EXHIBIT 13
ROHR PROFILE
INCORPORATED IN DELAWARE in 1969, Rohr, Inc. is the successor to an aerospace
manufacturing company founded in San Diego in 1940 and is now headquartered in
Chula Vista, California.
The Company had approximately 3,800 full-time employees at the end of fiscal
1996 and is an equal opportunity employer.
SHAREHOLDER INFORMATION
Rohr's common stock is traded principally on the following markets:
. New York Stock Exchange (RHR) . Pacific Stock Exchange (RHR)
. The Stock Exchange, London
The number of common shareholders of record on July 31, 1996 was 4,187. The
Company's fiscal year is from August 1 to July 31.
10-K REPORT REQUESTS
The Company will provide a copy of its most recent report to the Securities and
Exchange Commission on Form 10-K (excluding the exhibits thereto) upon the
written request of any beneficial owner of the Company's securities as of the
record date for the Annual Meeting (October 9, 1996) without charge. Copies of
the exhibits to Form 10-K are also available upon request and after payment of
the cost of reproducing such exhibits. Such requests should be addressed to
Rohr, Inc., Attention: Shareholders Services, 850 Lagoon Drive, Chula Vista, CA
91910-2098.
TRANSFER AGENT AND REGISTRAR COMMUNICATING WITH ROHR
Rohr's common stock transfer agent and registrar Mailing Address Parcel Deliveries:
is the First Chicago Trust Co. of New York at: 850 Lagoon Drive
Chula Vista, CA 91910-2098
P.O. Box 2500, Jersey City, NJ 07303-2500
(Correspondence and address changes) Main Telephone: (619) 691-4111
P.O. Box 2506, Jersey City, NJ 07303-2506 Employment: (619) 691-3022
(Certificate transfers) Fax: (619) 691-4103
Investor Relations: (619) 691-3002
Telephone: (800) 446-2617 Fax: (619) 691-2222
Internet address http://www.fctc.com Purchasing: (619) 691-2331
Fax: (619) 691-2584
E-Mail address: FCTC@delphi.com
Shareholders Records
and Services: (619) 691-2214
Fax: (619) 691-2801
Telex: 69-5038
STOCK PRICE BY FISCAL QUARTER
1996 1995
High Low High Low
- --------------------------------------------------------------------------------
First Quarter $16-7/8 $14-3/4 $12-1/8 $ 8-5/8
Second Quarter 18-3/8 13-1/2 12-1/4 8-1/4
Third Quarter 18-7/8 15-7/8 12-3/4 10
Fourth Quarter 23 17 15-3/8 10-3/8
===============================================================================
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis presents management's assessment of
material developments affecting the Company's results of operations, liquidity
and capital resources for each of the three years in the period ended July 31,
1996. These discussions should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto.
On certain long-term programs under which spares are sold directly to the
airlines, the Company accounts for profit and loss under the program method of
accounting. Under the program method of accounting, the quantity of units in
the profit center includes existing and anticipated orders and is predicated
upon contractual arrangements with customers and market forecasts. Included
within the program quantity are spares anticipated to be sold concurrent with
production units which historically have increased as a percentage of total
deliveries as a program matures. Generally, spares have been sold at higher
prices than production units. This inclusion of anticipated orders for
production units and spares in the program quantity generally increases margins
in the early program years and decreases margins in the later program years
compared to the margins that would be reported under other methods of
accounting. Programs for which the Company uses the program method of
accounting and for which spares are significant are as follows: V2500, CF6-80C,
CFM56-5, A340, and MD-90. See "Notes to the Consolidated Financial Statements --
Note 1b."
INDUSTRY OUTLOOK
Demand for new commercial jet aircraft is dependent upon consumer demand for
air travel, the financial condition and earnings of aircraft operators (which is
generally related to the stability of fuel and ticket prices), and the
availability of surplus or "parked" aircraft. In addition, demand is dependent
on the replacement of older aircraft which is influenced by the aging of the
fleet and the time required for, and the economics of, compliance with noise and
maintenance regulations. Historically, such demands and financial conditions
have been related to the stability and health of the United States and world
economies. Since the production of aircraft involves long lead times,
production cycles in the aircraft manufacturing industry typically lag behind
changes in the general economy.
Demand for new commercial aircraft has been growing. Since 1993, airline
traffic has increased over 6 percent per year and analysts expect continued
growth to average approximately 5 percent per year over the next twenty years.
Airlines have improved their utilization of aircraft which, combined with stable
fare structures and aggressive cost reduction measures has resulted in
substantially improved airline profitability. The number of surplus or "parked"
aircraft continues to decline with 682 surplus aircraft at May 31, 1996,
compared to the peak of 1,103 surplus aircraft in 1994. A significant number
2
of these surplus aircraft are not expected to return to service. In addition,
noise regulations require the replacement or modification of Stage Two aircraft
by 2000 in the United States and shortly thereafter in most other developed
countries.
Aircraft operators have responded to the improved market conditions and their
improved profitability by ordering large quantities of new commercial aircraft.
Orders rose to 679 aircraft in calendar 1995 and 700 through September of 1996,
compared to 321 in all of 1994. Deliveries of new aircraft, which lag behind
orders, decreased in calendar 1995 to 443, down from 495 in 1994 and from the
industry peak of 830 in 1991. Industry analysts also predict a potentially
large replacement market for commercial aircraft driven by noise legislation and
the need to replace aging fleets.
COMPANY OUTLOOK
Predicated upon customer scheduled delivery requirements, the Company expects
sales to increase at least 15 percent in fiscal 1997 as compared to fiscal 1996,
primarily as a result of increased deliveries scheduled in the latter half of
fiscal 1997. Due to the timing and mix of sales, the Company expects that its
operating margins in the first half of fiscal 1997 will be lower than the
operating margin before unusual items in fiscal 1996. Management continues to
work toward improving operating margins and believes that margins for the entire
fiscal year 1997 will approximate those achieved in fiscal 1996.
The Company continues to pursue additional business opportunities with its
customers, and at present is attempting to obtain work on the new Boeing 747
model 500/600 aircraft and also believes, as rates of aircraft deliveries
increase, there will be an opportunity for the Company to obtain additional work
from The Boeing Company on existing aircraft nacelle programs.
In response to the slow-down in the commercial aerospace industry which began
in the early 1990s, and in preparation for an upturn in the industry, management
has taken aggressive actions over the last several years to reduce costs,
improve quality, increase competitiveness, improve margins and maximize cash
flows. The Company has improved the ratio of indirect employees to direct
employees, resulting in a significant reduction in overhead expense. The
Company has also incorporated and is in the process of incorporating design
changes on certain programs to manufacture products on a more cost-effective
basis. In addition, the Company has implemented concurrent product development
and commenced the implementation of a lean manufacturing initiative to further
reduce costs and improve quality. As a result of these actions, and other
actions taken over the last several years, the Company believes it is well-
positioned to respond to the increasing demand for aircraft products.
3
FORWARD LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This document includes forward looking statements, as defined in the Private
Securities Litigation Reform Act of 1995, that involve risk and uncertainty.
Actual sales in fiscal year 1997 may be materially less than the sales projected
in the forward looking statements if the Company's customers cancel or delay
current orders or reduce the rate at which the Company is building or expects to
build products for such customers. Such cancellations, delays or reductions may
occur if there is a substantial change in the health of the airline industry or
in the general economy, or if a customer were to experience major financial
difficulties. Margins may differ from those projected in the forward looking
statements if management does not achieve success in improving margins or if
performance, mix of sales, or other events occur that differ from the estimates
used in preparing the Company's financial statements.
4
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Sales declined to $770.8 million in fiscal 1996 from $805.0 million in fiscal
1995. Sales in fiscal 1996 benefited from increased MD-90 deliveries and
approximately $30 million of one-time sales related to Boeing and International
Aero Engines programs. Overall, sales declined from fiscal 1995 primarily due
to delivery rate reductions on the PW4000, RB211-535 and CF6-80C programs. In
addition, government sales declined due to the near completion of the C-130
and the Titan Space programs.
The Company reported operating income of $69.1 million, an operating margin of
9.0 percent for fiscal 1996, excluding the impact of the unusual items discussed
below. Including the effect of the unusual items of $12.4 million, operating
income was $56.7 million, a margin of 7.4 percent. The unusual items, were a
loss on the sale of Rohr Credit Corporation, a Company subsidiary whose
principal assets were beneficial interests in two aircraft, and an impairment
write-down on the Company's Arkadelphia, Arkansas facility. Operating results
in fiscal 1995 were $64.6 million, a margin of 8.0 percent. Operating results
in fiscal 1996 were impacted by the change in sales described above, several
one-time items, and the resolution of outstanding issues on several programs,
some of which will have a favorable on-going impact.
The Company negotiated the sale of Rohr Credit Corporation, a Company
subsidiary whose principal assets were beneficial interests in two aircraft (an
A300 and a DC10), on lease through 2003 and 2004, respectively. The Company
recorded a $5.2 million pre-tax loss as a result of this sale, but retained an
interest in the residual value of these assets through which it could recover
additional amounts in the future. The Company also recorded a receivable in the
amount of $20.1 million (collected subsequent to year-end) and a secured note in
the amount of $7.5 million in connection with the sale.
As a result of the slowdown over the last several years in the commercial
aerospace industry and reductions in the Company's military and space programs,
many of the Company's facilities are currently operating below capacity. The
Company has been reviewing its long-range site strategy and assessing the
facilities necessary to meet its future needs including the potential favorable
operating effect of lean manufacturing. As a result of the review, the Company
has taken a $7.2 million pre-tax impairment write-down on its Arkadelphia,
Arkansas facility to estimated net realizable value and intends to seek a buyer
for the facility. The Company intends to continue to review its site strategy
and facilities with respect to its current and projected needs.
5
Net interest expense was $46.0 million in fiscal 1996 compared to $50.0
million for fiscal 1995. Interest expense declined primarily due to principal
payments made in the fourth quarter of fiscal year 1995 on the Company's 9.33%
and 9.35% Senior Notes and the conversion of the Convertible Subordinated Notes,
as discussed below.
During fiscal 1996, the Company exchanged 4.0 million shares of the Company's
common stock for $37.8 million of its 7.75% Convertible Subordinated Notes due
2004. The Convertible Subordinated Notes, of which $19.7 million remain
outstanding at July 31, 1996, are convertible into shares of common stock at a
conversion price of $10.35 per share and are redeemable at the Company's option,
beginning in May 1998, at a price of 104.7%, declining to par at maturity. The
shares of common stock issued in the exchanges in excess of the shares required
for conversion were valued at $5.4 million, which was expensed in fiscal 1996.
The value of the additional shares of common stock issued represents only a
portion of the interest expense the Company would have incurred on the exchanged
notes through May 1998, the first date on which the Company could force
conversion by calling the notes for redemption.
The impact of the charge for the exchange of the convertible notes and the
unusual items described above was to reduce net income for fiscal 1996 by $10.6
million or 51 cents per share. Income from continuing operations for fiscal
1996 after these items was $3.2 million or 16 cents per share compared to income
from continuing operations for fiscal 1995 of $8.5 million or 47 cents per
share. Total net income for fiscal 1995 was $11.2 million or 62 cents per
share, which included $3.8 million or 21 cents per share from the discontinuance
of the business jet line of business and an extraordinary loss, net of income
tax benefit, of $1.1 million or 6 cents per share.
FISCAL 1995 COMPARED TO FISCAL 1994
Sales from continuing operations declined 12 percent from $918.1 million in
fiscal 1994 to $805.0 million in fiscal 1995. Commercial sales declined
primarily as a result of reduced deliveries of commercial aircraft. Government
sales declined due to the near completion of certain military and space
programs.
The Company reported operating income of $64.6 million, a margin of 8 percent,
for fiscal 1995 compared to $59.3 million, a margin of 6.5 percent (excluding
the impact from unusual items), for fiscal 1994. Including the effect of the
unusual items of $7.9 million, operating income for fiscal 1994 was $51.4
million, a margin of 5.6 percent. Operating results in fiscal 1995 benefited
from initial deliveries on the MD-90 program, improved results on several other
programs, and a reduction in general and administrative expense.
6
Net interest expense was $50.0 million for the year ended July 31, 1995,
compared to $46.8 million for fiscal 1994. Net interest expense increased due
to the $157.5 million of public debt offerings completed in the fourth quarter
of fiscal 1994.
Income from continuing operations for fiscal 1995 was $8.5 million or 47 cents
per share compared to income from continuing operations for fiscal 1994 of $4.7
million or 26 cents per share. In fiscal 1994, the net impact of unusual items
was to reduce income from continuing operations by $4.8 million or 27 cents per
share.
Discontinued Operations
In the fourth quarter of fiscal 1994, the Company sold and commenced the
transfer of its business jet line of business which was accounted for as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30. The purchase agreement required the Company to manufacture and deliver
certain components and transfer program engineering and tooling, tasks which
were substantially completed in fiscal 1995. The business jet line of business
sales were approximately $22.3 million and $40.3 million in fiscal 1995 and
fiscal 1994, respectively. Income from discontinued operations, net of income
tax benefit, was $3.8 million or 21 cents per share for fiscal 1995 compared to
$2.2 million or 12 cents per share for fiscal 1994. See "Notes to the
Consolidated Financial Statements -- Note 11."
Extraordinary Item
In line with the objective of reducing its debt and interest expense, the
Company prepaid a portion of its 9.33% and 9.35% Senior Notes during the fourth
quarter of fiscal 1995. The cost associated with the early extinguishment of
this debt has been reported as an extraordinary item. Loss from the
extraordinary item, net of income tax benefit, was $1.1 million or 6 cents per
share for fiscal 1995. See "Notes to the Consolidated Financial Statements --
Note 7."
Net Income
Total net income for fiscal 1995 was $11.2 million or 62 cents per share
compared to $6.9 million or 38 cents per share in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The primary factors that affect the Company's liquidity are cash flow from
operations and investing in new programs (which require significant development
expenditures and inventory buildup that may be partially offset through the
participation of major subcontractors). Delivery levels under existing
programs, payment terms with customers, capital facilities expenditures, debt
service, and the timing of defined benefit plans and federal income tax payments
also affect the Company's liquidity and cash flow.
7
At July 31, 1996, the Company had $88.4 million of cash and cash equivalents.
Cash provided by operating activities during fiscal 1996 totaled $7.8 million,
compared to $27.5 million for the prior fiscal year. Cash provided by operating
activities in fiscal year 1995 benefited from improved collection efforts on
receivables. Cash flow from operations in 1996 decreased, in large part, due to
increased receivables caused by the high level of sales in the fourth quarter.
Cash provided by operations is subject to significant variations from period to
period.
The Company's net inventory decreased slightly to $382.4 million at July 31,
1996, from $390.3 million at July 31, 1995. As programs mature, the Company's
pre-production inventory is declining through amortization of cost over unit
deliveries. In fiscal 1996, this decline was partially offset by the increase
in design expenditures and investments on programs early in their production
life such as the BR715-MD95 program. In addition, inventory increased on
several programs due to build up of inventory to support additional deliveries
in fiscal year 1997. Over the next several years, the Company expects to
increase its investments in inventory in connection with developmental
expenditures on new programs, increased deliveries, and anticipated new business
opportunities.
Beginning in November 1994, inspections of certain commercial aircraft
revealed three aircraft with a cracked spar cap on a wing pylon. These wing
pylon spar caps were purchased by a major subcontractor from one of its
suppliers and then assembled and supplied to the Company. The Company has
implemented a replacement program, which is approximately half complete, through
which the spar caps on approximately 120 aircraft are being replaced. The spar
caps are warranted to Rohr by its subcontractor, and subsequent to year end, the
Company reached an agreement with its subcontractor under which the
subcontractor bears the substantial portion of the replacement cost. Costs
borne by the Company are within provision previously provided. In addition, the
Company acquired other materials directly from the supplier who manufactured the
spar cap. The Company has completed testing of this other material and believes
that no replacement or repair is required.
Total financings, which includes balance sheet debt, a $40.0 million on-going
accounts receivable sales program (described below) and $21.8 million of
equipment leases, totaled $569.2 million at July 31, 1996, down from $605.6
million at July 31, 1995. This reduction is due primarily to the negotiated
exchanges during the year of common stock for $37.8 million of the Company's
7.75% Convertible Subordinated Notes, resulting in an increase to stockholders'
equity of $42.3 million. As expected the Company made its annual $12.0 million
principal payment on its 9.35% Senior Notes.
The Company sells certain receivables under a $40 million receivable financing
program. From time to time, the amount of outstanding qualified receivables
falls below levels required to support the facility. As a result, the Company
has elected to deposit cash collateral when necessary to support the facility
and has withdrawn cash when it is not longer required to be deposited. The
Company had no amounts on deposit at July 31, 1996 and cash collateral on
deposit totaling $13.5 million at July 31, 1995.
8
During fiscal 1996, the Company improved the underfunded status (excess of
accrued benefit obligations over plan assets) of its primary defined benefit
plans to $53.0 million, down $11.0 million from the end of the prior year. The
defined benefit plans' funded status is primarily impacted by discount rates
(which are changed annually to reflect prevailing market interest rates), market
performance of plan assets, the granting of additional benefits, changes in
actuarial assumptions including mortality assumption, and fundings made by the
Company during the year. During fiscal 1996, the funded status of the plans
improved primarily as a result of substantial market gains in plan assets,
partially offset by the use of a lower discount rate and increased benefits
granted on a retroactive basis during recent union negotiations. Reflecting a
decrease in market interest rates, the Company reduced its benefit plan discount
rate to 7.75 percent for its fiscal 1996 valuation from 8.25 percent used for
the prior year's valuation. The decrease in the underfunded status of the plans
resulted in a $12.0 million reduction in the charge to shareholders' equity,
down to $26.4 million from $38.4 million at the end of the prior year. During
fiscal 1996, in light of the improved market performance of plan assets, the
Company made cash contributions of $10.6 million, down from $39.7 million paid
during fiscal 1995. On September 16, 1996, the Company announced it intends to
issue approximately $50 million of its common stock, the proceed of which
(together with additional cash) would be used to fully fund the two pension
plans. The Company is considering either a public offering of registered stock
or a direct contribution of unregistered stock to the two plans. If the stock is
registered, the offering will be made only by means of a prospectus. If the
stock is contributed directly to the plans, it will be contributed pursuant to
an exemption for federal securities registration requirements.
Capital expenditures for property, plant, and equipment totaled $13.0 million
for fiscal 1996, up from $8.1 million for fiscal 1995. The level of spending is
expected to increase over the next several years.
The Company's firm backlog, which includes the sales price of all undelivered
units covered by customers' orders, was approximately $1.2 billion at July 31,
1996, compared to $1.0 billion at July 31, 1995. Approximately $700 million of
the $1.2 billion backlog is scheduled to be delivered in fiscal 1997. (Sales
during any period include sales which were not part of backlog at the end of the
prior period.) Customer orders in firm backlog are subject to rescheduling
and/or termination for customer convenience; however, in certain cases, the
Company is entitled to an adjustment in contract amounts.
The Company has also entered into preliminary discussions with banks to
replace its existing revolving credit agreement which matures in April, 1997,
and expects to successfully replace such agreement. Accordingly, the Company
believes that its financial resources are adequate to meet its financial
requirements over the next several years.
9
ENVIRONMENTAL MATTERS
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), and under certain analogous state
laws for the cleanup of contamination resulting from past disposal of hazardous
substances at several sites to which the Company, among others, sent such
substances in the past. CERCLA requires the cleanup of sites from which there
has been a release or threatened release of hazardous substances, and authorizes
the Environmental Protection Agency ("EPA") to take any necessary response
actions at such sites, including ordering PRPs to clean up or contribute to the
cleanup of a Superfund site. Courts have interpreted CERCLA to impose strict,
joint, and several liability upon all persons liable for response cost.
In June 1987, the U.S. District Court of Los Angeles, in U.S. et al., vs.
Stringfellow, granted partial summary judgment against the Company and 14 other
defendants on the issue of liability under CERCLA, at the Stringfellow site near
Riverside, California. Subsequently, the State of California was found liable
and an allocation of its responsibility was made. The most recent estimate the
Company has made of its liability, assuming the court order allocating
substantial liability to the State of California is upheld, assuming the 1989
EPA estimate of total cleanup costs is not exceeded (although the EPA cautioned
the actual costs could have a variation of 30 percent less or 50 percent higher
than its estimate), and assuming tentative allocations among the Company and all
other users of the site will approximate the final allocation of aggregate user
liability, shows a Company expenditure ranging from $5 million to $8 million
over and above sums spent to date. However, the Company estimates further
assume that the EPA selects a final remedial action of moderate technology and
cost, rather than one of several more radical ones previously suggested, but
apparently discarded at this point, by the EPA. Expenditures by the Company for
cleanup of this site during fiscal 1996 were approximately $35,000 and are
expected to be approximately $250,000 during fiscal 1997. From inception to
July 31, 1996, the Company has expended approximately $3.7 million on cleanup
costs for this site. Applicable law provides for continuing liability for
future remedial work beyond existing agreements and consent decrees. The
Company has reached settlement agreements with its primary comprehensive general
liability insurers and has retained the right to file future claims against its
excess carriers. The Company recorded the proceeds from such settlements
received from its carriers as reserves. The Company has not recorded any other
amounts with respect to its rights against its insurers.
The Company is also involved in several other proceedings and investigations
related to waste disposal sites and other environmental matters. It is
difficult to estimate the ultimate level of environmental expenditures for these
various other environmental matters due to a number of uncertainties at this
early stage, including the complexity of the related laws and their
interpretation, alternative cleanup technologies and methods, insurance and
other recoveries, and in some cases the extent or uncertainty of the Company's
involvement. However, preliminary estimates of cleanup costs for the Rio Bravo
and Casmalia waste disposal sites were approximately $7 million and $70 million
10
respectively, and the Company's share (based on estimated, respective volumes of
discharges into such sites by all generators, all of which cannot now be known
with certainty) could approximate $500,000 for the Rio Bravo site and $1.8
million for the Casmalia site. The Company does not yet know about the ability
of all of the other waste generators using the Casmalia and Rio Bravo sites to
fund their allocable share, and the Company could be found jointly and severally
liable with all waste generators using such sites. The Company has made claims
against its insurance carriers for certain of these items, and has received
claims acknowledgment letters reserving the rights of such carriers. The
insurers have alleged or may allege various defenses to coverage, although no
litigation has been commenced.
During the year ended July 31, 1996, the Company expended, for the
environmental items described above and also for other environmental matters
(including environmental protection activities in the normal operation of its
plants), a total of approximately $6.1 million. These expenditures covered
various environmental elements, including hazardous waste treatment and disposal
costs, environmental permits, environmental consultants, fines or donations
(which were not material, either individually or in the aggregate), and
environmental remediation (including Stringfellow), no significant part of which
was capitalized. Assuming the usage of all of these various environmental
elements remains substantially the same for fiscal 1997 as in fiscal 1996, which
the Company anticipates, costs for these elements in fiscal 1997 should be
comparable to the current rate of expenditure for fiscal 1996.
Based upon presently available information, the Company believes it has
sufficient reserves and that aggregate costs in relation to all environmental
matters of the Company will not have a material adverse effect on the Company's
financial condition, liquidity, results of operations or capital expenditures.
INCOME TAXES
At July 31, 1996, the Company's net deferred tax asset was $100.6 million,
consisting of $87.6 million for federal tax purposes and $13.0 million for state
tax purposes. Statement of Financial Accounting Standards (SFAS)No. 109
requires that deferred income taxes be classified on the balance sheet
predicated upon the categorization of the item to which the deferred tax is
attributed. The resulting classification is not necessarily indicative of when
taxes will be paid or deductions utilized. In addition, the Company has
considerable net operating loss carryforwards and expects that tax payments in
the near term will be minimal. The ultimate realization of the Company's
deferred tax asset is dependent upon the generation of sufficient future taxable
income during the available federal and state NOL carryforward periods.
Management expects that a sufficient level of taxable income will result in
years subsequent to fiscal 1996 and prior to the expiration of the NOLs to
realize the deferred tax asset recorded at July 31, 1996.
11
The Company's long-term contracts and programs provide the Company
opportunities to generate future taxable income necessary to realize the
deferred tax asset recorded. During the rapid growth cycle in the late 1980's
and early 1990's, the Company made significant investments in new facilities and
in new programs. As programs mature, the Company expects to utilize its
investments, resources, and experience to reduce the cost of production.
Recently the Company has been able to reduce its work force through
consolidation and downsizing. In addition, direct sales of spare parts to the
airlines are expected to increase as a program matures. Generally, the Company
earns a higher margin on the direct sales of spare parts to the airlines. Based
on tax rates in effect on July 31, 1996, the Company must generate approximately
$266 million of future taxable income (net of $294 million of taxable income
that the Company will report as a result of the automatic reversal of existing
taxable temporary differences between asset and liability values for financial
reporting and income tax purposes) prior to the expiration of the Company's NOLs
in 2003 through 2012 for full realization of the net deferred tax asset.
The availability of the Company's NOLs may be limited under the Tax Reform Act
of 1986 as a result of significate changes that could occur in the ownership of
the Company's stock in the future. Management has considered this factor in
reaching its conclusion that it is "more likely than not" that future taxable
income will be sufficient to realize fully the deferred tax asset reflected on
the balance sheet.
Late in fiscal 1996, the Company received a Revenue Agent's Report ("RAR")
from the Internal Revenue Service in connection with the audit of the Company's
federal income tax returns for fiscal years 1986 through 1989. In the RAR, the
agent has challenged the timing of various deductible items, some of which are
significant. Based upon its review to date, the Company expects to contest
substantially all the proposed adjustments and believes it will prevail on all
material items. The Company anticipates that any adjustment made to its
reported taxable income for the years under audit will increase the amount of
the net operating loss available for carryback purposes and therefore the audit
adjustments will not have a material adverse impact on the financial position of
the Company.
12
CONSOLIDATED BALANCE SHEETS
(in thousands)
JULY 31,
- ---------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 88,403 $ 84,584
Accounts receivable 129,523 72,152
Inventories:
Work-in-process 423,312 429,578
Raw materials, purchased parts and supplies 26,220 23,367
Less customers' progress payments and advances (67,165) (62,670)
- ---------------------------------------------------------------------------------
Inventories - net 382,367 390,275
Deferred tax asset - 6,493
Prepaid expenses and other current assets 14,587 13,685
- ---------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 614,880 567,189
PROPERTY, PLANT AND EQUIPMENT - NET 196,052 217,051
INVESTMENT IN LEASES - 34,657
DEFERRED TAX ASSET 156,863 105,020
OTHER ASSETS 64,742 52,623
- ---------------------------------------------------------------------------------
$1,032,537 $976,540
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts and other payables $ 125,974 $126,312
Salaries, wages and benefits 44,094 32,011
Deferred income tax liability 56,250 -
Short-term debt and current portion of long-term debt 25,962 14,119
- ---------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 252,280 172,442
LONG-TERM DEBT 481,481 540,658
PENSION AND POST-RETIREMENT OBLIGATIONS - LONG-TERM 46,096 69,386
OTHER OBLIGATIONS 17,503 18,123
COMMITMENTS AND CONTINGENCIES (NOTE 8) - -
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value per share,
10 million shares authorized, none issued - -
Common stock, $1 par value per share,
authorized 50,000,000 shares; issued and
outstanding 22,329,793 and 18,068,076 shares,
respectively 22,330 18,068
Additional paid-in capital 142,656 102,887
Retained earnings 96,622 93,394
Minimum pension liability adjustment (26,431) (38,418)
- ---------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 235,177 175,931
- ---------------------------------------------------------------------------------
$1,032,537 $976,540
=================================================================================
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
13
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per-share data)
YEAR ENDED JULY 31,
- --------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------
SALES $770,814 $805,000 $918,141
COSTS AND EXPENSES 674,471 714,173 830,474
GENERAL AND ADMINISTRATIVE EXPENSES 27,233 26,198 28,352
UNUSUAL ITEMS (NOTE 2) 12,395 - 7,926
- --------------------------------------------------------------------------------------------
OPERATING INCOME 56,715 64,629 51,389
INTEREST INCOME 2,735 4,015 2,236
INTEREST EXPENSE 48,702 54,001 49,072
CHARGE FOR EXCHANGE OF CONVERTIBLE NOTES (NOTE 7) 5,350 - -
- --------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES (BENEFIT) ON INCOME 5,398 14,643 4,553
TAXES (BENEFIT) ON INCOME 2,170 6,150 (116)
- --------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 3,228 8,493 4,669
INCOME FROM DISCONTINUED OPERATIONS
- NET OF TAXES (NOTE 11) - 3,879 2,258
- --------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 3,228 12,372 6,927
LOSS FROM EXTRAORDINARY ITEM - NET OF TAXES (NOTE 7) - (1,146) -
- --------------------------------------------------------------------------------------------
NET INCOME $ 3,228 $ 11,226 $ 6,927
============================================================================================
PRIMARY EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK FROM:
Continuing Operations $ 0.16 $ 0.47 $ 0.26
Discontinued Operations - 0.21 0.12
Extraordinary Item - (0.06) -
- --------------------------------------------------------------------------------------------
NET PRIMARY EARNINGS PER AVERAGE SHARE $ 0.16 $ 0.62 $ 0.38
============================================================================================
FULLY DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK FROM:
Continuing Operations $ 0.16 $ 0.47 $ 0.26
Discontinued Operations - 0.16 0.12
Extraordinary Item - (0.05) -
- --------------------------------------------------------------------------------------------
NET FULLY DILUTED EARNINGS PER AVERAGE SHARE $ 0.16 $ 0.58 $ 0.38
============================================================================================
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
- -----------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL MINIMUM PENSION
PAR VALUE PAID-IN RETAINED LIABILITY
$1 A SHARE CAPITAL EARNINGS ADJUSTMENT
- -----------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1993 $17,996 $102,312 $ 75,241 $(13,306)
Stock plans activity 46 286 --- ---
Net Income --- --- 6,927 ---
Minimum pension liability adjustment (Note 9) --- --- --- (42,593)
- -----------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1994 18,042 102,598 82,168 (55,899)
Stock plans activity 26 289 --- ---
Net Income --- --- 11,226 ---
Minimum pension liability adjustment (Note 9) --- --- --- 17,481
- -----------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1995 18,068 102,887 93,394 (38,418)
Stock plans activity 253 1,472 --- ---
Conversion of 7.75% Convertible Subordinated Notes 4,009 38,297 --- ---
Net Income --- --- 3,228 ---
Minimum pension liability adjustment (Note 9) --- --- --- $11,987
- -----------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1996 $22,330 $142,656 $ 96,622 $(26,431)
===========================================================================================================
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands)
YEAR ENDED JULY 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 3,228 $ 11,226 $ 6,927
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,442 22,148 22,538
Unusual items 12,395 - -
Charge for exchange of convertible notes 5,350 - -
Changes due to (increase) decrease in operating assets:
Accounts receivable (50,729) 29,059 27,500
Inventories - net 7,908 (22,034) 71,497
Prepaid expenses and other assets (28) 5,291 (1,459)
Changes due to increase (decrease) in operating liabilities:
Trade accounts and other payables 13,186 (10,206) (56,000)
Pension and post-retirement obligations (8,544) (26,642) 5,517
Taxes on income and deferred income taxes 1,734 8,332 1,176
Other 1,895 10,373 2,837
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,837 27,547 80,533
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale (purchase) of short-term investments - 17,568 (17,568)
Repurchase of sale-leaseback transactions - (21,782) -
Purchase of property, plant and equipment (13,029) (8,135) (5,784)
Net advances on discontinued operations - (5,045) 5,045
Other 3,174 1,280 (907)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,855) (16,114) (19,214)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds from 11.625% Senior Notes - - 95,690
Net proceeds from 7.75% convertible Subordinated Notes - - 55,515
Annual principal payment of 9.35% Senior Notes (12,025) (12,500) (12,500)
Net prepayment of 9.33% and 9.35% Senior Notes - (22,481) -
Repayment of medium-term notes - - (35,000)
Net short-term borrowings 3,615 - -
Long-term borrowings under revolving credit agreement - - 115,000
Repayment of borrowings under revolving credit agreement - - (165,000)
Repayment of other long-term borrowings (1,678) (2,323) (2,618)
Repayment of cash values in insurance policies - - (9,907)
Reduction in sales of receivable sales program - (20,000) -
Cash collateral (increase) for receivable sales program 13,500 13,003 (26,503)
Long-term borrowings 1,106 - -
Other 1,319 1,456 (2,186)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,837 (42,845) 12,491
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,819 (31,412) 73,810
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 84,584 115,996 42,186
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 88,403 $ 84,584 $ 115,996
===========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest, net of amount capitalized $ 48,436 $ 52,010 $ 41,622
Income taxes 367 (1,958) 174
NON-CASH INVESTING AND FINANCING ACTIVITIES:
RCC sold for notes receivable (Note 2) 27,594 - -
Exchange of 7.75% convertible notes (37,780) - -
Change in Equity due to exchange of 7.75% convertible notes 43,130 - -
===========================================================================================================================
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The consolidated statements include the accounts of Rohr, Inc. and all
subsidiaries ("Company"). Total assets and sales of foreign subsidiaries are
not significant.
Certain reclassifications have been made to prior years to conform to current
year presentation.
B. SALES AND EARNINGS
The Company follows the guidelines of Statement of Position 81-1, "Accounting
for Performance of Construction-Type and Certain Production-Type Contracts" (the
contract method of accounting) for certain commercial and all governmental
contracts, except that the Company's contract accounting policies differ from
the recommendations of SOP 81-1 in that revisions of estimated profits on
contracts are included in earnings by the Company under the reallocation method
rather than the cumulative catch-up method. Contract accounting generally
places limitations on the combining of contracts and prohibits the anticipation
of future contracts in determining the contract profit center. Approximately
one-half of the Company's sales during fiscal years 1996,1995, and 1994 were
accounted for using the contract method of accounting.
Several major commercial programs, under which spares and technical product
support are sold directly to airlines, are accounted for under the program
method of accounting, a method which existed in practice for many years prior to
the issuance of SOP 81-1. Guidelines for use of program accounting have been
developed in practice and are not codified by authoritative accounting
literature. This method of accounting is followed by relatively few public
companies in a limited number of industries. It applies in situations where the
economics of producing and marketing the program product extend beyond the
initial production order. The most significant differences from contract
accounting are that (1) the quantity of units included in the profit center
under program accounting includes existing and anticipated contracts, and (2)
program units may be sold to more than one customer. The Company uses program
accounting in those circumstances where it is able to make reasonably dependable
estimates of (1) the value of anticipated production units and spares sales in
future contracts, (2) the length of time to produce and sell those additional
production units and spares, and (3) the production costs and selling prices
associated with such units and spares. Typically, the Company applies program
accounting on programs for which the Company is responsible for total systems
integration and continuing product support.
Profit is estimated based on the difference between total estimated revenue and
total estimated cost of a contract or program and the remaining profit is
recognized evenly as a uniform percentage of sales value on all remaining units
to be delivered. Current revenue does not anticipate higher or lower future
prices, but
17
includes units delivered at actual sales prices. A constant contract or program
margin is achieved by deferring or accelerating a portion of the average unit
cost on each unit delivered. Cost includes the estimated cost of the pre-
production effort (primarily tooling and design), plus the estimated cost of
manufacturing both a specified number of production units and, under the program
method of accounting, those spares which are expected to be delivered
concurrently with such production units. The specified number of production
units used to establish the profit margin is predicated upon market forecasts
and does not exceed the lesser of those quantities assumed in original program
pricing or those quantities which the Company now expects to deliver in the
periods assumed in original program pricing. The number of units used to
estimate profit margin is increased when firm orders exceed the number of units
used for pricing purposes. Generally, spares, as a percentage of total
deliveries, increase as a program matures and are sold at higher prices than
production units. This higher price reflects, in part, additional costs related
to technical and customer support activities.
Under both the contract and program methods of accounting, the Company's sales
are primarily under fixed-price contracts, many of which contain escalation
clauses and require delivery of products over several years. Sales and profits
on each contract or program are recognized primarily in accordance with the
percentage-of-completion method of accounting, using the units-of-delivery
method. Revisions of estimated profits on contracts or programs are included in
earnings by the reallocation method, which spreads the change in estimate over
current and future deliveries. Any anticipated losses on contracts or programs
and overruns of program pre-production costs are charged to earnings when
identified. Both the contract and program methods of accounting involve the use
of various estimating techniques to project estimated costs at completion and
may include estimates of recoveries on claims asserted against the customer for
changes in specifications. These estimates involve various assumptions and
projections relative to the outcome of future events. Paramount are assumptions
relative to labor performance and anticipated future labor rates, and
projections relative to material and overhead costs. These assumptions involve
various levels of expected performance improvements. Program accounting also
requires estimates of the market for a program and the spares expected to be
ordered. The Company reevaluates its estimates semi-annually for all
significant contracts and programs. Changes in estimates are reflected in the
current and future periods.
Included in sales are amounts arising from contract terms that provide for
invoicing a portion of the contract price at a date after delivery. Also
included are: negotiated values for units delivered; and anticipated price
adjustments for contract changes, claims, escalation, and estimated earnings in
excess of billing provisions resulting from the percentage-of-completion method
of accounting. Certain contract costs are estimated based on the learning curve
concept discussed in Note 1c.
18
C. INVENTORIES
Inventories of raw materials, purchased parts and supplies are stated at the
lower of average cost or estimated realizable value. Inventoried costs on long-
term contracts and programs include certain pre-production costs, consisting
primarily of tooling and design costs, and production costs, including
applicable overhead. As the production costs for early units are charged to
work-in-process inventory at an actual unit cost in excess of the estimated
average cost for all units projected to be delivered over the entire contract or
program, a segment of inventory described as the excess of production costs over
estimated average unit cost (and referred to as excess-over-average inventory)
is created. Generally, excess-over-average inventory, which may include
production (but not pre-production) cost over-runs, builds during the early
years of the contract or program when the efficiencies resulting from learning
are not yet fully realized and declines as the program matures. Under the
learning curve concept, an estimated decrease in unit labor hours is assumed as
tasks and production techniques become more efficient through repetition of the
same manufacturing operation and through management action such as simplifying
product design, improving tooling, purchasing new capital equipment, improving
manufacturing techniques, etc. For programs under the program method of
accounting, excess-over-average inventory also builds until sales of spares, as
a percentage of total sales, equal or exceed the percentage used for the overall
profit margin calculation.
Inventoried costs are reduced by the estimated average cost of deliveries
computed as a uniform percentage of sales value.
In the event that work-in-process inventory plus estimated costs to complete a
specific contract or program exceeds the anticipated remaining sales value of
such contract or program, such excess is charged to current earnings, thus
reducing inventory to estimated realizable value.
In accordance with industry practice, costs in inventory include amounts
relating to programs and contracts with long production cycles, much of which is
not expected to be realized within one year.
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost or, in the case of assets
under capital leases, the lower of the present value of minimum lease payments
or fair market value. Depreciation and amortization is computed by the
straight-line method over the estimated useful lives of the various classes of
assets or, in the case of capitalized leased assets, over the lease term if
shorter.
The Company periodically assesses its ability to recover the carrying value of
its long-lived assets. If management concludes that the carrying value will not
be recovered, an impairment write-down is recorded to reduce the asset to its
estimated fair value (see Note 2).
19
E. PENSION
Pension costs include current costs plus the amortization of transition assets
over periods up to 14 years. The Company funds pension costs in accordance with
plan and legal requirements.
F. RESEARCH AND DEVELOPMENT
Research and development costs incurred for the development of proprietary
products are expensed as incurred as part of general and administrative expense.
These costs have not been material to operations during the periods presented.
Design efforts performed under contract generally consist of the adaptation of
an existing capability to a particular customer need and are accounted for as an
element of contract costs.
G. INCOME TAXES
Deferred tax assets and liabilities are recognized based upon temporary
differences between financial statement and tax bases of assets and liabilities
using presently enacted tax rates (See Note 6.)
H. NET INCOME PER AVERAGE SHARE OF COMMON STOCK
Primary earnings per share was determined by dividing net income by the
weighted average number of common shares and common share equivalents (stock
options and warrants) outstanding during the year. Fully diluted earnings per
share reflect the maximum dilution of per share earnings, if applicable, which
would have occurred if the convertible notes and debentures of the Company which
are dilutive had been converted as of the beginning of the period.
I. CASH EQUIVALENTS
For purpose of the statement of cash flows, the Company considers all
investments and highly liquid debt instruments with a maturity of three months
or less to be cash equivalents. Cash equivalents are stated at cost which
approximates market.
J. SHORT-TERM INVESTMENTS
Short-term investments are highly liquid investments with a maturity of 91 days
to one-year and generally issued by the U.S. Treasury, federal agencies,
municipalities, banks and major corporations. Short-term investments are stated
at cost which approximates market.
20
K. INDUSTRY SEGMENTS
The Company considers itself to operate in one industry segment.
L. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
was adopted by the Company in fiscal 1996. The standard requires that
impairment losses be recognized when the carrying value of an asset exceeds its
fair value. The Company periodically assesses its ability to recover the
carrying value of its long-lived assets. If management concludes that the
carrying value will not be recovered, an impairment write-down is recorded to
reduce the asset to its estimated fair value (see Note 2).
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," will be effective for the Company beginning in fiscal
1997. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages, but does not require, compensation
cost to be measured based on the fair value of the equity instrument awarded.
Corporations are permitted, and the Company will continue to apply Accounting
Principles Board (APB) Opinion No. 25 and will disclose the required pro forma
effect on net income and earnings per share.
21
NOTE 2 - UNUSUAL ITEMS
The Company negotiated the sale of Rohr Credit Corporation, a Company subsidiary
whose principal assets were beneficial interests in two aircraft (an A300 and a
DC10), on lease through 2003 and 2004, respectively. The Company recorded a
$5.2 million pre-tax loss as a result of this sale, but retained an interest in
the residual value of these assets through which it could recover additional
amounts in the future. The Company also recorded a receivable in the amount of
$20.1 million (collected subsequent to year-end) and a secured note in the
amount of $7.5 million in connection with the sale.
As a result of the slow-down over the last several years in the commercial
aerospace industry and reductions in the Company's military and space programs,
many of the Company's facilities are currently operating below capacity. The
Company has been reviewing its long-range site strategy and assessing the
facilities necessary to meet its future needs including the potential favorable
operating effect of lean manufacturing. As a result of the review, the Company
has taken a $7.2 million pre-tax impairment write-down on its Arkadelphia,
Arkansas facility to its estimated net realizable value and intends to seek a
buyer for the facility. The Company intends to continue to review its site
strategy and facilities with respect to its current and projected needs.
During fiscal 1994, the Company recognized a curtailment loss of $10.6 million
for the write-off of unamortized pension past service costs relating to the
downsizing of employment levels. This loss is reflected as an unusual item for
the 1994 statement of operations net of a gain recognized on the sale of a
facility.
These losses have been recorded as unusual items in the Consolidated
Statements of Operations.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, which relate primarily to long-term programs and
contracts, consist of the following (in thousands):
JULY 31,
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
Amount billed $ 80,661 $41,884
Receivable for sale of RCC (See Note 2) 20,142 -
Recoverable costs and accrued profit on
units delivered but not billed 6,504 12,422
Recoverable costs and accrued profit on
progress completed but not billed 8,276 4,533
Unrecovered costs and estimated profit
subject to future negotiations 13,940 13,313
- -----------------------------------------------------------------
$129,523 $72,152
=================================================================
22
"Recoverable costs and accrued profit on units delivered but not billed"
represent revenue recognized on contracts for amounts not billable to customers
at the balance sheet date. This amount principally represents delayed payment
terms along with escalation and repricing predicated upon deliveries and final
payment after acceptance. Some of these recoverable costs are expected to be
billed and collected in the normal course of business beyond one year.
"Recoverable costs and accrued profit on progress completed but not billed"
represent revenue recognized on contracts based on the percentage-of-completion
method of accounting and is anticipated to be billed and collected in accordance
with contract terms, which may be longer than one year.
"Unrecovered costs and estimated profit subject to future negotiations"
consist of contract tasks completed for which a final price has not been
negotiated with the customer. Amounts in excess of agreed upon contract prices
are recognized when it is probable that the claim will result in additional
contract revenue and the amounts can be reliably estimated. Included in this
amount at July 31, 1996, are estimated recoveries on constructive change claims
related to government imposed redefined acceptance criteria on the Grumman F-14
and the Boeing E3/E6 programs. Management believes that amounts reflected in
the financial statements are reasonable estimates of the ultimate settlements.
The resolution of these items may take several years.
The Company has a $40 million accounts receivable sales program under which it
sells qualified receivables through a subsidiary to a trust on an ongoing basis.
The investors' interests in the trust, net of the cash collateral discussed
below, are reported as a reduction to accounts receivable. The Company's
subsidiary holds the remaining interest in the trust which fluctuates in value
depending upon the amount of receivables owned by the trust from time to time.
Due to the slowdown in the aerospace industry and the resulting reduction in the
Company's sales, the amount of outstanding receivables owned by the trust has,
from time to time, fallen below the aggregate amount of the facility. As a
result, the Company has elected to deposit cash collateral when insufficient
qualified receivables exist as required to support the facility. The Company
had no amounts on deposit at July 31, 1996 and cash collateral on deposit
totaling $13.5 million at July 31, 1995. The cost associated with the sale of
receivables under the current facility is 7.57 percent per year. These costs,
which have been reflected as a reduction in sales values, were $3.0 million,
$3.6 million, and $4.5 million in fiscal 1996, 1995, and 1994, respectively.
23
SALES
The Company's sales to major customers including related program spares,
expressed as a percentage of total sales, during the following periods are
summarized as follows:
YEAR ENDED JULY 31,
- --------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------
International Aero Engines 22% 14% 16%
Boeing 19 17 15
CFM International 12 11 9
Pratt & Whitney 8 10 14
Rolls-Royce 7 13 10
McDonnell Douglas 7 8 7
General Electric 7 7 9
Airbus Industrie 6 6 3
Lockheed 3 5 6
United Technology 1 4 4
Other 8 5 7
- --------------------------------------------------------
Total sales to the U.S. Government (including direct sales and indirect sales
through some of the prime contractors shown above) accounted for 8 percent, 12
percent, and 14 percent of sales from continuing operations in the years ended
July 31, 1996, 1995, and 1994, respectively.
Commercial products sold by the Company to jet engine manufacturers are
ultimately installed on aircraft produced by the major commercial airframe
manufacturers, Airbus Industrie, Boeing and McDonnell Douglas. Sales to foreign
customers accounted for 44 percent, 38 percent, and 24 percent of total sales
for fiscal 1996, 1995, and 1994, respectively. Of the total sales, 36 percent,
33 percent, and 22 percent, were to Europe for fiscal 1996, 1995, and 1994,
respectively.
24
NOTE 4 - INVENTORIES
Work-in-process inventories as of July 31, 1996, which relate primarily to
long-term contracts and programs, are summarized as follows (in thousands,
except quantities):
AIRCRAFT ORDER STATUS (1) COMPANY ORDER STATUS
--------------------------------- -------------------------------------------
(2) FIRM (3)
DELIVERED UNFILLED UNFILLED PROGRAM UNFILLED FISCAL YEAR
PROGRAM TO AIRLINES ORDERS OPTIONS QUANTITY DELIVERED ORDERS COMPLETE(6)
- ------------------------------------------------------------------------------------------------------------------
A340 nacelle (4) (5) 79 97 87 262 90 38 2003
PW4000 nacelle for the
A300/A310 and
MD-11 (4) 265 23 59 318 279 26 2003
MD-90 (4) (5) 19 119 78 417 33 93 2006
V2500 nacelle for the
A319/A320/A321 (4) (5) 220 132 91 314 230 28 1998
CF6-80C nacelle for the
747/767, MD-11 and
A300/A310 (5) 707 145 233 898 735 137 1999
CFM56-5 nacelle for the
A319/A320/A321 (5) 370 287 137 611 388 203 2000
MD-95 (5) (7) 0 50 50 TBD 0 0 TBD
Others
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1996
===============================================================================================================
Balance at July 31, 1995
===============================================================================================================
WORK-IN-PROCESS INVENTORY
--------------------------------------------------------
PRE- EXCESS
PROGRAM PRODUCTION PRODUCTION OVER AVERAGE TOTAL
- ------------------------------------------------------------------------------------------
A340 nacelle (4) (5) $ 19,537 $ 39,646 $ 11,897 $ 71,080
PW4000 nacelle for the
A300/A310 and
MD-11 (4) 22,427 15,465 33,905 71,797
MD-90 (4) (5) 15,061 74,821 21,060 110,942
V2500 nacelle for the
A319/A320/A321 (4) (5) 12,931 4,316 0 17,247
CF6-80C nacelle for the
747/767, MD-11 and
A300/A310 (5) 17,745 0 16,686 34,431
CFM56-5 nacelle for the
A319/A320/A321 (5) 17,392 2,572 29,392 49,356
MD-95 (5) (7) 0 6,874 0 6,874
Others 46,851 14,734 0 61,585
- -------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1996 $151,944 $158,428 $112,940 $423,312
===========================================================================================
Balance at July 31, 1995 $128,362 $187,527 $113,689 $429,578
===========================================================================================
(1) Represents the aircraft order status as reported by Airclaims and/or other
sources the Company believes reliable for the related aircraft and engine
option. The Company's orders frequently are less than the announced orders
shown above.
(2) Represents the number of aircraft used to obtain average unit cost. Spares
(which are not included in this quantity) anticipated to be delivered
concurrently with the production units for the above aircraft are also used
in calculating average unit cost. Total spares sales values used in
calculating average unit cost at July 31, 1996, were $215,062 on the A340,
$297,558 on the PW4000, $270,294 on the MD-90, $132,890 on the V2500,
$206,318 on the CF6-80C, and $226,911 on the CFM56-5. Total spares values
sold as of July 31, 1996, were $75,366 on the A340, $223,398 on the PW4000,
$24,493 on the MD-90, $98,188 on the V2500, $156,975 on the CF6-80C, and
$143,762 on the CFM56-5. The Company does not have orders for all of these
units at this time.
(3) Represents the number of aircraft for which the Company has firm unfilled
orders.
(4) Program quantity represents the lesser of those quantities assumed in
original program pricing or those quantities which the Company now expects
to deliver in the periods assumed in original program pricing.
(5) Programs accounted for in accordance with the program method of accounting.
(6) The year presented for each program or contract represents the fiscal year
in which the final production and spares units included in the program
quantity will be delivered. The expected life of a program is often
significantly longer and as additional orders are received, program
quantity is increased and this date is extended.
(7) Program quantity to be determined. New program; quantity not to exceed that
used by the prime manufacturer.
25
On certain long-term programs, the Company has agreed to recover pre-production
costs (primarily tooling and design) over an expected number of deliveries,
including spare parts. The number of deliveries over which production costs are
to be amortized is predicated upon initial pricing agreements and does not
exceed the Company's overall assessment of the market for that program.
Excess-over-average inventory represents the cost of in-process and delivered
units less, for each such unit, the current estimated average cost of the units
in the program. Recovery of these inventoried costs assumes (i) certain
production efficiencies, (ii) the sale of the program quantity used in
estimating the profit margin, (iii) a specified allocation of sales among
production units and spare units, and (iv) the attainment of an estimated spares
margin that is substantially higher than the margin of production units. Spares
prices are higher than production unit prices, in part, due to additional costs
related to technical and customer support activities. If these program
assumptions are not attained, then substantial amounts of unrecoverable costs
may be charged to expense in subsequent periods.
To the extent that a forward loss is encountered on a program, the amount of
such loss is offset against the inventory of such program, (until such inventory
has been depleted). The loss is offset first against excess-over-average,
followed by pre-production, then production.
Contractual terms on certain programs provide varying levels of recovery
commitments for specified amounts of pre-production costs. Certain programs
also provide for the repricing of units in the event that less than a specified
quantity is sold, which allows for recovery of additional excess-over-average
inventory in such circumstances. The Company, in turn, has provided certain
subcontractors with similar recovery commitments and repricing provisions on
certain programs. The PW4000 contract was revised in 1993 and provides that if
Pratt & Whitney accepts delivery of less than 500 units between 1993 through
2003 an "equitable" adjustment will be made. Recent market projections on the
PW4000 program indicate that less than 500 units will be delivered. The Company
has submitted a "request for equitable adjustment" to the customer and believes
it will achieve a recovery such that there will be no material adverse effect on
the financial position of the Company.
The excess of deferred program costs over the total costs allocated to units in
process and delivered (less recoveries from customers due to repricing
provisions) that would not be recovered based on existing firm orders as of July
31, 1996, is $11.2 million on the A340, $78.7 million on the MD-90, and $6.9
million on the MD-95.
The Company has used forward contracts, on a limited basis, to manage its
exchange risk on a portion of its purchase commitments from vendors of aircraft
components denominated in foreign currencies and to manage its exchange risk for
sums paid to its French subsidiary for services. The extent to which the
Company utilizes forward contracts varies and depends upon management's
26
evaluation of current and projected foreign currency exchange rates and
limitation within existing lending agreements, but the Company does not acquire
forward contracts in excess of its current hedging requirements. At July 31,
1996, the Company had $2.8 million of foreign exchange contracts outstanding to
purchase foreign currencies. There were no significant deferred gains or losses
associated with these foreign exchange contracts.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
JULY 31,
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
Land $ 24,660 $ 25,132
Buildings 195,153 205,637
Machinery and equipment 287,035 282,427
Construction in progress 12,183 10,400
- ------------------------------------------------------------------------------
519,031 523,596
Less accumulated depreciation and amortization (322,979) (306,545)
- ------------------------------------------------------------------------------
Property, plant and equipment - net $ 196,052 $ 217,051
==============================================================================
Included in the above categories are assets recorded under capitalized leases
with original cost totaling $50.6 million at July 31, 1996 and 1995.
NOTE 6 - TAXES ON INCOME
The provision (benefit) for taxes on income is comprised of the following (in
thousands):
JULY 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
CURRENTLY PAYABLE:
Federal income taxes $ 80 $ 900 $ 1,320
Foreign income taxes 350 (90) 400
State income taxes 130 240 1,200
DEFERRED:
Federal income taxes 1,090 2,310 (3,660)
State income taxes 520 2,790 624
- --------------------------------------------------------------------------------
$2,170 $6,150 $ (116)
================================================================================
27
The difference between the income tax provision (benefit) computed at
the federal statutory rate and the actual tax provision (benefit) is as follows
(in thousands):
JULY 31,
- ------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------
Taxes computed at the federal statutory tax rate $ 1,889 $5,125 $ 1,594
Increase (reduction) resulting from:
State income taxes, net of federal tax benefit 281 761 237
Effect of statutory rate increase - - (2,870)
Tax-exempt income from Foreign Sales Corporation (152) (395) (680)
Non-deductible items 1,453 922 2,270
Corporate-owned life insurance (433) (236) 154
Sale of investment leases (1,048) - -
Utilization of reserves previously provided
for tax assessments - - (860)
Other 180 (27) 39
- ------------------------------------------------------------------------------------
$ 2,170 $6,150 $ (116)
====================================================================================
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and (b) operating loss and
tax credit carryforwards.
The components of the Company's deferred tax asset (liability) which reflect
the tax effects of the Company's temporary differences, tax credit carryforwards
and net operating loss carryforwards (NOLs) are listed below (in thousands):
JULY 31,
- --------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------
CURRENT:
Inventories $(27,641) $ 5,546
Employee benefits 3,597 5,235
State taxes (4,390) (4,288)
Sale of investment leases (27,816)
- --------------------------------------------------------------------------
Net deferred tax asset (liabilities) - current $(56,250) $ 6,493
==========================================================================
LONG-TERM:
Depreciation $ 9,332 $ 16,500
Deferred gain on sale/leaseback 7,876 8,249
Minimum pension liability adjustment 17,767 25,826
Net operating loss carryforward 120,485 83,135
Tax credit carryforward 8,432 8,883
Investment in leases (3,525) (35,973)
Other - net (3,504) (1,600)
- --------------------------------------------------------------------------
Net deferred tax asset - long-term $156,863 $105,020
==========================================================================
28
Statement of Financial Accounting Standard (SFAS) No. 109 requires that
deferred income taxes be classified on the balance sheet predicated upon the
categorization of the item to which the deferred tax is attributed. The
resulting classification is not necessarily indicative of when taxes will be
paid or deductions utilized. In addition, the Company has considerable NOLs and
expects that tax payments in the near term will be minimal.
The Company has federal NOLs totaling approximately $298 million at July 31,
1996, which expire in the years 2003 through 2012, and tax credit carryforwards
totaling $8.4 million which expire in the years 2003 through 2011.
When tax effected at the rates in effect July 31, 1996, the net deductible
temporary differences, tax credit carryforwards, and NOLs result in a deferred
tax asset of $100.6 million, consisting of $87.6 million for federal tax
purposes and $13.0 million for state tax purposes. Based on rates in effect
July 31, 1996, approximately $266 million of future taxable income is required
prior to expiration of the Company's NOLs and credits for full realization of
the deferred tax asset. The Company believes that its future taxable income
will be sufficient for full realization of the deferred tax asset.
Late in fiscal 1996, the Company received a Revenue Agent's Report ("RAR") from
the Internal Revenue Service in connection with the audit of the Company's
federal income tax returns for fiscal years 1986 through 1989. In the RAR, the
agent has challenged the timing of various deductible items, some of which are
significant. Based upon its review to date, the Company expects to contest
substantially all the proposed adjustments and believes it will prevail on all
material items. The Company anticipates that any adjustment made to its
reported taxable income for the years under audit will increase the amount of
the net operating loss available for carryback purposes and therefore the audit
adjustments will not have a material adverse impact on the financial position of
the Company.
29
NOTE 7 - INDEBTEDNESS
The maturity schedule of the Company's debt is summarized as follows (in
thousands, except quantities):
TOTAL AT
FISCAL YEAR ENDED JULY 31, JULY 31,
- -------------------------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 Thereafter 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
11.625% Senior Notes $100,000 $100,000 $100,000
9.35% Senior Notes $12,025 $12,025 $12,025 $ 3,657 39,732 51,757
9.33% Senior Notes 8,850 8,850 8,850 8,850 $ 8,850 7,093 51,343 51,343
Other Debt 3,941 436 172 175 121 17,090 21,935 17,671
- -------------------------------------------------------------------------------------------------------------------------------
24,816 21,311 21,047 12,682 8,971 124,183 213,010 220,771
CAPITAL LEASES 1,943 1,871 1,766 1,662 1,557 4,703 13,502 16,189
LESS IMPUTED INTEREST (797) (701) (604) (510) (416) (761) (3,789) (4,683)
- -------------------------------------------------------------------------------------------------------------------------------
1,146 1,170 1,162 1,152 1,141 3,942 9,713 11,506
SUBORDINATED DEBT:
7.75% Convertible Notes 19,720 19,720 57,500
9.25% Debentures 7,500 7,500 7,500 7,500 120,000 150,000 150,000
7.00% Convertible Debentures 5,750 5,750 5,750 97,750 115,000 115,000
- -------------------------------------------------------------------------------------------------------------------------------
7,500 13,250 13,250 13,250 237,470 284,720 322,500
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INDEBTEDNESS $25,962 $29,981 $35,459 $27,084 $23,362 $365,595 507,443 554,777
- -------------------------------------------------------------------------------------------------------------------------------
Less Current Portion (25,962) (14,119)
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT $481,481 $540,658
===============================================================================================================================
The fair value of the Company's total indebtedness as of July 31, 1996 is
estimated to be $505.7 million compared to the carrying value of $507.4 million
reflected in the table above. This fair value was derived using quoted market
prices on publicly traded debt and estimated market value of the privately held
debt.
The Company's total financings were $569.2 million and $605.6 million at July
31, 1996 and 1995, respectively. The Company's total financings at July 31,
1996 included: indebtedness, shown in the table above; the accounts receivable
sales program in the amount of $40.0 million, which is reported as a reduction
to accounts receivable (see Note 3); and two sale-leaseback transactions,
accounted for as operating leases, totaling $21.8 million.
The Company has an unsecured revolving credit agreement with a group of banks,
maturing in April 1997 against which there were no outstanding borrowings at
July 31, 1996. The commitment under this revolving credit agreement was $74.5
million at July 31, 1996, and is reduced by $8.3 million in October 1996. Up to
$30 million of the commitment is available to support the issuance of letters of
credit. At July 31, 1996, $16.9 million of the commitment was used to support
an industrial development bond financing. The Company has entered into
preliminary discussions to replace the existing revolving credit agreement with
a new facility.
30
Borrowings under this credit agreement generally incur interest at an annual
rate equal to the London Interbank Offered Rate plus 0.75% to 3.25%. In
addition, the agreement provides for a facility fee, payable on a monthly basis
at the rate of 0.35 to 0.75 of 1% on each lender's total commitment. The
specific interest rate and facility fee payable at any time are based upon the
Company's credit rating.
The Company's privately placed 9.35% Senior Notes require principal payments of
approximately $12.0 million in January 1997, 1998, and 1999 and a final payment
of $3.7 million in January 2000. The Company's privately placed 9.33% Senior
Notes require principal payments of approximately $8.9 million in December 1996
through 2000, and a final payment of $7.1 million in December 2001. In the
fourth quarter of fiscal 1995, the Company voluntarily prepaid $10.7 million of
its 9.33% Senior Notes and $10.7 million of its 9.35% Senior Notes. The Company
used existing funds to extinguish this debt. A premium and certain other
expenses associated with this early extinguishment of debt were recorded as an
extraordinary item. The net loss associated with this early extinguishment
totaled $1.1 million or 6 cents per share, net of income tax benefit of $0.7
million. The note holders can require the Company to purchase the remaining
principal amount of the notes plus accrued interest and premium for yield
adjustment in the event of certain changes in control or ownership of the
Company.
The $100 million of 11.625% Senior Notes due May 2003 are general unsecured
obligations of the Company and do not have sinking fund requirements. These
Senior Notes are redeemable after May 1999, at a premium price of 105.8 percent,
declining annually to par at maturity. The note holders can require the Company
to purchase the principal, plus accrued interest and premium in the event of
certain changes in control or ownership of the Company. The Company's 7.75%
Convertible Subordinated Notes due May 2004 have no sinking fund requirements.
The Convertible Subordinated Notes are convertible at the option of the holder
into shares of the Company's common stock at a conversion price of $10.35 per
share, subject to adjustment under certain conditions. At the Company's option,
the Convertible Subordinated Notes are redeemable after May 1998, at a premium
price of 104.7 percent, declining to par at maturity. During fiscal 1996, the
Company exchanged 4.0 million shares of the Company's common stock for $37.8
million of these notes. At July 31, 1996, $19.7 million of the 7.75% Convertible
Subordinated Notes remained outstanding. The shares of common stock issued in
the exchanges in excess of the share required for conversion were valued at $5.4
million, which was expensed during fiscal 1996.
The Company's 9.25% Subordinated Debentures due March 2017 are subject to
mandatory annual sinking fund payments of $7.5 million beginning March 1998.
The Company's 7.00% Convertible Subordinated Debentures due October 2012 are
subject to mandatory annual sinking fund payments of $5.8 million beginning
October 1998. These debentures are convertible at the option of the holder into
shares of the Company's common stock at a conversion price of $43.00 per share,
subject to adjustment under certain conditions. The 7.00% debentures are
redeemable at the Company's option at a premium price of 102.1 percent and the
9.25% debentures are redeemable at a premium price of 105.6 percent, both
declining to par over specified time periods.
31
The Company's principal financing agreements contain covenants and ratios, the
most significant of which relate to tangible net worth, debt to equity, and
income available for fixed charges. The Company was in compliance with these
covenants at July 31, 1996. These financing agreements also contain other
restrictions, including restrictions on new indebtedness, prepayments and
redemptions of indebtedness, amendments to debt agreements, liens, dividends,
lease obligations, mergers, sales of assets, investments and capital
expenditures. If the Company were to breach a covenant in any of its principal
financing agreements, the lenders under such agreement could, at their option,
accelerate the maturity of the debt evidenced by such agreement. In addition,
any such default (or, in some cases, an acceleration after the occurrence of
such a default) would cause defaults under cross-default provisions (or cross-
acceleration provisions) in other Company financing agreements.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under operating leases with non-cancelable terms of
more than one year as of July 31, 1996 are as follows (in thousands):
- ----------------------------------------------
1997 $ 6,200
1998 6,300
1999 4,600
2000 4,200
2001 4,100
Thereafter 6,300
- ----------------------------------------------
$31,700
==============================================
Generally, leases have provisions for rent escalation based on inflation.
Certain leases provide for options to renew with substantially similar terms
(except negotiable rent increases). The total expense under all operating
leases was approximately $6.3 million, $8.5 million, and $13.1 million for
fiscal 1996, 1995, and 1994, respectively.
In June 1987, the U.S. District Court of Los Angeles, in U.S. et al, vs.
Stringfellow, granted partial summary judgment against the Company and 14 other
defendants on the issue of liability under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"). This suit alleges that the
defendants are jointly and severally liable for all damage in connection with
the Stringfellow hazardous waste disposal site in Riverside County, California.
In June 1989, a federal jury and a special master appointed by the federal court
found the State of California also liable for the cleanup costs. On November
30, 1993, the special master released his "Findings of Fact, Conclusions of Law
and Reporting Recommendations of the Special Master Regarding the State Share
Fact Finding Hearing." In it, he allocated liability between the State of
California and other parties. As this hearing did not involve the valuation of
future tasks and responsibilities, the order did not specify dollar amounts of
liability. The order, phrased in percentages of liability,
32
recommended allocating liability on the CERCLA claims as follows: 65 percent to
the State of California and 10 percent to the Stringfellow entities, leaving 25
percent to the generator/counterclaimants (including the Company) and other
users of the site (or a maximum of up to 28 percent depending on the allocation
of any Stringfellow entity orphan share). On the state law claims, the special
master recommended a 95 percent share for the State of California, and 5 percent
for the Stringfellow entities, leaving 0 percent for the
generator/counterclaimants. This special master's finding is subject to a final
decision and appeal. The Company and the other generators of wastes disposed at
the Stringfellow site, which include numerous companies with assets and equity
significantly greater than the Company, are jointly and severally liable for the
share of cleanup costs for which the generators, as a group, may ultimately be
found to be responsible. Notwithstanding, CERCLA liability is sometimes
allocated among hazardous waste generators who used a waste disposal site based
on the volume of hazardous waste they disposed at the site. The Company is the
second largest generator of waste by volume disposed at the site, although it
and certain other generators have argued the final allocation of cleanup costs
among generators should not be determined solely by volume. The largest volume
generator of wastes disposed at the Stringfellow site has indicated it is
significantly dependent on insurance to fund its share of any cleanup costs, and
that it is in litigation with certain of its insurers.
The Company has reached settlement agreements with its primary comprehensive
general liability insurers for reimbursement of its cleanup costs at the site
and has retained the right to file future claims against its excess carriers.
The Company intends to continue to vigorously defend itself in the Stringfellow
matter and believes, based upon currently available information, that the
ultimate resolution will not have a material adverse effect on the financial
position, liquidity, or results of operations of the Company.
The Company is involved as plaintiff or defendant in various other legal and
regulatory actions and inquiries incident to its business, none of which are
believed by management to have a material adverse effect on the financial
position or results of operations of the Company.
NOTE 9 - EMPLOYEE BENEFIT PLANS
A. PENSION PLAN
The Company has non-contributory pension plans covering substantially all of
its employees. Benefits for the salaried employees' plan are based on age and
years of service plus interest at specified levels. Benefits under the
retirement plan covering certain union employees are based on a negotiated
amount per year of service. The Company has made contributions to independent
trusts for the minimum funding requirements of these plans under IRS
regulations. The Company also has supplemental retirement plans which are
generally unfunded.
33
Defined benefit plans expense consists of the following components (in
thousands):
YEAR ENDED JULY 31,
- ------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------
Service cost $ 8,336 $ 9,574 $ 7,017
Interest cost on projected benefit obligation 38,726 36,462 36,686
Actual gain on plan assets (90,646) (43,245) (9,168)
Net amortization and deferral 58,865 12,118 (20,093)
- ------------------------------------------------------------------------------------
Total $ 15,281 $ 14,909 $ 14,442
====================================================================================
The following table summarizes the funded status of these plans and the
amounts recognized in the Consolidated Balance Sheets (in thousands):
JULY 31,
- -------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $507,659 $459,036
Non-vested 20,714 20,252
- -------------------------------------------------------------------------------------
Accumulated benefit obligation 528,373 479,288
Effect of projected future salary increases 5,545 3,441
- -------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date 533,918 482,729
Plan assets at fair value, primarily stocks, bonds,
other fixed income obligations and real estate 475,343 415,284
- -------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (58,575) (67,445)
Unrecognized net loss 52,937 73,255
Unrecognized net asset from initial application
of SFAS No. 87 being recognized over
plans' average remaining service life (9,816) (12,819)
Unrecognized prior service cost 31,859 26,915
Additional minimum liability (72,735) (87,480)
- -------------------------------------------------------------------------------------
Pension liability recognized in the
Consolidated Balance Sheets $(56,330) $(67,574)
=====================================================================================
At July 31, 1996, the Company's additional minimum liability for its defined
benefit plans was in excess of the unrecognized prior service costs and net
transition obligation and was recorded as a reduction of $26.4 million to
shareholders' equity, net of tax benefits of $17.8 million, in accordance with
SFAS No. 87, "Employers' Accounting for Pensions." At July 31, 1995, the
reduction to shareholders' equity totaled $38.4 million, net of tax benefit of
$25.8 million.
34
The weighted average discount rate used in determining the present value of the
projected benefit obligation was 7.75 percent, 8.25 percent, and 7.5 percent
for the years ended July 31, 1996, 1995, and 1994, respectively. For
compensation based plans, the rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation and service cost was based upon an experience-related table and
approximated 4.5 percent on current salaries through January 1, 1996, in
accordance with plan terms. The expected long-term rate of return on plan
assets was 9 percent for the periods presented. Plan assets are invested
primarily in stocks, bonds, and real estate.
The Company also has certain defined contribution plans covering most
employees. Expenses for these plans amounted to $3.5 million, $2.8 million and
$1.7 million in fiscal 1996, 1995 and 1994, respectively.
B. POST-RETIREMENT BENEFIT OBLIGATIONS OTHER THAN PENSIONS
The Company has a retirement health care program that pays a specified fixed
amount to supplement the medical insurance payments made by retirees who are
under age 65 and their spouses and covered dependents. Eligibility for and the
amount of the supplement provided by the Company is based on age and years of
service. The program requires employee contributions.
SFAS No. 106 requires disclosure of the effect on the Company's accumulated
post-retirement benefit obligation, and net periodic post-retirement benefit
cost, using the assumption that the health care cost trend will increase by 1
percent each year. This disclosure is not applicable because the Company is not
affected by future health care cost trends since its obligation is to pay a
fixed amount as a health care supplement for retirees entitled to this benefit.
35
Post-retirement benefit costs, net of expected retiree contributions, included
the following components (in thousands):
YEAR ENDED JULY 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Service cost - benefits attributed to service during the period $125 $146 $168
Interest cost on accumulated post-retirement benefit obligation 419 408 465
Net amortization and deferral 13 32 -
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $557 $586 $633
=================================================================================================================================
The liability for post-retirement health care benefits included the following
components (in thousands):
JULY 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees $2,660 $2,722
Fully eligible active plan participants 236 180
Other active plan participants 2,159 2,425
Unrecognized net loss (380) (690)
- ---------------------------------------------------------------------------------------------------------------------------------
Liability for post-retirement health care benefits $4,675 $4,637
=================================================================================================================================
The accumulated post-retirement benefit obligation was determined using
weighted average discount rates of 7.75 percent, 8.25 percent, and 7.5 percent,
respectively, for the years ended July 31, 1996, 1995, and 1994. The plan is
unfunded. Each year the Company funds the benefits paid.
36
NOTE 10 - SHAREHOLDERS' EQUITY
Covenants in several of the Company's principal financing agreements restrict
the Company from paying cash dividends until after April 25, 1997. (See Note 7)
Thereafter, the Company's ability to pay cash dividends is substantially
restricted.
The Company's 1995 Stock Incentive Plan provides that qualified employees are
eligible to receive stock options and various other stock-based awards. Subject
to certain adjustments, the plan provides that up to 1,800,000 shares of common
stock may be sold or issued under the plan. The terms and conditions of the
stock-based awards are determined by a Committee of the Board of Directors on
each grant date and may include provisions for the exercise price, expiration,
vesting, restriction on sale and forfeiture, as applicable. Under the terms of
the plan, the Company may not change the exercise price of or replace any stock
option previously granted (except pursuant to certain plan adjustments), nor
grant an option with an exercise price less than 100 percent of the fair market
value of the underlying common stock on the date the Committee approves such
stock option. Restricted shares purchased under the plan are subject to
restrictions on sale or disposal, which lapse in varying installments from one
to 10 years. During fiscal 1996, 10,000 restricted shares were awarded to
employees.
The Company's 1982 Stock Option Plan and the 1989 Stock Incentive Plan, under
both of which no future options will be granted, provided for the issuance of
non-qualified stock options at the market price of the Company's common stock at
the date of grant. The options become exercisable in installments from one to
six years after date of grant and expire 10 years from date of grant. Under the
1989 Stock Incentive Plan, restricted shares purchased under the plan are
subject to restrictions on sale or disposal, which lapse in varying installments
from one to 10 years. During fiscal 1996, 26,076 shares were awarded to various
employees. At July 31, 1996, there were no shares available for grants under
these plans.
The Company has a director stock plan under which non-employee directors are
automatically granted, on the first business day following the annual meeting of
shareholders, an option to purchase 1,000 shares of common stock. The option
exercise price is equal to the fair market value of the stock on the date the
option is granted. Options granted under the plan generally become exercisable
six months after the date of grant and expire 10 years from the date of grant.
Subject to certain adjustments, the plan provides that up to 100,000 shares of
common stock may be sold or issued under the plan. As a result of previous
option grants under the plan, 34,000 shares remained available for grant at July
31, 1996.
The Company also has a stock compensation plan for non-employee directors
pursuant to which the Company will issue or deliver to each such director, in
partial consideration for the services rendered by such director during the
Company's prior fiscal year, 250 shares of the Company's common stock, subject
to certain adjustments. The shares will be issued or delivered on the date of
the first meeting of the Board that occurs after the end of each fiscal year.
37
Under the various stock option plans, outstanding options for 2,035,452 and
2,267,359 shares of common stock were exercisable as of July 31, 1996 and 1995,
respectively. Activity in these stock option plans for the three years ended
July 31, 1996, is summarized as follows:
OPTIONS OPTION PRICE
- -------------------------------------------------------------------------------
Balance Outstanding at July 31, 1993 2,665,849 $ 8.875 - $31.625
Granted 109,000 8.375 - 10.250
Relinquished (18,655) 16.500 - 31.625
Forfeited (33,150) 10.625 - 22.125
- -------------------------------------------------------------------------------
Balance Outstanding at July 31, 1994 2,723,044 8.375 - 31.625
Granted 19,000 9.125 - 10.250
Relinquished (7,180) 16.500 - 31.625
Forfeited (44,300) 10.625 - 23.875
Exercised (26,000) 10.625 - 12.000
- -------------------------------------------------------------------------------
Balance Outstanding at July 31, 1995 2,664,564 8.375 - 31.625
Granted 1,123,936 14.875 - 22.000
Relinquished (77,465) 16.500 - 31.625
Forfeited (47,667) 10.625 - 22.125
Exercised (394,707) 8.750 - 19.375
- -------------------------------------------------------------------------------
Balance Outstanding at July 31, 1996 3,268,661 $ 8.375 - $31.625
===============================================================================
The Company's stockholder rights plan generally entitles the holder of each
right to purchase one one-hundredths of a share of Series C preferred stock, $1
par value, from the Company for $100, subject to adjustment. A right is included
with, and attaches to, each share of common stock issued and expires on August
25, 1999, and is redeemable by the Company. The rights become exercisable and
separate from the common stock under certain circumstances generally when a
person or group of affiliated or associated persons has acquired or obtained the
right to acquire 15 percent or more of the Company's outstanding voting stock or
has made a tender offer to acquire 15 percent or more of such voting stock.
Under certain circumstances, each right would entitle the holder to purchase a
certain number of the Company's common stock at one-half of fair market value.
In May 1993, in connection with certain amendments to the financial
covenants of its principal financing agreements, the Company issued warrants to
certain lenders. The warrants are exercisable for 600,000 shares of common stock
at $9.00 per share and expire in August 2000.
38
Authorized, unissued shares of common stock were reserved for the following:
July 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Various stock plans 3,983,911 2,963,938
Conversion of subordinated debentures and notes 4,579,732 8,229,973
Warrants 600,000 600,000
- --------------------------------------------------------------------------------
9,163,643 11,793,911
================================================================================
NOTE 11 - DISCONTINUED OPERATIONS
In the fourth quarter of fiscal 1994, the Company sold and commenced the
transfer of its business jet line of business. The purchase agreement required
the Company to manufacture and deliver certain components and transfer program
engineering and tooling which was substantially completed in fiscal 1995. The
operating results of the business jet line of business are included in earnings
from discontinued operations summarized as follows (in thousands):
YEAR ENDED JULY 31,
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Net sales $22,287 $40,286
Income before taxes 6,486 3,777
Taxes on income 2,607 1,519
- --------------------------------------------------------------------------------
Net income $ 3,879 $ 2,258
================================================================================
Net income per average share
of common stock $ 0.21 $ 0.12
================================================================================
39
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER-SHARE DATA)
YEAR ENDED JULY 31, 1996
- ---------------------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH
- ---------------------------------------------------------------------------------------------------
SALES $150,400 $180,702 $203,711 $236,001
OPERATING INCOME BEFORE UNUSUAL ITEMS 12,139 16,384 18,565 22,022
OPERATING INCOME AFTER UNUSUAL ITEMS 12,139 16,384 18,565 9,627
INCOME (LOSS) FROM CONTINUING OPERATIONS 805 343 6,908 (2,658)
BEFORE TAXES
NET INCOME (LOSS) 482 205 4,130 (1,589)
PRIMARY EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK $ 0.03 $ 0.01 $ 0.19 $ (0.07)
- ---------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK $ 0.03 $ 0.01 $ 0.18 $ (0.07)
===================================================================================================
40
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER-SHARE DATA)
YEAR ENDED JULY 31, 1995
- -------------------------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH
- -------------------------------------------------------------------------------------------------------
SALES $192,156 $219,774 $210,759 $182,311
OPERATING INCOME 15,353 17,986 16,784 14,506
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES 2,291 5,438 4,676 2,238
INCOME FROM CONTINUING OPERATIONS 1,370 3,252 2,573 1,298
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES 497 337 87 2,958
INCOME BEFORE EXTRAORDINARY ITEMS 1,867 3,589 2,660 4,256
LOSS FROM EXTRAORDINARY ITEM, NET OF TAXES - - - (1,146)
NET INCOME $ 1,867 $ 3,589 $ 2,660 $ 3,110
PRIMARY EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK FROM:
CONTINUING OPERATIONS $ 0.08 $ 0.18 $ 0.14 $ 0.07
DISCONTINUED OPERATIONS 0.02 0.02 0.01 0.16
EXTRAORDINARY ITEM - - - (0.06)
NET PRIMARY EARNINGS $ 0.10 $ 0.20 $ 0.15 $ 0.17
FULLY DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK FROM:
CONTINUING OPERATIONS $ 0.08 $ 0.17 $ 0.14 $ 0.08
DISCONTINUED OPERATIONS 0.02 0.01 - 0.13
EXTRAORDINARY ITEM - - - (.05)
NET FULLY DILUTED EARNINGS $ 0.10 $ 0.18 $ 0.14 $ 0.16
=======================================================================================================
41
REPORT BY MANAGEMENT
To the Shareholders and Board of Directors of Rohr, Inc.
The management of the Company has prepared and is responsible for the
consolidated financial statements and all related financial information
contained in this report. The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles and reflect
the effects of certain estimates and judgments made by management.
The Company maintains a system of internal accounting controls designed and
intended to provide reasonable assurance that assets are safeguarded,
transactions are properly executed and recorded in accordance with management's
authorization, and accountability for assets is maintained. The system is
continuously monitored by direct management review, by internal auditors who
conduct an extensive program of audits and by independent auditors in connection
with their annual audit.
Management recognizes its responsibility to foster a strong ethical climate and
has formalized ethics as an integral part of the organization. Management has
issued written policy statements and the importance of ethical behavior is
regularly communicated to all employees. These communications include
distribution of written codes of ethics and standards of business conduct and
through ongoing education and review programs designed to create a strong
compliance environment.
The Company's consolidated financial statements have been audited by Deloitte &
Touche LLP, independent certified public accountants. Their audits were
conducted in accordance with generally accepted auditing standards, and included
a review of financial controls and tests of accounting records and other
procedures as they considered necessary in the circumstances.
The Audit and Ethics Committee of the Board of Directors is composed of five
outside directors. This committee meets periodically with management, the
internal auditors and the independent accountants to review accounting,
reporting auditing internal control and ethics matters. The committee has
direct and private access to both internal and external auditors and held six
meetings during fiscal 1996.
/s/ L. A. CHAPMAN /s/ R. H. RAU
- ------------------------- -------------------------------------
L. A. Chapman R. H. Rau
Senior Vice President and President and Chief Executive Officer
Chief Financial Officer
/s/ A. L. MAJORS
- -----------------------------
A. L. Majors
Vice President and Controller
(Chief Accounting Officer)
42
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Rohr, Inc.
We have audited the accompanying consolidated balance sheets of Rohr, Inc. and
its subsidiaries as of July 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended July 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rohr, Inc. and its subsidiaries as
of July 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1996, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE
San Diego, California
September 11, 1996
43
SELECTED FINANCIAL DATA
(in thousands except for per-share data, number of employees, percentages and
ratios)
YEAR ENDED JULY 31,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
Results of Continuing Operations:
Sales $ 770,814 $ 805,000 $ 918,141 $1,149,503 $1,251,502
Operating income (1) $ 56,715 $ 64,629 $ 51,389 $ 8,562 $ 44,801
Operating Profit margin (1) 7.4% 8.0% 5.6% 0.7% 3.6%
Income (loss) $ 3,228 $ 8,493 $ 4,669 $ (24,257) $ 996
Primary earnings (loss) per average share
of common stock $ 0.16 $ 0.47 $ 0.26 $ (1.35) $ 0.05
Cash dividends per share of
common stock - - - - -
==================================================================================================================
Financial Position at July 31:
Total assets $1,032,537 $ 976,540 $1,056,847 $1,017,786 $1,363,958
Indebtedness 507,443 554,777 588,990 531,608 572,594
Net financings (2) 480,828 520,970 537,567 601,669 656,472
Shareholders' equity 235,177 175,931 146,909 182,243 448,866
Debt-to-equity ratio 2.16:1 3.15:1 4.01:1 2.92:1 1.28:1
Return on average equity 1.6% 7.0% 4.2% - 0.3%
Book value per common share $ 10.53 $ 9.74 $ 8.14 $ 10.13 $ 25.17
Number of full-time employees
at year end 3,800 4,000 4,900 6,500 9,200
Backlog $1,200,000 $1,000,000 $1,200,000 $1,400,000 $1,900,000
==================================================================================================================
(1) Operating income and operating profit margin was adversely impacted by
unusual items and special provisions of $12.4 million in fiscal 1996, $7.9
million in fiscal 1994, $25.0 million in fiscal 1993 and $50.0 million in
fiscal 1992.
(2) Net financings include indebtedness plus the receivables sales program
(which is reflected as a reduction to accounts receivable) and two sale-
leaseback transactions (accounted for as operating leases), reduced by
cash, including cash equivalents and short-term investments. See Notes 3
and 7 of the Notes to the Consolidated Financial Statements.
44