle program and the International Aero
Engines V2500-A5 nacelle program (excluding inlet and fan cowl), both of which
engines are being competitively marketed for the Airbus A319, A320 and A321;
the CFM International-powered Airbus A340; and the International Aero Engines
V2500-D5 for the McDonnell Douglas MD-90 aircraft. The company also has
responsibility for the wing and tail pylon program for the McDonnell Douglas
MD-11 aircraft, and has subcontracted the wing pylon manufacture and assembly.
The Company manufactures the thrust reverser, nozzle, pylons and fan cowl
for Rolls-Royce engine options for the Boeing 757; the pylon for the Pratt
engine option for the Boeing 757; the nacelle without thrust reverser for the
CF6-80C2, which is the General Electric engine option for the Airbus A310 and
A300-600 and the McDonnell Douglas MD-11; the nacelle without thrust reverser
for the CF6-80E1, which is the General Electric engine option for the Airbus
A330; nacelle components, including the inlet cowl, fan cowl, and extension ring
for the Boeing 737-300, -400, -500 and the inlet and fan cowl for the Boeing
737-600, -700 and -800. Major components produced by the Company for the General
Electric CF6-80C2 nacelle are also used on the Boeing 747 and 767.
The role of systems integrator, while broadening the Company's business
base in the commercial aerospace industry, typically requires a substantial
investment in working capital and subjects the Company to increased market risk
relative to the ultimate success of such programs. In those cases where the
Company has subcontracted the design and production of major components (CFM56-
5, V2500, MD-90, A340 and the wing pylon for the MD-11) to foreign and domestic
companies, some of the risks associated with such programs have been passed on
to those subcontractors. However, the Company's performance and ultimate
profitability on these programs is dependent on the performance of its
subcontractors, including the timeliness and quality of their work, as well as
the ability of the Company to monitor and manage its subcontractors. See
"Subcontractors".
2
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In February 1996, BMW Rolls-Royce Aero Engines selected the Company to be
the nacelle system integrator for the new MD-95 aircraft , a new 100 passenger
aircraft currently under development. Delivery of development hardware was made
in July 1997. The aircraft's flight test program is scheduled to commence in
April 1998 and its scheduled Federal Aviation Administration certification date
is mid 1999.
The Company manufactures and sells modification kits for the re-engining of
existing Boeing 727 aircraft with new Pratt & Whitney JT8D-217C/219 engines.
The program, designated the "Super 27," consists of new nacelles, struts, engine
mounts and thrust reversers.
The Company also manufactures other components for commercial jet aircraft,
including the common nozzle used on the Rolls-Royce-powered versions of the
Boeing 747 and 767, the aft fan case nozzle and plug for the General Electric GE
90 engine option for the Boeing 777, the common nozzle assembly used on the
Rolls Royce powered Airbus A330, and the acoustical ducts and/or acoustic panels
for the Pratt & Whitney engine used on the McDonnell Douglas MD-80 and the
Boeing 757.
The Company has been performing nacelle modification and integration
services for Pratt & Whitney, installing Boeing 757 nacelles under a Pratt &
Whitney license, on the PW2000 series engine for use on the former Soviet
Union's IL-96M/T transport aircraft. Pratt & Whitney has entered into a
contracts with Boeing for additional nacelles and with the Company for
additional modification and integration services. The Company also provides
nacelles (essentially the same as those used on the Rolls Royce powered version
of the 757) to Rolls Royce for its program to install Rolls Royce engines on the
former Soviet Union's TU-204 aircraft.
Government (Military and Space). For military aircraft, the Company
-------------------------------
manufactures nacelle components for re-engining of existing Boeing KC-135
military aerial refueling tankers and spares components for "out of production"
aircraft such as the P-3, C130, F-14 and C-5. The Company developed and has
delivered the engine bay doors for the U.S. Air Force F-22 tactical fighter
aircraft being built under a development contract for the U. S. Air Force . As
a member of the Lockheed Martin team which was selected in July 1996 by NASA to
build and fly a sub-scale demonstrator X-33 Single-Stage-to-Orbit ("SSTO")
reusable launch vehicle, the Company will be responsible for the SSTO's thermal
protection system.
Spares. The Company sells spare parts for both military and commercial
------
aircraft, including those for aircraft in use but no longer in production and
such sales were approximately $187.2 million in fiscal 1997, $178.5 million in
fiscal 1996, and $142.5 million in fiscal 1995.
Under several major programs, the Company sells spare parts directly to
airlines (although on certain programs, royalty payments are required). On
these programs the Company also provides technical and product support directly
to the airlines. On other programs, the Company sells such spares to the
airframe or engine manufacturer who then resells them to the airlines together
with manuals and product support. The Company's direct sales of spare parts to
the airlines are expected to increase in the future as nacelle programs on which
the Company sells spare parts directly to the airlines mature and as the
aircraft using those nacelles age. Generally, the Company earns a higher margin
on the direct sale of spare parts to airlines than it does on the sale of spare
parts to prime contractors (for resale to the airlines). Prices for direct
spare part sales are higher than prices for spare parts sold to prime
contractors, in part, because of additional costs related to the technical and
customer support activities provided to the airlines.
3
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Contracts
Most of the Company's major commercial contracts establish a firm unit
price, subject to cost escalation, over a number of years or deliveries or, in
certain cases, over the life of the related program. Life-of-program
agreements generally entitle the Company to work as a subcontractor on the
program during the entire period the customer produces its aircraft or engine.
While the customer retains the right to terminate these long-term and life-of-
program arrangements, there are generally significant costs for doing so.
Although most of the Company's contracts are long-term, fixed-price contracts,
from time to time, the Company has experienced pressures from customers to
reduce prices.
The Company's long-term contracts generally contain escalation clauses for
revising prices based on published indices which reflect increases in material
and labor costs. Furthermore, in almost all cases, when a customer orders
production schedule revisions (outside of a range provided in the contract) or
design changes, the contract price is subject to adjustment. These long-term
contracts provide the Company with an opportunity to obtain increased profits if
the Company can perform more efficiently than it assumed at the time of pricing.
Conversely, there is the potential for significant losses if it cannot produce
the product for the agreed upon price.
The Company's other commercial contracts generally provide a fixed price
for a specified number of units which, in many cases, are to be delivered over a
specified period of time. Under these contracts, prices are re-negotiated for
each new order. As a result, the Company has the opportunity to negotiate price
increases for subsequent units ordered if production costs are higher than
expected. The Company's customers, however, may seek price reductions from the
Company in connection with any new orders they place.
On its longer-term contracts, the Company bases initial production prices
on estimates of the average cost for a block of the units which it believes will
be ordered over a specified period of time. Generally, production costs on
initial units are substantially higher during the early years of a new contract
or program, when the efficiencies resulting from learning are not yet fully
realized, and decline as the program matures. Learning typically occurs on a
program as tasks and production techniques become more efficient through
repetition of the same manufacturing operation and as management implements
actions to simplify product design and improve tooling and manufacturing
techniques. If the customer orders fewer than the expected number of units
within a specified time period, certain of the Company's contracts have
repricing clauses which increase the prices for units that have already been
delivered. However, other contracts do not include such repricing provisions
and force the Company to bear certain market risks (such as the MD-90, MD-95 and
the 737). The Company analyzes the potential market for the products under such
contracts and agrees to prices based on its estimate of the average estimated
costs for the units it expects to deliver under the program.
Some of the Company's contracts have provided for the recovery of a
specified amount of nonrecurring, pre-production costs, consisting primarily of
design and tooling costs. In some cases, a significant portion of such pre-
production costs have been advanced by the customer. However, in negotiating
several contracts, the Company has agreed to defer recovery of pre-production
costs and instead to recover a certain amount of such costs with the sale of
each production unit over an agreed number of production units plus spares
equivalents. In addition, on several of these contracts, based on its analysis
of the potential market for the
4
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products covered by such contracts, the Company agreed to amortize pre-
production costs over a number of units which was larger than the anticipated
initial fabrication orders without the protection of a repricing clause or
guaranteed quantities of orders. On other commercial contracts, the Company
receives advance payments with orders, or other progress or advance payments,
which assist the Company in meeting its working capital requirements for
inventories. In addition, to reduce such funding requirements and, in certain
cases, market risks, the Company has subcontracted substantial portions of
several of its programs. See "Subcontractors".
In accordance with practices in the aircraft industry, most of the
Company's commercial orders and contracts are subject to termination at the
convenience of the customer and on many programs the tooling and design prepared
by the Company are either owned by the customer or may be purchased by it at a
nominal cost. The contracts generally provide, upon termination of firm orders,
for reimbursement of costs incurred by the Company, plus a reasonable profit on
the work performed. The costs of terminating an entire contract or program can
be significantly greater for the customer than the costs of terminating specific
firm orders. All of the Company's government contracts are subject to
termination at the convenience of the government. In such a situation, the
Company is entitled to recover the costs it incurred prior to termination, plus
a reasonable profit on the work performed.
The Company may encounter, and on several programs from time to time has
encountered, preproduction and/or production cost overruns caused by increased
material, labor or overhead costs, design or production difficulties, increased
quality requirements, redefined acceptance criteria on government programs, and
various other factors such as technical and manufacturing complexity. The
Company seeks recovery of such cost overruns from the customer if they are
caused by the action or inaction of the customer; otherwise, such cost overruns
will be, and in many cases have been, borne by the Company.
Incident to the manufacture and sale by the Company of its products, the
Company is subject to possible liability by reason of (i) warranties against
defects in design, material and workmanship; (ii) potential product liability
responsibility arising out of the use of its products; and (iii) strict
liability arising from the disposal of certain wastes covered by environmental
protection laws. The Company also has varying contractual obligations to
maintain the ability to produce and service spare parts as long as there are
specified numbers of aircraft still in operation. In addition, the Company's
contracts provide remedies ranging from actual damages to specified daily
penalties for late deliveries of products.
Subcontractors
The competitive market has required the Company to make substantial
financial investments in programs on which it participates. Both to reduce the
burden and risk of such financial investments, and also in some cases to
participate in foreign programs, the Company has further subcontracted the
design, development and production of substantial portions of several of its
major components to other foreign and domestic corporations. In return, those
companies provided a portion of the investment and assumed a portion of the risk
associated with various of the Company's programs. The Company's performance
and ultimate profitability on these programs is dependent on the performance of
its subcontractors, including the timeliness and quality of their work, as well
as the ability of the Company to monitor and manage its subcontractors.
5
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Program Funding
The highly competitive nature of the aerospace market has required the
Company to commit substantial financial resources, largely for working capital,
to participate with its customers on certain long-term programs. Those working
capital requirements consist primarily of nonrecurring pre-production costs such
as design and tooling, recurring costs for inventories and accounts receivables.
In some cases, a significant portion of the pre-production costs have been
advanced by the customer. However in other cases, the Company has agreed to
defer recovery of pre-production costs and instead to recover a certain amount
of such costs with the sale of each production unit over an agreed number of
production units plus spares equivalents. On some commercial contracts, the
Company receives advance payments with orders, or other progress or advance
payments, which assist the Company in meeting its working capital requirements
for inventories. On government contracts, the Company receives progress
payments for both pre-production and inventory costs. To reduce both its pre-
production funding requirements and the build-up of program inventories, the
Company has entered into agreements with subcontractors to provide a portion of
the program funding needs and has subcontracted to these entities substantial
portions of many of its programs. See "Subcontractors." Advances and progress
payments have varied in the past and are subject to change in the future based
on changes in both commercial and government procurement practices and
governmental regulations. Any future change could affect the Company's need for
program funding.
Accounts receivable balances vary in accordance with various payment terms
and other factors including the periodic receipt of large payments from
customers for reimbursement of non-recurring costs or for amounts which had been
deferred pending aircraft certification.
The Company's primary sources of program funding have been funds generated
from operations and borrowings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
in the Company's 1997 Annual Report to Shareholders.
Principal Customers
For a discussion of the Company's sales to its principal customers, see
"Notes to the Consolidated Financial Statements" in the Company's 1997 Annual
Report to Shareholders, Note 3--"Accounts Receivable--Sales."
Backlog
The Company's backlog is significant to its business because the production
of most Company products involves a long lead time from order to shipment date.
Firm backlog represents the sales price of all undelivered units covered by
customer orders. Firm backlog includes units ordered by a customer although the
Company and the customer have not yet agreed upon a sales price. In such cases,
the Company records in backlog an amount it believes) is a reasonable price
estimate.
The Company's firm backlog at July 31, 1997, was approximately $1.5
billion, compared to $1.2 billion at July 31, 1996. Of such backlog,
approximately $950 million is scheduled for delivery on or before July 31, 1998,
with the balance to be delivered in subsequent periods. A portion of the
Company's expected sales for fiscal 1998 is not included in firm backlog.
6
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All of the Company's firm backlog is subject to termination or rescheduling
at the customer's convenience. The Company's contracts generally provide for
reimbursement of costs incurred, plus a reasonable profit on such costs, with
respect to any firm orders that are terminated. Historically, it has been rare
for a customer to cancel units in firm backlog because of its obligations to the
Company with respect to such units and its obligations to suppliers of
components other than nacelles and pylons, who frequently are producing
concurrently components for use with the units ordered from the Company.
Competition
The Company's principal competition is Boeing (which, in addition to being
a significant customer to the Company, also manufactures nacelle systems and
pylons for its own aircraft), other significant aerospace corporations which
have development and production experience with respect to portions of the
nacelle system, and the companies to whom the Company has subcontracted various
components and who could (and have) bid on contracts in competition with the
Company.
The Company believes that its capabilities and technology, which range from
research and development through component design and testing, flight
certification assistance, component production and integration and airframe
production line assistance, contribute significantly to its market position.
The Company also believes that its contractual rights to participate on programs
for long periods of time or, in some cases, over the life of programs also
contribute to the maintenance of its market position.
Even with respect to its shorter term contracts, the Company is likely to
continue working as a subcontractor for the prime contractors well beyond the
end of the existing shorter term contracts. The Company has long standing
relationships with all of its significant customers. The Company's continued
participation on existing programs provides cost advantages to the prime
contractors because it avoids the cost of disassembling, moving, reassembling
and recalibrating the customized tooling used to manufacture aerospace products
which would be necessary if a program were transferred to a new subcontractor at
the end of a short-term contract. In addition, the delays inherent in such a
transfer are likely to disrupt the prime contractor's own production schedule as
the flow of deliveries from the subcontractor is interrupted during the
transfer. It is also generally more expensive for a new subcontractor to begin
producing products in the middle of an existing program than it is for the
Company to continue producing the required products. A new subcontractor's
employees must learn program specific tasks with which the Company's employees
will already be familiar. As a result of all of these factors, it is unusual
for a prime contractor to shift a major aerospace subcontract from one
manufacturer to another at the end of a short-term contract.
Competitive factors include price, quality of product, design and
development capability combined with the ability to quickly bring a product to
market, ability to consistently achieve scheduled delivery dates, manufacturing
capabilities and capacity, technical expertise of employees, the desire or lack
thereof of airframe and engine manufacturers to produce certain components in-
house, and the willingness, and increasingly the ability, of the Company and
other nacelle manufacturers to accept financial and other risks in connection
with new programs.
7
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Raw Materials and Suppliers
The principal raw materials used by the Company are sheet, plate, rod, bar,
tubing, and extrusions made of aluminum, steel, Inconel and titanium; electrical
wire; rubber; adhesives; and advanced composite products. The principal
purchased components are aircraft engine equipment, custom machined parts, sheet
metal details, and castings and forgings. All of these items are procured from
commercial sources. Supplies of raw materials and purchased parts historically
have been adequate to meet the requirements of the Company. However, from time
to time, including currently, shortages have been encountered, particularly
during periods of high industry production and demand. While the Company
endeavors to assure the availability of multiple sources of supply, there are
many instances in which, either because of a customer requirement or the
complexity of the item, the Company may rely on a single source. The failure of
any of these single source suppliers or subcontractors to meet the Company's
needs could seriously delay production on a program. The Company monitors the
delivery performance, product quality and financial health of its critical
suppliers, including all of its single source suppliers.
Employees
At July 31, 1997, the Company had approximately 4,600 full-time employees,
of whom approximately 1,380 were represented by the International Association of
Machinists and Aerospace Workers under agreements which expire on February 15,
2000; approximately 170 were represented by the International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America under an
agreement which expires on October 29, 2000; and approximately 20 were
represented by the International Union of Operating Engineers under an agreement
which expires on June 25, 2000. The Company considers its relationship with its
employees generally to be satisfactory.
Environmental Matters
As an international aerospace manufacturing corporation, the Company is
subject to foreign, federal, state and local laws and regulations that limit the
discharge of pollutants into the air, soil and water and establish standards for
the treatment, storage and disposal of hazardous wastes. If the Company were to
violate or otherwise to have liability pursuant to any of these laws or
regulations, it could be subject to judicial or administrative enforcement
proceedings requiring the Company to investigate the nature and extent of any
pollution it caused, to remediate such pollution, to install control devices in
its manufacturing facilities to reduce the amount of pollutants entering the
environment and to otherwise respond to orders and requests of the courts and
the various regulatory agencies. These proceedings could result in the Company
expending additional funds to satisfy judicial or regulatory decisions. The
Company does not believe that its environmental risks are materially different
from those of comparable manufacturing companies. Nevertheless, the Company
cannot provide assurances that environmental laws will not adversely affect the
Company's operations and financial condition in the future. Environmental risks
are generally excluded from coverage under the Company's current insurance
policies. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Environmental Matters" and "Notes to the Consolidated
Financial Statements, Note 8, Commitments and Contingencies," in the Company's
1997 Annual Report to Shareholders. See, also, Item 3, "Legal Proceedings," in
this report.
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The Company is involved in several proceedings and investigations related
to waste disposal sites and other environmental matters. See Item 3, "Legal
Proceedings," for a discussion of these matters, and additional suits and
matters that are pending or have been threatened against the Company.
Based upon presently available information, the Company believes that
aggregate costs in relation to all environmental matters of the Company will not
have a material adverse effect on the Company's financial condition, liquidity,
results of operations or capital expenditures.
Research and Development
The Company's research and development activities are designed to improve
its existing products and manufacturing processes, to enhance the
competitiveness of its new products, and to broaden the Company's aerospace
product base.
Most of its product development is funded through regular production
contracts and other agreements, several of which are funded by the U.S.
government. The Company developed the world's first all composite nacelle and
its large cascade thrust reverser under such contracts. The Company also
performs self-funded research and development through which it developed
proprietary products which reduce noise and prevent ice formation on nacelles.
The Company seeks research and development contracts from the U.S.
government and from commercial customers in targeted areas of interest such as
composite materials and advanced low-cost processing and joining of new
materials. From time to time, the Company also enters into joint research and
development programs with its customers.
Patents and Proprietary Information
The Company has obtained patents and developed proprietary information
which it believes provide it with a competitive advantage. For example, the
Company holds patents on the DynaRohr family of honeycomb sound attenuation
structures, the state-of-the-art RohrSwirl system which prevents ice formation
on the leading edges of nacelles, and bonding processes for titanium and other
metals. In addition, the Company has developed proprietary information covering
such matters as nacelle design, sound attenuation, bonding of metallic and
advanced composite structures, material specifications and manufacturing
processes. The Company protects this information through invention agreements
with its employees and confidentiality agreements with third parties. Although
the Company believes that its patents and proprietary information allow it to
produce superior products, it also believes that the loss of any such patent or
disclosure of any item of proprietary information would not have a material
adverse effect on the Company.
Manufacturing
The Company's products are manufactured and assembled at its facilities in
the United States and Europe by an experienced work force. The Company
considers its facilities and equipment generally to be in good operating
condition and adequate for the purpose for which they are being used. In
addition, it has a substantial number of raw material suppliers and numerous
subcontractors to produce components, and in some cases, major assemblies.
The Company's European final assembly sites, which are located adjacent to
the Company's major European customer, Airbus, allow the Company to respond
quickly to
9
<PAGE>
customer needs. The Company believes that these European sites provide it with
advantages in obtaining certain contracts with Airbus because they allow the
Company to perform a portion of the required work in Europe.
Overhaul and Repair Facilities
The Company has four overhaul and repair facilities which give it the
capability to overhaul and repair nacelles and thrust reversers for airlines
operating virtually anywhere in the world The facilities are located in
Fairhope, Alabama; Toulouse, France; Prestwick, Scotland; and Singapore. The
Singapore facility is jointly owned by the Company and Singapore Aerospace
Manufacturing Pte., Ltd.
Miscellaneous
No material portion of the Company's business is considered to be seasonal.
ITEM 2. PROPERTIES
- -------------------
All owned and leased properties of the Company are generally well
maintained, in good operating condition, and are generally adequate and
sufficient for the Company's business. The Company's properties are
substantially utilized; however, the Company does have excess manufacturing
capacity. All significant leases are renewable at the Company's option on
substantially similar terms, except for increases of rent which must be
negotiated in some cases.
10
<PAGE>
The following table sets forth the location, principal use, approximate
size and acreage of the Company's major production facilities. Those which are
owned by the Company and its subsidiaries are owned free of material
encumbrances, except as noted below:
<TABLE>
<CAPTION>
Owned Leased
-------------------------- --------------------------
Approximate Approximate
Square Feet Square Feet
Type of of Facility Approximate of Facility Approximate
Location Facility(1) (000) Acreage (000) Acreage
-------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ALABAMA
Fairhope(2)............ A,B 123 70.6 -- --
Foley(2)............... A,B 343 163.7 -- --
ARKANSAS
Arkadelphia(3)......... A,B 224 65.2 -- --
Heber Springs(2)....... A,B 153 70.5 -- --
Sheridan(2)............ A,B 149 78.0 -- --
CALIFORNIA
Chula Vista............ A,B,C,D 2,743 97.5 12 57.5
Riverside.............. A,B,C,D 1,159 75.3 4 --
FRANCE
Toulouse/St. Martin.... A,B,C 132 7.0 18 3.2
Toulouse/Gramont(2).... A,B 170 23.0 -- --
GERMANY
Hamburg................ A,B 28 5.3 -- --
MARYLAND
Hagerstown............. A,B 423 55.7 -- --
SCOTLAND
Prestwick.............. A,B -- -- 58 --
SINGAPORE
Singapore(4)........... A,B 44 -- -- 2.3
TEXAS
San Marcos............. A,B 172 55.0 -- --
----- ----- ---- ----
Approximate Totals..... 5,863 766.8 92 63.0
</TABLE>
_____________
(1) The letters indicated for each location describe the principal activities
conducted at that location:
A-Office
B-Manufacturing
C-Warehouse
D-Research and Testing
(2) Subject to a capital lease
(3) The completion of construction of this facility has been deferred. The
Company has taken an impairment write down on the facility.
(4) This facility is jointly owned by the Company and Singapore Aerospace
Manufacturing Pte., Ltd.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
A. Accounts receivable and inventories include estimated recoveries on
constructive change claims that the Company has asserted with respect to costs
it incurred as a result of government imposed redefined acceptance criteria on
the Grumman F-14 subcontract and the Company filed Appeal No. 47139 (filed
February 7, 1994) before the Armed Service Board of Contract Appeals ("ASBCA").
In the above appeal the Company's customer is the sponsor of the claims, the
U.S. Navy is the defendant and the Company is claiming monetary damages.
Management believes that the amounts reflected in the financial statements are
within the range of estimates of the amounts for which this matter will be
resolved. The resolution of this matter may take more than one year. See "Notes
to the Consolidated Financial Statements, Note 3", contained in the Company's
1996 Annual Report to Shareholders.
B. In June 1987, the U.S. District Court of Los Angeles, in U.S. et al.
vs. Stringfellow (United States District Court for the Central District of
California, Civil Action No. 83-2501 (JMI)), granted partial summary judgment
against the Company and 14 other defendants on the issue of liability under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").
This suit, along with related lawsuits, alleges that the defendants are jointly
and severally liable for all damage in connection with the Stringfellow
hazardous waste disposal site in Riverside County, California. In June 1989, a
federal jury and a special master appointed by the federal court found the State
of California also liable for the cleanup costs. On November 30, 1993, the
special master released his "Findings of Fact, Conclusion of Law and Reporting
Recommendations of the Special Master Regarding the State Share Fact Finding
Hearing." In it, he allocated liability between the State of California and
other parties. As this hearing did not involve the valuation of future tasks
and responsibilities, the order did not specify dollar amounts of liability.
The order, phrased in percentages of liability, recommended allocating liability
on the CERCLA claims as follows: 65% to the State of California and 10% to the
Stringfellow entities, leaving 25% to the generator/counterclaimants (including
the Company) and other users of the site (or a maximum of up to 28% depending on
the allocation of any Stringfellow entity orphan share). On the state law
claims, the special master recommended a 95% share for the State of California,
and 5% for the Stringfellow entities, leaving 0% for the
generator/counterclaimants. The special master's recommendation was
substantially approved by the federal judge but that decision is subject to a
final appeal. The Company and other generators of wastes disposed at the
Stringfellow site, which include numerous companies with assets and equity
significantly greater than the Company, are jointly and severally liable for the
share of cleanup costs for which the generators, as a group, ultimately are
found to be responsible. Notwithstanding, CERCLA liability is sometimes
allocated among hazardous waste generators who used a waste disposal site based
on the volume of hazardous waste they disposed of at the site. The Company is
the second largest generator of wastes disposed at the site by volume, although
it and certain other generators have argued the final allocation among
generators of their shares of cleanup costs should not be determined solely by
volume. The largest generator of wastes disposed at the Stringfellow site, by
volume, has indicated it is significantly dependent on insurance to fund its
share of any cleanup costs, and that it is in litigation with certain of its
insurers. The Company intends to continue to defend vigorously these matters
and believes, based on currently available
12
<PAGE>
information, that the ultimate resolutions of these matters will not have a
material adverse effect on the financial position or results of operations of
the Company.
The Company has reached settlements with its primary comprehensive general
liability insurance carriers concerning the Stringfellow site and has retained
the right to file future claims against its excess carriers.
C. In December 1989, the Maryland Department of the Environment ("MDE")
served the Company with a Letter and Consent Order No. CO-90-093. The Consent
Order calls for investigation and remediation of chemicals detected in soil and
ground water at the Company's bonding facility in Hagerstown, Maryland. The
Company and MDE subsequently negotiated a mutually acceptable Consent Order
under which the Company has developed a work plan to determine the nature and
extent of the pollution at the bonding plant. The Company had acquired the
bonding plant from Fairchild Industries, Inc. ("Fairchild"), in September 1987
and Fairchild had agreed to retain responsibility for and to indemnify the
Company against any claims and fees in connection with any hazardous materials
or pollutants released into the environment at or near the bonding plant or any
other property before the closing date of the sale. On March 11, 1993, the
Company and Fairchild executed a settlement agreement pursuant to which
Fairchild substantially reimbursed the Company for past costs relating to
environmental investigations at the bonding plant. The parties also agreed on a
procedure to perform the work required under the MDE Consent Order. On
February 21, 1997, the Company and Fairchild jointly submitted to MDE a Study
Area Feasibility Report. MDE has responded favorably to the report but
requested some additional groundwater sampling. Based on currently available
information, the Company believes that the resolution of this matter will not
have a material adverse effect on the financial position or results of
operations of the Company.
D. In July 1994, the Department of Toxic Substances Control of the State of
California Environmental Protection Agency ("DTSC") filed an action against the
Company and other individuals and companies in the U. S. District Court for the
Eastern District of California, Case No. CV-F-94-5683-GEB DLB, seeking, among
other things, recovery of response costs approximating $1.3 million plus
interest and attorney fees. The demand for payment, which is joint and several,
is for expenses allegedly incurred by DTSC personnel in the oversight of the
cleanup of the Rio Bravo deep injection well disposal site in Shafter,
California. The cleanup is currently being conducted by a group of cooperating
potentially responsible parties ("PRPs"), including the Company ("the
Cooperating PRPs"). In January 1996, the DTSC and the Cooperating PRPs settled
the monetary claim for a reduced amount. In addition, the Cooperating PRPs have
agreed to plug and abandon the deep injection well which will resolve the last
remaining cleanup issues. In April 1997, DTSC certified completion of the
remediative action conducted at the site. In July 1997, DTSC made a demand of
$30,000 on the PRPs for oversight costs related for the site. Based on
currently available information, the Company believes that the resolution of
this matter will not have a material adverse effect on the financial position or
results of operations of the Company.
13
<PAGE>
E. During fiscal 1993, Region IX of the United States Environmental
Protection Agency ("EPA") named the Company as a generator of hazardous wastes
that were transported to the Casmalia Resources Hazardous Waste Management
Facility (the "Casmalia Site") in Casmalia, California. In July 1996, the
Company and approximately 50 other cooperating generators executed a Consent
Decree and an Administrative Order on Consent which obligated the cooperating
generators to perform, jointly and severally, certain responsive actions at the
Casmalia Site prior to the entry of the Consent Decree. Since the entry of the
Consent Decree, the cooperating generators (including the Company) have agreed
to perform certain remedial actions at the site. The Company does not yet know
the ability of all other PRPs at this site, which include companies of
substantial assets and equity, to fund their allocable share. Some PRPs have
made preliminary estimates of cleanup costs at this site of approximately $60 to
$70 million and the Company's share (based on estimated, respective volumes of
discharge into such site by all generators, all of which cannot now be known
with certainty) could approximate $2.0 million. Based on currently available
information, the Company believes that the resolution of this matter will not
have a material adverse effect on the financial position or results of
operations of the Company.
F. By letter dated July 14, 1994, the Company was notified by the State of
Washington's Department of Ecology that the Department believes the Company to
be a "potentially liable person" ("PLP") under the Model Toxics Control Act of
the Revised Code of Washington. The Company is alleged to have arranged for the
disposal or treatment of a hazardous substance or arranged with a transporter
for disposal or treatment of a hazardous substance at a facility in Washington
known as the Yakima Railroad Area. The Department has made a written
determination that the Company is a PLP. In June 1996, the Department advised
the Company that it has been drafting a uniform settlement offer to be extended
individually to the PLPs, specifically, those who, like the Company, allegedly
shipped carbon to the site. In December, 1996, the Company and the Department
settled this matter based on pounds of carbon the Company shipped to the site.
G. In July 1996 the United States Environmental Protection Agency ('EPA")
advised the Company that it was working under the Superfund program to
investigate and clean up contamination from hazardous substances, particularly
polychlorinated biphenyls (PCBs), volatile organic compounds (VOCs), and waste
oils from the Hayford Bridge Groundwater Superfund Site located in St. Charles,
Missouri. The EPA further advised the Company that business records from the
site operator indicated that the Company sent materials to the facility for
services which may have included recycling, reclamation, generation, disposal,
treatment, storage, chemical processing, manufacture or other handling. The EPA
further requested that the Company respond to an information request concerning
the Company's use of the facility between 1963 and 1989. In June 1997, the
Company and EPA executed a Settlement Agreement based on the number of pounds of
material allegedly sent by the Company to the site.
H. From time to time, various environmental regulatory agencies request
that the Company conduct certain investigations on the nature and extent of
pollution, if any, at its various facilities. For example, such a request may
follow the spill of a reportable quantity of certain chemicals. At other times,
the request follows the removal,
14
<PAGE>
replacement or closure of an underground storage tank pursuant to applicable
regulations. At present, the Company's Chula Vista facility is conducting
certain investigations pursuant to discussions with the San Diego County
Department of Health Services, Hazardous Materials Management Division and the
San Diego Regional Water Quality Control Board. The Company intends to cooperate
fully with the various regulatory agencies.
I. In addition to the litigation discussed above, from time to time the
Company is a defendant in lawsuits involving (i) claims based on the Company's
alleged negligence or strict liability as a manufacturer in the design or
manufacture of various products; (ii) claims based upon environmental protection
laws; and (iii) claims based on the alleged wrongful termination of its
employees due to, among other things, discrimination based on race, age, sex,
national origin, handicap status, sexual preference, etc. The Company believes
that in those types of cases now pending, or in claims known by the Company to
be asserted against it whether or not reduced to a legal proceeding, it either
has no material liability or any such liability is adequately covered by its
reserves or its liability insurance, subject to certain deductible amounts. The
Company is aware that various of its insurers may assert, and in some such cases
have asserted, that their insurance coverage does not provide protection against
punitive damages in any specific lawsuit. While there can be no assurances that
the Company will not ultimately be found liable for material punitive damages,
the Company does not now believe that it has an exposure to any material
liability for punitive damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There is no information required to be submitted by the Company under this
Item.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------
As of September 15, 1997, the executive officers of the Company, in
addition to R. H. Rau, President and Chief Executive Officer, referred to at
Item 10, Part III, were as follows:
Laurence A. Chapman, Senior Vice President and Chief Financial Officer,
age 48, joined the Company in May 1994. Prior to that and since 1981, he
worked for Westinghouse Electric Company ("Westinghouse"). He had been the
Vice President and Treasurer of Westinghouse since January 1992. He was
previously the Chief Financial Officer of Westinghouse Financial Services,
Inc., a wholly-owned subsidiary of Westinghouse. Prior to that, Mr. Chapman
held positions in Corporate Finance and Corporate Planning with
Westinghouse.
15
<PAGE>
John R. Johnson, Senior Vice President, Programs, Technical Resources,
and Quality Assurance, age 60, has served in his present position since
January 1994. Prior to that and since September 1979, he has served in
other senior management positions, including Senior Vice President,
Programs and Support from March 1993 to January 1994; Vice President,
Government Business from February 1990 to February 1993; Vice President,
Planning from May 1989 to February 1990; and Vice President, Manufacturing,
Chula Vista, from April 1986 to May 1989. He joined the Company in
September 1979.
Richard W. Madsen, Vice President, General Counsel and Secretary, age
58, has served in his present position since December 5, 1987. Prior to
that and since August 1979, he served as Secretary and head of the legal
function, and has been an employee of the Company since 1974.
Alvin L. Majors, Vice President and Controller (Chief Accounting
Officer), age 57, has served in his present position since May 1989. Prior
to that and since December 1987 he served as the Company's Controller.
Prior to that and since 1971, he has served in other senior management
positions. He has been an employee of the Company since 1971.
David R. Watson, Senior Vice President - Customer Support and Business
Development, age 46, has served in his present position since March 1994,
assuming the title of Senior Vice President in June 1994. Prior to that and
since May 1991, he served as Vice President, Commercial Programs. In May
1989, he assumed the position of Vice President and General Manager of the
Company's Riverside facility. He has been an employee since February 1988
when he joined the Company as Vice President, Quality Assurance.
Graydon A. Wetzler, Senior Vice President, Operations, age 55, has
served in his present position since January 1994. Prior to that and since
July 1993, he served as Vice President, Technical and Quality Assurance.
From November 1990 to July 1993, he served as Vice President
Quality/Product Assurance. From April 1987 to November 1990, he served as
Vice President - Management Information Systems. He has served in other
senior management positions. He has been an employee of the Company since
1979.
The terms of office of Messrs. Chapman and Madsen expire on December 6,
1997. The initial three-year term of Mr. Rau's Employment Agreement terminated
on July 31, 1996; however, the agreement is automatically extended for
successive periods of one year each unless the Board of Directors gives one
year's advance written notice of its intention to terminate the agreement. The
other executive officers named above serve at the pleasure of the Chief
Executive Officer.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company has not paid a cash dividend since 1975. The Company is
restricted from paying cash dividends by the indenture governing its 11 5/8%
Senior Notes until its fixed charge coverage ratio exceeds 2.25 to 1 and by the
agreement governing its 9.33% and 9.35% Senior Notes until its ratio of debt to
tangible net worth is less than 2.5 to 1. The Company does not currently meet
these ratios.
Other information required by this Item is set forth in the section headed
"Rohr Profile" in the Registrant's Annual Report to Shareholders for the fiscal
year ended July 31, 1997, and such information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required by this Item is set forth in the section headed
"Selected Financial Data" in the Company's Annual Report to Shareholders for the
fiscal year ended July 31, 1997, and such information is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The information required by this Item is set forth in the section headed
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Shareholders for the fiscal year
ended July 31, 1997, and such information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
The information required by this Item is set forth in "Footnote 1 --
Summary of Significant Accounting Policies" and "Footnote 4 -- Inventories" in
the "Notes to the Consolidated Financial Statements" in the Company's Annual
Report to Shareholders for the fiscal year ended July 31, 1997, and such
information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required by this Item is set forth in the section headed
"Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Shareholders' Equity," "Consolidated Statements of
Cash Flows," and "Notes to the Consolidated Financial Statements" in the
Company's Annual Report to Shareholders for the fiscal year ended July 31, 1997,
and such information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
There is no information required to be submitted by the Company under this
Item.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required under this Item is set forth in the section headed
"Election of Directors" in the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders for fiscal year ended July 31, 1997, and such
information is incorporated herein by reference. See also "Additional Item" at
Part I of this report.
Compliance with Section 16(a) of The Securities Exchange Act of 1934
- --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC") and the
New York Stock Exchange. Officers, directors and greater than 10-percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on its review of the copies
of such forms received by it, or written representations from certain reporting
persons that no such forms were required for those persons, the Company believes
that, during fiscal year 1997, all filing requirements applicable to its
officers, directors, and greater than 10-percent beneficial owners were met.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this Item is set forth in the section headed
"Executive Compensation and Other Information" and in the section headed
"Directors' Beneficial Ownership and Compensation" in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders for fiscal year ended July
31, 1997, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this Item is set forth in the table headed
"Beneficial Ownership of Shares" in the Company's Proxy Statement for the 1997
Annual Meeting of Shareholders for fiscal year ended July 31, 1997, and such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
There is no information required to be submitted by the Company under this
Item.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
The following consolidated financial statements of the Company and
consolidated subsidiaries, included in the Company's 1997 Annual Report to
Shareholders, are incorporated by reference in Item 8:
(a) 1. Financial Statements
--------------------
Consolidated Balance Sheets at July 31, 1997, and 1996
Consolidated Statements of Operations for Years Ended
July 31, 1997, 1996, and 1995
Consolidated Statements of Shareholders' Equity for
Years Ended July 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for Years
Ended July 31, 1997, 1996, and 1995
Notes to the Consolidated Financial Statements
(a) 2. Financial Statement Schedules
-----------------------------
The following consolidated financial statement schedule of the
Company and subsidiaries is included in Part IV of this report.
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
not required under the instructions or the information is included
in the financial statements or notes thereto.
(a) 3. Index to Exhibits
-----------------
3.1 Restated Certificate of Incorporation of Rohr Industries,
Inc., dated December 7, 1985, incorporated herein by
reference to Exhibit 3.1, filed with Form 10-K for fiscal
year ended July 31, 1986.
3.2 Certificate of Designations of Series C Junior Participating
Cumulative Preferred Stock $1.00 Par Value of Rohr
Industries, Inc., dated August 15, 1986, incorporated herein
by reference to Exhibit 3.2, filed with Form 10-K for fiscal
year ended July 31, 1986.
19
<PAGE>
3.3 Certificate of Amendment to Restated Certificate of
Incorporation, dated December 9, 1986, incorporated herein by
reference to Exhibit 3.3, filed with Form 10-K for fiscal
year ended July 31, 1987.
3.4 Certificate of Amendment to Restated Certificate of
Incorporation, dated December 10, 1991, incorporated herein
by reference to Exhibit II, filed with Form 8-K dated as of
December 7, 1991.
3.5 Bylaws, as amended December 3, 1994, incorporated herein by
reference to Exhibit 3.8, filed with Form 10-Q for period
ended January 29, 1995.
4.1 Indenture, dated as of March 1, 1987, between Rohr
Industries, Inc., and Bankers Trust Company, trustee,
relating to 9 1/4% subordinated debentures, incorporated
herein by reference to Exhibit 4.1, filed with Form 10-Q for
period ended May 2, 1993.
4.2 Indenture, dated as of October 15, 1987, between Rohr
Industries, Inc., and Bankers Trust Company, trustee,
relating to 7% convertible subordinated debentures,
incorporated herein by reference to Exhibit 4.2, filed with
Form 10-Q for period ended May 2, 1993.
4.3 Indenture, dated as of May 15, 1994, between Rohr, Inc., and
IBJ Schroder Bank and Trust Company, trustee, relating to 11
5/8% senior notes, incorporated herein by reference to
Exhibit 4.5, filed with Form 10-Q for period ended May 1,
1994.
4.4 Indenture, dated as of May 15, 1994, between Rohr, Inc., and
The Bank of New York, trustee, relating to 7 3/4% convertible
subordinated notes, incorporated herein by reference to
Exhibit 4.6, filed with Form 10-Q for period ended May 1,
1994.
4.5 Amended and Restated Note Agreement, dated as of January 1,
1996, relating to the 9.35% Series A Senior Notes due January
29, 2000, the 9.35% Series B Senior Notes due January 29,
2000, and the 9.33% Series C Senior Notes due December 15,
2001, incorporated herein by reference to Exhibit 4.5.2,
filed with Form 10-Q for period ended January 28, 1996.
*4.5.1 First Amendment to Amended and Restated Note Agreement dated
as of July 31, 1997, relating to the 9.35% Series A Senior
Notes due January 29, 2000, the 9.35% Series B Senior Notes
due January 29, 2000, and the 9.33% Series C Senior Notes due
December 15, 2001.
4.7 Amended and Restated Rights Agreement, dated as of April 6,
1990, incorporated herein by reference to Item 7 of Form 8-K
dated as of April 6, 1990.
20
<PAGE>
4.7.1 Amendment No. 1 to Amended and Restated Rights Agreement,
incorporated herein by reference to Exhibit 4.7, filed with
Form 10-Q for period ended January 28, 1996.
10.1 Rohr, Inc., Directors Retirement Plan, as amended through the
Seventh Amendment, incorporated herein by reference to
Exhibits 10.1 through 10.7, as set forth in Form 10-K for
fiscal year ended July 31, 1994.
10.2 Rohr, Inc., Supplemental Retirement Plan (Restated 1997),
incorporated herein by reference to Exhibit 10.2, as set
forth in Form 10-Q for the quarterly period ended May 4,
1997.
10.3 Rohr, Inc. 1991 Stock Compensation for Non-Employee
Directors, incorporated by reference to Exhibit 10.5, filed
with Form 10-K for fiscal year ended July 31, 1992.
10.4 Rohr Industries, Inc., Management Incentive Plan (Restated
1982), as amended through the Fifteenth Amendment,
incorporated herein by reference to Exhibits 10.4.1 through
10.4.15, as set forth in Form 10-K for fiscal year ended July
31, 1994.
10.4.1 Sixteenth Amendment to Rohr, Inc. Management Incentive Plan
(Restated 1982), dated June 7, 1996, incorporated herein by
reference to Exhibit 10.4.1, filed with Form 10-K for fiscal
year ended July 31, 1996.
10.4.2 Seventeenth Amendment to Rohr Industries, Inc. Management
Incentive Plan (Restated 1982), dated September 13, 1996,
incorporated herein by reference to Exhibit 10.4.2, filed
with form 10-K for fiscal year ended July 31, 1996.
10.5 Rohr Industries, Inc., 1988 Non-Employee Director Stock
Option Plan, incorporated herein by reference to Exhibit
10.17, filed with Form 10-K for fiscal year ended July 31,
1989.
10.7 Employment Agreement with Robert H. Rau, incorporated herein
by reference to Exhibit 10.12, filed with Form 10-Q for
period ended May 2, 1993.
10.7.1 First Amendment to Employment Agreement with Robert H. Rau,
incorporated herein by reference to Exhibit 10.7.1, filed
with Form 10-K for fiscal year ended July 31, 1996.
10.8 Employment Agreement with L. A. Chapman, incorporated herein
by reference to Exhibit 10.12, filed with Form 10-K for
fiscal year ended July 31, 1994.
21
<PAGE>
10.9 Rohr, Inc., Executive Deferred Compensation Plan incorporated
herein by reference to Exhibit 10.9, filed with Form 10-Q,
for quarterly period ended May 4, 1997.
10.14 Lease Agreements, dated as of September 14, 1992, by and
between Rohr, Inc., as lessor, and State Street Bank and
Trust Company of California, National Association and W.
Jeffrey Kramer, Trustees, as lessee, incorporated herein by
reference to Exhibit 10.22, filed with Form 10-K for fiscal
year ended July 31, 1992.
10.15 Sublease Agreements, dated as of September 14, 1992, by and
between State Street Bank and Trust Company of California,
National Association and W. Jeffrey Kramer, Trustees, as
sublessor, and Rohr, Inc., as sublessee, as amended,
supplemented and modified through July 31, 1994, incorporated
herein by reference to Exhibits 10.15 through 10.15.5, as set
forth in Form 10-K for the fiscal year ended July 31, 1994.
10.15.6 Third Amendment Agreement, dated as of November 29, 1994, to
Sublease Agreement, dated as of September 14, 1992,
incorporated herein by reference to Exhibit 10.15.6, filed
with Form 10-K for fiscal year ended July 31, 1995.
10.15.7 Fourth Amendment Agreement, dated as of June 30, 1995, to
Sublease Agreement, dated as of September 14, 1992,
incorporated herein by reference to Exhibit 10.15.7, filed
with Form 10-K for fiscal year ended July 31, 1995.
10.15.8 Fifth Amendment Agreement, dated as of November 17, 1995, to
Sublease Agreement, dated as of September 14, 1992,
incorporated herein by reference to Exhibit 10.15.8, filed
with Form 10-Q for period ended January 28, 1996.
10.15.9 Sixth Amendment Agreement, dated as of January 19, 1996, to
Sublease Agreement, dated as of September 14, 1992,
incorporated herein by reference to Exhibit 10.15.9, filed
with Form 10-Q for period ended January 28, 1996.
*10.15.10 Seventh Amendment Agreement, dated as of July 18, 1997, to
Sublease Agreement, dated as of September 14, 1992.
10.16 Pooling and Servicing Agreement, dated as of December 23,
1992, among Rohr, Inc., RI Receivables, Inc., and Bankers
Trust Company, as Trustee, as amended through the Second
Amendment, incorporated herein by reference to Exhibits
10.16, through 10.16.2, as set forth in Form 10-K for the
fiscal year ended July 31, 1994.
22
<PAGE>
10.17 Receivables Purchase Agreement, dated as of December 23,
1992, among Rohr, Inc., and RI Receivables, Inc.,
incorporated herein by reference to Exhibit 10.11, filed with
Form 10-Q for period ended May 2, 1993.
*11.1 Calculation of Primary Earnings per Share.
*11.2 Calculation of Fully Diluted Earnings per Share.
*13 Annual Report to Shareholders for fiscal year ended July 31,
1997. (The Annual Report, except for the portions thereof
which are expressly incorporated by reference in the Form 10-
K, is being furnished for the information of the Commission
and is not to be deemed "filed" as part of the Form 10-K.)
*23. Consent of Deloitte & Touche.
*23.1 Deloitte & Touche Preferability Letter.
*27. Financial Data Schedule. (Filed with EDGAR filing only.)
(b) Reports on Form 8-K for Fourth Quarter of Fiscal 1997
-----------------------------------------------------
There were no reports on Form 8-K filed by the Company for the fourth
quarter of fiscal 1997.
(c) Exhibits required by Item 601 of Regulation S-K
-----------------------------------------------
See Subparagraph (a) above.
(d) Financial Statements required by Regulation S-X
-----------------------------------------------
See Subparagraph (a) and (b) above.
- -------------
* Exhibits filed with this report.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Rohr, Inc.:
We have audited the accompanying consolidated balance sheets of Rohr, Inc. and
its subsidiaries as of July 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended July 31, 1997. 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 conducted our audits in accordance with generally accepted audition
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rohr, Inc. and its subsidiaries as
of July 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1997, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements in fiscal 1997,
the Company changed its accounting principle related to long-term contracts and
retroactively restated the fiscal 1996 and 1995 financial statements for the
change.
San Diego, California
September 11, 1997
24
<PAGE>
ROHR, INC., AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1997, 1996, AND 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Charged Balance
Balance at to Costs at
beginning of and Accounts end of
period Expenses written off period
------------ -------- ----------- -------
<S> <C> <C> <C> <C>
Reserve for bad debts:
1997 $13,050 $ -- $(4,700) $ 8,350
1996 12,922 128 -- 13,050
1995 21,422 -- (8,500) 12,922
</TABLE>
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROHR, INC.
(Registrant)
/s/ R. H. RAU
By:______________________________________
R. H. Rau
President and Chief Executive Officer
/s/ L. A. CHAPMAN
By:______________________________________
L. A. Chapman
Senior Vice President and Chief
Financial Officer
/s/ A. L. MAJORS
By:______________________________________
A. L. Majors
Vice President and Controller
(Chief Accounting Officer)
Date: September 15, 1997
26
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W. BARNES
_______________________ Director SEPTEMBER 15, 1997
W. Barnes
/s/ E. E. COVERT
_______________________ Director SEPTEMBER 15, 1997
E. E. Covert
/s/ D. C. CREEL
_______________________ Director SEPTEMBER 15, 1997
D. C. Creel
/s/ S. F. IACOBELLIS
_______________________ Director SEPTEMBER 15, 1997
S. F. Iacobellis
/s/ V. N. MARAFINO
_______________________ Director SEPTEMBER 15, 1997
V. N. Marafino
/s/ D. LARRY MOORE
_______________________ Director SEPTEMBER 15, 1997
D. Larry Moore
/s/ R. M. PRICE
_______________________ Director SEPTEMBER 15, 1997
R. M. Price
/s/ R. H. RAU
_______________________ Director SEPTEMBER 15, 1997
R. H. Rau
/s/ W. P. SOMMERS
_______________________ Director SEPTEMBER 15, 1997
W. P. Sommers
/s/ J. R. WILSON
_______________________ Director SEPTEMBER 15, 1997
J. R. Wilson
</TABLE>
27
<PAGE>
EXHIBIT 4.5.1
FIRST AMENDMENT
TO AMENDED AND RESTATED NOTE AGREEMENT
FIRST AMENDMENT TO AMENDED AND RESTATED NOTE AGREEMENT (this "Amendment"),
dated as of July 31, 1997, among ROHR, INC. (together with its successors, the
"Company"), and each of the holders of Notes whose name appears on the signature
pages hereof (individually, a "Holder" and, collectively, the "Holders").
RECITALS:
WHEREAS, the Company entered into that certain Amended and Restated Note
Agreement (the "Note Agreement"), dated as of January 1, 1996, between the
Company and the purchasers identified on Annex 1 thereto; and
WHEREAS, the Company has requested that the Holders modify certain terms of
the Note Agreement; and
WHEREAS, the Holders are agreeable to such modifications on the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. DEFINITIONS.
Capitalized terms used in this Amendment and not otherwise defined herein
shall have the respective meanings ascribed to them in the Note Agreement.
2. AMENDMENTS.
Subject to the satisfaction of the conditions set forth in paragraph 3
hereof, the Note Agreement shall be amended as set forth below:
2A. Paragraph 6E of the Note Agreement shall be amended as follows:
(i) The "." at the end of subparagraph (iii) thereof shall be deleted
and replaced with the term "; less", and
(ii) New subparagraphs (iv)and (v) shall be added thereto in
appropriate numerical order as follows:
"(iv) an amount equal, on an after tax basis, to the provisions
and charges established
1
<PAGE>
by the Company at one time in fiscal 1998 or earlier in connection
with the MD-90 program, assuming a forty percent (40%) effective tax
rate, such amount not to exceed Forty Eight Million Dollars
($48,000,000); less
"(v) an amount equal, on an after tax basis, to the
provisions and charges established by the Company at one time in
fiscal 1998 or earlier in connection with the cessation of the use of
the program method of accounting, assuming a forty percent (40%)
effect tax rate, such amount not to exceed Forty Two Million Dollars
($42,000,000)."
2B. Paragraph 10B of the Note Agreement shall be amended by adding to
subparagraph (ii) of the definition of "Consolidated Net Income Available for
Fixed Charges" the following clauses in appropriate alphabetical order:
"(i) the provisions and charges, if any, not in excess of Eighty
Million Dollars ($80,000,000), established by the Company at one time in
fiscal 1998 or earlier in connection with the MD-90 program; and
(j) the provisions and charges, if any, not in excess of Seventy
Million Dollars ($70,000,000), established by the Company at one time in
fiscal 1998 or earlier in connection with the cessation of the use of the
program method of accounting."
2C. The first sentence of paragraph 11F of the Note Agreement shall be
amended and restated to read as follows:
"All accounting terms not specifically defined herein shall be
construed in accordance with generally accepted accounting principles
consistent with those applied in the preparation of the financial
statements contained in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1997."
3. CONDITIONS TO EFFECTIVENESS.
The amendments set forth in Paragraph 2 shall become effective only upon
the satisfaction in all respects of the conditions set forth below (the date on
which such conditions are so satisfied being the "Effective Date"):
3A. The Required Holders and the Company shall have caused this Amendment
to be executed and delivered on their behalf by duly authorized officers thereof
and the Note Agreement, as amended hereby, shall be in full force and effect.
2
<PAGE>
3B. Sections XVII (j) and (k) of the Sublease Agreement, dated as of
September 14, 1992, between the Company and State Street Bank and Trust Company
of California, National Association, and an individual trustee, not in their
individual capacities but solely as owner trustees under a trust for the benefit
of General Electric Capital Corporation, as amended through the date hereof,
shall have been amended, in substance and effect, in the same manner as set
forth in paragraphs 2A, 2B and 2C hereof, and each of the Holders shall have
received a copy of such amendment.
3C. The Company shall have paid all amounts which are payable pursuant to
paragraph 4 hereof.
4. COSTS AND EXPENSES.
Whether or not the conditions to effectiveness set forth in paragraph 3 of
this Amendment are satisfied, the Company shall pay all out-of-pocket expenses
of the Holders in connection with the negotiation, preparation, execution and
delivery of this Amendment, including, without limitation, all the fees and
expenses of special counsel engaged by the Holders in connection therewith.
Without limiting the generality of the foregoing, the Company will pay, on the
Effective Date, the reasonable fees and disbursements of the Holders' special
counsel presented on such date, and shall also pay, upon receipt of any
statement thereof, each additional statement for reasonable fees and
disbursements of the Holders' special counsel rendered after the Effective Date
in connection with this Amendment.
5. MISCELLANEOUS.
5A. All provisions of this Amendment by or for the benefit of the parties
hereto shall bind and inure to the benefit of their respective successors and
assigns hereunder.
5B. This Amendment may be executed in one or more counterparts, all of
which taken together shall constitute a single instrument.
5C. THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND
THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE
OF NEW YORK.
5D. Except as expressly provided herein, (i) no other terms and provisions
of the Note Agreement shall be modified or changed by this Amendment and (ii)
the terms and provisions of the Note Agreement shall continue in full force and
effect. The Company hereby acknowledges and reaffirms all of its obligations
and duties under the Note
3
<PAGE>
Agreement, as amended by this Amendment, and under the notes, as amended to
date, issued thereunder.
5E. Any provision of this Amendment which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
fist above written.
ROHR, INC.
By:/s/ Ken Scholz
--------------
Name: Ken Scholz
Title: Treasurer
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By: /s/ Warren Shank
----------------
Name: Warren Shank
Title: Counsel
By: /s/ Fredrick A. Bell
--------------------
Name: Fredrick A. Bell
Title: Second Vice
President - Securities
Investment
4
<PAGE>
EXHIBIT 10.15.10
SEVENTH AMENDMENT AGREEMENT
This Seventh Amendment Agreement (this "Amendment"), dated as of July
18, 1997, is entered into by Rohr, Inc., a Delaware corporation ("Rohr), State
Street Bank and Trust Company of California, National Association, a national
banking association, not in an individual capacity but solely as owner trustee
("Trustee"), and General Electric Capital Corporation ("GE Capital").
WITNESSETH:
WHEREAS, Rohr is a party to a Sublease Agreement, dated as of
September 14, 1992, with the Trustee and an individual trustee, as owner
trustees under that certain Trust Agreement for the benefit of GE Capital (such
Sublease Agreement as amended to date, being hereinafter referred to as the "GE
Capital Sublease"); and
WHEREAS, Rohr has requested that the GE Capital Sublease be modified;
NOW, THEREFORE, for and in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Amendment to GE Capital Sublease. The GE Capital Sublease is
--------------------------------
amended as follows:
(a) The definition of "Net Income Available For Fixed Charges" in
Section 1.01 of the Credit Agreement, dated as of April 26, 1989,
among Sublessee, the Lenders parties thereto and Citicorp USA, Inc.,
as agent (as in effect on January 19, 1996, after giving effect to
the Eleventh Amendment thereto dated as of January 19, 1996; the
"Credit Agreement), incorporated by Section XVII (j) into the GE
Capital Sublease, is amended and restated to read as follows:
'Net Income Available for Fixed Charges' means, for any
----------------------------------------
period, net income (or net deficit, as the case may be) before taxes
for such period, as determined in accordance with generally accepted
accounting principles consistent with those applied in the
preparation of the financial statements referred to in Section
4.01(e), plus amounts which, in the determination of net income for
such period, have been deducted for (i) the items referred to in the
definition of "Fixed Charges" in this Section 1.01, (ii)
depreciation, (iii) in the case of any such period that includes the
month of April 1992, the $50,000,000
1
<PAGE>
special provision which was established by the Borrower in the third
quarter of Fiscal Year 1992, (iv) in the case of any such period that
includes the fiscal month ending May 2, 1993 (A) the cumulative
effect through May 2, 1993 of the accounting changes adopted by the
Borrower, effective as of August 1, l992, as described in the
Borrower's Form 10-Q filed with the Securities and Exchange
Commission for third Fiscal Quarter 1993, and (B) the provisions and
charges, not in excess of $38 million in the aggregate, established
by the Borrower in the third Fiscal Quarter of Fiscal Year 1993, (v)
non-cash expenses, in an amount not to exceed $10 million in the
aggregate from November 1, 1995 through the Termination Date, that
are incurred by Borrower in connection with one or more exchanges by
Borrower of shares of its common stock for all or any portion of
Borrower's Convertible Subordinated Notes due 2004 or Borrower's
Convertible Subordinated Debentures due 2012, (vi) non-cash expenses,
in an amount not to exceed Six Million Dollars ($6,000,000), incurred
by the Borrower in connection with the sale of Rohr Credit
Corporation, (vii) the provisions and charges, not in excess of
Eighty Million Dollars ($80,000,000), established by the Company at
one time in fiscal 1998 or earlier in connection with the MD-90
program, and (viii) the provisions and charges, not in excess of
Seventy Million Dollars ($70,000,000), established by the Company at
one time in fiscal 1998 or earlier in connection with the cessation
of the use of the program method of accounting.
(b) The provisions of Sections 5.01(c) of the Credit Agreement,
incorporated by Section XVII (j) into the GE Capital Sublease, are amended
by adding the following clauses to the end thereof:
less, (iv) an amount equal, on an after tax basis, to the
----
provisions and charges established by the Company at one time in
fiscal 1998 or earlier in connection with the MD-90 program,
assuming a forty percent (40%) effective tax rate, such amount
not to exceed Forty Eight Million Dollars ($48,000,000); less,
----
(v) an amount equal, on an after tax basis, to the provisions and
charges established by the Company at one time in fiscal 1998 or
earlier in connection with the cessation of the use of the
program method of accounting, assuming a forty percent (40%)
effective tax rate, such amount not to exceed Forty Two Million
Dollars ($42,000,000).
(c) The first sentence of Section XVII (k) into the GE
Capital Sublease, is amended and restated to read as follows:
2
<PAGE>
"With respect to the provisions incorporated herein pursuant
to the provisions of Section XVII(j), all accounting terms not
defined herein or therein shall be construed in accordance with
generally accepted accounting principles consistent with those
applied in the preparation of the financial statements contained
in the Sublessee's Annual Report on Form 10-K for the fiscal year
ended July 31, 1997."
2. Jury Trial Waiver. EACH OF THE PARTIES HERETO HEREBY
-----------------
UNCONDITIONALLY WAIVES THEIR RESPECTIVE RIGHT TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS
AMENDMENT, ANY DEALINGS AMONG ANY OF THEM RELATING TO THE SUBJECT MATTER HEREOF,
AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED AMONG THEM. THE SCOPE OF THIS
WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE
FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS). THIS
WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN
WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS AMENDMENT. IN THE EVENT OF LITIGATION,
THIS AMENDMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
3. Direction to Trustee. GE Capital hereby joins in this Amendment
--------------------
to acknowledge its consent to the terms and provisions hereof and to direct the
Trustee to enter into this Amendment and any other agreements, instruments and
documents to be executed in connection herewith in its capacity as owner
trustee.
4. Expenses. Rohr agrees to pay all reasonable costs and expenses of
--------
the Trustee and GE Capital in connection with the preparation, execution,
delivery and enforcement of this Amendment and any other agreements, instruments
and documents executed in connection herewith.
5. Further Assurances. Each of the parties hereto agrees that at any
------------------
time it shall execute and deliver all further instruments and documents, and
take all further action, in order to effectuate or otherwise document the
transactions contemplated hereby or otherwise implement the intention of the
parties under this Amendment, as any of the parties hereto and their successors
and assigns reasonably may request.
6. Further Modifications. NO VARIATION OR MODIFICATION OF THIS
---------------------
AMENDMENT OR ANY WAIVER OF ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID
UNLESS IN WRITING AND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF EACH OF THE
PARTIES HERETO.
3
<PAGE>
7. Multiple Counterparts. This Amendment may be executed in two or
---------------------
more counterparts, each of which shall be deemed to be an original as against
any party whose signature appears thereon, and all of which shall constitute one
and the same instrument.
8. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective, as of the date first written above, when it has been executed and
delivered by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized representatives as of the date first above
written.
Rohr, Inc. State Street Bank and Trust Company of
California, National Association, not in its
individual capacity but solely as Corporate
Trustee
By: /s/ By: /s/
Name: Kenneth W. Scholz Name: Scott C. Emmons
Title: Treasurer Title: Assistant Vice President
General Electric Capital Corporation
By: /s/
Name: Moira Duncan
Title: Region Credit Analyst
4
<PAGE>
Exhibit 11.1
ROHR, INC., AND SUBSIDIARIES
CALCULATION OF PRIMARY NET INCOME PER SHARE OF COMMON STOCK
(in thousands except per share data)
<TABLE>
<CAPTION>
Year ended July 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------- ---------- ---------- ---------- ----------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Net income (loss) from continuing operations before cumulative
effect of accounting changes ($3,368) $22,278 $20,211 $23,341 ($26,488)
Income (loss) from discontinued operations, net of taxes 3,879 2,259 (6,324)
Loss from extraordinary item, net of taxes (2,654) (1,146)
Cumulative effect of accounting changes -- net of taxes (223,950)
------- ------- ------- ------- ---------
Net income (loss) applicable to primary earnings per common
share ($6,022) $22,278 $22,944 $25,600 ($256,762)
======= ======= ======= ======= =========
Common stock and common stock equivalents:
Average shares of common stock outstanding during the year 24,567 20,157 18,055 18,017 17,908
Net effect of common stock equivalents (principally stock
options and rights) 900 657 158 45 1
------- ------- ------- ------- ---------
Total common stock and common stock equivalents 25,467 20,814 18,213 18,062 17,909
======= ======= ======= ======= =========
Net income (loss) per average share of common stock:
Net income (loss) from continuing operations before
cumulative effect of accounting changes ($0.13) $1.07 $1.11 $1.29 (1.48)
Income (loss) from discontinued operations, net of taxes 0.21 0.12 (0.36)
Extraordinary item, net of taxes (0.11) (0.06)
Cumulative effect of accounting changes -- net of taxes (12.50)
------- ------- ------- ------- ---------
Primary net income (loss) per share ($0.24) $1.07 $1.26 $1.41 ($14.34)
======= ======= ======= ======= =========
</TABLE>
<PAGE>
Exhibit 11.2
ROHR, INC., AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED NET INCOME PER SHARE OF COMMON STOCK
(in thousands except per share data)
<TABLE>
<CAPTION>
Year ended July 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ---------- ---------- ---------- ---------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Net income (loss) from continuing
operations before cumulative effect
of accounting changes applicable to primary
earnings per common share ($3,368) $22,278 $20,211 $23,341 ($26,488)
Add back interest and issue expense on
convertible debentures, net of tax
adjustment 961 1,856 2,720 5,477 4,941
-------- ------- ------- ------- ---------
Adjusted income (loss) from continuing
operations before cumulative effect
of accounting changes applicable to
common stock on a fully diluted basis (2,407) 24,134 22,931 28,818 (21,547)
Income (loss) from discontinued operations,
net of taxes 3,879 2,259 (6,324)
Loss from extraordinary item, net of taxes (2,654) (1,146)
Cumulative effect of accounting changes -
net of taxes (223,950)
-------- ------- ------- ------- ---------
Net income (loss) applicable to fully
diluted earnings per share ($5,061) $24,134 $25,664 $31,077 ($251,821)
======= ======= ======= ======= =========
Average number of shares outstanding on a
fully diluted basis:
Shares used in calculating primary
earnings per share 25,467 20,814 18,213 18,062 17,909
Unexercised options 259 280 375
Shares on conversion of 7.00% debentures 2,674 2,674
Shares on conversion of 7.75% debentures 1,903 1,905 5,556 1,157
-------- ------- ------- ------- ---------
Average number of shares outstanding on a
fully diluted basis 27,629 22,999 24,144 21,893 20,583
======= ======= ======= ======= =========
Fully diluted net income (loss) per common
share before extraordinary item and cumulative
effect of accounting changes ($0.09) $1.05 $0.95 $1.32 ($1.04)
Income (loss) from discontinued operations,
net of taxes 0.16 0.10 (0.31)
Extraordinary item, net of taxes (0.09) (0.05)
Loss from cumulative effect of accounting
changes - net of taxes (10.88)
------- ------- ------- ------- ---------
Fully diluted net income (loss) per
average common share ($0.18) $1.05 $1.06 $1.42 ($12.23)
======= ======= ======= ======= =========
</TABLE>
Note:
The fully diluted net income (loss) per average share for the twelve months
ended July 31, 1996 and 1995, excludes the assumed conversion of those
securities that results in improvement of earnings per share. The assumed
conversion of the convertible debentures for prior years were antidilutive,
hence primary earnings per share are presented for these periods in the
Company's Consolidated Statement of Earnings.
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following discussion and analysis presents management's assessment of
material developments affecting the Company's results of operations, liquidity,
and capital resources for each of the three years in the period ended July 31,
1997. Years prior to 1997 have been restated for the effects of the accounting
change, as described below. These discussions should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.
Industry Outlook
Commercial aircraft orders rose dramatically in calendar 1996 and have
continued at a strong pace in calendar 1997. In the first seven months of
calendar 1997, airlines ordered 460 new commercial aircraft (seating 70 or more
passengers), compared to a full years orders of 1,113 in 1996 and 662 in 1995.
Analysts expect commercial aircraft manufacturers to deliver approximately 600
aircraft in 1997, compared to 440 in 1996 and 443 in 1995. Based on production
rate increases recently announced by The Boeing Company and Airbus Industrie and
their respective order books, the Company expects commercial aircraft deliveries
to increase.
Orders for commercial aircraft are based in large part on consumer demand for
air travel and the financial condition of airline operators. Over the last
several years, airline passenger traffic has increased over 6 percent per year
on average and airline analysts expect that traffic will grow approximately 5
percent per year for the next 20 years. As a result, airlines are expected to
expand their fleets to meet the increased demand for travel. In addition,
airline operators are expected to purchase large numbers of aircraft in the next
five years to meet existing aircraft noise regulations and to replace aging
aircraft in their fleets. There are approximately 3,000 Stage Two aircraft in
operation throughout the world, many of which must be replaced or modified to
Stage Three noise requirements by 1999 in the United States and by mid-2002 in
most other developed countries.
Historically, the financial condition of airlines and their demand for new
aircraft has been related to the health of the world economies. Healthy world
economies, increases in demand for air travel, relatively stable fare
structures, aggressive cost reductions, increased load factors, and improved
utilization of aircraft have raised airline profitability to high levels over
the last several years and have enabled airlines to order and purchase new
aircraft.
2
<PAGE>
Overall, the conditions of the market suggest that the commercial aircraft
industry is strong and poised for continued expansion.
Material and component shortages have been noted as an increasing problem
throughout the industry, as the rate of production of commercial aircraft has
rapidly accelerated. The Company has also encountered shortages and has taken
various steps to minimize the impact on its operations.
Company Outlook
As a result of increased production of new commercial aircraft and increased
deliveries of spare parts, the Company's sales increased 23 percent in fiscal
1997 as compared with the prior year. Predicated upon customer scheduled
delivery requirements, the Company expects its sales in fiscal 1998 to be
approximately 15 percent higher than in fiscal 1997.
The Company continued to realize improved efficiency in its manufacturing
processes, maintained its existing level of general and administrative expenses
in spite of the growth in sales, participated in new programs, and expanded its
level of support in the overhaul and repair market by opening a new repair
facility in Prestwick, Scotland. In addition, the Company improved its capital
structure by reducing debt and by contributing common stock and cash to fully
fund its pension plans. These activities are expected to strengthen the Company
to meet the growth in the industry and the future challenges and opportunities.
Management continues to focus on reducing cost and improving quality. For
example, the Company has implemented concurrent product development and is
continuing to implement its lean manufacturing initiative. Lean manufacturing
is a focused attack on non-value-added steps in the manufacturing process. Lean
enterprise techniques involve defining the value stream for each product and
eliminating the unnecessary steps from every value stream.
The Company's firm backlog, which includes the sales price of all undelivered
units covered by customers' orders, was approximately $1.5 billion at July 31,
1997, compared to $1.2 billion at July 31, 1996. Approximately $950 million of
the $1.5 billion backlog is scheduled to be delivered in fiscal 1998. (Sales
during any period includes sales which were not part of backlog at the end of
the prior period.) Customer orders in firm backlog are subject to rescheduling
and/or termination for customer convenience; however, in certain cases, the
Company is entitled to an adjustment in contract amounts.
3
<PAGE>
Forward-Looking Information Is Subject to Risk and Uncertainty
This document includes forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995, that involve risk and uncertainty.
Actual sales in fiscal year 1998 may be materially less than the sales projected
in the "Company Outlook" section if the Company's customers cancel or delay
current orders or reduce the rate at which the Company is building or expects to
build products for such customers. Such cancellations, delays or reductions may
occur if there is a substantial change in the health of the airline industry or
in the general economy, or if a customer were to experience major financial
difficulties. In addition, capital expenditures may exceed those projected in
the "Liquidity and Capital Resources" section if the Company obtains significant
new business.
4
<PAGE>
Results of Operations
Change in Accounting
In the fourth quarter of fiscal 1997, the Company changed its accounting
principle related to long-term programs and contracts and restated its
historical results to reflect the application of the changed principle. The
change eliminated the use of program accounting so that all current and future
programs will be accounted for under the contract method of accounting as
described in "Notes to the Consolidated Financial Statements - Note 1." Prior
to the change, approximately half of the Company's revenues were accounted for
under the program method of accounting and approximately half were accounted for
under the contract method of accounting. Under contract accounting, the Company
accounts for the direct sale of spare parts to airlines separately from the sale
of production units. Previously, on programs that were accounted for under the
program method of accounting, the Company combined the estimated costs and
revenues associated with a program's production units and spare parts into a
single profit center.
While the Company's previous method of accounting was in accordance with
generally accepted accounting principles, the Company believes that the new
principle is preferable. By accounting for spare parts sales separately from
long-term production contracts, the amount of deferred costs included in
inventory has been reduced. The change will also decrease the significance of
the projections used in calculating the Company's financial results by
eliminating the need to project spare parts sales into the future. Instead,
spare parts sales will be accounted for as they occur and will not be aggregated
with the costs and expenses of multi-year production contracts. In addition,
under the changed principle, the Company's financial results will more clearly
reflect its current operating activities and cash flow. The Company also
believes that the change in accounting principle will enhance internal
accountability by allowing the Company to emphasize internal responsibility for
production and spare parts profitability.
The effect of this change in accounting for the periods through July 31, 1996,
was a charge of $59.6 million, net of income tax benefits of $40.0 million. In
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," prior year financial statements have been restated to reflect this
change on a retroactive basis. The effect of the change on fiscal 1997 results
was to increase operating income by $15.1 million (composed of $25.5 million of
additional operating income less $10.4 million of additional loss on the MD-90
contract, in each case arising from the change in accounting). The effect of
the change in accounting on fiscal 1997 net income was to increase net income by
$9.0 million, or 35 cents per share (composed of $15.3 million, or 60 cents per
share, of additional net income less $6.3 million, or 25 cents per share,
arising from the additional loss on the
5
<PAGE>
MD-90 program). The total impact on fiscal 1996 and fiscal 1995 was to increase
net income by $19.1 million (92 cents per share) and $11.7 million (64 cents per
share), respectively.
The discussion in the remainder of "Results of Operations" reflects the impact
of the accounting change.
Fiscal 1997 Compared to Fiscal 1996
Fiscal 1996 has been restated to reflect the accounting change made during the
fourth quarter of fiscal 1997. See "Notes to Consolidated Financial Statements
- - Note 2."
Fiscal 1997 sales increased 23 percent to $944.4 million, up from $770.8
million in the prior fiscal year. Contributing to increased sales were
accelerated delivery rates on most commercial programs. The A340, MD-90, CFM56-
5, and RB211-535 programs all reflected significant increases in sales.
The Company reported an operating profit of $34.4 million, an operating margin
of 3.6 percent for fiscal 1997 as compared with operating profit of $88.6
million, an operating margin of 11.5 percent for fiscal 1996. Fiscal 1997
operating results were favorably impacted by the effects of the change in
accounting principle described above, and adversely impacted by the recognition
of a $84.5 million loss on the MD-90 production contract, as discussed below,
which reduced the fiscal 1997 overall operating margin by 9.0 percent. In
addition, fiscal 1997 results were also negatively impacted by the decision made
earlier in the year (and prior to the recognition of the $84.5 million loss) not
to record profit on the MD-90 production contract, on which profit was
recognized in the prior fiscal year. In fiscal 1997, operating results on other
programs benefited from increased delivery rates and improved operating
efficiencies. Fiscal 1996 operating results were also favorably effected by the
accounting change, but were adversely impacted by one-time charges of $12.4
million, which reduced the operating margin by 1.6 percent. This $12.4 million
represented a loss on the sale of an aircraft leasing subsidiary and an
impairment write-down on the Company's Arkadelphia, Arkansas facility to net
realizable value. Operating results will vary from period to period, in part
depending on the amount and mix of direct spare sales and the ratio of direct
spare sales to production sales. Direct spare sales generally carry a higher
margin than production sales.
The Company entered into a contract with International Aero Engines to produce
nacelles for McDonnell Douglas Corporation's ("McDonnell Douglas") MD-90
aircraft in 1990. Under the terms of the contract, the Company agreed to
recover its preproduction costs, and the higher than average production costs
associated with early production shipments, over a specified number of
deliveries. In light of the wide market acceptance of the MD-80 series, which
was the predecessor aircraft, the Company believed sufficient MD-90 aircraft
would be sold to allow it to recover its costs.
6
<PAGE>
Over the last year, however, a series of developments created market
uncertainties regarding future sales of the MD-90 aircraft. The most
significant of these developments included: McDonnell Douglas' termination of
the MD-XX program and the doubts this action raised regarding McDonnell Douglas'
continued presence in the commercial aircraft industry; the decision of several
large airlines that have traditionally operated McDonnell Douglas aircraft to
order aircraft that compete with the MD-90; the announced (and subsequently
completed) acquisition of McDonnell Douglas by The Boeing Company, which
produces a family of competing aircraft; the announcement by Delta Airlines,
launch customer for the MD-90, of its intent to replace its existing fleet of
MD-90s and to seek a business resolution with McDonnell Douglas with respect to
its remaining orders for the aircraft; and the lack of significant MD-90 orders
during the past year.
In recognition of these developments, the Company reduced its estimates of
future MD-90 aircraft deliveries in the second quarter of fiscal 1997 to include
only deliveries which were supported by firm orders, options, and letters of
intent for the aircraft. During the fourth quarter of fiscal 1997, the Company
further reduced its market estimate of future MD-90 sales to existing firm
aircraft orders (excluding firm orders from Delta Airlines). Based on its
reduced estimate of future aircraft deliveries, the Company believes that future
MD-90 sales will not be sufficient to recover its existing contract investment
plus the costs it will be required to spend in the future to complete the
contract. As a result, the Company recognized a $84.5 million operating loss on
the contract in fiscal 1997 (which included a $10.4 million increase in the loss
as a result of the change in accounting). The change in accounting principle
adopted in the fourth quarter of fiscal 1997 resulted in $49.3 million of the
loss being reported in the second quarter of fiscal 1997 and $35.2 million being
reported in the fourth quarter of fiscal 1997. The MD-90 contract accounted for
13.9 percent and 11.2 percent of fiscal 1997 and 1996 sales, respectively.
The McDonnell Douglas MD-95 program is a new 100-passenger aircraft currently
under development. The Company has invested $51.7 million for design and
development costs on the MD-95 contract through July 31, 1997. The Company
anticipates spending approximately $23 million more for preproduction costs
through mid 1999, the aircraft's scheduled Federal Aviation Administration (FAA)
certification date. Most of this remaining $23 million of expenditures will
occur prior to the flight test program, which is scheduled to commence in April
1998. If the contract is canceled 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. To date, McDonnell Douglas has announced 50 firm orders and 50
options from the launch customer, ValuJet.
7
<PAGE>
Net interest expense was $40.1 million in fiscal 1997 compared to $46.0
million for fiscal 1996. Interest expense declined primarily as a result of
reduced debt levels while interest income increased due to a higher level of
invested funds.
Net loss before the extraordinary item, noted below, was $3.4 million or 13
cents per share for fiscal 1997, compared to net income of $22.3 million or
$1.07 per share for fiscal 1996. The loss associated with the MD-90 contract
adversely impacted fiscal 1997 net income by $50.5 million or $1.99 per share.
Fiscal 1996 results were adversely impacted by the charge for the exchange of
the convertible notes, the loss from the sale of an aircraft leasing subsidiary,
and an impairment write-down which, in the aggregate, totaled $10.6 million or
51 cents per share.
Extraordinary Item
In line with the Company's objective of reducing its debt and interest
expense, the Company used existing funds to prepay a significant portion of its
9.33% and 9.35% Senior Notes during the fourth quarter of fiscal 1997. The
premium and certain other expenses associated with the early extinguishment of
this debt have been reported as an extraordinary item. The cost of the
prepayment, net of income tax benefit of $1.8 million, was $2.6 million or 11
cents per share for fiscal 1997. See "Notes to the Consolidated Financial
Statements -- Note 7."
Fiscal 1996 compared to Fiscal 1995
Fiscal 1996 and 1995 have been restated to reflect the accounting change made
during the fourth quarter of fiscal 1997. See "Notes to Consolidated Financial
Statements - Note 2."
Sales declined to $770.8 million in fiscal 1996 from $805.0 million in fiscal
1995. Sales in fiscal 1996 benefited from increased MD-90 deliveries and
approximately $30 million of one-time sales related to Boeing and International
Aero Engines contracts. Overall, sales declined from fiscal 1995 levels
primarily due to delivery rate reductions on the PW4000, RB211-535, and CF6-80C
programs. In addition, government sales declined due to the near completion of
the C-130 and the Titan Space programs.
The Company's operating income for fiscal 1996 was $88.6 million, an operating
margin of 11.5 percent. Fiscal 1996 operating results were adversely impacted
by a $12.4 million loss, which reduced operating margin by 1.6 percent, as a
result of the sale of an aircraft leasing subsidiary and an impairment write-
down on the Company's Arkadelphia, Arkansas facility to estimated net realizable
value. Operating results in fiscal 1995, were $84.2 million, a margin of 10.5
percent. Operating results
8
<PAGE>
in fiscal 1996 were impacted by the change in sales described above, several
one-time items, and the positive settlement of outstanding contract terms on the
IL96 and the A340 contracts, some of which will have a favorable on-going
impact.
During fiscal 1996, the Company negotiated the sale of its aircraft leasing
subsidiary. This subsidiary's principal assets were beneficial interests in two
aircraft (an A300 and a DC-10) on lease through 2003 and 2004, respectively.
The Company recorded a $5.2 million pre-tax loss as a result of this sale, but
retained an interest in the residual value of these assets through which it
could recover additional amounts in the future. The Company also recorded a
receivable in the amount of $20.1 million (collected in fiscal 1997) and a
secured note in the amount of $7.5 million in connection with the sale.
The Company has been reviewing its long-range site strategy and assessing the
facilities necessary to meet its future needs including the potential favorable
operating effect of lean manufacturing. As a result of the review during fiscal
1996, the Company recognized a $7.2 million pre-tax impairment write-down on its
Arkadelphia, Arkansas facility to estimated net realizable value. Many of the
Company's facilities are operating below capacity and the Company intends to
continue to review its site strategy and facilities with respect to its current
and projected needs.
Net interest expense was $46.0 million in fiscal 1996 compared to $50.0
million for fiscal 1995. Interest expense declined primarily due to principal
payments made in the fourth quarter of fiscal 1995 on the Company's 9.33% and
9.35% Senior Notes and the conversion of the Convertible Subordinated Notes, as
discussed below.
During fiscal 1996, the Company exchanged 4.0 million shares of the Company's
common stock for $37.8 million of its 7.75% Convertible Subordinated Notes due
2004. The Convertible Subordinated Notes, of which $19.7 million remained
outstanding at July 31, 1996, are convertible into shares of common stock at a
conversion price of $10.35 per share and are redeemable at the Company's option,
beginning in May 1998, at a price of 104.7 percent, declining to par at
maturity. The shares of common stock issued in the exchanges in excess of the
shares required for conversion were valued at $5.4 million, which was expensed
in fiscal 1996. The value of the additional shares of common stock issued
represents only a portion of the interest expense the Company would have
incurred on the exchanged notes through May 1998, the first date on which the
Company could force conversion by calling the notes for redemption.
9
<PAGE>
Net income from operations for fiscal 1996 was $22.3 million or $1.07 per
share. Fiscal 1996 results were adversely impacted by the charge for the
exchange of the convertible notes, the loss from the sale of an aircraft leasing
subsidiary, and an impairment write-down which, in the aggregate, totaled $10.6
million or 51 cents per share. Fiscal 1995 income from continuing operations
was $20.2 million or $1.11 per share. Fiscal 1995 net income included $3.8
million or 21 cents per share from the discontinuance of the business jet line
of business and a loss associated with the prepayment of debt as described below
of $1.1 million or 6 cents per share.
Discontinued Operations
In the fourth quarter of fiscal 1994, the Company sold and commenced the
transfer of its business jet line of business which was accounted for as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30. The purchase agreement required the Company to manufacture and deliver
certain components and transfer program engineering and tooling tasks which were
substantially completed in fiscal 1995. The business jet line of business sales
were approximately $22.3 million in fiscal 1995. Income from discontinued
operations, net of income tax benefit, was $3.8 million or 21 cents per share
for fiscal 1995. See "Notes to the Consolidated Financial Statements - Note
13."
Extraordinary Item
In line with the objective of reducing its debt and interest expense, the
Company prepaid a portion of its 9.33% and 9.35% Senior Notes during the fourth
quarter of fiscal 1995. The cost associated with the early extinguishment of
this debt has been reported as an extraordinary item. Loss from the
extraordinary item, net of income tax benefit, was $1.1 million or 6 cents per
share for fiscal 1995. See "Notes to the Consolidated Financial Statements -
Note 7."
Liquidity and Capital Resources
The primary factors that affect the Company's liquidity are cash flow from
operations and investment in new programs (which depending upon contract terms
may require significant developmental expenditures and inventory buildup that
may be partially offset through the participation of major subcontractors).
Delivery levels under existing contracts, payment terms with customers, capital
facilities expenditures, debt service, and the timing of defined benefit plan
and federal income tax payments also affect the Company's liquidity and cash
flow.
10
<PAGE>
Over the next several years, the Company expects to increase its investment in
production inventory in connection with increased deliveries on existing
contracts. Additionally, the Company continues to seek business opportunities
which would require future investments. The Company believes that its financial
resources will be adequate to meet its requirements during such period.
The Company is in the process of implementing a new revolving credit agreement
as a replacement to the credit agreement that expired on April 25, 1997. The
Company has engaged two banks as agents and expects to have a satisfactory
credit agreement in place prior to any need for funds from such agreement.
At July 31, 1997, the Company had $43.1 million of cash, cash equivalents, and
short-term investments. Cash provided by operating activities during fiscal
1997 totaled $34.7 million, compared to $7.8 million for the prior fiscal year.
Contributing to the positive cash flow in fiscal 1997 was cash generated from
the higher level of deliveries on mature programs, an increase in spare parts
sales, and several one-time payments received for non-recurring tasks. This was
partially offset by the investment in preproduction costs on the MD-95 contract.
Cash provided by operations is subject to significant variation from period to
period.
Receivables were up $31.8 million to $161.3 million at July 31, 1997. This
increase was primarily due to an increase in sales, customer mix, and the timing
of deliveries.
The Company's net inventories decreased to $227.2 million at July 31, 1997,
from $282.8 million at July 31, 1996. As its contracts mature, the Company's
inventory is declining through amortization of cost over unit deliveries. In
fiscal 1997, preproduction and excess-over-average inventory declined primarily
due to the loss recognized on the MD-90 contract. In addition, preproduction
inventory declined on the A340 contract due to amortization of cost over unit
deliveries. Preproduction inventory increased on the MD-95 contract due to
design and tooling expenditures which are expected to be recovered as units are
delivered. Production inventory increased due to a build up for scheduled
future deliveries. Over the next several years, the Company expects to increase
its investments in inventory in connection with expenditures on new contracts,
increased deliveries on existing contracts, and anticipated new business
opportunities.
Cash flow used in investing activities was $5.5 million in fiscal 1997 compared
to $9.9 million in the prior fiscal year. Included in cash flow from investing
activities in fiscal 1997 was the collection of a note receivable of $20.1
million from the sale of an aircraft leasing subsidiary. Cash of $11.2 million
was used in investing activities for the purchase of short-term investments.
Capital expenditures for property, plant, and equipment totaled $17.1 million
for fiscal 1997, up from $13.0 million for fiscal 1996. Capital expenditures
for property, plant, and equipment are projected to approximate $20 million for
fiscal 1998 and are expected to be financed by internally generated cash flow.
11
<PAGE>
The Company's total financings declined to $483.5 million at July 31, 1997,
compared to $569.2 million at July 31, 1996. Total financings decreased due to
$12.0 million and $8.9 million of scheduled principle payments made during the
year on the Company's 9.35% Senior Notes and 9.33% Senior Notes, respectively.
In line with the Company's objective of reducing debt and interest expense, the
Company used existing funds to make additional voluntary prepayments of $22.4
million on its 9.35% Senior Notes and $34.3 million on its 9.33% Senior Notes.
Total financings at July 31, 1997, included balance sheet debt, a $40.0 million
accounts receivable sales program, and $19.1 million of equipment leases.
The Company's $40 million accounts receivable sales program will begin to
phase-out, as scheduled in October 1997, and is scheduled to be repaid in full
by December 1997. If the Company obtains a substantial amount of new business,
it may seek additional financing which may include a replacement receivable
facility.
The Company has been striving to improve the funding of its defined benefit
pension plans. During fiscal 1997, the Company contributed 2.9 million shares
of common stock valued at $48.0 million and made cash contributions of $10.3
million to its defined benefit pension plans. The plans also benefited from
substantial market gains on plan assets and the use of an increased discount
rate. Reflecting the increase in market interest rates, the Company increased
its pension plan discount rate to 8.25 percent in fiscal 1997, up from the 7.75
percent used for the prior year's valuation. The Company also updated its
mortality rate assumptions which increased the plans' accrued benefit
obligation. Primarily as a result of the Company's contributions to the plan
and market gains, the market value of plan assets exceeded plan benefit
obligations. As a result, the Company was able to reverse the liability and
deferred asset related to the underfunded position and to eliminate a related
$26.4 million charge to shareholders' equity, net of the tax benefit of $17.8
million.
12
<PAGE>
Environmental Matters
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), and under certain analogous state
laws for the cleanup of contamination resulting from past disposal of hazardous
substances at several sites to which the Company, among others, sent such
substances in the past. CERCLA requires the cleanup of sites from which there
has been a release or threatened release of hazardous substances, and authorizes
the Environmental Protection Agency ("EPA") to take any necessary response
actions at such sites, including ordering PRPs to clean up or contribute to the
cleanup of a Superfund site. Courts have interpreted CERCLA to impose strict,
joint, and several liability upon all persons liable for response cost.
In June 1987, the U.S. District Court of Los Angeles, in U.S. et al., vs.
Stringfellow, granted partial summary judgment against the Company and 14 other
defendants on the issue of liability under CERCLA, at the Stringfellow site near
Riverside, California. Subsequently, the State of California was found liable
and an allocation of its responsibility was made. The most recent estimate the
Company has made of its liability, assuming the court order allocating
substantial liability to the State of California is upheld, assuming the 1989
EPA estimate of total cleanup costs is not exceeded (although the EPA cautioned
the actual costs could have a variation of 30 percent less or 50 percent higher
than its estimate), and assuming tentative allocations among the Company and all
other users of the site will approximate the final allocation of aggregate user
liability, shows a Company expenditure ranging from $5 million to $8 million
over and above sums spent to date. However, the Company's estimates further
assume that the EPA selects a final remedial action of moderate technology and
cost, rather than one of several more radical ones previously suggested, but
apparently discarded at this point, by the EPA. Expenditures by the Company for
cleanup of this site during fiscal 1997 were approximately $0.4 million and are
expected to be approximately the same during fiscal 1998. From inception to July
31, 1997, the Company has expended approximately $4.1 million on cleanup costs
for this site. Applicable law provides for continuing liability for future
remedial work beyond existing agreements and consent decrees. The Company has
reached settlement agreements with its primary comprehensive general liability
insurers and has retained the right to file future claims against its excess
carriers. The Company recorded the proceeds from such settlements received from
its carriers as reserves. The Company has not recorded any other amounts with
respect to its rights against its insurers.
The Company is also involved in several other proceedings and investigations
related to waste disposal sites and other environmental matters. It is
difficult to estimate the ultimate level of environmental expenditures for these
various other environmental matters due to a number of uncertainties at this
early stage, including the complexity of the related laws and their
interpretation,
13
<PAGE>
alternative cleanup technologies and methods, insurance, and other recoveries,
and in some cases the extent or uncertainty of the Company's involvement.
Included is the Casmalia waste disposal site wherein, estimated cleanup costs
approximate $70 million, and the Company's share (based on estimated,
respective volumes of discharges into such sites by all generators, all of which
cannot now be known with certainty) could approximate $2.0 million. The Company
does not yet know about the ability of all of the other waste generators using
the Casmalia site to fund their allocable share, and the Company could be found
jointly and severally liable with all waste generators using such site. The
Company has made claims against its insurance carriers for certain of these
items, and has received claims acknowledgment letters reserving the rights of
such carriers. The insurers have alleged or may allege various defenses to
coverage, although no litigation has been commenced.
During the year ended July 31, 1997, the Company expended, for the
environmental items described above and also for other environmental matters
(including environmental protection activities in the normal operation of its
plants), a total of approximately $7.0 million. These expenditures covered
various environmental elements, including hazardous waste treatment and disposal
costs, environmental permits, environmental consultants, fines or donations
(which were not material, either individually or in the aggregate), and
environmental remediation (including Stringfellow), no significant part of which
was capitalized. Assuming the usage of all of these various environmental
elements remains substantially the same for fiscal 1998 as in fiscal 1997, which
the Company anticipates costs for these elements in fiscal 1998 should be
comparable to the current rate of expenditure for fiscal 1997.
Based upon presently available information, the Company believes it has
sufficient reserves and that aggregate costs in relation to all environmental
matters of the Company will not have a material adverse effect on the Company's
financial condition, liquidity, results of operations, or capital expenditures.
Income Taxes
At July 31, 1997, the Company's net deferred tax asset was $130.4 million,
consisting of $112.4 million for federal tax purposes and $18.0 million for
state tax purposes. The ultimate realization of the Company's deferred tax
asset is dependent upon the generation of sufficient future taxable income
during the available federal and state net operating loss ("NOL") carryforward
periods. Management expects that the Company will report a sufficient level of
taxable income prior to the expiration of the NOLs to realize the deferred tax
asset recorded as of July 31, 1997.
14
<PAGE>
The Company's long-term contracts and programs provide the Company
opportunities to generate future taxable income necessary to realize the
deferred tax asset recorded. During the rapid growth cycle in the late 1980s
and early 1990s, the Company made significant investments in new facilities and
in new programs. As programs mature, the Company expects to utilize its
investments, resources, and experience to reduce the cost of production. In
addition, direct sales of spare parts to the airlines are expected to increase
as a program matures. Generally, the Company earns a higher margin on the
direct sales of spare parts to the airlines. Based on tax rates in effect on
July 31, 1997, the Company must generate approximately $340 million of future
taxable income (net of $119 million of taxable income that the Company will
report as a result of the automatic reversal of existing taxable temporary
differences between asset and liability values for financial reporting and
income tax purposes) prior to the expiration of the Company's NOLs in 2004
through 2012 for full realization of the net deferred tax asset.
The availability of the Company's NOLs may be limited under the Tax Reform Act
of 1986 as a result of significant changes that could occur in the ownership of
the Company's stock in the future. Management has considered this factor in
reaching its conclusion that it is "more likely than not" that future taxable
income will be sufficient to realize fully the deferred tax asset reflected on
the balance sheet.
Late in fiscal 1996, the Company received a Revenue Agent's Report ("RAR")
from the Internal Revenue Service in connection with the audit of the Company's
federal income tax returns for fiscal years 1986 through 1989. In the RAR, the
agent challenged the timing of various deductible items, some of which are
significant. The Company is contesting substantially all the proposed
adjustments and believes it will prevail on all material items. The Company
anticipates that any adjustment made to its reported taxable income for the
years under audit will increase the amount of the net operating loss available
for carryback purposes and therefore the audit adjustments will not have a
material adverse impact on the financial position of the Company.
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in thousands)
July 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(restated)
<S> <C> <C>
Assets
Cash and cash equivalents $ 31,881 $ 88,403
Short-term investments 11,190 -
Accounts receivable 161,275 129,523
Inventories:
Work-in-process 264,356 323,715
Raw materials, purchased parts, and supplies 22,909 26,220
Less customers' progress payments and advances (60,066) (67,165)
- --------------------------------------------------------------------------------
Inventories - net 227,199 282,770
Deferred tax asset 45,998 -
Prepaid expenses and other current assets 12,315 14,587
- --------------------------------------------------------------------------------
Total Current Assets 489,858 515,283
Property, Plant, and Equipment - Net 188,764 196,052
Deferred Tax Asset 84,358 156,863
Prepaid Pension Costs 84,386 -
Other Assets 36,612 64,742
- --------------------------------------------------------------------------------
$883,978 $932,940
================================================================================
Liabilities and Shareholders' Equity
Trade accounts and other payables $138,342 $125,974
Salaries, wages, and benefits 38,197 44,094
Deferred tax liability - 16,213
Short-term debt and current portion of long-term debt 12,928 25,962
- --------------------------------------------------------------------------------
Total Current Liabilities 189,467 212,243
Long-Term Debt 411,467 481,481
Pension and Post-Retirement Obligations - Long-term 20,449 46,096
Other Obligations 16,315 17,503
Commitments and Contingencies (Note 8)
Shareholders' Equity:
Preferred stock, $1 par value per share,
10 million shares authorized, none issued - -
Common stock, $1 par value per share,
authorized 50,000,000 shares; issued and
outstanding 25,329,725 and 22,329,793 shares,
respectively 25,330 22,330
Additional paid-in capital 189,910 142,656
Retained earnings 31,040 37,062
Minimum pension liability adjustment - (26,431)
- --------------------------------------------------------------------------------
Total Shareholders' Equity 246,280 175,617
- --------------------------------------------------------------------------------
$883,978 $932,940
================================================================================
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share data)
Year ended July 31,
- -------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C> <C>
Sales $944,357 $770,814 $805,000
Costs and Expenses 797,691 642,614 694,576
Charge for MD-90 Contract (Note 12) 84,541 - -
Loss on Sale of Aircraft Leasing Subsidiary and
Impairment Write-down (Note 12) - 12,395 -
General and Administrative Expenses 27,704 27,233 26,198
- -------------------------------------------------------------------------------------------------------
Operating Income 34,421 88,572 84,226
Interest Income 4,509 2,735 4,015
Interest Expense 44,562 48,702 54,001
Charge for Exchange of Convertible Notes (Note 7) - 5,350 -
- -------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Taxes (Benefit) on Income (5,632) 37,255 34,240
Taxes (Benefit) on Income (2,264) 14,977 14,029
- -------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (3,368) 22,278 20,211
Income from Discontinued Operations -
Net of Taxes (Note 13) - - 3,879
- -------------------------------------------------------------------------------------------------------
Income (Loss) before Extraordinary Item (3,368) 22,278 24,090
Loss from Extraordinary Item - Net of Taxes (Note 7) (2,654) - (1,146)
- -------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (6,022) $ 22,278 $ 22,944
=======================================================================================================
Primary Earnings (Loss) Per Average Share
of Common Stock from:
Continuing Operations $ (0.13) $ 1.07 $ 1.11
Discontinued Operations - - 0.21
Extraordinary Item (0.11) - (0.06)
- -------------------------------------------------------------------------------------------------------
Net Primary Earnings (Loss) Per Average Share $ (0.24) $ 1.07 $ 1.26
=======================================================================================================
Fully Diluted Earnings (Loss) Per Average Share
of Common Stock from:
Continuing Operations $ (0.13) $ 1.05 $ 0.95
Discontinued Operations - - 0.16
Extraordinary Item (0.11) - (0.05)
- -------------------------------------------------------------------------------------------------------
Net Fully Diluted Earnings (Loss) Per Average Share $ (0.24) $ 1.05 $ 1.06
=======================================================================================================
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Minimum Pension
Par Value Paid-In Retained Liability
$1 per Share Capital Earnings Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at July 31, 1994 as previously reported $18,042 $102,598 $ 82,168 $(55,899)
Change in accounting (Note 2) - - (90,328) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994 (restated) 18,042 102,598 (8,160) (55,899)
Stock plans activity 26 289 - -
Net Income - - 22,944 -
Minimum pension liability adjustment (Note 9) - - - 17,481
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 (restated) 18,068 102,887 14,784 (38,418)
Stock plans activity 253 1,472 - -
Conversion of 7.75% Convertible Subordinated Notes 4,009 38,297 - -
Net Income - - 22,278 -
Minimum pension liability adjustment (Note 9) - - - 11,987
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996 (restated) 22,330 142,656 37,062 (26,431)
Stock plans activity 133 2,621 - -
Pension retirement contribution 2,867 44,633 - -
Net Loss - - (6,022) -
Minimum pension liability adjustment (Note 9) - - - 26,431
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 $25,330 $189,910 $ 31,040 $ -
====================================================================================================================================
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Year ended July 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ (6,022) $ 22,278 $ 22,944
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 21,751 21,442 22,148
Loss on sale of subsidiary and impairment write-down - 12,395 -
Charge for exchange of 7.75% Convertible Notes - 5,350 -
Changes due to (increase) decrease in operating assets:
Accounts receivable (51,894) (50,729) 29,059
Inventories - net 55,571 (23,949) (41,631)
Prepaid expenses and other assets 3,241 (28) 5,291
Changes due to increase (decrease) in operating liabilities:
Trade accounts, salaries and wages, and other payables 16,252 13,186 (10,206)
Pension and post-retirement obligations 993 (8,544) (26,642)
Deferred taxes (4,732) 14,541 16,211
Other (426) 1,895 10,373
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 34,734 7,837 27,547
- -----------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sale of aircraft leasing subsidiary 20,142 - -
Purchase of property, plant, and equipment (17,124) (13,029) (8,135)
Sale (purchase) of short-term investments (11,190) - 17,568
Proceeds from sale of assets 2,480 2,905 -
Repurchase of sale-leaseback transactions - - (21,782)
Net advances on discontinued operations - - (5,045)
Other 148 269 1,280
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,544) (9,855) (16,114)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Annual principal payment of 9.33% and 9.35% Senior Notes (20,875) (12,025) (12,500)
Net prepayment of 9.33% and 9.35% Senior Notes (59,324) - (22,481)
Net short-term borrowings (3,615) 3,615 -
Repayment of other long-term borrowings (858) (1,678) (2,323)
Reduction in sales of receivable sales program - - (20,000)
Cash collateral for receivable sales program - 13,500 13,003
Long-term borrowings - 1,106 -
Other (1,040) 1,319 1,456
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (85,712) 5,837 (42,845)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (56,522) 3,819 (31,412)
Cash and Cash Equivalents, Beginning of Year 88,403 84,584 115,996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 31,881 $ 88,403 $84,584
===================================================================================================================================
Supplemental Cash Flow Information:
Cash Paid (Received) During the Year for:
Interest, net of amount capitalized $ 44,821 $ 48,436 $ 52,010
Income taxes 565 367 (1,958)
Non-Cash Investing and Financing Activities
Aircraft leasing subsidiary sold for notes receivable (Note 12) - 27,594 -
Exchange of 7.75% Convertible Notes - (37,780) -
Change in equity due to exchange of 7.75% Convertible Notes - 43,130 -
Stock contributions to pension plans 48,000 - -
====================================================================================================================================
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
19
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
a. Principles of consolidation
The consolidated statements include the accounts of Rohr, Inc. and all
subsidiaries ("Company"). Total assets and sales of foreign subsidiaries are
not significant.
Certain reclassifications have been made to prior years to conform to current
year presentation.
b. 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 reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. On an ongoing basis, predicated
upon information then available, management reviews and updates its estimates to
reflect changes in facts and circumstances including those related to
inventories and contracts along with litigation, taxes, environmental, pensions,
and other matters.
c. Sales and operating income
The Company's sales are primarily under fixed-priced contracts, many of which
contain escalation clauses, requiring delivery of products over several years
and frequently provide 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.
As discussed in Note 2, following the change in accounting made in the fourth
quarter of fiscal 1997, the Company follows the guidelines of Statement of
Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" (the contract method of accounting) for commercial
and governmental contracts, 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 by the Company under the
reallocation method rather than the cumulative catch-up method.
20
<PAGE>
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. A constant contract margin is achieved by
deferring or accelerating a portion of the average unit cost on each unit
delivered. 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. Any anticipated losses on contracts and overruns of preproduction
costs are charged to earnings when identified.
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.
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 in Note 1d.
21
<PAGE>
d. Inventories
Inventories of raw materials, purchased parts, and supplies are stated at the
lower of average cost or estimated realizable value. Inventoried costs on long-
term contracts include certain preproduction costs, consisting primarily of
tooling and design costs, and production costs, including applicable overhead.
As the production costs for early units are charged to work-in-process inventory
at an actual unit cost in excess of the estimated average cost for all units
projected to be delivered over the entire contract, a segment of inventory
described as the excess of production costs over estimated average unit cost
(and referred to as excess-over-average inventory) is created. Generally,
excess-over-average inventory, which may include production (but not
preproduction) cost overruns, builds during the early years of the contract when
the efficiencies resulting from learning are not yet fully realized and declines
as the contract matures. Under the learning curve concept, an estimated
decrease in unit labor hours is assumed as tasks and production techniques
become more efficient through repetition of the same manufacturing operation and
through management action such as simplifying product design, improving tooling,
purchasing new capital equipment, improving manufacturing techniques, etc.
Inventoried costs are reduced by the estimated average cost of deliveries
computed as a uniform percentage of sales value.
In the event that work-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 is not expected
to be realized within one year.
e. Property, plant, and equipment
Property, plant, and equipment is recorded at cost or, in the case of assets
under capital leases, the lower of the present value of minimum lease payments
or fair market value. Depreciation and amortization is computed by the
straight-line method over the estimated useful lives of the various classes of
assets or, in the case of capitalized leased assets, over the lease term if
shorter.
The Company periodically assesses its ability to recover the carrying value of
its long-lived assets. If management concludes that the carrying value will not
be recovered, an impairment write-down is recorded to reduce the asset to its
estimated fair value (see Note 12).
22
<PAGE>
f. Pension
Pension costs include current costs plus the amortization of transition assets
over periods up to 14 years. The Company funds pension costs in accordance with
plan and legal requirements.
g. Research and development, general and administrative expenses
Research and development costs incurred for the development of proprietary
products (which have not been material to operations during the periods
presented) and general and administrative expenses are charged to operating
income as incurred. Design efforts performed under contract generally consist
of the adaptation of an existing capability to a particular customer need and
are accounted for as an element of contract costs.
h. Income taxes
Deferred tax assets and liabilities are recognized based upon temporary
differences between financial statement and tax bases of assets and liabilities
using presently enacted tax rates (see Note 6).
i. Net income per average share of common stock
Primary earnings per share was determined by dividing net income by the
weighted average number of common shares and common share equivalents (stock
options and warrants) outstanding during the year. Fully diluted earnings per
share reflect the maximum dilution of per share earnings, if applicable, which
would have occurred if the convertible notes and debentures of the Company which
are dilutive had been converted as of the beginning of the period.
j. Cash equivalents
For purpose of the statement of cash flows, the Company considers all
investments and highly liquid debt instruments with a maturity of three months
or less at date of purchase to be cash equivalents. Cash equivalents are stated
at cost which approximates market.
k. Short-term investments
Short-term investments are highly liquid investments with a maturity of 91
days to one year and generally issued by the U.S. Treasury, federal agencies,
municipalities, banks, and major corporations. Short-term investments are
stated at cost which approximates market.
23
<PAGE>
l. Industry segments
The Company considers itself to operate in one industry segment.
m. New accounting standards
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," requires expanded disclosures of stock-based
compensation arrangements with employees and encourages, but does not require,
compensation cost to be measured based on the fair value of the equity
instrument awarded. Corporations are permitted, and the Company continues, to
apply Accounting Principles Board (APB) Opinion No. 25 with the required
disclosure for the pro forma effect on net income and earnings per share (see
Note 11).
In February 1997, the Financial Accounting Standard Board issued SFAS No. 128
"Earnings per Share." This statement specifies the computation, presentation,
and disclosure requirements for earnings per share for entities with publicly
held common stock. SFAS No. 128 is not in effect for the Company in fiscal
1997, but will be in effect for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company does not expect
the adoption of SFAS No. 128 to have a material effect on its net income per
share.
24
<PAGE>
Note 2 - Change in Accounting
In the fourth quarter of fiscal 1997, the Company changed its accounting
principle related to long-term programs and contracts and restated its
historical results to reflect the application of the new principle. The change
eliminated the use of program accounting so that all current and future programs
will be accounted for under the contract method of accounting as described in
Note 1. Prior to the change, approximately half of the Company's revenues were
accounted for under the program method of accounting and approximately half were
accounted for under the contract method of accounting. Under contract
accounting, the Company accounts for the direct sale of spare parts to airlines
separately from the sale of production units. Previously, on programs that were
accounted for under the program method of accounting, the Company combined the
estimated costs and revenues associated with a program's production units and
spare parts into a single profit center.
While the Company's previous method of accounting was in accordance with
generally accepted accounting principles, the Company believes that the new
principle is preferable. By accounting for spare parts sales separately from
long-term production contracts, the amount of deferred costs included in
inventory has been reduced. The change will also decrease the significance of
the projections used in calculating the Company's financial results by
eliminating the need to project spare parts sales into the future. In addition,
under the changed principle, the Company's financial results will more clearly
reflect its current operating activities and cash flow. The Company also
believes that the change in accounting principle will enhance internal
accountability.
The effect of this change in accounting for the periods through July 31, 1996,
was a charge of $59.6 million, net of income tax benefits of $40.0 million. In
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," prior year financial statements have been restated to reflect this
change on a retroactive basis. The effect of the change on fiscal 1997 results
was to increase operating income by $15.1 million (composed of $25.5 million of
additional operating income less $10.4 million of additional loss on the MD-90
contract, in each case arising from the change in accounting). The effect of
the change in accounting on fiscal 1997 net income was to increase net income by
$9.0 million, or 35 cents per share (composed of $15.3 million, or 60 cents per
share, of additional net income less $6.3 million, or 25 cents per share,
arising from the additional loss on the MD-90 program). The total impact on
fiscal 1996 and fiscal 1995 was to increase net income by $19.1 million (92
cents per share) and $11.7 million (64 cents per share), respectively.
25
<PAGE>
Note 3 - Accounts Receivable
Accounts receivable, which relate primarily to long-term contracts, consist of
the following (in thousands):
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Amount billed $143,710 $ 80,661
Receivable for sale of aircraft leasing subsidiary
(see Note 12) - 20,142
Recoverable costs and accrued profit on
units delivered but not billed 6,090 6,504
Recoverable costs and accrued profit on
progress completed but not billed 30 8,276
Unrecovered costs and estimated profit
subject to future negotiations 11,445 13,940
- --------------------------------------------------------------------------------
$161,275 $129,523
================================================================================
</TABLE>
"Recoverable costs and accrued profit on units delivered but not billed"
represent 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. Of these recoverable costs, $0.4 million is expected
to be billed and collected in the normal course of business beyond one year.
"Recoverable costs and accrued profit on progress completed but not billed"
represent 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"
consist 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 at July 31, 1997, are estimated recoveries on constructive change claims
related to government imposed redefined acceptance criteria on the Grumman F-14
contract, which may not be collected within one year. Management believes that
amounts reflected in the financial statements are reasonable estimates of the
ultimate settlements.
The Company has a $40 million accounts receivable sales program under which it
sells qualified receivables through a subsidiary to a trust on an ongoing basis.
The investors' interests in the trust, net of the cash collateral discussed
below, are reported as a reduction to accounts receivable. The Company's
subsidiary holds the remaining interest in the trust which fluctuates in value
depending upon
26
<PAGE>
the amount of receivables owned by the trust from time to time. The cost
associated with the sale of receivables under the current facility is 7.57
percent per year. These costs, which have been reflected as a reduction in sales
values, were $3.0 million, $3.0 million, and $3.6 million in fiscal 1997, 1996,
and 1995, respectively. The Company's accounts receivable sales program begins
to phase out as scheduled in October 1997 and is scheduled to be repaid in full
by December 1997. If the Company obtains a substantial amount of new business,
it may seek additional financing which may include a replacement receivable
facility.
27
<PAGE>
Sales
The Company's sales to major customers including related program spares,
expressed as a percentage of total sales, during the following periods are
summarized as follows:
<TABLE>
<CAPTION>
Year ended July 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
International Aero Engines 23% 22% 14%
CFM International 17 12 11
The Boeing Company 15 19 17
Airbus Industrie 9 6 6
Rolls-Royce 8 7 13
Pratt & Whitney 7 8 10
General Electric 6 7 7
McDonnell Douglas* 6 7 8
United Technology 1 1 4
Lockheed 0 3 5
Other 8 8 5
================================================================================
</TABLE>
*In August 1997, McDonnell Douglas Corporation was acquired by The Boeing
Company.
Total sales to the U.S. Government (including direct sales and indirect sales
through some of the prime contractors shown above) accounted for 3 percent, 8
percent, and 12 percent of sales from continuing operations in the years ended
July 31, 1997, 1996, and 1995, respectively.
Commercial products sold by the Company to jet engine manufacturers are
ultimately installed on aircraft produced by the major commercial airframe
manufacturers, Airbus Industrie, Boeing, and McDonnell Douglas. Sales to
foreign customers accounted for 42 percent, 39 percent, and 38 percent of total
sales for fiscal 1997, 1996, and 1995, respectively. Of the total sales, 37
percent, 31 percent, and 33 percent, were ultimately delivered to customers in
Europe for fiscal 1997, 1996, and 1995, respectively.
28
<PAGE>
Note 4 - Inventories
Work-in-process inventories as of July 31, 1997, with a detail break-out of
contracts which have significant deferred costs, are summarized as follows (in
thousands, except quantities which are number of aircraft):
<TABLE>
<CAPTION>
Aircraft Order Status (1) Company Order Status Work-in-Process Inventory
------------------------------- ------------------------------------------- -------------------------
(3) (5)
Delivered (2) Firm Fiscal
to Unfilled Unfilled Contract Unfilled Year Pre-
Contract Airlines Orders Options Quantity Delivered Orders Complete Production Production
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A340 (4) 115 69 75 267 124 44 2003 $ 15,760 $ 6,390
PW4000 for the
A300/A310 and
MD-11 (4) 275 19 31 319 288 18 2003 24,490 12,945
GE90 (4) 20 74 24 55 31 24 1998 2,106 10,450
737-700 - 627 1,028 TBD(6) 11 239 TBD(6) 5,755 4,990
MD-95 - 50 50 TBD(6) - 5 TBD(6) 3,828 51,723
Others 91,048 439
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 $142,987 $ 86,937
=================================================================================================================================
Balance at July 31, 1996 $114,349 $151,540
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Work-in-Process Inventory
--------------------------
Excess-
Contract Over-Average Total
- -------------------------------------------------------
<S> <C> <C>
A340 (4) $ - $ 22,150
PW4000 for the
A300/A310 and
MD-11 (4) 30,682 68,117
GE90 (4) - 12,556
737-700 2,273 13,018
MD-95 - 55,551
Others 1,477 92,964
- ------------------------------------------------------
Balance at July 31, 1997 $34,432 $264,356
======================================================
Balance at July 31, 1996 $57,826 $323,715
======================================================
</TABLE>
(1) Represents the aircraft order status as reported by Airclaims and/or other
sources the Company believes 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 fiscal year in which the final production
units included in the contract quantity will be delivered. The contract may
continue in effect beyond this date.
(6) "To Be Determined" - New contracts on which the amortization quantity is yet
to be determined.
Contractual terms on certain contracts provide varying levels of recovery
commitments often over a specified number of deliveries for specified amounts of
costs (primarily tooling and design). The number of deliveries over which
production costs are to be amortized is predicated upon initial pricing
agreements and does not exceed the Company's overall assessment of the market
for that program. Certain contracts also provide for the repricing of units in
the event that less than a specified quantity is sold, which allows for recovery
of additional excess-over-average inventory in such circumstances. The Company,
in turn, has provided certain subcontractors with similar recovery commitments
and repricing provisions on certain contracts. The PW4000 contract was revised
in 1993 and provides that if Pratt & Whitney accepts delivery of less than 500
units between 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 for equitable adjustment"
to the customer and believes it will achieve a recovery such that there will be
no material adverse effect on the financial position of the Company.
29
<PAGE>
The excess of deferred contract costs over the total costs allocated to units
in process and delivered (less recoveries from customers due to repricing
provisions) that would not be recovered based on existing firm orders as of July
31, 1997, is $2.3 million on the 737-700 contract. The MD-95 contract which is
currently in development has preproduction inventory of $51.7 million. 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 Company estimates that it would require orders for approximately
300 aircraft to fully recover its costs. To date, McDonnell Douglas has
received orders for 50 firm and 50 options from ValuJet . The Company has firm
orders for five aircraft.
Excess-over-average inventory represents the costs of in-process and delivered
units less, for each such unit, the current estimated average cost of the units
in the contract. Recovery of these inventoried costs assumes certain production
efficiencies and the sale of the contract quantity used in estimating the profit
margin. If these contract assumptions are not attained, such will be reflected
as a change in estimate and impact future operating margins.
To the extent that a forward loss is encountered on a contract, the amount of
such loss is offset against the inventory of such contract, (until such
inventory has been depleted). The loss is offset first against excess-over-
average inventory, followed by preproduction inventory, then production
inventory.
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 its French subsidiary for services. The extent to which the
Company utilizes forward contracts varies and depends upon management's
evaluation of current and projected foreign currency exchange rates, but the
Company does not acquire forward contracts in excess of its current hedging
requirements. At July 31, 1997, the Company had $16.5 million of foreign
exchange contracts outstanding to purchase foreign currencies. There were no
significant deferred gains or losses associated with these foreign exchange
contracts.
30
<PAGE>
Note 5 - Property, Plant, and Equipment
Property, plant, and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 24,348 $ 24,660
Buildings 194,996 195,153
Machinery and equipment 294,375 287,035
Construction in progress 11,583 12,183
- --------------------------------------------------------------------------------
525,302 519,031
Less accumulated depreciation and amortization (336,538) (322,979)
- --------------------------------------------------------------------------------
Property, plant, and equipment - net $ 188,764 $ 196,052
================================================================================
</TABLE>
Included in the above categories are assets recorded under capitalized leases
with original costs totaling $50.6 million at July 31, 1997, and 1996.
Note 6 - Taxes (Benefit) on Income
Taxes (benefit) on income is comprised of the following (in thousands):
<TABLE>
<CAPTION>
July 31,
- -------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------
(restated) (restated)
<S> <C> <C> <C>
Currently Payable:
Federal income taxes $ 1,080 $ 80 $ 900
Foreign income taxes (290) 350 (90)
State income taxes 440 130 240
Deferred:
Federal income taxes (1,754) 12,239 9,169
State income taxes (1,740) 2,178 3,810
- -------------------------------------------------------------------
$(2,264) $14,977 $14,029
===================================================================
</TABLE>
31
<PAGE>
The difference between the tax (benefit) on income computed at the
federal statutory rate and the actual tax (benefit) on income is as follows (in
thousands):
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C> <C>
Taxes computed at the federal
statutory tax rate $(1,971) $13,039 $11,984
Increase (decrease) resulting from:
State income taxes, net of federal
tax benefit (293) 1,937 1,780
Tax-exempt income from Foreign Sales
Corporation (152) (152) (395)
Non-deductible items 402 1,453 922
Corporate-owned life insurance (387) (433) (236)
Sale of investment leases - (1,048) -
Other 137 181 (26)
- --------------------------------------------------------------------------------
$(2,264) $14,977 $14,029
================================================================================
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and (b) operating loss and
tax credit carryforwards.
The components of the Company's deferred tax asset (liability) which reflect
the tax effects of the Company's temporary differences, tax credit
carryforwards, and net operating loss carryforwards (NOLs) are listed below (in
thousands):
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(restated)
<S> <C> <C>
Current:
Inventories $ 48,750 $ 15,186
Employee benefits 3,100 3,597
State taxes (5,852) (7,180)
Sale of investment leases - (27,816)
- --------------------------------------------------------------------------------
Net deferred tax asset (liabilities) - current $ 45,998 $(16,213)
================================================================================
Long-term:
Depreciation $ 761 $ 9,332
Deferred gain on sale/leaseback 7,502 7,876
Minimum pension liability adjustment - 17,767
Net operating loss carryforward 91,415 120,485
Tax credit carryforward 9,549 8,432
Investment in leases (3,151) (3,525)
Other - net (21,718) (3,504)
- --------------------------------------------------------------------------------
Net deferred tax asset - long-term $ 84,358 $156,863
================================================================================
</TABLE>
The Company has federal NOLs totaling approximately $233 million at July 31,
1997, which expire in the years 2004 through 2012, and tax credit carryforwards
totaling $9.5 million which expire in the years 2003 through 2013.
32
<PAGE>
When tax effected at the rates in effect July 31, 1997, the net deductible
temporary differences, tax credit carryforwards, and NOLs result in a deferred
tax asset of $130.4 million, consisting of $112.4 million for federal tax
purposes and $18.0 million for state tax purposes. Based on rates in effect
July 31, 1997, approximately $340 million of future taxable income is required
prior to expiration of the Company's NOLs and credits for full realization of
the deferred tax asset. The Company believes that its future taxable income
will be sufficient for full realization of the deferred tax asset.
Late in fiscal 1996, the Company received a Revenue Agent's Report ("RAR")
from the Internal Revenue Service in connection with the audit of the Company's
federal income tax returns for fiscal years 1986 through 1989. In the RAR, the
agent challenged the timing of various deductible items, some of which are
significant. The Company is contesting substantially all the proposed
adjustments and believes it will prevail on all material items. The Company
anticipates that any adjustment made to its reported taxable income for the
years under audit will increase the amount of the net operating loss available
for carryback purposes and therefore the audit adjustments will not have a
material adverse impact on the financial position of the Company.
33
<PAGE>
Note 7 - Indebtedness
The maturity schedule of the Company's debt is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Total at
Fiscal Year Ended July 31, July 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11.625% Senior Notes $100,000 $100,000 $100,000
9.35% Senior Notes $ 2,287 $ 2,287 $ 695 5,269 39,732
9.33% Senior Notes 1,713 1,713 1,713 $ 1,713 $ 1,372 8,224 51,343
Other Debt 417 236 241 196 202 17,318 18,610 21,935
- -------------------------------------------------------------------------------------------------------------------------------
4,417 4,236 2,649 1,909 1,574 117,318 132,103 213,010
Capital Leases 1,611 1,522 1,433 1,344 1,256 2,989 10,155 13,502
Less Imputed Interest (600) (518) (436) (356) (276) (372) (2,558) (3,789)
- -------------------------------------------------------------------------------------------------------------------------------
1,011 1,004 997 988 980 2,617 7,597 9,713
Subordinated Debt:
7.75% Convertible Notes 19,695 19,695 19,720
9.25% Debentures 7,500 7,500 7,500 7,500 7,500 112,500 150,000 150,000
7.00% Convertible Debentures 5,750 5,750 5,750 5,750 92,000 115,000 115,000
- -------------------------------------------------------------------------------------------------------------------------------
7,500 13,250 13,250 13,250 13,250 224,195 284,695 284,720
- -------------------------------------------------------------------------------------------------------------------------------
Total Indebtedness $12,928 $18,490 $16,896 $16,147 $15,804 $344,130 $424,395 $507,443
- -------------------------------------------------------------------------------------------------------------------------------
Less Current Portion (12,928) (25,962)
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $411,467 $481,481
===============================================================================================================================
</TABLE>
The fair value of the Company's total indebtedness as of July 31, 1997, is
estimated to be $445.2 million compared to the carrying value of $424.4 million
reflected in the table above. This fair value was derived using quoted market
prices on publicly traded debt and estimated market value of the privately held
debt.
The Company's total financings were $483.5 million and $569.2 million at July
31, 1997, and 1996, respectively. The Company's total financings at July 31,
1997, included: indebtedness, shown in the table above; the accounts receivable
sales program in the amount of $40.0 million, which is reported as a reduction
to accounts receivable (see Note 3); and two sale-leaseback transactions,
accounted for as operating leases, totaling $19.1 million.
The Company's privately placed 9.35% Senior Notes require principal payments
of approximately $2.3 million in January 1998 and 1999, and a final payment of
$0.7 million in January 2000. The Company's privately placed 9.33% Senior Notes
require principal payments of approximately $1.7 million in December 1997
through 2000, and a final payment of $1.4 million in December 2001. In the
fourth quarter of fiscal 1997, the Company voluntarily prepaid $34.3 million of
its 9.33% Senior Notes and $22.4 million of its 9.35% Senior Notes. The Company
used existing funds to extinguish this debt. A premium and certain other
expenses associated with this early extinguishment of debt were recorded as an
extraordinary item. The net loss associated with this early extinguishment
totaled $2.6 million or 11 cents per share, net of income tax benefit of $1.8
million. The noteholders can require the Company to purchase the remaining
principal amount of the
34
<PAGE>
notes plus accrued interest and premium for yield adjustment in the event of
certain changes in control or ownership of the Company.
The $100 million of 11.625% Senior Notes due May 2003 are general unsecured
obligations of the Company and do not have sinking fund requirements. These
Senior Notes are redeemable after May 1999, at a premium price of 105.8 percent,
declining annually to par at maturity. The noteholders can require the Company
to purchase the principal, plus accrued interest and premium in the event of
certain changes in control or ownership of the Company. The Company's 7.75%
Convertible Subordinated Notes due May 2004 have no sinking fund requirements.
The Convertible Subordinated Notes are convertible at the option of the holder
into shares of the Company's common stock at a conversion price of $10.35 per
share, subject to adjustment under certain conditions. At the Company's option,
the Convertible Subordinated Notes are redeemable after May 1998, at a premium
price of 104.7 percent, declining to par at maturity. The Company's 9.25%
Subordinated Debentures due March 2017 are subject to mandatory annual sinking
fund payments of $7.5 million beginning March 1998. The Company's 7.00%
Convertible Subordinated Debentures due October 2012 are subject to mandatory
annual sinking fund payments of $5.8 million beginning October 1998. These
debentures are convertible at the option of the holder into shares of the
Company's common stock at a conversion price of $43.00 per share, subject to
adjustment under certain conditions. The 7.00% debentures are currently
redeemable at the Company's option at a premium price of 102.1 percent and the
9.25% debentures are redeemable at a premium price of 105.6 percent, both
declining to par over specified time periods.
The Company's principal financing agreements contain certain covenants and
ratios, the most significant of which relate to tangible net worth, debt to
equity, and income available for fixed charges. The Company was in compliance
with these covenants at July 31, 1997. These financing agreements also contain
other restrictions, including restrictions on new indebtedness, prepayments and
redemptions of indebtedness, amendments to debt agreements, liens, dividends,
lease obligations, mergers, sales of assets, investments, and capital
expenditures. If the Company were to breach a covenant in any of its principal
financing agreements, the lenders under such agreement could, at their option,
accelerate the maturity of the debt evidenced by such agreement. In addition,
any such default (or, in some cases, an acceleration after the occurrence of
such a default) would cause defaults under cross-default provisions (or cross-
acceleration provisions) in other Company financing agreements.
35
<PAGE>
Note 8 - Commitments and Contingencies
Minimum rental commitments under operating leases with non-cancelable terms of
more than one year as of July 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------
<S> <C>
1998 $ 7,900
1999 6,100
2000 4,400
2001 4,100
2002 4,000
Thereafter 2,300
- ------------------------------------------------------
$28,800
======================================================
</TABLE>
Generally, leases have provisions for rent escalation based on inflation.
Certain leases provide for options to renew with substantially similar terms
(except negotiable rent increases). The total expense under all operating
leases was approximately $7.2 million, $6.3 million, and $8.5 million for fiscal
1997, 1996, and 1995, respectively.
In June 1987, the U.S. District Court of Los Angeles, in U.S. et al, vs.
Stringfellow, granted partial summary judgment against the Company and 14 other
defendants on the issue of liability under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"). This suit alleges that the
defendants are jointly and severally liable for all damage in connection with
the Stringfellow hazardous waste disposal site in Riverside County, California.
In June 1989, a federal jury and a special master appointed by the federal court
found the State of California also liable for the cleanup costs. On November
30, 1993, the special master released his "Findings of Fact, Conclusions of Law
and Reporting Recommendations of the Special Master Regarding the State Share
Fact Finding Hearing." In it, he allocated liability between the State of
California and other parties. As this hearing did not involve the valuation of
future tasks and responsibilities, the order did not specify dollar amounts of
liability. The order, phrased in percentages of liability, recommended
allocating liability on the CERCLA claims as follows: 65 percent to the State
of California and 10 percent to the Stringfellow entities, leaving 25 percent to
the generator/counterclaimants (including the Company) and other users of the
site (or a maximum of up to 28 percent depending on the allocation of any
Stringfellow entity orphan share). On the state law claims, the special master
recommended a 95 percent share for the State of California, and 5 percent for
the Stringfellow entities, leaving 0 percent for the generator/counterclaimants.
This special master's finding was substantially approved by the federal judge
but that decision is subject to an appeal. The Company and the other generators
of wastes disposed at the Stringfellow site, which include numerous
36
<PAGE>
companies with assets and equity significantly greater than the Company, are
jointly and severally liable for the share of cleanup costs for which the
generators, as a group, may ultimately be found to be responsible.
Notwithstanding, CERCLA liability is sometimes allocated among hazardous waste
generators who used a waste disposal site based on the volume of hazardous waste
they disposed at the site. The Company is the second largest generator of waste
by volume disposed at the site, although it and certain other generators have
argued the final allocation of cleanup costs among generators should not be
determined solely by volume. The largest volume generator of wastes disposed at
the Stringfellow site has indicated it is significantly dependent on insurance
to fund its share of any cleanup costs, and that it is in litigation with
certain of its insurers.
From inception to date, the Company has expended approximately $4.1 million on
clean-up costs for this site. The Company also estimates that its future clean-
up expenditures for this site are likely to range from $5 million to $8 million
over and above the sums spent to date, as explained in greater detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Analysis - Environmental Matters."
The Company intends to continue to vigorously defend itself in the
Stringfellow matter. Based upon the information currently available to it,
including the fact that the Company has reached settlement agreements with its
primary comprehensive general liability insurers with respect to this matter and
has established reserves in connection with its expected future clean-up
liabilities, the Company believes that the ultimate resolution of this matter
will not have a material adverse effect on the financial position, liquidity or
results of operations of the Company.
The Company is involved as plaintiff or defendant in various other legal and
regulatory actions and inquiries incident to its business, none of which are
believed by management to have a material adverse effect on the financial
position or results of operations of the Company.
Note 9 - Employee Benefit Plans
a. Pension plan
The Company has non-contributory pension plans covering substantially all of
its employees. Benefits for the salaried employees' plan are based on age and
years of service plus interest at specified levels. Benefits under the pension
plan covering certain union employees are based on a negotiated amount per year
of service. The Company has made contributions to independent trusts in excess
of the minimum funding requirements of these plans under IRS regulations. The
37
<PAGE>
Company also has supplemental retirement plans which are generally unfunded.
Defined benefit plans expense consists of the following components (in
thousands):
<TABLE>
<CAPTION>
Year ended July 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 8,031 $ 8,336 $ 9,574
Interest cost on projected benefit obligation 40,201 38,726 36,462
Actual gain on plan assets (69,809) (90,646) (43,245)
Net amortization and deferral 33,791 59,173 12,118
- --------------------------------------------------------------------------------
Total $12,214 $15,589 $14,909
================================================================================
</TABLE>
The following table summarizes the funded status of these plans and the
amounts recognized in the Consolidated Balance Sheets (in thousands):
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $528,905 $507,659
Non-vested 19,364 20,714
- --------------------------------------------------------------------------------
Accumulated benefit obligation 548,269 528,373
Effect of projected future salary increases 5,777 5,545
- --------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date 554,046 533,918
Plan assets at fair value, primarily stocks, bonds,
other fixed income obligations and real estate 554,135 475,343
- --------------------------------------------------------------------------------
Plan assets greater (less) than projected benefit
obligation 89 (58,575)
Unrecognized net loss 42,601 52,937
Unrecognized net asset from initial application of SFAS
No. 87 being recognized over plans' average remaining
service life (6,814) (9,816)
Unrecognized prior service cost 29,037 31,859
Additional minimum liability - (72,735)
- --------------------------------------------------------------------------------
Net pension asset (liability) recognized in the
consolidated balance sheets $64,913 $(56,330)
================================================================================
</TABLE>
In fiscal 1997, the Company's defined benefit pension plans' assets exceeded
the accumulated benefit obligation primarily due to its contribution of $48
million of common stock and $10.3 million cash in addition to market gain on
plan assets, and therefore no additional minimum liability was recorded. The
amounts recorded in fiscal 1996 relating to the plans' underfunded position were
reversed in fiscal 1997. At July 31, 1996, the plans' accumulated benefit
obligations exceeded plan assets and the additional minimum liability for the
Company's defined benefit plans was in excess of the unrecognized prior service
costs and net transition obligation and was recorded as a reduction
38
<PAGE>
of $26.4 million to shareholders' equity, net of tax benefits of $17.8 million,
in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
The weighted-average discount rate used in determining the present value of
the projected benefit obligation was 8.25 percent, 7.75 percent, and 8.25
percent for the years ended July 31, 1997, 1996, and 1995, respectively. For
compensation-based plans, the rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation and service cost was based upon an experience-related table and
approximated 5.0 percent on current salaries through January 1, 1997, in
accordance with plan terms. The expected long-term rate of return on plan
assets was 9 percent for the periods presented. Plan assets are invested
primarily in stocks, bonds, and real estate.
The Company also has certain defined contribution plans covering most
employees. Expenses for these plans amounted to $3.8 million, $3.5 million, and
$2.8 million in fiscal 1997, 1996, and 1995, respectively.
b. Post-Retirement benefit obligations other than pensions
The Company has a retirement health care program that pays a specified fixed
amount to supplement the medical insurance payments made by retirees who are
under age 65 and their spouses and covered dependents. Eligibility for and the
amount of the supplement provided by the Company is based on age and years of
service. The program requires employee contributions.
SFAS No. 106 requires disclosure of the effect on the Company's accumulated
post-retirement benefit obligation, and net periodic post-retirement benefit
cost, using the assumption that the health care cost trend will increase by 1
percent each year. This disclosure is not applicable because the Company is not
affected by future health care cost trends since its obligation is to pay a
fixed amount as a health care supplement for retirees entitled to this benefit.
39
<PAGE>
Post-retirement benefit costs, net of expected retiree contributions, included
the following components (in thousands):
<TABLE>
<CAPTION>
Year ended July 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits attributed to service
during the period $ 106 $ 125 $ 146
Interest cost on accumulated post-retirement
benefit obligation 371 419 408
Net amortization and deferral (10) 13 32
- --------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $ 467 $ 557 $ 586
================================================================================
</TABLE>
The liability for post-retirement health care benefits included the following
components (in thousands):
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $1,840 $2,660
Fully eligible active plan participants 310 236
Other active plan participants 2,058 2,159
Unrecognized net loss 421 (380)
- --------------------------------------------------------------------------------
Liability for post-retirement health care benefits $4,629 $4,675
================================================================================
</TABLE>
The accumulated post-retirement benefit obligation was determined using
weighted average discount rates of 8.25 percent, 7.75 percent, and 8.25 percent,
respectively, for the years ended July 31, 1997, 1996, and 1995. The plan is
unfunded. Each year the Company funds the benefits paid.
40
<PAGE>
Note 10 - Shareholders' Equity
The Company has not paid a cash dividend since 1975 and is restricted from
paying cash dividends by covenants within its primary loan agreements.
The Company's stockholder rights plan generally entitles the holder of each
right to purchase one one-hundredths of a share of Series C preferred stock, $1
par value, from the Company for $100, subject to adjustment. A right is included
with, and attaches to, each share of common stock issued and expires on August
25, 1999, and is redeemable by the Company. The rights become exercisable and
separate from the common stock under certain circumstances -- generally when a
person or group of affiliated or associated persons has acquired or obtained the
right to acquire 15 percent or more of the Company's outstanding voting stock or
has made a tender offer to acquire 15 percent or more of such voting stock.
Under certain circumstances, each right would entitle the holder to purchase a
certain number of the Company's common stock at one-half of fair market value.
In May 1993, in connection with certain amendments to the financial covenants
of its principal financing agreements, the Company issued warrants to certain
lenders. The warrants are exercisable for 600,000 shares of common stock at
$9.00 per share and expire in August 2000.
Authorized, unissued shares of common stock were reserved for the following:
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Various stock plans 3,598,978 3,983,911
Conversion of subordinated debentures and notes 4,577,318 4,579,732
Warrants 600,000 600,000
- --------------------------------------------------------------------------------
8,776,296 9,163,643
================================================================================
</TABLE>
Note 11 - Stock Based Plans
The Company's 1995 Stock Incentive Plan provides that qualified employees are
eligible to receive stock options and various other stock-based awards. Subject
to certain adjustments, the plan provides that up to 1,800,000 shares of common
stock may be sold or issued under the plan. The terms and conditions of the
stock-based awards are determined by a Committee of the Board of Directors on
each grant date and may include provisions for the exercise price, expiration,
41
<PAGE>
vesting, restriction on sale and forfeiture, as applicable. Under the terms of
the plan, the Company may not change the exercise price of or replace any stock
option previously granted (except pursuant to certain plan adjustments), nor
grant an option with an exercise price less than 100 percent of the fair market
value of the underlying common stock on the date the Committee approves such
stock option. Restricted shares purchased under the plan are subject to
restrictions on sale or disposal, which lapse in varying installments from one
to ten years. During fiscal 1997, 63,728 restricted shares were awarded to
employees.
The Company's 1982 Stock Option Plan and the 1989 Stock Incentive Plan, under
both of which no future options will be granted, provided for the issuance of
non-qualified stock options at the market price of the Company's common stock at
the date of grant. The options become exercisable in installments from one to
six years after date of grant and expire ten years from date of grant. Under
the 1989 Stock Incentive Plan, restricted shares purchased under the plan are
subject to restrictions on sale or disposal, which lapse in varying installments
from one to ten years. During fiscal 1996, 26,076 shares were awarded to
various employees. At July 31, 1997, there were no shares available for grants
under these plans.
The Company has a director stock plan under which non-employee directors are
automatically granted, on the first business day following the annual meeting of
shareholders, an option to purchase 1,000 shares of common stock. The option
exercise price is equal to the fair market value of the stock on the date the
option is granted. Options granted under the plan generally become exercisable
six months after the date of grant and expire ten years from the date of grant.
Subject to certain adjustments, the plan provides that up to 100,000 shares of
common stock may be sold or issued under the plan. As a result of previous
option grants under the plan, 30,000 shares remained available for grant at July
31, 1997.
The Company also has a stock compensation plan for non-employee directors
pursuant to which the Company will issue or deliver to each such director, in
partial consideration for the services rendered by such director during the
Company's prior fiscal year, 250 shares of the Company's common stock, subject
to certain adjustments. The shares will be issued or delivered on the date of
the first meeting of the Board of Directors that occurs after the end of each
fiscal year.
42
<PAGE>
Under the various stock option plans, outstanding options for 2,383,500 and
2,035,452 shares of common stock were exercisable with weighted-average exercise
price of $17.015 and $17.479 as of July 31, 1997, and 1996, respectively.
Activity in these stock option plans for the three years ended July 31, 1997, is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance Outstanding at July 31, 1994 2,723,044 $16.618
Granted 19,000 9.717
Relinquished (7,180) 25.812
Forfeited (44,300) 17.861
Exercised (26,000) 10.889
- --------------------------------------------------------------------------------
Balance Outstanding at July 31, 1995 2,664,564 $16.588
Granted 1,123,936 16.120
Relinquished (77,465) 27.470
Forfeited (47,667) 19.026
Exercised (394,707) 11.845
- --------------------------------------------------------------------------------
Balance Outstanding at July 31, 1996 3,268,661 $16.686
Granted 281,705 21.265
Relinquished (34,200) 28.402
Forfeited (33,500) 21.938
Exercised (287,005) 13.368
- --------------------------------------------------------------------------------
Balance Outstanding at July 31, 1997 3,195,661 $17.207
================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
July 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
Price Shares Life (Yrs.) Price Shares Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.50 to $13.49 968,166 5.0 $10.47 912,166 $10.53
$13.50 to $18.49 1,018,565 7.6 15.18 646,941 15.14
$18.50 to $23.49 829,780 6.1 21.39 445,243 21.37
$23.50 to $28.49 17,500 2.8 25.49 17,500 25.49
$28.50 to $33.49 361,650 1.4 30.95 361,650 30.95
- -----------------------------------------------------------------------------------------
3,195,661 2,383,500
=========================================================================================
</TABLE>
43
<PAGE>
The Company's accounting for stock-based plans is in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." For stock options granted, the option prices is not less than the
market value of shares on the grant date; therefore, no compensation expense has
been recognized for fixed stock option plans.
Had compensation expense for the Company's stock-based plans been accounted
for using the fair value method prescribed by SFAS No. 123, net income (loss)
and earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
(restated)
<S> <C> <C>
Net earnings (loss) as reported $(6,022) $22,287
Pro forma net earnings (loss) under SFAS No. 123 $(7,619) $21,552
Earnings (loss) per share as reported $ (0.24) $ 1.07
Pro forma earnings (loss) per share under SFAS No. 123 $ (0.30) $ 1.04
================================================================================
</TABLE>
As required by SFAS No. 123, the Company has determined the weighted-average
fair value of each option granted in fiscal 1997 and 1996 to be $10.38 and
$7.58, respectively. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996, respectively;
risk-free interest rates of 6.6 percent and 5.6 percent; no expected dividends;
expected volatility of 43.8 percent and 43.1 percent; and expected lives of 5.3
years for both years.
The effects of applying SFAS No. 123 in the above pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards granted
prior to fiscal 1996.
Note 12 - Charge for MD-90, Loss on Sale of Aircraft Leasing Subsidiary, and
Impairment Write-down
The Company entered into a contract with International Aero Engines to produce
nacelles for McDonnell Douglas' MD-90 aircraft in 1990. Under the terms of the
contract, the Company agreed to recover its preproduction costs, and the higher
than average production costs associated with early production shipments, over a
specified number of deliveries. In light of the wide market acceptance of the
MD-80 series, which was the predecessor aircraft, the Company believed
sufficient MD-90 aircraft would be sold to allow it to recover its costs.
Over the last year, however, a series of developments created market
uncertainties regarding
44
<PAGE>
future sales of the MD-90 aircraft. The most significant of these developments
included: McDonnell Douglas' termination of the MD-XX contract and the doubts
this action raised regarding McDonnell Douglas' continued presence in the
commercial aircraft industry; the decision of several large airlines that have
traditionally operated McDonnell Douglas aircraft to order aircraft that compete
with the MD-90; the announced (and subsequently completed) acquisition of
McDonnell Douglas by The Boeing Company, which produces a family of competing
aircraft; the announcement by Delta Airlines, launch customer for the MD-90, of
its intent to replace its existing fleet of MD-90s and to seek a business
resolution with McDonnell Douglas with respect to its remaining orders for the
aircraft; and the lack of significant MD-90 orders during the past year.
In the recognition of these developments, the Company reduced its estimates of
future MD-90 aircraft deliveries in the second quarter of fiscal 1997 to include
only deliveries which were supported by firm orders, options, and letters of
intent for the aircraft. During the fourth quarter of fiscal 1997, the Company
further reduced its market estimate of future MD-90 sales to existing firm
aircraft orders (excluding firm orders from Delta Airlines). Based on its
reduced estimate of future aircraft deliveries, the Company now believes that
future MD-90 sales will not be sufficient to recover its existing contract
investment plus the costs it will be required to spend in the future to complete
the contract. As a result, the Company realized an $84.5 million operating loss
on the contract in fiscal 1997 (which included a $10.4 million increase in the
loss as a result of the change in accounting). The change in accounting
principles adopted in the fourth quarter of fiscal 1997 resulted in $49.3
million of the loss being reported in the second quarter of fiscal 1997 and
$35.2 million being reported in the fourth quarter of fiscal 1997. The MD-90
contract accounted for 13.9 percent and 11.2 percent of fiscal 1997 and 1996
sales, respectively.
During fiscal 1996, the Company negotiated the sale of its aircraft leasing
subsidiary, whose principal assets were beneficial interests in two aircraft (an
A300 and a DC-10), on lease through 2003 and 2004, respectively. The Company
recorded a $5.2 million pre-tax loss as a result of this sale, but retained an
interest in the residual value of these assets through which it could recover
additional amounts in the future. The Company also recorded a receivable in the
amount of $20.1 million (collected in fiscal 1997) and a secured note in the
amount of $7.5 million in connection with the sale.
The Company has been reviewing its long-range site strategy and assessing the
facilities necessary to meet its future needs including the potential favorable
operating effect of lean manufacturing. During fiscal 1996, the Company
recognized a $7.2 million pre-tax impairment write-down on its Arkadelphia,
Arkansas facility to its estimated net realizable value. The Company intends to
continue to review its site strategy and facilities with respect to its current
and projected needs.
45
<PAGE>
Note 13 - Discontinued Operations
In the fourth quarter of fiscal 1994, the Company sold and commenced the
transfer of its business jet line of business. The purchase agreement required
the Company to manufacture and deliver certain components and transfer program
engineering and tooling which was substantially completed in fiscal 1995. The
operating results of the business jet line of business are included in earnings
from discontinued operations summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year ended July 31,
- -------------------------------------------------------------
1995
- -------------------------------------------------------------
<S> <C>
Net sales $22,287
Income before taxes 6,486
Taxes on income 2,607
- -------------------------------------------------------------
Net income $ 3,879
=============================================================
Net income per average share
of common stock $ 0.21
=============================================================
</TABLE>
46
<PAGE>
Note 14 - Quarterly Results of Operations (Unaudited)
(In thousands except for per share data)
<TABLE>
<CAPTION>
Year ended July 31, 1997
- -----------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C> <C>
Sales $201,905 $213,274 $249,308 $279,870
Cost & expenses 172,621 182,238 212,761 230,071
Charge on MD-90 contract -- 49,357 -- 35,184
General and administrative expenses 7,447 6,352 7,127 6,778
Income (loss) from operations 21,837 (24,673) 29,420 7,837
Income (loss) before extraordinary items 6,787 (20,769) 11,774 (1,160)
Loss from extraordinary item - net of tax -- -- -- (2,654)
Net income (loss) 6,787 (20,769) 11,774 (3,814)
Primary earnings (loss) per average share
of common stock $ 0.29 $ (0.79) $ 0.45 $ (0.15)
Fully diluted earnings (loss) per average share
of common stock $ 0.28 $ (0.79) $ 0.43 $ (0.15)
=====================================================================================================
</TABLE>
Proforma quarterly results (prior to accounting change as described in Note 2)
<TABLE>
<CAPTION>
Year ended July 31, 1997
- -----------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $201,905 $213,274 $249,308 $279,870
Cost and expenses 178,354 188,700 214,360 241,738
Charge on MD-90 contract -- -- -- 74,105
General and administrative expenses 7,447 6,352 7,127 6,778
Income (loss) from operations 16,104 18,222 27,821 (42,751)
Income (loss) before extraordinary items 3,358 4,883 10,818 (31,411)
Loss from extraordinary item - net of tax -- -- -- (2,654)
Net income (loss) 3,358 4,883 10,818 (34,065)
Primary earnings (loss) per average share
of common stock $ 0.14 $ 0.19 $ 0.42 $ (1.30)
Fully diluted earnings (loss) per average
share of common stock $ 0.14 $ 0.18 $ 0.39 $ (1.30)
====================================================================================================
</TABLE>
47
<PAGE>
(In thousands except for per share data)
<TABLE>
<CAPTION>
Year ended July 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
- ----------------------------------------------------------------------------------------------------------------------------
(restated) (restated) (restated) (restated)
<S> <C> <C> <C> <C>
Sales $150,400 $180,702 $203,711 $236,001
Cost and expenses 136,015 144,596 170,377 191,626
Loss on sale of aircraft subsidiary
and impairment write-down - - - 12,395
General and administrative 6,728 5,247 7,336 7,922
Operating income 7,657 30,859 25,998 24,058
Net income (loss) (2,199) 8,861 8,576 7,040
Primary earnings (loss) per average share
of common stock $ (0.12) $ 0.45 $ 0.38 $ 0.31
Fully diluted earnings (loss) per average share
of common stock $ (0.12) $ 0.42 $ 0.36 $ 0.30
==========================================================================================================================
</TABLE>
Pro forma quarterly results (prior to accounting change as described in Note 2)
<TABLE>
<CAPTION>
Year ended July 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $150,400 $180,702 $203,711 $236,001
Cost and expenses 131,533 159,071 177,810 206,057
Loss on sale of aircraft Subsidiary
and impairment write-down - - - 12,395
General and administrative 6,728 5,247 7,336 7,922
Operating income 12,139 16,384 18,565 9,627
Net income (loss) 482 205 4,130 (1,589)
Primary earnings (loss) per average share
of common stock $ 0.03 $ 0.01 $ 0.19 $ (0.07)
Fully diluted earnings (loss) per average share
of common stock $ 0.03 $ 0.01 $ 0.18 $ (0.07)
========================================================================================================================
</TABLE>
48
<PAGE>
Report by Management
To the Shareholders and Board of Directors of Rohr, Inc.
The management of the Company has prepared and is responsible for the
consolidated financial statements and all related financial information
contained in this report. The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles and reflect
the effects of certain estimates and judgments made by management.
The Company maintains a system of internal accounting controls designed and
intended to provide reasonable assurance that assets are safeguarded,
transactions are properly executed and recorded in accordance with management's
authorization, and accountability for assets is maintained. The system is
continuously monitored by direct management review, by internal auditors who
conduct an extensive program of audits, and by independent auditors in
connection with their annual audit.
Management recognizes its responsibility to foster a strong ethical climate
and has formalized ethics as an integral part of the organization. Management
has issued written policy statements and the importance of ethical behavior is
regularly communicated to all employees. These communications include
distribution of written codes of ethics and standards of business conduct and
through ongoing education and review programs designed to create a strong
compliance environment.
The Company's consolidated financial statements have been audited by Deloitte
& Touche LLP, independent certified public accountants. Their audits were
conducted in accordance with generally accepted auditing standards, and included
a review of financial controls and tests of accounting records and other
procedures as they considered necessary in the circumstances.
The Audit and Ethics Committee of the Board of Directors is composed of five
outside directors. This committee meets periodically with management, the
internal auditors, and the independent accountants to review accounting,
reporting, auditing, internal control, and ethics matters. The committee has
direct and private access to both internal and external auditors and held five
meetings during fiscal 1997.
L. A. Chapman R. H. Rau
Senior Vice President and President and Chief Executive Officer
Chief Financial Officer
A. L. Majors
Vice President and Controller
(Chief Accounting Officer)
================================================================================
49
<PAGE>
Independent Auditors' Report
To the Shareholders and Board of Directors of Rohr, Inc.
We have audited the accompanying consolidated balance sheets of Rohr, Inc. and
its subsidiaries as of July 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended July 31, 1997. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rohr, Inc. and its subsidiaries as
of July 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1997, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the Consolidated Financial Statements, in fiscal
1997 the Company changed its accounting principle related to long-term contracts
and retroactively restated the fiscal 1996 and 1995 financial statements for the
change.
================================================================================
San Diego, California
September 11, 1997
50
<PAGE>
================================================================================
SELECTED FINANCIAL DATA
(in thousands except for per share data, number of employees, percentages, and
ratios)
<TABLE>
<CAPTION>
Year ended July 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
(restated) (restated) (restated) (restated)
<S> <C> <C> <C> <C> <C>
Results of continuing operations :
Sales $ 944,357 $ 770,814 $ 805,000 $ 918,141 $1,149,503
Operating income (1) $ 34,421 $ 88,572 $ 84,226 $ 79,911 $ 4,887
Operating profit margin (1) 3.6% 11.5% 10.5% 8.7% 0.4%
Income (loss) $ (3,368) $ 22,278 $ 20,211 $ 23,341 $ (26,488)
Primary earnings (loss) per average share
of common stock $ (0.13) $ 1.07 $ 1.11 $ 1.29 $ (1.48)
Cash dividends per share of
common stock - - - - -
====================================================================================================================
Financial Position at July 31:
Total assets $ 883,978 $ 932,940 $ 897,930 $ 966,519 $ 908,785
Indebtedness 424,395 507,443 554,777 588,990 531,608
Net financings (2) 440,428 480,828 520,970 537,567 601,669
Shareholders' equity 246,280 175,617 97,321 56,581 73,242
Debt-to-equity ratio 1.72:1 2.89:1 5.70:1 10.41:1 7.26:1
Return on average equity - 16.3% 29.8% 39.4% -
Book value per common share $ 9.72 $ 7.86 $ 5.39 $ 3.14 $ 4.07
Number of full-time employees
at year end 4,600 3,800 4,000 4,900 6,500
Backlog $1,500,000 $1,200,000 $1,000,000 $1,200,000 $1,400,000
=====================================================================================================================
</TABLE>
(1) Operating income and operating profit margin was adversely impacted by
certain items and special provisions of $84.5 million in fiscal 1997, $12.4
million in fiscal 1996, $7.9 million in fiscal 1994, and $25.0 million in
fiscal 1993.
(2) Net financings include indebtedness plus the receivables sales program
(which is reflected as a reduction to accounts receivable) and two sale-
leaseback transactions (accounted for as operating leases), reduced by cash,
including cash equivalents, and short-term investments. (See Notes 3 and 7
of the Notes to the Consolidated Financial Statements.)
51
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements on Form
S-3 (Nos. 33-53113, 33-12340, 33-13373 and 33-17536); Form S-8 (Nos. 2-75423,
2-83877, 33-14382, 33,29351, 33-32839, and 33-65447); and Form S-16 (Nos.
2-76538 and 2-76656) of Rohr, Inc., of our report dated September 11, 1997,
appearing and incorporated by reference in this Annual Report on Form 10-K of
Rohr, Inc., for the year ended July 31, 1997.
Deloitte & Touche LLP
San Diego, California
September 15, 1997
<PAGE>
EXHIBIT 23.1
September 11, 1997
To the Shareholders and Board of Directors of Rohr, Inc.
We have audited the consolidated financial statements of Rohr, Inc. and its
subsidiaries as of July 31, 1997 and 1996, and for each of the three years in
the period ended July 31, 1997, included in your Annual Report on Form 10-K as
of July 31, 1997 to the Securities and Exchange Commission and have issued our
report thereon dated September 11, 1997. Note 2 to such consolidated financial
statements contains a description of your adoption during the fourth quarter of
the year ended July 31, 1997 of a change in accounting principle from the
program method of accounting to the contract method of accounting. In our
judgement, such change is to an alternative accounting principle that is
preferable under the circumstances.
Yours truly,
DELOITTE & TOUCHE LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 31,881
<SECURITIES> 11,190
<RECEIVABLES> 161,275
<ALLOWANCES> 0
<INVENTORY> 227,199
<CURRENT-ASSETS> 489,858
<PP&E> 525,302
<DEPRECIATION> (336,538)
<TOTAL-ASSETS> 883,978
<CURRENT-LIABILITIES> 189,467
<BONDS> 411,467
0
0
<COMMON> 25,330
<OTHER-SE> 220,950
<TOTAL-LIABILITY-AND-EQUITY> 883,978
<SALES> 0
<TOTAL-REVENUES> 944,357
<CGS> 0
<TOTAL-COSTS> 882,232
<OTHER-EXPENSES> 27,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,053
<INCOME-PRETAX> (5,632)
<INCOME-TAX> (2,264)
<INCOME-CONTINUING> (3,368)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,654)
<CHANGES> 0
<NET-INCOME> (6,022)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
