-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPLUnRRJNmw1ii9XGTH5PxS1fcuRGRwkgvKKkZOtmchl86oilTMYM7FE8xnolMwz hQ2IecF3tAoebksE8P/v5A== 0000950152-98-001843.txt : 19980310 0000950152-98-001843.hdr.sgml : 19980310 ACCESSION NUMBER: 0000950152-98-001843 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980309 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOODRICH B F CO CENTRAL INDEX KEY: 0000042542 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 340252680 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-40291 FILM NUMBER: 98560512 BUSINESS ADDRESS: STREET 1: 4020 KINROSS LAKES PKWY CITY: RICHFIELD STATE: OH ZIP: 44286-9368 BUSINESS PHONE: 2166597600 MAIL ADDRESS: STREET 1: 4020 KINROSS LAKES PARKWAY CITY: RICHFIELD STATE: OH ZIP: 44286-9368 10-K 1 THE B.F. GOODRICH COMPANY 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________________to______________________ Commission file number 1-892 THE B.F.GOODRICH COMPANY (Exact name of registrant as specified in its charter) New York 34-0252680 (State of incorporation) (I.R.S. Employer Identification No.) 4020 Kinross Lakes Parkway Richfield, Ohio 44286-9368 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (330) 659-7600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ Common Stock, $5 par value New York Stock Exchange 9 5/8% Notes, maturing in 2001 8.30% Cumulative Quarterly Income Preferred Securities, Series A* New York Stock Exchange - --------------- * Issued by BFGoodrich Capital and the payments of trust distributions and payments on liquidation or redemption are guaranteed under certain circumstances by The B.F.Goodrich Company. The B.F.Goodrich Company is the owner of 100% of the common securities issued by BFGoodrich Capital, a Delaware statutory business trust. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ] The aggregate market value of the voting stock, consisting solely of common stock, held by nonaffiliates of the registrant as of March 2, 1998 was $3,613.5 million ($49.625 per share). On such date, 72,815,895 of such shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV. Portions of the proxy statement dated March 13, 1998 are incorporated by reference into Part III. 2 PART I ------ ITEM 1. BUSINESS - ------ -------- GENERAL DEVELOPMENT OF BUSINESS On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by exchanging 18,588,004 shares of BFGoodrich common stock for all of the common stock of Rohr (the term Company is used to refer to BFGoodrich including Rohr). Each share of Rohr common stock was exchanged for .7 of one share of BFGoodrich common stock. The merger was accounted for as a pooling of interests, and all prior period financial statements have been restated to include the financial information of Rohr as though Rohr had always been a part of BFGoodrich. For further information concerning the merger with Rohr, see Note A of the Notes to Consolidated Financial Statements appearing on page 40 of the Company's 1997 Annual Report to Shareholders, which is incorporated herein by reference. The Company manufactures and supplies a wide variety of systems and component parts for the aerospace industry and provides maintenance, repair and overhaul services on commercial, regional, business and general aviation aircraft. The Company also manufactures specialty plastics and specialty additives products for a variety of end-user applications. A further description of the Company's business is provided below. The Company, with 1997 sales of $3.4 billion, is organized into two principal business segments: BFGoodrich Aerospace ("Aerospace") and BFGoodrich Specialty Chemicals ("Specialty Chemicals"). The Company maintains patent and technical assistance agreements, licenses and trademarks on its products, process technologies and expertise in most of the countries in which it operates. The Company conducts its business through numerous divisions and 82 wholly and majority-owned subsidiaries worldwide. The principal executive offices of BFGoodrich are located at 4020 Kinross Lakes Parkway, Richfield, Ohio 44286-9368 (telephone (330) 659-7600). The Company was incorporated under the laws of the State of New York on May 2, 1912 as the successor to a business founded in 1870. During 1997, the Company acquired five businesses (four of which were acquired during the fourth quarter) for cash consideration of $133.4 million in the aggregate, which includes $65.3 million of goodwill. The purchase price allocations have been based on preliminary estimates. One of the acquired businesses is a manufacturer of data acquisition systems for satellites and other aerospace applications. A second business manufactures diverse aerospace products for commercial and military applications. A third business is a manufacturer of dyes, chemical additives and durable press resins for the textiles industry. A fourth business manufactures thermoplastic polyurethanes and is located in the United Kingdom. The remaining acquisition is a small specialty chemicals business. -2- 3 In January 1998, the Company signed a definitive agreement to acquire Freedom Chemical Company for $375.0 million in cash. Freedom Chemical had sales of $293.1 million in 1997, 42 percent of which were outside the United States. Freedom Chemical is a leading global manufacturer of specialty and fine chemicals that are sold to a variety of customers who use them to enhance the performance of their finished products. Freedom Chemical has leadership positions as a supplier of specialty chemical additives used in personal care, food and beverage, pharmaceutical, textile, graphic arts, paints, colorants and coatings applications and as chemical intermediates. The Company expects to complete the transaction late in the first quarter of 1998. On August 15, 1997, the Company sold its chlor-alkali and olefins ("CAO") business to The Westlake Group for $92.7 million, resulting in an after-tax gain of $14.5 million, or $.19 per diluted share. The disposition of the CAO business represents the disposal of a segment of a business under APB Opinion No. 30 ("APB 30"). Accordingly, the Consolidated Statement of Income reflects the CAO business (previously reported as Other Operations) as a discontinued operation. On February 3, 1997, the Company sold Tremco Incorporated to RPM, Inc. for $230.7 million, resulting in an after-tax gain of $59.5 million, or $.80 per diluted share. The sale of Tremco Incorporated completed the disposition of the Company's Sealants, Coatings and Adhesives ("SC&A") Group, which also represented a disposal of a segment of a business under APB 30. Accordingly, the SC&A Group is also reflected as a discontinued operation in the Consolidated Statement of Income. Also during 1997, the Company completed the sale of its Engine Electrical Systems Division, which was part of the Sensors and Integrated Systems Group in the Aerospace Segment. The Company received cash proceeds of $72.5 million, which resulted in a pretax gain of $26.4 million ($16.4 million after tax). During 1996, the Company acquired five specialty chemicals businesses for cash consideration of $107.9 million, which includes $80.0 million of goodwill. Four of the acquisitions are part of the Specialty Additives Group. One of the businesses acquired is a European-based supplier of emulsions and polymers for use in paint and coatings for textiles, paper, graphic arts and industrial applications. Two of the acquisitions represent product lines consisting of water-borne acrylic resins and coatings and additives used in the graphic arts industry. The fourth acquisition consists of water-based textile coatings product lines. The Specialty Plastics Group made the remaining acquisition, a small supplier of anti-static compounds. During 1995, the Company acquired four small aerospace businesses and two small specialty chemicals businesses for an aggregate price of $15.4 million. In 1995, the Company sold its wholly owned subsidiary, Arrowhead Industrial Water, Inc., for $84.3 million, which resulted in a pretax gain of $3.6 million. -3- 4 During 1994, the Company acquired two small specialty chemicals businesses which manufacture coatings and products for the textile industry. In 1993, the Company acquired certain assets and assumed certain liabilities of eight businesses and acquired the minority interest in a previously majority-owned subsidiary, for approximately $528.5 million. Acquisitions of five aerospace businesses amounted to approximately $504.8 million. These acquisitions included the Cleveland Pneumatic Company Division and Cleveland Pneumatic Product Service Division (collectively referred to as "Cleveland Pneumatic") for approximately $193.4 million from Pneumo Abex Corporation, a wholly owned subsidiary of Abex Inc., and the aerospace business (Rosemount Aerospace) of Rosemount Inc., a wholly owned subsidiary of Emerson Electric Company, for approximately $301.1 million. Cleveland Pneumatic designs, develops and manufactures landing gear for commercial and military aircraft and also provides overhaul service for commercial aircraft landing gear. Principal manufacturing facilities are located in Cleveland, Ohio and Tullahoma, Tennessee. The service facilities are located in Miami, Florida. Rosemount Aerospace designs and manufactures aerospace sensors and related equipment in facilities located in Burnsville and Eagan, Minnesota. The other Aerospace acquisitions, which were, in the aggregate, not significant, include a specialty heating and avionics power business and a manufacturer of automated test equipment for aircraft. In addition to the five aerospace business acquisitions, three specialty chemicals businesses were acquired in 1993, which included a water management business (which was subsequently included in and sold along with Arrowhead Industrial Water, Inc.), a manufacturer of urethane polymer resins and a small reaction-injection-molding business. These acquisitions in the aggregate were not significant. Also, in December 1993, the Company disposed of its remaining investment in The Geon Company ("Geon"). Geon was formed in early 1993 from the business (other than the chloralkali, ethylene and utilities operations primarily located at Calvert City, Kentucky) that was previously included in the former Geon Vinyl Division of the Company. The disposition of Geon through public offerings of stock generated net cash proceeds of $470.4 million and a financial gain of $110.9 million after tax. Prior to the sale of Geon, the Company received a special distribution of $160.0 million from Geon. Net assets of Geon, including equity in earnings of the business to the dates of disposition, were approximately $247.0 million. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS In 1997, 1996 and 1995, sales to Boeing, solely by the Aerospace Segment, totaled 11 percent, 9 percent and 9 percent, respectively, of consolidated sales. For financial information concerning the Company's sales, operating income, identifiable assets, property additions, depreciation and amortization and geographic information, see Note O of the -4- 5 Notes to Consolidated Financial Statements appearing beginning on page 56 of the Company's 1997 Annual Report to Shareholders, which is incorporated herein by reference. NARRATIVE DESCRIPTION OF BUSINESS Aerospace - --------- The Company's Aerospace Segment is conducted through four major business groups. Aerostructures Group (Rohr) primarily designs, develops and integrates aircraft engine nacelle and pylon systems and provides support services. Landing Systems Group manufactures aircraft landing gear; aircraft wheels and brakes; high-temperature composites and manufactures aircraft evacuation slides and rafts for commercial, military, regional and business aviation customers, and space programs. Sensors and Integrated Systems Group manufactures sensors and sensor-based systems; fuel measurement and management systems; electromechanical actuators; aircraft windshield wiper systems; health and usage management systems, electronic test equipment; ice protection systems; specialty heated products; collision warning systems; weather detection systems; standby attitude indicators; aircraft lighting components; and polymer and composite products for commercial, military, regional, business and general aviation customers, and for aircraft engine and space programs. Maintenance, Repair and Overhaul Group ("MRO") provides maintenance, repair and overhaul of commercial airframes, components, wheels and brakes, landing gear, instruments and avionics for commercial, regional, business and general aviation customers. The Company is among the largest suppliers of aircraft systems and components and aircraft maintenance repair and overhaul service businesses in the world. It competes with other aerospace industry manufacturers to supply parts and provide service on specific fleets of aircraft, frequently on a program-by-program bid basis. Competition is primarily based on product performance, service capability and price. Contracts to supply systems and components and provide service are generally with aircraft manufacturers, airlines and airfreight businesses worldwide. The Company also competes on U.S. government contracts, generally as a subcontractor. Competition is principally based on product performance and price. Specialty Chemicals - ------------------- The Company's Specialty Chemicals Segment is conducted through two major business groups. Specialty Additives Group manufactures synthetic thickeners and emulsifiers; controlled release -5- 6 and suspension agents; polymer emulsions; rubber and lubricant additives and plastic and adhesive modifiers. These products are used by manufacturers of personal-care products; pharmaceuticals; liquid soaps and detergents; water treatment products; electronics; tires and petroleum products and molded plastics. Specialty additives are also used in textile printing manufacturing; non-woven manufacturing; paper coating and saturation; graphic arts; and paints and industrial coatings. Specialty Plastics Group manufactures thermoplastic polyurethane and alloys; high-heat-resistant and low-combustibility plastics; static-dissipating polymers; and reaction-injection molding resins. Products are marketed and sold to manufacturers for film and sheet applications; wire and cable jacketing; and magnetic media. Specialty plastics are also used in the manufacture of automotive products; recreational vehicles and products; agricultural equipment; industrial equipment; plumbing and industrial pipe; fire sprinkler systems and building material components. The Company competes with other major chemical manufacturers. Products are sold primarily based on product performance. Frequently, products are manufactured or formulated to order for specific customer applications and often involve considerable technical assistance from the Company. BACKLOGS At December 31, 1997, the Company had a backlog of approximately $2.4 billion, principally related to the Aerospace Segment, of which approximately 68 percent is expected to be filled during 1998. The amount of backlog at December 31, 1996 was approximately $2.3 billion. Backlogs in the Aerospace Segment are subject to delivery delays or program cancellations, which are beyond the Company's control. RAW MATERIALS Raw materials used in the manufacture of Aerospace products, including steel and carbon, are available from a number of manufacturers and are generally in adequate supply. Availability of all major monomers and chemicals used in the Specialty Chemicals Segment is anticipated to be adequate for 1998. While chemical feedstocks are currently in adequate supply, in past years, from time-to-time for limited periods, various chemical feedstocks were in short supply. However, the effect of any future shortages on the Company's operations will depend upon the duration of any such shortages and possibly on future U.S. Government policy, which cannot be determined at this time. ENVIRONMENTAL Federal, state and local statutes and regulations relating to the protection of the environment and the health and safety of employees and other individuals have resulted in higher operating costs -6- 7 and capital investments by the industries in which the Company operates. Because of a focus toward greater environmental awareness and increasingly stringent environmental regulations, the Company believes that expenditures for compliance with environmental, health and safety regulations will continue to have a significant impact on the conduct of its business. Although it cannot predict accurately how these developments will affect future operations and earnings, the Company does not believe these costs will vary significantly from those of its competitors. For additional information concerning environmental matters, see Note W of the Notes to Consolidated Financial Statements appearing beginning on page 67 of the Company's 1997 Annual Report to Shareholders, which is incorporated herein by reference. RESEARCH AND DEVELOPMENT The Company conducts research and development under Company-funded programs for commercial products and under contracts with others. Research and development expense amounted to $141.2 million in 1997, which includes amounts funded by customers. For additional information concerning research and development expense, see Note P of the Notes to Consolidated Financial Statements appearing on page 58 of the Company's 1997 Annual Report to Shareholders, which is incorporated herein by reference. PATENTS AND LICENSES The Company has many patents of its own and has acquired licenses under patents of others. While such patents in the aggregate are important to the Company, neither the primary business of the Company nor any of its industry segments is dependent on any single patent or group of related patents. The Company uses a number of trademarks important either to its business as a whole or to its industry segments considered separately. The Company believes that these trademarks are adequately protected. HUMAN RESOURCES As of December 31, 1997, the Company had 15,809 employees in the United States. An additional 1,029 people were employed overseas. Approximately 7,700 employees were hourly paid. The Company believes it has good relationships with its employees. The hourly employees who are unionized are covered by collective bargaining agreements with a number of labor unions and with varying contract termination dates ranging from May 1998 to October 2000. There were no material work stoppages during 1997. The Company did, however, experience a three-week strike during 1997 at its landing gear business. -7- 8 FOREIGN OPERATIONS The Company is engaged in business in foreign markets. Manufacturing and service facilities for Aerospace and Specialty Chemicals are located in Belgium, Canada, England, France, Germany, Hong Kong, The Netherlands, Scotland, Singapore and Spain. A plant in Korea manufactures specialty chemicals for the Company. The Company also markets its products and services through sales subsidiaries and distributors in a number of foreign countries. The Company also has technical fee and patent royalty agreements with various foreign companies. Outside North America, no single foreign geographic area is currently significant, although the Company continues to expand its business in Europe. Currency fluctuations, tariffs and similar import limitations, price controls and labor regulations can affect the Company's foreign operations, including foreign affiliates. Other potential limitations on the Company's foreign operations include expropriation, nationalization, restrictions on foreign investments or their transfers, and additional political and economic risks. In addition, the transfer of funds from foreign operations could be impaired by the unavailability of dollar exchange or other restrictive regulations that foreign governments could enact. The Company does not believe that such restrictions or regulations would have a materially adverse effect on its business, in the aggregate. For additional financial information about foreign and domestic operations and export sales, see Note O of the Notes to Consolidated Financial Statements appearing beginning on page 56 of the Company's 1997 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 2. PROPERTIES - ------ ---------- The manufacturing and service operations of the Company are carried on at facilities, all of which are owned, unless otherwise indicated, at the following locations: Aerospace - --------- Albuquerque, New Mexico Amelot, France* Arkadelphia, Arkansas Austin, Texas* Basingstoke, England* Bedford, Massachusetts Burnsville, Minnesota Cedar Knolls, New Jersey Chula Vista, California** Cleveland, Ohio** Columbus, Ohio Dallas, Texas* East Brunswick, New Jersey* Eagan, Minnesota Everett, Washington** Fairhope, Alabama* Foley, Alabama* Fort Lauderdale, Florida Grand Rapids, Michigan Green, Ohio** Hagerstown, Maryland Hamburg, Germany Harrow, England* Heber Springs, Arkansas* Irvine, California* Jacksonville, Florida Louisville, Kentucky* Lynnwood, Washington* Marlboro, Massachusetts* Memphis, Tennessee Miami, Florida* Middletown, Connecticut* New Century, Kansas** Oldsmar, Florida Ontario, California* Paris, France Phoenix, Arizona Prestwick, Scotland* Pueblo, Colorado Riverside, California -8- 9 Aerospace (cont'd) - ------------------ San Marcos, Texas Santa Fe Springs, California** Sheridan, Arkansas* Singapore* Spencer, West Virginia Taipo, Hong Kong* Tempe, Arizona* Toulouse, France** Troy, Ohio Tullallahoma, Tennessee Union, West Virginia Vergennes, Vermont Wokingham, England Zevenaar, The Netherlands Specialty Chemicals - ------------------- Akron, Ohio Antwerp, Belgium Avon Lake, Ohio Barcelona, Spain Calvert City, Kentucky Chagrin Falls, Ohio Darien, Connecticut Donaldson, South Carolina Elyria, Ohio Gastonia, North Carolina Greenville, South Carolina Henry, Illinois Lawrence, Massachusetts Leominster, Massachusetts Louisville, Kentucky Oevel, Belgium Pedricktown, New Jersey Shepton Mallet, England Taylors, South Carolina Twinsburg, Ohio Williston, South Carolina Research Facilities and Administrative Offices Other Than Manufacturing Facility Offices - ------------------------------ Avon Lake, Ohio* Brecksville, Ohio Brussels, Belgium* Chula Vista, California** Cleveland, Ohio* Hong Kong* Montrose, Ohio North Canton, Ohio* Richfield, Ohio Uniontown, Ohio* Washington, D.C.* Waterloo, Ontario, Canada* * Leased ** Leased in part The Company considers that its properties are well maintained and in good operating condition. The Company and its subsidiaries are lessees under a number of cancelable and non-cancelable leases for certain real properties, used primarily for administrative, retail, maintenance, repair and overhaul of aircraft, aircraft wheels and brakes and evacuation systems and warehouse operations, and for certain equipment. ITEM 3. LEGAL PROCEEDINGS - ------ ----------------- There are pending or threatened against BFGoodrich or its subsidiaries various claims, lawsuits and administrative proceedings, all arising from the ordinary course of business with respect to commercial, product liability and environmental matters, which seek remedies or damages. BFGoodrich believes that any liability that may finally be determined with respect to commercial and product liability claims, should not have a material effect on the Company's consolidated financial position or results of operations. -9- 10 The Company has been named a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency in connection with 38 sites, most of which relate to businesses that the Company has previously discontinued. The Company believes it may have continuing liability with respect to not more than 18 sites, most of which relate to previously discontinued businesses. Sites for which successor companies have assumed liability are not included. Based on information currently available, the Company believes it has adequately accrued for future environmental expenditures. However, management believes that it is reasonably possible that additional environmental costs may be incurred beyond the amounts accrued as a result of new information. The amounts, if any, however, cannot be estimated and management believes that they would not be material to the Company's financial condition, but could be material to the Company's results of operations in a given period. In June 1987, the U. S. District Court of Los Angeles, in U.S. ET AL. VS. STRINGFELLOW (United States District Court for the Central District of California, Civil Action No. 83-2501 (JMI)), granted partial summary judgment against the Company and 14 other defendants on the issue of liability under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). This suit, along with related lawsuits, alleges that the defendants are jointly and severally liable for all damage in connection with the Stringfellow hazardous waste disposal site in Riverside County, California. In June 1989, a federal jury and a special master appointed by the Federal court found the State of California also liable for the cleanup costs. On November 30, 1993, the special master released his "Findings of Fact, Conclusion of Law and Reporting Recommendations of the Special Master Regarding the State Share Fact-Finding Hearing." In it, he allocated liability between the State of California and other parties. As this hearing did not involve the valuation of future tasks and responsibilities, the order did not specify dollar amounts of liability. The order, phrased in percentages of liability, recommended allocating liability on the CERCLA claims as follows: 65 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. The special master's recommendation was substantially approved by the federal judge but that decision has been appealed. The Company and other generators of wastes disposed at the Stringfellow site, which include numerous companies with assets and equity significantly greater than the Company, are jointly and severally liable for the share of cleanup costs for which the generators, as a group, ultimately are found to be responsible. The Company is the second largest generator of wastes disposed at the site by volume, although it and certain other generators have argued the final allocation among generators of their shares of cleanup costs should not be determined solely by volume. The largest generator of wastes disposed at the Stringfellow site, by volume, has indicated it is significantly dependent on insurance to fund its share of any cleanup costs, and that it is in litigation with certain of its insurers. The Company intends to continue to defend vigorously these matters and believes, based on currently available information, that the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company. -10- 11 The Company has reached settlements with its primary comprehensive general liability insurance carriers concerning the Stringfellow site and has retained the right to file future claims against its excess carriers. During fiscal 1993, Region IX of the United States Environmental Protection Agency ("EPA") named the Company as a generator of hazardous wastes that were transported to the Casmalia Resources Hazardous Waste Management Facility (the "Casmalia Site") in Casmalia, California. In July 1996, the Company and approximately 50 other cooperating generators executed a Consent Decree and an Administrative Order on Consent which obligated the cooperating generators to perform, jointly and severally, certain response actions at the Casmalia Site prior to the entry of the Consent Decree. Since the entry of the Consent Decree, the cooperating generators (including the Company) have agreed to perform certain remedial actions at the Casmalia Site. The Company does not yet know the ability of all other PRPs at this site, which include companies of substantial assets and equity, to fund their allocable share. Some PRPs have made preliminary estimates of cleanup costs at this site of approximately $60.0 to $70.0 million and the Company's share (based on estimated, respective volumes of discharge into such site by all generators, all of which cannot now be known with certainty) could approximate $2.0 million. Based on currently available information, the Company believes that the resolution of this matter will not have a material adverse effect on the financial position or results of operations of the Company. The EPA has asserted that the Company and others disposed of certain hazardous substances at the Industrial Excess Landfill site in Uniontown, Ohio. This site is on the National Priorities List. The Company and some of the other PRPs have contributed to the cost of a public water supply system in the area. The Government has filed a lawsuit against the Company and twelve other PRPs seeking to recover past and future response and oversight costs of an undetermined amount (but currently in excess of $22.0 million). The State of Ohio has also sued to recover its oversight costs. The defendants are seeking contribution, indemnity, and cost recovery under CERCLA, in third party claims against 68 other PRPs. The Company is currently engaged in discussions with the government to change the remedy. If successful, a settlement may result. The Company's ultimate costs are uncertain but it is presently estimated that they should not exceed approximately 11 percent of the total cost expended on the site. Estimates of the total costs for the EPA selected remedy range from $32.0-50.0 million. If an alternative remedy is accepted, these costs could be cut by as much as one-half. The Company's aggregate liability is estimated to be approximately $5.0 million. The Company was identified as a PRP with respect to cleanup of the Vandale Junkyard, Marietta Ohio, a National Priorities List Superfund Site. The Company, along with other PRPs, was issued a unilateral order to design and construct a remedy at this site. Construction began in 1997, but was halted when geological conditions made construction of the remedy as designed ineffective. Additional testing is being conducted to determine what modifications are necessary. The participating PRPs hope to complete a remedy in 1999, but -11- 12 costs are likely to increase. The suit against Lockheed Martin and Mobil Oil who were substantial waste contributors at the site has resulted in an agreement which includes interim participation by those parties at 25 percent of total site costs and a course of binding alternative dispute resolution to determine final allocation of liability and costs among the parties. The U.S. EPA has sued the six PRPs, including the Company, for the government's oversight costs. The Company's total costs at this site, including investigation, design, construction, transaction costs and reimbursement of the government are not anticipated to exceed $4.3 million, subject to significant changes in the remedy. The Oklahoma Department of Environmental Quality sued the Company and others based on two different environmental issues at the former BFGoodrich Tire plant in Miami, Oklahoma. The first issue involves the release of asbestos to the environment as a result of demolition and/or deterioration of the plant buildings. In this part of the case, the State filed a motion for mandatory injunction against the Company and the not-for-profit company to which the plant was donated in 1993, Save Our Children's Environment (SOCE). The motion sought to have the defendants clean up and abate the alleged hazard posed by loose asbestos at the site. The court ordered SOCE and the current owner of the property, Ottawa Management Company, to prepare and implement a plan to abate the asbestos hazard. The Court declined to enjoin the Company without a full trial on all the issues. The defendants and Oklahoma engaged in mediated settlement discussions in August and September 1997 and arrived at an agreement contingent upon obtaining a performance bond to assure performance of the asbestos clean-up by the current owner. The owner could not obtain the necessary bond. The second part of the suit involves soil and/or groundwater contamination resulting from the operation of the plant prior to the donation. This issue is covered by an indemnity from The Uniroyal-Goodrich Tire Company, who has agreed to address this part of the State's concern and has signed an administrative consent order to perform the necessary work. A settlement is in the final stages of being completed. Under the agreement, the Company will spend approximately $300,000 in costs, penalties and remediation in exchange for a dismissal from the State. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- On December 22, 1997, the shareholders of the Company, at a special meeting, approved the issuance of the Company's common stock in connection with the merger with Rohr, Inc. Results of the voting were as follows: 42,425,014 shares voted for; 697,804 shares voted against; and 307,085 shares abstained from voting. -12- 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- --------------------------------------------------------------------- Common stock prices and dividends are on page 70 of the Company's 1997 Annual Report to Shareholders. The number of common shareholders at December 31, 1997, was 13,550. The discussions of the limitations and restrictions on the payment of dividends on common stock are included in Note J appearing beginning on page 49 and Note U on page 63 of the Company's 1997 Annual Report to Shareholders. All of these sections are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- Sales from continuing operations, income from continuing operations, total assets, non-current long-term debt and capital lease obligations, mandatorily redeemable preferred securities of Trust, redeemable preferred stock, income from continuing operations per share of common stock, and dividends declared per share of common stock as of and for each of the years in the five-year period ended December 31, 1997, on page 71 of the Company's 1997 Annual Report to Shareholders, are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- Management's Discussion and Analysis on pages 20-33 of the Company's 1997 Annual Report to Shareholders, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ------------------------------------------- The Consolidated Financial Statements and the related notes thereto, together with the report thereon of Ernst & Young LLP dated February 16, 1998, and supplementary data, appearing on pages 69-71 of the Company's 1997 Annual Report to Shareholders, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- None. -13- 14 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- Biographical information concerning the Company's Directors appearing under the caption "Election of Directors" in the Company's proxy statement dated March 13, 1998 is incorporated herein by reference. Biographical information concerning the Company's Executive Officers is as follows: David L. Burner, Age 58, Chairman, President and Chief Executive Officer - ------------------------------------------------------------------------ Mr. Burner joined the Company in 1983 as Vice President, Finance, for the Company's Engineered Products Group. He served in several other management positions before being named Executive Vice President of BFGoodrich Aerospace in 1985. He was appointed President of BFGoodrich Aerospace in 1987. Mr. Burner was elected a Senior Vice President in 1990, an Executive Vice President in 1993, President in December 1995, assumed the additional title of Chief Executive Officer in December 1996 and became Chairman in July 1997. Before joining BFGoodrich he was Executive Vice President and Chief Financial Officer of ABS Industries in Willoughby, Ohio. Mr. Burner received a B.S.C. degree in accounting from Ohio University. Marshall O. Larsen, Age 49, Executive Vice President and President and Chief - ---------------------------------------------------------------------------- Operating Officer, BFGoodrich Aerospace - --------------------------------------- Mr. Larsen joined the Company in 1977 as an Operations Analyst. He served in various management positions until 1986 when he became Assistant to the President of the Company. He later served as General Manager of several divisions of BFGoodrich Aerospace. In 1994, Mr. Larsen was elected a Vice President of the Company and named Group Vice President, Safety Systems, BFGoodrich Aerospace. In December 1995 he was elected Executive Vice President of the Company and named President and Chief Operating Officer of BFGoodrich Aerospace. Mr. Larsen has a B.S. in engineering from the U.S. Military Academy and an M.S. in industrial administration from the Krannert Graduate School of Management at Purdue University. Terrence G. Linnert, Age 51, Senior Vice President and General Counsel - ---------------------------------------------------------------------- Mr. Linnert joined BFGoodrich in November 1997. Prior to joining BFGoodrich, Mr. Linnert was senior vice president of corporate administration, chief financial officer and general counsel at Centerior Energy Corporation. At BFGoodrich, Mr. Linnert has responsibilities for the Company's legal, auditing, environmental and federal government relations organizations. Mr. Linnert joined The Cleveland Electric Illuminating Company in 1968, holding various engineering, procurement and legal positions until 1986, when CEI and The Toledo Edison Company became affiliated as wholly owned subsidiaries of Centerior Energy Corporation. Subsequently, Mr. Linnert had a variety of legal responsibilities until he was named director of legal services in 1990. In 1992, he was appointed a vice president, with responsibilities for legal, governmental and regulatory affairs. Prior to joining the Company, his responsibilities at Centerior included -14- 15 managing the legal, finance, human resources, regulatory and governmental affairs, auditing and corporate secretary functions. Mr. Linnert received a bachelor of science degree in electrical engineering from the University of Notre Dame in 1968 and a juris doctor degree from the Cleveland-Marshall School of Law at Cleveland State University in 1975. David B. Price, Jr., Age 52, Executive Vice President and President and Chief - ----------------------------------------------------------------------------- Operating Officer, BFGoodrich Specialty Chemicals - ------------------------------------------------- Mr. Price joined BFGoodrich in July 1997 in his present capacity. Prior to joining BFGoodrich, he was President of Performance Materials of Monsanto Company since 1995. Prior positions held by Mr. Price at Monsanto include Vice President and General Manager of commercial operations for the Industrial Products Group from 1993 to 1995, Vice President and General Manager of the Performance Products Group from 1991 to 1993, and Vice President and General Manager of Specialty Chemicals Division from 1987 to 1991. His association with Monsanto spanned 25 years. Mr. Price has a B.S. in civil engineering from the University of Missouri and an M.B.A. from Harvard University. D. Lee Tobler, Age 64, Executive Vice President and Chief Financial Officer - --------------------------------------------------------------------------- Mr. Tobler joined the Company in January 1985 as Executive Vice President and Chief Financial Officer and was elected a Director in April 1988. Prior to coming with the Company, Mr. Tobler had been Group Vice President and Chief Administrative and Financial Officer of Zapata Corporation from 1981 to 1984. Mr. Tobler has a B.A. from Brigham Young University and an M.B.A. from Northwestern University. Nicholas J. Calise, Age 56, Vice President, Associate General Counsel and - ------------------------------------------------------------------------- Secretary - --------- Mr. Calise joined the Company in October 1984 as Secretary and was also appointed Staff Vice President and Assistant General Counsel. In January 1989 he was elected Vice President and Associate General Counsel. Prior to joining BFGoodrich, he was with the Richardson-Vicks Inc. Home Care Products Division, Memphis, Tennessee, where he was Division Counsel, Director - Planning and Business Development and Marketing Director. Mr. Calise has an A.B. from Middlebury College and an M.B.A. and LL.B. from Columbia University. Robert H. Rau, Age 61, President, BFGoodrich Aerostructures Group - ----------------------------------------------------------------- Mr. Rau received a B.A. in Business Administration from Whittier College. Prior to the Company's merger with Rohr, Inc. in December 1997, Mr. Rau was President and Chief Executive Officer of Rohr, Inc. from 1993-1997. Before joining Rohr, he was an Executive Vice President of Parker Hannifin Corporation and, for the ten years prior to 1993, had served as President of the Parker Bertea Aerospace segment of Parker Hannifin. He joined Parker Hannifin in 1969 and held positions in finance, program management and general management. Mr. Rau has extensive experience in the aerospace industry. Mr. Rau is a member of the Board of Directors of Primtex Technologies, Inc. In addition, Mr. Rau is a member of the Board of Governors of the Aerospace Industries Association, a past Chairman of the General Aviation Manufacturers Association and a member of the Board of Trustees of Whittier College. -15- 16 Steven G. Rolls, Age 43, Vice President and Controller - ------------------------------------------------------ Mr. Rolls joined the Company in September 1981 as a Financial Analyst. He subsequently served in various capacities in the Treasury department, becoming an Assistant Treasurer in 1985. In 1987 he joined BFGoodrich Canada as Vice President, Finance and Treasurer. In 1989 he was appointed Vice President - Finance for the Aerospace business. Mr. Rolls was elected Vice President and Controller in 1993. He has a B.S. in business administration from Miami University and an M.B.A. from Ohio State University. George K. Sherwood, Age 59, Vice President - Tax Administration - --------------------------------------------------------------- Mr. Sherwood joined the Company in July 1985 as Staff Vice President - Taxes and was elected Vice President - Tax Administration in April 1986. Prior to joining BFGoodrich, Mr. Sherwood was Vice President - Tax Administration for Zapata Corporation. Mr. Sherwood has a B.S. in business administration from Kansas State College and an M.B.A. in management from The University of Tulsa. Les C. Vinney, Age 49, Vice President and Treasurer - --------------------------------------------------- Mr. Vinney joined the Company in 1991 as Vice President of Finance and Chief Financial Officer, Specialty Polymers and Chemicals Division. In 1993, he was named Senior Vice President, Finance and Administration, BFGoodrich Specialty Chemicals. In 1994, he was named Group Vice President, Sealants, Coatings and Adhesives Group, and President, Tremco Incorporated, and elected a Vice President of the Company. In January 1997, Mr. Vinney was elected Vice President and Treasurer of the Company. Prior to joining the Company, he was with Engelhard Corporation in a number of senior operating and financial management positions, including Group Vice President of the Engineered Materials Division. He also held various management positions with Exxon Corporation. Mr. Vinney has a B.A. in economics and political science and an M.B.A. from Cornell University. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- Information concerning executive compensation appearing under the captions "Compensation Committee Report" and "Compensation of Directors" in the Company's proxy statement dated March 13, 1998, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- Security ownership data appearing under the captions "Holdings of Company Equity Securities by Directors and Executive Officers" and "Beneficial Ownership of Securities" in the Company's proxy statement dated March 13, 1998, is incorporated herein by reference. -16- 17 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON - -------- ------------------------------------------------------ FORM 8-K - -------- (a) (1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this Form 10-K on page F-1. (3) - Listing of Exhibits: A listing of exhibits is on pages II-1 to II-3 of this Form 10-K. (b) Reports on Form 8-K filed in the fourth quarter of 1997: Filed October 16, 1997, regarding restatement of financial statements in order to present the chlor-alkali & olefins business (divested on August 15, 1997) as a discontinued operation. Filed October 27, 1997, regarding certain pro forma information and plan of disposition pertaining to the sale of the chlor-alkali and olefins business. -17- 18 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 16, 1998. The BFGoodrich Company (Registrant) By S/DAVID L. BURNER ---------------------------------------- (David L. Burner, Chairman and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 16, 1998 by the following persons (including a majority of the Board of Directors) on behalf of the registrant and in the capacities indicated. /S/DAVID L. BURNER - ------------------------------------ (David L. Burner) Chairman and Chief Executive Officer and Director (Principal Executive Officer) /S/D. LEE TOBLER - ------------------------------------ (D. Lee Tobler) Executive Vice President and Chief Financial Officer and Director (Principal Financial Officer) /S/STEVEN G. ROLLS - ------------------------------------ (Steven G. Rolls) Vice President and Controller (Principal Accounting Officer) /S/JEANETTE GRASSELLI BROWN - ------------------------------------ (Jeanette Grasselli Brown) Director /S/DIANE C. CREEL - ------------------------------------ (Diane C. Creel) Director /S/GEORGE A. DAVIDSON, JR. - ------------------------------------ (George A. Davidson, Jr.) Director - ------------------------------------ (Richard K. Davidson) Director - ------------------------------------ (James J. Glasser) Director /S/JODIE K. GLORE - ------------------------------------ (Jodie K. Glore) Director /S/DOUGLAS E. OLESEN - ------------------------------------ (Douglas E. Olesen) Director /S/RICHARD DE J. OSBORNE - ------------------------------------ (Richard de J. Osborne) Director /S/JOSEPH A. PICHLER - ------------------------------------ (Joseph A. Pichler) Director /S/ALFRED M. RANKIN, JR. - ------------------------------------ (Alfred M. Rankin, Jr.) Director /S/ROBERT H. RAU - ------------------------------------ (Robert H. Rau) Director /S/IAN M. ROSS - ------------------------------------ (Ian M. Ross) Director /S/JAMES R. WILSON - ------------------------------------ (James R. Wilson) Director /S/A. THOMAS YOUNG - ------------------------------------ (A. Thomas Young) Director -18- 19 THE B.F.GOODRICH COMPANY INDEX TO FINANCIAL INFORMATION Item 14(a)(1)-(2)
Reference ------------ 1997 Annual Report to Shareholders (page) ------------ Data incorporated by reference from the 1997 Annual Report to Shareholders of The BFGoodrich Company: Report of Independent Auditors 35 Consolidated Statement of Income for the years ended December 31, 1997, 1996 and 1995 36 Consolidated Balance Sheet at December 31, 1997 and 1996 37 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995 38 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 39 Notes to Consolidated Financial Statements 40-68 Quarterly Financial Data (Unaudited) 69-70
Schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information is included in the above listed financial statements or notes thereto. F-1 20 Item 14 (a)(3) Index to Exhibits Table II Exhibit No. - ----------- 3(A) The Company's Restated Certificate of Incorporation, as amended through August 5, 1988. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-Q for the quarter ended September 30, 1988, and is incorporated herein by reference. 3(B) The Company's By-Laws, as amended, through February 18, 1991. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1990, and is incorporated herein by reference. 4 Information relating to the Company's long-term debt is set forth in Note J "Financing Arrangements" on pages 49 and 50 of the Company's 1997 Annual Report to Shareholders, and is incorporated herein by reference. Instruments defining the rights of holders of such long-term debt are not filed herewith since no single debt item exceeds 10% of consolidated assets. Copies of such instruments will be furnished to the Commission upon request. 10(A) Stock Option Plan. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1997, and is incorporated herein by reference. 10(B)(4) Form of Disability Income Agreement. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1988, and is incorporated herein by reference. 10(B)(5) Form of Supplemental Executive Retirement Plan Agreement. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1989 and is incorporated herein by reference. 10(C) Performance Share Plan. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1991, and is incorporated herein by reference. 10(E) Management Incentive Program. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-Q for the quarter ended September 30, 1989, and is incorporated herein by reference. II-1 21 Item 14 (a)(3) Index to Exhibits Table II Exhibit No. - ----------- 10(F) Form of Management Continuity Agreement entered into by The B.F.Goodrich Company and certain of its employees. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1992, and is incorporated herein by reference. 10(G) Senior Executive Management Incentive Plan. This exhibit was filed as Appendix B to the Company's 1995 Proxy Statement dated March 2, 1995 and is incorporated herein by reference. 10(H) Rights Agreement, dated as of June 2, 1997, between The B.F.Goodrich Company and The Bank of New York which includes the form of Certificate of Amendment setting forth the terms of the Junior Participating Preferred Stock, Series F, par value $1 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C which was filed as Exhibit 1 to Form 8-A filed June 19, 1997 is incorporated herein by reference. 10(I) Employee Protection Plan. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1997, and is incorporated herein by reference. 10(J)(1) Benefit Restoration Plan. This exhibit was filed as Exhibit 10(J) to the Company's Form 10-K Annual Report for the year ended December 31, 1992, and is incorporated herein by reference. 10(J)(2) The B.F.Goodrich Company Savings Benefit Restoration Plan was filed as Exhibit 4(b) to the Company's Registration Statement No. 333-19697 on Form S-8 and is incorporated herein by reference. 10(K) Long-Term Incentive Plan and form of award. This exhibit was filed as Exhibit 10(K) to the Company's Form 10-K Annual Report for the year ended December 31, 1995, and is incorporated herein by reference. 10(L) Amended and Restated Assumption of Liabilities and Indemnification Agreement between the Company and The Geon Company, which was filed as exhibit 10.3 to Registration Statement No. 33-70998 on Form S-1 of The Geon Company, is incorporated herein by reference. 10(M) Outside Directors' Phantom Share Plan. II-2 22 Item 14 (a)(3) Index to Exhibits Table II Exhibit No. - ----------- 10(N) Directors Deferred Compensation Plan 10(O) Rohr, Inc. Supplemental Retirement Plan (Restated 1997) which was filed as an exhibit to Rohr, Inc.'s Form 10-Q for the quarterly period ended May 4, 1997, is incorporated herein by reference. 10(P) Rohr, Inc. 1991 Stock Compensation for Non-Employee Directors which was filed as an exhibit to Rohr, Inc.'s Form 10-K for fiscal year ended July 31, 1992, is incorporated herein by reference. 10(Q) Rohr Industries, Inc., Management Incentive Plan (Restated 1982), as amended through the Fifteenth Amendment, as set forth in Rohr, Inc.'s Form 10-K for fiscal year ended July 31, 1994, is incorporated herein by reference. 10(R) Sixteenth Amendment to Rohr, Inc. Management Incentive Plan (Restated 1982), dated June 7, 1996, which was filed as an exhibit to Rohr, Inc.'s Form 10-K for the fiscal year ended July 31, 1996, is incorporated herein by reference. 10(S) Seventeenth Amendment to Rohr Industries, Inc. Management Incentive Plan (Restated 1982), dated September 13, 1996, which was filed as an exhibit to Rohr, Inc.'s Form 10-K for the fiscal year ended July 31, 1996, is incorporated herein by reference. 10(T) Employment Agreement with Robert H. Rau, which was filed as an exhibit to Rohr, Inc.'s Form 10-Q for the period ended May 2, 1993, is incorporated herein by reference. 10(U) First Amendment to Employment Agreement with Robert H. Rau, which was filed as an exhibit to Rohr, Inc.'s Form 10-K for fiscal year ended July 31, 1996, is incorporated herein by reference. 10(V) Rohr, Inc. 1989 Stock Option Plan filed as exhibit 10.18 to the Rohr Industries, Inc. Form 10-K for the fiscal year ended July 31, 1990, is incorporated herein by reference. 10(W) Rohr, Inc. 1995 Stock Incentive Plan filed as exhibit 4.1 to Rohr, Inc. Registration Statement No. 33-65447 filed on December 28, 1995, is incorporated herein by reference. II-3 23 Item 14 (a)(3) Index to Exhibits Table II Exhibit No. - ----------- 10(X) Employment Agreement with Robert H. Rau. 13 Annual Report to Shareholders. The Company's 1997 Annual Report to Shareholders (only those portions incorporated by reference in the Form 10-K). 21 Subsidiaries 23(a) Consent of Independent Auditors - Ernst & Young LLP 23(b) Consent of Independent Auditors - Deloitte & Touche LLP 27 Financial Data Schedule 99 Independent Auditors Report The Company will supply copies of the foregoing exhibits to any shareholder upon receipt of a written request addressed to the Secretary of The B.F.Goodrich Company, 4020 Kinross Lakes Parkway, Richfield, Ohio 44286-9368, and the payment of $.50 per page (except for the Annual Report to Shareholders which is complimentary) to help defray the costs of handling, copying and postage. II-4 EX-10.M 2 EXHIBIT 10(M) 1 Exhibit 10(M) DIRECTORS' PHANTOM SHARE PLAN ----------------------------- ADOPTED BY THE BOARD OF DIRECTORS ON SEPTEMBER 18, 1995 AMENDED BY THE BOARD OF DIRECTORS ON FEBRUARY 16, 1998 WHEREAS, the Board of Directors has previously established a retirement income program for certain Directors of the Company by resolution adopted on February 17, 1982 ("1982 Directors' Retirement Plan"); and WHEREAS, the Board of Directors wishes to replace the 1982 Directors' Retirement Plan with a phantom share plan and establish certain transitional provisions; NOW THEREFORE, BE IT RESOLVED, that the following plan, to be known as the Directors' Phantom Share Plan is hereby established with the following terms and conditions: Directors who are not and have not been executive officers of the Company ("Outside Directors") shall receive annual grants of phantom shares ("Phantom Shares") (each Phantom Share to equal the fair market value of one share of Company common stock) equal in value to one times the then current annual retainer for Outside Directors on each Board service anniversary date (as hereinafter defined) through the tenth Board service anniversary date. No further awards of Phantom Shares shall be made following the tenth Board service anniversary date. With respect to the current Outside Directors: - Outside Directors with ten or more years of Board service as of the date hereof shall receive no grant of Phantom Shares but shall continue to be eligible to receive benefits under the 1982 Directors' Retirement Plan. - Outside Directors with at least five years but less than ten years of Board service as of the date hereof shall receive an annual grant of Phantom Shares equal in value to one times the then current annual retainer for Outside Directors on each Board service anniversary date commencing on their next Board service anniversary date through their tenth Board service anniversary date. Such Directors shall continue to be eligible to receive benefits under the 1982 Directors' Retirement Plan to the extent such benefits are accrued for benefit computation purposes as of the date hereof (rounded to completed years of Board service). 2 - Outside Directors with less than five years of Board service as of the date hereof shall receive an initial grant of Phantom Shares equal to the current annual retainer for Outside Directors times the number of years (rounded to completed years) of Board service. Such Directors shall thereafter receive an annual grant of Phantom Shares equal to one times the then current annual retainer for Outside Directors on each Board service anniversary date commencing on their next Board service anniversary date through their tenth Board service anniversary date. Such Directors shall not be eligible for any benefits under the 1982 Directors' Retirement Plan. Dividend equivalents will be accrued on all Phantom Shares granted under this Plan. Upon the payment date of each dividend declared on the Company's common stock, that number of additional Phantom Shares will be credited to each Outside Directors' account which is equivalent in value to the aggregate amount of dividends which would be paid if the number of Phantom Shares credited to each Outside Directors' account were actual shares of the Company's common stock. All Phantom Shares become fully vested at the earlier of: (i) five years from the date of grant; (ii) upon the Director's termination of service on the Board on or after age 55; or (iii) a "Change in Control" as defined in the Company's Key Employees' Stock Option Plan. Upon termination of Board service (the "termination date") the fair market value of all vested Phantom Shares shall be paid to each Outside Director in cash, subject to applicable withholding taxes, as follows: The value of each Outside Directors' account shall be paid in 12 installments commencing on the first day of the month coincident with or next following the Directors termination date, and on the first day of the next 11 months thereafter (each an "installment date"). Each installment shall equal a fractional amount of each Outside Directors' account, the numerator of which is one and the denominator of which is equal to the number of months remaining between the installment date and 12 months after the first installment date. 3 For all purposes of this Plan, the fair market value for the Company's common stock and Phantom Shares shall be the mean of the high and low prices of the Company's common stock on the relevant date as reported on the New York Stock Exchange Composite Transactions Listing (or similar report) or if no sale was made on such date, then on the next preceding day on which such sale was made. The first Board service anniversary date for each Outside Director shall mean the date of the first Annual Meeting of Shareholders following election as a Director. Each Board service anniversary thereafter shall be the date of the next Annual Meeting of Shareholders. Any person who is entitled to benefits under the 1982 Director's Retirement Plan as of the date hereof shall be fully vested in the right to receive such benefits. No additional accrual of years of service for benefit calculation purposes shall be made under the 1982 Directors' Retirement Plan. Other than as expressly provided in these Directors' Phantom Share Plan resolutions, the resolutions of February 17, 1982 are hereby rescind and are of no further force and effect. No award of Phantom Shares shall be assignable or transferable by the Outside Directors, except by will or by the laws of descent and distribution. The number of Phantom Shares credited to an Outside Directors' account shall be adjusted to reflect any stock split, stock dividend, combination of shares, merger, consolidation, reorganization, or other change in the structure of the Company or the nature of the Company's common stock (the "event") in the same manner as the event affects the Company's common stock. The Board of Directors may alter or amend this Plan, in whole or in part, from time to time, or terminate the Plan at any time, provided, however, no such action shall adversely affect any rights or obligations with respect to awards of Phantom Shares previously made under the Plan, without consent of the individual Outside Director. FURTHER RESOLVED, that the officers of the Company be and they severally are authorized to do and perform each and every act and thing and to execute and deliver any and all documents as, on the advice of legal counsel of the Company, such officers may deem necessary or advisable to implement the intent and purpose of the preceding resolutions, such officer's execution thereof to be conclusive evidence of the exercise of the discretionary authority herein conferred. EX-10.N 3 EXHIBIT 10(N) 1 Exhibit 10(N) DIRECTORS DEFERRED COMPENSATION PLAN ------------------------------------ ADOPTED BY THE BOARD OF DIRECTORS ON DECEMBER 1, 1997 RESOLVED, that effective January 1, 1998, a fixed retainer be paid to each Director, except employees or former employees of the Company or its subsidiaries who are Directors, for services as a member of the Board of Directors, at a rate of $40,000 per year. One-half of the fixed retainer shall be deferred under the Directors' Deferred Compensation Plan (the "Plan") into a bookkeeping account ("Deferred Compensation Account") denominated in phantom shares ("Phantom Shares") with each Phantom Share equal to the fair market value of one share of Company common stock. Directors may elect to defer (the "Deferral Election") all or a portion of the remaining fixed retainer into the Deferred Compensation Account in Phantom Shares. The Deferral Election shall remain in effect for the calendar year for which made and shall continue in effect for each succeeding calendar year unless revoked or modified prior to the commencement of such succeeding year. Dividend equivalents will be accrued on all Phantom Shares under this Plan. Upon the payment date of each dividend declared on the Company's common stock, that number of additional Phantom Shares will be credited to each Director's account which is equivalent in value to the aggregate amount of dividends which would be paid if the number of Phantom Shares credited to each Director's account were actual shares of the Company's common stock. Upon termination of service as a Director for any reason, accrual shares of the Company's common stock equal in number to the number of Phantom Shares credited to the Director's account, less any applicable withholding, shall be promptly paid to the Director or his or her designated beneficiary (or estate if no beneficiary designated). For all purposes of this Plan, the fair market value for the Company's common stock and Phantom Shares shall be the mean of the high and low prices of the Company's common stock on the relevant date as reported on the New York Stock Exchange - Composite Transactions Listing (or similar report) or if no sale was made on such date, then on the next preceding day on which such sale was made. No award of Phantom Shares shall be assignable or transferable by the Directors, except by will or by the laws of descent and distribution. 2 The number of Phantom Shares credited to a Director's account shall be adjusted to reflect any stock split, stock dividend, combination of shares, merger, consolidation, reorganization, or other change in the structure of the Company or the nature of the Company's common stock (the "event") in the same manner as the event affects the Company's common stock. The Board of Directors may alter or amend this Plan, in whole or in part, from time to time, or terminate the Plan at any time, provided, however, no such action shall adversely affect any rights or obligations with respect to awards of Phantom Shares previously made under the Plan, without consent of the individual Director. RESOLVED FURTHER, that the officers of the Company be and they severally are authorized to do and perform each and every act and thing and to execute and deliver any and all documents as, on the advice of legal counsel of the Company, such officers may deem necessary or advisable to implement the intent and purpose of the preceding resolutions, such officer's execution thereof to be conclusive evidence of the exercise of the discretionary authority herein conferred. RESOLVED FURTHER, that a fee of $1,000 be paid to each Director, except employees or former employees of the Company or its subsidiaries who are Directors, for attendance at each duly called meeting of the Board and for attendance at each duly called meeting of any Committee of the Board of which he or she is a member (other than as Chairman), or which he or she is requested by the Chairman of such Committee to attend, together with an allowance for any proper expenses incurred in attending such meeting; and RESOLVED FURTHER, that a fee of $1,500 be paid to each Director, except employees or former employees of the Company or its subsidiaries who are Directors, for attendance at each duly called meeting of any Committee of the Board of which he or she is Chairman, together with an allowance for any proper expenses incurred in attending such meeting; and RESOLVED FURTHER, that the officers of the Company be and hereby severally are authorized to make payments to each such Director in accordance with the provisions of the preceding resolutions. EX-10.X 4 EXHIBIT 10(X) 1 Exhibit 10(X) January 9, 1998 Mr. Robert H. Rau President and Chief Executive Officer Rohr, Inc. 850 Lagoon Drive Chula Vista, CA 91910-2098 Dear Bob: This letter is to confirm our various discussions concerning your continuing relationship with Rohr and BFGoodrich following the merger. You will continue as President and Chief Executive Officer of Rohr through December 31, 1998, located at the Rohr headquarters in Chula Vista. As you know, Rohr will be one of the operating groups within BFGoodrich Aerospace and you will report to Marshall Larsen. Your compensation will continue at the same level that exists today. Your base salary will be $640,200 per year and your 1998 target annual bonus will be $384,120. The 1998 bonus is payable in February 1999. In accordance with your current agreement with Rohr, you will be entitled to be paid a pro rata bonus related to Rohr's R.O.N.A. performance of not less than $160,000 and not more than $320,000 for the period from August 1, 1997 to December 31, 1997. You will be recommended for participation in the Long Term Incentive Plan at the same level as Marshall Larsen. Actual awards under the plan may only be made by the Compensation Committee, which will consider this at its February 1998 meeting. Based upon a BFGoodrich share price of $45 at the time of the meeting, current guidelines provide for an award of 12,600 Performance Shares for the three-year plan cycle ending December 31, 2000. At the end of the plan cycle, you would be entitled to a pro rata award of 1/3 the amount earned based on your retirement on December 31, 1998. You will be reimbursed for the membership fees and business expenses incurred by you at the Fairbanks Ranch Country Club in accordance with the policies and procedures of BFGoodrich for reimbursement of such expenses for senior executives who are 2 Robert H. Rau January 9, 1998 Page 2 offered company-paid country club memberships. You will be reimbursed, including tax gross-up, for financial planning and tax preparation services in accordance with the BFGoodrich policies for executives receiving such benefits. Based on your salary, you will be entitled to a combined financial planning and tax preparation reimbursement of $16,000 per year, plus gross-up. You will be eligible for first class air travel. You will be entitled to five weeks of paid vacation per year. Upon your retirement from Rohr you will be paid for all unused vacation in accordance with BFGoodrich's policy, which is related to your base pay in effect at the time of your retirement. Upon your retirement you will be entitled to retirement benefits in accordance with your Employment Agreement with Rohr and the existing Rohr Supplemental Retirement Plan. You will continue to be reimbursed for your fees and business related expenses at the Fairbanks Ranch Country Club until age 65 in accordance with BFGoodrich policies and procedures for retired senior executives. During your service as an employee and retiree you will continue to have the employee benefits, including medical, dental, disability and life insurance, to which other Rohr employees or retirees are entitled. You have been elected a member of the BFGoodrich Board of Directors. You will continue to be considered for renomination to the Board of Directors in accordance with the BFGoodrich Board's policies. You will not be entitled to any compensation as a director during the time you are an employee or a consultant. For the three-year period beginning January 1, 1999 and continuing through December 31, 2001, you agree to serve as a consultant to BFGoodrich. You will receive a consulting fee of $28,000 per month. While it is not intended that you be required to devote your full time as a consultant, you agree that you will be available as a consultant on a reasonable basis. You will be reimbursed for reasonable expenses associated with your consulting assignments. While you are a consultant you may join other boards of directors and after your retirement you may do consulting work for other companies, subject in each case to the prior approval of the Chief Executive Officer of BFGoodrich, provided there is no 3 Robert H. Rau January 9, 1998 Page 3 conflict of interest with BFGoodrich and there is no interference with your ability to properly perform your duties. During the period through December 31, 2001, you shall not engage in any activity which competes with or assists others to compete with BFGoodrich. If you agree with the foregoing, please sign and return a copy to me. Sincerely, David L. Burner ACCEPTED AND AGREED TO: By: --------------------------------- Robert H. Rau Date: ------------------------------- EX-13 5 EXHIBIT 13 1 Exhibit 13 The BFGoodrich Company and Subsidiaries financials 20 Management's Discussion and Analysis 34 Management's Responsibility for Financial Statements 35 Report of Independent Auditors 36 Consolidated Statement of Income 37 Consolidated Balance Sheet 38 Consolidated Statement of Cash Flows 39 Consolidated Statement of Shareholders' Equity 40 Notes to Consolidated Financial Statements 69 Quarterly Financial Data (Unaudited) 71 Selected Five-Year Financial Data 72 Board of Directors 73 Officers 74 Shareholder Information [19] 2 The BFGoodrich Company and Subsidiaries Management's Discussion and Analysis This Management's Discussion and Analysis contains forward-looking statements. See the last section for certain risks and uncertainties. RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 BFGoodrich achieved the fourth year of solid sales and income growth since the new company effectively came into being on January 1, 1994, following the sale of the Geon Vinyl Products Segment in 1993. In addition, the largest business combination in its 128-year history was accomplished at the end of 1997. MERGER WITH ROHR On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by exchanging 18,588,004 shares of BFGoodrich common stock for all of the common stock of Rohr (the term Company is used to refer to BFGoodrich including Rohr). Each share of Rohr common stock was exchanged for .7 of one share of BFGoodrich common stock. The merger was accounted for as a pooling of interests, and all prior period financial statements have been restated to include the financial information of Rohr as though Rohr had always been a part of BFGoodrich. CONSOLIDATED OPERATIONS The Company achieved strong double-digit sales and income growth from continuing operations in 1997. Income from continuing operations climbed 58 percent, excluding the impact of merger-related costs. The Company experienced continued strong demand in many markets in both the Aerospace and Specialty Chemicals Segments.
(IN MILLIONS ) 1997 1996 1995 -------- -------- -------- Sales: BFGoodrich $2,306.0 $2,078.2 $1,860.5 Rohr 1,067.0 767.6 801.3 -------- -------- -------- $3,373.0 $2,845.8 $2,661.8 ======== ======== ========
Cost of sales was 73.8 percent of sales in 1997, compared with 71.8 percent in 1996. Margin improvement in several businesses in 1997 was more than offset by margin decline in others (see detailed group discussions below). Selling and administrative costs were 16.5 percent of sales in 1997, compared with 16.9 percent a year earlier. Each segment contributed to the reduction, which was principally the result of higher sales. Additional leverage was mitigated by higher variable selling-related costs in the Specialty Chemicals Segment and increased original-equipment strategic sales incentives and a large bad debt write-off in the Aerospace Segment. The table below presents income from continuing operations for the previously separate companies and the combined amounts presented in the Consolidated Statement of Income for each of the last three fiscal years.
(IN MILLIONS) 1997 1996 1995 ------ ------ ----- Income from Continuing Operations: BFGoodrich $140.5 $ 93.2 $74.6 Rohr 42.0 22.3 20.2 ------ ------ ----- 182.5 115.5 94.8 Merger-related costs (after tax) (69.3) - - ------ ------ ----- $113.2 $115.5 $94.8 ====== ====== =====
[20] 3 The BFGoodrich Company and Subsidiaries Income from continuing operations included various charges or gains (referred to as special items) which affected reported earnings. Excluding the effects of special items, income from continuing operations in 1997 was $179.3 million, or $2.42 per diluted share, compared with $127.7 million, or $1.83 per diluted share, in 1996. The following table presents the impact of special items on 1997 and 1996 earnings per diluted share.
EARNINGS PER DILUTED SHARE 1997 1996 ----- ----- Income from continuing operations $1.53 $1.65 MD-90 write-off .28 - Net (gain) loss on sold businesses (.22) .03 Gain on issuance of subsidiary stock (.10) - Merger-related costs .93 - Asset impairment and restructuring charges - .10 Exchange of convertible debt - .05 ----- ----- Income from continuing operations, excluding special items $2.42 $1.83 ===== =====
Prior to the merger, Rohr's fiscal year ended on July 31. For purposes of the combination, Rohr's financial results for its fiscal year ended July 31, 1997, have been restated to the year ended December 31, 1997, to conform with BFGoodrich's calendar year end. Financial results for Rohr's fiscal years ended July 31, 1996 and earlier have not been restated to conform to BFGoodrich's calendar year end. For periods prior to 1997, Rohr's fiscal years ended July 31 have been combined with BFGoodrich's calendar years ended December 31. As a result, Rohr's results of operations for the period August 1, 1996 to December 31, 1996, do not appear in the Consolidated Statement of Income and instead are recorded as a direct adjustment to equity. Rohr's revenues, expenses and net loss for this five-month period were $341.3 million, $359.3 million and $18.0 million, respectively. Included in expenses during this period was a $49.3 million pretax charge ($29.5 million after tax) relating to the McDonnell Douglas MD-90 program (see discussion under Aerostructures Group). As a result of the Rohr merger occurring at the end of 1997, certain users of financial statements may find it helpful, or be interested to know, what BFGoodrich's 1997 earnings may have looked like without the merger. On this basis, 1997 pro forma net income excluding special items was $116.3 million, or $2.12 per diluted share on a pro forma basis. This compares with pro forma net income of $94.8 million, or $1.76 per diluted share on a pro forma basis, for 1996 (excluding special items). OUTLOOK For 1998 and beyond, the Company has established a financial template which sets forth a series of specific financial goals that define excellence in business and financial performance from the perspective of an investor. The goals are: double-digit annual revenue growth; combined segment operating margins of at least 15 percent; earnings-per-share growth of 15 percent on average; and return on equity of 15 percent. To attain these goals, the Company will aggressively assimilate the more recent large acquisitions and expand its previously existing businesses worldwide. The Company has the financial strength needed to pursue this growth. AEROSPACE MARKET OVERVIEW 1997 was a strong year for the aerospace industry. Deliveries of large commercial transport aircraft, a key indicator of market demand, surged 44 percent over 1996. A second key indicator, revenue passenger miles-which reflects the number of passengers and the distance they travel on the airlines-also rose during the year. For instance, world airline passenger traffic increased an estimated 7.3 percent over 1996, including an increase of revenue passenger miles in the U.S. market of 4.7 percent. Although market conditions boosted commercial programs, military spending again declined from the prior year. Total military spending in 1997 was approximately 6 percent less than in 1996. [21] 4 The BFGoodrich Company and Subsidiaries SEGMENT PERFORMANCE Aerospace achieved sales growth of 22 percent over 1996. Sixty percent of Aerospace's 1997 sales were to original-equipment manufacturers, up from 51 percent in 1996. The increase in original-equipment sales was due to stronger demand for new commercial aircraft in the marketplace. Sales to civil aviation customers were 86 percent of total Aerospace sales in 1997, compared with 87 percent in 1996. Military sales decreased to 9 percent of Aerospace sales, from 12 percent a year earlier. Aerospace achieved a 3 percent increase in operating income, despite a $35.2 million charge related to the MD-90 program, a large increase in sales incentives related to wheels and brakes, and an $11.8 million bad debt write-off due to a customer's bankruptcy and productivity problems in the MRO Group.
SALES BY GROUP (IN MILLIONS) 1997 1996 1995 -------- -------- -------- Aerostructures $1,039.7 $ 744.4 $ 783.8 Landing Systems 509.6 414.8 364.2 Sensors and Integrated Systems 550.7 493.2 475.8 MRO 368.3 369.0 327.2 -------- -------- -------- Total $2,468.3 $2,021.4 $1,951.0 ======== ======== ========
AEROSTRUCTURES GROUP (ROHR) The group achieved 40 percent sales growth in 1997. Contributing to increased sales were accelerated delivery rates on most commercial programs, reflecting increased production rates of commercial aircraft and increased deliveries of spare parts. The CFM56-5 and V2500 programs (which power the A320 family), A340, RR535-E4 (primarily for the Boeing 757), and MD-90 programs all reflected significant volume increases. The Aerostructures Group 1997 operating income of $102.6 million included a $35.2 million pretax charge on the MD-90 contract. Operating income increased in 1997 primarily as a result of increased sales. Operating income of $89.8 million in 1996 was adversely impacted by a $7.2 million pretax impairment charge on the group's Arkadelphia, Arkansas, facility. Operating income in 1996 benefited from the recognition of profit on the MD-90 program (1996 MD-90 sales were $68.8 million). In 1997, however, no profit was recognized on MD-90 sales (totaling $109.9 million), adversely affecting margins, in addition to the $35.2 million pretax charge recognized on that program in 1997, as discussed below. In 1990, the Company entered into a contract with International Aero Engines to produce nacelles for The Boeing Company's (formerly the McDonnell Douglas Corporation's) MD-90 aircraft. Under the terms of the contract, the Company agreed to recover its preproduction costs, and the higher-than-average production costs associated with early production shipments, over a specified number of deliveries. In light of the wide market acceptance of the MD-80 series, which was the predecessor aircraft, the Company believed sufficient MD-90 aircraft would be sold to allow it to recover its costs. Starting in 1996, a series of developments created market uncertainties regarding future sales of the MD-90 aircraft. The most significant of these developments included: McDonnell Douglas' termination of the MD-XX program and the doubts this action raised regarding McDonnell Douglas' continued presence in the commercial aircraft industry; the decision of several large airlines that have traditionally operated McDonnell Douglas aircraft to order aircraft that compete with the MD-90; the announced (and subsequently completed) acquisition of McDonnell Douglas by Boeing, which produces a family of competing aircraft; the announcement by Delta Air Lines (launch customer for the MD-90) of its intent to replace its existing fleet of MD-90s and to seek a business resolution with McDonnell Douglas with respect to its remaining orders for the aircraft; and the lack of significant new MD-90 orders. In recognition of these developments, the Company reduced its estimates of future MD-90 aircraft deliveries in December 1996 to include only deliveries which were supported by firm orders, options and letters of intent for [22] 5 The BFGoodrich Company and Subsidiaries the aircraft. Based on its reduced estimate of future aircraft deliveries, the Company believed that future MD-90 sales would not be sufficient to recover its contract investment plus the costs it will be required to spend in the future to complete the contract. As a result, the Company recorded a $49.3 million pretax charge ($29.5 million after tax) in December of 1996 (this charge did not impact the income statement; rather, it was recognized as a direct adjustment to equity as a result of aligning Rohr's fiscal year with BFGoodrich's). During July 1997, the Company further reduced its market estimate of future MD-90 sales to existing firm aircraft orders (excluding firm orders from Delta Air Lines) and recorded an additional $35.2 million pretax charge ($21.0 million after tax, or $.28 per diluted share).
OPERATING INCOME (LOSS) BY GROUP (IN MILLIONS) 1997 1996 1995 ------ ------ ------ Aerostructures $102.6 $ 89.8 $ 77.7 Landing Systems 72.0 61.2 54.1 Sensors and Integrated Systems 89.0 72.6 64.9 MRO (3.3) 30.0 32.8 ------ ------ ------ Total $260.3 $253.6 $229.5 ====== ====== ======
The Boeing 717 program (previously termed the McDonnell Douglas MD-95 program) is a new 100-passenger aircraft currently under development. The Company has invested $62.8 million for design and development costs on the Boeing 717 program through December 31, 1997. The Company anticipates spending approximately $23.0 million more for preproduction costs through mid-1999, the aircraft's scheduled Federal Aviation Administration ("FAA") certification date. If the contract is cancelled prior to FAA certification, the Company expects substantial recovery of these costs. If the aircraft is certified and actively marketed, the amount of these costs and initial production start-up costs recovered by the Company will depend upon the number of aircraft delivered. To date, Boeing has announced 50 firm orders and 50 options from the launch customer, AirTran Airlines, formerly ValuJet. Boeing has indicated that it intends to "embrace" the aircraft as a "strong addition to the Boeing product line" and has indicated it expects future additional orders for this aircraft. In 1993, the Company revised its contract with Pratt & Whitney on the PW4000 for the A300/A310 and MD-11 programs. The revised contract provides that if Pratt & Whitney accepts delivery of less than 500 units from 1993 through 2003, an "equitable adjustment" will be made. Recent market projections on the PW4000 contract indicate that less than 500 units will be delivered. The Company has submitted a "request for equitable adjustment" to the customer and believes it will achieve a recovery such that there should not be a material adverse effect on the financial position, liquidity or results of operations of the Company. If the Company does not receive the equitable adjustment it believes it is entitled to, it is possible that there may be a material adverse effect on earnings in a given period. At December 31, 1997, the Company had $64.0 million of contract costs in inventory for the above PW4000 programs. LANDING SYSTEMS GROUP The continued sales growth in 1997 primarily reflected higher original-equipment volumes of landing gear and evacuation products and higher wheel and brake replacement sales. Landing gear programs providing the largest increased volume contribution included the B737 (nose gear), B767 and MD-11. Key evacuation systems programs included the B747-400 and the A330/340. Aftermarket demand for commercial wheels and brakes was also strong, primarily for the B777, B737, B747-400 and A330/340 programs. In addition, demand for regional, business, and military wheels and brakes significantly improved during the year, particularly for the F-16 retrofit program. The Landing Systems Group achieved significantly higher operating income during the year, due primarily to greater sales of landing gear and evacuation slides to the original-equipment market and more aftermarket sales of wheels and brakes. This result was achieved by the group despite a three-week strike at the landing gear business in the second quarter and substantially higher strategic sales incentive costs in the wheel and brake business. Operating [23] 6 The BFGoodrich Company and Subsidiaries margins (operating income as a percent of sales) declined modestly, reflecting the lower margins associated with original-equipment sales relative to aftermarket sales and significantly higher strategic sales incentive costs. SENSORS AND INTEGRATED SYSTEMS GROUP The increased sales volumes of the Sensors and Integrated Systems Group reflected increased demand from commercial original-equipment manufacturers for aircraft sensors, principally on the B777 and B747 commercial transport programs and the Embraer and Gulfstream GV regional and business jet programs. Stronger demand for aftermarket spares also boosted sales, particularly for aircraft sensors and aircraft fuel systems. In addition, the group benefited from the March completion of the Gulton Data Systems acquisition, a transaction which offset lost sales resulting from the engine electrical systems business divestiture in June 1997. Gulton Data Systems sells products primarily to the space industry. Operating income for the group increased 23 percent over 1996 results. Operating margins increased 10 percent, due to increased volumes of higher-margin aftermarket spares that were sold to the commercial markets. Operating income improvement also reflects productivity initiatives, including business and plant consolidations. In addition, the income contribution of Gulton Data Systems more than offset the lost income from the divested engine electrical systems business.
OPERATING MARGIN BY GROUP 1997 1996 1995 ---- ---- ---- Aerostructures 9.9 % 12.1% 9.9% Landing Systems 14.1 % 14.8% 14.9% Sensors and Integrated Systems 16.2 % 14.7% 13.6% MRO (1.0)% 8.1% 10.0% Total Segment 10.5 % 12.5% 11.8%
MAINTENANCE, REPAIR AND OVERHAUL (MRO) GROUP Sales declined modestly compared with 1996, largely reflecting decreased sales volume in the component services business due to reduced demand from a major customer and, to a lesser extent, the bankruptcy of two customers early in 1997. The group's airframe business, however, posted higher sales during the year. Despite the negative effects of the UPS strike during the summer of 1997 and productivity issues throughout the year, the airframe business achieved a 5 percent sales growth. This growth was due to increased demand for services from airline customers throughout the year and the addition of two new customers-United and Northwest Airlines. The MRO Group, however, recorded an operating loss in 1997. The group recognized an $11.8 million bad debt charge related to all amounts receivable from Western Pacific Airlines ($10.9 million of which was recognized in the fourth quarter). Western Pacific filed for Chapter 11 protection under the Bankruptcy Code last October. On February 4, 1998, Western Pacific abruptly ceased its operations, resulting in the bankruptcy court ordering liquidation of the airline. The Company expects that 1998 MRO sales and operating income will not be materially adversely impacted by lost Western Pacific business, due to expected replacement business. In addition to the Western Pacific matter, the airframe business continued to face challenges in retaining skilled technical workers, as competition for skilled workers significantly increased due to hiring at Boeing and the airlines. This resulted in higher costs for training new workers, lower productivity and higher wage and benefit rates for retained skilled workers. Although turnover of the labor force declined progressively during 1997, turnover levels at year end were still higher than historical levels. In addition, lower customer demand and higher operating costs in the component services business contributed to the operating income decline. Finally, the group's 1996 sales included approximately $7.0 million of high-margin product sales by the component services business which are not normally made by the service businesses and which are not expected to recur. OUTLOOK Industry analysts predict that commercial transport aircraft production will continue to be strong throughout 1998 and into future years, with Boeing and Airbus deliveries forecasted to increase by more [24] 7 The BFGoodrich Company and Subsidiaries than 35 percent over 1997 deliveries. BFGoodrich Aerospace, with 60 percent of sales to original-equipment manufacturers in 1997, is expected to benefit from the continued upswing in production rates at Boeing, Airbus and the regional aircraft manufacturers. In the longer term, projected worldwide airline traffic growth and enforcement of federal noise regulations should continue to exert favorable pressure on the original-equipment production cycle beyond 1998. In addition to the positive commercial original-equipment sales outlook, aftermarket spares demand is also anticipated to increase in 1998 as the average age of commercial fleets continues to rise. Because military procurement of new aircraft is expected to remain relatively flat in 1998, the Company will continue its aggressive pursuit of aircraft retrofit and life-extension programs for military customers to improve longer-term sales of aftermarket products. Military spares sales are expected to improve which would complement Aerospace's existing program sales and should sustain military sales at approximately 10 percent of Aerospace's total sales. The regional aircraft market is expected to continue its strong growth in 1998, with revenue passenger miles forecasted to increase by 7 percent. The turbo-jet market should lead regional aircraft growth, while turbo-prop production is expected to decline. The Company has products on most of the new models in production, including those manufactured by Embraer and Canadair, and is well-positioned to benefit from further growth in this market segment with new product lines. In addition, the Company expects continued strong aftermarket sales from the components and systems that it provides for older aircraft in service. The business jet market is forecasted to grow by approximately 3 percent, and Aerospace has products on the latest models from Cessna and Gulfstream. Airlines are expected to continue to outsource traditionally retained services in efforts to reduce operating costs. The Company, through its MRO Group, is a leading provider of third-party airframe and component maintenance services. Labor issues at the Seattle operations have begun to stabilize, and the Company expects this to result in operating margin improvement during 1998 and 1999. The addition of Rohr (Aerostructures Group) provides opportunities for the Company to serve new business and markets with a broader line of products and services. Rohr supplies either components or complete nacelle systems for approximately 90 percent of the world's commercial transport aircraft fleet. As a result, the Rohr nacelle business should continue to gain from commercial aircraft production growth in 1998. Furthermore, Rohr expects to expand its service capabilities in conjunction with the MRO Group and to increase its spare parts sales to airlines and original-equipment manufacturers. The merger with Rohr in 1997 will benefit Aerospace's position in an industry that continues to consolidate and reward manufacturers offering a broad portfolio of product and services. The Company expects to continue to acquire and develop differentiated systems capabilities, pursue process and quality improvements, and strive for product and market leadership. As the industry continues to consolidate domestically and internationally, the Company will be prepared to perform at the highest levels and consistently offer the best products and services to our aerospace customers. SPECIALTY CHEMICALS SEGMENT PERFORMANCE 1997 represented another exceptional year for Specialty Chemicals, with both sales and operating income exceeding the 1996 record levels. Sales increased 10 percent in 1997, to $904.7 million. Excluding acquisitions, sales increased 7 percent. Segment operating income increased 17 percent, largely reflecting strong volume growth. Adverse foreign exchange effects tempered the segment's income growth, which would have been 21 percent excluding the impact of the stronger U.S. dollar.
SALES BY GROUP (IN MILLIONS) 1997 1996 1995 ------ ------ ------ Specialty Additives $587.1 $532.0 $460.4 Specialty Plastics 317.6 292.4 250.4 ------ ------ ------ Total $904.7 $824.4 $710.8 ====== ====== ======
[25] 8 The BFGoodrich Company and Subsidiaries SPECIALTY ADDITIVES GROUP Strong volume growth and, to a lesser extent, acquisitions drove a 10 percent sales increase in 1997. Excluding the negative impact of the stronger U.S. dollar on European businesses, sales increased 12 percent. Volume gains were realized in most product lines and market segments. Synthetic thickeners sales for industrial, personal-care, household and pharmaceutical applications in Europe and Asia were particularly strong, as were North American resins and emulsions sales in the paints and coatings and electronics market segments. Selling prices were generally higher in all Specialty Additives product lines. Excluding acquisitions, sales increased 7 percent. Operating income in 1997 increased 28 percent, driven by volume and productivity gains. The benefits of higher selling prices were mitigated by the negative impact of the stronger U.S. dollar. Excluding the negative foreign exchange impact, the group's operating income increased 34 percent over 1996. Group operating margins increased 17 percent as a result of the above gains.
OPERATING INCOME BY GROUP (IN MILLIONS) 1997 1996 1995 ------ ------ ----- Specialty Additives $ 84.9 $ 66.1 $48.9 Specialty Plastics 43.3 43.4 25.5 ------ ------ ----- Total $128.2 $109.5 $74.4 ====== ====== =====
SPECIALTY PLASTICS GROUP Sales in 1997 rose 9 percent, despite the stronger U.S. dollar effects during the year. Adjusted for exchange rate changes, principally against European currencies, sales increased 12 percent over 1996. Solid volume gains in the group's high-heat-resistant plastics were achieved, most of which were in North America, while significantly higher volumes for thermoplastic polyurethanes occurred in both North America and Europe. Static-control polymer sales growth was achieved in North America and Asia. 1997 was a transitional year for Specialty Plastics from an operating income perspective. Income growth relating to volume gains was offset principally by start-up costs in connection with investments in domestic and global expansions in all divisions. Also, the negative foreign exchange impact of the stronger U.S. dollar and higher raw material costs reduced operating income. The group's operating income increased 3 percent over 1996 without the foreign exchange impact. Operating income growth was achieved by the thermoplastic polyurethane business. Significant operating margin erosion occurred, however, in the high-heat-resistant plastics business, principally caused by the significant start-up costs associated with the construction of two new European plants. Operating margins in this business are expected to improve during 1998 and 1999 as the two new plants become fully operational and volume leverage is achieved.
OPERATING MARGIN BY GROUP 1997 1996 1995 ---- ---- ---- Specialty Additives 14.5% 12.4% 10.6% Specialty Plastics 13.6% 14.8% 10.2% Total Segment 14.2% 13.3% 10.5%
OUTLOOK Specialty Chemicals is committed to aggressive growth. The growth strategy includes global expansion, extension of product breadth and entering new markets. Consistent with that strategy, in late 1997 and early 1998, the Company announced several initiatives, including the formation of a specialty plastics joint venture in China, the acquisition of ICI's thermoplastic polyurethane capacity in the United Kingdom, the acquisition of the C. H. Patrick textile and coatings business and the signing of a definitive agreement to acquire Freedom Chemical Company. Freedom Chemical had sales of $293.1 million in 1997, 42 percent of which were outside the U.S., including product lines in food additives-representing a new market for Specialty Chemicals. Additionally, [26] 9 The BFGoodrich Company and Subsidiaries the construction of a new high-heat-resistant plastic resin facility will be completed in early 1998 in The Netherlands, which will provide additional sales volume and strengthen the Company's competitive position in Europe. The segment expects continued sales and operating income growth and improved operating margins from its internal and external growth initiatives. 1996 Compared with 1995 CONSOLIDATED OPERATIONS 1996 marked a year of continued growth and improved earnings performance. Both Aerospace and Specialty Chemicals Segments achieved higher sales and operating income in 1996 compared with 1995. Income from continuing operations increased 22 percent over 1995. Results in 1995 included (after tax) a $12.5 million insurance recovery, a $1.9 million restructuring charge and a $2.2 million business sale gain. Excluding these special items and the previously mentioned 1996 special items, 1996 income from continuing operations was $127.7 million, or $1.83 per diluted share, compared with $82.0 million, or $1.11 per diluted share in 1995. AEROSPACE The Aerospace Segment achieved higher sales and operating income in 1996. Sales increased 4 percent over 1995, while operating income increased 11 percent. AEROSTRUCTURES GROUP Sales declined 5 percent in 1996, to $744.4 million. Sales in 1996 benefited from increased MD-90 deliveries and approximately $30.0 million of one-time sales related to Boeing and International Aero Engines contracts. Overall, sales declined from 1995 levels primarily due to delivery rate reductions on the PW4000, RB211-535 and CF6-80C programs. In addition, government sales declined due to the near completion of the C-130 and the Titan Space programs. Despite the sales decline, the group's 1996 operating income increased 16 percent over 1995, reflecting a favorable sales mix and the positive settlement of outstanding contract terms on the IL96 and the A340 contracts. The group's 1996 operating income was adversely impacted by a $7.2 million pretax impairment charge on its Arkadelphia, Arkansas, facility. LANDING SYSTEMS GROUP Demand from airlines for several wheel and brake programs increased, including the Boeing 747-400 and Airbus A320 and A330/340 programs. Strong commercial landing gear spares sales, particularly for the Boeing 767 program, also contributed to the sales increase. Improving demand for new aircraft landing gear, principally for the Boeing 747-400 program, also added to the group's sales growth. Strong aftermarket demand for evacuation products and evacuation repair services more than offset lower evacuation products sales for new aircraft. Higher volumes, particularly in higher-margin aftermarket sales, drove the group's operating income increase over 1995. SENSORS AND INTEGRATED SYSTEMS GROUP The group's sales increase resulted from strong aircraft sensors aftermarket demand. Demand increased for retrofit products, particularly for Boeing 727 and 737 and Lockheed L1011 aircraft. The increase in operating income over 1995 reflects the higher 1996 sales levels. MAINTENANCE, REPAIR AND OVERHAUL GROUP The MRO Group achieved significant sales growth compared to 1995 levels, reflecting the continuing trend by airlines toward outsourcing of commercial airframes and components maintenance, principally landing gear and wheels and brakes. The MRO Group also benefited from the full-year impact of America West Airlines and Western Pacific Airlines contracts. Despite higher 1996 sales, operating income remained flat compared with 1995. This principally reflected inefficiencies and higher labor costs at the group's airframe business in Seattle, Washington. The higher costs and inefficiencies resulted from significant labor turnover during 1996 due to increased demand by neighboring Boeing and the airlines for skilled technicians. SPECIALTY CHEMICALS Segment sales and operating income in 1996 exceeded the 1995 record levels. Sales in 1996 increased 16 percent, to $824.4 million. Excluding 1996 acquisitions and a 1995 divestment, sales increased 10 percent. Segment operating income increased 47 percent, to $109.5 million. Adjusted for 1996 acquisitions and the 1995 divestment, operating income increased 40 percent. [27] 10 The BFGoodrich Company and Subsidiaries SPECIALTY ADDITIVES GROUP Sales increased 16 percent over the prior year. Excluding four 1996 acquisitions, sales increased 7 percent, reflecting both volume gains and price increases across most major product lines. Resins and emulsions sales to the textile, electronics, adhesives, industrial coatings and do-it-yourself markets were especially strong. Synthetic thickeners sales for industrial, personal-care, household and pharmaceutical applications also generated strong volume gains over 1995. The group's operating income performance reflected the benefits of higher 1996 volumes and selling prices, plus the contribution from acquisitions. SPECIALTY PLASTICS GROUP A 17 percent sales increase in 1996 reflected strong high-heat-resistant plastics demand in North America, Europe and the Middle East. In addition, higher thermoplastic polyurethane volumes in Europe and in North American static-control polymers markets contributed to the group's overall growth. Sales also benefited from higher prices in most major product lines. 1996 operating income growth was largely driven by volume gains, assisted by higher selling prices. IMPAIRMENT AND RESTRUCTURING CHARGES In 1997, the Company recognized a $35.2 million pretax charge ($21.0 million after tax, or $.28 per diluted share) to write off that portion of its McDonnell Douglas MD-90 aircraft contract investment, plus the future costs it will be required to spend to complete the contract, that the Company determined would not be recoverable from future MD-90 sales represented by firm aircraft orders. In addition, the Company recognized a $49.3 million pretax charge ($29.5 million after tax) for this program in December 1996 (this charge did not impact the income statement; rather, it was recognized as a direct adjustment to equity as a result of aligning Rohr's fiscal year with BFGoodrich's). In 1996, the Company recognized a $7.2 million pretax impairment charge on its Arkadelphia, Arkansas, facility. Also during 1996, the Company recognized a $4.0 million pretax charge for a voluntary early retirement program for eligible employees of the Specialty Plastics and Specialty Additives Groups. In 1995, the Company recorded a $3.1 million pretax charge to reflect the termination benefits paid under a voluntary early retirement program. The Company continues to evaluate employment levels and facility cost structures in relation to economic and competitive conditions. NET INTEREST EXPENSE Net interest expense has declined significantly in each of the last three years. This achievement principally reflects progressively lower debt levels as a result of cash generated from operations and proceeds from the sale of businesses. In addition, the Company has gradually been refinancing its long-term debt with lower-cost funds. ISSUANCE OF SUBSIDIARY STOCK In May 1997, the Company's subsidiary, DTM Corporation, issued 2,852,191 shares of its authorized but previously unissued common stock in an initial public offering ("IPO"). The shares were issued at $8.00 per share ($7.44 per share net of the underwriting discount), resulting in $21.2 million cash proceeds to DTM, net of the underwriting discount. DTM develops, designs, manufactures, markets and supports, on an international basis, rapid prototyping and rapid tooling systems, powdered material and related services. The Company owned approximately 92 percent of DTM's outstanding common stock immediately prior to the IPO. As a result of the IPO, the Company's interest declined to approximately 50 percent (the Company did not sell any of its interest in the IPO). The Company recognized a pretax gain of $13.7 million ($8.0 million after tax, or $.10 per diluted share, including provision for deferred income taxes) in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin 84. The Company does not expect public or private offerings of any of its subsidiaries' previously unissued stock to occur in the foreseeable future. [28] 11 The BFGoodrich Company and Subsidiaries OTHER INCOME (EXPENSE)-NET For major components of Other income (expense)-net, see Note P to the Consolidated Financial Statements. DISCONTINUED OPERATIONS On August 15, 1997, the Company sold its chlor-alkali and olefins ("CAO") business to The Westlake Group for $92.7 million, resulting in a $14.5 million after-tax gain, or $.19 per diluted share. The CAO business disposition represents the disposal of a segment of a business under APB Opinion No. 30 ("APB 30"). Accordingly, the Consolidated Statement of Income reflects the CAO business (previously reported as Other Operations) as a discontinued operation. For further information, see Note C to the Consolidated Financial Statements. On February 3, 1997, the Company sold Tremco Incorporated to RPM, Inc. for $230.7 million, resulting in a $59.5 million after-tax gain, or $.80 per diluted share. The sale of Tremco Incorporated completed the disposition of the Company's Sealants, Coatings and Adhesives ("SC&A") Group, which also represented a disposal of a segment of a business under APB 30. In 1995, Rohr completed the disposition of its business jet line of nacelle business, which represented the disposal of a business segment under APB 30. EXTRAORDINARY ITEMS During 1997, the Company incurred $19.3 million of costs (net of a $13.1 million income tax benefit), or $.25 per diluted share, to extinguish certain indebtedness previously held by Rohr, which is reported as an extraordinary item. Costs incurred include debt premiums and other direct costs associated with the extinguishment of the related debt. The Company used a combination of existing cash funds and proceeds from new lower-cost long-term debt to extinguish the debt. Of the $19.3 million, $2.6 million (net of a $1.8 million income tax benefit) was incurred during the third quarter in connection with prepaying Rohr's 9.33 percent Senior Notes and 9.35 percent Senior Notes. The remaining $16.7 million (net of an $11.3 million income tax benefit) relates to debt extinguishment costs incurred in connection with the Rohr merger during the fourth quarter for refinancing Rohr's 11.625 percent Senior Notes, 9.25 percent Subordinated Debentures, 7.00 percent Convertible Subordinated Debentures and 7.75 percent Convertible Subordinated Notes. RETURN ON EQUITY The Company's objective is to achieve and maintain a return on equity of 15 percent. In 1997, the Company achieved a return on equity of 13.5 percent, compared with 15.8 percent in 1996 and 14.7 percent in 1995. Adjusted for the special items previously mentioned, return on equity for 1997, 1996 and 1995 was 13.5 percent, 11.6 percent and 8.3 percent, respectively. CAPITAL RESOURCES AND LIQUIDITY Current assets less current liabilities were $466.4 million at December 31, 1997, compared with $553.7 million a year earlier-a decrease of $87.3 million. The Company's current ratio was 1.50X at December 31, 1997, compared with 1.65X a year ago. In addition, the quick ratio was .62X at the end of 1997, compared with .78X at the end of 1996. These decreases principally reflect the impact of the Company's refinancing activities. The Company's total debt less cash and cash equivalents was $713.3 million at December 31, 1997, compared with $937.0 million at December 31, 1996. The Company has adequate cash flow from operations to satisfy its operating requirements and capital spending programs. In addition, the Company has the credit facilities described in the following paragraphs to finance growth opportunities as they arise. The Company maintains $410.0 million of uncommitted domestic money market facilities with various banks to meet its short-term borrowing requirements. As of December 31, 1997, $262.3 million of these facilities were unused and available. The Company's uncommitted credit facilities are provided by a small number of commercial banks that also provide the Company with all of its domestic committed lines of credit and the majority of its cash management, trust and investment management requirements. As a result of these established relationships, the Company believes that its uncommitted facilities are a highly reliable and cost-effective source of liquidity. [29] 12 The BFGoodrich Company and Subsidiaries The Company also maintains $300.0 million of committed domestic revolving credit agreements with various banks, expiring in the year 2000. At December 31, 1997, and throughout the year, these facilities were not in use. In addition, at December 31, 1997, the Company had an effective shelf registration statement with the SEC providing the ability to issue up to $131.0 million of public debt securities (referred to as the MTN program). MTN notes are fixed-rate non-callable debt securities. In January 1998, the Company issued $130.0 million of 6.9 percent 20-year MTN notes, essentially exhausting the Company's shelf registration. The notes were issued to finance partially the acquisition of Freedom Chemical, the purchase of which the Company expects to complete late in the first quarter of 1998 (see Note D to the Consolidated Financial Statements for additional information). In early 1998, the Company expects to file a registration statement with the SEC for the establishment of a new shelf registration for purposes of the MTN program. The Company also has a $75.0 million committed multi-currency revolving credit facility with various international banks, expiring in the year 2003. The Company intends to use this facility for short- and long-term local currency financing to support European operations growth. At December 31, 1997, the Company had borrowed $69.7 million ($44.2 million on a short-term basis and $25.5 million on a long-term basis) denominated in various European currencies at floating rates. The Company has effectively converted the $25.5 million long-term debt portion into fixed-rate debt with an interest rate swap. The Company believes that its credit facilities are sufficient to meet longer-term capital requirements, including normal maturities of long-term debt. One of the Company's objectives is to achieve and maintain an "A" rating by the leading credit rating agencies. Accomplishing this goal reduces the Company's cost of debt capital and strengthens the Company's financial flexibility to achieve its growth plans. During 1997, the Company made further progress toward achieving this objective as Standard & Poor's Ratings Group raised its rating on the Company's senior debt to A-. Duff & Phelps Credit Rating Co. had previously upgraded the Company's rating to A-, while Moody's Investors Service currently maintains a Baa1 rating on the Company's senior debt. At December 31, 1997, the Company's debt-to-capitalization ratio was 33.0 percent. For purposes of this ratio, the QUIPS (see Note U to the Consolidated Financial Statements) are treated as capital. The Company strives to maintain its debt-to-capitalization ratio within the long-term target range of 35 to 40 percent. CASH FLOW "Free cash flow" is cash from operations remaining after satisfying capital expenditures and dividend payments. The Company's strategy is to maximize free cash flow through profitable business growth and to reinvest in opportunities that will build shareholder value after providing common shareholders with appropriate dividend payments. Free cash flow for the Company is summarized as follows:
(IN MILLIONS) 1997 1996 1995 ------ ------ ------ Cash flows from (used for): Operations $209.6 $265.5 $221.0 Capital expenditures-net (151.4) (188.3) (152.6) ------ ------ ------ 58.2 77.2 68.4 Dividends and QUIPS distributions (70.0) (69.3) (66.7) ------ ------ ------ Free cash flow (deficiency) $(11.8) $ 7.9 $ 1.7 ====== ====== ======
Cash flow from operations in 1997 declined $55.9 million compared with 1996. This decline largely reflects income tax payments of $54.7 million made by the Company in 1997, relating to the gains on the sale of businesses. Excluding the effect of these income tax payments, 1997 free cash flow improved substantially compared with 1996. [30] 13 The BFGoodrich Company and Subsidiaries Cash flow from operations has been more than adequate to finance capital expenditures in each of the past three years. The Company expects to have sufficient cash flow from operations to finance planned capital spending for 1998. ENVIRONMENTAL MATTERS Federal, state and local statutes and regulations relating to the protection of the environment and the health and safety of employees and other individuals have resulted in higher operating costs and capital investments by the industries in which the Company operates. Because of a focus toward greater environmental awareness and increasingly stringent environmental regulations, the Company believes that expenditures for compliance with environmental, health and safety regulations will continue to have a significant impact on the conduct of its business. Although it cannot predict accurately how these developments will affect future operations and earnings, the Company does not believe its costs will vary significantly from those of its competitors. The Company expects to incur capital expenditures and future costs for environmental, health and safety improvement programs. These expenditures are customary operational costs and are not expected to have a material adverse effect on the financial position, liquidity or results of operations of the Company. BFGoodrich and its subsidiaries are generators of both hazardous and non-hazardous wastes, the treatment, storage, transportation and disposal of which are subject to various laws and governmental regulations. Although past operations were in substantial compliance with the then-applicable regulations, the Company has been designated as a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency ("EPA") in connection with approximately 38 sites, most of which related to businesses previously discontinued. The Company believes it may have continuing liability with respect to not more than 18 sites. The Company initiates corrective and/or preventive environmental projects of its own to ensure safe and lawful activities at its current operations. The Company believes that compliance with current governmental regulations will not have a material adverse effect on its capital expenditures, earnings or competitive position. The Company's environmental engineers and consultants review and monitor past and existing operating sites. This process includes investigation of National Priority List sites where the Company is considered a PRP, review of remediation methods and negotiation with other PRPs and governmental agencies. At December 31, 1997, the Company has recorded as Accrued expenses and as Other Non-current Liabilities a total of $31.4 million to cover future environmental expenditures, principally for remediation of the aforementioned sites and other environmental matters. A significant portion of accrued environmental liabilities is in connection with four sites which relate to businesses previously discontinued and two sites that came with the Rohr merger. Two of the most significant variables in determining the Company's ultimate liability are the remediation method finally adopted for the site and the Company's share of the total site remediation cost. With respect to three of the four sites of previously discontinued businesses, the Company's maximum percentage share of the ultimate remediation costs is fixed. The percentages range from approximately 12 percent to approximately 41 percent, and appropriate reserves have accordingly been established. At the fourth site, alternate dispute resolution ("ADR") is underway to establish the various parties' share of responsibility. The Company's interim share is 30 percent, which the Company believes will likely decrease as a result of the ADR. Of the four sites relating to discontinued businesses, two sites are in the operation and maintenance phase for which costs are reasonably fixed. Construction at a third site was begun in 1997, but problems with the remedial design caused work to be discontinued. Modifications or other remedial alternatives are being explored which could result in increases or decreases in estimated costs. Until a decision on these remedy changes is made in 1998, an accurate cost estimate for this site cannot be determined. Litigation on this site with the government over the recovery of past government costs is ongoing. Until a final decision on the remedy is made and the Company's percentage of liability is determined through ADR, it is not possible to estimate the Company's total cost of this site. However, total site costs are not expected to exceed $15.0 million, of which the Company's share is 30 percent, which reflects the basis for the amount accrued at December 31, 1997. The final site involving discontinued businesses continues in litigation with no agreement with the government over the remedy and government costs [31] 14 The BFGoodrich Company and Subsidiaries exceeding $22.0 million. This site presents the greatest uncertainty both as to the nature and cost of the final remedy and the percentage of the government's costs that are found to be recoverable. However, the Company's share of this site is relatively small, at less than 12 percent. The Company has accrued for costs it expects to incur. The Company also has two active Superfund sites relating to the Aerostructures Group (Rohr). Of these, one is a multimillion dollar site that has been in active investigation/remediation/litigation for over 15 years. Depending on the outcome of recent settlement discussions, the Company may not spend much more on this matter, but a reserve is being retained in the event the settlement does not occur. An action against third-party defendants is being pursued by the PRPs seeking contribution. No receivable has been reflected for any potential contributions. The second Rohr site is in an earlier stage and the Company's percentage share of the total site remediation cost has not been determined. The estimated cost of this site to all parties is $70.0 million. The Company believes that it has adequately reserved for all of the above sites based on currently available information. Management believes that it is reasonably possible that additional costs may be incurred beyond the amounts accrued as a result of new information. However, the amounts, if any, cannot be estimated and management believes that they would not be material to the Company's financial condition, but could be material to the Company's results of operations in a given period. YEAR 2000 COMPUTER COSTS The Company has been addressing the computer system changes that will be required to ensure functionality of all the Company's computer systems for the year 2000. The Company has completed, is currently working on or soon will be engaged in the implementation of several new business systems, replacing outdated systems. The new systems are already designed to be year 2000 compliant. In other circumstances, the Company will be required to make changes to existing systems. The Company currently estimates that incremental costs (i.e., payments to third parties) to modify existing software to become year 2000 compliant should be less than $5.0 million in the aggregate for its existing businesses. Such costs are expected to be incurred throughout 1998 and 1999 and will be expensed as incurred. The Company is also in the process of reviewing the efforts being undertaken by its vendors and customers to become year 2000 compliant to ensure that no business interruption is experienced at the turn of the century. The Company is not currently aware of vendor or customer circumstances that may have a material adverse impact on the Company. NEW ACCOUNTING STANDARDS During 1997, the Financial Accounting Standards Board issued Statement 128, regarding earnings per share, and Statement 131, which deals with segment reporting. The Company has restated all earnings per share amounts in accordance with Statement 128. Statement 131, effective for the Company's annual report for the year ending December 31, 1998, provides new guidance on how an enterprise is to determine its segments in order to provide segment disclosures for financial reporting purposes. The Company does not expect Statement 131 to change its reportable segments as currently presented in the Consolidated Financial Statements. [32] 15 The BFGoodrich Company and Subsidiaries FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY This document includes certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve risk and uncertainty. With respect to Aerospace, the expected continuing recovery of the worldwide civil aviation market, including a more than 35 percent increase in delivery of aircraft by Boeing and Airbus, could be adversely affected if customers cancel or delay current orders or original-equipment manufacturers reduce the rate they build or expect to build products for such customers. Such cancellations, delays or reductions may occur if there is a substantial change in the health of the airline industry or in the general economy, or if a customer were to experience financial or operational difficulties. There have been reports of weak new aircraft orders and actual cancellation of orders from Asian carriers due to the Asian financial crisis. If these developments should continue or accelerate, it could have an adverse effect upon the Company. Even if orders remain strong, original-equipment manufacturers could reduce the rate at which they build aircraft due to inability to obtain adequate parts from suppliers and/or because of productivity problems relating to a recent rapid build-up of the labor force to increase the build rate of new aircraft. Boeing announced a temporary cessation of production in the fall of 1997 for these reasons. A change in levels of defense spending could curtail or enhance prospects in the Company's military business. If the trend towards increased outsourcing or reduced number of suppliers in the airline industry changes, it could affect the Company's business. If the Boeing 717 program is not as successful as anticipated, or the Company cannot work out an equitable adjustment on the PW4000 program, it could adversely affect the Company's business. If the Company is unable to continue to acquire and develop new systems and improvements, it could affect future growth rates. There has been a higher-than-normal historical turnover rate of technicians in the MRO business due to hiring by Boeing and the airlines, although recently the turnover rate has been returning closer to historical levels. If this trend were again to reverse, it could have an adverse effect on the Company. If the Company is unable to replace the Western Pacific MRO business with similar volumes at similar margins, it could adversely affect the Company. Such events could be exacerbated if there is a substantial change in the health of the airline industry, or in the general economy, or if a customer were to experience major financial difficulties. With respect to Specialty Chemicals, the expected growth in volume demand could be adversely impacted by a lack of acceptance of new product offerings or by a delay in capacity expansions in the United States and Europe. Expected sales increases in the Far East could be adversely impacted by recent turmoil in financial markets in that region. If operating margins in the specialty plastics businesses do not improve or the Company is unable to achieve additional sales of high-heat-resistant plastic resins at appropriate margins, it could adversely affect the Company. With respect to the entire Company, if outside vendors are unable to make their computer systems year 2000 compliant in time, or if the magnitude of the year 2000 issue is greater than presently anticipated, it could have a material adverse impact on the Company. If there are unexpected developments with respect to environmental matters involving the Company, it could have an adverse effect upon the Company. The Company's financial template sets forth goals, but they are not forecasts. [33] 16 The BFGoodrich Company and Subsidiaries Management's Responsibility for Financial Statements The Consolidated Financial Statements and Notes to Consolidated Financial Statements of The BFGoodrich Company and subsidiaries have been prepared by management. These statements have been prepared in accordance with generally accepted accounting principles and, accordingly, include amounts based upon informed judgments and estimates. Management is responsible for the selection of appropriate accounting principles and the fairness and integrity of such statements. The Company maintains a system of internal controls designed to provide reasonable assurance that accounting records are reliable for the preparation of financial statements and for safeguarding assets. The Company's system of internal controls includes: written policies, guidelines and procedures; organizational structures, staffed through the careful selection of people that provide an appropriate division of responsibility and accountability; and an internal audit program. Ernst & Young LLP, independent auditors, were engaged to audit and to render an opinion on the Consolidated Financial Statements of The BFGoodrich Company and subsidiaries. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the Consolidated Financial Statements are not materially misstated. The report of Ernst & Young LLP follows. The Board of Directors pursues its oversight responsibility for the financial statements through its Audit Committee, composed of Directors who are not employees of the Company. The Audit Committee meets regularly to review with management and Ernst & Young LLP the Company's accounting policies, internal and external audit plans and results of audits. To ensure complete independence, Ernst & Young LLP and the internal auditors have full access to the Audit Committee and meet with the Committee without the presence of management. D. L. Burner Chairman and Chief Executive Officer D. L. Tobler Executive Vice President and Chief Financial Officer S. G. Rolls Vice President and Controller [34] 17 The BFGoodrich Company and Subsidiaries Report Of Independent Auditors TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE BFGOODRICH COMPANY: We have audited the accompanying Consolidated Balance Sheet of The BFGoodrich Company and subsidiaries as of December 31, 1997 and 1996, and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements as of and for the years ended July 31, 1996 and 1995 of Rohr, Inc., which statements reflect total assets constituting 26 percent as of July 31, 1996, and total sales constituting 27 percent and 30 percent for the years ended July 31, 1996 and 1995, respectively, of the related consolidated totals. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Rohr, Inc. for 1996 and 1995, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1996 and 1995, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The BFGoodrich Company and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Cleveland, Ohio February 16, 1998 [35] 18 The BFGoodrich Company and Subsidiaries Consolidated Statement of Income
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31 1997 1996 1995 --------- --------- --------- SALES $ 3,373.0 $ 2,845.8 $ 2,661.8 Operating costs and expenses: Cost of sales 2,454.7 2,042.5 1,973.3 Charge for MD-90 contract 35.2 - - Selling and administrative costs 556.0 481.8 438.0 Restructuring costs and asset impairment - 11.2 3.1 Merger-related costs 77.0 - - --------- --------- --------- 3,122.9 2,535.5 2,414.4 --------- --------- --------- OPERATING INCOME 250.1 310.3 247.4 Interest expense (73.0) (89.3) (98.6) Interest income 12.0 4.2 6.5 Gain on issuance of subsidiary stock 13.7 - - Other income (expense)-net 15.0 (30.8) 1.9 --------- --------- --------- Income from continuing operations before income taxes and Trust distributions 217.8 194.4 157.2 Income tax expense (94.1) (68.4) (57.3) Distributions on Trust preferred securities (10.5) (10.5) (5.1) --------- --------- --------- INCOME FROM CONTINUING OPERATIONS 113.2 115.5 94.8 Income from discontinued operations-net of taxes 84.3 58.4 47.3 --------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEMS 197.5 173.9 142.1 Extraordinary losses on debt extinguishment-net of taxes (19.3) - (1.2) --------- --------- --------- NET INCOME $ 178.2 $ 173.9 $ 140.9 ========= ========= ========= BASIC EARNINGS PER SHARE: Continuing operations $ 1.59 $ 1.74 $ 1.40 Discontinued operations 1.19 .87 .74 Extraordinary losses (.27) - (.02) --------- --------- --------- Net income $ 2.51 $ 2.61 $ 2.12 ========= ========= ========= DILUTED EARNINGS PER SHARE: Continuing operations $ 1.53 $ 1.65 $ 1.34 Discontinued operations 1.13 .83 .69 Extraordinary losses (.25) - (.02) --------- --------- --------- Net income $ 2.41 $ 2.48 $ 2.01 ========= ========= =========
See Notes to Consolidated Financial Statements. [36] 19 The BFGoodrich Company and Subsidiaries Consolidated Balance Sheet
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31 1997 1996 -------- -------- CURRENT ASSETS Cash and cash equivalents $ 47.0 $ 137.1 Accounts and notes receivable 532.6 527.5 Inventories 652.6 646.4 Deferred income taxes 132.4 51.8 Prepaid expenses and other assets 36.7 45.1 -------- -------- TOTAL CURRENT ASSETS 1,401.3 1,407.9 PROPERTY 1,065.1 1,142.0 DEFERRED INCOME TAXES 86.0 160.2 PREPAID PENSION 148.3 89.3 GOODWILL 546.2 544.3 IDENTIFIABLE INTANGIBLE ASSETS 51.1 47.6 OTHER ASSETS 195.9 188.5 -------- -------- TOTAL ASSETS $3,493.9 $3,579.8 ======== ======== CURRENT LIABILITIES Short-term bank debt $ 192.8 $ 134.4 Accounts payable 327.6 306.7 Accrued expenses 411.3 344.4 Income taxes payable - 10.4 Current maturities of long-term debt and capital lease obligations 3.2 58.3 -------- -------- TOTAL CURRENT LIABILITIES 934.9 854.2 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 564.3 881.4 PENSION OBLIGATIONS 39.6 56.8 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 343.7 352.4 OTHER NON-CURRENT LIABILITIES 65.7 86.6 COMMITMENTS AND CONTINGENT LIABILITIES (NOTE W) - - MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST 123.1 122.6 SHAREHOLDERS' EQUITY Common stock-$5 par value Authorized, 100,000,000 shares; issued, 73,946,160 shares in 1997 and 70,530,178 shares in 1996 369.7 352.7 Additional capital 500.7 444.0 Income retained in the business 591.5 490.8 Cumulative unrealized translation adjustments (1.7) 5.9 Minimum pension liability adjustment (1.8) (26.4) Unearned portion of restricted stock awards (.7) (9.0) Common stock held in treasury, at cost (1,204,022 shares in 1997 and 1,135,985 shares in 1996) (35.1) (32.2) -------- -------- TOTAL SHAREHOLDERS' EQUITY 1,422.6 1,225.8 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,493.9 $3,579.8 ======== ========
See Notes to Consolidated Financial Statements. [37] 20 The BFGoodrich Company and Subsidiaries Consolidated Statement of Cash Flows
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31 1997 1996 1995 -------- -------- -------- OPERATING ACTIVITIES Net income $ 178.2 $ 173.9 $ 140.9 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on debt extinguishment 19.3 - 1.2 Depreciation and amortization 138.8 139.8 136.0 Deferred income taxes 33.2 29.0 31.6 Net gains on sale of businesses (138.8) (4.5) (3.6) Charge for exchange of 7.75% Convertible Notes - 5.3 - Asset impairment write-down - 7.2 - Change in assets and liabilities, net of effects of acquisitions and dispositions of businesses: Receivables (41.7) (36.9) 13.6 Inventories (53.3) (29.9) (64.4) Other current assets 1.1 2.0 5.2 Accounts payable 26.0 7.2 (14.6) Accrued expenses 86.2 6.2 (1.4) Income taxes payable (11.2) (19.5) 9.1 Other non-current assets and liabilities (28.2) (14.3) (32.6) -------- -------- -------- Net cash provided by operating activities 209.6 265.5 221.0 -------- -------- -------- INVESTING ACTIVITIES Purchases of property (159.9) (197.1) (155.8) Proceeds from sale of property 8.5 8.8 3.2 Proceeds from sale of businesses 395.9 28.9 82.3 Repurchase of sale-leaseback transactions - - (21.8) Sale of short-term investments 8.0 - 17.6 Payments made in connection with acquisitions, net of cash acquired (133.4) (107.9) (15.4) Other - - (5.7) -------- -------- -------- Net cash provided (used) by investing activities 119.1 (267.3) (95.6) -------- -------- -------- FINANCING ACTIVITIES Net (decrease) increase in short-term debt 68.9 122.5 (59.2) Proceeds from issuance of long-term debt 150.0 71.1 80.8 Repayment of long-term debt and capital lease obligations (543.0) (155.5) (99.3) Cash collateral for receivable sales program 5.0 13.5 13.0 Reduction in sales of receivable sales program - - (20.0) Proceeds from issuance of capital stock 14.8 11.2 16.6 Proceeds from issuance of Trust preferred securities, net of issuance costs - - 122.1 Purchases of treasury stock (9.7) (.1) (33.4) Dividends (59.5) (58.8) (61.6) Distributions on Trust preferred securities (10.5) (10.5) (5.1) Retirements of preferred stock - - (88.3) Other 1.1 1.3 1.5 -------- -------- -------- Net cash used by financing activities (382.9) (5.3) (132.9) -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2.2) (.7) .6 -------- -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (56.4) (7.8) (6.9) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR1 103.4 144.9 151.8 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 47.0 $ 137.1 $ 144.9 ======== ======== ========
1 Cash and cash equivalents at the beginning of 1997 does not agree with the amount at the end of 1996 due to the net cash transactions of Rohr from August 1, 1996 to December 31, 1996, which are not reflected in the 1996 column above. See Notes to Consolidated Financial Statements. [38] 21 The BFGoodrich Company and Subsidiaries Consolidated Statement of Shareholders' Equity
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31 1997 1996 1995 -------- -------- -------- COMMON STOCK-$5 PAR VALUE Balance at beginning of year $ 352.7 $ 197.2 $ 192.9 Adjustment to conform Rohr's fiscal year 10.3 - - Two-for-one common stock split - 134.7 - Contribution to pension plans - 3.8 - Conversion of Series D Preferred Stock - - 2.0 Conversion of 7.75% Convertible Subordinated Notes .5 14.0 - Employee award programs 4.1 3.0 2.3 Exercise of warrants 2.1 - - -------- -------- -------- Balance at end of year 369.7 352.7 197.2 -------- -------- -------- ADDITIONAL CAPITAL Balance at beginning of year 444.0 505.2 459.3 Adjustment to conform Rohr's fiscal year 39.6 - - Two-for-one common stock split - (134.7) - Contribution to pension plans - 26.2 - Conversion of Series D Preferred Stock - - 20.8 Conversion of 7.75% Convertible Subordinated Notes 1.0 28.3 - Employee award programs 12.8 19.0 25.1 Exercise of warrants 3.3 - - -------- -------- -------- Balance at end of year 500.7 444.0 505.2 -------- -------- -------- INCOME RETAINED IN THE BUSINESS Balance at beginning of year 490.8 375.7 297.6 Net income 178.2 173.9 140.9 Adjustment to conform Rohr's fiscal year (18.0) - - Premium on redemption of Series D Preferred Stock - - (1.2) Dividends: Series D Preferred Stock, $3.50 per share - - (4.4) Common stock, $1.10 per share in each year (59.5) (58.8) (57.2) -------- -------- -------- Total dividends (59.5) (58.8) (61.6) -------- -------- -------- Balance at end of year 591.5 490.8 375.7 -------- -------- -------- CUMULATIVE UNREALIZED TRANSLATION ADJUSTMENTS Balance at beginning of year 5.9 9.6 4.9 Aggregate adjustments for the year (7.6) (3.7) 4.7 -------- -------- -------- Balance at end of year (1.7) 5.9 9.6 -------- -------- -------- MINIMUM PENSION LIABILITY ADJUSTMENT Balance at beginning of year (26.4) (67.2) (74.5) Adjustment to conform Rohr's fiscal year 26.4 - - Aggregate adjustments for the year (1.8) 40.8 7.3 -------- -------- -------- Balance at end of year (1.8) (26.4) (67.2) -------- -------- -------- UNEARNED PORTION OF RESTRICTED STOCK AWARDS (.7) (9.0) (16.2) -------- -------- -------- COMMON STOCK HELD IN TREASURY, AT COST (35.1) (32.2) (28.3) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY $1,422.6 $1,225.8 $ 976.0 ======== ======== ========
See Notes to Consolidated Financial Statements. [39] 22 The BFGoodrich Company and Subsidiaries Notes to Consolidated Financial Statements NOTE A MERGER WITH ROHR On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by exchanging 18,588,004 shares of BFGoodrich common stock for all of the common stock of Rohr (the term Company is used to refer to BFGoodrich including Rohr). Each share of Rohr common stock was exchanged for .7 of one share of BFGoodrich common stock. The merger was accounted for as a pooling of interests. Accordingly, all prior period Consolidated Financial Statements and notes thereto have been restated to include the results of operations, financial position and cash flows of Rohr as though Rohr had always been a part of BFGoodrich. Prior to the merger, Rohr's fiscal year ended on July 31. For purposes of the combination, Rohr's financial results for its fiscal year ended July 31, 1997, have been restated to the year ended December 31, 1997, to conform with BFGoodrich's calendar year end. Financial results for Rohr's fiscal years ended July 31, 1996 and earlier have not been restated to conform to BFGoodrich's calendar year end. For periods prior to 1997, Rohr's fiscal years ended July 31 have been combined with BFGoodrich's calendar years ended December 31. As a result, Rohr's results of operations for the period August 1, 1996 to December 31, 1996 do not appear in the Consolidated Statement of Income and instead are recorded as a direct adjustment to equity. Rohr's revenues, expenses and net loss for this five-month period were $341.3 million, $359.3 million and $18.0 million, respectively. Included in expenses during this period was a $49.3 million pretax charge ($29.5 million after tax) relating to the McDonnell Douglas MD-90 program (see Note E). There were no transactions between BFGoodrich and Rohr prior to the combination. Certain reclassifications were made to Rohr's financial statements to conform to BFGoodrich's presentation. The results of operations for the previously separate companies and the combined amounts presented in the Consolidated Statement of Income for each of the last three fiscal years are as follows:
(IN MILLIONS) 1997 1996 1995 -------- -------- -------- Sales: BFGoodrich $2,306.0 $2,078.2 $1,860.5 Rohr 1,067.0 767.6 801.3 -------- -------- -------- Combined $3,373.0 $2,845.8 $2,661.8 ======== ======== ======== Extraordinary items: BFGoodrich $ - $ - $ - Rohr (19.3) - (1.2) -------- -------- -------- Combined $ (19.3) $ - $ (1.2) ======== ======== ======== Net income: BFGoodrich $ 224.8 $ 151.7 $ 118.0 Rohr 39.4 22.2 22.9 Merger-related costs (after tax) (86.0) - - -------- -------- -------- Combined $ 178.2 $ 173.9 $ 140.9 ======== ======== ========
The Company recognized pretax merger-related costs of $105.0 million ($86.0 million after tax, or $1.15 per diluted share). Merger-related costs consisted primarily of costs of investment bankers, attorneys, accountants, financial printing, debt extinguishment and payments due under contractual employee arrangements. Of the $105.0 million, $28.0 million related to debt extinguishment costs ($16.7 million after tax, or $.22 per diluted share) which have been reported as an extraordinary item (see Note F). Of the $86.0 million after-tax merger-related costs above, $7.9 million was recorded by BFGoodrich and $78.1 million was recorded by Rohr. [40] 23 The BFGoodrich Company and Subsidiaries NOTE B SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements reflect the accounts of The BFGoodrich Company and its majority-owned subsidiaries. Investments in 20- to 50-percent-owned affiliates and majority-owned companies in which investment is considered temporary are accounted for using the equity method. Equity in earnings (losses) from these businesses is included in Other income (expense)-net. Intercompany accounts and transactions have been eliminated. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. INVENTORIES Inventories are stated at the lower of cost or market. Certain domestic inventories are valued by the last-in, first-out ("LIFO") cost method. Inventories not valued by the LIFO method are valued principally by the average cost method. Inventoried costs on long-term contracts include certain preproduction costs, consisting primarily of tooling and design costs and production costs, including applicable overhead. As the production costs for early units are charged to in-process inventory at an actual unit cost in excess of the estimated average cost for all units projected to be delivered over the entire contract, a segment of inventory described as the excess of production costs over estimated average unit cost (and referred to as excess-over-average inventory) is created. Generally, excess-over-average inventory, which may include production (but not preproduction) cost overruns, builds during the early years of the contract when the efficiencies resulting from learning are not yet fully realized and declines as the contract matures. Under the learning curve concept, an estimated decrease in unit labor hours is assumed as tasks and production techniques become more efficient through repetition of the same manufacturing operation and through management action such as simplifying product design, improving tooling, purchasing new capital equipment, improving manufacturing techniques, etc. Inventoried costs are reduced by the estimated average cost of deliveries. In the event that in-process inventory plus estimated costs to complete a specific contract exceeds the anticipated remaining sales value of such contract, such excess is charged to current earnings, thus reducing inventory to estimated realizable value. In accordance with industry practice, costs in inventory include amounts relating to contracts with long production cycles, some of which are not expected to be realized within one year. LONG-LIVED ASSETS Property, plant and equipment, including amounts recorded under capital leases, are recorded at cost. Depreciation and amortization is computed principally using the straight-line method over the following estimated useful lives: buildings and improvements, 15 to 40 years; machinery and equipment, 5 to 15 years. In the case of capitalized lease assets, amortization is computed over the lease term if shorter. Repairs and maintenance costs are expensed as incurred. Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses and is being amortized by the straight-line method, in most cases over 20 to 40 years. Goodwill amortization is recorded in cost of sales. Identifiable intangible assets are recorded at cost, or when acquired as a part of a business combination, at estimated fair value. These assets include patents and other technology agreements, licenses and non-compete agreements. They are amortized using the straight-line method over estimated useful lives of 5 to 25 years. [41] 24 The BFGoodrich Company and Subsidiaries NOTE B SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of long-lived assets and related goodwill is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable. Measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset. REVENUE AND INCOME RECOGNITION For revenues not recognized under the contract method of accounting, the Company recognizes revenues from the sale of products at the point of passage of title, which is at the time of shipment. Revenues earned from providing maintenance service are recognized when the service is complete. A significant portion of the Company's sales in the Aerostructures Group of the Aerospace Segment are under long-term, fixed-priced contracts, many of which contain escalation clauses, requiring delivery of products over several years and frequently providing the buyer with option pricing on follow-on orders. Sales and profits on each contract are recognized primarily in accordance with the percentage-of-completion method of accounting, using the units-of-delivery method. The Company follows the guidelines of Statement of Position 81-1 ("SOP 81-1"), "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" (the contract method of accounting) except that the Company's contract accounting policies differ from the recommendations of SOP 81-1 in that revisions of estimated profits on contracts are included in earnings under the reallocation method rather than the cumulative catch-up method. Profit is estimated based on the difference between total estimated revenue and total estimated cost of a contract, excluding that reported in prior periods, and is recognized evenly in the current and future periods as a uniform percentage of sales value on all remaining units to be delivered. Current revenue does not anticipate higher or lower future prices but includes units delivered at actual sales prices. Cost includes the estimated cost of the preproduction effort (primarily tooling and design), plus the estimated cost of manufacturing a specified number of production units. The specified number of production units used to establish the profit margin is predicated upon contractual terms adjusted for market forecasts and does not exceed the lesser of those quantities assumed in original contract pricing or those quantities which the Company now expects to deliver in the periods assumed in the original contract pricing. Option quantities are combined with prior orders when follow-on orders are released. The contract method of accounting involves the use of various estimating techniques to project costs at completion and includes estimates of recoveries asserted against the customer for changes in specifications. These estimates involve various assumptions and projections relative to the outcome of future events, including the quantity and timing of product deliveries. Also included are assumptions relative to future labor performance and rates, and projections relative to material and overhead costs. These assumptions involve various levels of expected performance improvements. The Company reevaluates its contract estimates periodically and reflects changes in estimates in the current and future periods under the reallocation method. Included in sales are amounts arising from contract terms that provide for invoicing a portion of the contract price at a date after delivery. Also included are negotiated values for units delivered and anticipated price adjustments for contract changes, claims, escalation and estimated earnings in excess of billing provisions, resulting from the percentage-of-completion method of accounting. Certain contract costs are estimated based on the learning curve concept discussed under Inventories above. [42] 25 The BFGoodrich Company and Subsidiaries FINANCIAL INSTRUMENTS The Company's financial instruments recorded on the balance sheet include cash and cash equivalents, accounts and notes receivable, accounts payable and debt. Because of their short maturity, the carrying amount of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term bank debt approximates fair value. Fair value of long-term debt is based on rates available to the Company for debt with similar terms and maturities. Off balance sheet derivative financial instruments at December 31, 1997, include an interest rate swap agreement, foreign currency forward contracts and foreign currency swap agreements. Interest rate swap agreements are used by the Company, from time to time, to manage interest rate risk on its floating rate debt portfolio. Each interest rate swap is matched as a hedge against a specific debt instrument and has the same notional amount and maturity as the related debt instrument principal. Interest rate swap agreements are generally entered into at the time the related floating rate debt is issued in order to convert the floating rate to a fixed rate. The cost of interest rate swaps is recorded as part of interest expense and accrued expenses. Fair value of these instruments is based on estimated current settlement cost. The Company enters into foreign currency forward contracts (principally against the British pound, Italian lira, Spanish peseta, French franc, Dutch gilder and U.S. dollar) to hedge the net receivable/payable position arising from trade sales and purchases and intercompany transactions by its European businesses. Foreign currency forward contracts reduce the Company's exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products and purchases from suppliers denominated in a currency other than the functional currency of the respective businesses will be adversely affected by changes in exchange rates. Foreign currency gains and losses under the above arrangements are not deferred and are reported as part of cost of sales and accrued expenses. Foreign currency forward contracts are entered into with major commercial European banks that have high credit ratings. From time to time, the Company uses foreign currency forward contracts to hedge purchases of capital equipment. Foreign currency gains and losses for such purchases are deferred as part of the basis of the asset. Also, 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 a French subsidiary for services. Forward gains and losses associated with contracts accounted for under contract accounting are deferred as contract costs. The Company also enters into foreign currency swap agreements (principally for the Belgian franc, French franc and Dutch gilder) to eliminate foreign exchange risk on intercompany loans between European businesses. The fair value of foreign currency forward contracts and foreign currency swap agreements is based on quoted market prices. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation in accordance with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. ISSUANCE OF SUBSIDIARY STOCK The Company recognizes gains and losses on the issuance of stock by a subsidiary in accordance with the U.S. Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin 84. EARNINGS PER SHARE Earnings per share has been computed in accordance with SFAS No. 128, "Earnings per Share." As required, all previously reported earnings per share amounts have been restated using the computational requirements of SFAS No. 128. [43] 26 The BFGoodrich Company and Subsidiaries NOTE B SIGNIFICANT ACCOUNTING POLICIES (continued) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE C DISCONTINUED OPERATIONS On August 15, 1997, the Company completed the disposition of its chlor-alkali and olefins ("CAO") business to The Westlake Group for $92.7 million, resulting in an after-tax gain of $14.5 million, or $.19 per diluted share. The disposition of the CAO business represents the disposal of a segment of a business under APB Opinion No. 30 ("APB 30"). Accordingly, the Consolidated Statement of Income reflects the CAO business (previously reported as Other Operations) as a discontinued operation, in addition to the following discontinued operations. On February 3, 1997, the Company completed the sale of Tremco Incorporated to RPM, Inc. for $230.7 million, resulting in an after-tax gain of $59.5 million, or $.80 per diluted share. The sale of Tremco Incorporated completed the disposition of the Company's Sealants, Coatings and Adhesives ("SC&A") Group which also represented a disposal of a segment of a business under APB 30. In 1995, Rohr completed the disposition of its business jet line of nacelle business, which represented a business segment under APB 30. A summary of the results of discontinued operations is as follows:
(IN MILLIONS) 1997 1996 1995 ------- ------- ------- Sales: CAO $ 98.0 $ 160.6 $ 188.9 SC&A - 316.8 359.5 Jet business - - 22.3 ------- ------- ------- $ 98.0 $ 477.4 $ 570.7 ======= ======= ======= Pretax income from operations: CAO $ 16.1 $ 21.0 $ 57.5 SC&A(1) - 27.0 17.8 Jet business - - 6.5 ------- ------- ------- 16.1 48.0 81.8 Income tax expense (5.8) (19.6) (34.5) ------- ------- ------- Net income from operations 10.3 28.4 47.3 Gains on sale of discontinued operations: CAO(2) 14.5 - - SC&A(3) 59.5 - - Adjustment to gain of 1993 discontinued operation - 30.0 - ------- ------- ------- Income from discontinued operations $ 84.3 $ 58.4 $ 47.3 ======= ======= =======
1 Includes $6.4 million gain on the sale of a business in 1996. 2 Net of $7.8 million of income taxes. 3 Net of $22.8 million of income taxes; includes provision of $7.9 million for operating losses during the phase-out period. [44] 27 The BFGoodrich Company and Subsidiaries NOTE D OTHER ACQUISITIONS AND DISPOSITIONS ACQUISITIONS The following acquisitions were recorded using the purchase method of accounting. Their results of operations, which are not material, have been included in the Consolidated Financial Statements since their respective dates of acquisition. During 1997, the Company acquired five businesses (four of which were acquired during the fourth quarter) for cash consideration of $133.4 million in the aggregate, which includes $65.3 million of goodwill. The purchase price allocations have been based on preliminary estimates. One of the acquired businesses is a manufacturer of data acquisition systems for satellites and other aerospace applications. A second business manufactures diverse aerospace products for commercial and military applications. A third business is a manufacturer of dyes, chemical additives and durable press resins for the textiles industry. A fourth business manufactures thermoplastic polyurethanes and is located in the United Kingdom. The remaining acquisition is a small specialty chemicals business. During 1996, the Company acquired five specialty chemicals businesses for cash consideration of $107.9 million, which included $80.0 million of goodwill. During 1995, the Company acquired four small aerospace businesses and two small specialty chemicals businesses. The aggregate purchase price of these businesses was $15.4 million. In January 1998, the Company signed a definitive agreement to acquire Freedom Chemical Company for $375.0 million in cash. Freedom Chemical had sales of $293.1 million in 1997, 42 percent of which were outside the United States. Freedom Chemical is a leading global manufacturer of specialty and fine chemicals that are sold to a variety of customers who use them to enhance the performance of their finished products. Freedom Chemical has leadership positions as a supplier of specialty chemical additives used in personal-care, food and beverage, pharmaceutical, textile, graphic arts, paints, colorants and coatings applications and as chemical intermediates. The Company expects to complete the transaction late in the first quarter of 1998. DISPOSITIONS During 1997, the Company completed the sale of its Engine Electrical Systems Division, which was part of the Sensors and Integrated Systems Group in the Aerospace Segment. The Company received cash proceeds of $72.5 million, which resulted in a pretax gain of $26.4 million ($16.4 million after tax) reported in Other income (expense)-net. In May 1995, the Company sold its wholly owned subsidiary, Arrowhead Industrial Water, Inc., for $84.3 million, resulting in a pretax gain of $3.6 million, which is included in Other income (expense)-net. NOTE E IMPAIRMENT AND RESTRUCTURING CHARGES In 1997, the Company recognized a $35.2 million pretax charge ($21.0 million after tax, or $.28 per diluted share) to write off that portion of its contract investment in the McDonnell Douglas MD-90 aircraft program, including the costs it will be required to spend in the future to complete the contract, that the Company determined would not be recoverable from future MD-90 sales represented by firm aircraft orders. In addition, the Company recognized a $49.3 million pretax charge ($29.5 million after tax) in December 1996, related to the MD-90 program. This charge did not impact the income statement; rather, it was recognized as a direct adjustment to equity as a result of aligning Rohr's fiscal year with BFGoodrich's. In 1996, the Company recognized a $7.2 million pretax impairment charge on its Arkadelphia, Arkansas, facility. Also during 1996, the Company recognized a $4.0 million pretax charge for a voluntary early retirement program for eligible employees of the Specialty Plastics and Specialty Additives Groups. [45] 28 The BFGoodrich Company and Subsidiaries NOTE E IMPAIRMENT AND RESTRUCTURING CHARGES (continued) In 1995, the Company recorded a $3.1 million pretax charge for a voluntary early retirement program for eligible salaried employees at the Company's corporate headquarters, Advanced Technology Group research facilities and Aerospace Segment headquarters. NOTE F EXTRAORDINARY ITEMS During 1997, the Company incurred a charge of $19.3 million (net of a $13.1 million income tax benefit), or $.25 per diluted share, to extinguish certain indebtedness previously held by Rohr, which is reported as an extraordinary item. Costs incurred include debt premiums and other direct costs associated with the extinguishment of the related debt. The Company used a combination of existing cash funds and proceeds from new lower-cost long-term debt to extinguish the debt. Of the $19.3 million, $2.6 million (net of a $1.8 million income tax benefit) was incurred during the third quarter in connection with Rohr's 9.33 percent Senior Notes and 9.35 percent Senior Notes. The remaining $16.7 million (net of an $11.3 million income tax benefit) relates to debt extinguishment costs incurred in connection with the Rohr merger during the fourth quarter for refinancing Rohr's 11.625 percent Senior Notes, 9.25 percent Subordinated Debentures, 7.00 percent Convertible Subordinated Debentures and 7.75 percent Convertible Subordinated Notes. NOTE G EARNINGS PER SHARE The computation of basic and diluted earnings per share for income from continuing operations is as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 -------- -------- -------- Numerator: Income from continuing operations $ 113.2 $ 115.5 $ 94.8 Preferred stock dividends and call premium - - (5.6) -------- -------- -------- Numerator for basic earnings per share-income available to common stockholders 113.2 115.5 89.2 Effect of dilutive securities: 7.75% Convertible Notes .9 1.9 2.7 -------- -------- -------- Numerator for diluted earnings per share-income available to common stockholders after assumed conversions $ 114.1 $ 117.4 $ 91.9 ======== ======== ======== Denominator: Denominator for basic earnings per share-weighted-average shares 71.0 66.6 63.8 Effect of dilutive securities: Stock options and warrants 1.6 1.4 .8 Contingent shares .7 .5 .3 7.75% Convertible Notes 1.3 2.4 3.9 -------- -------- -------- Dilutive potential common shares 3.6 4.3 5.0 -------- -------- -------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 74.6 70.9 68.8 ======== ======== ======== Per share income from continuing operations: Basic $ 1.59 $ 1.74 $ 1.40 ======== ======== ======== Diluted $ 1.53 $ 1.65 $ 1.34 ======== ======== ========
[46] 29 The BFGoodrich Company and Subsidiaries NOTE H ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following:
(IN MILLIONS) 1997 1996 ------- ------- Amounts billed $ 477.2 $ 454.6 Receivable from sale of aircraft leasing subsidiary - 20.1 Recoverable costs and accrued profit on units delivered but not billed 10.0 6.5 Recoverable costs and accrued profit on progress completed but not billed - 8.3 Unrecovered costs and estimated profit subject to future negotiations 11.3 13.9 Notes and other receivables 34.1 24.1 ------- ------- Total $ 532.6 $ 527.5 ======= =======
"Recoverable costs and accrued profit on units delivered but not billed" represents 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. "Recoverable costs and accrued profit on progress completed but not billed" represents revenue recognized on contracts based on the percentage-of-completion method of accounting and is anticipated to be billed and collected in accordance with contract terms. "Unrecovered costs and estimated profit subject to future negotiations" consists 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 are estimated recoveries on constructive change claims related to government-imposed redefined acceptance criteria on the Grumman F-14 contract, which may not be collected within one year. Management believes that amounts reflected in the financial statements are reasonable estimates of the ultimate settlements. The Company has a $40.0 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. 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, were $3.0 million, $3.0 million and $3.6 million in 1997, 1996 and 1995, respectively. The Company expects to eliminate this program in early 1998. [47] 30 The BFGoodrich Company and Subsidiaries NOTE 4 INVENTORIES Inventories consist of the following:
(IN MILLIONS) 1997 1996 ------- ------- FIFO or average cost (which approximates current costs): Finished products $ 173.4 $ 202.0 In process 411.2 398.0 Raw materials and supplies 161.4 178.3 Progress payments and advances (35.9) (67.2) ------- ------- 710.1 711.1 Reserve to reduce certain inventories to LIFO basis (57.5) (64.7) ------- ------- Total $ 652.6 $ 646.4 ======= =======
At December 31, 1997 and 1996, approximately 27 percent and 28 percent, respectively, of inventory was valued by the LIFO method. In-process inventories as of December 31, 1997, which include significant deferred costs for long-term contracts accounted for under contract accounting, are summarized by contract as follows (in millions, except quantities which are number of aircraft):
AIRCRAFT ORDER STATUS(1) COMPANY ORDER STATUS -------------------------------- ----------------------------------------- (3)FIRM DELIVERED UN- UN- (2) UN- TO FILLED FILLED CONTRACT FILLED (5)YEAR CONTRACT AIRLINES ORDERS OPTIONS QUANTITY DELIVERED ORDERS COMPLETE - -------------------------------- -------------------------------- ----------------------------------------- A340(4) 127 63 56 267 135 33 2003 PW4000 for the A300/A310 and MD-11(4) 276 15 9 308 291 17 2003 GE90(4) 25 73 19 55 43 12 1998 737-700 4 703 1,065 1,000 45 205 2002 717-200 (formerly MD-95) - 50 50 TBD(6) - 10 2007 Others In-process inventory related to long-term contracts In-process inventory not related to long-term contracts Balance at December 31, 1997 IN-PROCESS INVENTORY ---------------------------------------- PRE- EXCESS- PRO- PRO- OVER- CONTRACT DUCTION DUCTION AVERAGE TOTAL - -------------------------------- ---------------------------------------- A340(4) $ 11.6 $ 4.7 $ - $ 16.3 PW4000 for the A300/A310 and MD-11(4) 21.9 11.7 30.4 64.0 GE90(4) 2.0 13.7 - 15.7 737-700 7.7 7.2 4.4 19.3 717-200 (formerly MD-95) 15.0 62.8 - 77.8 Others 65.0 2.3 - 67.3 --------------------------------------- In-process inventory related to long-term contracts $123.2 $102.4 $ 34.8 260.4 ============================ In-process inventory not related to long-term contracts 150.8 ------ Balance at December 31, 1997 $411.2 ======
1 Represents the aircraft order status as reported by Airclaims and/or other sources the Company believes to be reliable for the related aircraft and engine option. The Company's orders frequently are less than the announced orders shown above. 2 Represents the number of aircraft used to obtain average unit cost. 3 Represents the number of aircraft for which the Company has firm unfilled orders. 4 Contract quantity represents the lesser of those quantities assumed in original contract pricing or those quantities which the Company now expects to deliver in the periods assumed in original contract pricing. 5 The year presented represents the year in which the final production units included in the contract quantity are expected to be delivered. The contract may continue in effect beyond this date. 6 To Be Determined-a new contract on which the amortization quantity is yet to be determined. [48] 31 The BFGoodrich Company and Subsidiaries In 1993, the Company revised its contract with Pratt & Whitney on the PW4000 for the A300/A310 and MD-11 programs. The revised contract provides that if Pratt & Whitney accepts delivery of less than 500 units between 1993 through 2003, an "equitable adjustment" will be made. Recent market projections on the PW4000 contract indicate that less than 500 units will be delivered. The Company has submitted a "request for equitable adjustment" to the customer and believes it will achieve a recovery such that there should not be a material adverse effect on the financial position, liquidity or results of operations of the Company. If the Company does not receive the equitable adjustment it believes it is entitled to, it is possible that there may be a material adverse effect on earnings in a given period. At December 31, 1997, the Company had $64.0 million of contract costs in inventory for the above PW4000 programs. NOTE J FINANCING ARRANGEMENTS SHORT-TERM BANK DEBT At December 31, 1997, the Company had separate revolving credit agreements with certain banks providing for domestic lines of credit aggregating $300.0 million. Borrowings under these agreements can be for any period of time until the expiration date and bear interest, at the Company's option, at rates tied to the banks' certificate of deposit, Eurodollar or prime rates. The lines expire on June 30, 2000, unless extended by the banks at the request of the Company. Under the agreements, the Company is required to pay a commitment fee of 12 basis points per annum on the total $300.0 million committed line. At December 31, 1997, no amounts were outstanding pursuant to these agreements. In addition, the Company had available formal foreign lines of credit and overdraft facilities, including the European revolver, of $99.0 million at December 31, 1997, of which $28.4 million was available. The Company also maintains uncommitted domestic money market facilities with various banks aggregating $410.0 million, of which $262.3 million of these lines were unused and available at December 31, 1997. Weighted-average interest rates on outstanding short-term borrowings were 6.4 percent and 6.6 percent at December 31, 1997 and 1996, respectively. Weighted-average interest rates on short-term borrowings were 5.0 percent, 5.9 percent and 6.5 percent during 1997, 1996 and 1995, respectively. LONG-TERM DEBT At December 31, 1997 and 1996, long-term debt and capital lease obligations payable after one year consisted of:
(IN MILLIONS) 1997 1996 ------- ------- 9.625% Notes, maturing in 2001 $ 175.0 $ 175.0 MTN notes payable 269.0 119.0 European revolver 25.5 29.2 IDRBs, maturing in 2023, 6.0% 60.0 60.0 11.625% Senior Notes _ 100.0 9.25% Debentures _ 150.0 7.00% Convertible Debentures _ 115.0 9.35% Senior Notes _ 27.7 9.33% Senior Notes _ 42.5 7.75% Convertible Notes _ 19.7 Other debt, maturing to 2015 (interest rates from 3.0% to 7.0%) 26.8 32.7 ------- ------- 556.3 870.8 Capital lease obligations (Note K) 8.0 10.6 ------- ------- Total $ 564.3 $ 881.4 ======= =======
[49] 32 The BFGoodrich Company and Subsidiaries NOTE J FINANCING ARRANGEMENTS (continued) MTN NOTES PAYABLE The Company has issued long-term debt securities in the public markets (referred to as the MTN program, which commenced in 1995). MTN notes outstanding at December 31, 1997, were fixed-rate non-callable debt securities. During 1997, and in connection with the refinancing of Rohr's debt, the Company issued $150.0 million of 7.2 percent MTN notes, due in 2027. All other MTN notes outstanding were issued during 1995 and 1996, with interest rates ranging from 7.3 percent to 8.7 percent and maturity dates ranging from 2025 to 2046. In January 1998, the Company issued $130.0 million of 6.9 percent 20-year MTN notes as part of the financing for the acquisition of Freedom Chemical (see Note D). EUROPEAN REVOLVER The Company has a $75.0 million committed multi-currency revolving credit facility with various international banks, expiring in the year 2003. The Company uses this facility for short- and long-term, local currency financing to support the growth of its European operations. At December 31, 1997, the Company's long-term borrowings under this facility were $25.5 million denominated in Spanish pesetas at a floating rate that is tied to Spanish LIBOR (5.02 percent at December 31, 1997). IDRBs The industrial development revenue bonds were issued to finance the construction of a hangar facility in 1993. Property acquired through the issuance of these bonds secures the repayment of the bonds. Aggregate maturities of long-term debt, exclusive of capital lease obligations, during the five years subsequent to December 31, 1997, are as follows (in millions): 1998-$1.2; 1999-$.8; 2000-$.4; 2001-$200.7; and 2002-$.5. The Company's debt agreements contain various restrictive covenants that, among other things, place limitations on the payment of cash dividends and the repurchase of the Company's capital stock. Under the most restrictive of these agreements, $799.1 of income retained in the business and additional capital was free from such limitations at December 31, 1997. During 1997, the 11.625% Senior Notes, 9.25% Debentures, 7.00% Convertible Debentures, 9.35% Senior Notes, 9.33% Senior Notes and the 7.75% Convertible Notes were extinguished. See Note F for further information on debt extinguishments. [50] 33 The BFGoodrich Company and Subsidiaries NOTE K LEASE COMMITMENTS The Company leases certain of its office and manufacturing facilities as well as machinery and equipment under various leasing arrangements. The future minimum lease payments from continuing operations, by year and in the aggregate, under capital leases and under noncancelable operating leases with initial or remaining noncancelable lease terms in excess of one year, consisted of the following at December 31, 1997:
NONCANCELABLE (IN MILLIONS) CAPITAL LEASES OPERATING LEASES --------------- --------------- 1998 $ 3.5 $ 23.8 1999 2.4 20.3 2000 1.9 17.1 2001 1.6 14.5 2002 1.4 12.1 Thereafter 1.8 24.3 --------------- --------------- Total minimum payments 12.6 $ 112.1 --------------- =============== Amounts representing interest (2.6) --------------- Present value of net minimum lease payments 10.0 Current portion of capital lease obligations (2.0) --------------- Total $ 8.0 ===============
Net rent expense from continuing operations consisted of the following:
(IN MILLIONS) 1997 1996 1995 ------- ------- ------- Minimum rentals $ 28.2 $ 26.0 $ 26.4 Contingent rentals 3.9 2.9 2.4 Sublease rentals (.1) (.1) (.1) ------- ------- ------- Total $ 32.0 $ 28.8 $ 28.7 ======= ======= =======
NOTE L PENSIONS The Company has several contributory and noncontributory defined benefit pension plans covering substantially all employees. Plans covering salaried employees generally provide benefit payments using a formula that is based on an employee's compensation and length of service. Plans covering hourly employees generally provide benefit payments of stated amounts for each year of service. The Company's general funding policy for pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. The Company's qualified pension plans were fully funded on an accumulated benefit obligation basis at December 31, 1997. Assets for these plans consist principally of corporate and government obligations and commingled funds invested in equities, debt and real estate. At December 31, 1997, the pension plans held 2,761,585 shares of the Company's common stock with a fair value of $114.4 million. [51] 34 The BFGoodrich Company and Subsidiaries NOTE L PENSIONS (continued) The components of net periodic pension cost are as follows:
(IN MILLIONS) 1997 1996 1995 ------- ------- ------- Service cost for benefits earned $ 21.0 $ 24.8 $ 20.9 Interest cost on projected benefit obligation 93.5 85.3 83.7 Actual return on plan assets (191.7) (155.1) (144.7) Net amortization and deferral 107.9 82.1 74.2 ------- ------- ------- Net pension cost $ 30.7 $ 37.1 $ 34.1 ======= ======= =======
Amortization of unrecognized transition assets and liabilities, prior service cost and gains and losses (if applicable) are recorded using the straight-line method over the average remaining service period of active employees, or approximately 12 years. The following table sets forth the status of the Company's funded defined benefit pension plans as of December 31, 1997 and 1996, and the amounts recorded in the Consolidated Balance Sheet at those dates. This table excludes accrued pension costs for unfunded, non-qualified pension plans of $73.2 million in 1997 and $25.5 million in 1996, and the related projected benefit obligations of $82.2 million in 1997 and $36.7 million in 1996.
(IN MILLIONS) 1997 1996 1996 PLANS WITH PLANS WITH PLANS WITH ASSETS EXCEEDING ASSETS EXCEEDING ACCUMULATED ACCUMULATED ACCUMULATED BENEFIT OBLIGATION BENEFIT OBLIGATION BENEFIT OBLIGATION EXCEEDING ASSETS ---------------- ---------------- ---------------- Actuarial present value of accumulated benefit obligation: Vested $ 1,097.8 $ 568.8 $ 507.7 Non-vested 104.5 26.6 20.7 ---------------- ---------------- ---------------- Accumulated benefit obligation 1,202.3 595.4 528.4 Plan assets at fair value 1,263.1 646.5 475.3 ---------------- ---------------- ---------------- Plan assets in excess of (less than) accumulated benefit obligation $ 60.8 $ 51.1 $ (53.1) ================ ================ ================ Projected benefit obligation $ 1,251.9 $ 645.0 $ 533.9 Plan assets at fair value 1,263.1 646.5 475.3 ---------------- ---------------- ---------------- Plan assets in excess of (less than) projected benefit obligation $ 11.2 $ 1.5 $ (58.6) ================ ================ ================ Consisting of: Unrecognized transition asset (liability) $ (9.6) $ (20.2) $ 9.8 Unrecognized prior service cost (40.0) (19.0) (31.9) Unrecognized net gain (loss) (101.6) (63.6) (52.9) Adjustment required to recognize minimum liability - _ 72.7 Prepaid (accrued) pension cost recognized in the balance sheet 162.4 104.3 (56.3) ---------------- ---------------- ---------------- Total $ 11.2 $ 1.5 $ (58.6) ================ ================ ================
[52] 35 The BFGoodrich Company and Subsidiaries Major assumptions used in accounting for the Company's defined benefit pension plans are presented below. The assumptions used for periods prior to 1997 were comparable for BFGoodrich's and Rohr's plans, except for the 1995 discount rate for obligations, which was 7.25 percent for BFGoodrich's plans and 8.25 percent for Rohr's plans.
1997 1996 1995 ------- ------- ------- Discount rate for obligations 7.25% 7.75% 7.25% Rate of increase in compensation levels 3.5% 4.0% 3.5% Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
The Company also maintains voluntary retirement savings plans for U.S. salaried and wage employees. Under provisions of these plans, eligible employees can receive Company matching contributions on up to the first 6 percent of their eligible earnings. The Company matches 1 dollar for each 1 dollar of employee contributions invested in BFGoodrich common stock, and 50 cents for each dollar of eligible employee contributions invested in other available investment options (up to 6 percent of eligible earnings). For 1997, 1996 and 1995, Company contributions amounted to $15.3 million, $15.9 million and $14.6 million, respectively. In addition, the Company contributed $8.9 million, $12.4 million and $12.8 million in 1997, 1996 and 1995, respectively, under other defined contribution plans for employees not covered under the aforementioned defined benefit pension and voluntary retirement savings plans. Contributions are determined based on various percentages of eligible earnings and a profit sharing formula. NOTE M POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company sponsors several unfunded defined benefit postretirement plans that provide certain health-care and life insurance benefits to eligible employees. The health-care plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features, such as deductibles and coinsurance. The life insurance plans are generally noncontributory. The following table sets forth the combined status of the plans as recorded in the Consolidated Balance Sheet at December 31, 1997 and 1996:
(IN MILLIONS) 1997 1996 ------- ------- Accumulated postretirement benefit obligation (APBO): Retirees $ 272.4 $ 257.1 Fully eligible active plan participants 21.7 23.4 Other active plan participants 32.8 31.9 Unrecognized gain 42.9 66.3 ------- ------- Accrued postretirement cost $ 369.8 $ 378.7 ======= =======
[53] 36 The BFGoodrich Company and Subsidiaries NOTE M POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) Net periodic postretirement benefit expense included the following components:
(IN MILLIONS) 1997 1996 1995 -------- -------- -------- Service cost for benefits earned $ 2.2 $ 2.4 $ 1.8 Interest cost on APBO 23.7 22.7 25.7 Net amortization and deferral (1.5) (2.3) (2.9) -------- -------- -------- Net periodic postretirement cost $ 24.4 $ 22.8 $ 24.6 ======== ======== ========
For measurement purposes, the annual rate of increase in the per capita cost of covered health-care benefits of 7.5 percent was assumed for 1998, decreasing gradually to 5.0 percent through the year 2002 and remaining at that level thereafter. The health-care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. An increase in the assumed health-care cost trend rate by one percentage point in each year would increase the APBO as of December 31, 1997, by $21.2 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by $1.6 million. The weighted-average discount rates used in determining the APBO were 7.25 percent, 7.75 percent and 7.25 percent as of December 31, 1997, 1996 and 1995, respectively. NOTE N INCOME TAXES Income from continuing operations before income taxes and Trust distributions as shown in the Consolidated Statement of Income consists of the following:
(IN MILLIONS) 1997 1996 1995 ------- ------- ------- Domestic $ 199.9 $ 167.1 $ 135.4 Foreign 17.9 27.3 21.8 ------- ------- ------- Total $ 217.8 $ 194.4 $ 157.2 ======= ======= =======
A summary of income tax (expense) benefit from continuing operations in the Consolidated Statement of Income is as follows:
(IN MILLIONS) 1997 1996 1995 ------- ------- ------- Current: Federal $ (52.2) $ (25.8) $ (16.7) Foreign (5.8) (9.0) (4.5) State (2.9) (4.6) (4.5) ------- ------- ------- (60.9) (39.4) (25.7) ------- ------- ------- Deferred: Federal (31.3) (27.6) (27.9) Foreign (1.3) .8 .1 State (.6) (2.2) (3.8) ------- ------- ------- (33.2) (29.0) (31.6) ------- ------- ------- Total $ (94.1) $ (68.4) $ (57.3) ======= ======= =======
[54] 37 The BFGoodrich Company and Subsidiaries Significant components of deferred income tax assets and liabilities at December 31, 1997 and 1996, are as follows:
(IN MILLIONS) 1997 1996 ------ ------ Deferred income tax assets: Accrual for postretirement benefits other than pensions $127.8 $129.6 Inventories 64.2 22.9 Other nondeductible accruals 59.3 58.7 Tax credit and net operating loss carryovers 95.6 148.0 Other 44.4 51.0 ------ ------ Total deferred income tax assets 391.3 410.2 ------ ------ Deferred income tax liabilities: Tax over book depreciation (72.3) (90.0) Tax over book intangible amortization (17.2) (13.3) Pensions (47.7) (26.5) Sales of investment leases - (27.8) Other (35.7) (48.0) ------ ------ Total deferred income tax liabilities (172.9) (205.6) ------ ------ Net deferred income taxes $218.4 $204.6 ====== ======
Management has determined, based on the Company's history of prior earnings and its expectations for the future, that taxable income of the Company will more likely than not be sufficient to recognize fully these net deferred tax assets. In addition, management's analysis indicates that the turnaround periods for certain of these assets are for long periods of time or are indefinite. In particular, the turnaround of the largest deferred tax asset related to accounting for postretirement benefits other than pensions will occur over an extended period of time and, as a result, will be realized for tax purposes over those future periods and beyond. The tax credit and net operating loss carryovers, principally relating to Rohr, are primarily comprised of federal net operating loss carryovers of $207.5 million which expire in the years 2005 through 2012, state net operating loss carryovers of $99.3 million which expire in the years 2003 through 2014 and investment tax credit and other credits of $11.4 million which expire in the years 2003 through 2013. The remaining deferred tax assets and liabilities approximately match each other in terms of timing and amounts and should be realizable in the future, given the Company's operating history. The effective income tax rate from continuing operations varied from the statutory federal income tax rate as follows:
PERCENT OF PRETAX INCOME 1997 1996 1995 ------ ------ ------ Statutory federal income tax rate 35.0% 35.0% 35.0% Corporate-owned life insurance investments - (1.0) (1.6) Amortization of nondeductible goodwill .9 1.0 1.1 Difference in rates on consolidated foreign subsidiaries (.1) (.4) (1.6) State and local taxes, net of federal benefit 1.3 2.5 2.9 Tax exempt income from foreign sales corporation (3.3) (.1) (.3) QUIPS distributions (1.7) (1.9) (1.2) Nondeductible merger-related costs 9.2 - - Other items 1.9 .1 2.2 ------ ------ ------ Effective income tax rate 43.2% 35.2% 36.5% ====== ====== ======
[55] 38 The BFGoodrich Company and Subsidiaries NOTE N INCOME TAXES (continued) The Company has not provided for U.S. federal and foreign withholding taxes on $123.3 million of foreign subsidiaries' undistributed earnings as of December 31, 1997, because such earnings are intended to be reinvested indefinitely. It is not practical to determine the amount of income tax liability that would result had such earnings actually been repatriated. On repatriation, certain foreign countries impose withholding taxes. The amount of withholding tax that would be payable on remittance of the entire amount of undistributed earnings would approximate $6.0 million. NOTE O BUSINESS SEGMENT INFORMATION The Company's operations are classified into two reportable business segments: BFGoodrich Aerospace ("Aerospace") and BFGoodrich Specialty Chemicals ("Specialty Chemicals"). Aerospace consists of four business groups: Aerostructures; Landing Systems; Sensors and Integrated Systems; and Maintenance, Repair and Overhaul. They serve commercial, military, regional, business and general aviation markets. Aerospace's major products are aircraft engine nacelle and pylon systems; aircraft landing gear and wheels and brakes; sensors and sensor-based systems; fuel measurement and management systems; aircraft evacuation slides and rafts; ice protection systems, and collision warning systems. Aerospace also provides maintenance, repair and overhaul services on commercial airframes and components. Specialty Chemicals consists of two business groups: Specialty Additives and Specialty Plastics. They serve various markets such as personal-care, pharmaceuticals, printing, textiles, industrial, construction and automotive. Specialty Chemicals' major products are thermoplastic polyurethane; high-heat-resistant plastics; synthetic thickeners and emulsifiers; polymer emulsions, resins and additives, and textile thickeners, binders, emulsions and compounds. The Company's business is conducted on a global basis with manufacturing, service and sales undertaken in various locations throughout the world. Aerospace's products and services and Specialty Chemicals' products are principally sold to customers in North America and Europe. Segment operating income is total segment revenue reduced by operating expenses directly identifiable with that business segment. Corporate includes general corporate administrative costs and Advanced Technology Group research expenses.
SALES OPERATING INCOME (IN MILLIONS) 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- -------- Aerospace(1) $2,468.3 $2,021.4 $1,951.0 $ 260.3 $ 253.6 $ 229.5 Specialty Chemicals(2) 904.7 824.4 710.8 128.2 109.5 74.4 -------- -------- -------- -------- -------- -------- 3,373.0 2,845.8 2,661.8 388.5 363.1 303.9 Corporate(3) - - - (61.4) (52.8) (56.5) Merger-related costs - - - (77.0) - - -------- -------- -------- -------- -------- -------- Total $3,373.0 $2,845.8 $2,661.8 $ 250.1 $ 310.3 $ 247.4 ======== ======== ======== ======== ======== ========
[56] 39 The BFGoodrich Company and Subsidiaries
DEPRECIATION AND PROPERTY ADDITIONS AMORTIZATION EXPENSE IDENTIFIABLE ASSETS (IN MILLIONS) 1997 1996 1995 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- -------- Aerospace $ 81.9 $ 64.6 $ 46.4 $ 82.6 $ 79.3 $ 79.0 $2,347.0 $2,169.2 $2,147.5 Specialty Chemicals 73.2 97.5 86.4 48.2 39.0 35.3 877.3 784.6 602.7 -------- -------- -------- -------- -------- -------- -------- -------- -------- 155.1 162.1 132.8 130.8 118.3 114.3 3,224.3 2,953.8 2,750.2 Corporate(4) 4.8 35.0 23.0 8.0 21.5 21.7 269.6 626.0 637.3 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total $ 159.9 $ 197.1 $ 155.8 $ 138.8 $ 139.8 $ 136.0 $3,493.9 $3,579.8 $3,387.5 ======== ======== ======== ======== ======== ======== ======== ======== ========
SALES OPERATING INCOME IDENTIFIABLE ASSETS (IN MILLIONS) 1997 1996 1995 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- -------- Geographic Areas: United States $3,091.7 $2,604.1 $2,452.6 $ 369.3 $ 336.4 $ 281.6 $2,926.0 $2,651.4 $2,533.5 Other North America 26.9 21.4 19.5 1.2 1.3 .8 6.3 12.0 20.8 Europe 216.7 190.3 163.0 20.9 24.9 20.8 286.4 282.7 188.6 Other Foreign 37.7 30.0 26.7 1.3 .9 1.9 15.1 12.5 11.6 Inter-area - - - (4.2) (.4) (1.2) (9.5) (4.8) (4.3) -------- -------- -------- -------- -------- -------- -------- -------- -------- Total $3,373.0 $2,845.8 $2,661.8 $ 388.5 $ 363.1 $ 303.9 $3,224.3 $2,953.8 $2,750.2 ======== ======== ======== ======== ======== ======== ======== ======== ========
1 Operating income in 1997 includes a $35.2 million charge for the McDonnell Douglas MD-90 program, and in 1996 includes a $7.2 million asset impairment charge. 2 Operating income in 1996 includes a $4.0 million charge for a voluntary early retirement program. 3 Corporate operating expenses in 1995 include a $3.1 million charge for a voluntary early retirement program. 4 Includes amounts relating to the CAO business and the SC&A Group, which were accounted for as discontinued operations (see Note C). Sales are generally not concentrated in any one customer. Sales, solely in the Aerospace Segment, represented 11 percent, 9 percent and 9 percent of consolidated sales in 1997, 1996 and 1995, respectively, to Boeing. At December 31, 1997, approximately 19 percent of the Company's labor force was covered by various collective bargaining agreements. Approximately 2 percent of the labor force was covered by a collective bargaining agreement that will expire during 1998. Net assets of consolidated foreign subsidiaries, principally in Europe, amounted to $166.4 million, $219.1 million and $219.3 million in 1997, 1996 and 1995, respectively. The Company does not believe that business risks in countries in which it operates, including currency restrictions, would have a significant adverse effect on cash flow, liquidity or capital resources. The Company also exports products manufactured in the United States to affiliated and unaffiliated companies worldwide. Intercompany transfers made at prevailing prices to foreign subsidiaries amounted to $99.0 million, $85.2 million and $81.1 million in 1997, 1996 and 1995, respectively. Export sales to unaffiliated foreign customers amounted to $790.1 million, $620.6 million and $537.2 million in 1997, 1996 and 1995, respectively. [57] 40 The BFGoodrich Company and Subsidiaries NOTE P SUPPLEMENTAL STATEMENT OF INCOME INFORMATION
(IN MILLIONS) 1997 1996 1995 -------- -------- -------- Other Income (Expense)-Net Cost of health-care benefits for retirees of previously discontinued businesses $ (11.5) $ (10.5) $ (12.1) Net gains (losses) on sale of businesses 26.9 (3.5) 3.6 Equity in losses of unconsolidated subsidiary (3.0) (3.9) (4.4) Exchange of convertible notes (.2) (5.3) - Interest on Company-owned life insurance - (7.5) (10.0) Environmental recoveries (costs) of previously discontinued businesses - 1.6 19.1 Other-net 2.8 (1.7) 5.7 -------- -------- -------- Total $ 15.0 $ (30.8) $ 1.9 ======== ======== ========
The Company's unconsolidated subsidiary, DTM Corporation ("DTM"), had assets of $17.6 million and $17.9 million and liabilities of $7.5 million and $21.8 million at December 31, 1997 and 1996, respectively, and revenues of $24.9 million, $24.4 million and $13.9 million in 1997, 1996 and 1995, respectively. In May 1997, DTM issued 2,852,191 shares of its authorized but previously unissued common stock in an initial public offering ("IPO"). The shares were issued at $8.00 per share ($7.44 per share net of the underwriting discount), resulting in cash proceeds of $21.2 million to DTM, net of the underwriting discount. DTM develops, designs, manufactures, markets and supports, on an international basis, rapid prototyping and rapid tooling systems, powdered material and related services. The Company owned approximately 92 percent of DTM's outstanding common stock immediately prior to the IPO. As a result of the IPO, the Company's interest declined to approximately 50 percent (the Company did not sell any of its interest in the IPO). The Company recognized a pretax gain of $13.7 million ($8.0 million after tax, including provision for deferred income taxes) in accordance with the SEC's Staff Accounting Bulletin 84. In 1995, the Company recognized $19.1 million of income from the settlement of certain insurance issues relating to past environmental claims of previously discontinued businesses. RESEARCH AND DEVELOPMENT EXPENSE The Company performs research and development under Company-funded programs for commercial products, and under contracts with others. Research and development under contracts with others is performed by the Aerospace Segment for military and commercial products. Total research and development expenditures from continuing operations in 1997, 1996 and 1995 were $141.2 million, $137.5 million and $127.0 million, respectively. Of these amounts, $39.4 million, $29.4 million and $41.2 million, respectively, were funded by customers. [58] 41 The BFGoodrich Company and Subsidiaries NOTE Q SUPPLEMENTAL BALANCE SHEET INFORMATION
(IN MILLIONS) 1997 1996 ----- ----- Allowance for Doubtful Accounts $21.3 $26.2 ===== =====
Amounts charged to expense from continuing operations during 1997, 1996 and 1995 were $15.4 million, $2.8 million and $2.0 million, respectively. Of the $15.4 million expense in 1997, $11.8 million related to the bankruptcy of one customer.
(IN MILLIONS) 1997 1996 -------- -------- PROPERTY Land $ 41.8 $ 47.5 Buildings and improvements 632.9 682.1 Machinery and equipment 1,215.7 1,328.9 Construction in progress 125.0 124.2 -------- -------- 2,015.4 2,182.7 Less allowances for depreciation and amortization (950.3) (1,040.7) -------- -------- Total $1,065.1 $1,142.0 ======== ========
Property includes assets acquired under capital leases, principally buildings and machinery and equipment, of $71.6 million and $70.9 million at December 31, 1997 and 1996, respectively. Related allowances for depreciation and amortization are $33.9 million and $28.9 million, respectively. Interest costs capitalized from continuing operations were $5.3 million in 1997, $6.3 million in 1996 and $2.4 million in 1995. Amounts charged to expense for depreciation and amortization from continuing operations during 1997, 1996 and 1995 were $111.3 million, $101.2 million and $98.7 million, respectively.
(IN MILLIONS) 1997 1996 ---- ---- GOODWILL Accumulated amortization $71.4 $75.5 ===== ===== IDENTIFIABLE INTANGIBLE ASSETS Accumulated amortization $26.0 $30.9 ===== =====
Amortization of goodwill and identifiable intangible assets from continuing operations was $22.2 million, $20.1 million and $18.3 million in 1997, 1996 and 1995, respectively. [59] 42 The BFGoodrich Company and Subsidiaries NOTE Q SUPPLEMENTAL BALANCE SHEET INFORMATION (continued)
(IN MILLIONS) 1997 1996 ------- ------- ACCRUED EXPENSES Wages, vacations, pensions and other employment costs $ 164.9 $ 138.2 Postretirement benefits other than pensions 26.1 26.3 Taxes, other than federal and foreign taxes on income 42.3 46.6 Accrued environmental liabilities 18.0 23.5 Accrued interest 27.0 38.3 Other 133.0 71.5 ------- ------- Total $ 411.3 $ 344.4 ======= =======
FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's accounting policies with respect to financial instruments are described in Note B. The carrying amounts and fair values of the Company's significant on balance sheet financial instruments at December 31, 1997 and 1996, are as follows:
CARRYING FAIR 1997 (IN MILLIONS) AMOUNT VALUES ------ ------ Cash and cash equivalents $ 47.0 $ 47.0 Accounts and notes receivable 532.6 532.6 Accounts payable 327.6 327.6 Short-term bank debt 192.8 192.8 Long-term debt (including current portion) 567.5 605.6
CARRYING FAIR 1996 (IN MILLIONS) AMOUNT VALUES -------- -------- Cash and cash equivalents $ 137.1 $ 137.1 Accounts and notes receivable 527.5 527.5 Accounts payable 306.7 306.7 Short-term bank debt 134.4 134.4 Long-term debt (including current portion) 939.7 957.7
[60] 43 The BFGoodrich Company and Subsidiaries Off balance sheet derivative financial instruments at December 31, 1997 and 1996, held for purposes other than trading, were as follows:
(IN MILLIONS) 1997 1996 CONTRACT/ CONTRACT/ NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE ----- ----- ----- ----- Interest rate swaps $25.5 $(1.3) $15.0 $ (.1) Foreign currency forward contracts 12.2 (.1) 15.2 (.1) Foreign currency swap agreements .7 - 17.1 -
At December 31, 1997, the Company had one interest rate swap agreement, wherein the Company pays a fixed rate of interest and receives a LIBOR-based floating rate. Foreign currency forward contracts mature over the next four months coincident with the anticipated settlement of accounts receivable and accounts payable in Europe. No additional cash requirements are necessary with respect to outstanding agreements. The counterparties to each of these agreements are major commercial banks. Management believes that losses related to credit risk are remote. NOTE R SUPPLEMENTAL CASH FLOW INFORMATION The following tables set forth non-cash financing and investing activities and other cash flow information. Acquisitions accounted for under the purchase method are summarized as follows:
(IN MILLIONS) 1997 1996 1995 ------- ------- ------- Estimated fair value of tangible assets acquired $ 70.1 $ 46.4 $ 3.6 Goodwill and identifiable intangible assets 75.8 81.7 12.7 Cash paid (133.4) (107.9) (15.4) ------- ------- ------- Liabilities assumed or created $ 12.5 $ 20.2 $ .9 ======= ======= ======= Liabilities disposed in connection with sales of businesses $ 44.2 $ 1.5 $ 9.2 Assets acquired in connection with sale of business - 27.6 - Interest paid (net of amount capitalized) 81.5 88.6 95.3 Income taxes paid 145.9 34.8 30.2 Conversion of Series D Convertible Preferred Stock into common stock - - 22.9 Contribution of common stock to pension trust - 30.0 - Exchange of 7.75% Convertible Notes (1.3) (37.8) - Change in equity due to exchange of 7.75% Convertible Notes 1.5 43.1 -
[61] 44 The BFGoodrich Company and Subsidiaries NOTE S PREFERRED STOCK There are 10,000,000 authorized shares of Series Preferred Stock-$1 par value. Shares of Series Preferred Stock that have been redeemed are deemed retired and extinguished and may not be reissued. As of December 31, 1997, 2,401,673 shares of Series Preferred Stock have been redeemed, and no shares of Series Preferred Stock were outstanding. The Board of Directors establishes and designates the series and fixes the number of shares and the relative rights, preferences and limitations of the respective series of the Series Preferred Stock. CUMULATIVE PARTICIPATING PREFERRED STOCK-SERIES F In 1997, the Company authorized 100,000 shares of Junior Participating Preferred Stock-Series F-$1 par value. Series F shares have preferential voting, dividend and liquidation rights over the Company's common stock. At December 31, 1997, no Series F shares were issued or outstanding and 81,670 shares were reserved for issuance. On August 2, 1997, the Company made a dividend distribution of one Preferred Share Purchase Right ("Right") on each share of the Company's common stock. These Rights replace previous shareholder rights which expired on August 2, 1997. Each Right, when exercisable, entitles the registered holder thereof to purchase from the Company one one-thousandth of a share of Series F Stock at a price of $200 per one one-thousandth of a share (subject to adjustment). The one one-thousandth of a share is intended to be the functional equivalent of one share of the Company's common stock. The Rights will not be exercisable or transferable apart from the common stock until an Acquiring Person, as defined in the Rights Agreement without the prior consent of the Company's Board of Directors, acquires 20 percent or more of the voting power of the Company's common stock or announces a tender offer that would result in 20 percent ownership. The Company is entitled to redeem the Rights at 1 cent per Right any time before a 20 percent position has been acquired or in connection with certain transactions thereafter announced. Under certain circumstances, including the acquisition of 20 percent of the Company's common stock, each Right not owned by a potential Acquiring Person will entitle its holder to purchase, at the Right's then-current exercise price, shares of Series F Stock having a market value of twice the Right's exercise price. Holders of the Right will be entitled to buy stock of an Acquiring Person at a similar discount if, after the acquisition of 20 percent or more of the Company's voting power, the Company is involved in a merger or other business combination transaction with another person in which its common shares are changed or converted, or the Company sells 50 percent or more of its assets or earnings power to another person. The Rights expire on August 2, 2007. [62] 45 The BFGoodrich Company and Subsidiaries NOTE T COMMON STOCK On December 22, 1997, 18,588,004 shares of common stock were issued in connection with the merger with Rohr (see Note A). During 1996, 754,717 shares ($30.0 million) of authorized but previously unissued shares of common stock were issued and contributed to the Company's defined benefit wage and salary pension plans. In addition, 2,006,868 shares ($48.0 million) of common stock related to Rohr's pension plans were contributed during the period between August 1 and December 31, 1996 and, as a result, are included in equity as part of the adjustment to conform Rohr's fiscal year. During 1997, 1996 and 1995, 826,388; 600,057 and 441,209 shares, respectively, of authorized but unissued shares were issued under the Stock Option Plan and other employee stock ownership plans. The Company acquired 53,137; 52,949 and 1,365,654 shares of treasury stock in 1997, 1996 and 1995, respectively, and reissued 5,000; 22,500 and 775,900 shares, respectively, in connection with the Stock Option Plan and other employee stock ownership plans. In 1997, 1996 and 1995, 19,900; 60,400 and 134,250 shares, respectively, of common stock previously awarded to employees were forfeited and restored to treasury stock. Shares reserved for future issuance at December 31, 1997, were as follows: Stock options under Stock Option Plan 6,488,531 Other 1,235,070 --------- Total 7,723,601 ========= NOTE U PREFERRED SECURITIES OF TRUST On July 6, 1995, BFGoodrich Capital, a wholly owned Delaware statutory business trust (the "Trust") which is consolidated by the Company, received $122.5 million, net of the underwriting commission, from the issuance of 8.3 percent Cumulative Quarterly Income Preferred Securities, Series A ("QUIPS"). The Trust invested the proceeds in 8.3 percent Junior Subordinated Debentures, Series A, due 2025 ("Junior Subordinated Debentures") issued by the Company, which represent approximately 97 percent of the total assets of the Trust. The Company used the proceeds from the Junior Subordinated Debentures primarily to redeem all of the outstanding shares of the $3.50 Cumulative Convertible Preferred Stock, Series D. The QUIPS have a liquidation value of $25 per Preferred Security, mature in 2025 and are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures. The Company has the option at any time on or after July 6, 2000, to redeem, in whole or in part, the Junior Subordinated Debentures with the proceeds from the issuance and sale of the Company's common stock within two years preceding the date fixed for redemption. The Company has unconditionally guaranteed all distributions required to be made by the Trust, but only to the extent the Trust has funds legally available for such distributions. The only source of funds for the Trust to make distributions to preferred security holders is the payment by the Company of interest on the Junior Subordinated Debentures. The Company has the right to defer such interest payments for up to five years. If the Company defers any interest payments, the Company may not, among other things, pay any dividends on its capital stock until all interest in arrears is paid to the Trust. [63] 46 The BFGoodrich Company and Subsidiaries NOTE V STOCK OPTION PLAN At December 31, 1997, the Company had stock-based compensation plans described below that include the pre-merger plans of Rohr. Effective with the merger, outstanding Rohr options were assumed by the Company and converted to fully-vested options to purchase BFGoodrich common stock at a ratio of .7 of one share of BFGoodrich common stock for each Rohr option. The Stock Option Plan, which will expire on April 5, 2001, unless renewed, provides for the awarding of or the granting of options to purchase 3,200,000 shares of common stock of the Company. Generally, options granted are exercisable at the rate of 35 percent after one year, 70 percent after two years and 100 percent after three years. Certain options are fully exercisable immediately after grant. The term of each option cannot exceed 10 years from the date of grant. All options granted under the Plan have been granted at not less than 100 percent of market value (as defined) on the date of grant. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 5.75 percent, 5.39 percent and 7.83 percent for 1997, 1996 and 1995, respectively; dividend yield of 2.7 percent for 1997, and 2.5 percent for 1996 and 1995; volatility factor of the expected market price of the Company's common stock of 16.2 percent for 1997, and 19.0 percent for 1996 and 1995; and a weighted-average expected life of the options of 5.2 years, 5.0 years and 4.9 years for 1997, 1996 and 1995, respectively. The assumptions used were comparable for BFGoodrich's and Rohr's stock options, except that for the Rohr options, the dividend yield assumption was zero and the volatility factor was 43.8 percent in 1997 and 43.1 percent in 1996. The option valuation model requires the input of highly subjective assumptions, primarily stock price volatility, changes in which can materially affect the fair value estimate. The weighted-average fair values of stock options granted during 1997, 1996 and 1995 were $7.59, $7.28 and $5.31, respectively. For purposes of the pro forma disclosures required by SFAS 123, the estimated fair value of the options is amortized to expense over the options' vesting period. In addition, the grant-date fair value of performance shares (discussed below) is amortized to expense over the three-year plan cycle without adjustments for subsequent changes in the market price of the Company's common stock. The Company's pro forma information is as follows:
(in millions, except per share amounts) 1997 1996 1995 ---- ---- ---- Net income: As reported $ 178.2 $ 173.9 $ 140.9 Pro forma 170.6 172.8 141.2 Earnings per share: Basic As reported $ 2.51 $ 2.61 $ 2.12 Pro forma 2.40 2.59 2.12 Diluted As reported $ 2.41 $ 2.48 $ 2.01 Pro forma 2.30 2.45 2.01
[64] 47 The BFGoodrich Company and Subsidiaries The pro forma effect on net income for 1996 and 1995 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. In addition, the pro forma effect on net income in 1997 is not representative of the pro forma effect on net income in future years because 1997 includes $4.5 million of after-tax compensation expense related to the Rohr options which became fully vested upon the consummation of the merger. A summary of the Company's stock option activity and related information follows:
YEAR ENDED DECEMBER 31, 1997 WEIGHTED-AVERAGE (OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE -------------- -------------- Outstanding at beginning of year 4,943.8 $ 25.16 Granted 846.7 40.51 Exercised (1,661.1) 22.44 Forfeited (97.1) 33.96 Expired (14.3) 43.64 --------- Outstanding at end of year 4,018.0 29.25 =========
YEAR ENDED DECEMBER 31, 1996 WEIGHTED-AVERAGE (OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE -------------- -------------- Outstanding at beginning of year 4,212.6 $ 22.96 Granted 1,612.2 28.85 Exercised (842.4) 21.33 Forfeited (96.4) 26.64 Expired (54.2) 39.24 --------- Outstanding at end of year 4,831.8 24.96 =========
YEAR ENDED DECEMBER 31, 1995 WEIGHTED-AVERAGE (OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE -------------- -------------- Outstanding at beginning of year 4,352.3 $ 23.05 Granted 839.2 21.67 Exercised (870.4) 22.00 Forfeited (103.5) 23.44 Expired (5.0) 36.87 --------- Outstanding at end of year 4,212.6 22.96 =========
The number of options outstanding at the end of 1996 does not agree with the beginning amount for 1997 due to option activity for Rohr during the five-month period ended December 31, 1996, not reflected in the 1996 activity above. [65] 48 The BFGoodrich Company and Subsidiaries NOTE V STOCK OPTION PLAN (continued) The following table summarizes information about the Company's stock options outstanding at December 31, 1997:
WEIGHTED- WEIGHTED- AVERAGE OPTIONS OPTIONS AVERAGE REMAINING GRANT OUTSTANDING EXERCISEABLE EXERCISE CONTRACTUAL DATE (IN THOUSANDS) (IN THOUSANDS) PRICE LIFE (YEARS) ----- ------------- ------------- --------- ------------ 1997 811.0 395.5 $40.53 9.2 1996 857.5 559.4 33.53 8.1 1995 878.9 747.1 21.54 7.2 1994 281.0 281.0 18.78 6.1 1993 264.7 264.7 21.00 5.1 All other 924.9 924.9 28.24 2.4 --------- --------- Total 4,018.0 3,172.6 ========= =========
Stock options in the "All other" category were outstanding at prices ranging from $15.00 to $45.18. During 1997, 1996 and 1995, restricted stock awards for 9,761; 26,103 and 209,700 shares, respectively, were made under the Stock Option Plan. During 1997, 1996 and 1995, stock awards for 5,500; 25,400 and 1,200 restricted shares, respectively, were forfeited. Restricted stock awards may be subject to conditions established by the Board of Directors. Under the terms of the restricted stock awards, the granted stock vests three years after the award date. The cost of these awards, determined as the market value of the shares at the date of grant, is being amortized over the three-year period. In 1997, 1996 and 1995, $1.8 million, $1.9 million and $2.1 million, respectively, were charged to expense for restricted stock awards. The Stock Option Plan also provides that shares of common stock may be awarded as performance shares to certain key executives having a critical impact on the long-term performance of the Company. In 1995, the Compensation Committee of the Board of Directors awarded 566,200 shares and established performance objectives that are based on attainment of an average return on equity over the three-year plan cycle ending in 1997. In 1997 and 1996, 5,000 and 14,650 performance shares were granted to certain key executives that commenced employment during those years. During 1997, 1996 and 1995, 14,400; 35,000 and 133,050 performance shares, respectively, were forfeited. The market value of performance shares awarded under the plan is recorded as unearned restricted stock. The unearned amount is charged to compensation expense based upon the extent performance objectives are expected to be met. In 1997, 1996 and 1995, $14.3 million, $8.3 million and $6.9 million, respectively, were charged to expense for performance shares. If the provisions of SFAS 123 had been used to account for awards of performance shares, the weighted-average grant-date fair value of performance shares granted in 1997, 1996 and 1995 would have been $41.44, $38.54 and $22.37 per share, respectively. [66] 49 The BFGoodrich Company and Subsidiaries NOTE W COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries have numerous purchase commitments for materials, supplies and energy incident to the ordinary course of business. There are pending or threatened against BFGoodrich or its subsidiaries various claims, lawsuits and administrative proceedings, all arising from the ordinary course of business with respect to commercial, product liability and environmental matters, which seek remedies or damages. The Company believes that any liability that may finally be determined with respect to commercial and product liability claims, should not have a material effect on the Company's consolidated financial position or results of operations. The Company is also involved in legal proceedings as a plaintiff involving contract, patent protection, environmental and other matters. Gain contingencies, if any, are recognized when realized. At December 31, 1997, the Company was a party to various obligations assumed or issued by others, including guarantees of debt and lease obligations, principally relating to businesses previously disposed. The aggregate contingent liability, should the various third parties fail to perform, is approximately $52.0 million. The Company has not previously been required to assume any responsibility for these financial obligations as a result of defaults and is not currently aware of any existing conditions which would cause a financial loss. As a result, the Company believes that risk of loss relative to these contingent obligations is remote. The Company and its subsidiaries are generators of both hazardous and non-hazardous wastes, the treatment, storage, transportation and disposal of which are subject to various laws and governmental regulations. Although past operations were in substantial compliance with the then-applicable regulations, the Company has been designated as a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency ("EPA") in connection with approximately 38 sites, most of which related to businesses previously discontinued. The Company believes it may have continuing liability with respect to not more than 18 sites. The Company initiates corrective and/or preventive environmental projects of its own to ensure safe and lawful activities at its current operations. The Company believes that compliance with current governmental regulations will not have a material adverse effect on its capital expenditures, earnings or competitive position. The Company's environmental engineers and consultants review and monitor past and existing operating sites. This process includes investigation of National Priority List sites, where the Company is considered a PRP, review of remediation methods and negotiation with other PRPs and governmental agencies. At December 31, 1997, the Company has recorded as Accrued expenses and as Other Non-current Liabilities a total of $31.4 million to cover future environmental expenditures, principally for remediation of the aforementioned sites and other environmental matters. A significant portion of accrued environmental liabilities is in connection with four sites which relate to businesses previously discontinued and two sites that came with the Rohr merger. Two of the most significant variables in determining the Company's ultimate liability are the remediation method finally adopted for the site and the Company's share of the total site remediation cost. With respect to three of the four sites of previously discontinued businesses, the Company's maximum percentage share of the ultimate remediation costs is fixed. The percentages range from approximately 12 percent to approximately 41 percent, and appropriate reserves have accordingly been established. At the fourth site, alternate dispute resolution ("ADR") is under way to establish the various parties' share of responsibility. The Company's interim share is 30 percent, which the Company believes will likely decrease as a result of the ADR. [67] 50 The BFGoodrich Company and Subsidiaries NOTE W COMMITMENTS AND CONTINGENCIES (continued) Of the four sites relating to discontinued businesses, two sites are in the operation and maintenance phase for which costs are reasonably fixed. Construction at a third site was begun in 1997, but problems with the remedial design caused work to be discontinued. Modifications or other remedial alternatives are being explored which could result in increases or decreases in estimated costs. Until a decision on these remedy changes is made in 1998, an accurate cost estimate for this site cannot be determined. Litigation on this site with the government over the recovery of past government costs is ongoing. Until a final decision on the remedy is made and the Company's percentage of liability is determined through ADR, it is not possible to estimate the Company's total cost of this site. However, total site costs are not expected to exceed $15.0 million, of which the Company's share is 30 percent, which reflects the basis for the amount accrued at December 31, 1997. The final site involving discontinued businesses continues in litigation with no agreement with the government over the remedy and government costs exceeding $22.0 million. This site presents the greatest uncertainty both as to the nature and cost of the final remedy and the percentage of the government's costs that are found to be recoverable. However, the Company's share of this site is relatively small, at less than 12 percent. The Company has accrued for costs it expects to incur. The Company also has two active Superfund sites relating to the Aerostructures Group (Rohr). Of these, one is a multimillion dollar site that has been in active investigation/remediation/litigation for over 15 years. Depending on the outcome of recent settlement discussions, the Company may not spend much more on this matter, but a reserve is being retained in the event the settlement does not occur. An action against third-party defendants is being pursued by the PRPs seeking contribution. No receivable has been reflected for any potential contributions. The second Rohr site is in an earlier stage, and the Company's percentage share of the total site remediation cost has not been determined. The estimated cost of this site to all parties is $70.0 million. The Company believes that it has adequately reserved for all of the above sites based on currently available information. Management believes that it is reasonably possible that additional costs may be incurred beyond the amounts accrued as a result of new information. However, the amounts, if any, cannot be estimated and management believes that they would not be material to the Company's financial condition but could be material to the Company's results of operations in a given period. In addition, the Company expects to incur capital expenditures and future costs for environmental, health and safety improvement programs. These expenditures relate to anticipated projects to change process systems or to install new equipment to reduce ongoing emissions, improve efficiencies and promote greater worker health and safety. These expenditures are customary operational costs and are not expected to have a material adverse effect on the financial position, liquidity or results of operations of the Company. [68] 51 The BFGoodrich Company and Subsidiaries Quarterly Financial Data (Unaudited)
1997 QUARTERS 1996 QUARTERS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH ------ ------- ------ ------- ------ ------ ----- ------ BUSINESS SEGMENT SALES: Aerospace $541.5 $618.1 $646.5 $662.2 $457.3 $482.8 $512.9 $568.4 Specialty Chemicals 222.7 228.4 223.7 229.9 191.0 203.1 217.5 212.8 ------ ------ ------ ------ ------ ------ ------ ------ Total Sales $764.2 $846.5 $870.2 $892.1 $648.3 $685.9 $730.4 $781.2 ====== ====== ====== ====== ====== ====== ====== ====== Gross Profit $203.0 $228.5 $253.7 $233.1 $179.4 $203.4 $197.8 $222.7 ====== ====== ====== ====== ====== ====== ====== ====== BUSINESS SEGMENT OPERATING INCOME: Aerospace $ 55.0 $ 73.3 $ 63.5 $ 68.5 $ 47.0 $ 70.5 $ 62.8 $ 73.3 Specialty Chemicals 31.1 31.1 31.8 34.2 25.0 28.5 30.8 25.2 Corporate (14.8) (15.2) (16.3) (92.1) (12.7) (11.5) (15.0) (13.6) ------ ------ ------ ------ ------ ------ ------ ------ Total Operating Income $ 71.3 $ 89.2 $ 79.0 $ 10.6 $ 59.3 $ 87.5 $ 78.6 $ 84.9 ====== ====== ====== ====== ====== ====== ====== ====== INCOME (LOSS) FROM: CONTINUING OPERATIONS $ 29.8 $ 64.5 $ 37.4 $(18.5) $ 19.0 $ 33.9 $ 29.4 $ 33.2 DISCONTINUED OPERATIONS 64.1 3.4 16.8 - (1.3) 12.9 43.7 3.1 EXTRAORDINARY ITEMS - - (2.6) (16.7) - - - - ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME (LOSS) $ 93.9 $ 67.9 $ 51.6 $(35.2) $ 17.7 $ 46.8 $ 73.1 $ 36.3 ====== ====== ====== ====== ====== ====== ====== ====== BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $ .42 $ .91 $ .53 $ (.26) $ .29 $ .52 $ .43 $ .49 Net income (loss) $1.33 $ .96 $ .73 $ (.49) $ .27 $ .71 $1.08 $ .53 DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $ .40 $ .87 $ .50 $ (.26) $ .28 $ .49 $ .41 $ .47 Net income (loss) $1.27 $ .91 $ .69 $ (.49) $ .27 $ .67 $1.02 $ .51
The first quarter of 1997 includes a $59.5 million after-tax gain in discontinued operations from the sale of the SC&A Group. The second quarter includes a pretax gain of $26.4 million from the sale of the Company's engine electrical business and a $13.7 million pretax gain on the issuance of a subsidiary's stock. In the third quarter of 1997, the Company recognized a $35.2 million pretax loss to write off a portion of the MD-90 contract and recognized a $2.6 million after-tax charge from the early extinguishment of certain Rohr debt (reported as an extraordinary item). In the fourth quarter of 1997, the Company recognized pretax charges of $77.0 million for merger costs and $10.9 million from the write-off of accounts receivable from a bankrupt customer. The fourth quarter of 1997 also includes a $16.7 million after-tax charge for the early extinguishment of certain Rohr debt refinanced in connection with the merger, also reported as an extraordinary item. In the first quarter of 1996, operating income included a $4.0 million pretax charge for a voluntary early retirement program in the Specialty Chemicals Segment. In the second quarter of 1996, income from discontinued operations included a $6.4 million pretax gain on the sale of an SC&A business. In the third quarter of 1996, income from continuing operations included a $5.3 million pretax loss on the exchange of Rohr's convertible debt. Income [69] 52 The BFGoodrich Company and Subsidiaries Quarterly Financial Data (Unaudited) (continued) from discontinued operations in the 1996 third quarter included a $30.0 million non-cash adjustment to the gain of a business previously accounted for as a discontinued operation. The fourth quarter of 1996 included a $7.2 million pretax loss from the write-down of an impaired asset and a $5.2 million pretax loss from the sale of a subsidiary. This quarter also included a $1.6 million pretax gain from the sale of the Company's airport lighting business. As a result of the pooling-of-interests merger with Rohr late in the fourth quarter of 1997, the amounts reported above differ from those previously reported in the applicable BFGoodrich quarterly reports on Form 10-Q. Quarterly results for 1997 combine BFGoodrich and Rohr results for the same calendar quarters. Quarterly results for 1996 combine BFGoodrich historical results for each calendar quarter with Rohr historical results for each fiscal quarter (i.e., BFGoodrich's first quarter ended March 31, 1996, is combined with Rohr's first fiscal quarter ended October 31, 1995). A reconciliation of the amounts previously reported in BFGoodrich's quarterly reports on Form 10-Q to combined results reported above is as follows:
1997 QUARTERS 1996 QUARTERS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH ----- ------ ----- ------ ----- ------ ----- ------ SALES: As previously reported $549.4 $578.1 $585.9 $592.6 $498.0 $506.1 $528.2 $545.9 Effect of Rohr merger 214.8 268.4 284.3 299.5 150.3 179.8 202.2 235.3 ------ ------ ------ ------ ------ ------ ------ ------ As reported above $764.2 $846.5 $870.2 $892.1 $648.3 $685.9 $730.4 $781.2 ====== ====== ====== ====== ====== ====== ====== ====== GROSS PROFIT: As previously reported $174.4 $191.0 $196.8 $192.3 $164.9 $167.4 $165.7 $178.6 Effect of Rohr merger 28.6 37.5 56.9 40.7 14.5 36.0 32.1 44.1 ------ ------ ------ ------ ------ ------ ------ ------ As reported above $203.0 $228.5 $253.7 $233.0 $179.4 $203.4 $197.8 $222.7 ====== ====== ====== ====== ====== ====== ====== ====== INCOME (LOSS) FROM CONTINUING OPERATIONS: As previously reported $ 20.9 $ 52.4 $ 32.5 $ 26.7 $ 21.2 $ 25.0 $ 20.9 $ 26.1 Effect of Rohr merger 8.9 12.1 4.9 (45.2) (2.2) 8.9 8.5 7.1 ------ ------ ------ ------ ------ ------ ------ ------ As reported above $ 29.8 $ 64.5 $ 37.4 $(18.5) $ 19.0 $ 33.9 $ 29.4 $ 33.2 ====== ====== ====== ====== ====== ====== ====== ====== NET INCOME (LOSS): As previously reported $ 85.0 $ 55.8 $ 49.4 $ 26.7 $ 19.9 $ 37.9 $ 64.6 $ 29.3 Effect of Rohr merger 8.9 12.1 2.2 (61.9) (2.2) 8.9 8.5 7.0 ------ ------ ------ ------ ------ ------ ------ ------ As reported above $ 93.9 $ 67.9 $ 51.6 $(35.2) $ 17.7 $ 46.8 $ 73.1 $ 36.3 ====== ====== ====== ====== ====== ====== ====== ======
COMMON STOCK PRICES AND DIVIDENDS The table below lists dividends per share and quarterly price ranges for the common stock of The BFGoodrich Company based on New York Stock Exchange prices as reported on the consolidated tape.
1997 1996 QUARTER HIGH LOW DIVIDEND QUARTER HIGH LOW DIVIDEND ------- ---- --- -------- ------- ---- --- -------- First $43 1/8 $36 1/2 $.275 First $40 1/4 $33 15/16 $.275 Second 48 1/4 35 1/8 .275 Second 41 7/8 35 3/8 .275 Third 47 1/4 41 5/8 .275 Third 45 1/8 33 3/8 .275 Fourth 46 40 3/4 .275 Fourth 45 7/8 38 1/8 .275
[70] 53 The BFGoodrich Company and Subsidiaries Selected Five-Year Financial Data
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- STATEMENT OF INCOME DATA: Sales $3,373.0 $2,845.8 $2,661.8 $2,601.4 $2,504.3 Operating income 250.1 310.3 247.4 217.0 76.2 Income (loss) from continuing operations 113.2 115.5 94.8 66.4 (14.9) BALANCE SHEET DATA: Total assets $3,493.9 $3,579.8 $3,387.5 $3,435.4 $3,268.7 Non-current long-term debt and capital lease obligations 564.3 881.4 963.0 1,001.1 967.4 Mandatorily redeemable preferred securities of Trust 123.1 122.6 122.2 - - Redeemable preferred stock - - - - 3.8 Total shareholders' equity 1,422.6 1,225.8 975.9 979.2 968.5 OTHER FINANCIAL DATA: Total segment operating income $ 388.5 $ 363.1 $ 303.9 $ 270.0 $ 133.8 Capital expenditures 159.9 197.1 155.8 136.1 173.7 Dividends (common and preferred) 59.5 58.8 61.6 64.6 64.6 Distributions on Trust preferred securities 10.5 10.5 5.1 - - PER SHARE OF COMMON STOCK: Income (loss) from continuing operations, diluted $ 1.53 $ 1.65 $ 1.34 $ .91 $ (.37) Dividends declared 1.10 1.10 1.10 1.10 1.10 Book value 19.56 17.66 14.97 13.54 13.44 RATIOS: Operating income as a percent of sales (%) 7.4 10.9 9.3 8.3 3.0 Return on common shareholders' equity (%) 13.5 15.8 14.7 10.8 (14.2) Debt-to-capitalization ratio (%) 33.0 44.3 49.3 53.8 52.1 Dividend payout-common stock (%) 33.4 33.9 40.6 55.9 n/a OTHER DATA: Common shareholders of record at end of year 13,550 n/a n/a n/a n/a Common shares outstanding at end of year (millions) 72.7 69.4 65.2 64.2 63.9 Number of employees at end of year 16,838 17,960 17,275 18,292 19,916
All data have been restated to reflect the pooling-of-interests merger with Rohr. [71] 54 The BFGoodrich Company and Subsidiaries Board of Directors JEANETTE GRASSELLI BROWN Retired Director of Corporate Research, BP America, an oil and petrochemical producer. Director since 1991. (2, 3) DAVID L. BURNER Chairman, President and Chief Executive Officer, The BFGoodrich Company. Director since 1995.(1) DIANE C. CREEL President and Chief Executive Officer, Earth Tech, an international consulting engineering company. Director since 1997. (3, 5) GEORGE A. DAVIDSON, JR. Chairman and Chief Executive Officer, Consolidated Natural Gas Company, a natural gas holding company. Director since 1991. (2, 3) RICHARD K. DAVIDSON Chairman, President and Chief Executive Officer, Union Pacific Corporation, a transportation company with interests in the railroad and trucking industries. Director since 1996. (2, 5) JAMES J. GLASSER Chairman Emeritus, GATX Corporation, a transportation, storage, leasing and financial services company. Director since 1985. (2, 4, 6) JODIE K. GLORE Senior Vice President, Rockwell International, and President and Chief Operating Officer, Rockwell Automation, a producer of industrial automation systems. Director since 1997. (3, 6) DOUGLAS E. OLESEN President and Chief Executive Officer, Battelle Memorial Institute, a research and development organization for government and industry. Director since 1996. (3, 6) RICHARD DE J. OSBORNE Chairman and Chief Executive Officer, ASARCO Incorporated, a producer of nonferrous metals. Director since 1996. (4, 5, 6) JOSEPH A. PICHLER Chairman and Chief Executive Officer, The Kroger Co., a retail food company. Director since 1988. (4, 5, 6) ALFRED M. RANKIN, JR. Chairman, President and Chief Executive Officer, NACCO Industries, Inc., a holding company with interests in the mining and marketing of lignite and the manufacturing and marketing of forklift trucks and small household appliances. Director since 1988. (1, 3, 4, 5) ROBERT H. RAU President, Aerostructures Group, The BFGoodrich Company. Director since 1997. IAN M. ROSS President Emeritus, AT&T Bell Laboratories (now Lucent Technologies). Director since 1983. (1, 2, 4, 6) D. LEE TOBLER Executive Vice President and Chief Financial Officer, The BFGoodrich Company. Director since 1988. (1) JAMES R. WILSON Chairman, President and Chief Executive Officer, Thiokol Corporation, a producer of solid-propellant rocket motors for space, defense and commercial launch applications and precision fastening systems and cast components. Director since 1997. (2, 5) A. THOMAS YOUNG Retired Executive Vice President, Lockheed Martin Corporation, an aerospace and defense company. Director since 1995. (3, 5) COMMITTEES OF THE BOARD (1) Executive Committee (2) Compensation Committee (3) Audit Committee (4) Committee on Directors (5) Financial Policy Committee (6) Responsible Care Oversight Committee [72] 55 The BFGoodrich Company and Subsidiaries Officers DAVID L. BURNER Chairman, President and Chief Executive Officer MARSHALL O. LARSEN Executive Vice President; President and Chief Operating Officer, BFGoodrich Aerospace DAVID B. PRICE, JR. Executive Vice President; President and Chief Operating Officer, BFGoodrich Specialty Chemicals D. LEE TOBLER Executive Vice President and Chief Financial Officer TERRENCE G. LINNERT Senior Vice President and General Counsel ROBERT L. AVERY Vice President; Group Vice President, Maintenance, Repair and Overhaul NICHOLAS J. CALISE Vice President, Associate General Counsel and Secretary JOHN J. GRISIK Vice President; Group Vice President, Sensors and Integrated Systems STEVEN R. GUIDRY Vice President GARY L. HABEGGER Vice President, Human Resources VICTORIA F. HAYNES Vice President, Research and Development STEVEN G. ROLLS Vice President and Controller ERNEST F. SCHAUB Vice President; Group Vice President, Landing Systems SANDRA F. SELBY Vice President, Strategic Planning GEORGE K. SHERWOOD Vice President, Tax Administration MARY ANN TUCKER Vice President and Associate General Counsel, Patents LES C. VINNEY Vice President and Treasurer DAVID R. WATSON Vice President; Group Vice President, Aerostructures JOHN A. WEAVER Vice President; Group Vice President, Specialty Additives [73] 56 The BFGoodrich Company and Subsidiaries Shareholder Information COMPANY HEADQUARTERS The BFGoodrich Company 4020 Kinross Lakes Parkway Richfield, Ohio 44286-9368 (330) 659-7600 BFGOODRICH ON THE INTERNET BFGoodrich's home page on the World Wide Web can be found at http://www.bfgoodrich.com. STOCK EXCHANGE LISTING BFGoodrich common stock and BFGoodrich Capital cumulative quarterly income preferred securities (QUIPS) are listed on the New York Stock Exchange. Symbols: GR and GRPRA, respectively. Options to acquire the Company's common stock are traded on the Chicago Board Options Exchange. ANNUAL MEETING The annual meeting of shareholders of The BFGoodrich Company will be held at 10:30 a.m. on April 20, 1998, at the John S. Knight Center, 77 East Mill Street, Akron, Ohio. The meeting notice and proxy materials were mailed to shareholders with this report. SHAREHOLDER SERVICES Questions concerning your account as a shareholder, including dividend payments, BFGoodrich Dividend Reinvestment Plan and lost certificates, should be directed to our transfer agent: The Bank of New York Shareholder Relations Dept.-11E P.O. Box 11258 Church Street Station New York, N.Y. 10286-1258 1-800-524-4458 e-mail: Shareowner-svcs@bankofny.com STOCK TRANSFER AND ADDRESS CHANGES Please send certificates for transfer and address changes to: The Bank of New York Receive and Deliver Dept.-11W P.O. Box 11002 Church Street Station New York, N.Y. 10286-1002 FORM 10-K AND OTHER INFORMATION Copies of the Company's report to the Securities and Exchange Commission on Form 10-K are available without charge from: Office of the Secretary The BFGoodrich Company 4020 Kinross Lakes Parkway Richfield, Ohio 44286-9368 (330) 659-7901 e-mail: ar@corp.bfg.com Quarterly earnings, dividend information and news releases are available 24 hours a day by calling 1-800-BFG-5987. This information is also available at BFGoodrich's site on the World Wide Web at http://www.bfgoodrich.com. INVESTOR INQUIRIES Securities analysts and others seeking financial information may contact: John T. Bingle Director of Investor Relations The BFGoodrich Company 4020 Kinross Lakes Parkway Richfield, Ohio 44286-9368 (330) 659-7789 e-mail: investor@corp.bfg.com THE BFGOODRICH FOUNDATION The Company makes contributions to educational, cultural and other nonprofit organizations through The BFGoodrich Foundation, which distributed $1.25 million in 1997. For information about contributions in 1997 and foundation guidelines, contact: The BFGoodrich Foundation Attention: Lois Sumegi 4020 Kinross Lakes Parkway Richfield, Ohio 44286-9368 [74] EX-21 6 EXHIBIT 21 1
EXHIBIT 21 Page 1 of 2 THE B.F.GOODRICH COMPANY Parent And Subsidiaries Of Registrant - ------------------------------------- Percentage Of Place Of Voting Securities Consolidated Subsidiary Companies Incorporation Owned - --------------------------------- ------------- ----- The B.F.Goodrich Company (Registrant; there are no parents of the registrant) New York BFGoodrich Aerospace Aircraft Evacuation Systems Private Limited India 100.00 BFGoodrich Aerospace Asia-Pacific, Limited Hong Kong 51.00 BFGoodrich Aerospace Component Overhaul & Repair, Inc. Delaware 100.00 BFGoodrich Aerospace Pte. Ltd. Singapore 100.00 BFGoodrich Avionics Systems, Inc. Delaware 100.00 B.F.Goodrich Chemical Holding B.V. The Netherlands 100.00 B.F.Goodrich Realty Europe N.V. Belgium 100.00 BFGoodrich TempRite Resin B.V. The Netherlands 100.00 B.F.Goodrich Chemical (Belgie) N.V. Belgium 100.00 BFGoodrich Chemical Spain, S.A. Spain .01 B.F.Goodrich Europe Coordination Center N.V. Belgium 62.50 B.F.Goodrich Chemical Sales Company B.V. The Netherlands 100.00 BFGoodrich Chemical Spain, S.A. Spain 99.99 B.F.Goodrich Europe Coordination Center N.V. Belgium 37.50 BFGoodrich Holding S.A. France 100.00 BFGoodrich Aerospace Services S.A. France 100.00 Rosemount Aerospace S.A.R.L. France 100.00 E.P.P.C. Polyplastic S.A. France 100.00 JcAir, B.V. The Netherlands 100.00 B.F.Goodrich Holding GmbH Germany 100.00 B.F.Goodrich Chemical (Deutschland) GmbH Germany 100.00 Rosemount Aerospace GmbH Germany 100.00 B.F.Goodrich Chemical Italia, S.R.L. Italy 100.00 BFGoodrich China, Inc. Delaware 100.00 The B.F.Goodrich Company of Japan, Ltd. Japan 100.00 BFGoodrich de Mexico, S.A. de C.V. Mexico 100.00 BFGoodrich FlightSystems, Inc. Ohio 100.00 BFGoodrich Specialty Chemicals Asia-Pacific Limited Hong Kong 100.00 BFGoodrich Specialty Chemicals (M) SDN. BHD. Malaysia 100.00 Delfzijl Resin C.V. The Netherlands 99.00 First Charter Insurance Company Vermont 100.00 Godfrey Engineering, Inc. Florida 100.00 Goodrich Canada Inc. Canada 100.00 Goodrich Holding Corporation Delaware 100.00 Goodrich Holding UK Limited England 100.00 BFGoodrich Aerospace UK Limited England 100.00 B.F.Goodrich Chemical (U.K.) Limited England 100.00 BFGoodrich Component Services Limited England 100.00 Rosemount Aerospace Limited England 100.00 Simmonds Precision Limited England 100.00 Goodron Realty, Inc. Delaware 100.00 International BFGoodrich Technology Corporation Delaware 100.00 Goodrich FSC, Inc. Barbados 100.00 JcAir, Inc. Kansas 100.00
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EXHIBIT 21 Page 2 of 2 THE B.F.GOODRICH COMPANY Parent And Subsidiaries Of Registrant - ------------------------------------- Percentage Of Place Of Voting Securities Consolidated Subsidiary Companies Incorporation Owned - --------------------------------- ------------- ----- JMSI Corporation Delaware 100.00 Delfzijl Resin C.V. The Netherlands 1.00 ALA Corporation Delaware 100.00 CMK Corporation Delaware 100.00 Kinsman Road Realty Corporation Ohio 100.00 Mitech Corporation Ohio 100.00 C. H. Patrick & Co., Inc. South Carolina 100.00 Rohr, Inc. Delaware 100.00 RE Components Inc. Delaware 100.00 RII Services, Inc. New York 100.00 RI Receivables, Inc. Delaware 100.00 Rohr Aero Services, Inc. Delaware 100.00 Rohr Aero Services, Europe France 100.00 Rohr Europe, Inc. Delaware 100.00 Rohr Aero Services Limited United Kingdom 100.00 Rohr Europe GmbH Germany 100.00 Rohr Europe (SA) France 100.00 Rohr Finance Corporation Delaware 100.00 Rohr Foreign Sales Corporation Guam 100.00 Rohr, Inc. Maine 100.00 Rohr International Sales corporation Delaware 100.00 Rohr International Service Corporation Delaware 100.00 Transportation Insurance Limited Bermuda 100.00 Rohr Industries, Inc. Kentucky 100.00 Rohr Southern Industries, Inc. Delaware 100.00 Tolo, Incorporated California 100.00 Rosemount Aerospace Inc. Delaware 100.00 Rosemount Aerospace Canada Inc. Canada 100.00 Safeway Products Inc. Connecticut 100.00 Siltown Realty, Inc. Alabama 100.00 Simmonds Precision Products, Inc. New York 100.00 Simmonds Precision Engine Systems, Inc. New York 100.00 Simmonds Precision Motion Controls, Inc. New Jersey 100.00 TRAMCO, INC. Washington 100.00 TSA Holdings Inc. Delaware 100.00 TSA-rina Holding B.V. The Netherlands 100.00 BFGoodrich Capital Statutory trust in Delaware 100.00
All of the above subsidiaries are included in the 1997 consolidated financial statements. The Registrant also owns 100.00 percent of Prosytec S.A., incorporated in France; 50.22 percent of DTM Corporation, incorporated in Texas; 50.00 percent of BFGoodrich - Messier, Inc., incorporated in Delaware; 50.00 percent of Messier - BFGoodrich S.A., incorporated in France; 50.00 percent of Rohr Aero Services - Asia Pte. Ltd., incorporated in Singapore; 50.00 percent of Telenor S.A., incorporated in France; 28.00 percent of Sino-U.S. Youli Piping Co. Ltd., incorporated in China. DTM Corporation owns 100.00 percent of DTM GmbH, incorporated in Germany. Prosytec S.A. owns 100.00 percent of Tremco Italia S.R.L., incorporated in Italy. These companies are accounted for on the equity method. EX-23.A 7 EXHIBIT 23(A) 1 Exhibit 23(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The BFGoodrich Company of our report dated February 16, 1998, included in the 1997 Annual Report to Shareholders of The BFGoodrich Company. We also consent to the incorporation by reference of our report dated February 16, 1998, with respect to the consolidated financial statements incorporated herein by reference, in the following Registration Statements and in the related Prospectuses:
Registration Number Description of Registration Statement Filing Date - ------------ ------------------------------------- ------------ 2-83877 The Rohr Industries, Inc., Stock Option Plan of 1982 May 19, 1983 - Form S-8 33-14382 Rohr Industries, Inc. Savings Plan for Employees June 11, 1987 Covered by Collective Bargaining Agreements - Amendment No. 1 to Form S-8 33-20421 The B.F.Goodrich Company Key Employees' March 1, 1988 Stock Option Plan - Form S-8 33-32839 The Rohr Industries, Inc. 1989 Stock Incentive Plan January 2, 1989 - Form S-8 2-88940 The B.F.Goodrich Company Retirement Plus Savings April 28, 1989 Plan - Post-Effective Amendment - No. 2 to Form S-8 33-29351 The Rohr Industries, Inc. 1988 Non-Employee June 19, 1989 Director Stock Option Plan - Form S-8 33-49052 The B.F.Goodrich Company Key Employees' June 26, 1992 Stock Option Plan - Form S-8 33-49054 The B.F.Goodrich Company Performance June 26, 1992 Share Plan - Form S-8 33-59580 The B.F.Goodrich Company Retirement Plus March 15, 1993 Savings Plan for Wage Employees - Form S-8 33-53113 Rohr, Inc. 7 3/4% Subordinated Notes and 11 5/8% May 11, 1994 Senior Notes - Amendment No. 2 to Form S-3 33-56529 Pretax Savings Plan for the Salaried Employees November 18, 1994 of Rohr, Inc. - Form S-8 33-65447 Rohr, Inc. 1995 Stock Incentive Plan - Form S-8 December 28, 1995 333-03293 The B.F.Goodrich Company Stock Option May 8, 1996 Plan - Form S-8 333-03343 Common Stock - Form S-3 May 8, 1996 333-19697 The B.F.Goodrich Company Savings January 13, 1997 Benefit Restoration Plan - Form S-8
/S/ ERNST & YOUNG LLP Cleveland, Ohio March 5,1998 EX-23.B 8 EXHIBIT 23(B) 1 Exhibit 23(b) INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements on Form S-3 (Nos. 33-53113 and 333-03343) and Form S-8 (Nos. 2-83877, 33-14382, 33-20421, 33-32839, 2-88940, 33-29531, 33-49052, 33-49054, 33-59580, 33-56529, 33-65447, 333-03293 and 333-19697) of The BFGoodrich Company, of our report dated September 11, 1997, on our audits of Rohr, Inc. as of July 31, 1996 and for each of the two years in the period then ended, appearing in this Annual Report on Form 10-K of The BFGoodrich Company for the year ended December 31, 1997. /S/DELOITTE & TOUCHE LLP San Diego, California March 5, 1998 EX-27 9 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF THIS FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 47,000 0 553,900 21,300 652,600 1,401,300 2,015,400 950,300 3,493,900 934,900 564,300 123,100 0 369,700 1,052,900 3,493,900 3,373,000 3,373,000 2,489,900 2,489,900 77,000 0 73,000 217,800 94,100 113,200 84,300 (19,300) 0 178,200 2.51 2.41
EX-99 10 EXHIBIT 99 1 Exhibit 99 INDEPENDENT AUDITORS' REPORT We have audited the consolidated balance sheet of Rohr, Inc. and its subsidiaries as of July 31, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended July 31, 1996 (such statements are not separately presented). 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 aspects, the financial position of Rohr, Inc. and its subsidiaries as of July 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. /S/DELOITTE & TOUCHE LLP San Diego, California September 11, 1997 -----END PRIVACY-ENHANCED MESSAGE-----