FORM 10-Q/A
(AMENDMENT NO. 1)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NUMBER 1-892
GOODRICH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 34-0252680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Coliseum Centre, 2730 West Tyvola Road, Charlotte, N.C. 28217
- ------------------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 704-423-7000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
As of September 30, 2001, there were 101,938,739 shares of common stock
outstanding (excluding 14,000,000 shares held by a wholly-owned subsidiary).
There is only one class of common stock.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A is being filed with respect to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 filed
with the Securities and Exchange Commission ("SEC") on October 31, 2001 (the
"Form 10-Q"). The Form 10-Q, as amended hereby, continues to speak as of the
date of the original Form 10-Q and other disclosures have not been updated to
speak to any later date.
This amendment is being filed as the result of a reclassification of debt and
convertible preferred securities between continuing operations and discontinued
operations to reflect modifications in the Company's approach to capitalizing
its Engineered Industrial Products business which has been classified as a
discontinued operation pending its planned spin off. This amendment includes
certain revised disclosures, adjustments and reclassifications to the Company's
condensed consolidated financial statements and notes thereto in certain areas
as more fully described in Note A of the notes to the condensed consolidated
financial statements.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOODRICH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Sales $1,051.9 $ 932.4 $3,131.7 $2,739.2
Operating Costs and Expenses:
Cost of sales 752.9 673.4 2,236.6 1,982.7
Selling and administrative expenses 144.4 118.8 445.8 362.0
Merger-related and consolidation costs 1.5 8.3 14.9 29.1
-------- -------- -------- --------
898.8 800.5 2,697.3 2,373.8
-------- -------- -------- --------
Operating income 153.1 131.9 434.4 365.4
Interest expense (24.6) (28.4) (83.3) (77.3)
Interest income 7.0 0.8 18.9 3.4
Other income (expense) - net (8.1) (5.9) (15.2) (11.9)
-------- -------- -------- --------
Income before
income taxes and Trust distributions 127.4 98.4 354.8 279.6
Income tax expense (42.8) (34.7) (118.9) (97.7)
Distributions on Trust Preferred
Securities (2.7) (2.6) (7.9) (7.9)
-------- -------- -------- --------
Income from Continuing Operations 81.9 61.1 228.0 174.0
Income from Discontinued Operations 6.1 18.8 115.6 73.7
-------- -------- -------- --------
Net Income $ 88.0 $ 79.9 $ 343.6 $ 247.7
======== ======== ======== ========
Basic Earnings per Share:
Continuing operations $ 0.79 $ 0.60 $ 2.20 $ 1.65
Discontinued operations 0.06 0.19 1.12 0.69
-------- -------- -------- --------
Net Income $ 0.85 $ 0.79 $ 3.32 $ 2.34
======== ======== ======== ========
Diluted Earnings per Share:
Continuing operations $ 0.76 $ 0.57 $ 2.12 $ 1.58
Discontinued operations 0.07 0.20 1.12 0.72
-------- -------- -------- --------
Net Income $ 0.83 $ 0.77 $ 3.24 $ 2.30
======== ======== ======== ========
Dividends declared per common share $ 0.275 $ 0.275 $ 0.825 $ 0.825
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
GOODRICH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 84.3 $ 77.5
Accounts and notes receivable, less allowances
for doubtful receivables ($45.0 at
September 30, 2001; $28.5 at December 31, 2000) 683.8 633.3
Inventories 905.8 809.6
Deferred income taxes 151.2 88.4
Prepaid expenses and other assets 34.7 75.1
Net assets of discontinued operations 284.4 1,049.7
--------- --------
Total Current Assets 2,144.2 2,733.6
--------- --------
Property, plant and equipment 949.5 897.0
Deferred income taxes -- 4.2
Prepaid pension 243.8 235.0
Goodwill 763.5 681.7
Identifiable intangible assets 131.6 102.1
Payment-in-kind notes receivable, less discount
($21.9 at September 30, 2001) 163.1 --
Other assets 461.2 404.4
Net assets of discontinued operations --.- 80.9
--------- --------
$ 4,856.9 $5,138.9
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank debt $ 163.6 $ 755.6
Accounts payable 413.3 366.3
Accrued expenses 478.2 515.4
Income taxes payable 219.3 59.3
Current maturities of long-term debt
and capital lease obligations 9.7 179.2
--------- --------
Total Current Liabilities 1,284.1 1,875.8
--------- --------
Long-term debt and capital lease obligations 1,310.6 1,301.4
Pension obligations 61.4 61.4
Postretirement benefits other than pensions 328.0 334.4
Deferred income taxes 14.7 --
Other non-current liabilities 232.4 212.9
Commitments and contingent liabilities -- --
Mandatorily redeemable preferred securities of trust 124.8 124.5
Shareholders' Equity
Common stock - $5 par value
Authorized 200,000,000 shares; issued 115,096,525
shares at September 30, 2001, and 113,295,049 shares
at December 31, 2000 (excluding 14,000,000 shares
held by a wholly-owned subsidiary at each date) 575.5 566.5
Additional capital 972.6 922.8
Income retained in the business 416.1 158.1
Accumulated other comprehensive income (59.2) (57.7)
Unearned portion of restricted stock awards (0.7) (1.2)
Common stock held in treasury, at cost (13,157,786
shares at September 30, 2001, and 10,964,761 shares
at December 31, 2000) (403.4) (360.0)
--------- --------
Total Shareholders' Equity 1,500.9 1,228.5
--------- --------
$ 4,856.9 $5,138.9
========= ========
See notes to condensed consolidated financial statements.
4
GOODRICH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
---------- ------------
OPERATING ACTIVITIES
Income from continuing operations $228.0 $174.0
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Merger related and consolidation:
Expenses 14.9 29.1
Payments (22.2) (41.0)
Depreciation and amortization 129.3 122.7
Deferred income taxes 20.2 14.7
Net gains on sales of businesses (7.2) (2.0)
Payment-in-kind interest income (12.3) -
Change in assets and liabilities, net of effects
of acquisitions and dispositions of
Businesses:
Receivables (90.4) (96.4)
Change in receivables sold, net 46.3 (3.5)
Inventories (87.6) (69.1)
Other current assets (16.1) (10.3)
Accounts payable 17.1 16.1
Accrued expenses 15.6 (1.2)
Income taxes payable 62.6 (39.2)
Tax benefit on non-qualified options (7.7) -
Other non-current assets and liabilities (80.0) (127.5)
-------- --------
Net cash provided by (used in) operating activities of
continuing operations 210.5 (33.6)
-------- --------
INVESTING ACTIVITIES
Purchases of property (134.6) (85.2)
Proceeds from sale of property 0.7 22.5
Proceeds from sale of businesses 15.6 4.8
Payments made in connection with acquisitions,
net of cash acquired (119.2) (37.6)
-------- --------
Net cash used by investing activities of continuing
operations (237.5) (95.5)
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (576.1) 500.7
Proceeds from issuance of long-term debt 4.9 --
Repayment of long-term debt and capital lease obligations (186.6) (9.6)
Proceeds from issuance of capital stock 50.6 16.1
Purchases of treasury stock (27.8) (300.1)
Dividends (85.1) (89.5)
Distributions on Trust preferred securities (13.8) (13.8)
-------- --------
Net cash provided (used) by financing activities of
continuing operations (833.9) 103.8
-------- -------
DISCONTINUED OPERATIONS
Net cash provided (used) by discontinued operations (170.5) 52.6
Proceeds from sale of discontinued operations 1,035.7 -
-------- --------
Net cash provided by discontinued operations 865.2 52.6
-------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 2.5 (3.5)
-------- --------
Net Increase in Cash and Cash Equivalents 6.8 23.8
Cash and Cash Equivalents at Beginning of Period 77.5 66.4
-------- --------
Cash and Cash Equivalents at End of Period $ 84.3 $ 90.2
======== ========
See notes to condensed consolidated financial statements.
5
GOODRICH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: RECLASSIFICATIONS
On October 31, 2001, the Company filed its condensed consolidated financial
statements for the three and nine month periods ended September 30, 2001 and
2000. These condensed consolidated financial statements reflected the Company's
Engineered Industrial Products ("EIP") segment as a discontinued operation (see
Note I below). Accordingly, the Company reclassified to discontinued operations
the net assets, results of operations and cash flows attributable to this
business within its condensed consolidated financial statements. Included within
such classification was $153 million of short-term indebtedness related to the
acquisition of Dana Corporation's Glacier Bearings business in September 2001,
which is part of the EIP segment.
Subsequent to the issuance of these financial statements, the Company modified
its approach to capitalizing the EIP business upon spin-off. The Company decided
that it would retain the debt associated with the Glacier Bearings acquisition
and that the Company would not make a cash tender offer for the 5.25 percent
convertible trust preferred securities (TIDES) of Coltec Capital Trust.
Following is a summary of the adjustments required for the reclassifications
noted above:
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
STATEMENT OF INCOME SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2001 2000 2001 2000
------------- ------------- ------------- ------------
RECLASS OF TIDES TO DISCONTINUED OPERATIONS:
Other income (expense), net - Amortization of
TIDES deferred issuance costs $ -- $ 0.5 $ 0.7 $ 1.5
Distribution on Trust Preferred Securities $ 1.9 $ 2.0 $ 5.9 $ 5.9
RECLASS OF $153 IN MILLION IN SHORT-TERM
INDEBTEDNESS TO CONTINUING OPERATIONS:
Interest expense $ (0.5) $ -- $ (0.5) $ --
BALANCE SHEET SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
RECLASS OF TIDES TO DISCONTINUED OPERATIONS:
Accrued expenses $ (1.4) $ (1.6)
Mandatorily redeemable preferred securities of
trust $ (150.0) $ (149.3)
RECLASS OF $153 MILLION SHORT TERM DEBT
TO CONTINUING OPERATIONS:
Short-term bank debt $ 153.0 $ --
NOTE B: BASIS OF INTERIM FINANCIAL STATEMENT PREPARATION - The accompanying
unaudited condensed consolidated financial statements of Goodrich Corporation
("Goodrich" or the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Certain amounts in prior year financial
statements have been reclassified to conform to the current year presentation.
Operating results for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results that may be achieved for the year ending
December 31, 2001. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Current Report on Form 8-K
filed Frbruary 13, 2002, which supercedes the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
6
As discussed in Note I, the Company's Performance Materials and EIP segments
have been accounted for as discontinued operations. Unless otherwise noted,
disclosures herein pertain to the Company's continuing operations.
NOTE C: ACQUISITIONS - In the first nine months of 2001, the Company acquired a
manufacturer of aerospace lighting systems and related electronics, as well as
the assets of a designer and manufacturer of inertial sensors used for guidance
and control of unmanned vehicles and precision-guided systems. Total
consideration aggregated $114.4 million, of which $101.6 million represented
goodwill and other intangible assets. The purchase price allocation for these
acquisitions has been based on preliminary estimates.
NOTE D: INVENTORIES - Inventories included in the accompanying Condensed
Consolidated Balance Sheet consist of:
(DOLLARS IN MILLIONS) SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
FIFO or average cost (which approximates current
costs):
Finished products $ 154.7 $ 170.7
In process 628.8 563.9
Raw materials and supplies 205.5 162.8
-------- --------
989.0 897.4
Less:
Reserve to reduce certain
inventories to LIFO (40.9) (39.0)
Progress payments and advances (42.3) (48.8)
-------- --------
Total $ 905.8 $ 809.6
======== ========
Based on revisions to the production schedule announced by Boeing at the end of
2001, the Company reevaluated its estimated costs to complete Boeing 717-200
contract, its learning curve assumptions as well as the number of aircraft
expected to be delivered. As a result of this analysis, the Company recorded a
charge of $76.5 million during the fourth quarter of 2001. This charge
eliminated the remaining balance of excess-over-average inventory costs yet to
be recognized and reduced pre-production inventory balances down to $35.2
million as of December 31, 2001. The Company will continue to record no margin
on this contract based on its revised assumptions.
NOTE E: BUSINESS SEGMENT INFORMATION - Due to the sale of the Company's
Performance Materials segment earlier this year, as well as the intended
spin-off of the Company's EIP segment early in 2002, the Company has redefined
its segments in accordance with SFAS 131. The Company's operations are now
classified into four reportable business segments: Aerostructures and Aviation
Technical Services, Landing Systems, Engine and Safety Systems, and Electronic
Systems. Accordingly, the Company has reclassified all periods based on its
revised segment reporting.
Aerostructures and Aviation Technical Services: Aerostructures is a leading
supplier of nacelles, pylons, thrust reversers and related aircraft engine
housing components. The aviation technical sales division performs comprehensive
total aircraft maintenance, repair, overhaul and modification for many
commercial airlines, independent operations, aircraft leasing companies and
airfreight carriers.
Landing Systems: Landing Systems provides systems and components pertaining to
aircraft taxi, take-off, landing and stopping. Several divisions within the
group are linked by their ability to contribute to the integration design,
manufacture and service of entire aircraft undercarriage systems, including
sensors, landing gear, certain brake controls and wheels and brakes.
Engine and Safety Systems: Engine and Safety Systems produces engine and fuel
controls, pumps, fuel delivery systems, as well as structural and rotating
components such as disks, blisks, shafts and airfoils. This group also produces
aircraft evacuation, de-icing and passenger restraint systems, as well as
ejection seats and crew and attendant seating.
Electronic Systems: Electronic Systems produces a wide array of products that
provide flight performance measurements, flight management, and control and
safety data. Included are a variety of sensors systems that measure and manage
aircraft fuel and monitor oil debris; engine, transmission and structural
health; and aircraft motion control systems. The group's products also include
instruments and avionics, warning and detection systems, ice detection systems,
test equipment, aircraft lighting systems, landing gear cables and harnesses,
satellite control, data management and payload systems, launch and
7
missile telemetry systems, airborne surveillance and reconnaissance systems and
laser warning systems.
Segment operating income is total segment revenue reduced by operating expenses
identifiable with that business segment. Merger related and consolidation costs
are presented separately and are discussed in Note H of these unaudited
condensed consolidated financial statements. The accounting policies of the
reportable segments are the same as those for the consolidated Company. There
are no significant intersegment sales.
(DOLLARS IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------- ------------- ------------- -----------
Sales
Aerostructures and Aviation
Technical Services $ 374.0 $ 375.4 $1,139.3 $1,081.4
Landing Systems 293.1 265.9 862.8 785.0
Engine and Safety Systems 190.0 158.7 576.2 473.6
Electronic Systems 194.8 132.4 553.4 399.2
-------- -------- -------- --------
Total Sales $1,051.9 $ 932.4 $3,131.7 $2,739.2
======== ======== ======== ========
Segment Operating Income
Aerostructures and Aviation
Technical Services $ 60.7 $ 57.3 $ 176.6 $ 155.2
Landing Systems 40.9 35.7 115.2 108.1
Engine and Safety Systems 35.4 28.3 104.4 87.1
Electronic Systems 29.9 33.1 94.3 85.9
-------- -------- -------- --------
166.9 154.4 490.5 436.3
Corporate General and
Administrative Expenses (12.3) (14.2) (41.2) (41.8)
Merger-related and
Consolidation Costs (1.5) (8.3) (14.9) (29.1)
-------- -------- -------- --------
Total Operating Income $ 153.1 $ 131.9 $ 434.4 $ 365.4
======== ======== ======== ========
Unusual Items
Aerostructures and Aviation
Technical Services $ 1.2 $ 0.4 $ 1.9 $ 3.2
Landing Systems -- 7.2 7.2 13.7
Engine and Safety Systems -- -- 1.4 --
Electronic Systems 0.2 -- 2.5 0.3
-------- ------ -------- --------
Total Segment Unusual
Items $ 1.4 $ 7.6 $ 13.0 $ 17.2
======== ======== ======= ========
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Assets
Aerostructures and Aviation
Technical Services $1,329.5 $1,237.3
Landing Systems 1,002.4 948.8
Engine and Safety Systems 544.0 504.7
Electronic Systems 992.2 821.6
Net Assets of Discontinued Operations 284.4 1,130.6
Corporate 704.4 495.9
-------- --------
Total Assets $4,856.9 $5,138.9
======== ========
8
NOTE F: EARNINGS PER SHARE - The computation of basic and diluted earnings per
share from continuing operations is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
2001 2000 2001 2000
------------- ------------- ------------- -----------
Numerator:
Numerator for basic and diluted earnings per
share - income available to common
shareholders $ 81.9 $ 61.1 $ 228.0 $ 174.0
------- ------- ------- -------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 103.9 101.6 103.5 105.7
------- ------- ------- -------
Effect of dilutive securities:
Stock options, performance shares and
restricted shares 0.3 1.8 1.1 1.3
Convertible preferred securities 2.9 2.9 2.9 2.9
------- ------- ------- -------
Dilutive potential common shares 3.2 4.7 4.0 4.2
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted-average shares
and assumed conversions 107.1 106.3 107.5 109.9
======= ======= ======= =======
Earnings per share:
Basic $ 0.79 $ 0.60 $ 2.20 $ 1.65
======= ======= ======= =======
Diluted $ 0.76 $ 0.57 $ 2.12 $ 1.58
======= ======= ======= =======
NOTE G: COMPREHENSIVE INCOME
Total comprehensive income consists of the following:
(DOLLARS IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
2001 2000 2001 2000
------------- ------------- ------------- -----------
Net Income $ 88.0 $ 79.9 $ 343.6 $ 247.7
Other Comprehensive Income -
Unrealized translation
adjustments
during period (0.1) (15.2) (1.5) (18.3)
------ ------ -------- --------
Total Comprehensive Income $ 87.9 $ 64.7 $ 342.1 $ 229.4
====== ====== ======== ========
Accumulated other comprehensive income consists of the following (dollars in
millions):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Cumulative unrealized translation
adjustments $(55.4) $ (53.9)
Minimum pension liability adjustment (3.8) (3.8)
------ -------
$(59.2) $ (57.7)
====== =======
The minimum pension liability amounts above are net of deferred taxes of $1.9
million.
9
NOTE H: MERGER RELATED AND CONSOLIDATION COSTS
Through September 30, 2001, the Company recorded charges totaling $14.9 million
($9.9 million after-tax). The charges were recorded as follows:
(DOLLARS IN MILLIONS) NINE MONTHS
ENDED
SEPTEMBER 30, 2001
------------------
Segments $ 13.0
Corporate 1.9
--------
$ 14.9
========
Merger-related and consolidation reserves at December 31, 2000 and September 30,
2001, as well as activity during the nine months ended September 30, 2001,
consisted of:
(DOLLARS IN MILLIONS)
-----------------------------------------------------
BALANCE BALANCE
DECEMBER 31, SEPTEMBER 30,
2000 PROVISION ACTIVITY 2001
------------ ----------- ---------- -------------
Personnel-related costs $ 12.9 $ 6.9 $ (9.1) $ 10.7
Transaction costs 1.9 -- (1.9) --
Consolidation 43.4 8.0 (45.9) 5.5
------ ------ ------ ------
$ 58.2 $ 14.9 $(56.9) $ 16.2
====== ====== ====== ======
The $14.9 million PROVISION for the nine months ended September 30, 2001 related
to:
- - $1.1 million for employee relocation costs (personnel-related)
- - $5.8 million for employee severance costs - approximately 335 positions
(personnel-related)
- - $7.3 million for facility consolidation and closure costs
(consolidation)
- - $0.7 million for asset write-offs (consolidation)
The $56.9 million in ACTIVITY during the nine months ended September 30, 2001
includes reserve reductions of $65.0 million consisting of $22.2 million in cash
payments, $1.4 million reclassified to pension and postretirement benefit
liabilities and $41.4 million for restructuring costs associated with the sale
of Performance Materials that will be administered by the buyer. Also included
in the activity column is a $7.1 million increase in reserves, primarily for
severance costs, associated with two acquisitions, $0.8 million in reserves
transferred from Performance Materials for severance costs that will be
administered by the Company and a $0.2 net increase in reserves for revision of
prior estimates.
10
NOTE I: DISCONTINUED OPERATIONS - The disposition of the Performance Materials
and Engineered Industrial Products segments represent the disposal of segments
under APB Opinion No. 30 ("APB 30"). Accordingly, the revenues, costs and
expenses, assets and liabilities, and cash flows of Performance Materials and
Engineered Industrial Products have been segregated in the Condensed
Consolidated Statement of Income, Condensed Consolidated Balance Sheet and
Condensed Consolidated Statement of Cash Flows.
The following summarizes the results of discontinued operations:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(Dollars in millions) 2001 2000 2001 2000
------------- -------------- ------------- -------------
Sales:
Performance Materials $ -- $ 284.8 $ 187.0 $ 890.9
Engineered Industrial Products 151.0 161.0 487.5 507.2
---------- ---------- ------- -------
$ 151.0 $ 445.8 $ 674.5 $1,398.1
========== ========== ======= =======
Pretax income (loss) from operations:
Performance Materials $ -- $ 12.6 $ (3.6) $ 57.1
Engineered Industrial Products 12.9 22.1 48.2 75.1
---------- ---------- ------- -------
12.9 34.7 44.6 132.2
Income tax expense (4.9) (13.9) (16.6) (52.6)
Distributions on Trust preferred securities (1.9) (2.0) (5.9) (5.9)
Gain on sale of Performance Materials (net of
income tax expense of $54.9 million in 2001) -- -- 93.5 -.-
---------- ---------- ------- -------
Income from discontinued operations $ 6.1 $ 18.8 $ 115.6 $ 73.7
========== ========== ======= =======
PERFORMANCE MATERIALS
On February 28, 2001, the Company completed the sale of its Performance
Materials segment to an investor group led by AEA Investors, Inc. for
approximately $1.4 billion. Total net proceeds, after anticipated tax payments
and transaction costs, included approximately $1 billion in cash and $172
million in debt securities issued by the buyer (see additional discussion
regarding the debt securities received in Note I below). The transaction
resulted in an after-tax gain of $93.5 million and is subject to certain post
closing adjustments (e.g. working capital adjustments).
The Company has calculated a $25 million working capital adjustment in its
favor, which has been considered in the after-tax gain noted above. The Buyer is
disputing the Company's working capital adjustment and has asserted that the
Company owes the Buyer approximately $10 million under the purchase and sale
agreement. Should the parties not be able to settle their differences, the
disputed matters will be forwarded to an independent third party for resolution.
Such resolution will be final and binding on all parties. The Company expects to
finalize the working capital adjustment in 2002.
Pursuant to the terms of the transaction, the Company has retained certain
assets and liabilities (primarily pension, postretirement and environmental
liabilities) of the Performance Materials segment. The Company has also agreed
to indemnify the buyer for liabilities arising from certain events as defined in
the agreement. Such indemnification is not expected to be material to the
Company's financial condition, but could be material to the Company's results of
operations in a given period. During the quarter, the Company completed the sale
of the segment's Electronic Materials business. The resulting gain was offset by
additional costs related to the sale of Performance Materials.
ENGINEERED INDUSTRIAL PRODUCTS
During September 2001, the Company announced that its Board of Directors has
approved in principle the tax-free spin-off of its Engineered Industrial
Products business to shareholders. The transaction will create a new publicly
traded company, focused on its own customers, products and markets. The spin-off
is expected to be completed in early 2002. Application will be made to list the
shares of the new company on the New York Stock Exchange.
According to the plan, Goodrich shareholders will receive one share in the new
industrial company for every five Goodrich shares they own as of the record date
for the distribution.
11
The new industrial company will include substantially all the assets and
liabilities of the Engineered Industrial Products segment, including the
associated asbestos liabilities and related insurance (see additional
information below) as well as certain obligations associated with former
businesses of Coltec Industries Inc ("Coltec"), a wholly-owned subsidiary of
Goodrich. The Company expects to offer to exchange the outstanding $300 million,
7.5 percent Coltec senior notes, for similar Goodrich securities prior to the
spin-off.
ENGINEERED INDUSTRIAL PRODUCTS - ASBESTOS
Garlock and Anchor. Two subsidiaries of Coltec, Garlock Sealing Technologies,
LLC ("Garlock") and The Anchor Packing Company ("Anchor"), have been among a
number of defendants (typically 15 to 40) in actions filed in various states by
plaintiffs alleging injury or death as a result of exposure to asbestos fibers.
Among the products at issue in those actions are industrial sealing products,
predominantly gaskets, manufactured and/or sold by Garlock or Anchor. The
damages claimed vary from action to action and in some cases plaintiffs seek
both compensatory and punitive damages. To date, neither Garlock nor Anchor has
been required to pay any punitive damage awards, although there can be no
assurance that they will not be required to do so in the future. Liability for
compensatory damages historically has been allocated among all responsible
defendants, thus limiting the potential monetary impact of a particular judgment
or settlement on any individual defendant.
The Company believes that Garlock and Anchor are in a favorable position
compared to many other asbestos defendants because, among other things, the
asbestos-containing products sold by Garlock and Anchor are encapsulated, which
means the asbestos fibers are incorporated into the product during the
manufacturing process and sealed in a binder. The are also nonfriable, which
means they cannot be crumbled by hand pressure. The Occupational Safety and
Health Administration, which began requiring warnings on asbestos-containing
products in 1972, has never required that a warning be placed on products such
as Garlock's gaskets. Notwithstanding that no warning label has been required,
Garlock included one on all of its asbestos-containing products beginning in
1978. Further, gaskets such as those previously manufactured and sold by Garlock
are one of the few asbestos-containing products permitted to be manufactured
under regulations of the EPA. Since the mid-1980s, U.S. sales of
asbestos-containing industrial sealing products have not been a material part of
Garlock's sales and those sales have been predominantly to sophisticated
purchasers such as the U.S. Navy and large petrochemical facilities. These
purchasers generally have extensive health and safety procedures and are
familiar with the risks associated with the use and handling of industrial
sealing products that contain asbestos. Garlock discontinued distributing
asbestos-containing products in the U.S. during 2000 and world-wide in mid-2001.
Garlock settles and disposes of actions on a regular basis. In addition, some
actions are disposed of at trial. Garlock's historical settlement strategy has
been to try to match the timing of payments with recoveries received from
insurance. However, in 1999 and 2000, Garlock implemented a short-term
aggressive settlement strategy. The purpose of this short-term strategy was to
achieve a permanent reduction in the number of overall asbestos claims through
the settlement of a larger than normal number of claims, including some claims
not yet filed as lawsuits. Garlock believes that these settlements were at a
lower overall cost to Garlock than would eventually have been paid even though
the timing of payment was accelerated. Mainly due to this short-term aggressive
settlement strategy and because settlements are made over a period of time, the
settlement amounts paid in the first nine months of 2001, 2000 and 1999
increased over prior periods and the settlement amounts that will be paid in
2002 are also expected to be higher than amounts paid in prior periods. In 2001,
Garlock resumed its historical settlement strategy.
Settlements are generally made on a group basis with payments made to individual
claimants over a period of one to four years and are made without any admission
of liability. Settlement amounts vary depending upon a number of factors,
including the jurisdiction where the action was brought, the nature of the
disease alleged, the occupation of the plaintiff, the presence or absence of
other possible causes of the plaintiff's alleged illness, the availability of
legal defenses, such as the statute of limitations, and whether the action is an
individual one or part of a group. Garlock's allocable portion of the total
settlement amount for an action typically ranges from 1% to 2% of the total
amount.
Before any payment on a settled claim is made, the claimant is required to
submit a medical report acceptable to Garlock substantiating the
asbestos-related illness and meeting specific criteria of disability. In
addition, sworn testimony that the claimant worked with or around Garlock
asbestos-containing products is required. Generally, the claimant is also
required to sign a full and unconditional release of Garlock, its subsidiaries,
parent, officers, directors, affiliates and related parties from any liability
for asbestos-related injuries or claims.
12
When a settlement demand is not reasonable given the totality of the
circumstances, Garlock generally will try the case. Garlock has been successful
in winning a substantial majority of the cases it has tried to verdict.
Garlock's share of adverse verdicts in these cases in the first nine months of
2001 and in fiscal years 2000, 1999 and 1998 totaled less than $10 million in
the aggregate, and some of those verdicts are on appeal.
Anchor is an inactive and insolvent subsidiary of Coltec. The insurance coverage
available to it is fully committed. Anchor continues to pay settlement amounts
covered by its insurance but has not committed to settle any further actions
since 1998. As cases reach the trial stage, Anchor is typically dismissed
without payment.
The insurance coverage available to Garlock is substantial. As of September 30,
2001 Garlock had available $1.027 billion of insurance coverage from carriers
that it believes to be solvent. Of that amount, $113 million is allocated to
claims that have been paid by Garlock and submitted to its insurance companies
for reimbursement and $169 million has been committed to claim settlements not
yet paid by Garlock. Thus, at September 30, 2001, $745 million remained
available for coverage of future claims. Insurance coverage for asbestos claims
is not available to cover exposures initially occurring on and after July 1,
1984. Garlock and Anchor continue to be named as defendants in new actions, a
few of which allege initial exposure after July 1, 1984. To date, no payments
with respect to these claims, pursuant to a settlement or otherwise, have been
made. In addition, Garlock and Anchor believe that they have substantial
defenses to these claims and therefore automatically reject them for settlement.
However, there can be no assurance that that any or all of these defenses will
be successful in the future.
Arrangements with Garlock's insurance carriers limit the amount that can be
received by it in any one year. The amount of insurance available to cover
claims paid by Garlock currently is limited to $80 million per year ($60 million
in 1999 and 1998), covering both settlements and reimbursements of legal fees.
This limit automatically increases by 8% every three years. Amounts paid by
Garlock in excess of this annual limit that would otherwise be recoverable from
insurance may be collected from the insurance companies in subsequent years so
long as insurance is available but subject to the annual limit in each
subsequent year. As a result, Garlock is required to pay out of its own cash any
amounts paid to settle or dispose of asbestos-related claims in excess of the
annual limit and collect these amounts from its insurance carriers in subsequent
years. Various options, such as raising the annual limit, are being pursued to
ensure as close a match as possible between payments by Garlock and recoveries
received from insurance. There can be no assurance that Garlock will be
successful as to any or all of these options.
In accordance with internal procedures for the processing of asbestos product
liability actions and due to the proximity to trial or settlement, certain
outstanding actions against Garlock and Anchor have progressed to a stage where
the cost to dispose of these actions can reasonably be estimated. These actions
are classified as actions in advanced stages and are included in the table as
such below. With respect to outstanding actions against Garlock and Anchor that
are in preliminary procedural stages, as well as any actions that may be filed
in the future, insufficient information exists upon which judgments can be made
as to the validity or ultimate disposition of such actions, thereby making it
difficult to reasonably estimate what, if any, potential liability or costs may
be incurred. Accordingly, no estimate of future liabilities has been included in
the table below for such claims.
13
The Company records an accrual for liabilities related to Garlock and Anchor
asbestos-related matters that are deemed probable and can be reasonably
estimated, which consist of settled claims and actions in advanced stages of
processing. The Company also records an asset equal to the amount of those
liabilities that is expected to be recovered by insurance. A table is provided
below depicting quantitatively the items discussed above.
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
----------- -----------
(dollars in millions)
(NUMBER OF CASES)
New Actions Filed During the Period (1) 30,500 29,500
Actions in Advanced Stages at Period-End 1,900 13,400
Open Actions at Period-End 90,100 97,900
(DOLLARS IN MILLIONS AT PERIOD-END)
Estimated Liability for Settled Claims and Actions in
Advanced Stages of Processing (2) $ 180.6 $ 252.8
Estimated Amounts Recoverable From Insurance (2)(3) $ 295.7 $ 314.0
(DOLLARS IN MILLIONS)
Payments (2) $ 136.5 $ 90.3
Insurance Recoveries (2) 70.9 49.0
----------- -----------
Net Cash Flow (3) $ (65.6) $ (41.3)
=========== ===========
- --------------------------------------------------------
(1) Consists only of actions actually filed with a court of competent
jurisdiction. To the extent that a particular action names both Garlock
and Anchor as defendants, for purposes of this table the action is
treated as a single action.
(2) Includes amounts with respect to all claims settled, whether or not an
action has actually been filed with a court of competent jurisdiction,
claims which have been dismissed or tried and claims otherwise closed
during the period.
(3) Payments made during the period for which Garlock does not receive a
corresponding insurance recovery due to the annual limit imposed under
Garlock's insurance policies will be recovered in future periods to the
extent insurance is available. When estimating the amounts recoverable,
Garlock only includes insurance coverage available from carriers
believed to be solvent.
Garlock and Anchor recorded charges to operations amounting to approximately
$6.0 million during the first nine months of 2001 and 2000 representing payments
and related expenditures made during the periods which are not recoverable at
all under insurance, whether in the present period or in future periods.
Garlock and Anchor paid $65.6 million and $41.3 million for the defense and
disposition of asbestos-related actions, net of amounts received from insurance
carriers, during the first nine months of 2001 and 2000, respectively. The
amount of payments during the first nine months of 2001 was consistent with the
expectation that payments during 2001 would be higher than in 2000 due, in large
part, to Garlock's previously discussed short-term aggressive settlement
strategy. During 2001, Garlock was able to negotiate the receipt of $10 million
from one of its excess insurance carriers, $7.5 million of which was received in
the fourth quarter of 2001 and $2.5 million of which is expected to be received
during the first quarter of 2002. Garlock was able to securitize this cash flow
stream during the third quarter of 2001 and the cash received ($9.9 million) is
reflected in the amounts presented above.
14
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, recent bankruptcies of other
defendants, legislative efforts and given the substantial amount of insurance
coverage that Garlock expects to be available from its solvent carriers, the
Company believes that pending actions against Garlock and Anchor are not likely
to have a material adverse effect on the Company's consolidated financial
condition, but could be material to the Company's consolidated results of
operations or cash flows in a given period. However, because of the uncertainty
as to the number and timing of potential future actions, as well as the amount
that will have to be paid to settle or satisfy any such actions in the future,
there can be no assurance that those future actions will not have a material
adverse effect on the Company's consolidated financial condition, results of
operations and cash flows.
Coltec and some of its subsidiaries (other than Garlock and Anchor) have also
been named as defendants in various actions by plaintiffs alleging injury or
death as a result of exposure to asbestos fibers. The number of claims to date
has not been significant and insurance coverage is available to Coltec. Based on
the above, the Company believes that these pending and reasonably anticipated
future actions are not likely to have a material adverse effect on the Company's
consolidated financial condition, results of operations and cash flows and are
therefore not discussed above.
Coltec, Garlock, Anchor and some of Coltec's other subsidiaries are also
defendants in other asbestos-related lawsuits or claims involving maritime
workers, medical monitoring claimants and co-defendants. Based on past
experience, the Company believes that these categories of claims are not likely
to have a material adverse effect on the Company's consolidated financial
condition, results of operations and cash flows and are therefore not discussed
above.
Other Matters
Coltec has some contingent liabilities related to discontinued operations of its
predecessors and for which it retained liability or is obligated under indemnity
agreements. These contingent liabilities include potential product liability and
associated claims related to Coltec's former Colt Firearms subsidiary for
firearms manufactured prior to 1990 and related to Coltec's former Central
Maloney subsidiary for electrical transformers manufactured prior to 1994. There
are currently no claims pending against Coltec related to these former
subsidiaries. However, such claims could arise in the future. Coltec also has
ongoing obligations with regard to workers compensation and medical benefit
matters associated with Crucible Materials Corporation and Colt Firearms that
relate to Coltec's periods of ownership of these companies.
NOTE J: PAYMENT-IN-KIND NOTES RECEIVABLE
The proceeds from the sale of the Company's Performance Materials segment
included $172 million in debt securities issued by the buyer in the form of
unsecured notes with interest payable in cash or payment-in-kind, at the option
of the issuer. Payment-in-kind refers to the issuer's ability to issue
additional debt securities with identical terms and maturities as the original
debt securities as opposed to making interest payments in cash. The notes have a
term of 10.5 years, and bear interest at a rate of 13 percent, which increases
to 15 percent if cash interest payments do not commence after the fifth year.
The Company initially recorded a discount of $21.2 million based on a 14 percent
discount rate. The notes have a prepayment clause that allows the issuer to
reduce the principal amount by $75 million in the third year by making a $60
million cash payment. In determining the discount on the notes, the Company has
assumed that the prepayment will be made and that cash interest payments on the
notes will commence after the fifth year.
Interest income on the notes is recognized using the effective interest method
and is recorded in Interest Income in the Condensed Consolidated Statement of
Income. The notes are classified as held-to-maturity in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
15
The Company does not currently believe a valuation allowance is necessary. The
Company will record a valuation allowance if events or changes in circumstances
indicate that the carrying amount of the notes may not be recoverable. The fair
market value of the notes at September 30, 2001 approximated $135 million.
NOTE K: NEW ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"). This statement replaces FASB
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
125's provisions without reconsideration. SFAS 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The adoption of SFAS 140 did not have a material impact on
the Company's financial position or results of operations.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended, which requires that all derivative
instruments be reported on the balance sheet at fair value and that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge criteria are met. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded the previously unrecognized fair market value of an interest rate swap
designated as a fair value hedge and the associated adjustment to the carrying
amount of the debt instrument designated as the hedged item as cumulative-effect
adjustments to net income. As this pre-existing hedging relationship would have
met the requirements for the shortcut method at inception, the Company chose to
calculate the transition adjustment upon initial adoption as though the shortcut
method had been applied since the inception of the hedging relationship. The
effect of the adjustment to the carrying value of the debt was offset entirely
by the impact of recording the fair value of the interest rate swap.
Accordingly, the net cumulative-effect adjustment to net income was zero.
In July 2001, the FASB issued Statement No. 141 "Business Combinations" ("SFAS
141") and Statement No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 is effective as follows: a) use of the pooling-of-interest method is
prohibited for business combinations initiated after June 30, 2001; and b) the
provisions of SFAS 141 also apply to all business combinations accounted for by
the purchase method that are completed after September 30, 2001. There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. SFAS 142 is effective
for fiscal years beginning after December 15, 2001 and applies to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement is expected to result in an
increase in pre-tax income of approximately $29 million per year. During 2002,
the Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the Company's financial
position or results of operations.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company has not yet determined what the effect of SFAS 143 will be
on its consolidated financial condition or results of operations.
16
In October 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
FASB Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), however it retains the
fundamental provisions of that statement related to the recognition and
measurement of the impairment of long-lived assets to be "held and used." In
addition, SFAS 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset (group) to be
disposed of other than by sale (e.g. abandoned) be classified as "held and used"
until it is disposed of, and establishes more restrictive criteria to classify
an asset (group) as "held for sale." SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company has not yet determined what the
effect of SFAS 144 will be on its consolidated financial condition or results of
operations.
NOTE L: CONTINGENCIES
GENERAL
There are pending or threatened against Goodrich 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. Goodrich believes that
any liability that may finally be determined with respect to such claims,
lawsuits and proceedings 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.
ENVIRONMENTAL
Environmental liabilities are recorded when the Company's liability is probable
and the costs are reasonably estimable, which generally is not later than at
completion of a feasibility study or when the Company has recommended a remedy
or has committed to an appropriate plan of action. The accruals are reviewed
periodically and, as investigations and remediations proceed, adjustments are
made as necessary. Accruals for losses from environmental remediation
obligations do not consider the effects of inflation, and anticipated
expenditures are not discounted to their present value. The accruals are not
reduced by possible recoveries from insurance carriers or other third parties,
but do reflect anticipated allocations among potentially responsible parties at
federal Superfund sites or similar state-managed sites and an assessment of the
likelihood that such parties will fulfill their obligations at such sites. The
measurement of environmental liabilities by the Company is based on currently
available facts, present laws and regulations, and current technology. Such
estimates take into consideration the Company's prior experience in site
investigation and remediation, the data concerning cleanup costs available from
other companies and regulatory authorities, and the professional judgment of the
Company's environmental experts in consultation with outside environmental
specialists, when necessary.
The Company is subject to various domestic and international environmental laws
and regulations which may require that it investigate and remediate the effects
of the release or disposal of materials at sites associated with past and
present operations, including sites at which the Company has been identified as
a potentially responsible party under the federal Superfund laws and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws. Estimates of the Company's
liability are further subject to uncertainties regarding the nature and extent
of site contamination, the range of remediation alternatives available, evolving
remediation standards, imprecise engineering evaluations and estimates of
appropriate cleanup technology, methodology and cost, the extent of corrective
actions that may be required, and the number and financial condition of other
potentially responsible parties, as well as the extent of their responsibility
for the remediation. Accordingly, as investigation and remediation of these
sites proceeds, it is likely that adjustments in the Company's accruals will be
necessary to reflect new information. The amounts of any such adjustments could
have a material adverse effect on the Company's results of operations in a given
period, but the amounts, and the possible range of loss in excess of the amounts
accrued, are not reasonably estimable. Based on currently available information,
however, management does not believe that future environmental costs in excess
of those accrued with respect to sites with which the Company has been
identified are likely to have a material adverse effect on the Company's
financial condition. There can be no assurance, however, that additional future
developments, administrative actions or liabilities relating to environmental
matters will not have a material adverse effect on the Company's results of
operations in a given period.
17
At September 30, 2001, the Company's reserves for environmental remediation
obligations totaled $86.9 million, of which $11.5 million was included in
accrued liabilities. Of the $86.9 million, $13.0 million is associated with
ongoing operations and $73.9 million is associated with businesses previously
disposed of or discontinued.
The timing of expenditures depends on a number of factors that vary by site,
including the nature and extent of contamination, the number of potentially
responsible parties, the timing of regulatory approvals, the complexity of the
investigation and remediation, and the standards for remediation. The Company
expects that it will expend present accruals over many years, and will complete
remediation of all sites with which it has been identified in up to thirty
years. This period includes operation and monitoring costs which are generally
incurred over 15 years.
TOLO LITIGATION
In May 2000, the Company and its subsidiary Rohr, Inc. ("Rohr"), were served
with complaints in a lawsuit filed in the Superior Court of Orange County,
California, by former shareholders and certain former employees of Tolo, Inc.
Tolo, Inc. is a subsidiary of Rohr that was acquired in 1997. The former
shareholders alleged that the Company and Rohr breached the stock purchase
agreement by failing to pay $2.4 million under the terms of the agreement. In
September 2001, a jury found that the Company was liable to the shareholders for
the $2.4 million retained by Rohr under the stock purchase agreement and was
also assessed punitive damages of $48 million. The court subsequently reduced
the punitive damage award to $24 million.
At the time of the purchase the Company established a reserve of $2.4 million
relating to the amount withheld by Rohr pursuant to the stock purchase
agreement. The Company has not established an accrual for the punitive damages
award of $24 million, which was based on the plaintiff"s fraudulent concealment
claim, for the reasons set forth below.
The Company and its legal counsel believe that there were numerous points of
reversible error in the trial that make it more likely than not that the
judgment will be reversed or vacated on appeal. First, the Company believes the
plaintiffs' fraud claim is legally deficient under California law and should be
reversed. If the fraud claim is not reversed, defendants' should, at a minimum,
be granted a new trial on the fraudulent concealment claim because the trial
court permitted plaintiffs to add this claim late in the trial but did not allow
the Company to introduce evidence to defend against it. The Company also
believes that the trial court made numerous prejudicial errors regarding the
admission and exclusion of evidence relating to the fraud claims, which further
supports the grant of a new trial. And finally, the Company believes that the
trial court's directed verdict on plaintiffs' breach of contract claim should be
set aside and a new trial granted because, among other things, there was
sufficient evidence for the jury to find for the defendants on this claim.
DISCONTINUED OPERATIONS
Contingencies associated with Coltec and its subsidiaries, including
asbestos-related liabilities, are discussed in Note I to the condensed
consolidated financial statements. After the spin-off is completed, it is
possible that asbestos-related claims might be asserted against the Company on
the theory that it has some responsibility for the asbestos-related liabilities
of Coltec or its subsidiaries, even though the activities that led to those
claims occurred prior to the Company's ownership of Coltec. Also, it is possible
that a claim could be asserted against the Company that Coltec's dividend of its
aerospace business to the Company prior to the spin-off was made at a time when
Coltec was insolvent or caused Coltec to become insolvent. Such a claim could
seek recovery from the Company on behalf of Coltec of the fair market value of
the dividend.
No such claims have been asserted against the Company to date. The Company
believes that it would have substantial legal defenses against any such claims.
Any such claims would require, as a practical matter, that Coltec's subsidiaries
were unable to satisfy their asbestos-related liabilities and that Coltec was
found to be responsible for these liabilities and is unable to meet its
financial obligations. The Company believes any such claims would be without
merit and that Coltec will be solvent both before and after the dividend. If any
such claims were successful the Company believes it would not have a material
adverse effect on its financial condition, but could have a material adverse
effect on its results of operations or cash flows in a particular period.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
The following management discussion and analysis should be read in conjunction
with the consolidated condensed financial statements and footnotes presented
within this quarterly report on Form 10-Q/A. As discussed in Note A to the
condensed consolidated financial statements, the Company has restated its
financial statements for the three and nine-month periods ended September 30,
2001 and 2000, to a) reclassify the TIDES to discontinued operations; and b)
reclassify the short-term borrowings related to the Glacier Bearings acquisition
from discontinued operations to continuing operations. The accompanying
management's discussion and analysis gives effect to that restatement.
SIGNIFICANT EVENTS
- - Net income for the third quarter was $88.0 million, or $0.83 per share,
compared to $79.9 million, or $0.77 per share, during the third quarter
last year. Net income for the first nine months of 2001 was $343.6
million, or $3.24 per share, compared to $247.7 million, $2.30 per
share, during the first nine months of 2000.
- - Net income, excluding special items, for the third quarter was $83.0
million, or $0.77 per share, compared to $66.4 million, or $0.62 per
share, in the third quarter last year. Net income, excluding special
items, for the first nine months of 2001 was $233.2 million, or $2.17
per share, compared to $192.4 million, or $1.75 per share during the
first nine months of 2000.
- - The Company announced during the quarter its intention to spin-off its
Engineered Industrial Products ("EIP") segment to shareholders.
- - Net cash provided by operating activities of continuing operations
increased $244.1 from a use of $33.6 million during the first nine
months of 2000 to $210.5 million of cash provided during the first nine
months of 2001.
- - Free cash flow, defined as operating cash flows from continuing
operations adjusted for cash payments related to special items less
capital expenditures, increased from $50.9 million during the first nine
months of 2000 to $98.1 million during the first nine months of 2001.
ANTICIPATED RESTRUCTURING AND CONSOLIDATION ACTIVITIES
The Company expects to eliminate approximately 2,400 aerospace and corporate
positions and consolidate various aerospace operations. As part of these
actions, the Company plans to close approximately 16 of its facilities. Most of
these actions will be implemented by the end of the first half of 2002 and are
projected to generate annual cost savings in excess of $125 million when
completed. Over this period, the company anticipates recording pre-tax special
charges of $110 to $130 million, of which approximately 50 percent will be
recorded as non-cash asset impairment charges. A significant portion of the
total anticipated charge is expected to be recorded in the fourth quarter 2001.
These charges do not reflect any costs related to the 717 program or costs
related to any curtailment gains or losses that may need to be recorded as a
result of the employee terminations noted above. Boeing has recently announced
its intention to review the 717 program in-light of current market conditions.
If the program is significantly curtailed or cancelled, the Company would be
required to recognize a non-cash charge for a portion of its investment in
non-recurring engineering and inventory related to this program and many find it
necessary to take further restructuring action, including additional headcount
reductions. Such a charge could be material to the Company.
EIP SPIN-OFF
During September 2001, the Company announced that its Board of Directors has
approved in principle the tax-free spin-off of its Engineered Industrial
Products business to shareholders. The transaction will create a new publicly
traded company, focused on its own customers, products and markets. The spin-off
is expected to be completed in 2002. Application will be made to list the
shares of the new company on the New York Stock Exchange.
19
According to the plan, Goodrich shareholders will receive one share in the new
industrial company for every five Goodrich shares they own as of the record date
for the distribution.
The new industrial company will include substantially all the assets and
liabilities of the Engineered Industrial Products segment, including the
associated asbestos liabilities and related insurance (see additional discussion
regarding asbestos claims in Note I of the accompanying unaudited condensed
consolidated financial statements) as well as certain obligations associated
with former businesses of Coltec Industries Inc ("Coltec"), a wholly-owned
subsidiary of Goodrich. The Company expects to offer to exchange the outstanding
$300 million, 7.5 percent Coltec senior notes for similar Goodrich securities
prior to the spin-off. Assuming that these offers are fully subscribed, the new
company will have total debt of approximately $165 million at the time of the
spin-off.
The spin-off of the Engineered Industrial Products segment represents the
disposal of a segment under APB Opinion No. 30 ("APB 30"). Accordingly, the
revenues, costs and expenses, assets and liabilities, and cash flows of EIP have
been segregated in the Company's Condensed Consolidated Statement of Income,
Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of
Cash Flows.
DIVESTITURE OF PERFORMANCE MATERIALS SEGMENT
On February 28, 2001, the Company completed the sale of its Performance
Materials segment to an investor group led by AEA Investors, Inc. (the "Buyer")
for approximately $1.4 billion. Total net proceeds, after anticipated tax
payments and transaction costs, included approximately $1 billion in cash and
$172 million in debt securities issued by the buyer (see additional discussion
regarding the debt securities received in Note J of the accompanying unaudited
condensed consolidated financial statements). The transaction resulted in an
after-tax gain of $93.5 million and is subject to certain post closing
adjustments (e.g. working capital adjustments).
The Company has calculated a $25 million working capital adjustment in its
favor, which has been considered in the after-tax gain noted above. The Buyer is
disputing the Company's working capital adjustment and has asserted that the
Company owes the Buyer approximately $10 million under the purchase and sale
agreement. Should the parties not be able to settle their differences, the
disputed matters will be forwarded to an independent third party for resolution.
Such resolution will be final and binding on all parties. The Company expects to
finalize the working capital adjustment in 2002.
The disposition of the Performance Materials segment also represents the
disposal of a segment under APB Opinion No. 30 ("APB 30"). Accordingly, the
revenues, costs and expenses, assets and liabilities, and cash flows of
Performance Materials have been segregated in the Company's Condensed
Consolidated Statement of Income, Condensed Consolidated Balance Sheet and
Condensed Consolidated Statement of Cash Flows.
Pursuant to the terms of the transaction, the Company has retained certain
assets and liabilities (primarily pension, postretirement and environmental
liabilities) of the Performance Materials segment. The Company has also agreed
to indemnify the buyer for liabilities arising from certain events as defined in
the agreement. Such indemnification is not expected to be material to the
Company's financial condition, but could be material to the Company's results of
operations in a given period.
SHARE REPURCHASE PROGRAM
On September 17, 2001, Goodrich announced a program to repurchase up to $300
million of its common stock and has purchased approximately 2.2 million shares
through the end of the quarter. The total cost of these shares was $42.8 million
with an average price of $19.63 per share.
DIVIDEND
The Company's Board of Directors has declared a quarterly dividend of $.275 per
share, payable on January 2, 2002 to shareholders of record at the close of
business on December 3, 2001. The current dividend level is expected to be
reviewed in early 2002 by the Company's Board of Directors in connection with
the Engineered Industrial Products spin-off, with the intent of adjusting it to
a level consistent with that of a post-spin peer group.
20
OUTLOOK
The outlook for the commercial aerospace industry has changed considerably since
the end of the second quarter of 2001. Recent events have lowered new commercial
aircraft delivery estimates and most airlines have announced substantial
reductions in their capacity. To develop its outlook, the Company assumed new
aircraft production rates based upon the revised plans of Boeing, Airbus and the
regional jet manufacturers. The Company has also assumed that airline capacity
reductions will result in a 10 to 20 percent decline in 2002 aftermarket sales
versus 2001.
On a continuing operations basis, excluding special items, the company expects
full-year 2001 results of $2.65 to $2.75 per share, an increase of 10 to 14
percent over the comparable results for 2000, on revenue from continuing
operations of approximately $4.1 billion.
In 2002, the Company anticipates that revenue will decline 5 to 10 percent,
while its earnings per share from continuing operations, excluding special
items, will decline approximately 10 percent from the $2.65 to $2.75 per-share
levels mentioned above. This estimate includes the net benefit from eliminating
goodwill amortization under SFAS 142, as well as significantly higher levels of
pension expense as a result of lower than expected returns on plan assets. Also
included in these estimates are the savings from the restructuring initiatives
discussed above.
RESULTS OF OPERATIONS
THIRD QUARTER OF 2001 COMPARED WITH THIRD QUARTER OF 2000
Three Months Ended
September 30,
(Dollars in Millions) 2001 2000
-------------------------------------------------------------
SALES
Aerostructures and
Aviation Technical
Services $ 374.0 $ 375.4
Landing Systems 293.1 265.9
Engine and Safety Systems 190.0 158.7
Electronic Systems 194.8 132.4
-------- --------
Total Sales $1,051.9 $ 932.4
======== ========
OPERATING INCOME
Aerostructures and
Aviation Technical
Services $ 60.7 $ 57.3
Landing Systems 40.9 35.7
Engine and Safety Systems 35.4 28.3
Electronic Systems 29.9 33.1
-------- --------
Segment Operating Income $ 166.9 $ 154.4
Corporate General and
Administrative Costs (12.3) (14.2)
Merger-related and
Consolidation Costs (1.5) (8.3)
-------- --------
Total Operating Income $ 153.1 $ 131.9
Net Interest Expense (17.6) (27.6)
Other income (expense)-net (8.1) (5.9)
Income Tax Expense (42.8) (34.7)
Distribution on Trust
Preferred Securities (2.7) (2.6)
-------- --------
Income from Continuing
Operations 81.9 61.1
Income from Discontinued
Operations 6.1 18.8
-------- --------
Net Income $ 88.0 $ 79.9
======== ========
21
Changes in sales and segment operating income are discussed within the Business
Segment Performance section below.
Unallocated corporate general and administrative costs decreased by $1.9
million, from $14.2 million during the third quarter of 2000 to $12.3 million
during the third quarter of 2001. The decrease between periods was due to lower
incentive compensation expense due to the Company's lower share price, partially
offset by increased outside consulting fees (primarily related to tax, employee
benefit programs and legal matters).
Merger-related and consolidation costs of $1.5 million and $8.3 million were
recorded during the third quarter of 2001 and 2000, respectively (see further
discussion in Note I of the accompanying unaudited condensed consolidated
financial statements). As discussed above (under Anticipated Restructuring and
Consolidation Activities), the Company expects to incur additional
merger-related and consolidation costs through the first half of 2002. The
timing of these costs is dependent on the finalization of management's plans and
on the nature of the costs (accruable or period costs). These charges will
consist primarily of costs associated with the reorganization of operating
facilities and for employee relocation and severance costs.
Interest expense-net decreased $10.0 million from $27.6 million in 2000 to $17.6
million during the third quarter of 2001. The decrease was primarily
attributable to interest income on the PIK note and lower interest expense due
to reduced average outstanding borrowings. The lower average outstanding
borrowings during the period was due to significant working capital improvements
during the quarter and the maturity of $175 million of outstanding notes in
July.
Interest expense related to continuing operations is net of amounts directly
attributable to EIP and amounts allocated to Performance Materials during
periods prior to the sale. Such allocation was based on the respective net
assets of Performance Materials in relation to the net assets of the Company and
effectively resulted in a reduction in indebtedness attributable to continuing
operations in periods prior to the sale even though indebtedness reflected on
the Condensed Consolidated Balance Sheet does not reflect such an allocation.
Other expense-net increased $2.2 million from $5.9 million in the third quarter
of 2000 to $8.1 million in the third quarter of 2001. The increase was due
primarily to increased retiree healthcare costs related to previously disposed
of businesses and increased earnings due to minority interest shareholders. The
increase in retiree healthcare costs related to previously disposed of
businesses was primarily due to increased costs associated with providing
retiree healthcare benefits as well as increased costs resulting from the sale
of Performance Materials in the first quarter of 2001 and the retention of most
of its retiree healthcare obligations. The increase in earnings due minority
interest shareholders was primarily due to the sale of a 30 percent interest in
an aerospace overhaul business in the Asia Pacific region during the first
quarter of 2001 that had previously been wholly-owned by the Company.
The Company's effective tax rate from continuing operations during the third
quarter of 2001 was approximately 33.6 percent. This compares to an effective
tax rate of approximately 35.3 percent during the third quarter of 2000 and the
actual effective tax rate of 33.1 percent for all of 2000. The increase in rate,
as compared to the effective tax rate for all of 2000, was primarily
attributable to additional foreign earnings subject to U.S. tax..
Income from discontinued operations decreased $12.7 million from quarter to
quarter due to the sale of Performance Materials during the first quarter of
2001 and a reduction in EIP's net income due to continued softness in industrial
markets, unfavorable product mix and pricing pressures.
The Company and the buyer of Performance Materials continue to work through the
final purchase and sale agreement adjustments (i.e. working capital adjustment).
Any adjustment to the gain on sale that was recorded during the first quarter of
2001 is expected to occur before the end of 2002.
22
FIRST NINE MONTHS OF 2001 AS COMPARED TO THE FIRST NINE MONTHS OF 2000
Nine Months Ended
September 30,
(Dollars in Millions) 2001 2000
-------------------------------------------------------------
SALES
Aerostructures and
Aviation Technical
Services $1,139.3 $1,081.4
Landing Systems 862.8 785.0
Engine and Safety Systems 576.2 473.6
Electronic Systems 553.4 399.2
-------- --------
Total Sales $3,131.7 $2,739.2
======== ========
OPERATING INCOME
Aerostructures and
Aviation Technical
Services $ 176.6 $ 155.2
Landing Systems 115.2 108.1
Engine and Safety Systems 104.4 87.1
Electronic Systems 94.3 85.9
-------- --------
Segment Operating Income $ 490.5 $ 436.3
Corporate General and
Administrative Costs (41.2) (41.8)
Merger-related and
Consolidation Costs (14.9) (29.1)
-------- --------
Total Operating Income $ 434.4 $ 365.4
Net Interest Expense (64.4) (73.9)
Other income (expense)-net (15.2) (11.9)
Income Tax Expense (118.9) (97.7)
Distribution on Trust
Preferred Securities (7.9) (7.9)
-------- --------
Income from Continuing
Operations 228.0 174.0
Income from Discontinued
Operations 115.6 73.7
-------- --------
Net Income $ 343.6 $ 247.7
======== ========
Changes in sales and segment operating income are discussed within the Business
Segment Performance section below.
Unallocated corporate general and administrative costs decreased by $0.6
million, from $41.8 million during the first nine months of 2000 to $41.2
million during the first nine months of 2001. The decrease between periods was
due to lower incentive compensation expense due to the Company's lower share
price, partially offset by increased outside consulting fees (primarily related
to tax, employee benefit programs and legal matters).
23
Merger-related and consolidation costs of $14.9 million and $29.1 million were
recorded during the first nine months of 2001 and 2000, respectively (see
further discussion in Note H of the accompanying unaudited condensed
consolidated financial statements). As discussed above (under Anticipated
Restructuring and Consolidation Activities), the Company expects to incur
additional merger-related and consolidation costs during 2002. The timing of
these costs is dependent on the finalization of management's plans and on the
nature of the costs (accruable or period costs). These charges will consist
primarily of costs associated with the reorganization of operating facilities
and for employee relocation and severance costs.
Interest expense-net decreased $9.5 million from $73.9 million during the first
nine months of 2000 to $64.4 million during the first nine months of 2001. The
decrease was primarily attributable to interest income on the PIK note,
partially offset by increased interest expense. Interest expense related to
continuing operations is net of amounts directly attributable to EIP and amounts
allocated to Performance Materials during periods prior to the sale. Such
allocation was based on the respective net assets of Performance Materials in
relation to the net assets of the Company and effectively resulted in a
reduction in indebtedness attributable to continuing operations in periods prior
to the sale even though indebtedness reflected on the Condensed Consolidated
Balance Sheet does not reflect such an allocation. Taking the above into
consideration, outstanding average indebtedness attributed to continuing
operations increased during the first nine months of 2001 as compared to the
same period last year driven mostly by the financing of acquisitions. This
increase in outstanding average indebtedness resulted in the higher interest
expense noted above.
Other expense-net increased $3.3 million from $11.9 million during the first
nine months of 2000 to $15.2 million during the first nine months of 2001.
Excluding gains from the sale of businesses during both periods, other
expense-net increased by $8.5 million from $13.9 million during the first nine
months of 2000 to $22.4 million during the first nine months of 2001. The
increase was due primarily to increased retiree healthcare costs related to
previously disposed of businesses and increased earnings due to minority
interest shareholders. The increase in retiree healthcare costs related to
previously disposed of businesses was primarily due to increased costs
associated with providing retiree healthcare benefits as well as the sale of
Performance Materials in the first quarter of 2001 and the retaining of most of
its retiree healthcare obligations. The increase in earnings due minority
interest shareholders was primarily due to the sale of a 30 percent interest in
an aerospace overhaul business in the Asia Pacific region during the first
quarter of 2001.
The Company's effective tax rate from continuing operations during the first
nine months of 2001 was approximately 33.5 percent. This compares to an
effective tax rate of approximately 34.9 percent during the first nine months of
2000 and the actual effective tax rate of 33.1 percent for all of 2000. The
increase in rate, as compared to the to the effective tax rate for all of 2000,
was primarily attributable to additional foreign earnings being subject to U.S.
tax.
Income from discontinued operations increased $41.9 million, from $73.7 million
during the first nine months of 2000 to $115.6 million during the first nine
months of 2001. Excluding the after-tax gain on sale of $93.5 million, income
from discontinued operations decreased by $51.6 million. The decrease was
primarily due to the sale of Performance Materials in February, thus resulting
in only two months of income in 2001 and lower income from the Company's EIP
segment. The decrease in EIP income was due to continued softness in industrial
markets, unfavorable product mix and pricing pressures.
24
BUSINESS SEGMENT PERFORMANCE
SEGMENT ANALYSIS
Due to the sale of the Company's Performance Materials segment earlier this
year, as well as the intended spin-off of the Company's EIP segment early in
2002, the Company has redefined its segments in accordance with SFAS 131. The
Company's operations are now classified into four reportable business segments:
Aerostructures and Aviation Technical Services, Landing Systems, Engine and
Safety Systems, and Electronic Systems.
The Company's segments serve commercial, military, regional, business and
general aviation markets. Their major products include aircraft engine nacelle
and pylon systems, aircraft landing gear, wheels and brakes, sensors and
sensor-based systems, fuel measurement and management systems, flight attendant
and cockpit seats, aircraft evacuation slides and rafts, optical and
electro-optical systems, space applications, ice protection systems and
collision warning systems. Maintenance, repair and overhaul services on
commercial airframes and components is also provided.
Corporate includes general and administrative costs. Segment operating income is
total segment revenue reduced by operating expenses directly identifiable with
that business segment, except for merger-related and consolidation costs which
are presented separately (see further discussion in Note H to the accompanying
unaudited condensed consolidated financial statements).
An expanded analysis of sales and operating income by business segment follows.
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 % CHANGE 2001 2000 % CHANGE
------------ ------------ ------------ ------------ ------------ ----------
SALES
Aerostructures and
Aviation Technical
Services $ 374.0 $ 375.4 (0.4) $ 1,139.3 $ 1,081.4 5.4
Landing Systems 293.1 265.9 10.2 862.8 785.0 9.9
Engine and Safety Systems 190.0 158.7 19.7 576.2 473.6 21.7
Electronic Systems 194.8 132.4 47.1 553.4 399.2 38.6
-------- ------- ------- -------
Total Sales $1,051.9 $ 932.4 12.8 $ 3,131.7 $ 2,739.2 14.3
======== ======= ======= =======
OPERATING INCOME
Aerostructures and
Aviation Technical
Services $ 60.7 $ 57.3 5.9 $ 176.6 $ 155.2 13.8
Landing Systems 40.9 35.7 14.6 115.2 108.1 6.6
Engine and Safety Systems 35.4 28.3 25.1 104.4 87.1 19.9
Electronic Systems 29.9 33.1 (9.7) 94.3 85.9 9.8
-------- ------- ------- -------
Segment Operating
Income $ 166.9 $ 154.4 8.1 $ 490.5 $ 436.3 12.4
======== ======= ======= =======
OPERATING INCOME AS A
PERCENT OF SALES
Aerostructures and
Aviation Technical
Services 16.2 15.3 15.5 14.4
Landing Systems 14.0 13.4 13.4 13.8
Engine and Safety Systems 18.6 17.8 18.1 18.4
Electronic Systems 15.3 25.0 17.0 21.5
Total 15.9 16.6 15.7 15.9
25
THIRD QUARTER 2001 COMPARED WITH THIRD QUARTER 2000
AEROSTRUCTURES AND AVIATION TECHNICAL SERVICES: Sales decreased $1.4 million, or
0.4 percent, from $375.4 million during the third quarter of 2000 to $374.0
million during the third quarter of 2001. The decrease in sales was primarily
attributable to lower aftermarket sales of Super 27 aircraft as a result of
management's decision to phase-out this program, the end of the MD-90 contract
and lower airframe maintenance volume, partially offset by strong aerostructures
sales as well as a slight increase in aviation technical services sales (i.e.
airframe maintenance and modification services, component overhauls, etc.). The
increase in aerostructures sales was primarily driven by program rate increases
on the V2500, CFM 56/A340 and RR535-E4 programs, higher aftermarket spares
sales, increased aftermarket services (i.e. aerostructures maintenance, repair
and overhaul services) and several program start-ups (C-5 Pylon, F-15).
Operating income increased $3.4 million, or 5.9 percent, from $57.3 million
during the third quarter of 2000 to $60.7 million during the third quarter of
2001. The increase was primarily due to productivity improvements on several
aerostructures programs and increased higher margin aftermarket sales. Partially
offsetting these gains were additional costs associated with the implementation
of an ERP system at the segment's aerostructures businesses and increased losses
associated with the aviation technical services business.
LANDING SYSTEMS: Sales increased $27.2 million, or 10.2 percent, from $265.9
million during the third quarter of 2000 to $293.1 million during the third
quarter of 2001. The increase was primarily attributable to higher sales of
landing gear and wheels and brakes. Landing gear sales increased across all
major markets primarily due to increased sales of original equipment to Boeing,
Bombardier, and the U.S. government. Major programs contributing to the
increased sales of landing gear included the B737-700, F16, RJ601, and CRJ700
programs. Wheel and brake sales were higher than the third quarter of 2000 due
to increased aftermarket sales in the commercial, regional, and military markets
primarily on the A319/320, Embraer 145, DeHavilland Dash 8, F16, and Global
Express programs. This increase in sales was partially offset by decreased sales
of landing gear overhaul services due primarily to fewer customer removals as a
result of airline operating cost constraints.
Operating income increased $5.2 million, or 14.6 percent, from $35.7 million
during the third quarter of 2000 to $40.9 million during the third quarter of
2001. The increase in operating income was primarily due to the increase in
sales noted above, partially offset by increased wheel and brake sales
incentives and additional costs related to expedited shipments of certain
landing gear to Boeing.
ENGINE AND SAFETY SYSTEMS: Sales increased $31.3 million, or 19.7 percent, from
$158.7 million during the third quarter of 2000 to $190.0 million during the
third quarter of 2001. While all of the group's product lines experienced an
increase in sales over the third quarter last year, the increase was primarily
attributable to a significant increase in aftermarket sales and services,
increased demand for the group's gas turbine products that serve both the
aerospace and industrial engine markets and acquisitions.
Operating income increased $7.1 million, or 25.1 percent, from $28.3 million
during the third quarter of 2000 to $35.4 million during the third quarter of
2001. The increase was primarily attributable to the increase in sales noted
above, partially offset by increased R&D expenses primarily related to
continuing development of passenger restraint systems.
ELECTRONIC SYSTEMS: Sales increased $62.4 million, or 47.1 percent, from $132.4
million during the third quarter of 2000 to $194.8 million during the third
quarter of 2001. The increase was driven by acquisitions (approximately $46
million) and increased sales by the group's core businesses (approximately $16
million). The increase in sales at the group's core businesses was primarily
attributable to increased sales of sensors, fuel and utility systems and
lightning detection and collision avoidance units. The increase in sensor sales
was driven by increased regional and business OE demand, airline retrofits and
the resumption of thermocouple shipments to the USAF. Increased sales of fuel
and utility systems was due mostly to aftermarket sales of spares and retrofit
products, particularly on the B747 and B737 programs. These increases were
partially offset by program delays and cancellations that impacted the group's
space-based businesses.
Operating income decreased $3.2 million, or 9.7 percent, from $33.1 million
during the third quarter of 2000 to $29.9 million during the third quarter of
2001. The decrease was primarily due to the recovery of certain non-recurring
engineering costs in the prior period that did not occur in the current quarter,
negative contracts adjustments on certain space-based programs,
26
increased investment in MEMS (micro-electromechanical systems) technologies and
products, increased R&D expenses on the Smart Deck Integrated Flight Controls &
Display System and additional costs related to the consolidation and integration
of acquisitions.
The significant reduction in operating margins, period over period (25.0 percent
in 2000 to 15.3 percent in 2001), was primarily attributable to program delays
and cancellations impacting the segments space-based businesses, as well as
significantly lower margins on sales from acquisitions. The Company expects
these margins to increase next year as a result of current and planned
consolidation and integration activities.
FIRST NINE MONTHS OF 2001 COMPARED WITH FIRST NINE MONTHS OF 2000
AEROSTRUCTURES AND AVIATION TECHNICAL SERVICES: Sales increased $57.9 million,
or 5.4 percent, from $1,081.4 million during the first nine months of 2000 to
$1,139.3 million during the first nine months of 2001. The increase in sales was
primarily due to rate increases on the PW4000, B717-200, and V2500 programs,
higher aftermarket spares sales, increased aftermarket services and several
program start-ups (C-5 Pylon, F-15). Partially offsetting these increases was a
decrease in aftermarket sales of Super 27 aircraft, rate decreases on the
CFM56-5 (A340) and RR535-E4 programs and a decrease in aviation technical
services sales.
Operating income increased $21.4 million, or 13.8 percent, from $155.2 million
during the first nine months of 2000 to $176.6 million during the first nine
months of 2001. The increase was driven by the increase in sales noted above,
productivity improvements on several aerostructures programs and reduced
non-recurring engineering costs associated with the terminated X-33 program.
Partially offsetting these increases were additional costs associated with the
implementation of an ERP system at the group's aerostructures businesses,
increased losses associated with the segments aviation technical services sales
and the closeout of the MD-11 and MD-90 contracts.
LANDING SYSTEMS: Sales increased $77.8 million, or 9.9 percent, from $785.0
million during the first nine months of 2000 to $862.8 million during the first
nine months of 2001. The increase in sales was primarily attributable to higher
sales of landing gear and wheels and brakes. Landing gear sales increased across
all major markets primarily due to increased sales of original equipment to
Boeing, Bombardier, and the U.S. government. Major programs contributing to the
increased sales of landing gear included the B737-700, B777, F16, DeHavilland
Dash 8, and RJ601 programs. The increased sales of wheels and brakes related
primarily to increased aftermarket sales in the commercial, regional, business
and military markets primarily on the A319/320, B747-400, B777, Embraer 145,
DeHavilland Dash 8, F16, and Cessna programs. This increase in sales was
partially offset by decreased sales of landing gear overhaul services primarily
due to fewer customer removals as a result of airline operating cost
constraints.
Operating income increased $7.1 million, or 6.6 percent, from $108.1 million
during the first nine months of 2000 to $115.2 million during the first nine
months of 2001. The increase was primarily due to the increase in volume noted
above, partially offset by increased sales incentives, additional costs related
to expedited shipments of certain landing gear to Boeing and significantly lower
sales associated with providing landing gear overhaul services due to the
decrease in volume noted above.
ENGINE AND SAFETY SYSTEMS: Sales increased $102.6 million, 21.7 percent, from
$473.6 million during the first nine months of 2000 to $576.2 million during the
first nine months of 2001. While all of the group's product lines experienced an
increase in sales over the third quarter last year, the increase was primarily
attributable to a significant increase in aftermarket sales of evacuation
products, particularly on the B747 program, increased demand for the group's gas
turbine products that serve both the aerospace and industrial engine markets and
acquisitions.
Operating income increased $17.3 million, or 19.9 percent, from $87.1 million
during the first nine months of 2000 to $104.4 million during the first nine
months of 2001. The increase was primarily attributable to the increase in sales
noted above, partially offset by increased R&D expenses (primarily related to
continuing development of passenger restraint systems) and the recovery of
certain non-recurring engineering costs during the first nine months of 2000. No
such recovery occurred in 2001.
27
ELECTRONIC SYSTEMS GROUP: Sales increased $154.2 million, or 38.6 percent, from
$399.2 million during the first nine months of 2000 to $553.4 million during the
first nine months of 2001. The increase was driven primarily by acquisitions
(approximately $98 million) and increased sales by the group's core businesses
(approximately $56 million). The increase in sales at the group's core
businesses was primarily attributable to increased sales of sensors, fuel and
utility systems as well as lightning detection and collision avoidance units.
The increase in sensor sales was driven by increased regional and business OE
demand, airline retrofits and the resumption of thermocouple shipments to the
USAF. The fuel and utility sales increases were due mostly to aftermarket sales
of spares and retrofit products, particularly on the B747 and B737 programs.
These increases were partially offset by program delays and cancellations that
impacted the space-based businesses of the group.
Operating income increased $8.4 million, or 9.8 percent, from $85.9 million
during the first nine months of 2000 to $94.3 million during the first nine
months of 2001. The increase was primarily due to the factors noted above,
partially offset by increased investment in MEMS (micro-electromechanical
systems) technologies and products, increased R&D expenses on the Smart Deck
Integrated Flight Controls & Display System, unfavorable product mix and higher
costs related to the consolidation and integration of acquisitions
The significant reduction in operating margins, period over period (21.5 percent
in 2000 to 17.0 percent in 2001), was primarily attributable to program delays
and cancellations impacting the segments space-based businesses, as well as
significantly lower margins on sales from acquisitions. The Company expects
these margins to increase next year as a result of current and planned
consolidation and integration activities.
CAPITAL RESOURCES AND LIQUIDITY
The following table summarizes our cash flow activities for the periods
indicated:
(DOLLARS IN MILLIONS) NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000 CHANGE
------------- ------------- ------------
Cash flows from:
Operating activities of continuing operations $ 210.5 $ (33.6) $ 244.1
Investing activities of continuing operations $ (237.5) $ (95.5) $ (142.0)
Financing activities of continuing operations $ (833.9) $ 103.8 $ (937.7)
Discontinued operations $ 865.2 $ 52.6 $ 812.6
Cash flow from operating activities of continuing operations increased $244.1
million from a use of $33.6 million during the first nine months of 2000 to
$210.5 million during the first nine months of 2001, primarily as a result of
increased earnings, better working capital performance and lower quarterly tax
payments. Cash used in investing activities of continuing operations decreased
$142.0 million between periods mainly due to an acquisition (Hella Lighting) and
increased capital expenditures related to the expansion of the Company's carbon
disc brake producing capabilities and a large ERP project at the Company's
aerostructures operations. The significant increase in cash used in financing
activities between periods was primarily attributable to the repayment of all
outstanding short-term indebtedness with the proceeds from the Performance
Materials sale (see cash flow from Discontinued Operations above) and the
payment of $175 million related to notes that matured during the quarter.
The Company is also reviewing and plans to update its revolving credit
facilities to more appropriately reflect the Company on a post-spin basis.
Goodrich expects to offer to exchange the outstanding $300 million, 7.5 percent
Coltec senior notes, for similar Goodrich securities prior to the spin-off.
The Company also anticipates making a cash payment of approximately $20 million
during the fourth quarter of 2001 to repurchase certain collateralized
receivables that had been sold with recourse. The anticipated repurchase of
these receivables is a result of a customer default subsequent to September 30,
2001. The Company believes this amount is collectible and, as such, has not
recorded any additional reserves.
28
The Company's Board of Directors has declared a quarterly dividend of $.275 per
share, payable on January 2, 2002 to shareholders of record at the close of
business on December 3, 2001. The current dividend level will be reviewed in
early 2002 by the Company's Board of Directors in connection with the Engineered
Industrial Products spin-off, with the intent of adjusting it to a level
consistent with that of a post-spin peer group.
On September 17, 2001, Goodrich announced a program to repurchase up to $300
million of its common stock and has purchased approximately 2.2 million shares
through the end of the quarter. The total cost of these shares was $42.8 million
with an average price of $19.63 per share.
The Company expects to have adequate cash flow from operations and has the
credit facilities (described in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000) to satisfy its operating requirements and capital
spending programs, and to finance growth opportunities as they arise.
The Company's net debt-to-capitalization ratio (net of cash and cash
equivalents) was 41 percent at September 30, 2001 as compared to 59 percent at
December 31, 2000. For purposes of this ratio, the trust preferred securities
are treated as capital. The decrease was primarily attributable to the sale of
Performance Materials during the period and the use of proceeds to reduce
short-term indebtedness of the Company.
CONTINGENCIES
GENERAL
There are pending or threatened against Goodrich 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. Goodrich believes that
any liability that may finally be determined with respect to such claims,
lawsuits and proceedings 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.
ENVIRONMENTAL
Environmental liabilities are recorded when the Company's liability is probable
and the costs are reasonably estimable, which generally is not later than at
completion of a feasibility study or when the Company has recommended a remedy
or has committed to an appropriate plan of action. The accruals are reviewed
periodically and, as investigations and remediations proceed, adjustments are
made as necessary. Accruals for losses from environmental remediation
obligations do not consider the effects of inflation, and anticipated
expenditures are not discounted to their present value. The accruals are not
reduced by possible recoveries from insurance carriers or other third parties,
but do reflect anticipated allocations among potentially responsible parties at
federal Superfund sites or similar state-managed sites and an assessment of the
likelihood that such parties will fulfill their obligations at such sites. The
measurement of environmental liabilities by the Company is based on currently
available facts, present laws and regulations, and current technology. Such
estimates take into consideration the Company's prior experience in site
investigation and remediation, the data concerning cleanup costs available from
other companies and regulatory authorities, and the professional judgment of the
Company's environmental experts in consultation with outside environmental
specialists, when necessary.
The Company is subject to various domestic and international environmental laws
and regulations which may require that it investigate and remediate the effects
of the release or disposal of materials at sites associated with past and
present operations, including sites at which the Company has been identified as
a potentially responsible party under the federal Superfund laws and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws. Estimates of the Company's
liability are further subject to uncertainties regarding the nature and extent
of site contamination, the range of remediation alternatives available, evolving
remediation standards, imprecise engineering evaluations and estimates of
appropriate cleanup technology, methodology and cost, the extent of corrective
actions that may be required, and the number and financial condition of other
potentially responsible parties, as well as the extent of their responsibility
for the remediation. Accordingly, as investigation and remediation of these
sites proceeds, it is likely that adjustments in the Company's accruals will be
necessary to reflect new information. The amounts of any such adjustments
29
could have a material adverse effect on the Company's results of operations in a
given period, but the amounts, and the possible range of loss in excess of the
amounts accrued, are not reasonably estimable. Based on currently available
information, however, management does not believe that future environmental
costs in excess of those accrued with respect to sites with which the Company
has been identified are likely to have a material adverse effect on the
Company's financial condition. There can be no assurance, however, that
additional future developments, administrative actions or liabilities relating
to environmental matters will not have a material adverse effect on the
Company's results of operations in a given period.
At September 30, 2001, the Company's reserves for environmental remediation
obligations totaled $86.9 million, of which $11.5 million was included in
accrued liabilities. Of the $86.9 million, $13.0 million is associated with
ongoing operations and $73.9 million is associated with businesses previously
disposed of or discontinued.
The timing of expenditures depends on a number of factors that vary by site,
including the nature and extent of contamination, the number of potentially
responsible parties, the timing of regulatory approvals, the complexity of the
investigation and remediation, and the standards for remediation. The Company
expects that it will expend present accruals over many years, and will complete
remediation of all sites with which it has been identified in up to thirty
years. This period includes operation and monitoring costs which are generally
incurred over 15 years.
TOLO LITIGATION
In May 2000, the Company and its subsidiary Rohr, Inc. ("Rohr"), were served
with complaints in a lawsuit filed in the Superior Court of Orange County,
California, by former shareholders and certain former employees of Tolo, Inc.
Tolo, Inc. is a subsidiary of Rohr that was acquired in 1997. The former
shareholders alleged that the Company and Rohr breached the stock purchase
agreement by failing to pay $2.4 million under the terms of the agreement. In
September 2001, a jury found that the Company was liable to the shareholders for
the $2.4 million retained by Rohr under the stock purchase agreement and was
also assessed punitive damages of $48 million. The court subsequently reduced
the punitive damage award to $24 million.
At the time of the purchase the Company established a reserve of $2.4 million
relating to the amount withheld by Rohr pursuant to the stock purchase
agreement. The Company has not established an accrual for the punitive damages
award of $24 million, which was based on the plaintiff"s fraudulent concealment
claim, for the reasons set forth below.
The Company and its legal counsel believe that there were numerous points of
reversible error in the trial that make it more likely than not that the
judgment will be reversed or vacated on appeal. First, the Company believes the
plaintiffs' fraud claim is legally deficient under California law and should be
reversed. If the fraud claim is not reversed, defendants' should, at a minimum,
be granted a new trial on the fraudulent concealment claim because the trial
court permitted plaintiffs to add this claim late in the trial but did not allow
the Company to introduce evidence to defend against it. The Company also
believes that the trial court made numerous prejudicial errors regarding the
admission and exclusion of evidence relating to the fraud claims, which further
supports the grant of a new trial. And finally, the Company believes that the
trial court's directed verdict on plaintiffs' breach of contract claim should be
set aside and a new trial granted because, among other things, there was
sufficient evidence for the jury to find for the defendants on this claim.
DISCONTINUED OPERATIONS
Contingencies associated with Coltec and its subsidiaries, including
asbestos-related liabilities, are discussed in Note I to the condensed
consolidated financial statements. After the spin-off is completed, it is
possible that asbestos-related claims might be asserted against the Company on
the theory that it has some responsibility for the asbestos-related liabilities
of Coltec or its subsidiaries, even though the activities that led to those
claims occurred prior to the Company's ownership of Coltec. Also, it is possible
that a claim could be asserted against the Company that Coltec's dividend of its
aerospace business to the Company prior to the spin-off was made at a time when
Coltec was insolvent or caused Coltec to become insolvent. Such a claim could
seek recovery from the Company on behalf of Coltec of the fair market value of
the dividend.
No such claims have been asserted against the Company to date. The Company
believes that it would have substantial legal defenses against any such claims.
Any such claims would require, as a practical matter, that Coltec's subsidiaries
were unable to satisfy their asbestos-related liabilities and that Coltec was
found to be responsible for these liabilities and is unable to meet
30
its financial obligations. The Company believes any such claims would be without
merit and that Coltec will be solvent both before and after the dividend. If any
such claims were successful the Company believes it would not have a material
adverse effect on its financial condition, but could have a material adverse
effect on its results of operations or cash flows in a particular period.
CERTAIN AEROSPACE CONTRACTS
As discussed above, the Company's aerostructures business has a contract with
Boeing on the B717-200 program that is subject to certain risks and
uncertainties. The Company has pre-production inventory of $63.2 million related
to design and development costs on the B717-200 program at September 30, 2001.
In addition, the Company has excess-over-average inventory of $50.6 million
related to costs associated with the production of the flight test inventory and
the first production units on this program. 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 business is also in the business of re-engining 727
aircraft. The re-engining enables operators of these aircraft to meet sound
attenuation requirements as well as improve their fuel efficiency. The
aerostructures business has entered into several collateralized financing
arrangements to assist its customers and has also entered into certain off
balance sheet financing arrangements (primarily the sale of receivables with
recourse) related to this program. Collection of these receivables, as well as
the recovery of some portion of our investment in existing inventory balances,
may be negatively affected by the overall deterioration in the commercial
aerospace market noted above.
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 twelve 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, accounting systems 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 formation of a multi-discipline Euro
task force and the ability to quote its prices, invoice when requested by the
customer and issue pay checks to its employees on a dual currency basis. The
Company is in the process of converting its accounting systems, statutory
reporting and tax books and expects that the conversion will be completed on or
before December 31, 2001. The financial institutions with which the Company has
relationships have transitioned to the Euro successfully and are issuing
statements in dual currencies.
NEW ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"). This statement replaces FASB
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
125's provisions without reconsideration. SFAS 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The adoption of SFAS 140 did not have a material impact on
the Company's financial position or results of operations.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended, which requires that all derivative
instruments be reported on the balance sheet at fair value and that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge criteria are met. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
31
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded the previously unrecognized fair market value of an interest rate swap
designated as a fair value hedge and the associated adjustment to the carrying
amount of the debt instrument designated as the hedged item as cumulative-effect
adjustments to net income. As this pre-existing hedging relationship would have
met the requirements for the shortcut method at inception, the Company chose to
calculate the transition adjustment upon initial adoption as though the shortcut
method had been applied since the inception of the hedging relationship. The
effect of the adjustment to the carrying value of the debt was offset entirely
by the impact of recording the fair value of the interest rate swap.
Accordingly, the net cumulative-effect adjustment to net income was zero.
In July 2001, the FASB issued Statement No. 141 "Business Combinations" ("SFAS
141") and Statement No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 is effective as follows: a) use of the pooling-of-interest method is
prohibited for business combinations initiated after June 30, 2001; and b) the
provisions of SFAS 141 also apply to all business combinations accounted for by
the purchase method that are completed after June 30, 2001. There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. SFAS 142 is effective
for fiscal years beginning after December 15, 2001 and applies to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized.
The Company completed two acquisitions in the third quarter of 2001 and has not
recorded any amortization on amounts preliminarily allocated to goodwill in
accordance with SFAS 141.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of approximately $29 million per year. As provided for in the
transition provisions of SFAS 142, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets
during the first six months of 2002. The Company has not yet determined what the
effect of these tests will be on the Company's financial condition or results of
operations.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company has not yet determined what the effect of SFAS 143 will be
on its consolidated financial condition or results of operations.
In October 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
FASB Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), however it retains the
fundamental provisions of that statement related to the recognition and
measurement of the impairment of long-lived assets to be "held and used." In
addition, SFAS 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset (group) to be
disposed of other than by sale (e.g. abandoned) be classified as "held and used"
until it is disposed of, and establishes more restrictive criteria to classify
an asset (group) as "held for sale." SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company has not yet determined what the
effect of SFAS 144 will be on its consolidated financial condition or results of
operations.
32
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements made in this release are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 regarding
the company's future plans, objectives, and expected performance. Specifically,
statements that are not historical facts, including statements accompanied by
words such as "believe," "expect," "anticipate," "intend," "estimate" or "plan",
are intended to identify forward-looking statements and convey the uncertainty
of future events or outcomes. The Company cautions readers that any such
forward-looking statements are based on assumptions that the Company believes
are reasonable, but are subject to a wide range of risks, and actual results may
differ materially.
Important factors that could cause actual results to differ include, but are not
limited to:
- global demand for aircraft spare parts and aftermarket services;
- the impact of the terrorist attacks on September 11, 2001 and
their aftermath;
- the timing related to restoring consumer confidence in air
travel;
- the health of the commercial aerospace industry, including the
impact of bankruptcies in the airline industry;
- the extent to which the Company is able to achieve savings from
its restructuring plans;
- the timing and successful completion of the spin-off of the
Company's Engineered Industrial Products business;
- the successful completion of Coltec's dividend of its aerospace
business to the Company;
- the solvency of Coltec at the time of and subsequent to the EIP
spin-off;
- demand for and market acceptance of new and existing products,
including potential cancellation of orders by commercial
customers;
- successful development of advanced technologies;
- competitive product and pricing pressures;
- domestic and foreign government spending, budgetary and trade
policies;
- economic and political changes in international markets where
the Company competes, such as changes in currency exchange
rates, inflation rates, recession and other external factors
over which the Company has no control; and
- the outcome of contingencies (including completion of
acquisitions, divestitures, litigation and environmental
remediation efforts).
The Company cautions you not to place undue reliance on the forward-looking
statements contained in this release, which speak only as of the date on which
such statements were made. The Company undertakes 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.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are defendants in various lawsuits
involving asbestos-containing products. In addition, the Company has been
notified that it is among potentially responsible parties under federal
environmental laws, or similar state laws, relative to the cost of investigating
and in some cases remediating contamination by hazardous materials at several
sits. See Notes I and L to the accompanying condensed consolidated financial
statements, which are incorporated herein by reference.
In May 2000, the Company and its subsidiary Rohr, Inc. ("Rohr"), were served
with complaints in a lawsuit filed in the Superior Court of Orange County,
California, by former shareholders and certain former employees of Tolo, Inc.
Tolo, Inc. is a subsidiary of Rohr that was acquired in 1997. The former
shareholders alleged that the Company and Rohr breached the stock purchase
agreement by failing to pay $2.4 million under the terms of the agreement. In
September 2001, a jury found that the Company was liable to the shareholders for
the $2.4 million retained by Rohr under the stock purchase agreement and was
also assessed punitive damages of $48 million. The court subsequently reduced
the punitive damage award to $24 million.
At the time of the purchase the Company established a reserve of $2.4 million
relating to the amount withheld by Rohr pursuant to the stock purchase
agreement. The Company has not established an accrual for the punitive damages
award of $24 million, which was based on the plaintiff"s fraudulent concealment
claim, for the reasons set forth below.
The Company and its legal counsel believe that there were numerous points of
reversible error in the trial that make it more likely than not that the
judgment will be reversed or vacated on appeal. First, the Company believes the
plaintiffs' fraud claim is legally deficient under California law and should be
reversed. If the fraud claim is not reversed, defendants' should, at a minimum,
be granted a new trial on the fraudulent concealment claim because the trial
court permitted plaintiffs to add this claim late in the trial but did not allow
the Company to introduce evidence to defend against it. The Company also
believes that the trial court made numerous prejudicial errors regarding the
admission and exclusion of evidence relating to the fraud claims, which further
supports the grant of a new trial. And finally, the Company believes that the
trial court's directed verdict on plaintiffs' breach of contract claim should be
set aside and a new trial granted because, among other things, there was
sufficient evidence for the jury to find for the defendants on this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 10(II) Goodrich Corporation Severance Program. *
Exhibit 10(JJ) Amendment No. 1 to Goodrich Corporation 2001
Stock Option Plan. *
Exhibit 10(KK) Amendment No. 1 to Goodrich Corporation Employee
Stock Purchase Plan. *
* Previously filed.
34
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company
during the quarter ended September 30, 2001:
Current Report on Form 8-K filed July 20, 2001 (relating to the
announcement of the Company's conference call regarding its second
quarter 2001 earnings).
Current Report on Form 8-K filed July 23, 2001 (relating to the
announcement of the Company's earnings for the three-month and six-month
periods ended June 30, 2001).
Current Report on Form 8-K filed September 4, 2001 (relating to the
announcement that the Company's Board of Directors approved in principle
the tax-free spin-off of the Company's Engineered Industrial Products
business to shareholders).
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 14, 2002 Goodrich Corporation
/S/ULRICH SCHMIDT
-------------------------------
Ulrich Schmidt
Senior Vice President and
Chief Financial Officer
/S/ROBERT D. KONEY, JR.
-------------------------------
Robert D. Koney, Jr.
Vice President & Controller
(Chief Accounting Officer)
36