________________________________________________________________________________
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT FOR PER-SHARE DATA, NUMBER OF EMPLOYEES, PERCENTAGES AND
RATIOS)
YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------
Results of Operations:
Sales $ 805,000 $ 918,141 $1,149,503 $ 1,251,502 $1,361,766
Operating income (1) 64,629 51,389 8,562 44,801 97,353
Operating profit margin 8.0% 5.6% 0.7% 3.6% 7.1%
Net income (loss) from continuing
operations $ 8,493 $ 4,669 $ (24,257) $ 996 $ 28,566
Income (loss) from discontinued
operations, net of taxes 3,879 2,258 (6,324) 459 1,951
Extraordinary item, net of taxes (1,146) - - - -
Cumulative effect through
July 31, 1992 of accounting
changes, net of taxes (2) - - (223,950) - -
Net income (loss) $ 11,226 $ 6,927 $ (254,531) $ 1,455 $ 30,517
Primary earnings (loss)
per average share
of common stock from:
Continuing operations $ 0.47 $ 0.26 $ (1.35) $ 0.05 $ 1.63
Discontinued operations 0.21 0.12 (0.36) 0.03 0.11
Extraordinary item, net of taxes (0.06) - - - -
Cumulative effect through July
31, 1992, of accounting
changes, net of taxes (2) - - (12.50) - -
Primary earnings (loss) $ 0.62 $ 0.38 $ (14.21) $ 0.08 $ 1.74
Proforma amounts from
continuing operations (3):
Income (loss) $ 8,493 $ 4,669 $ (24,257) $ (35,314) $ (20,944)
Income (loss) per average
share of common stock $ 0.47 $ 0.26 $ (1.35) $ (1.99) $ (1.20)
Cash dividends per share of
common stock - - - - -
=====================================================================================================
Financial Position at July 31:
Total assets $ 976,540 $1,056,847 $1,017,786 $1,363,958 $1,411,498
Indebtedness 554,777 588,990 531,608 572,594 636,070
Net financings (4) 520,970 537,567 601,669 656,472 730,512
Shareholders' equity 175,931 146,909 182,243 448,866 441,401
Debt-to-equity ratio 3.15:1 4.01:1 2.92:1 1.28:1 1.44:1
Return on average equity 7.0% 4.2% - 0.3% 7.1%
Book value per common share 9.74 8.14 10.13 25.17 25.23
Number of full-time employees
at year end 4,000 4,900 6,500 9,200 11,200
Backlog - firm 1,000,000 1,200,000 1,400,000 1,900,000 2,200,000
Backlog - anticipated 2,800,000 2,500,000 2,600,000 2,300,000 2,800,000
=====================================================================================================
(1) Fiscal years 1993 and 1992 include special provisions of $25.0 million and
$50.0 million, respectively.
(2) In the third quarter of fiscal 1993, the Company changed certain elements
of its application of accounting principles relating to long-term programs
and contracts, and adopted the provisions of SFAS Nos. 106 and 109.
(3) Assumes the changes in the application of accounting principles for long-
term programs and contracts, adopted effective August 1, 1992, are applied
retroactively.
(4) 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, cash equivalents, and short-term investments. See Notes 3 and 7 of
the Notes to the Consolidated Financial Statements.
________________________________________________________________________________
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,
1995. These discussions should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto.
On certain long-term programs under which spares are sold directly to the
airlines, the Company accounts for profit and loss under the program method of
accounting. Under the program method of accounting, the quantity of units in
the profit center includes existing and anticipated orders and is predicated
upon contractual arrangements with customers and market forecasts. Included
within the program quantity are spares anticipated to be sold concurrent with
production units which historically have increased as a percentage of total
deliveries as a program matures. Generally, spares have been sold at higher
prices than production units. This inclusion of anticipated orders for
production units and spares in the program quantity generally increases
margins in the early program years and decreases margins in the later program
years compared to the margins that would be reported under other methods of
accounting. Programs for which the Company uses the program method of
accounting and for which spares are significant are as follows: V2500, CF6-
80C, CFM56-5, A340, and MD-90. See "Notes to Consolidated Financial Statement
-- Note 1b."
INDUSTRY OUTLOOK
Demand for new commercial jet aircraft is highly dependent upon consumer
demand for air travel, stability of fuel and ticket prices, the availability
of surplus or "parked" aircraft, and the financial capabilities of the
airlines and leasing companies to order and accept deliveries of new aircraft.
In addition, demand is dependent on the replacement of older aircraft which is
influenced by the time required for, and the economics of, compliance with
noise and maintenance regulations. Historically, such demands and financial
capabilities have been related to the stability and health of the United
States and world economies. Since the production of aircraft can take up to
18 months, production in the aircraft manufacturing industry typically lags
behind changes in the general economy.
United States and world airlines' (excluding the former U.S.S.R.)
passenger capacity increased rapidly from calendar 1990 through 1992 as the
commercial aircraft industry produced record numbers of aircraft. During this
same period, the United States and world economies experienced recession and
slow growth. United States' scheduled airlines reported operating losses
averaging approximately $2 billion per year, while non-United States scheduled
airlines reported significantly reduced profits. Aircraft deliveries by the
commercial aircraft manufacturing industry have been declining steadily since
calendar 1991. The industry delivered 830 new commercial transport aircraft
in calendar 1991, 784 in 1992, 629 in 1993, and 495 in 1994.
Recent indicators point to the beginning of improved market conditions for
new commercial jet aircraft. World airlines reported operating profit of $8.0
billion in 1994, as compared to $2.5 billion in 1993, and United States
airlines reported greatly improved operating profits for the first half of
calendar 1995. Other encouraging signs for improved market conditions are:
record load factors, a reduction in the number of "parked" aircraft, from
1,100 at the end of calendar 1993 to 741 at July 31, 1995 (a significant
number of these parked aircraft are not expected to return to service because
of age and noise restrictions), and an increased rate of orders for new
aircraft in the first half of 1995.
________________________________________________________________________________
________________________________________________________________________________
Industry analysts have predicted that worldwide airline passenger traffic
will grow in excess of 5 percent per year over the long term. Factors
favoring long-term passenger traffic growth include a favorable economic
environment, pricing pressures from low-cost carriers, and the potential
expansion of air travel in emerging markets. Industry analysts also predict a
potentially large replacement market for commercial jet aircraft fueled by
noise legislation and aging fleets. While it is difficult to predict exactly
when commercial jet aircraft deliveries will increase, industry analysts agree
that favorable long-term traffic growth and the need to replace older aircraft
will result in increased demand for new commercial jet aircraft.
COMPANY OUTLOOK
As a result of the slow-down in the commercial aerospace industry and
reductions in the Company's military and space programs, the Company's
revenues from continuing operations have decreased approximately 41 percent
from a high in fiscal 1991 to fiscal 1995. In response to these conditions,
management has taken aggressive actions to reduce costs, increase
competitiveness, improve margins, and maximize cash flow.
Although the commercial airline industry is experiencing financial
improvement, the Company expects revenues in fiscal 1996 to be lower than in
fiscal 1995. This is due in part to the long lead time between orders and
deliveries of commercial aircraft. The Company's level of commercial spare
sales increased in fiscal 1995 over fiscal 1994 and the Company is expecting
continued increases in spare sales as conditions in the commercial airline
industry continue to improve.
The Company has experienced pressures from customers to reduce prices. In
response, the Company has incorporated or is in the process of incorporating
design changes on certain programs, allowing for a more cost effective
manufacture of certain products, and is exerting pressure on its own suppliers
to reduce prices.
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
Sales from continuing operations declined 12 percent from $918.1 million
in fiscal 1994 to $805.0 million in fiscal 1995. Commercial sales declined
primarily as a result of reduced deliveries of commercial aircraft.
Government sales declined due to the near completion of certain military and
space programs. Both the C-130 and the Titan Space programs are scheduled to
make final deliveries in fiscal 1996.
The Company reported operating income of $64.6 million, a margin of 8
percent, for fiscal 1995 compared to $59.3 million, a margin of 6.5 percent
(excluding the impact from unusual items), for fiscal 1994. Including the
effect of the unusual items of $7.9 million, operating income for fiscal 1994
was $51.4 million, a margin of 5.6 percent. Operating results in fiscal 1995
benefited from initial deliveries on the MD-90 program, improved results on
several other programs, and a reduction in general and administrative expense.
Net interest expense was $50.0 million for the year ended July 31, 1995,
compared to $46.8 million for fiscal 1994. Net interest expense increased due
to the $157.5 million of public debt offerings completed in the fourth quarter
of fiscal 1994.
Income from continuing operations for fiscal 1995 was $8.5 million or 47
cents per share compared to income from continuing operations for fiscal 1994
of $4.7 million or 26 cents per share. In fiscal 1994, the net impact of
unusual items was to reduce income from continuing operations by $4.8 million
or 27 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 is 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, $40.3 million, and $25.6
million in fiscal 1995, 1994, and 1993, respectively. Income from
discontinued operations, net of income tax benefit, was $3.8 million or 21
cents per share for fiscal 1995 compared to $2.2 million or 12 cents per
share for fiscal 1994. See "Notes to the Consolidated Financial Statements --
Note 11."
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."
Net Income
Total net income for fiscal 1995 was $11.2 million or 62 cents per share
compared to $6.9 million or 38 cents per share in fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Sales from continuing operations declined 20 percent from $1,149.5 million
in fiscal 1993 to $918.1 million for fiscal 1994, due primarily to reduced
deliveries. Commercial sales aggregated 86 percent and government sales 14
percent in both fiscal 1994 and fiscal 1993.
The Company reported operating income of $59.3 million, an operating
margin of 6.5 percent, for fiscal 1994, excluding the impact from unusual
items. Including the effect of the unusual items of $7.9 million, operating
income was $51.4 million, a margin of 5.6 percent. The unusual items were the
write-off of unamortized pension past service costs related to the reduction
of employment levels, net of a gain on the sale of the Company's Auburn,
Washington, facility. Operating results in fiscal 1994 benefited from the
Company's downsizing, related reductions in overhead expenses, and improved
program results. During fiscal 1993, the Company reported operating income of
$8.6 million after the effect of a $25.0 million net provision for asset and
liability valuations and other costs related to the planned consolidation
activity. In addition, fiscal 1993 results were adversely impacted by losses
on tooling and design efforts and cost problems related to certain programs.
Net interest expense was $46.8 million for the year ended July 31, 1994,
compared to $47.9 million for fiscal 1993.
Income from continuing operations for fiscal 1994 was $4.7 million or 26
cents per share compared to a loss from continuing operations of $24.3 million
or $1.35 per share in fiscal 1993. The net impact of the unusual items
described above was to reduce net income for fiscal 1994 by $4.8 million or 27
cents per share. The increase in federal income tax rates resulting from the
Omnibus Budget Reconciliation Act, implemented in August 1993, increased net
income in fiscal 1994 by $2.8 million or 16 cents per share and increased the
deferred tax asset.
________________________________________________________________________________
________________________________________________________________________________
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1995, the Company had $84.6 million of cash and cash
equivalents and $74.2 million available under its revolving credit agreement.
Over the next several years, the Company expects to increase its investments
in program inventory in connection with increased deliveries and anticipated
new business opportunities. The Company believes that its financial resources
are adequate to meet its requirements during this time period.
Cash provided by operating activities during fiscal 1995 totaled $27.5
million compared with $80.5 million for the prior fiscal year. Contributing
to the positive cash flow in fiscal 1995 and 1994 were cost reduction efforts,
increased productivity, and improved collection efforts on receivables.
Fiscal 1995 cash provided by operating activities was reduced by a $36 million
contribution to the Company's pension plans compared with $17 million in
fiscal 1994. Cash provided by operating activities for fiscal 1994 included
significant settlements associated with the restructuring of certain
contracts, several one-time payments for non-recurring tasks, and proceeds
from the sale of the business jet line of business. Cash provided by
operations is subject to significant variations from period to period.
The Company's total financings (balance sheet debt plus off-balance sheet
financings) aggregated $605.6 million at July 31, 1995, compared to $671.1
million at July 31, 1994. Balance sheet debt decreased $34.2 million from
$589.0 million on July 31, 1994, to $554.8 million on July 31, 1995. In
January 1995, the Company made the annual $12.5 million principal payment on
its 9.35% Senior Notes and in July 1995, the Company made voluntary
prepayments of $10.7 million on its 9.35% Senior Notes and $10.7 million on
its 9.33% Senior Notes. As a result of such prepayments, the commitment under
the Company's revolving credit agreement was reduced from $110 million to
$91.1 million. The availability of this commitment is also reduced by an
outstanding $16.9 million stand-by letter of credit. The revised commitment
will be reduced by an additional $8.3 million every six months beginning in
October 1995 until it reaches $66.2 million. The Company anticipates that it
will replace the existing revolving credit agreement with a new facility
during fiscal 1996.
The Company has a $40 million accounts receivable sales program, down from
$60 million at July 31, 1994. Under this off-balance sheet financing program,
the Company sells receivables from specified customers on an on-going basis.
Due to the slowdown in the aerospace industry and the resulting reduction in
the Company's sales, the amount of outstanding receivables from these
customers falls, from time to time, below levels required to support the
facility. As a result, the Company has elected to deposit cash collateral
when necessary to support the facility and has withdrawn cash when it is no
longer required to be deposited. At July 31, 1995, $13.5 million of cash
collateral was on deposit thereby reducing the effective utilization of this
program to $26.5 million.
The Company is also a party to certain equipment leases, treated as an
off-balance sheet financing, totaling $24.3 million at July 31, 1995. During
the second quarter of fiscal 1995, the Company restructured a major sales
leaseback agreement reducing the size of this financing by approximately $22
million. In connection with this restructuring, the equipment lessors
released their interest in certain Company equipment and receivables and
released the Company from its potential obligation to prepay up to $10 million
of equipment lease rentals.
At July 31, 1995, the underfunded status (excess of accrued benefit
obligations over plan assets) of the Company's defined benefit plans was $64.0
million, a reduction of $60.0 million from $124.0 million at July 31, 1994.
The improved funded status resulted primarily from an increase in the discount
rate used to calculate the present value of future pension plan liabilities,
the substantial contribution made by the Company in fiscal 1995, and market
gains. Reflecting a rise in market interest rates, the Company increased its
discount rate to 8.25 percent for its fiscal 1995 valuation from the 7.5
percent used for its fiscal 1994 valuation. This decrease in the underfunded
status of the plans resulted in a $17.5 million reduction in the charge to
shareholders' equity in fiscal 1995 and a $11.7 million decrease to the
Company's deferred tax asset account.
________________________________________________________________________________
________________________________________________________________________________
The Company's required annual contribution to its defined benefit plans is
determined in accordance with IRS regulations. Due to the underfunded status
of the pension plans, these regulations required the Company to make
significant annual cash contributions to the pension plans. During fiscal
1995, the Company's contributions to its pension plans aggregated $36.0
million. A significant level of contributions is expected to continue until
the plans approach a fully funded status. The Company expects to have
sufficient liquidity to make these increased contributions. See "Notes to the
Consolidated Financial Statements -- Note 9."
The Company's net inventory increased to $390.3 million at July 31, 1995
from $363.2 million at July 31, 1994. Production inventory declined
reflecting the reduced sales volume and the efforts of management to control
inventory levels through shorter lead times and just-in-time contracts. In
addition, pre-production inventory declined as prior investments were
recovered from customers, but grew on the 737-700 program as the program
progressed through the design and tooling stages. Progress payments and
advances declined as the Company delivered units and certain government
programs neared completion. Excess-over-average inventory also increased on
certain programs due to implementation of design changes, higher than
anticipated costs, schedule slides, and initial production costs on the MD-90
program.
Capital expenditures for property, plant, and equipment totaled $8.1
million for fiscal 1995, up from $5.8 million for fiscal 1994. The Company
substantially curtailed capital expenditures for fiscal 1995 and 1994 in line
with other cost cutting efforts. This level of spending is expected to
increase over the next several years.
The Company's firm backlog, which includes the sales price of all
undelivered units covered by customers' orders, was approximately $1.0 billion
at July 31, 1995, compared to $1.2 billion at July 31, 1994. Approximately
$0.5 billion of the $1.0 billion backlog is scheduled to be delivered in
fiscal 1996. (Sales during any period include 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. The Company has an additional $2.8 billion in anticipated backlog,
which represents the sales price of units which the Company expects that its
customers will order under existing contracts and the Company will deliver
within seven years.
ADDITIONAL ITEMS
During November 1994 through January 1995, inspection of commercial
aircraft revealed a cracked spar cap on two wing pylons. The company has
warranted these applications to its customer. Investigation indicates that
the wing pylon spar caps, which were sourced, assembled and supplied by a
major subcontractor to the Company, did not receive a required process step.
Analysis and testing show that there are no airworthiness or safety of flight
concerns with continued aircraft operations. Subsequent fleetwide inspections
have revealed no other cracks; however, a replacement program is being
implemented. The Company expects that replacement will occur during regularly
scheduled maintenance. The spar caps will require replacement on
approximately 120 aircraft over a period of several years. The wing pylon is
warranted to Rohr by its subcontractor and the Company believes that the cost
of removing and replacing the spar cap components for the wing pylon, which is
expected to approximate $315,000 per aircraft, will be primarily the
responsibility of the subcontractor. To date the subcontractor has not agreed
to pay all of these costs, but has already borne some of the costs incurred
for the replacement program to date. Further, the Company believes that, under
the terms of its subcontractors contractual warranty, it will recover the
substantial portion of its own cost, and that the resolution of this matter
will not have a material adverse effect on the Company's financial condition.
In addition, the Company acquired materials directly from the spar cap
materials supplier, a small company with limited financial resources. Some of
these materials were not processed to specifications before use in various
aircraft applications. The Company has warranted these applications. With
respect to these other applications, no failures have been noted to date and
the Company and its customers are investigating whether any replacement or
repair will be required.
________________________________________________________________________________
________________________________________________________________________________
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. 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 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 1995 were approximately $0.4 million and are
expected to be approximately $0.3 million during fiscal 1996. From inception
to July 31, 1995, the Company has expended approximately $3.7 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, alternative cleanup technologies and methods,
insurance and other recoveries, and in some cases the extent or uncertainty of
the Company's involvement. However, preliminary estimates of cleanup costs for
the Rio Bravo, Chatham Brothers, and Casmalia waste disposal sites were
approximately $7 million, $30 million, and $70 million respectively, 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 $0.5 million for the Rio Bravo site, $0 for the Chatham
Brothers site (based on the Company's belief that it never used that site),
and $1.8 million for the Casmalia site. The Company does not yet know about
the ability of all of the other waste generators using the Casmalia and Rio
Bravo sites to fund their allocable share, and the Company could be found
jointly and severally liable with all waste generators using such sites. 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, 1995, 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 $6.3 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 1996 as in
fiscal 1995, which the Company anticipates, costs for these elements in fiscal
1996 should be comparable to the current rate of expenditure for fiscal 1995.
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, 1995, the Company's deferred tax asset was $111.5 million,
consisting of $96.7 million for federal tax purposes and $14.8 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 NOL carryforward periods. Management
expects that a sufficient level of taxable income will result in years
subsequent to fiscal 1995 and prior to the expiration of the NOLs to realize
the deferred tax asset recorded at July 31, 1995.
Based on tax rates in effect on July 31, 1995, the Company must generate
approximately $290 million of future taxable income (net of $210 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 2003 through 2010 for full realization of
the net deferred tax asset.
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 1980's
and early 1990's, 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. For
example, the Company has been able to reduce its work force through
consolidation and downsizing. 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. The
Company believes it will be able to generate, on average, at least $36 million
in pretax income for each of the next eight years, in order to fully utilize
the deferred tax asset (assuming all temporary differences between asset and
liability values for financial reporting and income tax purposes reverse
during that period). This level of annual pretax income would be $21.4 million
in excess of reported fiscal 1995 pretax income of $14.6 million from
continuing operations.
The availability of the Company's NOLs may be limited under the Tax Reform
Act of 1986 as a result of changes that may occur in the ownership of the
Company's stock in the future, principally relating to a change in control.
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.
________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(IN THOUSANDS)
JULY 31,
----------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 84,584 $ 115,996
Short-term investments - 17,568
Accounts receivable 72,152 93,143
Inventories:
Work-in-process 429,578 444,076
Raw materials, purchased parts and supplies 23,367 23,441
Less customers' progress payments and advances (62,670) (104,321)
-----------------------------------------------------------------------
Inventories - net 390,275 363,196
Deferred tax asset 6,493 36,353
Prepaid expenses and other current assets 13,685 18,493
-----------------------------------------------------------------------
TOTAL CURRENT ASSETS 567,189 644,749
PROPERTY, PLANT AND EQUIPMENT - NET 217,051 222,063
INVESTMENT IN LEASES 34,657 37,145
DEFERRED TAX ASSET 105,020 97,135
OTHER ASSETS 52,623 55,755
------------------------------------------------------------------------
$976,540 $1,056,847
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts and other payables $125,861 $ 129,674
Salaries, wages and benefits 32,011 37,100
Taxes on income 451 2,343
Current portion of long-term debt 14,119 14,952
-----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 172,442 184,069
LONG-TERM DEBT 540,658 574,038
PENSION AND POST-RETIREMENT
OBLIGATIONS - LONG-TERM 69,386 125,004
OTHER OBLIGATIONS 18,123 26,827
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 18,068,076 and 18,041,680
shares, respectively 18,068 18,042
Additional paid-in capital 102,887 102,598
Retained earnings 93,394 82,168
Minimum pension liability adjustment (38,418) (55,899)
-----------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 175,931 146,909
-----------------------------------------------------------------------
$976,540 $1,056,847
=======================================================================
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
________________________________________________________________________________
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT FOR PER-SHARE DATA)
YEAR ENDED JULY 31,
------------------------------------------------------------------------------
1995 1994 1993
------------------------------------------------------------------------------
SALES $ 805,000 $ 918,141 $1,149,503
COSTS AND EXPENSES 714,173 830,474 1,097,141
GENERAL AND ADMINISTRATIVE
EXPENSES 26,198 28,352 43,800
UNUSUAL ITEMS (NOTE 9) - 7,926 -
------------------------------------------------------------------------------
OPERATING INCOME 64,629 51,389 8,562
INTEREST - NET 49,986 46,836 47,883
------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS
BEFORE TAXES ON INCOME 14,643 4,553 (39,321)
TAXES (BENEFIT) ON INCOME 6,150 (116) (15,064)
----------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 8,493 4,669 (24,257)
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS
- NET OF TAXES (NOTE 11) 3,879 2,258 (6,324)
------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 12,372 6,927 (30,581)
LOSS FROM EXTRAORDINARY
ITEM - NET OF TAXES (NOTE 7) (1,146) - -
CUMULATIVE EFFECT THROUGH JULY 31,
1992, OF ACCOUNTING CHANGES
- NET OF TAXES (NOTE 2) - - (223,950)
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 11,226 $ 6,927 $ (254,531)
==============================================================================
PRIMARY EARNINGS (LOSS) PER AVERAGE
SHARE OF COMMON STOCK FROM:
Continuing Operations $ 0.47 $ 0.26 $ (1.35)
Discontinued Operations 0.21 0.12 (0.36)
Extraordinary Item (0.06) - -
Cumulative Effect Through July 31,
1992, of Accounting Changes - - (12.50)
------------------------------------------------------------------------------
NET PRIMARY EARNINGS (LOSS) PER
AVERAGE SHARE $ 0.62 $ 0.38 $ (14.21)
==============================================================================
FULLY DILUTED EARNINGS (LOSS) PER
AVERAGE SHARE OF COMMON STOCK FROM:
Continuing Operations $ 0.47 $ 0.26 $ (1.35)
Discontinued Operations 0.16 0.12 (0.36)
Extraordinary Item (0.05) - -
Cumulative Effect Through July 31,
1992, of Accounting Changes - - (12.50)
------------------------------------------------------------------------------
NET FULLY DILUTED EARNINGS
(LOSS) PER AVERAGE SHARE $ 0.58 $ 0.38 $ (14.21)
==============================================================================
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
________________________________________________________________________________
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
(IN THOUSANDS)
---------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL MINIMUM PENSION
PAR VALUE PAID-IN RETAINED LIABILITY
$1 A SHARE CAPITAL EARNINGS ADJUSTMENT
--------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1992 $ 17,833 $ 101,261 $ 329,772 $ -
Common stock issued to
employee benefit plans 67 673
Stock plans activity 96 378
Net loss (254,531)
Minimum pension
liability adjustment (Note 9) (13,306)
--------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1993 17,996 102,312 75,241 (13,306)
Stock plans activity 46 286
Net Income 6,927
Minimum pension
liability adjustment (Note 9) (42,593)
--------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1994 18,042 102,598 82,168 (55,899)
Stock plans activity 26 289
Net Income 11,226
Minimum pension liability
adjustment (Note 9) 17,481
--------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1995 $ 18,068 $ 102,887 $ 93,394 $ (38,418)
============================================================================================
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 11,226 $ 6,927 $(254,531)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 22,148 22,538 25,578
Cumulative effect of accounting changes -
net of taxes - - 223,950
Changes due to (increase) decrease in
operating assets:
Accounts receivable 29,059 27,500 84,013
Inventories - net (22,034) 71,497 34,447
Prepaid expenses and other assets 5,291 (1,459) 4,514
Changes due to increase (decrease) in operating
liabilities:
Trade accounts and other payables (10,206) (56,000) (6,464)
Pension and post-retirement obligations (26,642) 5,517 (5,269)
Taxes on income and deferred tax asset 8,332 1,176 (29,432)
Other 10,373 2,837 4,251
--------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,547 80,533 81,057
--------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale (purchase) of short-term investments 17,568 (17,568) -
Proceeds (repurchase) from sale-leaseback
transactions (21,782) - 52,247
Purchase of property, plant and equipment (8,135) (5,784) (27,536)
Net advances on discontinued operations (5,045) 5,045 -
Other 1,280 (907) (1,180)
--------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (16,114) (19,214) 23,531
--------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from 9.33% senior notes - - 62,000
Net proceeds from 11.625% senior notes - 95,690 -
Net proceeds from 7.75% convertible subordinated
notes - 55,515 -
Annual principal payment of 9.35% senior notes (12,500) (12,500) (12,500)
Net prepayment of 9.33% senior notes (11,195) - -
Net prepayment of 9.35% senior notes (11,286) - -
Repayment of medium-term notes - (35,000) (10,000)
Net short-term borrowings (repayments) - - (20,000)
Long-term borrowings under revolving credit
agreement - 115,000 90,000
Repayment of borrowings under revolving credit
agreement - (165,000) (120,000)
Repayment of other long-term borrowings (2,323) (2,618) (36,387)
Proceeds (repayment) from cash values in
insurance policies - (9,907) 9,907
Reduction in sales of receivable sales program (20,000) - (45,000)
Cash collateral for receivable sales program 13,003 (26,503) -
Stock contributions to employee benefit plans - - 741
Other 1,456 (2,186) (2,285)
--------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (42,845) 12,491 (83,524)
--------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (31,412) 73,810 21,064
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 115,996 42,186 21,122
--------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 84,584 $ 115,996 $ 42,186
==================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest, net of amount capitalized $ 52,010 $ 41,622 $ 47,758
Income taxes (1,958) 174 9,802
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Sale of receivables - - 60,000
Repurchase of receivable or inventory equivalents - - (105,000)
==================================================================================================
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
________________________________________________________________________________
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. SALES AND EARNINGS
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 certain commercial and all
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. Contract
accounting generally places limitations on the combining of contracts and
prohibits the anticipation of future contracts in determining the contract
profit center. Approximately one-half of the Company's sales during fiscal
years 1995, 1994, and 1993 were accounted for using the contract method of
accounting.
Several major commercial programs, under which spares and technical
product support are sold directly to airlines, are accounted for under the
program method of accounting, a method which existed in practice for many
years prior to the issuance of SOP 81-1. Guidelines for use of program
accounting have been developed in practice and are not codified by
authoritative accounting literature. This method of accounting is followed by
relatively few public companies in a limited number of industries. It applies
in situations where the economics of producing and marketing the program
product extend beyond the initial production order. The most significant
differences from contract accounting are that (1) the quantity of units
included in the profit center under program accounting includes existing and
anticipated contracts, and (2) program units may be sold to more than one
customer. The Company uses program accounting in those circumstances where it
is able to make reasonably dependable estimates of (1) the value of
anticipated production units and spares sales in future contracts, (2) the
length of time to produce and sell those additional production units and
spares, and (3) the production costs and selling prices associated with such
units and spares. Typically, the Company applies program accounting on
programs for which the Company is responsible for total systems integration
and continuing product support.
Profit is estimated based on the difference between total estimated
revenue and total estimated cost of a contract or program and is recognized
evenly 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 or
program 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 pre-production effort (primarily tooling and design), plus the cost of
manufacturing both a specified number of production units and, under the
program method of accounting, those spares which are expected to be delivered
concurrently with such production units. The specified number of production
units used to establish the profit margin is predicated upon market forecasts
and does not exceed the lesser of those quantities assumed in original program
pricing or those quantities which the Company now expects to deliver in the
periods assumed in original program pricing. The number of units used to
estimate profit margin is increased when firm orders exceed the number of
units used for pricing purposes. Generally, spares, as a percentage of total
deliveries, increase as a program matures and are sold at higher prices than
production units. This higher price reflects, in part, additional costs
related to technical and customer support activities.
________________________________________________________________________________
________________________________________________________________________________
Under both the contract and program methods of accounting, the Company's
sales are primarily under fixed-price contracts, many of which contain
escalation clauses and require delivery of products over several years. Sales
and profits on each contract or program are recognized primarily in accordance
with the percentage-of-completion method of accounting, using the units-of-
delivery method. Revisions of estimated profits on contracts or programs are
included in earnings by the reallocation method, which spreads the change in
estimate over current and future deliveries. Any anticipated losses on
contracts or programs and overruns of program pre-production costs are charged
to earnings when identified. Both the contract and program methods of
accounting involve the use of various estimating techniques to project
estimated costs at completion and may include estimates of recoveries on
claims asserted against the customer for changes in specifications. These
estimates involve various assumptions and projections relative to the outcome
of future events. Paramount are assumptions relative to labor performance and
anticipated future labor rates, and projections relative to material and
overhead costs. These assumptions involve various levels of expected
performance improvements. Program accounting also requires estimates of the
market for a program and the spares expected to be ordered. The Company
reevaluates its estimates quarterly for all significant contracts and
programs. Changes in estimates are reflected 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 1c.
C. 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 and programs include certain pre-production 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 or program, 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 pre-production) cost over-runs, builds
during the early years of the contract or program when the efficiencies
resulting from learning are not yet fully realized and declines as the program
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. For programs under
the program method of accounting, excess-over-average inventory also builds
until sales of spares, as a percentage of total sales, equal or exceed the
percentage used for the overall profit margin calculation.
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 or program exceeds the anticipated remaining
sales value of such contract or program, 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 programs and contracts with long production cycles, much of which
is not expected to be realized within one year.
________________________________________________________________________________
________________________________________________________________________________
D. 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 assesses on an annual basis its ability to recover the
carrying value of its long-lived assets. If management concludes that the
carrying value will not be recovered from future activities, an impairment
write-down is recorded to reduce the asset to its estimated fair value.
E. 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.
F. RESEARCH AND DEVELOPMENT
Research and development costs incurred for the development of proprietary
products are expensed as incurred as part of general and administrative
expense. These costs have not been material to operations during the periods
presented. 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.
G. 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.
H. 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 dilutive convertible notes and debentures of the
Company had been converted as of the beginning of the period.
I. 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 to be cash equivalents. Cash equivalents are stated at cost which
approximates market.
J. 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.
K. INDUSTRY SEGMENTS
The Company considers itself to operate in one industry segment.
________________________________________________________________________________
________________________________________________________________________________
NOTE 2 - ACCOUNTING CHANGES
In fiscal 1993, the Company changed certain elements in the application of
accounting principles relating to long-term programs and contracts. In
addition, the Company also adopted the provisions of SFAS No. 106, "Employers'
Accounting for Post-Retirement Benefits Other than Pensions", and SFAS No.
109, "Accounting for Income Taxes". Each change requires that the Company
calculate the effect of the change in accounting principles on retained
earnings as of the first day in the fiscal year of change. These changes did
not affect the Company's cash flow. The cumulative effect of these changes for
the periods through July 31, 1992, was a charge of $224.0 million, net of
income tax benefits of $139.0 million, substantially all of which related to
the change in application of accounting principles related to long-term
programs and contracts.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, which relate primarily to long-term programs and
contracts, consist of the following (in thousands):
JULY 31,
------------------------------------------------------------------------------------------------------------------------------------
1995 1994
-----------------------------------------------------------------------------------------------------------------------------------
Amount billed $ 41,884 $ 67,487
Recoverable costs and accrued profit on
units delivered but not billed 12,422 10,351
Recoverable costs and accrued profit on
progress completed but not billed 4,533 871
Unrecovered costs and estimated profit
subject to future negotiations 13,313 14,434
------------------------------------------------------------------------------------------------------------------------------------
$ 72,152 $ 93,143
====================================================================================================================================
"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. Some of these recoverable costs
are 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, which may be longer than one year.
"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, 1995, are estimated recoveries on constructive change
claims related to government imposed redefined acceptance criteria on the
Grumman F-14 and the Boeing E3/E6 programs. Management believes that amounts
reflected in the financial statements are reasonable estimates of the ultimate
settlements. The resolution of these items may take several years.
________________________________________________________________________________
________________________________________________________________________________
The Company has a $40 million accounts receivable sales program under
which it sells 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 the amount of receivables owned by the
trust from time to time. Due to the slowdown in the aerospace industry and the
resulting reduction in the Company's sales, the amount of outstanding
receivables owned by the trust has fallen below levels which existed at the
start of the facility. As a result, the Company has elected to deposit cash
collateral from time to time as required to support the facility. The Company
had cash collateral on deposit totaling $13.5 million and $26.5 million at
July 31, 1995 and 1994, respectively. The cost associated with the sale of
receivables under the current facility is 7.57% per year. These costs, and
those of a predecessor facility, all of which have been reflected as a
reduction in sales values, were $3.6 million, $4.5 million, and $5.3 million
in fiscal 1995, 1994, and 1993, respectively.
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:
YEAR ENDED JULY 31,
-------------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------------
Boeing 17% 15% 18%
International Aero Engines 14 16 9
Rolls-Royce 13 10 8
CFM International 11 9 8
Pratt & Whitney 10 14 17
McDonnell Douglas 8 7 11
General Electric 7 9 7
Airbus Industrie 6 3 6
Lockheed 5 6 3
United Technology 4 4 6
Other 5 7 7
==================================================================
Total sales to the U.S. Government (including direct sales and indirect
sales through some of the prime contractors shown above) accounted for 12
percent, 14 percent, and 14 percent of sales from continuing operations in the
years ended July 31, 1995, 1994, and 1993, 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 38%, 24%, and 26% of total sales for fiscal
1995, 1994, and 1993, respectively. Of the total sales, 33%, 22%, and 23%
were to Europe for fiscal 1995, 1994, and 1993, respectively.
________________________________________________________________________________
________________________________________________________________________________
NOTE 4 - INVENTORIES
Work-in-process inventories, which relate primarily to long-term contracts
and programs, are summarized as follows (in thousands, except quantities):
AIRCRAFT ORDER STATUS (1) COMPANY ORDER STATUS WORK-IN-PROCESS INVENTORY
-------------------------- --------------------------------------- ----------------------------------------
AS OF 6/30/95 AS OF 7/31/95 AS OF 7/31/95
(2) Firm (3)
Delivered Unfilled Unfilled Program Unfilled Fiscal Year Pre- Excess
Program to Airlines Orders Options Quantity Delivered Orders Complete(6) Production Production Over Average Total
------------------------------------------------------------------------------------------------------------------------------------
A340 nacelle (4) (5) 62 82 87 118 73 14 1997 $ 11,210 49,805 $19,280 $ 80,295
PW4000 nacelle for the
A300/A310 and
MD-11 (4) 268 17 48 395 272 16 2003 19,230 16,463 32,107 67,800
MD-90 (4) (5) 5 98 129 401 13 30 2006 8,405 83,405 22,832 114,642
V2500 nacelle for the
A319/A320/A321 (4) (5) 192 131 157 298 200 37 1998 16,193 7,441 0 23,634
CF6-80C nacelle for the
747/767, MD-11 and
A300/A310 (5) 644 197 255 829 680 132 1998 22,158 188 14,953 37,299
CFM56-5 nacelle for the
A319/A320/A321 (5) 339 189 131 554 351 172 2000 19,406 1,740 24,517 45,663
MD-11 pylon (4) (5) 140 22 71 200 150 20 1999 13,168 0 0 13,168
737-700 (5) (7) 0 146 108 TBD 0 0 TBD 16 14,068 0 14,084
Others 18,576 14,417 0 32,993
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1995 $128,362 $187,527 $113,689 $429,578
===================================================================================================================================
Balance at July 31, 1994 $172,799 $202,299 $ 68,978 $444,076
====================================================================================================================================
(1) Represents the aircraft order status as announced by the aircraft
manufacturers 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. Spares
(which are not included in this quantity) anticipated to be delivered
concurrently with the production units for the above aircraft are also used
in calculating average unit cost. Total spares sales values used in
calculating average unit cost at July 31, 1995, were $92,292 on the A340,
$330,744 on the PW4000, $278,173 on the MD90, $131,881 on the V2500,
$189,306 on the CF6-80C, $232,490 on the CFM56-5, and $18,663 on the MD-11.
Total spares values sold as of July 31, 1995, were $45,822 on the A340,
$212,034 on the PW4000, $6,647 on the MD90, $86,574 on the V2500, $138,130
on the CF6-80C, $132,607 on the CFM56-5, and $15,806 on the MD-11. The
Company does not have orders for all of these units at this time.
(3) Represents the number of aircraft for which the Company has firm unfilled
orders.
(4) Program quantity represents the lesser of those quantities assumed in
original program pricing or those quantities which the Company now expects
to deliver in the periods assumed in original program pricing.
(5) Programs accounted for in accordance with the program method of
accounting.
(6) The year presented for each program or contract represents the fiscal year
in which the final production and spares units included in the program
quantity will be delivered. The expected life of a program is often
significantly longer and as additional orders are received, program
quantity is increased and this date is extended.
(7) Program quantity to be determined. New program; quantity not to exceed
that used by the prime manufacturer.
________________________________________________________________________________
________________________________________________________________________________
On certain long-term programs, the Company has agreed to recover pre-
production costs (primarily tooling and design) over an expected number of
deliveries, including spare parts. 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.
Excess-over-average inventory represents the cost of in-process and
delivered units less, for each such unit, the current estimated average cost
of the units in the program. Recovery of these inventoried costs assumes (i)
certain production efficiencies, (ii) the sale of the program quantity used in
estimating the profit margin, (iii) a specified allocation of sales among
production units and spare units, and (iv) the attainment of an estimated
spares margin that is substantially higher than the margin of production
units. Spares prices are higher than production unit prices, in part, due to
additional costs related to technical and customer support activities. If
these program assumptions are not attained, then substantial amounts of
unrecoverable costs may be charged to expense in subsequent periods.
To the extent that a forward loss is encountered on a program, the amount
of such loss is offset against the inventory of such program, (until such
inventory has been depleted). The loss is offset first against excess-over-
average, followed by pre-production, then production.
Contractual terms on certain programs provide varying levels of recovery
commitments for specified amounts of pre-production costs. Certain programs
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 these programs.
The excess of deferred program 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, 1995, is $16.5 million on the A340 and $106.2 million on
the MD-90.
The Company has used forward contracts 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, 1995, the Company had no foreign exchange contracts outstanding to
purchase foreign currencies.
________________________________________________________________________________
________________________________________________________________________________
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
JULY 31,
---------------------------------------------------------------
1995 1994
---------------------------------------------------------------
Land $ 25,132 $ 25,234
Buildings 205,637 208,635
Machinery and equipment 282,427 253,480
Construction in progress 10,400 12,688
---------------------------------------------------------------
523,596 500,037
Less accumulated depreciation and
amortization (306,545) (277,974)
---------------------------------------------------------------
Property, plant and equipment - net $ 217,051 $ 222,063
===============================================================
Included in the above categories are assets recorded under capitalized
leases with original cost totaling $50.6 million at July 31, 1995 and 1994.
NOTE 6 - TAXES ON INCOME
The provision (benefit) for taxes on income is comprised of the following
(in thousands):
JULY 31,
---------------------------------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------------
CURRENTLY PAYABLE:
Federal income taxes $ 900 $ 1,320 $ 400
Foreign income taxes (90) 400 1,000
State income taxes 240 1,200 -
DEFERRED:
Federal income taxes 2,310 (3,660) (12,935)
State income taxes 2,790 624 (3,529)
---------------------------------------------------------------------------
$6,150 $ (116) $(15,064)
===========================================================================
________________________________________________________________________________
________________________________________________________________________________
The difference between the income tax provision (benefit) computed at the
federal statutory rate and the actual tax provision (benefit) is accounted for
as follows (in thousands):
JULY 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------------------------------------------------------------------------
Taxes (benefit) computed at the federal
statutory tax rate $ 5,125 $ 1,594 $ (13,369)
Increase (reduction) resulting from:
State income taxes, net of federal tax benefit 761 237 (2,176)
Effect of statutory rate increase (2,870)
Tax-exempt income from Foreign Sales Corporation (395) (680)
Non-deductible items 659 2,270
Utilization of reserves previously provided
for tax assessments (860)
Other 193 481
-----------------------------------------------------------------------------------------------
$ 6,150 $ (116) $ (15,064)
===============================================================================================
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 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):
JULY 31,
-------------------------------------------------------------------
1995 1994
-------------------------------------------------------------------
CURRENT:
Inventories $ 5,546 $ 36,512
Employee benefits 5,235 5,443
State taxes (4,288) (5,602)
-------------------------------------------------------------------
Net deferred tax asset - current $ 6,493 $ 36,353
===================================================================
LONG-TERM:
Depreciation $ 16,500 $ 25,308
Deferred gain on sale/leaseback 8,249 8,707
Minimum pension liability adjustment 25,826 37,578
Net operating loss carryforward 83,135 53,440
Tax credit carryforward 8,883 10,107
Investment in leases (35,973) (39,393)
Other - net (1,600) 1,388
-------------------------------------------------------------------
Net deferred tax asset - long-term $105,020 $ 97,135
===================================================================
________________________________________________________________________________
________________________________________________________________________________
The Company has federal NOLs totaling approximately $216 million at July
31, 1995, which expire in the years 2003 through 2010, and tax credit
carryforwards totaling $8.9 million which expire in the years 2003 through
2011.
When tax effected at the rates in effect July 31, 1995, the net deductible
temporary differences, tax credit carryforwards, and NOLs result in a deferred
tax asset of $111.5 million, consisting of $96.7 million for federal tax
purposes and $14.8 million for state tax purposes. Based on rates in effect
July 31, 1995, approximately $290 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.
During the fiscal year, the Company resolved the remaining audit issues
with the IRS regarding fiscal years 1984 and 1985. The resolution did not
have a material adverse effect on the Company and its financial position.
NOTE 7 - INDEBTEDNESS
The maturity schedule of the Company's debt is summarized as follows (in
thousands):
TOTAL AT
FISCAL YEAR ENDED JULY 31, JULY 31,
------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter 1995 1994
------------------------------------------------------------------------------------------------------------
11.625% Senior Notes 100,000 100,000 100,000
9.35% Senior Notes 12,500 12,500 12,500 12,500 1,757 51,757 75,000
9.33% Senior Notes 8,850 8,850 8,850 8,850 15,943 51,343 62,000
Other Debt 398 346 303 62 62 16,500 17,671 18,982
------------------------------------------------------------------------------------------------------------
12,898 21,696 21,653 21,412 10,669 132,443 220,771 255,982
CAPITAL LEASES 2,116 1,975 1,870 1,766 1,662 6,800 16,189 15,290
LESS IMPUTED INTEREST (895) (797) (700) (605) (510) (1,176) (4,683) (4,782)
------------------------------------------------------------------------------------------------------------
1,221 1,178 1,170 1,161 1,152 5,624 11,506 10,508
SUBORDINATED DEBT:
7.75% Convertible Notes 57,500 57,500 57,500
9.25% Debentures 7,500 7,500 7,500 127,500 150,000 150,000
7.00% Convertible Debentures 5,750 5,750 103,500 115,000 115,000
------------------------------------------------------------------------------------------------------------
7,500 13,250 13,250 288,500 322,500 322,500
------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 14,119 22,874 30,323 35,823 25,071 426,567 554,777 588,990
------------------------------------------------------------------------------------------------------------
Less Current Portion of Long-Term Debt (14,119) (14,952)
------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT $540,658 $574,038
============================================================================================================
The fair value of the Company's total long-term debt as of July 31, 1995
is estimated to be $544.9 million compared to the carrying value of $554.8
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 at July 31, 1995 included: indebtedness,
shown in the table above; the accounts receivable sales program in the net
amount (after the deposit of cash collateral) of $26.5 million, which is
reported as a reduction to accounts receivable (see Note 3); and two sale-
leaseback transactions, accounted for as operating leases, totaling $24.3
million. The Company's total financings were $605.6 million and $671.1
million at July 31, 1995 and 1994, respectively.
The Company has an unsecured revolving credit agreement with a group of
banks, maturing in April 1997. In the fourth quarter of fiscal 1995,
concurrent with a prepayment to its privately placed senior note holders, the
total commitment under this agreement was reduced to $91.1 million. The
revised commitment is reduced by an additional $8.3 million every six months
beginning in October 1995 until it reaches $66.2 million. The Company
anticipates that it will replace the existing revolving credit agreement with
a new facility in fiscal 1996. Up to $30 million of the commitment is
available to support the issuance of letters of credit. At July 31, 1995,
$16.9 million of the commitment was used to support an industrial development
bond financing. No borrowings were outstanding on July 31, 1995.
Borrowings under this credit agreement generally incur interest at an
annual rate equal to the London Interbank Offered Rate plus 0.75% to 3.25%.
In addition, the agreement provides for a facility fee, payable on a monthly
basis at the rate of 0.35 to 0.75 of 1% on each lender's total commitment.
The specific interest rate and facility fee payable at any time are based upon
the Company's credit rating.
The Company's privately placed 9.35% Senior Notes due January 2000 require
principal payments of $12.5 million in January of each year until repaid. The
Company's privately placed 9.33% Senior Notes due December 2002 require
principal payments of approximately $8.9 million in December of each year,
beginning in 1996, until repaid. In the fourth quarter of fiscal 1995, the
Company voluntarily prepaid $10.7 million of its 9.33% Senior Notes and $10.7
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 $1.1 million or 6
cents per share, net of income tax benefit of $.7 million. The note holders
can require the Company to purchase the remaining principal amount of the
notes plus accrued interest and premium for yield adjustment in the event of
certain changes in control or ownership of the Company.
During the fourth quarter of fiscal 1994, the Company completed its
public offering of $100 million of 11.625% Senior Notes due May 2003 and the
concurrent offering of $57.5 million of 7.75% Convertible Subordinated Notes
due May 2004. Both series of notes are general unsecured obligations of the
Company and do not have 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 14, 1998, at a premium
price of 104.7 percent, and the Senior Notes are redeemable after May 14,
1999, at a premium price of 105.8 percent, both declining annually to par at
maturity. The note holders can require the Company to purchase the remaining
principal, plus accrued interest and premium in the event of certain changes
in control or ownership of the Company.
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 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 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,
1995. 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.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under operating leases with non-cancelable
terms of more than one year as of July 31, 1995 are as follows (in thousands):
----------------------------------
1996 $ 5,500
1997 4,600
1998 4,100
1999 2,800
2000 2,500
Thereafter 6,400
----------------------------------
$25,900
==================================
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 $8.5 million, $13.1 million and $15.9 million for
fiscal 1995, 1994 and 1993, 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 is subject to a
final decision and appeal. The Company and the 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, 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.
The Company has reached settlement agreements with its primary
comprehensive general liability insurers for reimbursement of its cleanup
costs at the site and has retained the right to file future claims against its
excess carriers.
The Company intends to continue to vigorously defend itself in the
Stringfellow matter and believes, based upon currently available information,
that the ultimate resolution 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. Effective January 1, 1995, the Company froze at current
levels the benefits earned under the retirement plan covering approximately
two-thirds of its employees. Concurrently, for the same group of employees,
the Company adopted a cash balance plan and enhanced the benefits under its
primary defined contribution plan. The cash balance plan provides benefits
based on age and years of service plus interest at specified levels. Benefits
under the retirement plan covering certain union employees are based on a
negotiated amount per year of service. The Company has made contributions to
independent trusts for the minimum funding requirements of these plans under
IRS regulations. The Company also has supplemental retirement plans which are
generally unfunded.
Defined benefit plans expense consists of the following components (in
thousands):
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------------------------
Service cost $ 9,574 $ 7,017 $ 12,250
Interest cost on projected benefit obligation 36,462 36,686 34,601
Actual gain on plan assets (43,245) (9,168) (29,379)
Net amortization and deferral 12,118 (20,093) 1,605
-------------------------------------------------------------------------------
Total $ 14,909 $ 14,442 $ 19,077
===============================================================================
The adoption of the cash balance plan, net of the elimination of future
benefits under the retirement
________________________________________________________________________________
________________________________________________________________________________
plan, increased fiscal 1995 costs by $1.1 million. Fiscal 1994 expense
declined from the prior year primarily as a result of reduced employment
levels.
The following table summarizes the funded status of these plans and the
amounts recognized in the Consolidated Balance Sheets (in thousands):
JULY 31,
---------------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ 459,036 $ 471,678
Non-vested 20,252 22,702
----------------------------------------------------------------------------------
Accumulated benefit obligation 479,288 494,380
Effect of projected future salary increases 3,441 6,023
----------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date 482,729 500,403
Plan assets at fair value, primarily stocks, bonds,
other fixed income obligations and real estate 415,284 370,331
----------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (67,445) (130,072)
Unrecognized net loss 73,255 111,288
Unrecognized net asset from initial application
of SFAS No. 87 being recognized over
plans' average remaining service life (12,819) (15,822)
Unrecognized prior service cost 26,915 28,472
Additional minimum liability (87,480) (119,132)
----------------------------------------------------------------------------------
Pension liability recognized in the
Consolidated Balance Sheets $ (67,574) $ (125,266)
==================================================================================
At July 31, 1995, the Company's additional minimum liability for its
defined benefit plans was in excess of the unrecognized prior service costs
and net transition obligation and was recorded as a reduction of $38.4 million
to shareholders' equity, net of tax benefits of $25.8 million, in accordance
with SFAS No. 87, "Employers' Accounting for Pensions". At July 31,1994, the
reduction to shareholders' equity totalled $55.9 million.
The weighted average discount rate used in determining the present value
of the projected benefit obligation was 8.25 percent, 7.5 percent, and 8.5
percent respectively, for the years ended July 31, 1995, 1994, and 1993. 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 4.0 percent on current salaries through January 1, 1995, 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.
During fiscal 1994, the Company recognized a curtailment loss of $10.6
million for the write-off of unamortized pension past service costs relating
to the downsizing of employment levels. This loss is reflected as an unusual
item for the 1994 statement of operations net of a gain recognized on the sale
of a facility.
The Company also has certain defined contribution plans covering most
employees. Expenses for
________________________________________________________________________________
________________________________________________________________________________
these plans amounted to $2.8 million, $1.7 million and $3.4 million in fiscal
1995, 1994 and 1993, 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.
Post-retirement benefit costs, net of expected retiree contributions,
included the following components (in thousands):
YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------------------------------------------------------------------------
Service cost - benefits attributed to service during the period $ 146 $ 168 $ 196
Interest cost on accumulated post-retirement benefit obligation 408 465 549
Net amortization and deferral 32 - -
--------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $ 586 $ 633 $ 745
==================================================================================================
The liability for post-retirement health care benefits included the
following components (in thousands):
JULY 31,
--------------------------------------------------------------------------------------------------
1995 1994
--------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees $ 2,722 $ 2,671
Fully eligible active plan participants 180 214
Other active plan participants 2,425 2,749
Unrecognized net loss (690) (634)
--------------------------------------------------------------------------------------------------
Liability for post-retirement health care benefits $ 4,637 $ 5,000
==================================================================================================
The accumulated post-retirement benefit obligation was determined using
weighted average discount rates of 8.25 percent and 7.5 percent, respectively,
for the years ended July 31, 1995 and 1994. The plan is unfunded. Each year
the Company funds the benefits paid.
________________________________________________________________________________
________________________________________________________________________________
NOTE 10 - SHAREHOLDERS' EQUITY
Under the terms of certain covenants in several of the Company's principal
financing agreements, the Company may not pay cash dividends until after April
25, 1997. (See Note 7) Thereafter, the Company's ability to pay cash
dividends is substantially restricted.
The Company's 1989 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 2,500,000 shares
of common stock may be sold or issued under the plan. As a result of previous
option grants under this plan, 258,374 and 248,431 stock options and other
stock-based awards remained available for grant at July 31, 1995 and 1994,
respectively. The plan has no specific termination date except that Incentive
Stock Options may not be granted after July 31, 1999. 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, vesting, restriction on sale and forfeiture, as
applicable. Restricted shares purchased under this plan are subject to
restrictions on sale or disposal, which lapse in varying installments from one
to 10 years. During fiscal 1995, 14,000 restricted shares were purchased by
grantees at a price of $1.00 per share.
The Company's 1982 Stock Option Plan, under 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 two years after date of grant
and expire 10 years from date of grant.
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 becomes
exercisable six months after the date of grant and expire 10 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, 41,000 and 50,000 shares
remained available for grant at July 31, 1995 and 1994, respectively.
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 that occurs after the end of each fiscal year.
________________________________________________________________________________
________________________________________________________________________________
Under the various stock option plans, outstanding options for 2,267,359
and 2,037,769 shares of common stock were exercisable as of July 31, 1995 and
1994, respectively. Activity in these stock option plans for the three years
ended July 31, 1995, is summarized as follows:
OPTIONS OPTION PRICE
-----------------------------------------------------------------------------------
Balance at August 1, 1992 2,795,863 $10.625 - $31.625
Granted 155,000 8.875 11.375
Relinquished (30,880) 16.500 - 31.625
Forfeited (254,134) 10.625 22.125
-----------------------------------------------------------------------------------
Balance Outstanding at July 31, 1993 2,665,849 8.875 - 31.625
Granted 109,000 8.375 10.250
Relinquished (18,655) 16.500 - 31.625
Forfeited (33,150) 10.625 22.125
-----------------------------------------------------------------------------------
Balance Outstanding at July 31, 1994 2,723,044 8.375 - 31.625
Granted 19,000 9.125 10.250
Relinquished (7,180) 16.500 - 31.625
Forfeited (44,300) 10.625 23.875
Exercised (26,000) 10.625 12.000
-----------------------------------------------------------------------------------
BALANCE OUTSTANDING AT JULY 31, 1995 2,664,564 $ 8.375 - $31.625
===================================================================================
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, 1996 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:
JULY 31,
----------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------
Various stock plans 2,963,938 3,021,475
Conversion of subordinated debentures and notes 8,229,973 8,229,973
Warrants 600,000 600,000
----------------------------------------------------------------------------
11,793,911 11,851,448
============================================================================
NOTE 11 - 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
requires 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):
YEAR ENDED JULY 31,
------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------------------------------------------------------------------
Net sales $ 22,287 $ 40,286 $ 25,649
Income (loss) before taxes $ 6,486 $ 3,777 $(10,250)
Taxes on income (benefit) 2,607 1,519 (3,926)
------------------------------------------------------------------------------------------
Net income (loss) $ 3,879 $ 2,258 $ (6,324)
==========================================================================================
Net income (loss) per average share
of common stock $ 0.21 $ 0.12 $ (0.36)
==========================================================================================
________________________________________________________________________________
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
(in thousands except for pre-share data)
YEAR ENDED JULY 31, 1995
-----------------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH
-----------------------------------------------------------------------------------------------
SALES $192,156 $219,774 $210,759 $182,311
OPERATING INCOME 15,353 17,986 16,784 14,506
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES 2,291 5,438 4,676 2,238
INCOME FROM CONTINUING OPERATIONS 1,370 3,252 2,573 1,298
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES 497 337 87 2,958
INCOME BEFORE EXTRAORDINARY ITEM $ 1,867 $ 3,589 $ 2,660 $ 4,256
LOSS FROM EXTRAORDINARY ITEM, NET OF TAXES - - - (1,146)
NET INCOME $ 1,867 $ 3,589 $ 2,660 $ 3,110
PRIMARY EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK FROM:
CONTINUING OPERATIONS $ 0.08 $ 0.18 $ 0.14 $ 0.07
DISCONTINUED OPERATIONS 0.02 0.02 0.01 0.16
EXTRAORDINARY ITEM - - - (0.06)
NET PRIMARY EARNINGS $ 0.10 $ 0.20 $ 0.15 $ 0.17
-----------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK FROM:
CONTINUING OPERATIONS $ 0.08 $ 0.17 $ 0.14 $ 0.08
DISCONTINUED OPERATIONS 0.02 0.01 - 0.13
EXTRAORDINARY ITEM - - - (.05)
NET FULLY DILUTED EARNINGS $ 0.10 $ 0.18 $ 0.14 $ 0.16
===============================================================================================
Year ended July 31, 1994
-----------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
-----------------------------------------------------------------------------------------------
Sales $237,091 $234,800 $221,696 $224,554
Operating income before unusual items 16,567 14,048 14,099 14,601
Operating income after unusual items 16,567 14,048 6,173 14,601
Income (loss) from continuing operations
before taxes 4,728 2,206 (4,868) 2,487
Income (loss) from continuing operations 5,761 1,341 (2,953) 520
Income from discontinued operations, net of taxes 302 331 266 1,359
Net Income (loss) $ 6,063 $ 1,672 $ (2,687) $ 1,879
Primary earnings (loss) per average share
of common stock:
From continuing operations $ 0.32 $ 0.07 $ (0.16) $ 0.03
From discontinued operations 0.02 0.02 0.01 0.07
Net primary earnings (loss) $ 0.34 $ 0.09 $ (0.15) $ 0.10
===============================================================================================
The third quarter includes unusual items aggregating $7.9 million,
representing the write-off of unamortized pension past service costs related
to the downsizing of employment levels, net of a gain on the sale of the
Auburn, Washington facility, which was closed during the prior fiscal year.
________________________________________________________________________________
REPORT BY MANAGEMENT
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF ROHR, INC.
The consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles. These statements
necessarily include amounts based on judgments and estimates by the accounting
process.
The Company's operating and financial managers apply systems of internal
accounting controls that are designed to provide reasonable, but not absolute,
assurance that assets are safeguarded, that transactions are executed and
recorded in accordance with management's established policies and procedures,
and that accounting records are adequate for preparation of financial
statements and other financial information. Management's judgment with
respect to the relative cost and expected benefits of specific measures
determines the design, monitoring and revision of internal accounting control
systems.
The Company has a staff of internal auditors to review accounting records,
controls and practices on a planned, rotational basis and to determine
compliance with corporate policies.
The consolidated financial statements have been audited by Deloitte &
Touche LLP, independent certified public accountants, appointed annually by
the Board of Directors and ratified by the shareholders. Their responsibility
is to audit the Company's financial statements in accordance with generally
accepted auditing standards and to render an opinion that the statements
presented are in conformity with generally accepted accounting principles.
The voting members of the Audit Committee of the Board of Directors, none
of whom are employees of the Company, review the activities of the internal
auditors and independent certified public accountants to ascertain that each
is properly discharging its responsibility. These groups have free access to
the Audit Committee, and certain meetings with the independent certified
public accountants are held without the presence of management. The Audit
Committee held six meetings during fiscal 1995.
/s/ Bob Rau /s/ L.A. Chapman /s/ A. L. Majors
R. H. Rau L. A. Chapman A. L. Majors
President and Senior Vice President Vice President and and Controller
Chief Executive Officer Chief Financial Office (Chief Accounting Officer)
______________________________________________________________________________
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, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended July 31, 1995. 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, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended July 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in fiscal
year 1993 the Company changed certain elements in the application of
accounting principles relating to long-term programs and contracts and changed
its method of accounting for income taxes and for post-retirement benefits
other than pensions.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
September 11, 1995
________________________________________________________________________________
MANAGEMENT
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BOARD OF DIRECTORS
WALLACE BARNES Chairman of the Board of Rohr, Inc., and former Chairman,
Barnes Group Inc. Bristol, Conn. Director since 1989
PROF. EUGENE E. COVERT Professor, Department of Aeronautics and Astronautics,
Massachusetts Institute of Technology Cambridge, Mass. Director since 1986
WAYNE M. HOFFMAN Former Chairman of the Board, Tiger International, Inc. Los
Angeles, Calif. Director since 1982
SAM F. IACOBELLIS Executive Vice President and Deputy Chairman for Major
Programs, Rockwell International Corporation Seal Beach, Calif. Director since
1994
DR. D. LARRY MOORE President and Chief Operating Officer, Honeywell, Inc.
Minneapolis, Minn. Director since 1991
ROBERT M. PRICE Former Chairman and Chief Executive Officer, Control Data
Corporation Bloomington, Minn. Director since 1991
ROBERT H. RAU President and Chief Executive Officer, Rohr, Inc. Chula Vista,
Calif. Director since 1993
DR. WILLIAM P. SOMMERS President and Chief Executive Officer, SRI
International Menlo Park, Calif. Director since 1992
DR. JACK D. STEELE Former Dean, School of Business Administration, University
of Southern California Los Angeles, Calif. Director since 1976
JAMES R. WILSON President and Chief Executive Officer, Thiokol Corporation
Ogden, Utah Director since 1994
______________________________________________________________________________
OFFICERS
DANIEL ABEHSERA President and Director General, Rohr Europe
WALLACE BARNES Chairman of the Board
WILLIAM BILLINGSLEA, JR. Corporate Counsel and Assistant Secretary
F. PATRICK BURKE Vice President, Airline Support
LAURENCE A. CHAPMAN Senior Vice Presidentand Chief Financial Officer
KEITH D. GENTRY Vice President, Materiel
JAMES A. GOINGS Vice President, Manufacturing, Chula Vista
JOHN R. JOHNSON Senior Vice President, Programs, Technical Resources and
Quality Assurance
RICHARD W. MADSEN Vice President, General Counsel and Secretary
ALVIN L. MAJORS Vice President and Controller
ELAINE K. MILLS Manager, Corporate Stock Records and Assistant Secretary
DAVID A. RAMSAY Vice President, Human Resources
ROBERT H. RAU President and Chief Executive Officer
KENNETH W. SCHOLZ Treasurer
DAVID W. SHAW Vice President, Financial Planning and Control
RICHARD J. WARTERS Vice President, Technical Resources and Chief Engineer
DAVID R. WATSON Senior Vice President, Customer Support and Business
Development
GRAYDON A. WETZLER Senior Vice President, Operations
________________________________________________________________________________
ROHR PROFILE
--------------------------------------------------------------------------------
Incorporated in Delaware in 1969, Rohr, Inc. is the successor to an aerospace
manufacturing company founded in San Diego in 1940 and is now headquartered in
Chula Vista, California.
The Company had approximately 4,000 full-time employees at the end of
fiscal 1995 and is an Equal Opportunity Employer.
SHAREHOLDER INFORMATION
Rohr's common stock is traded principally on the following markets:
-- New York Stock Exchange (RHR)
-- Pacific Stock Exchange (RHR)
-- The Stock Exchange, London
The number of common shareholders of record on July 31, 1995 was 4,635.
The Company's fiscal year is from August 1 to July 31.
10-K REPORT REQUESTS
The Company will provide a copy of its most recent report to the
Securities and Exchange Commission on Form 10-K (excluding the exhibits
thereto) upon the written request of any beneficial owner of the Company's
securities as of the record date for the Annual Meeting (October 6, 1995)
without charge. Copies of the exhibits to Form 10-K are also available upon
request and after payment of the cost of reproducing such exhibits. Such
request should be addressed to Rohr, Inc., Attention: Shareholder Services,
850 Lagoon Drive, Chula Vista, CA 91910-2098.
TRANSFER AGENT AND REGISTRAR
Rohr's common stock transfer agent and registrar is the First Chicago
Trust Co. of New York at:
P.O. Box 2500, Jersey City, NJ 07303-2500 (Correspondence and address
changes)
P.O. Box 2506, Jersey City, NJ 07303-2506 (Certificate transfers)
Telephone: (800) 446-2617.
COMMUNICATING WITH ROHR
Mailing Address and Parcel Deliveries: 850 Lagoon Drive Chula Vista,
CA 91910-2098
Main Telephone: (619) 691-4111
Employment: (619) 691-4062
Investor Relations: (619) 691-3002 Fax: (619) 691-2222
Purchasing: (619) 691-2331 Fax: (619) 691-2584
Shareholder Records and Services: (619) 691-2214 Fax: (619) 691-2801
Telex: 69-5038
STOCK PRICE BY FISCAL QUARTER
1995 1994
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HIGH LOW High Low
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First Quarter $ 12-1/8 $ 8-5/8 $ 8-3/4 $ 6-3/4
Second Quarter 12-1/4 8-1/4 11-1/2 7-1/8
Third Quarter 12-3/4 10 11-1/8 8
Fourth Quarter 15-3/8 10-3/8 11-5/8 8-1/4
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