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1999 FINANCIAL REVIEW EXHIBIT 13
TABLE OF CONTENTS
Management's Discussion and Analysis........................ 1
Management's Responsibility for Financial Statements........ 16
Report of Independent Auditors.............................. 16
Consolidated Statement of Income for the years ended
December 31, 1999, 1998 and 1997......................... 17
Consolidated Balance Sheet at December 31, 1999
and 1998................................................. 18
Consolidated Statement of Cash Flows for the years
ended December 31, 1999, 1998 and 1997................... 19
Consolidated Statement of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997............. 20
Notes to Consolidated Financial Statements.................. 21
Quarterly Financial Data (unaudited)........................ 40
Selected Financial Data..................................... 41
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MANAGEMENT'S DISCUSSION AND ANALYSIS
WE BELIEVE THIS MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING
STATEMENTS. SEE THE LAST SECTION FOR CERTAIN RISKS AND UNCERTAINTIES.
RESULTS OF OPERATIONS
MERGER
On July 12, 1999, The BFGoodrich Company ("the Company" or "BFGoodrich")
completed its merger with Coltec Industries Inc. The merger has been accounted
for as a pooling-of-interests. Accordingly, all prior period consolidated
financial statements have been restated to include the results of operations,
financial position and cash flows of Coltec as though Coltec had always been a
part of BFGoodrich. As such, results for the three years ended December 31,
1999, 1998 and 1997 represent the combined results of BFGoodrich and Coltec (see
Note A to the Consolidated Financial Statements).
As a result of the merger, Coltec became a wholly-owned subsidiary of the
Company. In accordance with the terms of the merger, each share of Coltec common
stock was converted into the right to receive 0.56 shares of BFGoodrich common
stock, totaling 35.5 million shares of BFGoodrich common stock.
In addition, the Company issued options to purchase 3.0 million shares of
BFGoodrich common stock in exchange for options to purchase Coltec common stock
outstanding immediately prior to the merger. These options vest and become
exercisable in accordance with the terms and conditions of the original Coltec
options. Also, as a result of the merger, each 5 1/4% Convertible Preferred
Security issued by Coltec Capital Trust became convertible into 0.955248 of a
share of BFGoodrich common stock, subject to certain adjustments.
MERGER-RELATED AND CONSOLIDATION COSTS
(SEE NOTE D TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL DISCUSSION)
During 1999, the Company recorded merger related and consolidation costs of
$269.4 million before tax ($196.4 million after-tax, or $1.77 per share), of
which $12.3 million represents non-cash asset impairment charges. These costs
related primarily to personnel related costs, transaction costs and
consolidation costs. The merger related and consolidation reserves were reduced
by $218.2 million during the year, of which $207.1 million represented cash
payments.
During 1998, the Company recorded merger related and consolidation costs of
$10.5 million before tax ($6.5 million after tax, or $.06 per share), related to
costs associated with the closure of three facilities and an asset impairment
charge.
During 1997, the Company recorded merger-related and consolidation costs of
$77.0 million before tax ($69.5 million after tax, or $0.62 per diluted share)
in connection with the Rohr merger. In addition to the $77.0 million recorded as
merger - related and consolidation costs, the Company also recorded $28.0
million of debt extinguishment costs ($16.7 million after tax, or $0.15 per
diluted share) related to the Rohr merger which were reported as an
extraordinary item.
The Company has identified additional merger related and consolidation costs of
approximately $35 million that will be recorded throughout 2000. The timing of
these costs is dependent on the finalization of management's plans. These
charges consist primarily of costs associated with the consolidation of its
landing gear facilities, the reorganization of operating facilities and for the
relocation of personnel.
The Company expects to achieve costs savings of approximately $60 million per
year by 2002 related to the merger with Coltec.
SHARE REPURCHASE PROGRAM
On February 21, 2000, the Company's Board of Directors authorized the repurchase
of up to $300 million of the Company's common stock. Repurchases under the
program, which may not exceed 10 percent of the Company's issued shares of
common stock, may be made from time to time in the open market or in negotiated
transactions at price levels that the Company considers attractive. The program
will be funded from the Company's operating cash flows and short term borrowings
under existing credit lines.
2000 OUTLOOK
The Company expects the same market issues that have affected results during the
second half of 1999 to continue in 2000 (see segment discussion below). These
pressures, together with a further decline in commercial aircraft production,
will most likely result in relatively flat financial performance in 2000 as
compared to 1999. This outlook includes $25 million in annual headquarters cost
savings beginning in 2000 and significant operational savings through
consolidation of businesses and facilities. The Company is also currently
exploring ways to increase shareholder value, including the evaluation of
various financial and strategic alternatives related to our portfolio of
businesses.
TOTAL COMPANY
(DOLLARS IN MILLIONS) 1999 1998 1997
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SALES:
Aerospace....................... $3,617.4 $3,479.3 $3,026.1
Engineered Industrial
Products...................... 702.4 779.9 757.1
Performance Material............ 1,217.7 1,195.6 904.7
- ----------------------------------------------------------------
Total......................... $5,537.5 $5,454.8 $4,687.9
================================================================
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(DOLLARS IN MILLIONS) 1999 1998 1997
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OPERATING INCOME:
Aerospace....................... $ 558.7 $ 500.0 $ 325.8
Engineered Industrial
Products...................... 118.2 131.6 147.0
Performance Materials........... 150.4 145.8 128.2
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Total Reportable Segments....... 827.3 777.4 601.0
Merger Related and Consolidation
Costs......................... (269.4) (10.5) (77.0)
Corporate....................... (84.6) (83.7) (93.1)
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Total......................... $ 473.3 $ 683.2 $ 430.9
================================================================
Cost of sales was 71.4 percent of sales in 1999 compared with 71.8 percent in
1998 and 72.7 percent in 1997. The decrease in cost of sales as a percent of
sales in 1999 as compared to 1998 was a result of the Company's efforts to
improve productivity and to lower manufacturing and material costs. Margin
improvement in the Aerospace Segment in 1998 was partially offset by a margin
decline in the Engineered Industrial Products and Performance Materials Segments
as compared to 1997. Cost of sales in 1997 was also negatively impacted by the
MD-90 write-off as compared to 1998 levels (see detailed group discussions
below).
Selling and administrative costs were 15.2 percent of sales in 1999, compared
with 15.4 percent in 1998 and 16.5 percent in 1997. An increased focus on
controlling and reducing costs in 1999 resulted in the decrease in selling and
administrative costs between years despite level to declining sales at the
Engineered Industrial Products and Performance Materials Segments. The decrease
in 1998 as compared to 1997 was a result of additional long-term incentive
compensation expense in 1997 that resulted from exceeding the Company's three
year targets and achieving a maximum payout under the plan. (See detailed group
discussions below).
Income from continuing operations included various charges or gains (referred to
as special items) which affected reported earnings. Excluding the effects of
special items, income from continuing operations in 1999 was $361.7 million, or
$3.24 per diluted share, compared with $327.6 million, or $2.91 per diluted
share in 1998, and $261.1 million, or $2.34 per diluted share in 1997. The
following table presents the impact of special items on earnings per diluted
share.
(EARNINGS PER DILUTED SHARE) 1999 1998 1997
- ---------------------------------------------------------------
Income from continuing operations....... $1.53 $3.19 $1.75
Net (gain) on sold businesses......... (.04) (.34) (.15)
Gain on issuance of subsidiary
stock............................... -- -- (.07)
MD-90 write-off....................... -- -- .19
Merger-related and consolidation
costs............................... 1.77 .06 .62
Dilutive impact of convertible
preferred securities................ (.02) -- --
- ---------------------------------------------------------------
Income from continuing operations,
excluding special items............. $3.24 $2.91 $2.34
===============================================================
Income from continuing operations for the year ended December 31, 1999 includes
(i) $162.2 million ($1.47 per share) for costs associated with the Coltec merger
and an additional charge of $34.2 million ($0.30 per share) related to segment
restructuring activities; (ii) a net gain on the sale of businesses of $4.3
million ($0.04 per share); and (iii) the dilutive impact of convertible
preferred securities that were anti-dilutive on an as reported basis of $0.02
per share.
Income from continuing operations for the year ended December 31, 1998 includes
$6.5 million ($0.06 per share) for costs associated with the Aerostructures
Group's closure of three facilities and the impairment of a fourth facility and
a $38.5 million ($0.34 per share) gain on the sale of Holley Performance
Products.
Income from continuing operations for the year ended December 31, 1997 includes
(i) merger costs of $69.5 million ($0.62 per share) in connection with the
merger with Rohr, Inc., (ii) a net gain of $8.0 million ($0.07 per share)
resulting from an initial public offering of common stock by the Company's
subsidiary, DTM Corporation, (iii) a net gain of $16.4 million ($0.15 per share)
from the sale of a business, and (iv) a charge of $21.0 million ($0.19 per
share) related to the Aerostructures Group's production contract with IAE
International Aero Engines AG to produce nacelles for McDonnell Douglas
Corporation's MD-90 aircraft.
NET INTEREST EXPENSE Net interest expense increased by $5.5 million in 1999,
from $128.0 million in 1998 to $133.5 million in 1999. The increase in interest
expense-net was due to increased average borrowings during 1999 as a result of
the Coltec merger ($3 million), reduced interest income ($1 million) and a
reduction in capital expenditures between periods that resulted in a reduction
in capitalized interest ($1 million). Net interest expense increased by $12.1
million in 1998 as compared to 1997. The increase in interest expense-net in
1998 was due to increased indebtedness resulting from acquisitions during the
latter part of 1997 and early portion of 1998, partially offset by savings that
resulted from refinancing Rohr's higher cost debt in late 1997.
ISSUANCE OF SUBSIDIARY STOCK In May 1997, the Company's subsidiary, DTM
Corporation, issued 2,852,191 shares of its authorized but previously unissued
common stock in an initial public offering. The Company recognized a pretax gain
of $13.7 million ($8.0 million after tax, or $0.07 per diluted share) in
accordance with the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin 84.
In February 1999, the Company sold its remaining interest in DTM for
approximately $3.5 million. The Company's net investment in DTM approximated
$0.5 million at December 31, 1998. The gain was recorded within Other Income
(Expense) during the first quarter of 1999.
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OTHER INCOME (EXPENSE) -- NET Excluding the impact of net gains (losses) on sale
of businesses, other income (expense) net was expense of $15.2 million, $19.3
million and $11.4 million in 1999, 1998 and 1997, respectively. The decrease in
expense during 1999 was due primarily to gains related to the demutualization of
certain insurance companies with which the Company does business. The increase
in expense from 1997 to 1998 relates primarily to increased costs associated
with the Company's executive life insurance program.
INCOME TAX EXPENSE The Company's effective tax rate was 43.8, 36.8 and 40.2
percent in 1999, 1998 and 1997. The increase in the Company's effective tax rate
in 1999 as compared to 1998 was primarily attributable to the significant amount
of non-deductible merger costs incurred during 1999 related to the Coltec
merger.
DISCONTINUED OPERATIONS During the 1998 first quarter, the company recognized a
$1.6 million after-tax charge related to a business previously divested and
reported as a discontinued operation. Discontinued operations during 1997
reflect a gain on the sale of Tremco Incorporated in February 1997 and the
results of operations and gain on the sale of the chlor-alkali and olefins
business in August 1997. For additional information see Note T to the
Consolidated Financial Statements.
EXTRAORDINARY ITEMS The Company has recorded extraordinary items during 1998 and
1997, net of tax, related to the extinguishment of debt.
ACQUISITIONS
POOLING-OF-INTERESTS
COLTEC As noted above, on July 12, 1999, the Company completed its merger with
Coltec. The merger has been accounted for as a pooling-of-interests.
Accordingly, all prior period consolidated financial statements have been
restated to include the results of operations, financial position and cash flows
of Coltec as though Coltec had always been a part of BFGoodrich. As such,
results for the three years ended December 31, 1999, 1998 and 1997 represent the
combined results of BFGoodrich and Coltec.
ROHR On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by
exchanging 18.6 million shares of BFGoodrich common stock for all of the common
stock of Rohr. Each share of Rohr common stock was exchanged for .7 of one share
of BFGoodrich common stock. The merger was accounted for as a
pooling-of-interests, and all prior period financial statements were restated to
include the financial information of Rohr as though Rohr had always been a part
of BFGoodrich. Prior to the merger, Rohr's fiscal year ended on July 31. For
purposes of the combination, Rohr's financial results for its fiscal year ended
July 31, 1997, were restated to the year ended December 31, 1997, to conform
with BFGoodrich's calendar year end.
PURCHASES
The following acquisitions were recorded using the purchase method of
accounting. Their results of operations have been included in the Company's
results since their respective dates of acquisition.
During 1999, the Company acquired a manufacturer of spacecraft attitude
determination and control systems and sensor and imaging instruments; the
remaining 50 percent interest in a joint venture, located in Singapore, that
overhauls and repairs thrust reversers, nacelles and nacelle components; an
ejection seat business; a textile coatings business; and a manufacturer and
developer of micro-electromechanical systems, which integrate electrical and
mechanical components to form "smart" sensing and control devises. Total
consideration aggregated $76.1 million, of which $69.4 million represented
goodwill.
The purchase agreements for the manufacturer and developer of
micro-electromechanical systems provides for additional consideration to be paid
over the next six years based on a percentage of net sales. The additional
consideration for the first five years, however, is guaranteed not to be less
than $3.5 million. As the $3.5 million of additional consideration is not
contingent on future events, it has been included in the purchase price and
allocated to the net assets acquired. All additional contingent amounts payable
under the purchase agreement will be recorded as additional purchase price when
earned and amortized over the remaining useful life of the goodwill.
During 1998, the Company acquired a global manufacturer of specialty and fine
chemicals; a manufacturer of flexible graphite and polytetrafluoroethylene
("PTFE") products; a business that manufactures, machines and distributes PTFE
products; and another business that reprocesses PTFE compounds. The Company also
acquired a manufacturer of sealing products; a small manufacturer of textile
chemicals used for fabric preparation and finishing; the remaining 20 percent
not previously owned of a subsidiary that produces self-lubricating bearings;
and a small manufacturer of energetic materials systems. Total consideration
aggregated $521.5 million, of which $308.7 million represented goodwill.
During 1997, the Company acquired seven businesses for cash consideration of
$194.1 million in the aggregate, which included $84.4 million of goodwill. One
of the acquired businesses is a manufacturer of data acquisition systems for
satellites and other aerospace applications. A second business manufactures
diverse aerospace products for commercial and military applications. A third
business is a manufacturer of dyes, chemical additives and durable press resins
for the textiles industry. A fourth business manufactures thermoplastic
polyurethane and is located in the United Kingdom. A fifth business manufactures
flight attendant and cockpit seats and the sixth business is a sheet rubber and
conveyer belt business. The remaining acquisition is a small specialty chemicals
business.
The purchase agreement for the flight attendant and cockpit seat business
includes contingent payments based on earnings levels
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for the years ended December 31, 1997-2000. These contingent payments will be
recorded as additional purchase price consideration when made and will be
amortized over the remaining life of the goodwill.
The impact of these acquisitions was not material in relation to the Company's
results of operations. Consequently, pro forma information is not presented.
DISPOSITIONS
During 1999, the Company sold all or a portion of its interest in four
businesses, resulting in a pre-tax gain of $9.8 million, which has been reported
in other income (expense) net.
In May 1998, the Company sold the capital stock of its Holley Performance
Products subsidiary for $100 million in cash. The sale resulted in a pre-tax
gain of $58.3 million, net of liabilities retained, which has been reported
within other income (expense) net. The proceeds from this divestiture were
applied toward reducing debt. In 1997, Holley had gross revenues and operating
income of approximately $99.0 million and $8.0 million, respectively.
During 1997, the Company completed the sale of its Engine Electrical Systems
Division, which was part of the Sensors and Integrated Systems Group in the
Aerospace segment. The Company received cash proceeds of $72.5 million which
resulted in a pretax gain of $26.4 million reported within other income
(expense) net.
For dispositions accounted for as discontinued operations during 1998 and 1997
refer to Note T to the Consolidated Financial Statements.
BUSINESS SEGMENT PERFORMANCE
SEGMENT ANALYSIS
The Company's operations are classified into three reportable business segments:
BFGoodrich Aerospace ("Aerospace"), BFGoodrich Engineered Industrial Products
("Engineered Industrial Products") and BFGoodrich Performance Materials
("Performance Materials"). Aerospace consists of four business groups:
Aerostructures; Landing Systems; Sensors and Integrated Systems (as a result of
the Coltec merger, this business group will be renamed Electronics and Engine
Systems in 2000); and Maintenance, Repair and Overhaul ("MRO"). They serve
commercial, military, regional, business and general aviation markets.
Engineered Industrial Products is a single business group. This group
manufactures industrial seals; gaskets; packing products; self-lubricating
bearings; diesel, gas and dual fuel engines; air compressors; spray nozzles and
vacuum pumps.
Performance Materials consists of three business groups: Textile and Coatings
Solutions; Polymer Additives and Specialty Plastics; and Consumer Specialties.
These groups provide materials for a wide range of end use market applications
including textiles, coatings, food & beverage, personal care, pharmaceuticals,
graphic arts, industrial piping, plumbing and transportation.
Corporate includes general corporate administrative costs and certain
undistributed research and development expenses. Beginning in 2000, such
undistributed research and development expenses will be reported within segment
operating income. Segment operating income is total segment revenue reduced by
operating expenses directly identifiable with that business segment. Merger
related and consolidation costs are presented separately and are discussed above
(see further discussion under merger related and consolidation costs section and
Note D to the accompanying Consolidated Financial Statements).
An expanded analysis of sales and operating income by business segment follows:
1999 COMPARED WITH 1998
AEROSPACE
% of Sales
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998
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SALES
Aerostructures.............................................. $1,139.1 $1,144.2 (0.4)
Landing Systems............................................. 1,032.9 963.2 7.2
Sensors and Integrated Systems.............................. 938.4 911.3 3.0
MRO......................................................... 507.0 460.6 10.1
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Total Sales............................................... $3,617.4 $3,479.3 4.0
====================================================================================
OPERATING INCOME
Aerostructures.............................................. $ 191.5 $ 189.1 1.3 16.8 16.5
Landing Systems............................................. 157.7 117.9 33.8 15.3 12.2
Sensors and Integrated Systems.............................. 174.4 170.3 2.4 18.6 18.7
MRO......................................................... 35.1 22.7 54.6 6.9 4.9
- ------------------------------------------------------------------------------------
Total Operating Income.................................... $ 558.7 $ 500.0 11.7 15.4 14.4
====================================================================================
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MARKET OVERVIEW
The aerospace industry enjoyed another strong year of jet aircraft deliveries in
1999. Large commercial jet deliveries increased 15% and regional jet deliveries
increased 39% over 1998 levels. Revenue passenger miles, a key metric measuring
demand, increased in 1999 over 1998. World airline passenger traffic increased
an estimated 5.4% and US domestic airline passenger traffic increased an
estimated 4.3% in 1999. 1999 military spending remained relatively flat from
1998.
Approximately 36% of BFGoodrich Aerospace's 1999 sales were tied to the original
equipment ("OE") commercial transport market, most specifically aircraft
production which often leads aircraft delivery by as much as several quarters.
Because of this lead time effect, BFGoodrich Aerospace commercial sales began to
feel the impact in 1998 of the year to year delivery improvement noted above.
SEGMENT PERFORMANCE
Sales by BFGoodrich Aerospace increased by $138.1 million, or 4.0 percent, from
$3,479.3 million in 1998 to $3,617.4 million during 1999. The increase is
primarily attributable to the PW4000 settlement, strong after-market demand for
wheels and brakes as well as maintenance, repair and overhaul services and
several small acquisitions.
Aerospace operating income increased $58.7 million, or 11.7 percent, from $500.0
million in 1998 to $558.7 million during 1999 The higher sales volume noted
above in combination with a better after-market sales mix and ongoing
operational improvements positively impacted 1999 results.
AEROSTRUCTURES GROUP Sales during 1999 decreased $5.1 million, or 0.4 percent,
from $1,144.2 million in 1998 to $1,139.1 million in 1999. Higher production
spares, after-market sales and the PW4000 settlement only partially offset lower
OE sales.
Operating income increased $2.4 million, or 1.3 percent, from $189.1 million
during 1998 to $191.5 million in 1999. The increase is primarily attributable to
higher after-market sales that generally carry a higher margin than OE sales, a
gain resulting from an exchange of land and the settlement of the PW4000 claim,
partially offset by higher manufacturing costs associated with the restructuring
of several of the Group's facilities and the start-up of the Group's Arkadelphia
facility.
LANDING SYSTEMS GROUP Sales during 1999 increased $69.7 million, or 7.2 percent,
from $963.2 million in 1998 to $1,032.9 million in 1999. The increase is
attributable to higher after-market demand for wheels and brakes ($34.7
million), improved penetration into the aircraft seating market ($7.7 million)
and a product line acquisition completed in late 1998 ($26.8 million). Demand
for commercial transport OE products such as landing gear and evacuation slides
which are tied more closely to the OE production cycle, was largely flat year to
year.
Operating income increased $39.8 million, or 33.8 percent, from $117.9 million
in 1998 to $157.7 million in 1999. An overall favorable sales mix, increased
volume, acquisitions and operating efficiency improvements all contributed to
the higher results.
SENSORS & INTEGRATED SYSTEMS GROUP Sales during 1999 increased $27.1 million, or
3.0 percent, from $911.3 million in 1998 to $938.4 million in 1999. The increase
resulted from higher unit volume sales of sensor, launch vehicle electronic,
cockpit avionic, aircraft lighting, and gas turbine products, partially offset
by lower sales of fuel control products.
Operating income increased $4.1 million, or 2.4 percent, from $170.3 million
during 1998 to $174.4 million in 1999. This increase reflects the impact of
higher sales volumes and a favorable sales mix of higher margin after-market
spares, partially offset by increased R&D spending on the development of new
products for Health, Usage and Monitoring systems (HUMS).
MRO GROUP Sales during 1999 increased $46.4 million, or 10.1 percent, from
$460.6 million in 1998 to $507.0 million in 1999. The increase reflects higher
demand for airframe, component and landing gear overhaul maintenance services
($19 million) in addition to the acquisition of the remaining interest of a
joint venture business in the Asia Pacific region ($27 million).
Operating income increased by $12.4 million, or 54.6 percent, from $22.7 million
in 1998 to $35.1 million during 1999. The increase is principally due to the
higher demand experienced in all of the MRO markets served by the Company, as
well as the impact of the acquisition noted above and continued operational
improvements.
MARKET OUTLOOK
Aerospace has built a diversified portfolio of businesses that does not
correlate directly with the cyclical upturns and downturns of its airframe
customers. The expected decline in Boeing commercial jet aircraft deliveries of
over 22% in 2000 will negatively affect BFGoodrich's OE businesses, most notably
in the Segment's Aerostructures and Landing Systems Groups. The Company believes
that Aerospace sales for 2000 will be consistent with sales levels achieved in
1999. Expected decreases in OE sales are anticipated to be offset by a higher
content of aftermarket products, space and specialty products and by a
significant increase in sales by the MRO services group.
ENGINEERED INDUSTRIAL PRODUCTS
(IN MILLIONS) 1999 1998 % CHANGE
- --------------------------------------------------------------
Sales............................. $702.4 $779.9 (9.9)%
Operating Income.................. $118.2 $131.6 (10.2)%
Operating Income as a percent of
Sales........................... 16.8% 16.9%
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MARKET OVERVIEW
Several of the Segment's primary markets, including the chemical and petroleum
process industries (including oil and gas drilling), industrial machinery &
equipment (construction, mining and material handling), and the defense capital
goods markets, experienced weakness throughout 1999. The majority of the
Segment's business is in these areas of the domestic economy. Sales growth was
noted in several of the Segment's secondary markets, including the heavy-duty
vehicles, automotive and the semiconductor markets, though not at a level to
offset the reduction in business in the Segment's primary markets.
SEGMENT PERFORMANCE
Sales decreased $77.5 million, or 9.9 percent, from $779.9 million in 1998 to
$702.4 million in 1999. The decrease in sales is primarily attributable to a
1998 disposition of a division ($37 million) and reduced volume in most of the
Segment's businesses ($38 million), partially offset by favorable prices ($3
million). As previously discussed, the reduced volume is attributable to
weakness in most markets served by the Segment, especially in the businesses
serving the domestic chemical and petroleum process industries, industrial
machinery and equipment, and the defense capital goods markets. The Segment did
experience growth in European sales in its sealing business following the 1998
acquisition of a French company (Cefilac). Further, the operations serving the
automotive and heavy-duty vehicle markets experienced modest growth during 1999.
Operating income decreased by $13.4 million, or 10.2 percent, from $131.6
million in 1998 to $118.2 million in 1999. Excluding the impact of a 1998
disposition ($6 million) and non-recurring charges ($13 million) during 1998,
operating income decreased by approximately $20 million. The non-recurring
charges in 1998 related to Y2K costs and a warranty issue related to previously
sold diesel engines. Overall, the decrease in operating income between periods
was due to the market weakness noted above. Management was able to partially
offset the decline in business with various initiatives designed to lower costs
including facility consolidation, six sigma projects and the application of lean
manufacturing initiatives.
MARKET OUTLOOK
The Engineered Industrial Products segment will continue to face market
challenges in 2000. While the Segment anticipates some level of volume growth in
the year 2000 in its primary markets, including the chemical and petroleum
process markets, these will be partially offset by anticipated decreased demand
in the defense capital goods market and heavy-duty vehicle markets. The Segment
anticipates a continued focus on cost initiatives and facility consolidation
during 2000.
PERFORMANCE MATERIALS
% of Sales
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998
- -----------------------------------------------------------------------------------------------------------
SALES
Textile and Coatings Solutions.............................. $ 619.7 $ 606.2 2.2
Polymer Additives and Specialty Plastics.................... 422.2 431.3 (2.1)
Consumer Specialties........................................ 175.8 158.1 11.2
- ----------------------------------------------------------------------------------
Total Sales............................................... $ 1,217.7 $1,195.6 1.8
==================================================================================
OPERATING INCOME
Textile and Coatings Solutions.............................. $ 44.4 $ 63.0 (29.5) 7.2 10.4
Polymer Additives and Specialty Plastics.................... 73.6 58.8 25.2 17.4 13.6
Consumer Specialties........................................ 32.4 24.0 35.0 18.4 15.2
- ----------------------------------------------------------------------------------
Total Operating Income.................................... $ 150.4 $ 145.8 3.2 12.4 12.2
==================================================================================
MARKET OVERVIEW
Performance Materials is a worldwide leader in water-based thickeners and
high-performance polymers used in everything from toothpaste, food ingredients,
shampoo, and time-release pharmaceutical products to plastics and coatings for
wood, paper, and fabrics. Key markets served include consumer, textile,
industrial, construction, transportation, and paper.
Volumes for many of the Segment's products were down during 1999 as
recession-like conditions continued, perpetuating market stagnation,
consolidation, and intense competition. In addition, inexpensive imports and
pockets of foreign economic weakness put significant pressure on pricing.
Fortunately, the cost of many of the Segment's key raw materials was also lower
as compared to 1998 costs, allowing for some recovery against the negative
impact of reduced volumes and prices. The Segment's construction related
products, however, were helped by a strong housing market in the US. The Segment
also continued its aggressive focus on cost reduction and improved productivity
to maintain its overall margins.
SEGMENT PERFORMANCE
Sales increased $22.1 million, or 1.8 percent, from $1,195.6 million in 1998 to
$1,217.7 million in 1999. Acquisitions
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(primarily Freedom Chemical, which was acquired in March of 1998) accounted for
$80 million of the sales increase, offset by $58 million of unfavorable volume,
price, and mix. Volumes for many of the Segment's products have been down due to
a deterioration of end markets served by the Segment and increased competition
and consolidation that has resulted. Inexpensive imports and certain areas of
foreign economic weakness have put additional pressure on pricing, causing year-
to-date prices to be down approximately 4 percent versus 1998.
Operating income increased by $4.6 million, or 3.2 percent, from $145.8 million
in 1998 to $150.4 million in 1999. The increase was attributable to
acquisitions, reduced raw material costs, increased manufacturing productivity
and overhead cost controls, which more than offset the income erosion from the
price and volume declines mentioned above. Fluctuations in foreign exchange
rates did not have a significant impact on the Segment.
TEXTILE AND COATINGS SOLUTIONS GROUP Sales increased by $13.5 million, or 2.2
percent, from $606.2 million in 1998 to $619.7 million in 1999. The increase in
sales was primarily related to acquisitions ($60 million), partially offset by
volume, price and mix declines ($45 million).
Operating income decreased by $18.6 million, or 29.5 percent, from $63.0 million
in 1998 to $44.4 million in 1999. The decrease was due to the unfavorable volume
and price declines noted above, particularly in regards to the textile markets
served by the Group, partially offset by acquisitions.
POLYMER ADDITIVES AND SPECIALTY PLASTICS GROUP Sales decreased by $9.1 million,
or 2.1 percent, from $431.3 million in 1998 to $422.2 million in 1999. The
decrease was caused primarily by price reductions ($18 million), offset by
favorable volume/mix ($9 million). The price reductions impacted most of the
Group's products, while the volume increase was driven primarily by the Group's
TempRite high-heat resistant plastics plumbing products.
Operating income increased $14.8 million, or 25.2 percent, from $58.8 million in
1998 to $73.6 million in 1999. The increase was primarily driven by higher
demand in the Group's TempRite business, lower raw material costs, and effective
overhead cost controls, partially offset by decreased volumes and prices for the
Group's other products.
CONSUMER SPECIALTIES GROUP Sales increased $17.7 million, or 11.2 percent, from
$158.1 million in 1998 to $175.8 million in 1999. The increase in sales was
driven by the Freedom acquisition ($20 million), partially offset by volume and
price declines in some of the remaining businesses ($2 million).
Operating income increased $8.4 million, or 35.0 percent, from $24.0 million in
1998 to $32.4 million in 1999. The increase in operating income was attributable
to the Freedom acquisition noted above, manufacturing efficiencies, overhead
cost controls and a favorable settlement from a patent infringement lawsuit.
MARKET OUTLOOK
The Performance Materials Segment faces a challenging 2000. Most key indices
suggest US industrial production will be flat, while housing starts and auto
sales will be decreasing from 1999 levels. Many of the industries served by the
segment are projecting flat to down years in 2000 limiting our volume
expectations. In addition, our raw material costs have risen dramatically and at
a much faster rate than we believe can be offset through selectively raising
prices.
Continued strong productivity performance will be necessary to help fill the
gap. Given the economic environment, emphasis in 2000 will be on: strategic
top-line growth, improving efficiency by optimizing production assets, and
re-evaluating any low margin product lines.
1998 COMPARED WITH 1997
AEROSPACE
% of Sales
(IN MILLIONS) 1998 1997 % CHANGE 1998 1997
- ----------------------------------------------------------------------------------------------------------
SALES
Aerostructures.............................................. $1,144.2 $1,039.7 10.1
Landing Systems............................................. 963.2 765.8 25.8
Sensors and Integrated Systems.............................. 911.3 833.9 9.3
MRO......................................................... 460.6 386.7 19.1
- ---------------------------------------------------------------------------------
Total Sales............................................... $3,479.3 $3,026.1 15.0
=================================================================================
OPERATING INCOME
Aerostructures.............................................. $ 189.1 $ 102.6 84.3 16.5 9.9
Landing Systems............................................. 117.9 90.3 30.6 12.2 11.8
Sensors and Integrated Systems.............................. 170.3 133.9 27.2 18.7 16.1
MRO......................................................... 22.7 (1.0) N/A 4.9 (0.3)
- ---------------------------------------------------------------------------------
Total Operating Income.................................... $ 500.0 $ 325.8 53.5 14.4 10.8
=================================================================================
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AEROSTRUCTURES GROUP Aerostructures Group sales for 1998 of $1,144.2 million
were $104.5 million, or 10.1 percent, higher than in 1997. Contributing to the
increased sales were higher aftermarket spares sales and accelerated deliveries
on many commercial programs, including the V-2500 (A319/320/321 aircraft) and
the start up of production deliveries on the 737-700 program. These increases
were partially offset by reduced deliveries on the A340 program.
The Aerostructures Group's 1998 operating income increased by $86.5 million or
84.3 percent, from $102.6 million in 1997 to $189.1 million in 1998. Operating
income of $102.6 million in 1997 was adversely impacted by a $35.2 million
pretax charge on the MD-90 contract. Excluding this special item, operating
income increased in 1998 by $51.3 million, or 37 percent, primarily as a result
of increased sales volume and by the proportionately higher ratio of aftermarket
spares sales to production sales. Aftermarket spare sales generally carry a
higher margin than production sales.
LANDING SYSTEMS GROUP Sales in the Landing Systems Group increased $197.4
million, or 25.8 percent, from $765.8 million in 1997 to $963.2 million in 1998.
Sales growth reflected higher original-equipment demand for landing gear and
evacuation products, as well as stronger than expected aftermarket demand for
aircraft wheels and brakes. Principal landing gear programs were the B767 and
B737. Landing gear sales volumes also reflected the establishment of a facility
in Seattle to provide fully dressed landing gears to Boeing on the B747-400
program. Commercial wheel and brake demand was strongest on the A320, B737, and
B747 programs. Evacuation product sales increased on the B747-400 and A330/A340
programs. The AMI acquisition in June 1997 resulted in approximately $24 million
of additional revenue in 1998 as well. The evacuation systems business also
completed in October 1998 the acquisition of Universal Propulsion Company
("UPCo") which is expected to enhance the business's safety systems offerings
through its direct thermal inflation technology. UPCo manufactures energetic
materials systems used to activate ejection seats, airplane evacuation slides
and related products.
Operating income in the Landing Systems Group increased $27.6 million, or 30.6
percent, from $90.3 million in 1997 to $117.9 million in 1998. Higher sales, a
favorable product mix, the AMI acquisition and favorable fluctuations in foreign
exchange rates associated with our Canadian operations benefited the Group's
operating income in 1998. These increases were partially offset by higher wheel
and brake strategic sales incentives, principally for the B777, B737, and Airbus
programs; higher product development costs, offset in part by cost reduction
initiatives in operations; and increased landing gear manufacturing costs
associated with the increase in production to match original-equipment
manufacturers' build rates.
SENSORS AND INTEGRATED SYSTEMS GROUP Sensors and Integrated Systems Group sales
increased $77.4 million, or 9.3 percent, from $833.9 million in 1997 to $911.3
million in 1998. This group serves the large commercial transport; regional,
business and general aviation; military; and space markets. All four of these
markets experienced increased sales during the year.
Demand for sensor and avionics products was particularly strong. Increased sales
of sensor products were driven by rate increases on major Boeing programs,
retrofit of competitors' products on Airbus programs and the application of
products to new regional and business programs such as Embraer 145, Gulfstream
V, and Bombardier Global Express. The higher sales of avionics products was
fueled by greater than anticipated acceptance of a new, low cost collision
avoidance product -- SkyWatch(R) -- and strong associated sales of the Company's
StormScope(R) line of lightning detectors.
Expansion of the Company's ice protection product line, including new specialty
heated products, also contributed to the results. The Group's sales performance
was further enhanced by higher demand for satellite products (acquired in the
March 1997 purchase of Gulton Data Systems) driven by expansion of our
capabilities and product offerings and by increased demand for aircraft engine
components.
The Group's operating income increased $36.4 million, or 27.2 percent, from
$133.9 million in 1997 to $170.3 million in 1998. The increase reflects the
higher sales volumes, the impact of productivity initiatives, a favorable sales
mix, and new products introduced during the year.
MAINTENANCE, REPAIR AND OVERHAUL (MRO) GROUP The MRO Group's sales increased
$73.9 million, or 19.1 percent, from $386.7 million in 1997 to $460.6 million in
1998. During 1998, the MRO Group achieved higher sales volumes compared with
1997, successfully replacing the sales which were lost after the bankruptcy (in
early 1998) of Western Pacific Airlines and the termination of an America West
Airlines maintenance contract. New business included long-term service contracts
with, in addition to others, Qantas, Continental, Northwest, United, and Virgin
Atlantic Airlines. Sales improved due to higher volumes in the airframe and
component services businesses. The performance of the component services
business reflects strong demand for wheels and brakes and nacelles services. New
business assisting Boeing in paint and other component services also contributed
to the improved results.
Operating income increased $23.7 million, from $(1.0) million in 1997 to $22.7
million in 1998. Excluding a $11.8 million bad debt charge recognized in 1997
due to the bankruptcy of Western Pacific Airlines, operating income increased by
$11.9 million. The increased operating income in 1998 was attributable to
improved operating efficiencies in the component services business and the
introduction of new higher-margin specialized services. The Group also benefited
from substantially reduced turnover of the certified airframe and powerplant
mechanics work force in the airframe business, compared with the prior two
years.
Although the Group's operating income margin increased during 1998 compared with
1997 (4.9 percent versus 3.0 percent -- excluding the 1997 bad debt charge),
several factors constrained the growth of operating income and margins in 1998.
First, the Group's landing gear services business in Miami completed the
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construction of a new world-class service facility (also in the Miami area) in
mid 1998. Much of the second half of 1998 was spent transitioning operations
from the old facility to the new one, during which time duplicate facility costs
and production inefficiencies were incurred. This business also incurred
significant charges to resolve several customer billing disputes, largely from
the prior year. Second, start-up costs were incurred by the Group's airframe
business in connection with a new major customer, resulting from servicing
aircraft new to the business. Finally, the airframe business commenced in 1998
the development of a major new business system, the implementation of which is
expected to be completed by mid 1999. As a result, the business increased
inventory valuation reserves and expensed development-related costs. Excluding
the impact of the above charges, operating income margins in 1998 would have
been slightly above 6 percent rather than 4.9 percent.
ENGINEERED INDUSTRIAL PRODUCTS
(IN MILLIONS) 1998 1997 % CHANGE
- --------------------------------------------------------------
Sales............................. $779.9 $757.1 3.0
Operating Income.................. 131.6 147.0 (10.5)
Operating Income as Percent of
Sales........................... 16.9% 19.4%
Sales increased $22.8 million, or 3.0 percent, from $757.1 million in 1997 to
$779.9 million in 1998. Acquisitions accounted for a $66.0 million increase in
sales between periods, while dispositions reduced sales by $62.0 million. The
resulting net increase in sales between periods was due to increased volumes of
compressors, heavy duty wheel-end systems and diesel/gas engines. Continued
economic weakness in Asia and South America and slower growth in key markets,
including pulp and paper, chemical, refining and steel, adversely affected sales
growth.
Operating income decreased $15.4 million, or 10.5 percent, from $147.0 million
in 1997 to $131.6 million in 1998. The decrease was primarily attributable to
the divestitures noted above as well as additional warranty and legal reserves
($12.0 million) that were recorded in 1998.
PERFORMANCE MATERIALS
Comparable % of Sales
(IN MILLIONS) 1998 1997 % Change % Change 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
SALES
Textile and Coatings Solutions.............................. $ 606.2 $401.2 51.1 (0.4)
Polymer Additives and Specialty Plastics.................... 431.3 420.9 2.5 1.3
Consumer Specialties........................................ 158.1 82.6 91.4 6.2
- -------------------------------------------------------------------------------
Total..................................................... $1,195.6 $904.7 32.2 1.0
===============================================================================
OPERATING INCOME
Textile and Coatings Solutions.............................. $ 63.0 $ 48.6 29.6 8.0 10.4 12.1
Polymer Additives and Specialty Plastics.................... 58.8 57.3 2.6 1.6 13.6 13.6
Consumer Specialties........................................ 24.0 22.3 7.6 5.8 15.2 27.0
- -------------------------------------------------------------------------------
Total..................................................... $ 145.8 $128.2 13.7 4.8 12.2 14.2
===============================================================================
The following discussion and analysis of fluctuations in sales and operating
income for the Performance Materials Segment excludes the impact of acquisitions
(see Comparable % Change column).
TEXTILE AND COATINGS SOLUTIONS GROUP Sales in the Textile and Coatings Solutions
group decreased 0.4 percent from the prior year. The decrease resulted from
volume shortfalls in the Company's textile markets offset by increased volumes
in the Group's industrial specialty products and increased sales prices in the
Group's coatings products. Domestic textile mills demand has been lower due to
an increase in imports and a general slowdown in the apparel markets. In
addition, the export of fabrics to Asian and European countries slowed in 1998.
The Russian currency crisis and the European Union furniture fabric tariffs all
had negative revenue effects on this Group.
Operating income for the Textile and Coatings Solutions Group increased by $3.9
million, or 8 percent, in 1998 despite the slight reduction in sales due to
reduced raw material pricing and other manufacturing cost efficiencies.
POLYMER ADDITIVES AND SPECIALTY PLASTICS GROUP Sales in the Polymer Additives
and Specialty Plastics Group increased $5.5 million, or 1.3 percent, over the
prior year. Sales volumes increased in the Group's Estane(R) thermoplastic
polyurethanes (TPU) driven by strength in static control polymers and European
TPU demand and Telene(R) DCPD monomer markets but decreased in the Group's
TempRite(R) high heat resistant plastics due to weakness in middle east markets
as well as increased competition from other materials. Sales prices remained
relatively stable with the exception of some Polymer Additives' products used
for the rubber and polymer industries
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and Estane(R) TPU, where two competitors commissioned new U.S. production
facilities in 1998.
Operating income increased slightly over the prior year mostly as a result of
increased volume and favorable raw material pricing.
CONSUMER SPECIALTIES GROUP The $5.1 million, or 6.2 percent, increase in sales
in the Consumer Specialties Group was driven by increased volumes in the Group's
pharmaceutical and personal care products. Sales prices generally increased in
all of the Group's product lines.
The 5.8 percent increase in operating income was mainly attributable to a
favorable sales mix and higher volumes.
SHORT-TERM DEBT
During 1999, the Company increased its committed domestic revolving credit
agreements from $300.0 million to $600.0 million. These loan agreements are with
various domestic banks. Lines of credit totaling $300.0 million were amended in
1999 to extend the expiration date to the year 2004. The $300.0 million of lines
of credit added in 1999 are 364-day agreements that expire in March 2000. The
Company intends to renew the 364-day agreements on an annual basis and does not
anticipate any problems therein. At December 31, 1999, and throughout the year,
these facilities were not in use. In addition, the Company had available formal
foreign lines of credit and overdraft facilities, including the committed
multi-currency revolver, of $236.5 million at December 31, 1999, of which $84.3
million was available.
During 1999, the Company increased the committed multi-currency revolving credit
facility from $75.0 million to $125.0 million. The loan agreements are with
various international banks and expire in the year 2003. The Company intends to
use this facility for short- and long-term local currency financing to support
European operations growth. At December 31, 1999, the Company had borrowed
$103.6 million ($80.5 million on a short-term basis and $23.1 million on a
long-term basis) denominated in various currencies at floating rates. The
Company has effectively converted the $23.1 million long-term debt portion into
fixed-rate debt with an interest rate swap.
The Company also maintains $367.5 million of uncommitted domestic money market
facilities with various banks to meet its short-term borrowing requirements. As
of December 31, 1999, $266.3 million of these facilities were unused and
available. The Company's uncommitted credit facilities are provided by a small
number of commercial banks that also provide the Company with all of its
domestic committed lines of credit and the majority of its cash management,
trust and investment management requirements. As a result of these established
relationships, the Company believes that its uncommitted facilities are a highly
reliable and cost-effective source of liquidity.
LONG-TERM DEBT
During 1999, the Company issued $200.0 million of 6.6 percent senior notes due
in 2009. A previously existing revolving credit facility, which had provided a
commitment of up to $600 million, was terminated subsequent to the consummation
of the merger with Coltec.
The Company believes that its credit facilities are sufficient to meet long-term
capital requirements, including normal maturities of long-term debt.
At December 31, 1999, the Company's debt-to-capitalization ratio was 52.8
percent. For purposes of this ratio, the TIDES and QUIPS (see Note R to the
Consolidated Financial Statements) are treated as capital.
EBITDA
EBITDA is income from continuing operations before distributions on preferred
securities of trusts, income tax expense, net interest expense, depreciation and
amortization and special items. EBITDA for the Company is summarized as follows:
1999 1998 1997
- ---------------------------------------------------------------
Income from continuing operations
before taxes and distributions of
trusts............................. $334.5 $594.2 $343.7
Add:
Net interest expense............... 133.5 128.0 115.9
Depreciation and amortization...... 230.6 210.2 169.1
Special items...................... 262.8 (47.7) 72.1
- ---------------------------------------------------------------
EBITDA............................... $961.4 $884.7 $700.8
===============================================================
OPERATING CASH FLOWS
Operating cash flows decreased $126.5 million from $499.1 million in 1998 to
$372.6 million in 1999. The decrease between periods was primarily due to merger
related and consolidation expenses paid during each of the years -- $207.1
million in 1999 and $68.6 million in 1998. The 1998 expenses related to the Rohr
merger that was consummated in December 1997.
INVESTING CASH FLOWS
The Company used $285.8 million of cash in 1999 related to investing activities,
primarily in the acquisition of various businesses and purchases of property. In
1998, investing activities used cash of $679.3 million, also primarily in the
acquisition of various businesses and purchases of property. The Company expects
to acquire additional businesses as circumstances warrant and as opportunities
arise.
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FINANCING CASH FLOWS
Financing activities used $72.2 million in cash in 1999, as compared to
providing $171.6 million in cash in 1998. Excess operating cash flows in 1999
were used to assist with the payment of dividends and distributions on trust
preferred securities. The Company increased its borrowings in 1998 to finance
the acquisitions discussed above. The Company also spent approximately $40
million to terminate a receivables sales program in 1998.
Cash flow from operations has been more than adequate to finance capital
expenditures in each of the past three years. The Company expects to have
sufficient cash flow from operations to finance planned capital spending for
2000.
On February 21, 2000, the Company's Board of Directors authorized the repurchase
of up to $300 million of the Company's common stock. The program will be funded
from the Company's operating cash flows and short term borrowings under existing
credit lines.
CONTINGENCIES
GENERAL
There are pending or threatened against BFGoodrich or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to commercial, product liability, asbestos and
environmental matters, which seek remedies or damages. BFGoodrich believes that
any liability that may finally be determined with respect to commercial and
product liability claims should not have a material effect on the Company's
consolidated financial position or results of operations. From time to time, the
Company is also involved in legal proceedings as a plaintiff involving contract,
patent protection, environmental and other matters. Gain contingencies, if any,
are recognized when they are realized.
At December 31, 1999, approximately 20 percent of the Company's labor force was
covered by collective bargaining agreements. Approximately 10 percent of the
labor force is covered by collective bargaining agreements that will expire
during 2000.
ENVIRONMENTAL
The Company and its subsidiaries are generators of both hazardous wastes and
non-hazardous wastes, the treatment, storage, transportation and disposal of
which are subject to various laws and governmental regulations. Although past
operations were in substantial compliance with the then-applicable regulations,
the Company has been designated as a potentially responsible party ("PRP") by
the U.S. Environmental Protection Agency ("EPA"), or similar state agencies, in
connection with several sites.
The Company initiates corrective and/or preventive environmental projects of its
own to ensure safe and lawful activities at its current operations. It also
conducts a compliance and management systems audit program. The Company believes
that compliance with current governmental regulations will not have a material
adverse effect on its capital expenditures, earnings or competitive position.
The Company's environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as off-site
disposal sites at which the Company has been identified as a PRP. This process
includes investigation and remedial selection and implementation, as well as
negotiations with other PRPs and governmental agencies.
At December 31, 1999 and 1998, the Company had recorded in Accrued Expenses and
in Other Non-current Liabilities a total of $125.5 million and $129.7 million,
respectively, to cover future environmental expenditures. These amounts are
recorded on an undiscounted basis.
The Company believes that its reserves are adequate based on currently available
information. Management believes that it is reasonably possible that additional
costs may be incurred beyond the amounts accrued as a result of new information.
However, the amounts, if any, cannot be estimated and management believes that
they would not be material to the Company's financial condition but could be
material to the Company's results of operations in a given period.
ASBESTOS
As of December 31, 1999 and 1998, two subsidiaries of the Company were among a
number of defendants (typically 15 to 40) in approximately 96,000 and 101,400
actions (including approximately 8,300 and 4,700 actions, respectively in
advanced stages of processing) filed in various states by plaintiffs alleging
injury or death as a result of exposure to asbestos fibers. During 1999, 1998
and 1997, these two subsidiaries of the Company received approximately 30,200,
34,400 and 38,200 new actions, respectively. Through December 31, 1999,
approximately 280,400 of the approximately 376,400 total actions brought had
been settled or otherwise disposed.
Payments were made by the Company with respect to asbestos liability and related
costs aggregating $84.5 million in 1999, $53.7 million in 1998, and $59.2
million in 1997, respectively, substantially all of which were covered by
insurance. Settlements are generally made on a group basis with payments made to
individual claimants over periods of one to four years. Related to payments not
covered by insurance, the Company recorded charges to operations amounting to
approximately $8.0 million in each of 1999, 1998 and 1997.
In accordance with the Company's internal procedures for the processing of
asbestos product liability actions and due to the proximity to trial or
settlement, certain outstanding actions have progressed to a stage where the
Company can reasonably estimate the cost to dispose of these actions. As of
December 31, 1999, the Company estimates that the aggregate remaining cost of
the disposition of the settled actions for which payments remain to be made and
actions in advanced stages of processing, including associated legal costs, is
approximately $163.1 million and the Company expects that this cost will be
substantially covered by insurance.
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With respect to the 87,700 outstanding actions as of December 31, 1999, which
are in preliminary procedural stages, as well as any actions that may be filed
in the future, the Company lacks sufficient information upon which judgments can
be made as to the validity or ultimate disposition of such actions, thereby
making it difficult to estimate with reasonable certainty what, if any,
potential liability or costs may be incurred by the Company. However, the
Company believes that its subsidiaries are in a favorable position compared to
many other defendants because, among other things, the asbestos fibers in its
asbestos-containing products were encapsulated. Subsidiaries of the Company
continue to distribute encapsulated asbestos-bearing product in the United
States with annual sales of less than $1.5 million. All sales are accompanied by
appropriate warnings. The end users of such product are sophisticated users who
utilize the product for critical applications where no known substitutes exist
or have been approved.
Insurance coverage of a small non-operating subsidiary formerly distributing
asbestos-bearing products is nearly depleted. Considering the foregoing, as well
as the experience of the Company's subsidiaries and other defendants in asbestos
litigation, the likely sharing of judgments among multiple responsible
defendants, and given the substantial amount of insurance coverage that the
Company expects to be available from its solvent carriers to cover the majority
of its exposure, the Company believes that pending and reasonably anticipated
future actions are not likely to have a materially adverse effect on the
Company's consolidated results of operations or financial condition, but could
be material to the Company's results of operations in a given period. Although
the insurance coverage which the Company has is substantial, it should be noted
that insurance coverage for asbestos claims is not available to cover exposures
initially occurring on and after July 1, 1984. The Company's subsidiaries
continue to be named as defendants in new cases, some of which allege initial
exposure after July 1, 1984.
The Company has recorded an accrual for its liabilities for asbestos-related
matters that are deemed probable and can be reasonably estimated (settled
actions and actions in advanced stages of processing), and has separately
recorded an asset equal to the amount of such liabilities that is expected to be
recovered by insurance. In addition, the Company has recorded a receivable for
that portion of payments previously made for asbestos product liability actions
and related litigation costs that is recoverable from its insurance carriers.
Liabilities for asbestos-related matters and the receivable from insurance
carriers included in the Consolidated Balance Sheets are as follows:
DECEMBER 31, December 31,
(DOLLARS IN MILLIONS) 1999 1998
- -------------------------------------------------------------
Accounts and notes receivable... $ 146.9 $ 95.4
Other assets.................... 36.7 32.6
Accrued expenses................ 134.6 89.7
Other liabilities............... 28.5 22.8
CERTAIN AEROSPACE CONTRACTS
The Company's Aerostructures Group has a contract with Boeing on the 717-200
program that is subject to certain risks and uncertainties. The Company has
pre-production inventory of $84.9 million related to design and development
costs on the 717-200 program through December 31, 1999. In addition, the Company
has excess-over-average inventory of $53.9 million related to costs associated
with the production of the flight test inventory and the first production units
on this program. The aircraft was certified by the FAA on September 1, 1999, and
Boeing is actively marketing the plane. Recovery of these costs will depend on
the ultimate number of aircraft delivered and successfully achieving the
Company's cost projections in future years.
The Company's Aerostructures Group has also entered the market for re-engining
727 aircraft. The purpose of this endeavor is to assist the operators of these
aircraft meet new sound attenuation requirements along with improving fuel
efficiency. Many of the airplanes in this market are operated in emerging market
countries. The Aerostructures Group has entered into several collateralized
financing arrangements to assist its customers.
YEAR 2000 COMPUTER COSTS
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the Y2K issue. The Company is not
aware of any significant Y2K issues or problems that may have arisen for its
significant customers and suppliers.
The Company expended approximately $114 million through December 31, 1999, on
its Y2K readiness efforts. These efforts included replacing outdated,
noncompliant hardware and software as well as remediating other Y2K problems.
TRANSITION TO THE EURO
Although the Euro was successfully introduced on January 1, 1999, the legacy
currencies of those countries participating will continue to be used as legal
tender through January 1, 2002. Thereafter, the legacy currencies will be
canceled and Euro bills and coins will be used in the eleven participating
countries.
Transition to the Euro creates a number of issues for the Company. Business
issues that must be addressed include product pricing policies and ensuring the
continuity of business and financial contracts. Finance and accounting issues
include the conversion of bank accounts and other treasury and cash management
activities.
The Company continues to address these transition issues and does not expect the
transition to the Euro to have a material effect on the results of operations or
financial condition of the Company. Actions taken to date include the ability to
quote its
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prices; invoice when requested by the customer; and issue pay checks to its
employees on a dual currency basis. The Company has not yet set conversion dates
for its accounting systems, statutory reporting and tax books, but will do so in
early 2000. The financial institutions in which the Company has relationships
have transitioned to the Euro successfully and are issuing statements in dual
currencies.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which,
as amended by FASB Statement No. 137, is required to be adopted in years
beginning after June 15, 2000. The Statement permits early adoptions as of the
beginning of any fiscal quarter after its issuance. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the derivative will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement No. 133 will be
on its earnings and financial position. However, the Statement could increase
volatility in earnings and comprehensive income.
In September 1999, the EITF reached a consensus on Issue 99-5, "Accounting for
Pre-Production Costs Related to Long-Term Supply Arrangements." The consensus
requires design and development costs for products to be sold under long-term
supply arrangements incurred subsequent to December 31, 1999, to be expensed as
incurred unless contractually recoverable. The consensus did not have an impact
on the Company's results or financial position.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This document includes statements that reflect projections or expectations of
our future financial condition, results of operations or business that are
subject to risk and uncertainty. We believe such statements to be "forward
looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. BFGoodrich's actual results may differ materially from those
included in the forward-looking statements. Forward-looking statements are
typically identified by words or phrases such as "believe", "expect",
"anticipate", "intend", "estimate", "are likely to be" and similar expressions.
Factors that could cause actual results of our Aerospace segment to differ
materially from those discussed in the forward-looking statements include, but
are not limited to, the following:
- - The worldwide civil aviation market could be adversely affected if customers
cancel or delay current orders or original-equipment manufacturers reduce the
rate they build or expect to build products for such customers. Such
cancellations, delays or reductions may occur if there is a substantial change
in the health of the airline industry or in the general economy, or if a
customer were to experience financial or operational difficulties. There have
been weak new aircraft orders and actual cancellation of orders from Asian
carriers due to the Asian financial crisis. There are financial difficulties
in Russia and Latin America as well. If these developments should continue or
accelerate, it could have an adverse effect upon the Company.
- - If the decline in future new aircraft build rates is greater than anticipated,
there could be a material adverse impact on the Company. Even if orders remain
strong, original-equipment manufacturers could reduce the rate at which they
build aircraft due to inability to obtain adequate parts from suppliers and/or
because of productivity problems relating to a recent rapid build-up of the
labor force to increase the build rate of new aircraft. Boeing announced a
temporary cessation of production in the fall of 1997 for these reasons.
- - A change in levels of defense spending could curtail or enhance prospects in
the Company's military business.
- - If the trend towards increased outsourcing or reduced number of suppliers in
the airline industry changes, it could affect the Company's business.
- - If the Boeing 717 program is not as successful as anticipated or if the
Company does not successfully achieve its cost projections in future years, it
could adversely affect the Company's business.
- - If the Company is unable to continue to acquire and develop new systems and
improvements, it could affect future growth rates.
- - In the immediate past there has been a higher-than-normal historical turnover
rate of technicians in the MRO business due to hiring by Boeing and the
airlines, although recently the turnover rate has been returning closer to
historical levels. If this trend were again to reverse, it could have an
adverse effect on the Company.
- - If the Company does not experience continued growth in demand for its
higher-margin aftermarket aerospace products or is unable to continue to
achieve improved operating margins in its MRO business, it could have an
adverse effect on operating results. Such events could be exacerbated if there
is a substantial change in the health of the airline industry, or in the
general economy, or if a customer were to experience major financial
difficulties. Various industry estimates of future growth of revenue passenger
miles, new
13
15
original equipment deliveries and estimates of future deliveries of regional,
business, general aviation and military orders may prove optimistic, which
could have an adverse affect on operations.
Factors that could cause actual results of our Engineered Industrial Products
segment to differ materially from those discussed in the forward-looking
statements include, but are not limited to, the following:
- - If maintenance schedules are reduced or delayed in the segment's key customer
base, including the petrochemical industry in the US, then results could be
adversely impacted. A significant decline in the price of oil would also
negatively impact the results of the segment.
- - The segment could be adversely impacted if capital spending for products used
in the manufacture of industrial products in the US declines.
- - If decreases in Federal funding cause orders for large engines to decline or
be delayed, then the results of segment could be adversely impacted.
- - The results could be adversely impacted if orders in the automotive/heavy-duty
truck market decline.
Factors that could cause actual results of our Performance Materials segment to
differ materially from those discussed in the forward-looking statements
include, but are not limited to, the following:
- - Expected sales increases in the Far East and Latin America could be adversely
impacted by recent turmoil in financial markets in those regions.
- - If volume does not increase or cost reduction benefits do not materialize, the
results of the Performance Materials Segment could be adversely affected.
- - If raw material costs increase beyond the Company's expectations the results
of the Performance Materials Segment could be affected.
- - If cost benefits from continued integration of recent acquisitions and
realignment activities do not occur as expected, results could be adversely
impacted.
- - Revenue growth in various businesses may not materialize as expected.
- - The segment may not be able to achieve the $15 million in annualized savings
in 2000 from the 1999 realignment of the Performance Materials organization.
Factors that could cause actual results of the entire Company to differ
materially from those discussed in the forward-looking statements include, but
are not limited to, the following:
- - Future claims against the Company's subsidiaries with respect to asbestos
exposure and insurance and related costs may result in future liabilities that
are significant and may be material.
- - If there are unexpected developments with respect to environmental matters
involving the Company, it could have an adverse effect upon the Company.
- - The Company anticipates $60 million in annualized savings from the Coltec
merger by 2002. If the Company is unable to achieve these savings, it could
have an adverse impact upon the Company.
- - If the Company's tax planning is not as effective as anticipated, the
Company's effective tax rate could increase.
We caution you not to place undue reliance on the forward-looking statements
contained in this document, which speak only as of the date on which such
statements were made. We undertake no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date on which such statements were made or to reflect the occurrence
of unanticipated events.
14
16
FINANCIAL INSTRUMENTS SENSITIVITY ANALYSIS
INTEREST RATE EXPOSURE The table below provides information about the Company's
derivative financial instruments and other financial instruments that are
sensitive to changes in interest rates, including interest rate swaps and debt
obligations. For debt obligations, the table represents principal cash flows and
related weighted average interest rates by expected (contractual) maturity
dates. Notional values are used to calculate the contractual payments to be
exchanged under the contract. Weighted average variable (receive) rates are
based on implied forward rates in the yield curve at December 31, 1999.
EXPECTED MATURITY DATE
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
- --------------------------------------------------------------------------------------------------------------------------------
Debt
Fixed Rate................................ $ 12.8 $179.0 $3.8 $1.9 $0.9 $ 1,301.3 $1,499.7 $1,394.0
Average Interest Rate................... 7.4% 9.5% 0.4% 0.7% 1.2% 7.0% 7.3%
Variable Rate............................. 229.1 23.1 -- -- -- 252.2 252.2
Average Interest Rate................... 6.4% 3.7% -- -- -- 6.2%
Interest Rate Swaps
Variable to Fixed......................... 23.1 23.1 (0.8)
Average Pay Rate........................ 6.3% 6.3%
Average Receive Rate.................... 4.3% 4.3%
Fixed to Variable......................... 200.0 200.0 (15.8)
Average Pay Rate........................ 7.2% 7.2%
Average Receive Rate.................... 6.0% 6.0%
================================================================================================================================
FOREIGN CURRENCY EXPOSURE The Company's international operations expose it to
translation risk when the local currency financial statements are translated to
U.S. dollars. As currency exchange rates fluctuate, translation of the
statements of income of international businesses into U.S. dollars will affect
comparability of revenues and expenses between years. The Company hedges a
significant portion of its net investments in international subsidiaries by
financing the purchase and cash flow requirements through local currency
borrowings.
See Notes B and N to the Consolidated Financial Statements for a discussion of
the Company's exposure to foreign currency transaction risk. At December 31,
1999 a hypothetical 10 percent movement in foreign exchange rates applied to the
hedging agreements and underlying exposures would not have a material effect on
earnings.
15
17
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements of The BFGoodrich Company and subsidiaries have been prepared by
management. These statements have been prepared in accordance with generally
accepted accounting principles and, accordingly, include amounts based upon
informed judgments and estimates. Management is responsible for the selection of
appropriate accounting principles and the fairness and integrity of such
statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance that accounting records are reliable for the preparation of
financial statements and for safeguarding assets. The Company's system of
internal controls includes: written policies, guidelines and procedures;
organizational structures, staffed through the careful selection of people that
provide an appropriate division of responsibility and accountability; and an
internal audit program. Ernst & Young LLP, independent auditors, were engaged to
audit and to render an opinion on the Consolidated Financial Statements of The
BFGoodrich Company and subsidiaries. Their opinion is based on procedures
believed by them to be sufficient to provide reasonable assurance that the
Consolidated Financial Statements are not materially misstated. The report of
Ernst & Young LLP follows.
The Board of Directors pursues its oversight responsibility for the financial
statements through its Audit Committee, composed of Directors who are not
employees of the Company. The Audit Committee meets regularly to review with
management and Ernst & Young LLP the Company's accounting policies, internal and
external audit plans and results of audits. To ensure complete independence,
Ernst & Young LLP and the internal auditors have full access to the Audit
Committee and meet with the Committee without the presence of management.
/s/ D.L. Burner
D. L. BURNER
Chairman
and Chief Executive Officer
/s/ L. A. Chapman
L. A. CHAPMAN
Senior Vice President
and Chief Financial Officer
/s/ R. D. Koney, Jr.
R. D. KONEY, JR.
Vice President
and Controller
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
The BFGoodrich Company
We have audited the accompanying consolidated balance sheet of The BFGoodrich
Company and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Coltec Industries Inc,
which statements reflect total assets constituting 20% in 1998, and total sales
constituting 28% in both 1998 and 1997 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Coltec Industries
Inc for 1998 and 1997, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1998 and 1997, the report of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The BFGoodrich Company
and subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/S/ Ernst & Young LLP
Charlotte, North Carolina
February 14, 2000,
except for Note W, as to which the date is
February 21, 2000
16
18
CONSOLIDATED STATEMENT OF INCOME
(dollars in millions, except per share amounts)
YEAR ENDED DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------------
SALES....................................................... $5,537.5 $5,454.8 $4,687.9
Operating costs and expenses:
Cost of sales............................................. 3,953.3 3,919.2 3,372.7
Charge for MD-90 contract................................. -- -- 35.2
Selling and administrative costs.......................... 841.5 841.9 772.1
Merger-related and consolidation costs.................... 269.4 10.5 77.0
- --------------------------------------------------------------------------------------------
5,064.2 4,771.6 4,257.0
- --------------------------------------------------------------------------------------------
OPERATING INCOME............................................ 473.3 683.2 430.9
Interest expense............................................ (138.3) (134.1) (127.9)
Interest income............................................. 4.8 6.1 12.0
Gain on issuance of subsidiary stock........................ -- -- 13.7
Other income (expense) -- net............................... (5.3) 39.0 15.0
- --------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
Trust distributions....................................... 334.5 594.2 343.7
Income tax expense.......................................... (146.5) (218.5) (138.2)
Distributions on Trust preferred securities................. (18.4) (16.1) (10.5)
- --------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS........................... 169.6 359.6 195.0
Income (loss) from discontinued operations -- net of
taxes..................................................... -- (1.6) 84.3
- --------------------------------------------------------------------------------------------
Income Before Extraordinary Items........................... 169.6 358.0 279.3
Extraordinary losses on debt extinguishment -- net of
taxes..................................................... -- (4.3) (19.3)
- --------------------------------------------------------------------------------------------
NET INCOME.................................................. $ 169.6 $ 353.7 $ 260.0
============================================================================================
BASIC EARNINGS PER SHARE:
Continuing operations..................................... $ 1.54 $ 3.26 $ 1.81
Discontinued operations................................... -- (0.01) 0.78
Extraordinary losses...................................... -- (0.04) (0.18)
- --------------------------------------------------------------------------------------------
NET INCOME................................................ $ 1.54 $ 3.21 $ 2.41
============================================================================================
DILUTED EARNINGS PER SHARE:
Continuing operations..................................... $ 1.53 $ 3.19 $ 1.75
Discontinued operations................................... -- (0.01) 0.75
Extraordinary losses...................................... -- (0.04) (0.17)
- --------------------------------------------------------------------------------------------
NET INCOME................................................ $ 1.53 $ 3.14 $ 2.33
============================================================================================
See Notes to Consolidated Financial Statements.
17
19
CONSOLIDATED BALANCE SHEET
(dollars in millions, except per share amounts)
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents................................... $ 66.4 $ 53.5
Accounts and notes receivable............................... 845.1 777.2
Inventories................................................. 1,000.6 967.7
Deferred income taxes....................................... 129.7 162.6
Prepaid expenses and other assets........................... 58.7 54.8
- ---------------------------------------------------------------------------------
TOTAL CURRENT ASSETS.................................... 2,100.5 2,015.8
Property.................................................... 1,577.3 1,562.5
Prepaid pension............................................. 212.1 193.3
Goodwill.................................................... 1,031.1 985.6
Identifiable intangible assets.............................. 107.0 112.4
Other assets................................................ 427.6 343.4
- ---------------------------------------------------------------------------------
TOTAL ASSETS............................................ $5,455.6 $5,213.0
=================================================================================
CURRENT LIABILITIES
Short-term bank debt........................................ $ 229.1 $ 144.4
Accounts payable............................................ 476.2 456.0
Accrued expenses............................................ 712.2 617.0
Income taxes payable........................................ 78.9 45.2
Current maturities of long-term debt and capital lease
obligations............................................... 14.5 7.6
- ---------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES............................... 1,510.9 1,270.2
Long-term debt and capital lease obligations................ 1,516.9 1,572.7
Pension obligations......................................... 63.4 76.6
Postretirement benefits other than pensions................. 347.7 358.5
Deferred income taxes....................................... 126.7 100.2
Other non-current liabilities............................... 325.5 328.5
Commitments and contingent liabilities...................... -- --
Mandatorily redeemable preferred securities of trusts....... 271.3 268.9
SHAREHOLDERS' EQUITY
Common stock -- $5 par value
Authorized, 200,000,000 shares; issued, 112,064,927 shares
in 1999 and 111,524,852 shares in 1998 (excluding
14,000,000 shares held by a wholly-owned
subsidiary)............................................... 560.3 557.7
Additional capital.......................................... 895.8 883.5
Accumulated deficit......................................... (52.3) (120.4)
Accumulated other comprehensive income...................... (44.2) (15.1)
Unearned compensation....................................... (1.2) (2.7)
Common stock held in treasury, at cost (1,832,919 shares in
1999 and 1,846,894 shares in 1998)........................ (65.2) (65.6)
- ---------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY.............................. 1,293.2 1,237.4
- ---------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $5,455.6 $5,213.0
=================================================================================
See Notes to Consolidated Financial Statements.
18
20
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in millions)
YEAR ENDED DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income.................................................. $ 169.6 $ 353.7 $ 260.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Merger related and consolidation:
Expenses................................................ 269.4 10.5 77.0
Payments................................................ (207.1) (68.6) (12.4)
Extraordinary losses on debt extinguishment............... -- 4.3 19.3
Depreciation and amortization............................. 230.6 210.2 177.2
Deferred income taxes..................................... 59.4 83.3 57.1
Net gains on sale of businesses........................... (6.7) (58.3) (138.8)
Gain on sale of investment................................ (3.2) -- --
Change in assets and liabilities, net of effects of
acquisitions and dispositions of businesses:
Receivables............................................. (67.6) (45.2) (47.9)
Inventories............................................. (28.5) (79.2) (84.9)
Other current assets.................................... (4.8) 2.8 (1.6)
Accounts payable........................................ 10.1 (6.9) 63.3
Accrued expenses........................................ 45.2 104.8 11.7
Income taxes payable.................................... 36.6 46.0 4.7
Other non-current assets and liabilities................ (130.4) (58.3) (113.5)
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 372.6 499.1 271.2
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property....................................... (246.3) (262.0) (241.1)
Proceeds from sale of property.............................. 15.5 4.2 8.5
Proceeds from sale of businesses............................ 17.6 100.0 395.9
Sale of short-term investments.............................. 3.5 -- 8.0
Payments made in connection with acquisitions, net of cash
acquired.................................................. (76.1) (521.5) (194.1)
- -----------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES................... (285.8) (679.3) (22.8)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt, net................. 85.4 (52.3) 68.9
Proceeds from issuance of long-term debt.................... 203.9 724.5 150.8
Increase (decrease) in revolving credit facility, net....... (239.5) (458.0) 39.5
Repayment of long-term debt and capital lease obligations... (18.6) (33.1) (551.1)
Proceeds from sale of receivables, net...................... -- 12.5 87.5
Termination of a receivable sales program................... -- (40.0) --
Proceeds from issuance of convertible preferred securities,
net....................................................... -- 144.0 --
Proceeds from issuance of capital stock..................... 6.9 28.8 23.0
Purchases of treasury stock................................. (0.3) (64.7) (52.4)
Dividends................................................... (91.6) (75.7) (59.5)
Distributions on Trust preferred securities................. (18.4) (16.1) (10.5)
Other....................................................... -- 1.7 1.1
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........ (72.2) 171.6 (302.7)
- -----------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... (1.7) 0.4 (2.4)
- -----------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents........ 12.9 (8.2) (56.7)
Cash and Cash Equivalents at Beginning of Year.............. 53.5 61.7 118.4
- -----------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year.................... $ 66.4 $ 53.5 $ 61.7
=========================================================================================
See Notes to Consolidated Financial Statements.
19
21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unearned
Portion
Accumulated of
(in millions) Other Restricted
THREE YEARS ENDED Common Stock Additional Accumulated Comprehensive Stock Treasury
DECEMBER 31, 1999 Shares Amount Capital Deficit Income Awards Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996........ 108.171 $540.9 $ 852.2 $ (575.4) $ (24.9) $ (11.1) $ (32.2) $ 749.5
Net income....................... 260.0 260.0
Other comprehensive income:
Unrealized translation
adjustments, net of
reclassification adjustment
for loss included in net
income of $2.3............... (13.2) (13.2)
Minimum pension liability
adjustment................... (0.2) (0.2)
-------
TOTAL COMPREHENSIVE INCOME....... 246.6
Repurchase of stock by pooled
company........................ (0.831) (4.2) (27.9) (32.1)
Employee award programs.......... 0.884 4.4 12.1 7.7 (0.7) 23.5
Adjustment to conform Rohr's
fiscal year.................... 2.071 10.3 39.6 (18.0) 26.4 58.3
Conversion of 7.75%
Convertible Subordinated Notes... 0.099 0.5 1.0 1.5
Exercise of warrants............. 0.420 2.1 3.3 5.4
Purchases of stock for
treasury....................... (2.2) (2.2)
Dividends (per share -- $1.10)... (59.5) (59.5)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997........ 110.814 554.0 880.3 (392.9) (11.9) (3.4) (35.1) 991.0
Net income....................... 353.7 353.7
Other comprehensive income:
Unrealized translation
adjustments.................. (2.5) (2.5)
Minimum pension liability
adjustment................... (0.7) (0.7)
-------
TOTAL COMPREHENSIVE INCOME....... 350.5
Repurchase of stock by pooled
company........................ (1.602) (8.0) (40.4) (48.4)
Employee award programs.......... 1.078 5.5 31.5 0.7 (0.7) 37.0
Conversion of 7.75%
Convertible Subordinated Notes... 1.235 6.2 12.1 18.3
Purchases of stock for
treasury....................... (29.8) (29.8)
Dividends (per share -- $1.10)... (81.2) (81.2)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998........ 111.525 557.7 883.5 (120.4) (15.1) (2.7) (65.6) 1,237.4
Net income....................... 169.6 169.6
Other comprehensive income:
Unrealized translation
adjustments net of
reclassification adjustments
for loss included in net
income of $0.6............... (26.6) (26.6)
Minimum pension liability
adjustment................... (2.5) (2.5)
-------
TOTAL COMPREHENSIVE INCOME....... 140.5
Employee award programs.......... 0.540 2.6 12.3 1.5 0.7 17.1
Purchases of stock for
treasury....................... (0.3) (0.3)
Dividends (per share -- $1.10)... (101.5) (101.5)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999........ 112.065 $560.3 $ 895.8 $ (52.3) $ (44.2) $ (1.2) $ (65.2) $1,293.2
=================================================================================================================================
See Notes to Consolidated Financial Statements.
20
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) COLTEC MERGER
On July 12, 1999, the Company completed its merger with Coltec Industries Inc
("Coltec"). The merger has been accounted for as a pooling-of-interests.
Accordingly, all prior period consolidated financial statements have been
restated to include the results of operations, financial position and cash flows
of Coltec as though Coltec had always been a part of BFGoodrich. As such,
results for the three years ended December 31, 1999, 1998 and 1997 represent the
combined results of BFGoodrich and Coltec.
As a result of the merger, Coltec became a wholly-owned subsidiary of the
Company. In accordance with the terms of the merger agreement, each share of
Coltec common stock was converted into the right to receive 0.56 shares of
BFGoodrich common stock, totaling 35.5 million shares of BFGoodrich common
stock.
In addition, the Company issued options to purchase 3.0 million shares of
BFGoodrich common stock in exchange for options to purchase Coltec common stock
outstanding immediately prior to the merger. These options vest and become
exercisable in accordance with the terms and conditions of the original Coltec
options. Also, the holders of the 5 1/4% Convertible Preferred Securities issued
by Coltec Capital Trust, received the right to convert each such convertible
preferred security into 0.955248 of a share of BFGoodrich common stock, subject
to certain adjustments.
The following table presents sales, income from continuing operations and net
income for the previously separate companies and the combined amounts presented
within the income statement for the six months ended June 30, 1999 and the years
ended December 31, 1998 and 1997. The conforming accounting adjustments conform
Coltec's accounting policies to BFGoodrich's accounting policies, the more
significant of which include: (1) Coltec's landing gear business was changed
from percentage of completion contract accounting to accrual accounting; (2)
non-recurring engineering costs that were capitalized are now expensed unless
they are contractually recoverable from the customer; and (3) Coltec's SFAS 106
transition obligation that was previously deferred and being amortized to income
over twenty years has now been recognized immediately upon initial adoption of
SFAS 106.
SIX MONTHS Year Ended Year Ended
ENDED December 31, December 31,
(DOLLARS IN MILLIONS) JUNE 30, 1999 1998 1997
- ---------------------------------------------------------------------
Sales:
BFGoodrich............ $ 2,117.3 $ 3,950.8 $ 3,373.0
Coltec................ 757.9 1,504.0 1,314.9
- ---------------------------------------------------------------------
Combined.............. $ 2,875.2 $ 5,454.8 $ 4,687.9
=====================================================================
Income from continuing
operations:
BFGoodrich............ $ 110.9 $ 228.1 $ 113.2
Coltec................ 63.3 122.3 94.9
Conforming accounting
adjustments......... (0.1) 9.2 (13.1)
- ---------------------------------------------------------------------
Combined.............. $ 174.1 $ 359.6 $ 195.0
=====================================================================
Net Income:
BFGoodrich............ $ 110.9 $ 226.5 $ 178.2
Coltec................ 63.3 118.0 94.9
Conforming accounting
adjustments......... (0.1) 9.2 (13.1)
- ---------------------------------------------------------------------
Combined.............. $ 174.1 $ 353.7 $ 260.0
=====================================================================
The conforming accounting adjustments have also resulted in the following
changes applicable to the Coltec balance sheet accounts: a decrease in
inventories, income taxes payable and income retained in the business and an
increase in postretirement benefits other than pensions and accrued expenses.
(B) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements reflect the
accounts of The BFGoodrich Company and its majority-owned subsidiaries ("the
Company" or "BFGoodrich"). Investments in 20- to 50-percent-owned affiliates and
majority-owned companies in which investment is considered temporary are
accounted for using the equity method. Equity in earnings (losses) from these
businesses is included in Other income (expense) -- net. Intercompany accounts
and transactions are eliminated.
CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with a
maturity of three months or less at the time of purchase.
SALE OF ACCOUNTS RECEIVABLE The Company accounts for the sale of receivables in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Trade accounts receivable
sold are removed from the balance sheet at the time of transfer.
INVENTORIES Inventories other than inventoried costs relating to long-term
contracts are stated at the lower of cost or market. Certain domestic
inventories are valued by the last-in, first-out (LIFO) cost method. Inventories
not valued by the LIFO method are valued principally by the average cost method.
Inventoried costs on long-term contracts include certain preproduction costs,
consisting primarily of tooling and design costs and production costs, including
applicable overhead. The costs attributed to units delivered under long-term
commercial contracts are based on the estimated average cost of all units
expected to be produced and are determined under the learning
21
23
curve concept, which anticipates a predictable decrease in unit costs as tasks
and production techniques become more efficient through repetition. This usually
results in an increase in inventory (referred to as "excess-over average")
during the early years of a contract.
If in-process inventory plus estimated costs to complete a specific contract
exceeds the anticipated remaining sales value of such contract, such excess is
charged to current earnings, thus reducing inventory to estimated realizable
value.
In accordance with industry practice, costs in inventory include amounts
relating to contracts with long production cycles, some of which are not
expected to be realized within one year.
LONG-LIVED ASSETS Property, plant and equipment, including amounts recorded
under capital leases, are recorded at cost. Depreciation and amortization is
computed principally using the straight-line method over the following estimated
useful lives: buildings and improvements, 15 to 40 years; machinery and
equipment, 5 to 15 years. In the case of capitalized lease assets, amortization
is computed over the lease term if shorter. Repairs and maintenance costs are
expensed as incurred.
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired businesses and is being amortized by the straight-line
method, in most cases over 20 to 40 years. The weighted average number of years
over which goodwill is being amortized is 25 years. Goodwill amortization is
recorded in cost of sales.
Identifiable intangible assets are recorded at cost, or when acquired as a part
of a business combination, at estimated fair value. These assets include patents
and other technology agreements, trademarks, licenses and non-compete
agreements. They are amortized using the straight-line method over estimated
useful lives of 5 to 25 years.
Impairment of long-lived assets and related goodwill is recognized when events
or changes in circumstances indicate that the carrying amount of the asset, or
related groups of assets, may not be recoverable and the Company's estimate of
undiscounted cash flows over the assets remaining estimated useful life are less
than the assets carrying value. Measurement of the amount of impairment may be
based on appraisal, market values of similar assets or estimated discounted
future cash flows resulting from the use and ultimate disposition of the asset.
REVENUE AND INCOME RECOGNITION For revenues not recognized under the contract
method of accounting, the Company recognizes revenues from the sale of products
at the point of passage of title, which is at the time of shipment. Revenues
earned from providing maintenance service are recognized when the service is
complete.
A significant portion of the Company's sales in the Aerostructures Group of the
Aerospace Segment are under long-term, fixed-priced contracts, many of which
contain escalation clauses, requiring delivery of products over several years
and frequently providing the buyer with option pricing on follow-on orders.
Sales and profits on each contract are recognized primarily in accordance with
the percentage-of-completion method of accounting, using the units-of-delivery
method. The Company follows the guidelines of Statement of Position 81-1 ("SOP
81-1"), "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" (the contract method of accounting) except that the
Company's contract accounting policies differ from the recommendations of SOP
81-1 in that revisions of estimated profits on contracts are included in
earnings under the reallocation method rather than the cumulative catch-up
method.
Profit is estimated based on the difference between total estimated revenue and
total estimated cost of a contract, excluding that reported in prior periods,
and is recognized evenly in the current and future periods as a uniform
percentage of sales value on all remaining units to be delivered. Current
revenue does not anticipate higher or lower future prices but includes units
delivered at actual sales prices. Cost includes the estimated cost of the
preproduction effort (primarily tooling and design), plus the estimated cost of
manufacturing a specified number of production units. The specified number of
production units used to establish the profit margin is predicated upon
contractual terms adjusted for market forecasts and does not exceed the lesser
of those quantities assumed in original contract pricing or those quantities
which the Company now expects to deliver in the periods assumed in the original
contract pricing. Option quantities are combined with prior orders when
follow-on orders are released.
The contract method of accounting involves the use of various estimating
techniques to project costs at completion and includes estimates of recoveries
asserted against the customer for changes in specifications. These estimates
involve various assumptions and projections relative to the outcome of future
events, including the quantity and timing of product deliveries. Also included
are assumptions relative to future labor performance and rates, and projections
relative to material and overhead costs. These assumptions involve various
levels of expected performance improvements. The Company reevaluates its
contract estimates periodically and reflects changes in estimates in the current
and future periods under the reallocation method.
Included in sales are amounts arising from contract terms that provide for
invoicing a portion of the contract price at a date after delivery. Also
included are negotiated values for units delivered and anticipated price
adjustments for contract changes, claims, escalation and estimated earnings in
excess of billing provisions, resulting from the percentage-of-completion method
of accounting. Certain contract costs are estimated based on the learning curve
concept discussed under Inventories above.
FINANCIAL INSTRUMENTS The Company's financial instruments recorded on the
balance sheet include cash and cash equivalents, accounts and notes receivable,
accounts payable and debt. Because of their short maturity, the carrying amount
of cash and cash equivalents, accounts and notes receivable, accounts
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payable and short-term bank debt approximates fair value. Fair value of
long-term investments is based on quoted market prices. Fair value of long-term
debt is based on quoted market prices or on rates available to the Company for
debt with similar terms and maturities.
Off balance sheet derivative financial instruments at December 31, 1999, include
interest rate swap agreements, foreign currency forward contracts and foreign
currency swap agreements. All derivatives are entered into with major commercial
banks that have high credit ratings. Interest rate swap agreements are used by
the Company, from time to time, to manage interest rate risk on its floating and
fixed rate debt portfolio and its floating rate agreement to sell accounts
receivable on a revolving basis (See Note F). The cost of interest rate swaps is
recorded as part of interest expense and accrued expenses. Fair value of these
instruments is based on estimated current settlement cost.
The Company utilizes forward exchange contracts (principally against the
Canadian dollar, British pound, Euro and U.S. dollar) to hedge U.S.
dollar-denominated sales of certain Canadian subsidiaries, the net
receivable/payable position arising from trade sales and purchases and
intercompany transactions by its European businesses. Foreign currency forward
contracts reduce the Company's exposure to the risk that the eventual net cash
inflows and outflows resulting from the sale of products and purchases from
suppliers denominated in a currency other than the functional currency of the
respective businesses will be adversely affected by changes in exchange rates.
Foreign currency gains and losses under the above arrangements are not deferred
and are reported as part of cost of sales and accrued expenses. From time to
time, the Company uses foreign currency forward contracts to hedge purchases of
capital equipment. Foreign currency gains and losses for such purchases are
deferred as part of the basis of the asset.
The Company also enters into foreign currency swap agreements (principally for
the British pound, Euro and U.S. dollar) to eliminate foreign exchange risk on
intercompany loans between the Company's European businesses.
The fair value of foreign currency forward contracts and foreign currency swap
agreements is based on quoted market prices.
STOCK-BASED COMPENSATION The Company accounts for stock-based employee
compensation in accordance with the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
ISSUANCE OF SUBSIDIARY STOCK The Company recognizes gains and losses on the
issuance of stock by a subsidiary in accordance with the U.S. Securities and
Exchange Commission's ("SEC") Staff Accounting Bulletin 84.
EARNINGS PER SHARE Earnings per share is computed in accordance with SFAS No.
128, "Earnings per Share."
RESEARCH AND DEVELOPMENT EXPENSE The Company performs research and development
under Company-funded programs for commercial products, and under contracts with
others. Research and development under contracts with others is performed by the
Aerospace Segment for military and commercial products. Total research and
development expenditures from continuing operations in 1999, 1998 and 1997 were
$238.0 million, $240.6 million and $187.7 million, respectively. Of these
amounts, $43.7 million, $63.1 million and $39.4 million, respectively, were
funded by customers.
RECLASSIFICATIONS Certain amounts in prior year financial statements have been
reclassified to conform to the current year presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which, as amended by FASB Statement No. 137, is required to
be adopted in years beginning after June 15, 2000. The Statement permits early
adoptions as of the beginning of any fiscal quarter after its issuance. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement No. 133 will be
on its earnings and financial position. However, the Statement could increase
volatility in earnings and comprehensive income.
In September 1999, the EITF reached a consensus on Issue 99-5, "Accounting for
Pre-Production Costs Related to Long-Term Supply Arrangements." The consensus
requires design and development costs for products to be sold under long-term
supply arrangements incurred subsequent to December 31, 1999, to be expensed as
incurred unless contractually recoverable. The consensus did not have an impact
on the Company's results or financial position.
(C) ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
POOLING-OF-INTERESTS
COLTEC As noted above, on July 12, 1999, the Company completed its merger with
Coltec. The merger has been
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accounted for as a pooling-of-interests. Accordingly, all prior period
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows of Coltec as though Coltec had
always been a part of BFGoodrich. As such, results for the three years ended
December 31, 1999, 1998 and 1997 represent the combined results of BFGoodrich
and Coltec.
ROHR On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by
exchanging 18.6 million shares of BFGoodrich common stock for all of the common
stock of Rohr. Each share of Rohr common stock was exchanged for .7 of one share
of BFGoodrich common stock. The merger was accounted for as a pooling of
interests, and all prior period financial statements were restated to include
the financial information of Rohr as though Rohr had always been a part of
BFGoodrich. Prior to the merger, Rohr's fiscal year ended on July 31. For
purposes of the combination, Rohr's financial results for its fiscal year ended
July 31, 1997, were restated to the year ended December 31, 1997, to conform
with BFGoodrich's calendar year end.
PURCHASES
The following acquisitions were recorded using the purchase method of
accounting. Their results of operations have been included in the Company's
results since their respective dates of acquisition.
During 1999, the Company acquired a manufacturer of spacecraft attitude
determination and control systems and sensor and imaging instruments; the
remaining 50 percent interest in a joint venture, located in Singapore, that
overhauls and repairs thrust reversers, nacelles and nacelle components; an
ejection seat business; a textile coatings business; and a manufacturer and
developer of micro-electromechanical systems, which integrate electrical and
mechanical components to form "smart" sensing and control devises. Total
consideration aggregated $76.1 million, of which $69.4 million represented
goodwill.
The purchase agreements for the manufacturer and developer of
micro-electromechanical systems provides for additional consideration to be paid
over the next six years based on a percentage of net sales. The additional
consideration for the first five years, however, is guaranteed not to be less
than $3.5 million. As the $3.5 million of additional consideration is not
contingent on future events, it has been included in the purchase price and
allocated to the net assets acquired. All additional contingent amounts payable
under the purchase agreement will be recorded as additional purchase price when
earned and amortized over the remaining useful life of the goodwill.
During 1998, the Company acquired a global manufacturer of specialty and fine
chemicals; a manufacturer of flexible graphite and polytetrafluoroethylene
("PTFE") products; a business that manufactures, machines and distributes PTFE
products; and another business that reprocesses PTFE compounds. The Company also
acquired a manufacturer of sealing products; a small manufacturer of textile
chemicals used for fabric preparation and finishing; the remaining 20 percent
not previously owned of a subsidiary that produces self-lubricating bearings;
and a small manufacturer of energetic materials systems during 1998. Total
consideration aggregated $521.5 million, of which $308.7 million represented
goodwill.
During 1997, the Company acquired seven businesses for cash consideration of
$194.1 million in the aggregate, which included $84.4 million of goodwill. One
of the acquired businesses is a manufacturer of data acquisition systems for
satellites and other aerospace applications. A second business manufactures
diverse aerospace products for commercial and military applications. A third
business is a manufacturer of dyes, chemical additives and durable press resins
for the textiles industry. A fourth business manufactures thermoplastic
polyurethane and is located in the United Kingdom. A fifth business manufactures
flight attendant and cockpit seats and the sixth business is a sheet rubber and
conveyer belt business. The remaining acquisition is a small specialty chemicals
business.
The purchase agreement for the flight attendant and cockpit seat business
includes contingent payments based on earnings levels for the years ended
December 31, 1997-2000. These contingent payments will be recorded as additional
purchase price consideration when made and will be amortized over the remaining
life of the goodwill.
The impact of these acquisitions was not material in relation to the Company's
results of operations. Consequently, pro forma information is not presented.
DISPOSITIONS
During 1999, the Company sold all or a portion of its interest in four
businesses, resulting in a pre-tax gain of $9.8 million, which has been reported
in other income (expense) net.
In May 1998, the Company sold the capital stock of its Holley Performance
Products subsidiary for $100 million in cash. The pre-tax gain of $58.3 million,
net of liabilities retained, has been recorded within other income (expense),
net. The proceeds from this divestiture were applied toward reducing debt. In
1997, Holley had gross revenues and operating income of approximately $99.0
million and $8.0 million, respectively.
During 1997, the Company completed the sale of its Engine Electrical Systems
Division, which was part of the Sensors and Integrated Systems Group in the
Aerospace segment. The Company received cash proceeds of $72.5 million which
resulted in a pretax gain of $26.4 million reported within other income
(expense) net.
For dispositions accounted for as discontinued operations during 1998 and 1997
refer to Note T to the Consolidated Financial Statements.
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(D) MERGER RELATED AND CONSOLIDATION COSTS
The Company has incurred $269.4 million of merger related and consolidation
costs in 1999, $215.6 million of which were related to the Coltec merger. Merger
related and consolidation reserves at December 31, 1999, as well as activity
during the year, consisted of:
Balance Balance
December 31, Reserve December 31,
(dollars in millions) 1998 Provision Reduction 1999
- -----------------------------------------------------------------------------------------------------------------
Personnel related costs..................................... $ -- $ 162.3 $ (121.0) $ 41.3
Transaction costs........................................... -- 79.2 (77.2) 2.0
Consolidation............................................... -- 27.9 (20.0) 7.9
- -----------------------------------------------------------------------------------------------------------------
$ -- $ 269.4 $ (218.2) $ 51.2
=================================================================================================================
During 1999, the Company recorded merger related and consolidation costs of
$269.4 million, of which $12.3 million represents non-cash asset impairment
charges. These costs related primarily to personnel related costs, transaction
costs and consolidation costs. The merger related and consolidation reserves
were reduced by $218.2 million during the year, of which $207.1 million
represented cash payments.
Personnel related costs include severance, change in control and relocation
costs. Personnel related costs associated with the Coltec merger were $120.8
million, consisting of $61.8 million incurred under change in control provisions
in employment agreements, $53.4 million in employee severance costs and $5.6
million of relocation costs. Personnel related costs also include employee
severance costs of $26.5 million for reductions in Performance Materials
(approximately 265 positions), $2.1 million for reductions in Engineered
Industrial Products (approximately 125 positions), $7.3 million for reductions
in Aerospace (approximately 400 positions) and $5.6 million for reductions in
the Company's Advanced Technology Group (approximately 15 positions).
Transaction costs were associated with the Coltec merger and include investment
banking fees, accounting fees, legal fees, litigation settlement costs,
registration and listing fees and other transaction costs.
Consolidation costs include facility consolidation costs and asset impairment
charges. Consolidation costs associated with the Coltec merger were $15.6
million, consisting primarily of $6.6 million non-cash impairment charge for the
former BFGoodrich and Aerospace headquarters buildings in Ohio and $3.7 million
related to realignment activities at Landing Gear facilities. Consolidation
costs also included a $2.9 million non-cash charge related to the write-off of
the Company's investment in a research and development joint venture and $2.0
million, $1.7 million and $5.7 million related to realignment activities at
Performance Materials, Engineered Industrial Products and Aerospace,
respectively.
The Aerostructures Group's fourth quarter special charge in 1998 of $10.5
million before tax ($6.5 million after tax, or $.06 per share), relates to costs
associated with the closure of three facilities and an asset impairment charge.
The charge includes $4.0 million for employee termination benefits; $1.8 million
related to writing down the carrying value of the three facilities to their fair
value less cost to sell and $4.7 million for an asset impairment related to an
assembly-service facility in Hamburg, Germany.
The employee termination benefits primarily represents severance payments that
were made to approximately 700 employees (approximately 600 wage and 100
salaried).
The shutdowns affected a composite bonding facility in Hagerstown, Maryland and
two assembly sites in Heber Springs and Sheridan, Arkansas. Production work
performed at these facilities has been absorbed by the Aerostructures Group's
remaining facilities.
During 1997, the Company recorded merger-related and consolidation costs of
$77.0 million before tax ($69.5 million after tax, or $0.62 per diluted share)
in connection with the Rohr merger, substantially all of which was paid in 1998.
In addition to the $77.0 million recorded as merger-related and consolidation
costs, the Company also recorded $28.0 million of debt extinguishment costs
($16.7 million after tax, or $0.15 per diluted share) related to the Rohr merger
which were reported as an extraordinary item.
Also during 1997, the Company reversed a $10.0 million accrual related to a 1995
Aerospace charge primarily related to the closure of a facility in Canada.
During the same year, the Company's Engineered Industrial Products segment
recorded a $10.0 million charge. This special charge included the costs of
closing its FMD Electronics operations in Roscoe, Illinois and its Ortman Fluid
Power operations in Hammond, Indiana. The special charge also included the costs
to restructure the segment's businesses in Canada and Germany and certain
termination costs related to the relocation of the Delavan Commercial Spray
Technologies headquarters to North Carolina. The third quarter 1997 charge
included costs resulting from cancellation of contractual obligations, asset
writedowns, severance and employee-related costs and other costs to shut down
these facilities that will not benefit future operations.
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(E) EARNINGS PER SHARE
The computation of basic and diluted earnings per share for income from
continuing operations is as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- -----------------------------------------------------------------
Numerator:
Numerator for basic earnings per
share -- income from continuing
operations...................... $169.6 $359.6 $195.0
Effect of dilutive securities:
7.75% Convertible Notes........... -- 4.5 .9
- -----------------------------------------------------------------
Numerator for diluted earnings per
share -- income from continuing
operations available to common
stockholders after assumed
conversions................. $169.6 $364.1 $195.9
=================================================================
Denominator:
Denominator for basic earnings per
share -- weighted-average shares... 110.0 110.2 107.9
Effect of dilutive securities:
Stock options, warrants and
restricted stock issued........... 0.7 1.1 2.2
Contingent shares................... -- .1 .7
7.75% Convertible Notes............. -- .5 1.3
Convertible preferred securities.... -- 2.0 --
- -----------------------------------------------------------------
Dilutive potential common shares...... 0.7 3.7 4.2
- -----------------------------------------------------------------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions... 110.7 113.9 112.1
=================================================================
Per share income from continuing
operations:
Basic............................... $ 1.54 $ 3.26 $ 1.81
=================================================================
Diluted............................. $ 1.53 $ 3.19 $ 1.75
=================================================================
The computation of diluted earnings per share in 1999 excludes the effects of
the assumed exercise of approximately 4.2 million stock options and 2.9 million
potential common shares for assumed conversions of convertible preferred
securities because the effect would be anti-dilutive.
(F) SALE OF ACCOUNTS RECEIVABLE
The Company has entered into agreements to sell certain trade accounts
receivable, up to a maximum of $100.5 million and $95.0 million at December 31,
1999 and 1998, respectively. At December 31, 1999 and December 31, 1998, $96.0
million and $95.0 million, respectively, of the Company's receivables were sold
under these agreements and the sale was reflected as a reduction of accounts
receivable in the 1999 and 1998 balance sheet. The receivables were sold at a
discount, which was included in interest expense in the 1999 and 1998 income
statement.
(G) INVENTORIES
Inventories consist of the following:
(IN MILLIONS) 1999 1998
- --------------------------------------------------------------
FIFO or average cost (which approximates
current costs):
Finished products.................... $ 289.1 $ 289.9
In process........................... 608.4 587.2
Raw materials and supplies........... 257.5 229.0
- --------------------------------------------------------------
1,155.0 1,106.1
Reserve to reduce certain inventories
to LIFO basis........................ (70.8) (73.4)
Progress payments and advances......... (83.6) (65.0)
- --------------------------------------------------------------
TOTAL............................ $1,000.6 $ 967.7
==============================================================
Approximately 33 and 31 percent of inventory was valued by the LIFO method in
1999 and 1998, respectively.
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In-process inventories as of December 31, 1999, which include significant
deferred costs for long-term contracts accounted for under contract accounting,
are summarized by contract as follows (in millions, except quantities which are
number of aircraft):
Aircraft Order Status(1) Company Order Status
Delivered Un- Un- (3)Firm
To filled filled (2)Contract Un-filled (4)Year Pro-
Contract Airlines Orders Options Quantity Delivered Orders Complete duction
- -----------------------------------------------------------------------------------------------------------------------------
737-700............................. 425 794 1,062 1,000 486 514 2002 $ 5.6
717-200............................. 9 109 100 350 16 68 2007 13.4
Others.............................. 97.3
- -----------------------------------------------------------------------------------------------------------------------------
In-process inventory related to
long-term contracts............... $ 116.3
In-process inventory not related to
long-term contracts...............
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999........
=============================================================================================================================
In-Process Inventory
Pre- Excess-
Pro- Over-
Contract duction Average Total
- ------------------------------------ --------------------------
737-700............................. $ -- $ 1.1 $ 6.7
717-200............................. 84.9 53.9 152.2
Others.............................. 7.4 1.0 105.7
- ----------------------------------------------------------------
In-process inventory related to
long-term contracts............... $ 92.3 $ 56.0 264.6
In-process inventory not related to
long-term contracts............... 343.8
- ----------------------------------------------------------------
Balance at December 31, 1999........ $608.4
================================================================
(1) Represents the aircraft order status as reported by Case and/or other
sources the Company believes to be reliable for the related aircraft and
engine option. The Company's orders frequently are less than the announced
orders shown above.
(2) Represents the number of aircraft used to obtain average unit cost.
(3) Represents the number of aircraft for which the Company has firm unfilled
orders.
(4) The year presented represents the year in which the final production units
included in the contract quantity are expected to be delivered. The contract
may continue in effect beyond this date.
In-process inventories include significant deferred costs related to production,
pre-production and excess-over-average costs for long-term contracts. The
Company has pre-production inventory of $84.9 million related to design and
development costs on the 717-200 program at December 31, 1999. In addition, the
Company has excess-over-average inventory of $53.9 million related to costs
associated with the production of the flight test inventory and the first
production units on this program. The aircraft was certified by the FAA on
September 1, 1999, and Boeing is actively marketing the plane. Recovery of these
costs will depend on the ultimate number of aircraft delivered and successfully
achieving the Company's cost projections in future years.
(H) FINANCING ARRANGEMENTS
SHORT-TERM BANK DEBT At December 31, 1999 the Company had separate committed
revolving credit agreements with certain banks providing for domestic lines of
credit aggregating $600.0 million, an increase of $300.0 million from the prior
year. Lines of credit totaling $300.0 million were amended in 1999 to extend the
expiration date to February 18, 2004. During 1999, the Company entered into
$300.0 million of 364-day agreements that expire on March 13, 2000. The Company
has renewed these lines of credit prior to this expiration date. Borrowings
under these agreements bear interest, at the Company's option, at rates tied to
the banks' certificate of deposit, Eurodollar or prime rates. Under the
agreements expiring in 2004, the Company is required to pay a facility fee of
10.5 basis points per annum on the total $300.0 million committed line.
According to the 364-day agreements, the Company is required to pay a facility
fee of 9 basis points per annum on the total $300.0 million committed line. If
the amount outstanding on any bank's line of credit exceeds fifty percent of the
applicable commitment, a usage fee of 10 basis points per annum on the loan
outstanding is payable by the Company. At December 31, 1999 no amounts were
outstanding pursuant to these agreements.
In addition, the Company had available formal foreign lines of credit and
overdraft facilities, including a committed European revolver, of $236.5 million
at December 31, 1999, of which $84.3 million was available.
The Company also maintains uncommitted domestic money market facilities with
various banks aggregating $367.5 million, of which $266.3 million of these lines
were unused and available at December 31, 1999. Weighted-average interest rates
on outstanding short-term borrowings were 6.2 percent, 5.2 percent and 6.4
percent at December 31, 1999, 1998 and 1997, respectively. Weighted-average
interest rates on short-term borrowings were 5.2 percent, 5.6 percent and 5.0
percent during 1999, 1998 and 1997, respectively.
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LONG-TERM DEBT At December 31, 1999 and 1998, long-term debt and capital lease
obligations payable after one year consisted of:
(IN MILLIONS) 1999 1998
- --------------------------------------------------------------
Revolving credit facility................ $ -- $ 239.5
9.75% senior notes, maturing in 2000..... -- 7.4
9.625% Notes, maturing in 2001........... 175.0 175.0
MTN notes payable........................ 699.0 699.0
European revolver........................ 23.1 26.8
IDRBs, maturing in 2023, 6.0%............ 60.0 60.0
7.5% senior notes, maturing in 2008...... 300.0 300.0
6.6% senior notes, maturing in 2009...... 200.0 --
Other debt, maturing to 2015 (interest
rates from 3.0% to 11.625%)............ 52.9 58.6
- --------------------------------------------------------------
1,510.0 1,566.3
Capital lease obligations (Note I)....... 6.9 6.4
- --------------------------------------------------------------
TOTAL................................ $1,516.9 $1,572.7
==============================================================
REVOLVING CREDIT FACILITY During 1999, the Company terminated its revolving
credit facility subsequent to the consummation of the merger with Coltec. The
revolving credit facility provided a total commitment of up to $600 million, of
which up to $125.0 million could be issued for letters of credit. The
weighted-average interest rates on Credit Agreement borrowings was 6.5 percent
and 6.7 percent during 1998 and 1997, respectively.
SENIOR NOTES In 1999, the Company issued $200.0 million of 6.6 percent senior
notes due in 2009. The Company entered into a fixed-to-floating interest rate
swap to manage the Company's interest rate exposure. The settlement and maturity
dates on the swap are the same as those on the notes. The Company may redeem all
or a portion of the notes at any time prior to maturity.
In 1998, the Company purchased in the open market $5.0 million of the 9.75
percent senior notes, which were repaid on November 1, 1999. The 9.75 percent
notes due 2000 are redeemable at maturity on April 1, 2000. In April 1998, the
Company privately placed, with institutional investors, $300.0 million principal
amount of 7.5 percent senior notes due 2008, which are redeemable at a premium
prior to maturity on April 15, 2008.
MTN NOTES PAYABLE The Company has periodically issued long-term debt securities
in the public markets through a medium term note program (referred to as the MTN
program), which commenced in 1995. MTN notes outstanding at December 31, 1999,
consist entirely of fixed-rate non-callable debt securities. In 1998, the
Company issued $100.0 million of 6.45 percent MTN notes due in 2008, $130.0
million of 6.8 percent MTN notes due in 2018 and $200.0 million of 7.0 percent
notes due in 2038, primarily for the financing of acquisitions (see Note C). All
other MTN notes outstanding were issued during 1995, 1996 and 1997, with
interest rates ranging from 7.2 percent to 8.7 percent and maturity dates
ranging from 2025 to 2046.
EUROPEAN REVOLVER The Company has a $125.0 million committed multi-currency
revolving credit facility with various international banks, expiring in the year
2003. The Company uses this facility for short and long-term, local currency
financing to support the growth of its European operations. At December 31,
1999, the Company's long-term borrowings under this facility were $23.1 million
denominated in Spanish pesetas at a floating rate that is tied to Spanish LIBOR
(3.6 percent at December 31, 1999). The Company has effectively converted the
$23.1 million long-term borrowing into fixed rate debt with an interest rate
swap.
IDRBS The industrial development revenue bonds maturing in 2023 were issued to
finance the construction of a hangar facility in 1993. Property acquired through
the issuance of these bonds secures the repayment of the bonds.
Aggregate maturities of long-term debt, exclusive of capital lease obligations,
during the five years subsequent to December 31, 1999, are as follows (in
millions): 2000 -- $12.8; 2001 -- $202.1; 2002 -- $3.8; 2003 -- $1.9 and
2004 -- $0.9.
The Company's debt agreements contain various restrictive covenants that, among
other things, place limitations on the payment of cash dividends and the
repurchase of the Company's capital stock. Under the most restrictive of these
agreements, $422.9 million of income retained in the business and additional
capital was free from such limitations at December 31, 1999.
(I) LEASE COMMITMENTS
The Company leases certain of its office and manufacturing facilities as well as
machinery and equipment under various leasing arrangements. The future minimum
lease payments from continuing operations, by year and in the aggregate, under
capital leases and under noncancelable operating leases with initial or
remaining noncancelable lease terms in excess of one year, consisted of the
following at December 31, 1999:
Noncancelable
Capital Operating
(in millions) Leases Leases
- ---------------------------------------------------------------
2000.................................. $ 2.8 $40.1
2001.................................. 2.5 34.6
2002.................................. 2.2 26.4
2003.................................. 2.0 18.3
2004.................................. 1.4 14.1
Thereafter............................ 0.4 35.3
- ---------------------------------------------------------------
Total minimum payments................ 11.3 $168.8
=============
Amounts representing interest......... (2.7)
- -----------------------------------------------
Present value of net minimum lease
payments............................ 8.6
Current portion of capital lease
obligations......................... (1.7)
- -----------------------------------------------
TOTAL......................... $ 6.9
===============================================
28
30
Net rent expense from continuing operations consisted of the following:
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------------
Minimum rentals......................... $51.6 $45.9 $37.2
Contingent rentals...................... -- 0.3 3.9
Sublease rentals........................ (0.2) (0.1) (0.1)
- ---------------------------------------------------------------
TOTAL........................... $51.4 $46.1 $41.0
===============================================================
(J) PENSIONS AND POSTRETIREMENT BENEFITS
The Company has several noncontributory defined benefit pension plans covering
eligible employees. Plans covering salaried employees generally provide benefit
payments using a formula that is based on an employee's compensation and length
of service. Plans covering hourly employees generally provide benefit payments
of stated amounts for each year of service.
The Company also sponsors several unfunded defined benefit postretirement plans
that provide certain health-care and life insurance benefits to eligible
employees. The health-care plans are contributory, with retiree contributions
adjusted periodically, and contain other cost-sharing features, such as
deductibles and coinsurance. The life insurance plans are generally
noncontributory.
The Company's general funding policy for pension plans is to contribute amounts
at least sufficient to satisfy regulatory funding standards. The Company's
qualified pension plans were fully funded on an accumulated benefit obligation
basis at December 31, 1999 and 1998. Assets for these plans consist principally
of corporate and government obligations and commingled funds invested in
equities, debt and real estate. At December 31, 1999, the pension plans held 2.8
million shares of the Company's common stock with a fair value of $75.9 million.
Amortization of unrecognized transition assets and liabilities, prior service
cost and gains and losses (if applicable) are recorded using the straight-line
method over the average remaining service period of active employees, or
approximately 12 years.
29
31
The following table sets forth the status of the Company's defined benefit
pension plans and defined benefit postretirement plans as of December 31, 1999
and 1998, and the amounts recorded in the Consolidated Balance Sheet at these
dates.
Pension Benefits Other Benefits
(IN MILLIONS) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
CHANGE IN PROJECTED
BENEFIT OBLIGATIONS
Projected benefit obligation at beginning of year......... $2,081.7 $1,999.6 $ 345.7 $ 348.9
Service cost.............................................. 38.6 32.5 3.4 3.0
Interest cost............................................. 142.9 141.5 22.9 23.1
Amendments................................................ 24.6 20.9 3.6 (1.2)
Actuarial (gains) losses.................................. (174.6) 60.2 (1.9) (0.1)
Acquisitions.............................................. -- 4.6 -- 0.9
Benefits paid............................................. (162.8) (177.6) (33.6) (28.9)
- ------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year............... $1,950.4 $2,081.7 $ 340.1 $ 345.7
- ------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............ $2,185.0 $2,036.4 $ -- $ --
Actual return on plan assets.............................. 214.8 261.2 -- --
Acquisitions.............................................. -- 4.6 -- --
Company contributions..................................... 9.4 60.4 33.6 28.9
Benefits paid............................................. (162.8) (177.6) (33.6) (28.9)
- ------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year.................. $2,246.4 $2,185.0 $ -- $ --
- ------------------------------------------------------------------------------------------------------
FUNDED STATUS (UNDERFUNDED)
Funded status............................................. $ 296.0 $ 103.3 $ (340.1) $(345.7)
Unrecognized net actuarial loss........................... (229.6) (31.8) (34.3) (33.2)
Unrecognized prior service cost........................... 86.9 73.7 (4.6) (9.6)
Unrecognized net transition obligation.................... 7.8 9.3 -- --
- ------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost............................ $ 161.1 $ 154.5 $ (379.0) $(388.5)
======================================================================================================
AMOUNTS RECOGNIZED IN THE
STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost...................................... $ 231.1 $ 179.0 $ -- $ --
Intangible asset.......................................... 4.2 6.3 -- --
Accumulated other comprehensive income.................... 6.7 6.4 -- --
Accrued benefit liability................................. (80.9) (37.2) (379.0) (388.5)
- ------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED..................................... $ 161.1 $ 154.5 $ (379.0) $(388.5)
======================================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate............................................. 8.00% 7.00% 8.00% 7.00%
Expected return on plan assets............................ 9.25% 9.00% -- --
Rate of compensation increase............................. 4.00% 3.50% -- --
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 5.0 percent for 2005 and remain at that level
thereafter.
For Coltec plans, the assumptions were comparable to the BFGoodrich assumptions,
except for the rate of compensation increase (4.75 percent) and the rate of
increase in the per capita cost of covered health care (7.75 percent assumed to
decrease gradually to 5.25 percent by 2005).
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $95.4 million, $81.8 million and $11.1 million,
respectively, as of December 31, 1999 and $92.5 million, $79.1 million and $10.0
million, respectively, as of December 31, 1998. These amounts are included in
the above table.
30
32
Pension Benefits Other Benefits
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET
PERIODIC BENEFIT COST (INCOME):
Service cost.............................................. $ 38.6 $ 32.5 $ 29.4 $ 3.4 $ 3.0 $ 2.4
Interest cost............................................. 143.2 141.7 141.6 22.9 23.1 25.1
Expected return on plan assets............................ (193.9) (190.6) (207.9) -- -- --
Amortization of prior service cost........................ 11.0 26.5 54.6 (1.2) (0.5) (1.4)
Amortization of transition obligation..................... 0.9 0.1 0.3 -- -- --
Recognized net actuarial (gain) loss...................... (4.9) 5.8 5.5 (0.9) (1.3) (1.0)
- -----------------------------------------------------------------------------------------------------------------
Benefit cost (income)..................................... (5.1) 16.0 23.5 24.2 24.3 25.1
Settlements and curtailments (gain)/loss.................. 0.1 (7.8) 6.6 -- -- (2.5)
- -----------------------------------------------------------------------------------------------------------------
$ (5.0) $ 8.2 $ 30.1 $24.2 $24.3 $22.6
=================================================================================================================
The table below quantifies the impact of a one percentage point change in the
assumed health care cost trend rate.
1 Percentage 1 Percentage
Point Point
(IN MILLIONS) Increase Decrease
- ---------------------------------------------------------------
Effect on total of service and
interest cost components in
1999............................ $ 1.7 $ 1.5
Effect on postretirement benefit
obligation as of December 31,
1999............................ $ 21.0 $ 18.3
The Company also maintains voluntary retirement savings plans for salaried and
wage employees. Under provisions of these plans, eligible employees can receive
Company matching contributions on up to the first 6 percent of their eligible
earnings. For 1999, 1998 and 1997, Company contributions amounted to $36.0
million, $33.3 million and $32.1 million, respectively.
(K) INCOME TAXES
Income from continuing operations before income taxes and Trust distributions as
shown in the Consolidated Statement of Income consists of the following:
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------------
Domestic............................. $269.2 $551.0 $311.7
Foreign.............................. 65.3 43.2 32.0
- ---------------------------------------------------------------
TOTAL............................ $334.5 $594.2 $343.7
===============================================================
A summary of income tax (expense) benefit from continuing operations in the
Consolidated Statement of Income is as follows:
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------
Current:
Federal.......................... $ (65.3) $ (99.3) $ (61.3)
Foreign.......................... (11.5) (13.6) (12.7)
State............................ (10.3) (22.3) (7.1)
- ----------------------------------------------------------------
(87.1) (135.2) (81.1)
- ----------------------------------------------------------------
Deferred:
Federal.......................... (48.3) (75.4) (49.0)
Foreign.......................... (11.1) (8.5) (7.5)
State............................ -- 0.6 (0.6)
- ----------------------------------------------------------------
(59.4) (83.3) (57.1)
- ----------------------------------------------------------------
TOTAL.......................... $(146.5) $(218.5) $(138.2)
================================================================
Significant components of deferred income tax assets and liabilities at December
31, 1999 and 1998, are as follows:
(IN MILLIONS) 1999 1998
- --------------------------------------------------------------
Deferred income tax assets:
Accrual for postretirement benefits other
than pensions............................ $135.8 $128.8
Inventories................................ 30.8 30.7
Other nondeductible accruals............... 85.1 62.7
Tax credit and net operating loss
carryovers............................... 65.6 91.8
Employee benefits plans.................... 9.1 11.6
Other...................................... 71.1 60.7
- --------------------------------------------------------------
Total deferred income tax assets......... 397.5 386.3
- --------------------------------------------------------------
Deferred income tax liabilities:
Tax over book depreciation................. (134.5) (127.3)
Tax over book intangible amortization...... (44.0) (40.3)
Pensions................................... (41.0) (41.0)
Capital transactions, net.................. (62.7) (61.8)
Other...................................... (112.3) (53.5)
- --------------------------------------------------------------
Total deferred income tax liabilities.... (394.5) (323.9)
- --------------------------------------------------------------
NET DEFERRED INCOME TAXES.................. $ 3.0 $ 62.4
==============================================================
Management has determined, based on the Company's history of prior earnings and
its expectations for the future, that taxable income of the Company will more
likely than not be sufficient
31
33
to recognize fully these net deferred tax assets. In addition, management's
analysis indicates that the turnaround periods for certain of these assets are
for long periods of time or are indefinite. In particular, the turnaround of the
largest deferred tax asset related to accounting for postretirement benefits
other than pensions will occur over an extended period of time and, as a result,
will be realized for tax purposes over those future periods. The tax credit and
net operating loss carryovers, principally relating to Rohr, are primarily
comprised of federal net operating loss carryovers of $155.6 million which
expire in the years 2005 through 2013, and investment tax credit and other
credits of $11.2 million which expire in the years 2003 through 2014. The
remaining deferred tax assets and liabilities approximately match each other in
terms of timing and amounts and should be realizable in the future, given the
Company's operating history.
The effective income tax rate from continuing operations varied from the
statutory federal income tax rate as follows:
Percent of Pretax
Income
1999 1998 1997
- -------------------------------------------------------------
Statutory federal income tax rate........ 35.0% 35.0% 35.0%
Amortization of nondeductible goodwill... 1.9 0.8 0.6
Difference in rates on consolidated
foreign subsidiaries................... -- 0.5 0.8
State and local taxes, net of federal
benefit................................ 2.0 2.1 0.8
Tax exempt income from foreign sales
corporation............................ (2.5) (1.0) (2.1)
Trust distributions...................... (1.9) (0.5) (1.1)
Merger-related costs..................... 6.7 -- 5.9
Repatriation of non-U.S. earnings........ 0.7 (0.3) (0.3)
Other items.............................. 1.9 0.2 0.6
- -------------------------------------------------------------
Effective income tax rate................ 43.8% 36.8% 40.2%
=============================================================
The Company has not provided for U.S. federal and foreign withholding taxes on $
255.8 million of foreign subsidiaries' undistributed earnings as of December 31,
1999, because such earnings are intended to be reinvested indefinitely. It is
not practical to determine the amount of income tax liability that would result
had such earnings actually been repatriated. On repatriation, certain foreign
countries impose withholding taxes. The amount of withholding tax that would be
payable on remittance of the entire amount of undistributed earnings would
approximate $12.1 million.
(L) BUSINESS SEGMENT INFORMATION
The Company's operations are classified into three reportable business segments:
BFGoodrich Aerospace ("Aerospace"), BFGoodrich Engineered Industrial Products
("Engineered Industrial Products") and BFGoodrich Performance Materials
("Performance Materials"). The Company's three reportable business segments are
managed separately based on fundamental differences in their operations.
Aerospace consists of four business groups: Aerostructures; Landing Systems;
Sensors and Integrated Systems; and Maintenance, Repair and Overhaul. They serve
commercial, military, regional, business and general aviation markets.
Aerospace's major products are aircraft engine nacelle and pylon systems;
aircraft landing gear and wheels and brakes; sensors and sensor-based systems;
fuel measurement and management systems; flight attendant and cockpit seats;
aircraft evacuation slides and rafts; ice protection systems, and collision
warning systems. Aerospace also provides maintenance, repair and overhaul
services on commercial airframes and components.
Engineered Industrial Products is a single business group. This group
manufactures industrial seals; gaskets; packing products; self-lubricating
bearings; diesel, gas and dual-fuel engines; air compressors; spray nozzles and
vacuum pumps.
Performance Materials consists of three business groups: Textile and Coatings
Solutions, Polymer Additives and Specialty Plastics, and Consumer Specialties.
They serve various markets such as personal-care, pharmaceuticals, printing,
textiles, industrial, construction and automotive. Performance Materials' major
products are thermoplastic polyurethane; high-heat-resistant plastics; synthetic
thickeners and emulsifiers; polymer emulsions, resins and additives, and textile
thickeners, binders, emulsions and compounds.
The Company's business is conducted on a global basis with manufacturing,
service and sales undertaken in various locations throughout the world.
Aerospace's products and services and Engineered Industrial Products' and
Performance Materials' products are principally sold to customers in North
America and Europe.
Segment operating income is total segment revenue reduced by operating expenses
identifiable with that business segment. Corporate includes general corporate
administrative costs and Advanced Technology Group research expenses.
The Company evaluates performance and allocates resources based on operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. There are no
intersegment sales.
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------
SALES
Aerospace....................... $3,617.4 $3,479.3 $3,026.1
Engineered Industrial
Products...................... 702.4 779.9 757.1
Performance Materials........... 1,217.7 1,195.6 904.7
- ----------------------------------------------------------------
TOTAL SALES................. $5,537.5 $5,454.8 $4,687.9
================================================================
OPERATING INCOME
Aerospace....................... $ 558.7 $ 500.0 $ 325.8
Engineered Industrial
Products...................... 118.2 131.6 147.0
Performance Materials........... 150.4 145.8 128.2
- ----------------------------------------------------------------
827.3 777.4 601.0
Corporate General and
Administrative Expenses....... (84.6) (83.7) (93.1)
Merger Related and Consolidation
Costs......................... (269.4) (10.5) (77.0)
- ----------------------------------------------------------------
TOTAL OPERATING INCOME...... $ 473.3 $ 683.2 $ 430.9
================================================================
32
34
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------
ASSETS
Aerospace....................... $3,021.8 $2,844.9 $2,816.3
Engineered Industrial
Products...................... 390.3 404.0 320.6
Performance Materials........... 1,398.4 1,380.2 877.3
Corporate....................... 645.1 583.9 319.5
- ----------------------------------------------------------------
TOTAL ASSETS................ $5,455.6 $5,213.0 $4,333.7
================================================================
CAPITAL EXPENDITURES
Aerospace....................... $ 139.6 $ 157.9 $ 128.8
Engineered Industrial
Products...................... 29.4 29.6 31.4
Performance Materials........... 70.8 70.6 73.2
Corporate....................... 6.5 3.9 7.7
- ----------------------------------------------------------------
TOTAL CAPITAL
EXPENDITURES.............. $ 246.3 $ 262.0 $ 241.1
================================================================
DEPRECIATION AND AMORTIZATION
EXPENSE
Aerospace....................... $ 117.3 $ 106.6 $ 101.3
Engineered Industrial
Products...................... 23.4 21.1 15.7
Performance Materials........... 85.1 75.3 48.2
Corporate....................... 4.8 7.2 12.0
- ----------------------------------------------------------------
TOTAL DEPRECIATION AND
AMORTIZATION.............. $ 230.6 $ 210.2 $ 177.2
================================================================
GEOGRAPHIC AREAS
NET SALES
United States................... $3,776.8 $3,795.4 $3,362.1
Canada.......................... 221.8 240.5 171.0
Europe(1)....................... 1,052.2 970.1 802.8
Other Foreign................... 486.7 448.8 352.0
- ----------------------------------------------------------------
TOTAL....................... $5,537.5 $5,454.8 $4,687.9
================================================================
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------
PROPERTY
United States................... $1,362.7 $1,347.1 1,172.4
Canada.......................... 51.2 53.9 54.8
Europe.......................... 147.6 153.6 116.9
Other Foreign................... 15.8 7.9 8.6
- ----------------------------------------------------------------
TOTAL....................... $1,577.3 $1,562.5 $1,352.7
================================================================
(1) European sales in 1999, 1998 and 1997 included $384.0 million, $298.4
million and $431.0 million, respectively, of sales to customers in France.
Sales were allocated to geographic areas based on where the product was
shipped to.
In 1999, 1998 and 1997, sales to Boeing, solely by the Aerospace Segment,
totaled 16 percent, 16 percent and 14 percent, respectively, of consolidated
sales. Sales to Boeing include sales to McDonnell Douglas which merged with
Boeing in 1997.
(M) PUBLIC OFFERING OF SUBSIDIARY STOCK
In May 1997, the Company's subsidiary, DTM Corporation ("DTM"), issued 2,852,191
shares of its authorized but previously unissued common stock in an initial
public offering ("IPO"). As a result of the IPO, the Company's interest declined
from approximately 92 percent to approximately 50 percent (the Company did not
sell any of its interest in the IPO). The Company recognized a pretax gain of
$13.7 million ($8.0 million after tax) in accordance with the SEC's Staff
Accounting Bulletin 84.
In February 1999, the Company sold its remaining interest in DTM for
approximately $3.5 million. The Company's net investment in DTM approximated
$0.5 million at December 31, 1998. The gain was recorded within Other Income
(Expense) during the first quarter of 1999.
(N) SUPPLEMENTAL BALANCE SHEET INFORMATION
Charged
Balance to Costs Balance
Beginning and at End
(dollars in millions) of Year Expense Other Deductions(1) of Year
- --------------------------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE ALLOWANCE
Year ended December 31, 1999................................ $25.7 $5.7 $0.2(2) $(3.4) $28.2
Year ended December 31, 1998................................ 24.2 6.8 0.9(2) (6.2) 25.7
Year ended December 31, 1997................................ 28.2 16.8 0.7(2)
(2.1)(3) (19.4) 24.2
====================================================================================================================
(1) Write-off of doubtful accounts, net of recoveries
(2) Allowance related to acquisitions
(3) Allowance related to operations that were sold
33
35
(IN MILLIONS) 1999 1998
- ---------------------------------------------------------------
PROPERTY
Land.................................... $ 57.2 $ 66.0
Buildings and improvements.............. 867.0 820.6
Machinery and equipment................. 2,047.4 1,924.8
Construction in progress................ 167.6 191.5
- ---------------------------------------------------------------
$ 3,139.2 $ 3,002.9
Less allowances for depreciation........ (1,561.9) (1,440.4)
- ---------------------------------------------------------------
TOTAL............................... $ 1,577.3 $ 1,562.5
===============================================================
Property includes assets acquired under capital leases, principally buildings
and machinery and equipment, of $21.1 million and $17.0 million at December 31,
1999 and 1998, respectively. Related allowances for depreciation and
amortization are $7.1 million and $5.4 million, respectively. Interest costs
capitalized from continuing operations were $3.5 million in 1999, $5.1 million
in 1998 and $6.8 million in 1997.
(IN MILLIONS) 1999 1998
- --------------------------------------------------------------
GOODWILL
Accumulated amortization..................... $228.0 $183.3
===============================================================
IDENTIFIABLE INTANGIBLE ASSETS
Accumulated amortization..................... $ 37.8 $ 29.3
===============================================================
ACCRUED EXPENSES
Wages, vacations, pensions and other
employment costs........................... $195.8 $169.9
Postretirement benefits other than
pensions................................... 31.3 31.8
Taxes, other than federal and foreign taxes
on income.................................. 63.9 68.3
Accrued environmental liabilities............ 12.5 18.9
Accrued asbestos liability................... 134.6 89.7
Accrued interest............................. 44.3 44.3
Merger costs................................. 51.2 --
Other........................................ 178.6 194.1
- --------------------------------------------------------------
TOTAL................................ $712.2 $617.0
===============================================================
FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's accounting policies with
respect to financial instruments are described in Note B.
The carrying amounts of the Company's significant on balance sheet financial
instruments approximate their respective fair values at December 31, 1999 and
1998, except for the Company's long-term investments and long-term debt.
1999 1998
CARRYING FAIR Carrying Fair
(IN MILLIONS) VALUE VALUE Value Value
- -------------------------------------------------------------------------------------------------------
Long-term investments....................................... $ 20.4 $ 21.2 $ 13.4 $ 20.2
Long-term debt.............................................. 1,531.5 1,425.7 1,580.6 1,781.9
Off balance sheet derivative financial instruments at December 31, 1999 and 1998
were as follows:
1999 1998
CONTRACT/ Contract/
NOTIONAL FAIR Notional Fair
(IN MILLIONS) AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------------
Interest rate swaps......................................... $ 223.1 $ (16.6) $ 306.8 $(13.0)
Foreign currency forward contracts.......................... 26.3 0.3 124.7 (12.4)
During 1999 the Company entered into an interest rate swap agreement to manage
the Company's fixed interest rate exposure on its $200.0 million senior notes,
wherein the Company pays a LIBOR-based floating rate of interest and receives a
fixed rate. At December 31, 1999 the Company also had an interest rate swap
agreement, hedging a portion of the variable interest expense for the European
Revolver, according to which the Company pays a fixed rate and receives a
floating rate of interest tied to Spanish LIBOR.
At December 31, 1998 the Company had various interest rate swap agreements
wherein the Company paid fixed rates of interest and received LIBOR-based
floating rates. During 1999 the Company terminated $280.0 million of the
interest rate swaps that existed at December 31, 1998. The fair market value at
December 31, 1998 of the terminated swaps was ($9.4) million.
At December 31, 1999 the Company had forward exchange contracts to hedge trade
receivables and payables as well as intercompany transactions. These contracts
mature within one year.
At December 31, 1998 the Company had $120.5 million of forward exchange
contracts denominated in Canadian dollars to hedge the U.S. dollar denominated
sales of certain Canadian subsidiaries. During 1999 the Company terminated $94.0
million of these contracts which at December 31, 1998 had a fair market value of
($12.0) million. The remaining forward exchange contracts at December 31, 1998
relate to trade receivables and payables.
The counterparties to each of these agreements are major commercial banks.
Management believes that losses related to credit risk are remote.
The Company has an outstanding contingent liability for guaranteed debt and
lease payments of $41.6 million, and for letters of credit of $42.2 million. It
was not practical to obtain independent estimates of the fair values for the
contingent liability for guaranteed debt and lease payments and for letters
34
36
of credit without incurring excessive costs. In the opinion of management,
non-performance by the other parties to the contingent liabilities will not have
a material effect on the Company's results of operations or financial condition.
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME
Unrealized foreign currency
translation...................... $(37.5) $(10.9) $ (8.4)
Minimum pension liability.......... (6.7) (4.2) (3.5)
- ----------------------------------------------------------------
TOTAL.......................... $(44.2) $(15.1) $(11.9)
================================================================
(O) SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth non-cash financing and investing activities and
other cash flow information. Acquisitions accounted for under the purchase
method are summarized as follows:
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------
Estimated fair value of
tangible assets acquired.... $ 26.2 $ 266.0 $ 106.2
Goodwill and identifiable
intangible assets
acquired.................... 72.6 380.7 105.4
Cash paid..................... (76.1) (521.5) (194.1)
- ----------------------------------------------------------------
Liabilities assumed or
created..................... $ 22.7 $ 125.2 $ 17.5
================================================================
Interest paid (net of amount
capitalized)................ $126.9 $ 120.7 $ 131.7
Income taxes paid............. 66.3 45.9 165.2
Exchange of 7.75% Convertible
Notes....................... -- -- (1.3)
Change in equity due to
exchange of 7.75%
Convertible Notes........... -- -- 1.5
(P) PREFERRED STOCK
There are 10,000,000 authorized shares of Series Preferred Stock -- $1 par
value. Shares of Series Preferred Stock that have been redeemed are deemed
retired and extinguished and may not be reissued. As of December 31, 1999,
2,401,673 shares of Series Preferred Stock have been redeemed, and no shares of
Series Preferred Stock were outstanding. The Board of Directors establishes and
designates the series and fixes the number of shares and the relative rights,
preferences and limitations of the respective series of the Series Preferred
Stock.
CUMULATIVE PARTICIPATING PREFERRED STOCK -- SERIES F The Company has 200,000
shares of Junior Participating Preferred Stock-Series F -- $1 par value
authorized at December 31, 1999. Series F shares have preferential voting,
dividend and liquidation rights over the Company's common stock. At December 31,
1999, no Series F shares were issued or outstanding and 127,965 shares were
reserved for issuance.
On August 2, 1997, the Company made a dividend distribution of one Preferred
Share Purchase Right ("Right") on each share of the Company's common stock.
These Rights replace previous shareholder rights which expired on August 2,
1997. Each Right, when exercisable, entitles the registered holder thereof to
purchase from the Company one one-thousandth of a share of Series F Stock at a
price of $200 per one one-thousandth of a share (subject to adjustment). The one
one-thousandth of a share is intended to be the functional equivalent of one
share of the Company's common stock.
The Rights are not exercisable or transferable apart from the common stock until
an Acquiring Person, as defined in the Rights Agreement, without the prior
consent of the Company's Board of Directors, acquires 20 percent or more of the
voting power of the Company's common stock or announces a tender offer that
would result in 20 percent ownership. The Company is entitled to redeem the
Rights at 1 cent per Right any time before a 20 percent position has been
acquired or in connection with certain transactions thereafter announced. Under
certain circumstances, including the acquisition of 20 percent of the Company's
common stock, each Right not owned by a potential Acquiring Person will entitle
its holder to purchase, at the Right's then-current exercise price, shares of
Series F Stock having a market value of twice the Right's exercise price.
Holders of the Right are entitled to buy stock of an Acquiring Person at a
similar discount if, after the acquisition of 20 percent or more of the
Company's voting power, the Company is involved in a merger or other business
combination transaction with another person in which its common shares are
changed or converted, or the Company sells 50 percent or more of its assets or
earnings power to another person. The Rights expire on August 2, 2007.
(Q) COMMON STOCK
During 1999, 1998 and 1997, 0.540 million; 1.078 million and 0.884 million
shares, respectively, of authorized but unissued shares of common stock were
issued under the Stock Option Plan and other employee stock ownership plans.
On July 12, 1999, 35.472 million shares of common stock were issued in
connection with the merger with Coltec (see Note A).
On December 22, 1997, 18.588 million shares of common stock were issued in
connection with the merger with Rohr (see Note C). During 1998, 1.235 million
shares of authorized but previously unissued shares of common stock were issued
upon conversion of Rohr debentures that were extinguished in late 1997.
The Company acquired 0.085 million; 0.628 million and 0.053 million shares of
treasury stock in 1999, 1998 and 1997, respectively, and reissued 0.099 million
and 0.005 million shares in 1999 and 1997, respectively, in connection with the
Stock Option Plan and other employee stock ownership plans. In 1998 and 1997,
0.015 million and 0.020 million shares, respectively, of common stock previously
awarded to employees were forfeited and restored to treasury stock.
During 1998 and 1997, 1.602 million; and 0.831 million shares, respectively,
were repurchased by a pooled company (Coltec).
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37
As of December 31, 1999, there were 13.034 million shares of common stock
reserved for future issuance under the Stock Option Plan and 2.866 million
shares of common stock reserved for conversion of the 5 1/4% Trust Convertible
Preferred Securities.
(R) PREFERRED SECURITIES OF TRUST
In April 1998, Coltec privately placed with institutional investors $150 million
(3,000,000 shares at liquidation value of $50 per Convertible Preferred
Security) of 5 1/4% Trust Convertible Preferred Securities ("Convertible
Preferred Securities"). The placement of the Convertible Preferred Securities
was made through Coltec's wholly-owned subsidiary, Coltec Capital Trust
("Trust"), a newly-formed Delaware business trust. The Convertible Preferred
Securities represent undivided beneficial ownership interests in the Trust.
Substantially all the assets of the Trust are the 5 1/4% Convertible Junior
Subordinated Deferrable Interest Debentures due April 15, 2028 which were
acquired with the proceeds from the private placement of the Convertible
Preferred Securities. Coltec's obligations under the Convertible Junior
Subordinated Debentures, the Indenture pursuant to which they were issued, the
Amended and Restated Declaration of Trust of the Trust, the Guarantee of Coltec
and the Guarantee of the Company, taken together, constitute a full and
unconditional guarantee by the Company of amounts due on the Convertible
Preferred Securities. The Convertible Preferred Securities are convertible at
the option of the holders at any time into the common stock of the Company at an
effective conversion price of $52 1/3 per share and are redeemable at the
Company's option after April 20, 2001 at 102.63% of the liquidation amount
declining ratably to 100% after April 20, 2004.
On July 6, 1995, BFGoodrich Capital, a wholly owned Delaware statutory business
trust (the "Trust") which is consolidated by the Company, received $122.5
million, net of the underwriting commission, from the issuance of 8.3 percent
Cumulative Quarterly Income Preferred Securities, Series A ("QUIPS"). The Trust
invested the proceeds in 8.3 percent Junior Subordinated Debentures, Series A,
due 2025 ("Junior Subordinated Debentures") issued by the Company, which
represent approximately 97 percent of the total assets of the Trust. The Company
used the proceeds from the Junior Subordinated Debentures primarily to redeem
all of the outstanding shares of the $3.50 Cumulative Convertible Preferred
Stock, Series D.
The QUIPS have a liquidation value of $25 per Preferred Security, mature in 2025
and are subject to mandatory redemption upon repayment of the Junior
Subordinated Debentures. The Company has the option at any time on or after July
6, 2000, to redeem, in whole or in part, the Junior Subordinated Debentures with
the proceeds from the issuance and sale of the Company's common stock within two
years preceding the date fixed for redemption.
The Company has unconditionally guaranteed all distributions required to be made
by the Trusts, but only to the extent the Trusts have funds legally available
for such distributions. The only source of funds for the Trusts to make
distributions to preferred security holders is the payment by the Company of
interest on the Junior Subordinated Debentures. The Company has the right to
defer such interest payments for up to five years. If the Company defers any
interest payments, the Company may not, among other things, pay any dividends on
its capital stock until all interest in arrears is paid to the Trusts.
(S) STOCK OPTION PLAN
At December 31, 1999, the Company had stock-based compensation plans described
below that include the pre-merger plans of Coltec and Rohr. Effective with the
mergers, outstanding Coltec and Rohr options were assumed by the Company and
converted to fully-vested options to purchase BFGoodrich common stock at a ratio
of .56 and .7 of one share of BFGoodrich common stock, respectively, for each
Coltec and Rohr option and at an appropriately revised exercise price.
The Stock Option Plan, which will expire on April 19, 2004, unless renewed,
provides for the awarding of or the granting of options to purchase 5,000,000
shares of common stock of the Company. Generally, options granted are
exercisable at the rate of 35 percent after one year, 70 percent after two years
and 100 percent after three years. Certain options are fully exercisable
immediately after grant. The term of each option cannot exceed 10 years from the
date of grant. All options granted under the Plan have been granted at not less
than 100 percent of market value (as defined) on the date of grant.
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
1999 1998 1997
- -------------------------------------------------------------
Risk-Free Interest Rate (%).............. 6.7 4.7 5.8
Dividend Yield (%)....................... 3.5 2.8 2.7
Volatility Factor (%).................... 36.0 31.0 16.2
Weighted Average Expected Life of the
Options (years)........................ 7.0 4.5 4.6
The option valuation model requires the input of highly subjective assumptions,
primarily stock price volatility, changes in which can materially affect the
fair value estimate. The weighted-average fair values of stock options granted
during 1999, 1998 and 1997 were $12.13, $10.36 and $6.99, respectively.
For purposes of the pro forma disclosures required by SFAS 123, the estimated
fair value of the options is amortized to expense over the options' vesting
period. In addition, the grant-date fair value of performance shares (discussed
below) is amortized to expense over the three-year plan cycle without
adjustments for subsequent changes in the market price of the
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Company's common stock. The Company's pro forma information is as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- -----------------------------------------------------------------
Net income:
As reported......................... $169.6 $353.7 $260.0
Pro forma........................... 157.3 345.9 250.4
Earnings per share:
Basic:
As reported....................... $ 1.54 $ 3.21 $ 2.41
Pro forma......................... 1.43 3.14 2.32
Diluted:
As reported....................... $ 1.53 $ 3.14 $ 2.33
Pro forma......................... 1.42 3.04 2.23
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of effects on reported net income for future years. The pro
forma effect in 1999 and 1997 includes $2.6 million and $4.5 million of
after-tax expense related to acceleration of vesting in connection with the
Coltec and Rohr mergers, respectively. Additional awards in future years are
anticipated.
A summary of the Company's stock option activity and related information
follows:
(Options in thousands) Weighted Average
Year Ended December 31, 1999 Options Exercise Price
- ---------------------------------------------------------------
Outstanding at beginning of
year............................ 7,093.4 $ 30.18
Granted......................... 1,480.1 35.85
Exercised....................... (477.7) 25.67
Forfeited....................... (193.5) 36.92
Expired......................... (91.2) 42.22
- ---------------------------------------------------------------
Outstanding at end of year...... 7,811.1 30.10
===============================================================
Year Ended December 31, 1998
- ---------------------------------------------------------------
Outstanding at beginning of
year............................ 6,963.6 $ 27.90
Granted......................... 1,286.4 41.24
Exercised....................... (1,054.7) 27.63
Forfeited....................... (99.8) 36.17
Expired......................... (2.1) 38.04
- ---------------------------------------------------------------
Outstanding at end of year...... 7,093.4 30.18
===============================================================
Year Ended December 31, 1997
- ---------------------------------------------------------------
Outstanding at beginning of
year............................ 7,974.5 $ 24.57
Granted......................... 1,445.3 39.33
Exercised....................... (2,223.3) 23.38
Forfeited....................... (218.6) 27.07
Expired......................... (14.3) 43.64
- ---------------------------------------------------------------
Outstanding at end of year...... 6,963.6 27.90
===============================================================
The following table summarizes information about the Company's stock options
outstanding at December 31, 1999:
Options Outstanding
Weighted Options Exercisable
Number Weighted Average Average Weighted
Range of Outstanding Remaining Exercise Number Exercisable Average
Exercise Prices (in thousands) Contractual Life Price (in thousands) Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
$11.96 - $19.20.............................. 1,925.3 5.5 years $ 18.05 1,925.3 $ 18.05
$19.42 - $29.11.............................. 1,727.2 4.7 years 23.65 1,697.5 23.62
$30.18 - $39.88.............................. 2,364.8 8.0 years 36.12 1,469.0 36.07
$40.13 - $53.56.............................. 1,793.8 7.7 years 41.32 1,763.4 41.28
- ---------------------------------------------------------------------------------------------------------------------------------
Total.................................... 7,811.1 6,855.2
=================================================================================================================================
During 1999, 1998 and 1997, restricted stock awards for 89,810; 52,886 and
66,776 shares, respectively, were made. Restricted stock awards may be subject
to conditions established by the Board of Directors. Under the terms of the
restricted stock awards, the granted stock vests three years after the award
date. The cost of these awards, determined as the market value of the shares at
the date of grant, is being amortized over the three-year period. In 1999, 1998
and 1997, $4.1 million, $2.0 million and $3.3 million, respectively, were
charged to expense for restricted stock awards. Of the $4.1 million of expense
recognized in 1999, $3.6 million related to acceleration of vesting in
connection with the Coltec merger.
The Stock Option Plan also provides that shares of common stock may be awarded
as performance shares to certain key executives having a critical impact on the
long-term performance of the Company. In 1995, the Compensation Committee of the
Board of Directors awarded 566,200 shares and established performance objectives
that are based on attainment of an average return on equity over the three year
plan cycle ending in 1997. Since the Company exceeded all of the performance
objectives established in 1995, an additional 159,445 shares were awarded to key
executives in 1998. In 1997, 5,000 performance shares were granted to certain
key executives that commenced employment during the year.
Prior to 1998, the market value of performance shares awarded under the plan was
recorded as unearned restricted stock. In 1998, the Company changed the plan to
a phantom performance share plan. Dividends are earned on phantom shares and are
reinvested in additional phantom shares. Under this plan, compensation expense
is recorded based on the extent performance objectives are expected to be met.
During 1999 and 1998, the Company issued 304,780 and 207,800 phantom performance
shares, respectively. During 1999, 1998 and 1997, 34,263; 10,356 and 14,400
performance shares, respectively, were
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forfeited. In 1999, 1998 and 1997, $4.0 million, $1.7 million and $14.3 million,
respectively, were charged to expense for performance shares. If the provisions
of SFAS 123 had been used to account for awards of performance shares, the
weighted-average grant-date fair value of performance shares granted in 1999,
1998 and 1997 would have been $ 35.66, $45.47 and $41.44 per share,
respectively.
In 1999, a partial payout (approximately 83,000 shares) of the 1998 plan was
made under change in control provisions as a result of the Coltec merger.
(T) DISCONTINUED OPERATIONS
On August 15, 1997, the Company completed the disposition of its chlor-alkali
and olefins ("CAO") business to The Westlake Group for $92.7 million, resulting
in an after-tax gain of $14.5 million, or $.13 per diluted share. The
disposition of the CAO business represents the disposal of a segment of a
business under APB Opinion No. 30 ("APB 30"). Accordingly, the Consolidated
Statement of Income reflects the CAO business (previously reported as Other
Operations) as a discontinued operation, in addition to the following
discontinued operations. During 1997, the CAO business had sales of $98.0
million and net income of $10.3 million.
On February 3, 1997, the Company completed the sale of Tremco Incorporated to
RPM, Inc. for $230.7 million, resulting in an after-tax gain of $59.5 million,
or $.53 per diluted share. The sale of Tremco Incorporated completed the
disposition of the Company's Sealants, Coatings and Adhesives ("SC&A") Group
which also represented a disposal of a segment of a business under APB 30.
(U) EXTRAORDINARY ITEMS
During 1998, the Company incurred an extraordinary charge of $4.3 million (net
of a $2.2 million income tax benefit), or $0.04 per diluted share, in connection
with early debt repayment.
During 1997, the Company incurred an extraordinary charge of $19.3 million (net
of a $13.1 million income tax benefit), or $0.17 per diluted share, to
extinguish certain indebtedness previously held by Rohr.
(V) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have numerous purchase commitments for
materials, supplies and energy incident to the ordinary course of business.
CONTINGENCIES
GENERAL
There are pending or threatened against BFGoodrich or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to commercial, product liability, asbestos and
environmental matters, which seek remedies or damages. BFGoodrich believes that
any liability that may finally be determined with respect to commercial and
product liability claims, should not have a material effect on the Company's
consolidated financial position or results of operations. From time to time, the
Company is also involved in legal proceedings as a plaintiff involving contract,
patent protection, environmental and other matters. Gain contingencies, if any,
are recognized when they are realized.
At December 31, 1999, approximately 20 percent of the Company's labor force was
covered by collective bargaining agreements. Approximately 10 percent of the
labor force is covered by collective bargaining agreements that will expire
during 2000.
ENVIRONMENTAL
The Company and its subsidiaries are generators of both hazardous wastes and
non-hazardous wastes, the treatment, storage, transportation and disposal of
which are subject to various laws and governmental regulations. Although past
operations were in substantial compliance with the then-applicable regulations,
the Company has been designated as a potentially responsible party ("PRP") by
the U.S. Environmental Protection Agency ("EPA"), or similar state agencies, in
connection with several sites.
The Company initiates corrective and/or preventive environmental projects of its
own to ensure safe and lawful activities at its current operations. It also
conducts a compliance and management systems audit program. The Company believes
that compliance with current governmental regulations will not have a material
adverse effect on its capital expenditures, earnings or competitive position.
The Company's environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as off-site
disposal sites at which the Company has been identified as a PRP. This process
includes investigation and remedial selection and implementation, as well as
negotiations with other PRPs and governmental agencies.
At December 31, 1999 and 1998, the Company had recorded in Accrued Expenses and
in Other Non-current Liabilities a total of $125.5 million and $129.7 million,
respectively, to cover future environmental expenditures. These amounts are
recorded on an undiscounted basis.
The Company believes that its reserves are adequate based on currently available
information. Management believes that it is reasonably possible that additional
costs may be incurred beyond the amounts accrued as a result of new information.
However, the amounts, if any, cannot be estimated and management believes that
they would not be material to the Company's financial condition but could be
material to the Company's results of operations in a given period.
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ASBESTOS
As of December 31, 1999 and 1998, two subsidiaries of the Company were among a
number of defendants (typically 15 to 40) in approximately 96,000 and 101,400
actions (including approximately 8,300 and 4,700 actions, respectively in
advanced stages of processing) filed in various states by plaintiffs alleging
injury or death as a result of exposure to asbestos fibers. During 1999, 1998
and 1997, these two subsidiaries of the Company received approximately 30,200,
34,400 and 38,200 new actions, respectively. Through December 31, 1999,
approximately 280,400 of the approximately 376,400 total actions brought had
been settled or otherwise disposed.
Payments were made by the Company with respect to asbestos liability and related
costs aggregating $84.5 million in 1999, $53.7 million in 1998, and $59.2
million in 1997, respectively, substantially all of which were covered by
insurance. Settlements are generally made on a group basis with payments made to
individual claimants over periods of one to four years. Related to payments not
covered by insurance, the Company recorded charges to operations amounting to
approximately $8.0 million in each of 1999, 1998 and 1997.
In accordance with the Company's internal procedures for the processing of
asbestos product liability actions and due to the proximity to trial or
settlement, certain outstanding actions have progressed to a stage where the
Company can reasonably estimate the cost to dispose of these actions. As of
December 31, 1999, the Company estimates that the aggregate remaining cost of
the disposition of the settled actions for which payments remain to be made and
actions in advanced stages of processing, including associated legal costs, is
approximately $163.1 million and the Company expects that this cost will be
substantially covered by insurance.
With respect to the 87,700 outstanding actions as of December 31, 1999, which
are in preliminary procedural stages, as well as any actions that may be filed
in the future, the Company lacks sufficient information upon which judgments can
be made as to the validity or ultimate disposition of such actions, thereby
making it difficult to estimate with reasonable certainty what, if any,
potential liability or costs may be incurred by the Company. However, the
Company believes that its subsidiaries are in a favorable position compared to
many other defendants because, among other things, the asbestos fibers in its
asbestos-containing products were encapsulated. Subsidiaries of the Company
continue to distribute encapsulated asbestos-bearing product in the United
States with annual sales of less than $1.5 million. All sales are accompanied by
appropriate warnings. The end users of such product are sophisticated users who
utilize the product for critical applications where no known substitutes exist
or have been approved.
Insurance coverage of a small non-operating subsidiary formerly distributing
asbestos-bearing products is nearly depleted. Considering the foregoing, as well
as the experience of the Company's subsidiaries and other defendants in asbestos
litigation, the likely sharing of judgments among multiple responsible
defendants, and given the substantial amount of insurance coverage that the
Company expects to be available from its solvent carriers to cover the majority
of its exposure, the Company believes that pending and reasonably anticipated
future actions are not likely to have a materially adverse effect on the
Company's consolidated results of operations or financial condition, but could
be material to the Company's results of operations in a given period. Although
the insurance coverage which the Company has is substantial, it should be noted
that insurance coverage for asbestos claims is not available to cover exposures
initially occurring on and after July 1, 1984. The Company's subsidiaries
continue to be named as defendants in new cases, some of which allege initial
exposure after July 1, 1984.
The Company has recorded an accrual for its liabilities for asbestos-related
matters that are deemed probable and can be reasonably estimated (settled
actions and actions in advanced stages of processing), and has separately
recorded an asset equal to the amount of such liabilities that is expected to be
recovered by insurance. In addition, the Company has recorded a receivable for
that portion of payments previously made for asbestos product liability actions
and related litigation costs that is recoverable from its insurance carriers.
Liabilities for asbestos-related matters and the receivable from insurance
carriers included in the Consolidated Balance Sheets are as follows:
DECEMBER 31, December 31,
(DOLLARS IN MILLIONS) 1999 1998
- -------------------------------------------------------------
Accounts and notes receivable... $ 146.9 $ 95.4
Other assets.................... 36.7 32.6
Accrued expenses................ 134.6 89.7
Other liabilities............... 28.5 22.8
(W) SUBSEQUENT EVENT
On February 21, 2000, the Company's Board of Directors authorized the repurchase
of up to $300 million of the Company's common stock. Repurchases under the
program, which may not exceed 10 percent of the Company's issued shares of
common stock, may be made from time to time in the open market or in negotiated
transactions at price levels that the Company considers attractive. The program
will be funded from the Company's operating cash flows and short term borrowings
under existing credit lines.
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QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 QUARTERS 1998 Quarters
(DOLLARS IN MILLIONS) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENT SALES:
Aerospace............................... $ 926.2 $ 965.9 $ 855.2 $ 870.1 $ 851.3 $ 852.1 $ 862.4 $ 913.5
Engineered Industrial Prod.............. 185.6 186.5 170.6 159.7 208.4 212.8 179.4 179.3
Performance Materials................... 300.0 311.0 306.3 300.4 252.4 340.9 304.8 297.5
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL SALES....................... $1,411.8 $1,463.4 $1,332.1 $1,330.2 $1,312.1 $1,405.8 $1,346.6 $1,390.3
=================================================================================================================================
GROSS PROFIT.......................... $ 404.7 $ 419.8 $ 378.8 $ 380.9 $ 367.8 $ 379.0 $ 384.8 $ 404.0
=================================================================================================================================
BUSINESS SEGMENT OPERATING INCOME:
Aerospace............................... $ 142.5 $ 144.9 $ 130.9 $ 140.4 $ 112.6 $ 109.9 $ 128.5 $ 149.0
Engineered Industrial Prod.............. 34.2 37.0 28.1 18.9 36.0 25.6 35.2 34.8
Performance Materials................... 33.2 43.0 39.4 34.8 36.6 40.2 37.4 31.6
Corporate............................... (22.3) (21.8) (19.9) (20.6) (21.4) (20.3) (20.4) (21.6)
Merger-Related and Consolidation
Costs................................. (26.2) (10.1) (204.7) (28.4) -- -- -- (10.5)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME.................... $ 161.4 $ 193.0 $ (26.2) $ 145.1 $ 163.8 $ 155.4 $ 180.7 $ 183.3
=================================================================================================================================
INCOME (LOSS) FROM:
Continuing Operations................... $ 76.3 $ 97.9 $ (70.9) $ 66.3 $ 80.1 $ 106.5 $ 85.1 $ 87.9
Discontinued Operations................. -- -- -- -- (1.6) -- -- --
Extraordinary Items..................... -- -- -- -- -- (4.3) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME................................ $ 76.3 $ 97.9 $ (70.9) $ 66.3 $ 78.5 $ 102.2 $ 85.1 $ 87.9
=================================================================================================================================
Basic Earnings (Loss) Per Share:
Continuing operations................... $ 0.70 $ 0.89 $ (0.64) $ 0.60 $ 0.73 $ 0.96 $ 0.77 $ 0.80
Net income.............................. $ 0.70 $ 0.89 $ (0.64) $ 0.60 $ 0.72 $ 0.92 $ 0.77 $ 0.80
Diluted Earnings (Loss) Per Share:
Continuing operations................... $ 0.69 $ 0.87 $ (0.64) $ 0.60 $ 0.71 $ 0.94 $ 0.76 $ 0.79
Net income.............................. $ 0.69 $ 0.87 $ (0.64) $ 0.60 $ 0.70 $ 0.90 $ 0.76 $ 0.79
=================================================================================================================================
The first quarter of 1999 includes a $26.2 million pre-tax charge related to
employee termination payments resulting from realignment of the Performance
Materials Segment headquarters and the Company's Advanced Technology Group as
well as from reductions at certain Performance Materials operating locations.
The second quarter of 1999 includes a $10.1 million pre-tax charge related to
certain executive severance payments and employee relocation costs related to
the Coltec Merger. The second quarter of 1999 also includes a $6.1 million
pre-tax gain in other income (expense) from the sale of businesses.
The third quarter of 1999 includes a $204.7 million pre-tax charge, of which
$8.6 million represented non-cash asset impairment charges. The charge related
to personnel related costs, transaction costs and consolidation costs in
connection with the Coltec merger and restructuring activities at Aerospace,
Engineered Industrial Products and Performance Materials. The third quarter of
1999 also includes a $2.4 million pre-tax gain in other income (expense) from
the sale of a portion of the Company's interest in a business.
The fourth quarter of 1999 includes a $28.4 million pre-tax charge, of which
$3.7 million represented non-cash asset impairment charges. The charge related
to personnel related costs, transaction costs and consolidation costs in
connection with the Coltec merger and restructuring activities at Aerospace and
Performance Materials. The fourth quarter of 1999 also includes a $1.9 million
pre-tax loss in other income (expense) from the sale of a business.
The fourth quarter of 1998 includes a $10.5 million pre-tax loss from a
restructuring charge and a write-down of an impaired asset in the Aerospace
Segment.
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SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Sales....................................................... $5,537.5 $5,454.8 $4,687.9 $4,005.5 $3,761.4 $3,601.6
Operating income............................................ 473.3 683.2 430.9 482.0 395.7 368.8
Income from continuing operations........................... 169.6 359.6 195.0 177.0 130.6 103.2
BALANCE SHEET DATA:
Total assets................................................ $5,455.6 $5,213.0 $4,333.7 $4,324.9 $4,229.2 $4,250.7
Total debt.................................................. 1,760.5 1,724.7 1,519.7 1,794.3 2,014.4 2,111.9
Mandatorily redeemable preferred securities of trusts....... 271.3 268.9 123.1 122.6 122.2 --
Total shareholders' equity.................................. 1,293.2 1,237.4 991.0 749.4 455.9 386.0
OTHER FINANCIAL DATA:
Total segment operating income.............................. $ 827.3 $ 777.4 $ 601.0 $ 578.3 $ 523.3 $ 473.7
EBITDA(1),(2)............................................... 961.4 884.7 700.8 624.0 559.6 507.8
Operating cash flow......................................... 372.6 499.1 271.2 315.0 312.0 362.4
Capital expenditures........................................ 246.3 262.0 241.1 241.7 198.3 174.3
Depreciation................................................ 176.5 163.7 140.9 128.2 131.2 n/a
Dividends (common and preferred)............................ 91.6 75.7 59.5 58.8 61.6 64.6
Distributions on preferred securities of trusts............. 18.4 16.1 10.5 10.5 5.1 --
PER SHARE OF COMMON STOCK:
Income from continuing operations, diluted.................. $ 1.53 $ 3.19 $ 1.75 $ 1.63 $ 1.18 $ 0.93
Diluted EPS (2)............................................. 3.24 2.91 2.34 1.74 1.23 0.97
Dividends declared.......................................... 1.10 1.10 1.10 1.10 1.10 1.10
Book value.................................................. 11.74 11.28 9.04 7.00 4.37 2.67
RATIOS:
Segment operating income as a percent of sales (%).......... 14.9 14.3 12.8 14.4 13.9 13.2
Debt-to-capitalization ratio (%)............................ 52.8 53.3 57.7 67.3 77.7 84.5
Effective income tax rate (%)............................... 43.8 36.8 40.2 35.5 36.9 37.5
OTHER DATA:
Common shares outstanding at end of year (millions)......... 110.2 109.7 109.7 107.1 104.4 103.4
Number of employees at end of year.......................... 27,044 27,234 25,910 26,113 25,488 26,679
=============================================================================================================================
(1) "EBITDA" as used herein means income from continuing operations before
distributions on preferred securities of trusts, income tax expense, net
interest expense, depreciation and amortization and special items.
(2) Excludes special items which for 1999, 1998, and 1997 are described on page
2 herein. Special items in 1996 included a charge of $2.6 million relating
to a voluntary early retirement program; a net gain of $1.0 million from the
sale of a business; a loss of $3.1 million on the sale of a wholly-owned
aircraft leasing subsidiary; a charge of $4.3 million for an impairment
write-down on a facility in Arkadelphia, Arkansas; and a charge of $3.2
million for the exchange of convertible notes. Special items in 1995
included a net gain of $12.5 million from an insurance settlement; a charge
of $17.6 million primarily related to the closure of a facility in Canada
and selected other work force reductions; a net gain of $2.2 million from
the sale of a business; and a charge of $1.9 million relating to a voluntary
early retirement program. Special items in 1994 included a charge of $6.4
million attributable to unamortized pension prior service costs related to a
reduction in employment levels and a net gain of $1.6 million on the sale of
a business. All amounts within this footnote are presented net of tax.
41