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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2001
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Commission file number 1-892
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THE B.F.GOODRICH COMPANY
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(Exact Name of Registrant as Specified in its Charter)
NEW YORK 34-0252680
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Coliseum Centre, 2730 West Tyvola Road, Charlotte, N.C. 28217
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 704-423-7000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of March 31, 2001, there were 103,344,210 shares of common stock outstanding.
There is only one class of common stock.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE B.F. GOODRICH COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Dollars in millions, except per share amounts)
Three Months Ended
March 31,
-----------------------------
2001 2000
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Sales $ 1,177.3 $ 1,070.6
Operating Costs and Expenses:
Cost of sales 832.9 766.1
Selling and administrative expenses 181.1 150.9
Merger-related and consolidation costs 5.8 5.4
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1,019.8 922.4
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Operating income 157.5 148.2
Interest expense (31.1) (24.7)
Interest income 3.8 1.1
Other income (expense) - net (0.6) (4.5)
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Income before
income taxes and Trust distributions 129.6 120.1
Income tax expense (44.1) (42.5)
Distributions on Trust preferred
securities (4.6) (4.6)
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Income from Continuing Operations 80.9 73.0
Income from Discontinued Operations 91.4 13.1
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Net Income $ 172.3 $ 86.1
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Basic Earnings per Share:
Continuing operations $ 0.79 $ 0.67
Discontinued operations 0.89 0.12
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Net Income $ 1.68 $ 0.79
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Diluted Earnings per Share:
Continuing operations $ 0.77 $ 0.66
Discontinued operations 0.85 0.12
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Net Income $ 1.62 $ 0.78
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Dividends declared per common share $ 0.275 $ 0.275
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See notes to condensed consolidated financial statements.
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THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in millions)
March 31, December 31,
2001 2000
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ASSETS
Current Assets
Cash and cash equivalents $ 357.7 $ 77.5
Accounts and notes receivable, less allowances
for doubtful receivables (March 31, 2001:
$30.2; December 31, 2000: $27.9) 852.6 771.4
Inventories 926.8 865.3
Deferred income taxes 163.6 98.2
Prepaid expenses and other assets 29.0 79.0
Net assets of discontinued operations -- 1,049.7
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Total Current Assets 2,329.7 2,941.1
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Property, plant and equipment 1,039.2 1,022.0
Prepaid pension 247.8 246.9
Goodwill 765.9 761.6
Identifiable intangible assets 102.6 109.1
Payment-in-kind notes receivable 152.5 --
Other Assets 640.5 636.8
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$5,278.2 $5,717.5
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank debt $ 1.0 $ 756.3
Accounts payable 370.4 403.7
Accrued expenses 655.2 746.3
Income taxes payable 283.2 59.3
Current maturities of long-term debt
and capital lease obligations 180.9 181.7
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Total Current Liabilities 1,490.7 2,147.3
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Long-term debt and capital lease obligations 1,315.7 1,316.2
Pension obligations 61.5 61.4
Postretirement benefits other than pensions 330.5 336.9
Deferred income taxes 7.6 2.3
Other non-current liabilities 400.8 353.0
Commitments and contingent liabilities -- --
Mandatorily redeemable preferred securities of trust 274.4 273.8
Shareholders' Equity
Common stock - $5 par value
Authorized 200,000,000 shares; issued 114,313,768 shares
at March 31, 2001, and 113,295,049 shares at
December 31, 2000 (excluding 14,000,000 shares
held by a wholly owned subsidiary at each date) 571.5 566.5
Additional capital 949.0 922.8
Income retained in the business 302.1 158.1
Accumulated other comprehensive income (64.2) (59.6)
Unearned portion of restricted stock awards (1.2) (1.2)
Common stock held in treasury, at cost (10,969,558 shares
at March 31, 2001, and 10,964,761 shares
at December 31, 2000) (360.2) (360.0)
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Total Shareholders' Equity 1,397.0 1,226.6
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$5,278.2 $5,717.5
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See notes to condensed consolidated financial statements.
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THE B.F.GOODRICH COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
Three Months Ended
March 31,
-------------------------
2001 2000
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OPERATING ACTIVITIES
Net Income $ 172.3 $ 86.1
Net (Income) loss from discontinued operations 2.1 (13.1)
Gain on sale of discontinued business (93.5) --
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Merger related and consolidation:
Expenses 5.8 5.4
Payments (8.1) (21.5)
Depreciation and amortization 49.9 44.5
Deferred income taxes 2.5 9.5
Net gains on sales of businesses (7.2) (1.1)
Payment-in-kind interest income (1.8) --
Payments for asbestos-related claims, net of recoveries (17.8) (15.7)
Change in assets and liabilities, net of effects
of acquisitions and dispositions of
businesses:
Receivables (86.6) (41.7)
Sale of receivables 3.5 --
Inventories (65.7) (15.4)
Other current assets (0.7) (7.5)
Accounts payable (35.1) (26.2)
Accrued expenses (12.4) 15.3
Income taxes payable 34.5 40.3
Tax benefit on non-qualified options (4.4) --
Other non-current assets and liabilities (6.1) (72.0)
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Net cash provided (used) by operating activities of
continuing operations (68.8) (13.1)
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INVESTING ACTIVITIES
Purchases of property (44.3) (32.6)
Proceeds from sale of property 0.4 12.2
Proceeds from sale of businesses 15.6 1.4
Payments made in connection with acquisitions,
net of cash acquired (16.4) (22.7)
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Net cash used by investing activities of continuing (44.7) (41.7)
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operations
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (723.6) 181.5
Repayment of long-term debt and capital lease obligations (3.6) (1.0)
Proceeds from issuance of capital stock 26.5 0.2
Purchases of treasury stock -- (73.7)
Dividends (28.1) (30.3)
Distributions on Trust preferred securities (4.6) (4.6)
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Net cash provided (used) by financing activities of
continuing operations (733.4) 72.1
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DISCONTINUED OPERATIONS
Net cash provided (used) by discontinued operations (2.1) (7.0)
Proceeds from sale of discontinued operations 1,128.8 --
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Net cash provided (used) by discontinued operations 1,126.7 (7.0)
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Effect of Exchange Rate Changes on Cash and Cash 0.4 0.1
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Equivalents
Net Increase in Cash and Cash Equivalents 280.2 10.4
Cash and Cash Equivalents at Beginning of Period 77.5 66.4
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Cash and Cash Equivalents at End of Period $ 357.7 $ 76.8
======== ========
Supplemental Cash Flow Information:
Income taxes paid $ 5.4 $ 12.4
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Interest paid, net of amounts capitalized $ 29.2 $ 20.9
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See notes to condensed consolidated financial statements.
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THE B.F.GOODRICH COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: BASIS OF INTERIM FINANCIAL STATEMENT PREPARATION - The accompanying
unaudited condensed consolidated financial statements of The B.F.Goodrich
Company ("BFGoodrich" or the "Company") have been prepared in accordance with
the instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain amounts in prior year financial statements have been
reclassified to conform to the current year presentation. Operating results for
the three months ended March 31, 2001 are not necessarily indicative of the
results that may be achieved for the year ending December 31, 2001. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
NOTE B: DISCONTINUED OPERATIONS - On February 28, 2001, the Company completed
the sale of its Performance Materials segment to an investor group led by AEA
Investors, Inc. for approximately $1.4 billion. Total net proceeds, after
anticipated tax payments and transaction costs, included approximately $1
billion in cash and $172 million in debt securities issued by the buyer (see
additional discussion regarding the debt securities received in Note E below).
The transaction resulted in an after-tax gain of $93.5 million, or $0.87 per
diluted share, and is subject to certain post closing adjustments (e.g. working
capital adjustments). The disposition of the Performance Materials segment
represents the disposal of a segment under APB Opinion No. 30 ("APB 30").
Accordingly, the revenues, costs and expenses, assets and liabilities, and cash
flows of Performance Materials have been segregated in the Consolidated
Statement of Income, Consolidated Balance Sheet and Consolidated Statement of
Cash Flows.
Included below is summarized financial information for Performance Materials:
Two Months Three Months
Ended Ended
February 28, March 31,
(Dollars in millions) 2001 2000
------------ ------------
Sales $187.0 $307.6
Operating income $ 8.3 $ 34.4
Interest expense, including allocated interest $ 9.6 $ 11.7
Income tax (benefit) expense $ (1.5) $ 9.6
Net income (loss) from operations $ (2.1) $ 13.1
Gain on sale (net of income tax expense of
$54.9 million in 2001) $ 93.5 $ --
Income from discontinued operations $ 91.4 $ 13.1
Pursuant to the terms of the transaction, the Company has retained certain
assets and liabilities (primarily pension, postretirement and environmental
liabilities) of the Performance Materials segment. Certain of the retained
assets, primarily land located at the segment's Brecksville facility and the
segment's Electronic Materials business, are for sale and have been recorded at
their estimated net realizable value within the March 31, 2001 balance sheet.
The Company has also agreed to indemnify the buyer for liabilities arising from
certain events as defined in the agreement. Such indemnification is not expected
to be material to the Company's financial condition, but could be material to
the Company's results of operations in a given period.
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NOTE C: ACQUISITIONS - In the first three months of 2001, the Company acquired a
supplier of compressed air auditing services and systems products, as well as
the assets of a designer and manufacturer of inertial sensors used for guidance
and control of unmanned vehicles and precision-guided systems. Total
consideration aggregated $16.4 million, of which $11.0 million represented
goodwill and other intangible assets. The purchase price allocation for these
acquisitions has been based on preliminary estimates.
NOTE D: INVENTORIES - Inventories included in the accompanying condensed
consolidated balance sheet consist of:
(Dollars in millions) March 31, December 31,
2001 2000
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FIFO or average cost (which approximates current costs):
Finished products $ 181.7 $ 202.5
In process 667.0 615.5
Raw materials and supplies 204.5 175.4
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1,053.2 993.4
Less:
Reserve to reduce certain
inventories to LIFO (52.3) (52.0)
Progress payments and advances (74.1) (76.1)
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Total $ 926.8 $ 865.3
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In-process inventories include significant deferred costs related to production,
pre-production and excess-over-average costs for long-term contracts. The
Company has pre-production inventory of $71.8 million related to design and
development costs on the 717-200 program at March 31, 2001. In addition, the
Company has excess-over-average inventory of $56.7 million related to costs
associated with the production of the flight test inventory and the first
production units on this program. Recovery of these costs will depend on the
ultimate number of aircraft delivered and successfully achieving the Company's
cost projections in future years.
NOTE E: PAYMENT-IN-KIND NOTES RECEIVABLE
The proceeds from the sale of the Company's Performance Materials segment
included $172 million in debt securities issued by the buyer in the form of
unsecured notes with interest payable in cash or payment-in-kind, at the option
of the issuer. Payment-in-kind refers to the issuer's ability to issue
additional debt securities with identical terms and maturities as the original
debt securities as opposed to making interest payments in cash. The notes have a
term of 10.5 years, and bear interest at a rate of 13 percent, which increases
to 15 percent if cash interest payments do not commence after the fifth year.
The Company has recorded a discount of $21.2 million based on a 14 percent
discount rate. The notes have a prepayment clause that allows the issuer to
reduce the principal amount by $75 million in the second year by making a $60
million cash payment. In determining the discount on the notes, the Company has
assumed that the prepayment will be made and that cash interest payments on the
notes will commence after the fifth year.
Interest income on the notes is recognized using the effective interest method
and is recorded in Interest Income in the Consolidated Statement of Income. The
notes are classified as held-to-maturity in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
The Company does not currently believe a valuation allowance is necessary. The
Company will record a valuation allowance if events or changes in circumstances
indicate that the carrying amount of the notes may not be recoverable. The fair
market value of the notes at March 31, 2001 approximated $144.1 million.
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NOTE F: BUSINESS SEGMENT INFORMATION - The Company's operations are classified
into two reportable business segments: BFGoodrich Aerospace ("Aerospace") and
BFGoodrich Engineered Industrial Products ("Engineered Industrial Products").
The Company's reportable business segments are managed separately based on
fundamental differences in their operations.
Segment operating income is total segment revenue reduced by operating expenses
identifiable with that business segment. Merger-related and consolidation costs
are discussed in Note I of these unaudited condensed consolidated financial
statements. The accounting policies of the reportable segments are the same as
those for the consolidated Company. There are no significant intersegment sales.
Three Months Ended
March 31,
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2001 2000
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Sales
Aerospace $1,001.1 $ 893.0
Engineered Industrial Products 176.2 177.6
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Total Sales $1,177.3 $1,070.6
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Segment Operating Income
Aerospace $ 154.7 $ 138.7
Engineered Industrial Products 25.9 33.6
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180.6 172.3
Corporate General and
Administrative Expenses (17.3) (18.7)
Merger-related and
Consolidation Costs (5.8) (5.4)
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Total Operating Income $ 157.5 $ 148.2
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March 31, December 31,
2001 2000
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Assets
Aerospace $3,625.0 $3,499.9
Engineered Industrial Products 389.0 380.5
Net assets of discontinued -- 1,049.7
operations
Corporate 1,264.2 787.4
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Total Assets $5,278.2 $5,717.5
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NOTE G: EARNINGS PER SHARE - The computation of basic and diluted earnings per
share from continuing operations is as follows:
(In millions, except per share amounts) Three Months Ended
March 31,
----------------------
2001 2000
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Numerator:
Numerator for basic earnings per share
- income from continuing operations $ 80.9 $ 73.0
Effect of dilutive securities:
Convertible preferred securities 1.6 1.6
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Numerator for diluted earnings per
share-income from continuing operations
available to common shareholders after
assumed conversions $ 82.5 $ 74.6
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Denominator:
Denominator for basic earnings per
share - weighted-average shares 102.9 109.5
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Effect of dilutive securities:
Stock options, performance shares and
restricted shares 1.4 0.5
Convertible preferred securities 2.9 2.9
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Dilutive potential common shares 4.3 3.4
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Denominator for diluted earnings per
share - adjusted weighted-average shares
and assumed conversions 107.2 112.9
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Per share income from continuing operations:
Basic $ 0.79 $ 0.67
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Diluted $ 0.77 $ 0.66
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NOTE H: COMPREHENSIVE INCOME
Total comprehensive income consists of the following:
(Dollars in millions) Three Months Ended
March 31,
---------------------
2001 2000
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Net Income $172.3 $ 86.1
Other Comprehensive Income -
Unrealized translation adjustments
during period (4.6) 2.1
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Total Comprehensive Income $167.7 $ 88.2
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Accumulated other comprehensive income consists of the following (dollars in
millions):
March 31, December 31,
2001 2000
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Cumulative unrealized translation adjustments $(58.5) $(53.9)
Minimum pension liability adjustment (5.7) (5.7)
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$(64.2) $(59.6)
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NOTE I: MERGER-RELATED AND CONSOLIDATION COSTS
Through March 31, 2001, the Company recorded charges totaling $5.8 million ($3.8
million after-tax). The charges were recorded across the Company's segments as
follows:
(Dollars in millions) Three Months
Ended
March 31,
2001
------------
Aerospace $5.4
Corporate 0.4
----
$5.8
----
Merger-related and consolidation reserves at December 31, 2000 and March 31,
2001, as well as activity during the three months ended March 31, 2001,
consisted of:
(Dollars in millions)
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Balance Balance
December 31, March 31,
2000 Provision Activity 2001
------------ --------- -------- ---------
Personnel-related costs $14.2 $ 1.4 $ 0.8 $16.4
Transaction costs 1.9 -- (1.9) --
Consolidation 43.5 4.4 (42.8) 5.1
----- ----- ------ -----
$59.6 $ 5.8 $(43.9) $21.5
===== ===== ====== =====
During the three months ended March 31, 2001, the Company recorded
merger-related and consolidation costs of $5.8 million consisting of $1.4
million in personnel-related costs and $4.4 million in consolidation costs. The
$1.4 million in personnel-related costs includes $0.7 million in employee
relocation costs and $0.7 million for work force reductions in the Company's
Aerospace Segment (approximately 20 positions). Consolidation costs of $4.4
million were for facility consolidation and closure costs in the Company's
Aerospace Segment. The $43.9 million in activity during the quarter includes
reserve reductions of $50.3 million consisting of $8.1 million in cash payments,
$0.8 million reclassified to pension and postretirement benefit liabilities, and
$41.4 million for restructuring costs associated with the sale of Performance
Materials (of which $35 million represented non-cash asset write-offs) that will
be administered by the buyer. Also included within the activity column is a $5.7
million increase in reserves for severance costs associated with an acquisition
and $0.7 million in reserves transferred from Performance Materials for
severance costs that will be administered by the Company.
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NOTE J: ACCOUNTING CHANGE
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended, which requires that all derivative
instruments be reported on the balance sheet at fair value and that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge criteria are met. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded the previously unrecognized fair market value of an interest rate swap
designated as a fair value hedge and the associated adjustment to the carrying
amount of the debt instrument designated as the hedged item as cumulative-effect
adjustments to net income. As this pre-existing hedging relationship would have
met the requirements for the shortcut method at inception, the Company chose to
calculate the transition adjustment upon initial adoption as though the shortcut
method had been applied since the inception of the hedging relationship. The
effect of the adjustment to the carrying value of the debt was offset entirely
by the impact of recording the fair value of the interest rate swap.
Accordingly, the net cumulative-effect adjustment to net income was zero.
Fair Value Hedging Strategy
The Company has entered into an interest rate swap agreement for interest rate
exposure management purposes. The interest rate swap agreement utilized by the
Company effectively modifies its exposure to interest rate risk by converting
the Company's fixed-rate debt to floating rate debt. This agreement involves the
receipt of fixed rate amounts in exchange for floating rate interest payments
over the life of the agreement without an exchange of the underlying principal
amount.
NOTE K: CONTINGENCIES
General
There are pending or threatened against BFGoodrich or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to commercial, product liability, asbestos and
environmental matters, which seek remedies or damages. BFGoodrich believes that
any liability that may finally be determined with respect to commercial and
non-asbestos product liability claims should not have a material effect on the
Company's consolidated financial position or results of operations. From time to
time, the Company is also involved in legal proceedings as a plaintiff involving
contract, patent protection, environmental and other matters. Gain
contingencies, if any, are recognized when they are realized.
Environmental
The Company and its subsidiaries are generators of both hazardous wastes and
non-hazardous wastes, the treatment, storage, transportation and disposal of
which are subject to various laws and governmental regulations. Although past
operations were in substantial compliance with the then-applicable regulations,
the Company has been designated as a potentially responsible party ("PRP") by
the U.S. Environmental Protection Agency ("EPA"), or similar state agencies, in
connection with several sites.
The Company initiates corrective and/or preventive environmental projects of its
own to ensure safe and lawful activities at its current operations. It also
conducts a compliance and management systems audit program. The Company believes
that compliance with current governmental regulations will not have a material
adverse effect on its capital expenditures, earnings or competitive position.
The Company's environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as off-site
disposal sites at which the Company has been identified as a PRP. This process
includes investigation and remedial selection and implementation, as well as
negotiations with other PRPs and governmental agencies.
At March 31, 2001, the Company has recorded in Accrued Expenses and in Other
Non-Current Liabilities a total of $118.3 million to cover future environmental
expenditures. This amount is recorded on an undiscounted basis.
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The Company believes that its reserves are adequate based on currently available
information. Management believes that it is reasonably possible that additional
costs may be incurred beyond the amounts accrued as a result of new information.
However, the amounts, if any, cannot be estimated and management believes that
they would not be material to the Company's financial condition, but could be
material to the Company's results of operations in a given period.
Asbestos
Garlock Inc. and The Anchor Packing Company
As of March 31, 2001, these two subsidiaries of the Company were among a number
of defendants (typically 15 to 40) in actions filed in various states by
plaintiffs alleging injury or death as a result of exposure to asbestos fibers.
Settlements are generally made on a group basis with payments made to individual
claimants over a period of one to four years. The Company recorded charges to
operations amounting to approximately $2.0 million during the first three months
of 2001 and 2000 related to payments not covered by insurance.
In accordance with the Company's internal procedures for the processing of
asbestos product liability actions and due to the proximity to trial or
settlement, certain outstanding actions against Garlock and Anchor have
progressed to a stage where the Company can reasonably estimate the cost to
dispose of these actions. These actions are classified as actions in advanced
stages and are included in the table as such below. Garlock and Anchor are also
defendants in other asbestos-related lawsuits or claims involving maritime
workers, medical monitoring claimants, co-defendants and property damage
claimants. Based on its past experience, the Company believes that these
categories of claims will not involve any material liability and are not
included in the table below.
With respect to outstanding actions against Garlock and Anchor, which are in
preliminary procedural stages, as well as any actions that may be filed in the
future, the Company lacks sufficient information upon which judgments can be
made as to the validity or ultimate disposition of such actions, thereby making
it difficult to estimate with reasonable certainty what, if any, potential
liability or costs may be incurred by the Company. However, the Company believes
that Garlock and Anchor are in a favorable position compared to many other
defendants because, among other things, the asbestos fibers in the
asbestos-containing products sold by Garlock and Anchor were encapsulated.
Subsidiaries of the Company discontinued distributing encapsulated
asbestos-bearing products in the United States during 2000.
Anchor is an inactive and insolvent subsidiary of the Company. The insurance
coverage available to it is fully committed. Anchor continues to pay settlement
amounts covered by its insurance and is not committing to settle any further
actions. Considering the foregoing, as well as the experience of the Company's
subsidiaries and other defendants in asbestos litigation, the likely sharing of
judgments among multiple responsible defendants, recent bankruptcies of other
defendants, legislative efforts and given the substantial amount of insurance
coverage that Garlock expects to be available from its solvent carriers to cover
the majority of its exposure, the Company believes that pending and reasonably
anticipated future actions against Garlock and Anchor are not likely to have a
material adverse effect on the Company's financial condition, but could be
material to the Company's results of operations in a given period.
Although the insurance coverage which Garlock has available to it is substantial
(approximately $1 billion as of March 31, 2001), it should be noted that
insurance coverage for asbestos claims is not available to cover exposures
initially occurring on and after July 1, 1984. Garlock and Anchor continue to be
named as defendants in new actions, some of which allege initial exposure after
July 1, 1984. However, these cases are not significant and the Company regularly
rejects them for settlement.
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The Company has recorded an accrual for liabilities related to Garlock and
Anchor asbestos-related matters that are deemed probable and can be reasonably
estimated (settled actions and actions in advanced stages of processing), and
has separately recorded an asset equal to the amount of such liabilities that is
expected to be recovered by insurance. In addition, the Company has recorded a
receivable for that portion of payments previously made for Garlock and Anchor
asbestos product liability actions and related litigation costs that is
recoverable from its insurance carriers. A table is provided below depicting
quantitatively the items discussed above.
Three Months Ended
($ in millions) March 31, March 31,
2001 2000
--------- ---------
New Actions Filed 9,500 6,900
Payments $ 42.9 $ 26.3
Insurance Received 25.1 10.6
--------- ---------
Net Cash Flow $ (17.8) $ (15.7)
========= =========
At March 31, At December 31,
2001 2000
--------- ---------
Actions in Advanced Stages 3,200 5,800
Open Actions 85,200 96,300
Estimated Liability for Settled Actions and
Actions in Advanced Stages of Processing $ 208.2 $ 231.3
Estimated Amounts Recoverable
from Insurance $ 278.4 $ 285.7
The Company paid $17.8 million and $15.7 million for the defense and disposition
of Garlock and Anchor asbestos-related claims, net of amounts received from
insurance carriers, during the first three months of 2001 and 2000,
respectively. The amount of spending during the first quarter of 2001 was
consistent with the Company's expectation that spending during 2001 would be
higher than in 2000.
The Company believes the increased number of new actions in 2001 represents the
acceleration of claims from future periods rather than an increase in the total
number of asbestos-related claims expected. This acceleration can be mostly
attributed to bankruptcies of other asbestos defendants and proposed legislation
currently being discussed in Congress.
The acceleration of the claims also may have the impact of accelerating the
associated settlement payments. Arrangements with Garlock's insurance carriers,
however, potentially limit the amount that can be received in any one year.
Thus, to ensure as close a matching as possible between payments made on behalf
of Garlock and recoveries received from insurance, various options are currently
being pursued.
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Other
The Company and certain of its subsidiaries (excluding Garlock and Anchor) have
also been named as defendants in various actions by plaintiffs alleging injury
or death as a result of exposure to asbestos fibers. These actions relate to
previously owned businesses. The number of claims to date has not been
significant and the Company has substantial insurance coverage available to it.
Based on the above, the Company believes that these pending and reasonably
anticipated future actions are not likely to have a material adverse effect on
the Company's financial condition or results of operations.
The Company is also a defendant in other asbestos-related lawsuits or claims
involving maritime workers, medical monitoring claimants, co-defendants and
property damage claimants. Based on its past experience, the Company believes
that these categories of claims are not likely to have a material adverse effect
on the Company's financial condition or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
SIGNIFICANT EVENTS
- Net income for the quarter was $172.3 million, or $1.62 per share, compared
to $86.1 million, or $0.78 per share in the first quarter last year.
- Net income, excluding special items, for the quarter was $80.0 million, or
$0.76 per share, compared to $76.4 million, or $0.69 per share, in the
first quarter last year - an increase of greater than 10 percent on a per
share basis.
- The Company completed its sale of the Performance Materials Segment during
the quarter.
- Segment operating income margins held constant in Aerospace but declined
significantly in Engineered Industrial Products.
- Net cash used by operations increased to $68.8 million during the first
quarter of 2001 from $13.1 million during the first quarter of 2000.
EBITDA, excluding special items, was approximately $205 million and $194
million for the three months ended March 31, 2001 and 2000, respectively.
- Free cash flow, defined as cash from operating activities adjusted for
special items less capital expenditures, was negative $105 million during
the first quarter of this year.
DIVESTITURE OF PERFORMANCE MATERIALS SEGMENT
On February 28, 2001, the Company completed the sale of its Performance
Materials segment to an investor group led by AEA Investors, Inc. for
approximately $1.4 billion. Total net proceeds, after anticipated tax payments
and transaction costs, included approximately $1 billion in cash and $172
million in debt securities issued by the buyer (see additional discussion
regarding the debt securities received in Note E of the accompanying unaudited
condensed consolidated financial statements). The transaction resulted in an
after-tax gain of $93.5 million, or $0.87 per diluted share, and is subject to
certain post closing adjustments (e.g. working capital adjustments). The
disposition of the Performance Materials segment represents the disposal of a
segment under APB Opinion No. 30 ("APB 30"). Accordingly, the revenues, costs
and expenses, assets and liabilities, and cash flows of Performance Materials
have been segregated in the Consolidated Statement of Income, Consolidated
Balance Sheet and Consolidated Statement of Cash Flows.
Pursuant to the terms of the transaction, the Company has retained certain
assets and liabilities (primarily pension, postretirement and environmental
liabilities) of the Performance Materials segment. Certain of the retained
assets, primarily land located at the segment's Brecksville facility and the
segment's Electronic Materials business, are for sale and have been recorded at
their estimated net realizable value within the March 31, 2001 balance sheet.
The Company has also agreed to indemnify the buyer for liabilities arising from
certain events as defined in the agreement. Such indemnification is not expected
to be material to the Company's financial condition, but could be material to
the Company's results of operations in a given period.
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RESULTS OF OPERATIONS
TOTAL COMPANY
FIRST QUARTER OF 2001 COMPARED WITH FIRST QUARTER OF 2000
Three Months Ended
March 31,
(Dollars in Millions) 2001 2000
--------------------------- --------------- ----------------
SALES:
Aerospace $1,001.1 $ 893.0
Engineered Industrial
Products 176.2 177.6
--------------------------- --------------- ----------------
Total $1,177.3 $1,070.6
=========================== =============== ================
OPERATING INCOME:
Aerospace $ 154.7 $ 138.7
Engineered Industrial
Products 25.9 33.6
--------------------------- --------------- ----------------
Total Reportable
Segments 180.6 172.3
Corporate General and
Administrative Costs (17.3) (18.7)
Merger-related and
Consolidation Costs (5.8) (5.4)
--------------------------- --------------- ----------------
Total Operating Income 157.5 148.2
Net Interest Expense (27.3) (23.6)
Other income (expense)-net (0.6) (4.5)
Income Tax Expense (44.1) (42.5)
Distribution on Trust
Preferred Securities (4.6) (4.6)
--------------------------- --------------- ----------------
Income from Continuing
Operations 80.9 73.0
Income from Discontinued
Operations 91.4 13.1
--------------------------- --------------- ----------------
Net Income $172.3 $86.1
=========================== =============== ================
Changes in sales and segment operating income are discussed within the Business
Segment Performance section below.
Unallocated corporate general and administrative costs decreased by $1.4
million, or 7.5 percent, from $18.7 million during the first quarter of 2000 to
$17.3 million during the first quarter of 2001. The decrease between periods was
due primarily to certain expenditures falling into the second quarter of 2001 as
opposed to the first quarter of 2000. These expenditures related primarily to
outside tax and legal consulting fees.
Merger-related and consolidation costs of $5.8 million and $5.4 million were
recorded during the first quarter of 2001 and 2000, respectively (see further
discussion in Note I of the accompanying unaudited condensed consolidated
financial statements). The Company expects to incur an additional $10 million to
$15 million of merger-related and consolidation costs during the remainder of
2001. The timing of these costs is dependent on the finalization of management's
plans and on the nature of the costs (accruable or period costs). These charges
will consist primarily of costs associated with the consolidation of landing
gear facilities, the reorganization of operating facilities and for employee
relocation and severance costs.
Interest expense-net increased $3.7 million from $23.6 million in 2000 to $27.3
million in 2001. The increase was primarily attributable to additional interest
expense associated with increased levels of average short-term borrowings
outstanding during the first quarter of 2001 as compared to the first quarter of
2000. The increase in short-term indebtedness between periods was attributable
to the Company's share buy-back program in 2000 and acquisition activities. This
increase was partially offset by interest income on the PIK note and higher
interest income and lower interest expense during the month of March 2001 as a
result of using the proceeds of the Performance Materials sale to pay-down
outstanding short-term indebtedness on, or shortly after, February 28, 2001.
Other expense-net decreased $3.9 million from $4.5 million in the first quarter
of 2000 to $0.6 million in the first quarter of 2001. Excluding gains from the
sale of businesses during both periods, other expense-net increased by $2.2
million from $5.6 million in 2000, to $7.8 million in 2001. The increase was due
primarily to the recovery of a previously written-off note receivable in the
first quarter of 2000 which lowered the amount of other expense-net recorded and
increased retiree healthcare costs in 2001 related to previously disposed of
businesses.
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15
The Company's effective tax rate from continuing operations decreased from 35.4
percent to 34.0 percent, quarter to quarter. The effective tax rate in the first
quarter of 2001 is consistent with the rate expected for all of 2001.
Income from discontinued operations increased $78.3 million from $13.1 million
in the first quarter of 2000 to $91.4 million in the first quarter of 2001.
Excluding the after-tax gain on sale, income from discontinued operations
decreased $15.2 million from $13.1 million in 2000 to a loss of $2.1 million
during the first two months of 2001. The decrease was primarily due to
significantly higher raw material and energy costs, as well as lower sales
volumes and prices at the Company's former Performance Materials business.
BUSINESS SEGMENT PERFORMANCE
SEGMENT ANALYSIS
The Company's operations are classified into two reportable business segments:
BFGoodrich Aerospace ("Aerospace") and BFGoodrich Engineered Industrial Products
("Engineered Industrial Products"). The Company's reportable business segments
are managed separately based on fundamental differences in their operations.
Aerospace consists of four business groups: Aerostructures and Aviation
Services, Landing Systems, Engine and Safety Systems and Electronic Systems.
They serve commercial, military, regional, business and general aviation
markets. Aerospace's major products are aircraft engine nacelle and pylon
systems, aircraft landing gear, wheels and brakes, sensors and sensor-based
systems, fuel measurement and management systems, flight attendant and cockpit
seats, aircraft evacuation slides and rafts, optical and electro-optical
systems, space applications, ice protection systems and collision warning
systems. Aerospace also provides maintenance, repair and overhaul services on
commercial airframes and components.
Engineered Industrial Products is a single business group. This group
manufactures industrial seals, gaskets, packing products, self-lubricating
bearings, diesel, gas and dual-fuel engines, air compressors, spray nozzles and
vacuum pumps.
Corporate includes general and administrative costs. Segment operating income is
total segment revenue reduced by operating expenses directly identifiable with
that business segment. Merger-related and consolidation costs are presented
separately (see further discussion in Note I to the accompanying unaudited
condensed consolidated financial statements).
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An expanded analysis of sales and operating income by business segment follows.
AEROSPACE
(Dollars in millions)
Three Months Ended
March 31,
--------------------------------
2001 2000 % Change
-------- ------- --------
SALES
Aerostructures and Aviation
Services $ 359.8 $ 357.6 0.6
Landing Systems 289.6 260.1 11.3
Engine and Safety Systems 177.3 147.8 20.0
Electronic Systems 174.4 127.5 36.8
-------- -------
Total Sales $1,001.1 $ 893.0 12.1
======== =======
OPERATING INCOME
Aerostructures and Aviation
Services $ 52.6 $ 48.9 7.6
Landing Systems 40.8 37.3 9.4
Engine and Safety Systems 29.9 27.3 9.5
Electronic Systems 31.4 25.2 24.6
-------- -------
Total Operating Income $ 154.7 $ 138.7 11.5
======== =======
OPERATING INCOME AS A
PERCENT OF SALES
Aerostructures and Aviation
Services 14.6 13.7
Landing Systems 14.1 14.3
Engine and Safety Systems 16.9 18.5
Electronic Systems 18.0 19.8
Total Aerospace 15.5 15.5
FIRST QUARTER 2001 COMPARED WITH FIRST QUARTER 2000
AEROSTRUCTURES AND AVIATION SERVICES GROUP: Sales increased $2.2 million, or 0.6
percent, from $357.6 million during the first three months of 2000 to $359.8
million during the first three months of 2001. The increase was primarily due to
strong aerostructures sales, partially offset by lower sales of aviation and
aftermarket services. The increase in aerostructures sales was primarily
attributable to the CFM56-5 (A319, A320 & A321), PW4000, B717-200, and the V2500
programs. Partially offsetting these increases were reductions in the CFM56
(A340) and RR535 delivery rates, a decrease in aftermarket sales of Super 27
aircraft as well as lower sales in aviation services.
Operating income increased $3.7 million, or 7.6 percent, from $48.9 million
during the first three months of 2000 to $52.6 million during the first three
months of 2001. The increase was driven by productivity improvements on several
aerostructures programs, reduced non-recurring engineering costs associated with
the terminated X-33 program, lower costs and increased efficiencies associated
with aviation services and the order rate increase on the CFM56-5 program noted
above. Partially offsetting these gains were additional costs associated with
the implementation of an ERP system at the group's aerostructures businesses and
the favorable impact that resulted from the closeout of the MD-11 contract
during the first quarter of 2000.
LANDING SYSTEMS GROUP: Sales increased $29.5 million, or 11.3 percent, from
$260.1 million in the first quarter of 2000 to $289.6 million in the first
quarter of 2001. The increase was primarily due to higher sales of landing gear
and wheels and brakes as compared to the same period a year ago. Landing gear
sales increased across all major markets primarily due to increased OE
deliveries to Boeing, Bombardier and the U.S. government. Sales of wheels and
brakes were higher than the first quarter of 2000 due to increased aftermarket
sales in the commercial, regional, business and military markets primarily on
the B747-400, B777, Embraer 145, DeHavilland Dash 8 and F16 programs. Sales of
landing gear overhaul services, however, decreased due to fewer customer
removals as a result of airline operating cost constraints.
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17
Operating income increased $3.5 million, or 9.4 percent, from $37.3 million in
the first quarter of 2000 to $40.8 million in the first quarter of 2001. The
increase was primarily attributable to higher original equipment sales of
landing gear as well as increased aftermarket sales of wheels and brakes,
primarily in the regional, business and military markets. The increase in
operating income was partially offset by increased sales incentives as compared
to the same period a year ago and reduced landing gear overhaul services. These
factors, as well as continuing efforts to integrate the group's landing gear
facilities, led to a slight erosion in margins quarter-over-quarter.
ENGINE AND SAFETY SYSTEMS GROUP: Sales increased $29.5 million, or 20.0 percent,
from $147.8 million in the first quarter of 2000 to $177.3 million in the first
quarter of 2001. The increase was primarily attributable to continued strong
demand for aerospace OE and industrial gas turbine products, increased demand
for evacuation products (primarily on the B747 and B767 aircraft) and
acquisitions.
Operating income increased $2.6 million, or 9.5 percent, from $27.3 million in
the first quarter of 2000 to $29.9 million during the first three months of
2001. Operating income was favorably affected by the stronger volume experienced
in the group as well as from acquisitions. Although operating income increased,
operating income margins were negatively impacted by inefficiencies associated
with certain new programs and integration costs related to recent acquisitions.
ELECTRONIC SYSTEMS GROUP: Sales increased $46.9 million, or 36.8 percent, from
$127.5 million during the first three months of 2000 to $174.4 million during
the first three months of 2001. The increase was primarily attributable to
acquisitions and increased sales of fuel and utility systems as well as
lightning detection and collision avoidance units. These increases were
partially offset by program delays and cancellations that impacted the
space-based businesses of the group.
Operating income increased $6.2 million, or 24.6 percent, from $25.2 million
during the first three months of 2000 to $31.4 million during the first three
months of 2001. In addition to the factors noted above, lower new product
development costs on the helicopter health and usage management system also
contributed to the increase in operating income. Despite the increase in
operating income noted above, operating income margins decreased from 19.8
percent during the first quarter of last year to 18.0 percent during the first
quarter of 2001. The decrease was primarily attributable to the program delays
and cancellations impacting the group's space-based businesses noted above, as
well as lower margins from recent acquisitions.
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ENGINEERED INDUSTRIAL PRODUCTS:
(Dollars in millions)
Three Months Ended
March 31,
2001 2000
---------------- ----------
Sales $ 176.2 $ 177.6
Operating Income $ 25.9 $ 33.6
Operating Income as a Percent
of Sales 14.7% 18.9%
FIRST QUARTER 2001 COMPARED WITH FIRST QUARTER 2000
Sales decreased $1.4 million, or 0.8 percent, from $177.6 million during the
first three months of 2000 to $176.2 million during the first three months of
2001. The segment had a significant increase in engine sales during the quarter
as well as a modest increase in compressor sales. These increases were more than
offset, however, by lower sales of sealing products and significant weakness in
the domestic automotive and heavy-duty truck markets served by the segment.
Operating income decreased $7.7 million, or 22.9 percent from $33.6 million
during the first three months of 2000 to $25.9 million during the first three
months of 2001. In addition to the factors noted above, sales mix, pricing
pressures, as well as increased utility costs all contributed to the reduction
in operating income and in the percentage of operating income to sales quarter
over quarter (18.9 percent in the first quarter of 2000 versus 14.7 percent in
the first quarter of 2001).
CAPITAL RESOURCES AND LIQUIDITY
Cash flow from operating activities decreased $55.7 million from a use of $13.1
million during the first three months of 2000 to a use of $68.8 million during
the first three months of 2000, primarily as a result of increased working
capital requirements, partially offset by lower merger-related and consolidation
payments. Cash used in investing activities remained relatively constant between
periods as increased capital expenditures during the first quarter of 2001 were
partially offset by lower acquisition activity. The significant increase in cash
used in financing activities between periods was primarily attributable to the
repayment of all outstanding short-term indebtedness with the proceeds from the
Performance Materials sale.
The Company expects to have adequate cash flow from operations and has the
credit facilities (described in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000) to satisfy its operating requirements and capital
spending programs, and to finance growth opportunities as they arise.
The Company's net debt-to-capitalization ratio (net of cash and cash
equivalents) was 40.4 percent at March 31, 2001 as compared to 59.1 percent at
December 31, 2000. For purposes of this ratio, the trust preferred securities
are treated as capital. The decrease was primarily attributable to the sale of
Performance Materials during the quarter and the use of proceeds to reduce
short-term indebtedness of the Company.
EBITDA from continuing operations, excluding special items, was approximately
$205 million and $194 million for the three months ended March 31, 2001 and
2000, respectively.
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TRANSITION TO THE EURO
Although the Euro was successfully introduced on January 1, 1999, the legacy
currencies of those countries participating will continue to be used as legal
tender through January 1, 2002. Thereafter, the legacy currencies will be
canceled and Euro bills and coins will be used in the twelve participating
countries.
Transition to the Euro creates a number of issues for the Company. Business
issues that must be addressed include product pricing policies and ensuring the
continuity of business and financial contracts. Finance and accounting issues
include the conversion of bank accounts and other treasury and cash management
activities. The Company continues to address these transition issues and does
not expect the transition to the Euro to have a material effect on the results
of operations or financial condition of the Company. Actions taken to date
include the ability to quote its prices; invoice when requested by the customer;
and issue pay checks to its employees on a dual currency basis. The Company has
not yet set conversion dates for its accounting systems, statutory reporting and
its tax books. The financial institutions with which the Company has
relationships have transitioned to the Euro successfully and are issuing
statements in dual currencies.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This document includes statements that reflect projections or expectations of
our future financial condition, results of operations or business that are
subject to risk and uncertainty. We believe such statements to be "forward
looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. BFGoodrich's actual results may differ materially from those
included in the forward-looking statements. Forward-looking statements are
typically identified by words or phrases such as "believe", "expect",
"anticipate", "intend", "estimate", "are likely to be" and similar expressions.
Our Annual Report on Form 10-K for the year ended December 31, 2000 lists
various risks and uncertainties that could cause actual results to differ
materially from those discussed in the forward-looking statements. These risks
and uncertainties are detailed in the Management's Discussion and Analysis
section of that Form 10-K under the heading "Forward-Looking Information is
Subject to Risk and Uncertainty", which is incorporated by reference herein. You
should understand that it is not possible to predict or identify all such risks
and uncertainties. Consequently, you should not consider any such list to be a
complete set of all potential risks or uncertainties.
We caution you not to place undue reliance on the forward-looking statements
contained in this document, which speak only as of the date on which such
statements were made. We undertake no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date on which such statements were made or to reflect the occurrence
of unanticipated events.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are defendants in various lawsuits
involving asbestos-containing products. In addition, the Company has been
notified that it is among potentially responsible parties under federal
environmental laws, or similar state laws, relative to the cost of investigating
and in some cases remediating contamination by hazardous materials at several
sits. See Note K to the accompanying unaudited condensed consolidated financial
statements, which is incorporated herein by reference.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company
during the quarter ended March 31, 2001:
Current Report on Form 8-K filed January 30, 2001 relating to the
announcement of the Company's earnings for the three months and full
year periods ended December 31, 2000, as well as a portion of the
presentation materials used at the Bear Stearns 8th Annual Commercial
Aerospace Conference (Item 9).
Current Report on Form 8-K filed February 14, 2001, relating to
excerpts from the presentation materials used at the SG Cowen Aerospace
Conference (Item 9).
Current Report on Form 8-K filed March 1, 2001, relating to the
Company's announcement that it had completed the sale of its
Performance Materials segment (Item 9).
Current Report on Form 8-K filed March 15, 2001, relating to the
Company's sale of its Performance Materials segment (Item 2).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 11, 2001 The B.F.Goodrich Company
/S/ ULRICH SCHMIDT
------------------------------------
Ulrich Schmidt
Senior Vice President and
Chief Financial Officer
/S/ ROBERT D. KONEY, JR.
------------------------------------
Robert D. Koney, Jr.
Vice President & Controller
(Chief Accounting Officer)
21