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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 1-892
GOODRICH CORPORATION
(Exact name of registrant as specified in its charter)
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New York
(State of incorporation)
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34-0252680
(I.R.S. Employer Identification No.) |
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Four Coliseum Centre
2730 West Tyvola Road
Charlotte, North Carolina
(Address of principal executive offices)
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28217
(Zip Code) |
Registrant’s telephone number, including area code:
(704) 423-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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Name of Each Exchange on Which Registered |
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Common Stock, $5 par value
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New York Stock Exchange |
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 þ No o
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 or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
The aggregate market value of the voting stock, consisting
solely of common stock, held by nonaffiliates of the registrant
as of June 30, 2004 was $3.8 billion.
The number of shares of common stock outstanding as of
January 31, 2005 was 119,568,200.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement dated March 7, 2005 are
incorporated by reference into Part III
(Items 10, 11, 12, 13 and 14).
PART I
Overview
We are one of the largest worldwide suppliers of components,
systems and services to the commercial, regional, business and
general aviation markets. We are also a leading supplier of
systems and products to the global military and space markets.
Our business is conducted on a global basis with manufacturing,
service and sales undertaken in various locations throughout the
world. Our products and services are principally sold to
customers in North America, Europe and Asia.
We were incorporated under the laws of the State of New York on
May 2, 1912 as the successor to a business founded in 1870.
Our principal executive offices are located at Four Coliseum
Centre, 2730 West Tyvola Road, Charlotte, North Carolina 28217
(telephone 704-423-7000).
We maintain an Internet site at http://www.goodrich.com. The
information contained at our Internet site is not incorporated
by reference in this report, and you should not consider it a
part of this report. Our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and any amendments to those reports, are
available free of charge on our Internet site as soon as
reasonably practicable after they are filed with, or furnished
to, the Securities and Exchange Commission. In addition, we
maintain a corporate governance page on our Internet site that
includes key information about our corporate governance
initiatives, including our Guidelines on Governance, the
charters for our standing board committees and our Business Code
of Conduct. These materials are available to any shareholder who
requests them.
Unless otherwise noted herein, disclosures in this Annual Report
on Form 10-K relate only to our continuing operations. Our
discontinued operations consist of the Engineered Industrial
Products segment, which was spun-off to shareholders in May
2002, the Avionics business, which was divested in March 2003,
and the Passenger Restraints business, which ceased operating
during the first quarter of 2003.
Unless the context otherwise requires, the terms “we”,
“our”, “us”, “Company” and
“Goodrich” as used herein refer to Goodrich
Corporation and its subsidiaries.
Acquisition of TRW’s Aeronautical Systems Businesses
On October 1, 2002, we completed our acquisition of TRW
Inc.’s Aeronautical Systems businesses. The acquired
businesses design and manufacture commercial and military
aerospace systems and equipment, including engine controls,
flight controls, power systems, cargo systems, hoists and
winches and actuation systems. At the time of acquisition, these
businesses employed approximately 6,200 employees in
22 facilities in nine countries, including manufacturing
and service operations in the United Kingdom, France, Germany,
Canada, the United States and several Asia/ Pacific countries.
The purchase price for these businesses, after giving effect to
post-closing purchase price adjustments, was approximately
$1.4 billion. We financed the acquisition through a
$1.5 billion, 364-day credit facility provided by some of
our existing lenders. In the fourth quarter of 2002, we repaid
$1.3 billion of the credit facility using proceeds from an
offering of our common stock for net proceeds of
$216.2 million, the issuance of $800 million of 5 and
10-year notes for net proceeds of $793.1 million, cash flow
from operations and the sale of non-operating assets. During the
first quarter 2003, we repaid the balance of the facility with
funds generated from
1
the sale of the Noveon International, Inc. payment-in-kind notes
(Noveon PIK Notes) and a portion of the proceeds from the sale
of our Avionics business.
Subsequent to the acquisition, we submitted claims to Northrop
Grumman Space & Mission Systems Corp. (“Northrop
Grumman”), which acquired TRW, for reimbursement of certain
liabilities and obligations that were retained by TRW under the
Master Agreement of Purchase and Sale (Purchase Agreement), but
which were administered by us after the closing. We entered into
a partial settlement with Northrop Grumman on December 27,
2004. Under the terms of the partial settlement agreement,
Northrop Grumman paid us $99 million to settle certain
claims that were made against it under the Purchase Agreement
relating to customer warranty and other contract claims for
products designed, manufactured or sold by TRW prior to the
acquisition, as well as certain other miscellaneous claims.
Under the terms of the settlement agreement, except as described
below, we have, among other things:
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assumed certain liabilities associated with future customer
warranty and other contract claims for products designed,
manufactured or sold by TRW prior to the acquisition; |
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released Northrop Grumman from any additional claims that may be
made by us against it relating to such liabilities; and |
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released Northrop Grumman from certain claims for damages
arising in connection with a breach by TRW of its
representations, warranties and pre-acquisition covenants under
the Purchase Agreement. |
The settlement agreement does not release Northrop Grumman from
any claims that we may have against it relating to the A380
actuation systems development program and certain other
liabilities retained by TRW under the Purchase Agreement.
As a result of the partial settlement, we recorded a charge of
$23.4 million to Cost of Sales representing the amount by
which our estimated undiscounted future liabilities plus our
receivable from Northrop Grumman for these matters exceeded the
settlement amount.
Discontinued Operations
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Sale of the Avionics Business |
On March 28, 2003, we completed the sale of our Avionics
business to L-3 Communications Corporation for
$188 million, or $181 million net of fees and
expenses. The gain on the sale was $63 million after tax,
which was reported as income from discontinued operations. The
Avionics business marketed a variety of state-of-the art
avionics instruments and systems primarily for general aviation,
business jet and military aircraft. Prior period financial
statements have been reclassified to reflect the Avionics
business as a discontinued operation.
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Passenger Restraint Systems |
During the first quarter of 2003, our Passenger Restraint
Systems (PRS) business ceased operations. Prior period financial
statements have been reclassified to reflect the PRS business as
a discontinued operation.
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Spin-off of Engineered Industrial Products |
On May 31, 2002, we completed the tax-free spin-off of our
Engineered Industrial Products (EIP) segment. The spin-off
was effected through a tax-free distribution to our shareholders
of all of the capital stock of EnPro Industries, Inc. (EnPro),
then a wholly owned subsidiary of Goodrich. In the spin-off, our
shareholders received one share of EnPro common stock for every
five shares of our common stock owned on the record date,
May 28, 2002.
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At the time of the spin-off, EnPro’s only material asset
was all of the capital stock and certain indebtedness of Coltec
Industries Inc (Coltec). Coltec and its subsidiaries owned
substantially all of the assets and liabilities of the EIP
segment, including the associated asbestos liabilities and
related insurance.
Prior to the spin-off, Coltec also owned and operated an
aerospace business. Before completing the spin-off,
Coltec’s aerospace business assumed all intercompany
balances outstanding between Coltec and us and Coltec then
transferred to us by way of a dividend all of the assets,
liabilities and operations of Coltec’s aerospace business,
including these assumed balances. Following this transfer and
prior to the spin-off, all of the capital stock of Coltec was
contributed to EnPro, with the result that at the time of the
spin-off Coltec was a wholly-owned subsidiary of EnPro.
In connection with the spin-off, we and EnPro entered into a
distribution agreement, a tax matters agreement, a transition
services agreement, an employee matters agreement and an
indemnification agreement, which govern the relationship between
us and EnPro after the spin-off and provide for the allocation
of employee benefits, tax and other liabilities and obligations
attributable to periods prior to the spin-off.
The spin-off was recorded as a dividend and resulted in a
reduction in shareholders’ equity of $409.1 million
representing the recorded value of net assets of the business
distributed, including cash of $47 million. The
distribution agreement provided for certain post-distribution
adjustments relating to the amount of cash to be included in the
net assets distributed, which adjustments resulted in a cash
payment by EnPro to us of $0.6 million.
The $150 million of outstanding Coltec Capital
Trust 51/4 percent
convertible trust preferred securities (TIDES) that were
reflected in liabilities of discontinued operations prior to the
spin-off remained outstanding as part of the EnPro capital
structure following the spin-off. At December 31, 2004,
$145 million of the TIDES remained outstanding. The TIDES
are convertible into shares of both Goodrich and EnPro common
stock until April 15, 2028. We have guaranteed amounts owed
by Coltec Capital Trust with respect to the TIDES and have
guaranteed Coltec’s performance of its obligations with
respect to the TIDES and the underlying Coltec convertible
subordinated debentures. EnPro, Coltec and Coltec Capital Trust
have agreed to indemnify us for any costs and liabilities
arising under or related to the TIDES after the spin-off.
Business Segments
We have three business segments: Airframe Systems, Engine
Systems and Electronic Systems. Effective January 1, 2004,
the customer services business unit that primarily supports
aftermarket products for the businesses that were acquired as
part of Aeronautical Systems was transferred from the Airframe
Systems segment to the Engine Systems segment. Also effective
January 1, 2004, costs and sales associated with products
or services provided to customers through the customer services
business are reflected in the business providing the product or
service rather than the customer services business. Segment
financial results and amounts for prior periods have been
reclassified to reflect the new organization and reclassified to
conform to the current year presentation.
For financial information about the sales, operating income and
assets of our segments, as well as the sales attributable to our
five product categories, see Note O to our Consolidated
Financial Statements.
A summary of the products and services provided by our business
segments is presented below.
3
Airframe Systems provides systems and components pertaining to
aircraft taxi, take-off, landing and stopping. Several business
units within the segment are linked by their ability to
contribute to the integration, design, manufacture and service
of entire aircraft undercarriage systems, including landing
gear, wheels and brakes and certain brake controls. Airframe
Systems also includes the aviation technical services business
unit, which performs comprehensive total aircraft maintenance,
repair, overhaul and modification services for many commercial
airlines, independent operators, aircraft leasing companies and
airfreight carriers. The segment includes the actuation systems
and flight controls business units that were acquired as part of
Aeronautical Systems. The actuation systems business unit
provides systems that control the movement of steering systems
for missiles and electro-mechanical systems that are
characterized by high power, low weight, low maintenance,
resistance to extreme temperatures and vibrations and high
reliability. The actuation systems business unit also provides
actuators for primary flight control systems that operate
elevators, ailerons and rudders, and secondary flight controls
systems such as flaps and slats. The engineered polymer products
business unit provides large-scale marine composite structures,
marine acoustic materials, acoustic/vibration damping
structures, fireproof composites and high performance elastomer
formulations to government and commercial customers.
Engine Systems includes the aerostructures business unit, a
leading supplier of nacelles, pylons, thrust reversers and
related aircraft engine housing components. The segment also
produces engine and fuel controls, pumps, fuel delivery systems,
and structural and rotating components such as discs, blisks,
shafts and airfoils for both aerospace and industrial gas
turbine applications. The segment includes the cargo systems,
engine controls and customer services business units, which were
acquired as part of Aeronautical Systems. The cargo systems
business unit produces fully integrated main deck and lower lobe
cargo systems for wide body aircraft. The engine controls
business unit provides engine control systems and components for
jet engines used on commercial and military aircraft, including
fuel metering controls, fuel pumping systems, electronic control
software and hardware, variable geometry actuation controls,
afterburner fuel pump and metering unit nozzles, and engine
health monitoring systems. The customer services business unit
primarily supports aftermarket products for the businesses that
were acquired as part of Aeronautical Systems.
Electronic Systems produces a wide array of products that
provide flight performance measurements, flight management, and
control and safety data. Included are a variety of sensor
systems that measure and manage aircraft fuel and monitor oil
debris, engine and transmission, and structural health. The
segment’s products also include ice detection systems, test
equipment, aircraft lighting systems, landing gear cables and
harnesses, satellite control, data management and payload
systems, launch and missile telemetry systems, airborne
surveillance and reconnaissance systems, laser warning systems,
aircraft evacuation systems, de-icing systems, ejection seats,
and crew and attendant seating. The power systems business unit,
which was acquired as part of Aeronautical Systems, provides
systems that produce and control electrical power for commercial
and military aircraft, including electric generators for both
main and back-up electrical power, electric starters and
electric starter generating systems and power management and
distribution systems. Also acquired as part of Aeronautical
Systems was the hoists and winches business unit, which provides
airborne hoists and winches used on both helicopters and fixed
wing aircraft, and a business that produces engine shafts
primarily for helicopters.
4
Customers
We serve a diverse group of customers worldwide in the
commercial, military, regional, business and general aviation
markets and in the global military and space markets. We market
our products, systems and services directly to our customers
through an internal marketing and sales force.
In 2004, 2003 and 2002, direct and indirect sales to the United
States government totaled approximately 20 percent,
19 percent and 20 percent, respectively, of
consolidated sales. Indirect sales to the United States
government include a portion of the direct and indirect sales to
Boeing referred to in the preceding paragraph.
In 2004, 2003 and 2002, direct and indirect sales to Airbus
S.A.S. (Airbus) totaled approximately 16 percent,
14 percent and 13 percent, respectively, of
consolidated sales. In 2004, 2003 and 2002, direct and indirect
sales to The Boeing Company (Boeing) totaled approximately
13 percent, 17 percent and 20 percent,
respectively, of consolidated sales.
Competition
The aerospace industry in which we operate is highly
competitive. Principal competitive factors include price,
product and system performance, quality, service, design and
engineering capabilities, new product innovation and timely
delivery. We compete worldwide with a number of United States
and foreign companies that are both larger and smaller than us
in terms of resources and market share, and some of which are
our customers.
The following table lists the companies that we consider to be
our major competitors for each major aerospace product or system
platform for which we believe we are one of the leading
suppliers.
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Market Segments(1) |
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Major Non-Captive Competitors(2) |
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Airframe Systems
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Flight Control Actuation |
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Large Commercial/ Military |
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Parker Hannifin Corporation; United Technologies Corporation;
Smiths Group plc; Liebherr-Holding GmbH; Moog Inc. |
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Heavy Airframe Maintenance |
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Large Commercial |
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TIMCO Aviation Services, Inc.; SIA Engineering Company Limited;
Singapore Technologies Engineering Ltd.; Lufthansa Technik AG;
PEMCO Aviation Group, Inc. |
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Landing Gear |
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Large Commercial/ Military |
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Messier-Dowty (a member company of Snecma (3)); Liebherr-Holding
GmbH; Héroux-Devtek |
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Wheels and Brakes |
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Large Commercial/ Business |
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Honeywell International Inc.; Messier-Bugatti (a subsidiary of
Snecma (3)); Aircraft Braking Systems Corporation; Dunlop
Standard Aerospace Group plc., a division of Meggitt plc. |
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Engine Systems |
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Cargo Systems |
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Large Commercial |
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Telair International (a subsidiary of Teleflex Incorporated);
Ancra International LLC |
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Turbomachinery Products |
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Aero and Industrial Turbine Components |
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Blades Technology; Samsung; Howmet (a division of Alcoa); PZL (a
division of United Technologies Corporation); GE Power Systems
(a division of General Electric Company) |
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Market Segments(1) |
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Major Non-Captive Competitors(2) |
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Engine Controls |
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Large Commercial/ Military |
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United Technologies Corporation; BAE Systems plc; Honeywell
International Inc.; Argo-Tech Corporation |
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Turbine Fuel Technologies |
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Commercial/Military/ Regional & Business |
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Parker Hannifin Corporation; Woodward Governor Company |
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Nacelles/ Thrust Reversers |
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Large Commercial |
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Aircelle (a subsidiary of Snecma (3)); General Electric Company |
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Electronic Systems |
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Aerospace Hoists/ Winches |
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Military/Large Commercial |
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Breeze-Eastern (a division of TransTechnology Corporation);
Telair International (a subsidiary of Teleflex Incorporated) |
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Aircraft Crew Seating |
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Large Commercial/ Business |
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Ipeco Holdings Ltd; Sicma Aero Seat (a subsidiary of Zodiac
S.A.); EADS Sogerma Services (a subsidiary of EADS European
Aeronautical Defense and Space Co.); B/EAerospace, Inc.; C&D
Aerospace Group |
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De-Icing Systems |
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Regional/General Aviation |
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Aérazur S.A. (a subsidiary of Zodiac S.A.); B/E Aerospace,
Inc. |
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Ejection Seats |
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Military |
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Martin-Baker Aircraft Co. Limited |
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Evacuation Systems |
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Large Commercial |
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Air Crusiers (a subsidiary of Zodiac S.A.) |
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Fuel and Utility Systems |
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Large Commercial |
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Smiths Group plc; Parker Hannifin Corporation |
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Lighting |
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Large Commercial/ Business |
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Honeywell International Inc.; DLE Diehl; Page Aerospace Limited;
LSI Luminescent Systems Inc. |
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Optical Systems |
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Military/Space |
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BAE Systems, plc; ITT Industries, Inc.; L-3 Communications
Holdings, Inc.; Honeywell International Inc. |
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Power Systems |
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Large Commercial |
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Honeywell International Inc.; Smiths Group plc; United
Technologies Corporation |
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Propulsion Systems |
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Military |
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Danaher Corp (Pacific Scientific, McCormick Selph, SDI); Scot,
Inc.; Talley Industries |
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Sensors |
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Large Commercial/ Military |
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Honeywell International Inc.; Thales, S.A.; Auxitrol (a
subsidiary of Esterline Technologies) |
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As used in this table, “Large Commercial” means
commercial aircraft with a capacity for 100 or more seats. |
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Excludes aircraft manufacturers, airlines and prime military
contractors who, in some cases, have the capability to produce
these systems internally. |
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Snecma refers to Société Nationale d’-tudes et de
Construction de Moteurs d’ Aviation. |
Backlog
At December 31, 2004, we had a backlog of approximately
$3.5 billion, of which approximately 76 percent is
expected to be filled during 2005. The amount of backlog at
December 31, 2003 was approximately $3.2 billion.
Backlog includes fixed, firm contracts that have not been
shipped and for which cancellation is not anticipated. Backlog
is subject to delivery delays or program cancellations, which
are beyond our control.
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Raw Materials
Raw materials and components used in the manufacture of our
products, including aluminum, steel and carbon fiber, are
available from a number of manufacturers and are generally in
adequate supply.
Environmental
We are subject to various domestic and international
environmental laws and regulations, which may require that we
investigate and remediate the effects of the release or disposal
of materials at sites associated with past and present
operations. We are currently involved in the investigation and
remediation of a number of sites under these laws. Based on
currently available information, we do not believe that future
environmental costs in excess of those accrued with respect to
such sites will have a material adverse effect on our financial
condition. There can be no assurance, however, that additional
future developments, administrative actions or liabilities
relating to environmental matters will not have a material
adverse effect on our results of operations or cash flows in a
given period.
For additional information concerning environmental matters, see
“Item 3. Legal Proceedings —
Environmental.”
Research and Development
We perform research and development under company-funded
programs for commercial products and under contracts with
others. Research and development under contracts with others is
performed on both military and commercial products. Total
research and development expense from continuing operations in
the years ended December 31, 2004, 2003 and 2002 was
$348.3 million, $289.6 million and
$190.7 million, respectively. Of these amounts,
$99.5 million, $87.9 million, and $47.3 million,
respectively, were funded by customers. Research and development
expense in 2002 included $12.5 million of in-process
research and development expense written-off as part of the
Aeronautical Systems acquisition.
Intellectual Property
We own or are licensed to use various intellectual property
rights, including patents, trademarks, copyrights and trade
secrets. While such intellectual property rights are important
to us, we do not believe that the loss of any individual
property right or group of related rights would have a material
adverse effect on our overall business or on any of our
operating segments.
Human Resources
As of December 31, 2004, we had approximately 14,700
employees in the United States. Additionally, we employed
approximately 6,600 people in other countries. We believe
that we have good relationships with our 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 through July 2009. There were no
material work stoppages during 2004.
Foreign Operations
We are engaged in business in foreign markets. Our manufacturing
and service facilities are located in Australia, Canada, China,
England, France, Germany, India, Indonesia, Mexico, Poland,
Scotland and Singapore. We market our products and services
through sales subsidiaries and distributors in a number of
foreign countries. We also have joint venture agreements with
various foreign companies.
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Currency fluctuations, tariffs and similar import limitations,
price controls and labor regulations can affect our foreign
operations, including foreign affiliates. Other potential
limitations on our 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. We
do not believe that such restrictions or regulations would have
a material adverse effect on our business, in the aggregate.
For financial information about U.S. and foreign sales and
assets, see Note O to our Consolidated Financial Statements.
Certain Business Risks
Our business, financial condition, results of operations and
cash flows can be impacted by a number of factors, including but
not limited to those set forth below and elsewhere in this
Annual Report on Form 10-K, any one of which could cause
our actual results to vary materially from recent results or
from our anticipated future results.
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Our future success is dependent on demand for and market
acceptance of new commercial and military aircraft
programs. |
We are currently under contract to supply components and systems
for a number of new commercial and military aircraft programs,
including the Airbus A380 and A350, the Boeing 787
Dreamliner, the Embraer 190 and the Lockheed
Martin F-35 Joint Strike Fighter. We have made and will
continue to make substantial investments and incur substantial
development costs in connection with these programs. We cannot
assure you that each of these programs will enter full-scale
production as expected or that demand for the aircraft will be
sufficient to allow us to recoup our investment in these
programs. If any of these programs are not successful, it could
have a material adverse effect on our business, financial
condition or results of operations.
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The market segments we serve are cyclical and sensitive to
domestic and foreign economic considerations that could
adversely affect our business and financial results. |
The market segments in which we sell our products are, to
varying degrees, cyclical and have experienced periodic
downturns in demand. For example, certain of our commercial
aviation products sold to aircraft manufacturers have
experienced downturns during periods of slowdowns in the
commercial airline industry and during periods of weak general
economic conditions, as demand for new aircraft typically
declines during these periods. Although we believe that
aftermarket demand for many of our products may reduce our
exposure to these business downturns, we have experienced these
conditions in our business in the recent past and may experience
downturns in the future.
The terrorist attacks of September 11, 2001 adversely
impacted the U.S. and world economies and a wide range of
industries. These terrorist attacks, the allied military
response and subsequent developments may lead to future acts of
terrorism and additional hostilities, including possible
retaliatory attacks on sovereign nations, as well as financial,
economic and political instability. While the precise effects of
such instability on our industry and our business is difficult
to determine, it may negatively impact our business, financial
condition, results of operations and cash flows.
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Current conditions in the airline industry could adversely
affect our business and financial results. |
The downturn in the commercial air transport market segment, the
lingering impact of the 2001 terrorist attacks, increases in
fuel costs and heightened competition from low cost carriers
have adversely affected the financial condition of some
commercial airlines. Recently, several airlines have declared
bankruptcy or indicated that bankruptcy may be imminent. A
portion of our sales are derived from the sale of products
directly to airlines, and we sometimes provide sales incentives
to airlines and record unamortized sales incentives as other
assets. If an airline declares bankruptcy, we may be unable to
collect our outstanding accounts receivable from the airline and
we may be required to record a charge related to unamortized and
unrecoverable sales incentives.
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A significant decline in business with Airbus or Boeing
could adversely affect our business and financial
results. |
For the year ended December 31, 2004, approximately
16 percent and 13 percent of our sales were made to
Airbus and Boeing, respectively, for all categories of products,
including original equipment and aftermarket products for
commercial and military aircraft and space applications.
Accordingly, a significant reduction in purchases by either of
these customers could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
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Demand for our defense and space-related products is
dependent upon government spending. |
Approximately 30 percent of our sales for the year ended
December 31, 2004 were derived from the military and space
market segments. Included in that category are direct and
indirect sales to the United States government, which
represented approximately 20 percent of our sales for the
year ended December 31, 2004. The military and space market
segments are largely dependent upon government budgets,
particularly the U.S. defense budget. We cannot assure you
that an increase in defense spending will be allocated to
programs that would benefit our business. Moreover, we cannot
assure you that new military aircraft programs in which we
participate will enter full-scale production as expected. A
change in levels of defense spending could curtail or enhance
our prospects in these market segments, depending upon the
programs affected. A change in the level of anticipated new
product development costs for military aircraft could negatively
impact our business.
|
|
|
Competitive pressures may adversely affect our business
and financial results. |
The aerospace industry in which we operate is highly
competitive. We compete worldwide with a number of United States
and foreign companies that are both larger and smaller than we
are in terms of resources and market share, and some of which
are our customers. While we are the market and technology leader
in many of our products, in certain areas some of our
competitors may have more extensive or more specialized
engineering, manufacturing or marketing capabilities and lower
manufacturing cost. As a result, these competitors may be able
to adapt more quickly to new or emerging technologies and
changes in customer requirements or may be able to devote
greater resources to the development, promotion and sale of
their products than we can.
|
|
|
The significant consolidation occurring in the aerospace
industry could adversely affect our business and financial
results. |
The aerospace industry in which we operate has been experiencing
significant consolidation among suppliers, including us and our
competitors, and the customers we serve. Commercial airlines
have increasingly been merging and creating global alliances to
achieve greater
9
economies of scale and enhance their geographic reach. Aircraft
manufacturers have made acquisitions to expand their product
portfolios to better compete in the global marketplace. In
addition, aviation suppliers have been consolidating and forming
alliances to broaden their product and integrated system
offerings and achieve critical mass. This supplier consolidation
is in part attributable to aircraft manufacturers and airlines
more frequently awarding long-term sole source or preferred
supplier contracts to the most capable suppliers, thus reducing
the total number of suppliers from whom components and systems
are purchased. Our business and financial results may be
adversely impacted as a result of consolidation by our
competitors or customers.
|
|
|
Expenses related to employee and retiree medical and
pension benefits may continue to rise. |
We have periodically experienced significant increases in
expenses related to our employee and retiree medical and pension
benefits. Although we have taken action seeking to contain these
cost increases, including making material changes to some of
these plans, there are risks that our expenses will rise as a
result of continued increases in medical costs due to increased
usage of medical benefits and medical cost inflation in the
United States. Pension expense may increase if investment
returns on our pension plan assets do not meet our long-term
return assumption, if there are further reductions in the
discount rate used to determine the present value of our benefit
obligation, or if other actuarial assumptions are not realized.
|
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|
The aerospace industry is highly regulated. |
The aerospace industry is highly regulated in the United States
by the Federal Aviation Administration and in other countries by
similar regulatory agencies. We must be certified by these
agencies and, in some cases, by individual original equipment
manufacturers in order to engineer and service systems and
components used in specific aircraft models. If material
authorizations or approvals were revoked or suspended, our
operations would be adversely affected. New or more stringent
governmental regulations may be adopted, or industry oversight
heightened, in the future, and we may incur significant expenses
to comply with any new regulations or any heightened industry
oversight.
|
|
|
We may have liabilities relating to environmental laws and
regulations that could adversely affect our financial
results. |
We are subject to various domestic and international
environmental laws and regulations which may require that we
investigate and remediate the effects of the release or disposal
of materials at sites associated with past and present
operations. We are currently involved in the investigation and
remediation of a number of sites under these laws. Based on
currently available information, we do not believe that future
environmental costs in excess of those accrued with respect to
such sites will have a material adverse effect on our financial
condition. There can be no assurance, however, that additional
future developments, administrative actions or liabilities
relating to environmental matters will not have a material
adverse effect on our results of operations or cash flows in a
given period.
|
|
|
Third parties may not satisfy their contractual
obligations to indemnify us for environmental and other claims
arising out of our divested businesses. |
In connection with the divestiture of our tire, vinyl and other
businesses, we received contractual rights of indemnification
from third parties for environmental and other claims arising
out of the divested businesses. If these third parties do not
honor their indemnification obligations to us, it could have a
material adverse effect on our financial condition, results of
operations and cash flow.
10
|
|
|
Any product liability claims in excess of insurance may
adversely affect us. |
Our operations expose us to potential liability for personal
injury or death as a result of the failure of an aircraft
component that has been serviced by us, the failure of an
aircraft component designed or manufactured by us, or the
irregularity of products processed or distributed by us. While
we believe that our liability insurance is adequate to protect
us from these liabilities, our insurance may not cover all
liabilities. Additionally, insurance coverage may not be
available in the future at a cost acceptable to us. Any material
liability not covered by insurance or for which third-party
indemnification is not available could have a material adverse
effect on our financial condition, results of operations and
cash flows.
|
|
|
Any material product warranty obligations may adversely
affect us. |
Our operations expose us to potential liability for warranty
claims made by third parties with respect to aircraft components
that have been designed, manufactured, distributed or serviced
by us. Any material product warranty obligations could have a
material adverse effect on our financial condition, results of
operations and cash flows.
|
|
|
Our operations depend on our production facilities
throughout the world. These production facilities are subject to
physical and other risks that could disrupt production. |
Our production facilities could be damaged or disrupted by a
natural disaster, labor strike, war, political unrest or
terrorist activity. Although we have obtained property damage
and business interruption insurance, a major catastrophe such as
an earthquake or other natural disaster at any of our sites, or
significant labor strikes, work stoppages, political unrest, war
or terrorist activities in any of the areas where we conduct
operations, could result in a prolonged interruption of our
business. Any disruption resulting from these events could cause
significant delays in shipments of products and the loss of
sales and customers. We cannot assure you that we will have
insurance to adequately compensate us for any of these events.
|
|
|
We have significant international operations and assets
and are therefore subject to additional financial and regulatory
risks. |
We have operations and assets throughout the world. In addition,
we sell our products and services in foreign countries and seek
to increase our level of international business activity.
Accordingly, we are subject to various risks, including:
U.S.-imposed embargoes of sales to specific countries; foreign
import controls (which may be arbitrarily imposed or enforced);
price and currency controls; exchange rate fluctuations;
dividend remittance restrictions; expropriation of assets; war,
civil uprisings and riots; government instability; the necessity
of obtaining governmental approval for new and continuing
products and operations; legal systems of decrees, laws, taxes,
regulations, interpretations and court decisions that are not
always fully developed and that may be retroactively or
arbitrarily applied; and difficulties in managing a global
enterprise. We may also be subject to unanticipated income
taxes, excise duties, import taxes, export taxes or other
governmental assessments. Any of these events could result in a
loss of business or other unexpected costs that could reduce
sales or profits and have a material adverse effect on our
financial condition, results of operations and cash flows.
We are exposed to foreign currency risks that arise from normal
business operations. These risks include transactions
denominated in foreign currencies and the translation of certain
non-functional currency balances of our subsidiaries. Our
international operations also expose us to translation risk when
the local currency financial statements are translated to
U.S. Dollars, our parent company’s functional
currency. As currency exchange rates fluctuate, translation of
the statements of income of international businesses into
U.S. Dollars will affect comparability of revenues and
expenses between years.
11
|
|
|
Creditors may seek to recover from us if the businesses
that we spun off are unable to meet their obligations in the
future, including obligations to asbestos claimants. |
On May 31, 2002, we completed the spin-off of our wholly
owned subsidiary, EnPro Industries, Inc. (EnPro). Prior to the
spin-off, we contributed the capital stock of Coltec Industries
Inc to EnPro. At the time of the spin-off, two subsidiaries of
Coltec were defendants in a significant number of personal
injury claims relating to alleged asbestos-containing products
sold by those subsidiaries. It is possible that asbestos-related
claims might be asserted against us on the theory that we have
some responsibility for the asbestos-related liabilities of
EnPro, Coltec or its subsidiaries, even though the activities
that led to those claims occurred prior to our ownership of any
of those subsidiaries. Also, it is possible that a claim might
be asserted against us that Coltec’s dividend of its
aerospace business to us prior to the spin-off was made at a
time when Coltec was insolvent or caused Coltec to become
insolvent. Such a claim could seek recovery from us on behalf of
Coltec of the fair market value of the dividend.
A limited number of asbestos-related claims have been asserted
against us as “successor” to Coltec or one of its
subsidiaries. We believe that we have substantial legal defenses
against these claims, as well as against any other claims that
may be asserted against us on the theories described above. In
addition, the agreement between EnPro and us that was used to
effectuate the spin-off provides us with an indemnification from
EnPro covering, among other things, these liabilities. The
success of any such asbestos-related claims would likely
require, as a practical matter, that Coltec’s subsidiaries
were unable to satisfy their asbestos-related liabilities and
that Coltec was found to be responsible for these liabilities
and was unable to meet its financial obligations. We believe any
such claims would be without merit and that Coltec was solvent
both before and after the dividend of its aerospace business to
us. If we are ultimately found to be responsible for the
asbestos-related liabilities of Coltec’s subsidiaries, we
believe it would not have a material adverse effect on our
financial condition, but could have a material adverse effect on
our results of operations and cash flows in a particular period.
However, because of the uncertainty as to the number, timing and
payments related to future asbestos-related claims, there can be
no assurance that any such claims will not have a material
adverse effect on our financial condition, results of operations
and cash flows. If a claim related to the dividend of
Coltec’s aerospace business were successful, it could have
a material adverse impact on our financial condition, results of
operations and cash flows.
We operate manufacturing plants and service and other facilities
throughout the world.
Information with respect to our significant facilities that are
owned or leased is set forth below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Approximate | |
| |
|
|
|
|
|
Number of | |
| Segment |
|
Location |
|
Owned or Leased |
|
Square Feet | |
| |
|
|
|
|
|
| |
|
Airframe Systems
|
|
Everett, Washington(1) |
|
Owned/Leased |
|
|
962,000 |
|
| |
|
Cleveland, Ohio |
|
Owned/Leased |
|
|
445,000 |
|
| |
|
Troy, Ohio |
|
Owned |
|
|
405,000 |
|
| |
|
Wolverhampton, England |
|
Owned |
|
|
405,000 |
|
| |
|
Oakville, Canada |
|
Owned/Leased |
|
|
390,000 |
|
| |
|
Vernon, France |
|
Owned |
|
|
273,000 |
|
| |
|
Miami, Florida |
|
Owned |
|
|
200,000 |
|
12
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Approximate | |
| |
|
|
|
|
|
Number of | |
| Segment |
|
Location |
|
Owned or Leased |
|
Square Feet | |
| |
|
|
|
|
|
| |
|
Engine Systems
|
|
Chula Vista, California |
|
Owned |
|
|
1,835,000 |
|
| |
|
Riverside, California |
|
Owned |
|
|
1,162,000 |
|
| |
|
Neuss, Germany |
|
Owned/Leased |
|
|
380,000 |
|
| |
|
Birmingham, England |
|
Owned |
|
|
377,000 |
|
| |
|
Foley, Alabama |
|
Owned |
|
|
343,000 |
|
| |
|
Toulouse, France |
|
Owned/Leased |
|
|
302,000 |
|
| |
|
Singapore, Singapore |
|
Owned |
|
|
300,000 |
|
| |
|
Arkadelphia, Arkansas |
|
Owned |
|
|
275,000 |
|
| |
|
Jamestown, North Dakota |
|
Owned |
|
|
272,000 |
|
| |
|
West Hartford, Connecticut |
|
Owned |
|
|
262,000 |
|
|
Electronic Systems
|
|
Danbury, Connecticut |
|
Owned |
|
|
523,000 |
|
| |
|
Aurora, Ohio(2) |
|
Leased |
|
|
300,000 |
|
| |
|
Burnsville, Minnesota |
|
Owned |
|
|
253,000 |
|
| |
|
Vergennes, Vermont |
|
Owned |
|
|
211,000 |
|
| |
|
Phoenix, Arizona |
|
Owned |
|
|
206,000 |
|
|
|
| (1) |
Although three of the buildings are owned, the land at this
facility is leased. |
| |
| (2) |
The building in Aurora is leased until July 31, 2005. We
have transferred all of the manufacturing at this facility to
other sites. The remaining support functions will be relocated
to a new site prior to the end of the lease. |
Our headquarters operation is in Charlotte, North Carolina. In
May 2000, we leased approximately 110,000 square feet for
an initial term of ten years, with two five-year options to
2020. The offices provide space for the corporate headquarters
as well as the headquarters of our Engine Systems and Electronic
Systems segments.
We and our subsidiaries are lessees under a number of cancelable
and non-cancelable leases for real properties, used primarily
for administrative, maintenance, repair and overhaul of
aircraft, aircraft wheels and brakes and evacuation systems and
warehouse operations and for certain equipment.
In the opinion of management, our principal properties, whether
owned or leased, are suitable and adequate for the purposes for
which they are used and are suitably maintained for such
purposes. See Item 3, “Legal
Proceedings-Environmental” for a description of proceedings
under applicable environmental laws regarding some of our
properties.
|
|
| Item 3. |
Legal Proceedings |
General
There are pending or threatened against us or our 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. We believe 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 our consolidated financial position,
results of operations or cash flow. From time to time, we are
also involved in legal proceedings as a plaintiff involving tax,
contract, patent protection, environmental and other matters.
Gain contingencies, if any, are recognized when they are
realized. Legal costs are generally expensed when incurred.
13
Environmental
We are subject to various domestic and international
environmental laws and regulations which may require that we
investigate and remediate the effects of the release or disposal
of materials at sites associated with past and present
operations, including sites at which we have been identified as
a potentially responsible party under the federal Superfund laws
and comparable state laws. We are currently involved in the
investigation and remediation of a number of sites under these
laws.
The measurement of environmental liabilities by us is based on
currently available facts, present laws and regulations and
current technology. Such estimates take into consideration our
prior experience in site investigation and remediation, the data
concerning cleanup costs available from other companies and
regulatory authorities and the professional judgment of our
environmental specialists in consultation with outside
environmental specialists, when necessary. Estimates of our
environmental liabilities are further subject to uncertainties
regarding the nature and extent of site contamination, the range
of remediation alternatives available, evolving remediation
standards, imprecise engineering evaluations and estimates of
appropriate cleanup technology, methodology and cost, the extent
of corrective actions that may be required and the number and
financial condition of other potentially responsible parties, as
well as the extent of their responsibility for the remediation.
Accordingly, as investigation and remediation of these sites
proceed, it is likely that adjustments in our accruals will be
necessary to reflect new information. The amounts of any such
adjustments could have a material adverse effect on our results
of operations in a given period, but the amounts, and the
possible range of loss in excess of the amounts accrued, are not
reasonably estimable. Based on currently available information,
however, we do not believe that future environmental costs in
excess of those accrued with respect to sites for which we have
been identified as a potentially responsible party are likely to
have a material adverse effect on our financial condition. There
can be no assurance, however, that additional future
developments, administrative actions or liabilities relating to
environmental matters will not have a material adverse effect on
our results of operations or cash flows in a given period.
Environmental liabilities, including legal costs, are recorded
when our liability is probable and the costs are reasonably
estimable, which generally is not later than at completion of a
feasibility study or when we have recommended a remedy or have
committed to an appropriate plan of action. The liabilities are
reviewed periodically and, as investigation and remediation
proceed, adjustments are made as necessary. Liabilities for
losses from environmental remediation obligations do not
consider the effects of inflation and anticipated expenditures
are not discounted to their present value. The liabilities are
not reduced by possible recoveries from insurance carriers or
other third parties, but do reflect anticipated allocations
among potentially responsible parties at federal Superfund sites
or similar state-managed sites and an assessment of the
likelihood that such parties will fulfill their obligations at
such sites.
Our Consolidated Balance Sheet included an accrued liability for
environmental remediation obligations of $88.5 million and
$87.8 million at December 31, 2004 and
December 31, 2003, respectively. At December 31, 2004
and December 31, 2003, $16.2 million and
$17.6 million, respectively, of the accrued liability for
environmental remediation was included in current liabilities as
Accrued Expenses. At December 31, 2004 and
December 31, 2003, $29.6 million and
$24.9 million, respectively, was associated with ongoing
operations and $58.9 million and $62.9 million,
respectively, was associated with businesses previously disposed
of or discontinued.
The timing of expenditures depends on a number of factors that
vary by site, including the nature and extent of contamination,
the number of potentially responsible parties, the timing of
regulatory approvals, the complexity of the investigation and
remediation, and the
14
standards for remediation. We expect that we will expend present
accruals over many years, and will complete remediation in less
than 30 years at all sites for which we have been
identified as a potentially responsible party. This period
includes operation and monitoring costs that are generally
incurred over 15 to 25 years.
Asbestos
We and a number of our subsidiaries have been named as
defendants in various actions by plaintiffs alleging injury or
death as a result of exposure to asbestos fibers in products, or
which may have been present in our facilities. A number of these
cases involve maritime claims, which have been and are expected
to continue to be administratively dismissed by the court. These
actions primarily relate to previously owned businesses. We
believe that pending and reasonably anticipated future actions,
net of anticipated insurance recoveries, are not likely to have
a material adverse effect on our financial condition, results of
operations or cash flows. There can be no assurance, however,
that future legislative or other developments will not have a
material effect on our results of operations in a given period.
We believe that we have substantial insurance coverage available
to us related to any remaining claims. However, the primary
layer of insurance coverage for some of these claims is provided
by the Kemper Insurance Companies. Kemper has indicated that,
due to capital constraints and downgrades from various rating
agencies, it has ceased underwriting new business and now
focuses on administering policy commitments from prior years.
Kemper has also indicated that it is currently operating under a
“run-off” plan approved by the Illinois Department of
Insurance. We cannot predict the impact of Kemper’s
financial position on the availability of the Kemper insurance.
In addition, a portion of our primary and excess layers of
general liability insurance coverage for some of these claims
was provided by insurance subsidiaries of London United
Investments plc (KWELM). KWELM is insolvent and in the process
of distributing its assets and dissolving. In September 2004, we
entered into a settlement agreement with KWELM pursuant to which
we agreed to give up our rights with respect to the KWELM
insurance policies in exchange for $18.3 million. The
settlement amount is subject to increase under certain
circumstances. The settlement represents a negotiated payment
for our loss of insurance coverage, as we no longer have the
KWELM insurance available for claims that would have qualified
for coverage. The settlement amount of $18.3 million was
recorded as a deferred settlement credit.
Tax
In 2000, Coltec, our former subsidiary, made a
$113.7 million payment to the Internal Revenue Service
(IRS) for an income tax assessment and the related accrued
interest arising out of certain capital loss deductions and tax
credits taken in 1996. On February 13, 2001, Coltec filed
suit against the U.S. Government in the U.S. Court of
Federal Claims seeking a refund of this payment. The trial
portion of the case was completed in May 2004. On
November 2, 2004, we were notified that the trial
court ruled in favor of Coltec and ordered the Government to
refund federal tax payments of $82.8 million to Coltec.
This tax refund will also bear interest to the date of payment.
As of December 31, 2004, the interest amount was
approximately $46.6 million before tax, or
$30.3 million after tax. A final judgment was entered in
this case by the U.S. Court of Federal Claims on
February 15, 2005. The Government has until April 18,
2005 to appeal the decision to the United States Court of
Appeals for the Federal Circuit. If the Government does not
appeal the decision or the trial court judge’s decision is
ultimately upheld, we will be entitled to this tax refund and
related interest pursuant to an agreement with Coltec. If we
receive these amounts, we expect to record net income of
approximately $145 million, based on interest through
December 31, 2004, and including the release of previously
established reserves. If the IRS were to appeal the judgment and
ultimately prevail in this case, Coltec will not owe any
additional interest or taxes with respect to 1996. We may,
15
however, be required by the IRS to pay up to $32.7 million
plus accrued interest with respect to the same items claimed by
Coltec in its tax returns for 1997 through 2000. The amount of
the previously estimated liability if the IRS were to prevail
for the 1997 through 2000 period remains fully reserved.
In 2000, the IRS issued a statutory notice of deficiency
asserting that Rohr, Inc. (Rohr), our subsidiary, was liable for
$85.3 million of additional income taxes for the fiscal
years ended July 31, 1986 through 1989. In 2003, the IRS
issued an additional statutory notice of deficiency asserting
that Rohr was liable for $23 million of additional income
taxes for the fiscal years ended July 31, 1990 through
1993. The proposed assessments relate primarily to the timing of
certain tax deductions and tax credits. Rohr has filed petitions
in the U.S. Tax Court opposing the proposed assessments.
Rohr expects that these cases may be scheduled for trial in 2005
and that it will ultimately be successful in these cases. At the
time of settlement or final determination by the court, there
will be a net cash cost to us due at least in part to the
reversal of a timing item. We believe that our total net cash
cost is unlikely to exceed $100 million. We are reserved
for the estimated liability associated with these cases and as a
result, we do not expect a charge to earnings to result from the
resolution of these matters.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
Not applicable.
Executive Officers of the Registrant
|
|
|
Marshall O. Larsen, age 56, Chairman, President and
Chief Executive Officer |
Mr. Larsen joined the Company in 1977 as an Operations
Analyst. In 1981, he became Director of Planning and Analysis
and subsequently Director of Product Marketing. In 1986, he
became Assistant to the President and later served as General
Manager of several divisions of the Company’s aerospace
business. He was elected a Vice President of the Company and
named a Group Vice President of Goodrich Aerospace in 1994 and
was elected an Executive Vice President of the Company and
President and Chief Operating Officer of Goodrich Aerospace in
1995. He was elected President and Chief Operating Officer and a
director of the Company in February 2002, Chief Executive
Officer in April 2003 and Chairman in October 2003.
Mr. Larsen is a director of Lowe’s Companies, Inc. He
received a B.S. in engineering from the U.S. Military
Academy and an M.S. in industrial management from the Krannert
Graduate School of Management at Purdue University.
|
|
|
Terrence G. Linnert, age 58, Executive Vice
President, Administration and General Counsel |
Mr. Linnert joined the Company in 1997 as Senior Vice
President and General Counsel. In 1999, he was elected to the
additional positions of Senior Vice President, Human Resources
and Administration, and Secretary. He was elected Executive Vice
President, Human Resources and Administration, General Counsel
in 2002 and Executive Vice President, Administration and General
Counsel in February 2005. Prior to joining Goodrich,
Mr. Linnert was Senior Vice President of Corporate
Administration, Chief Financial Officer and General Counsel of
Centerior Energy Corporation. Mr. Linnert received a B.S.
in electrical engineering from the University of Notre Dame and
a J.D. from the Cleveland-Marshall School of Law at Cleveland
State University.
|
|
|
Ulrich Schmidt, age 55, Executive Vice President and
Chief Financial Officer |
Mr. Schmidt joined the Company in 1994 as Vice President of
Finance for Goodrich Aerospace and served in that capacity until
1999, when he was named Vice President of Finance and Business
Development for Goodrich Aerospace. In 2000, Mr. Schmidt
was elected Senior Vice President and Chief Financial Officer of
the Company. He was elected Executive Vice President
16
and Chief Financial Officer in 2002. Mr. Schmidt received a
B.A. in business administration and an M.B.A. in finance from
Michigan State University.
|
|
|
Stephen R. Huggins, age 61, Senior Vice President,
Strategy and Business Development |
Mr. Huggins joined the Company in 1988 as Group Vice
President, Specialty Products. He later served as Group Vice
President, Engine and Fuel Systems from 1991 to 1995 and as Vice
President — Business Development, Aerospace from 1995
to 1999. In 1999, he was elected Vice President, Strategic
Planning and Chief Knowledge Officer. In 2000, Mr. Huggins
was elected Senior Vice President, Strategic Resources and
Information Technology. In 2003, Mr. Huggins was elected
Senior Vice President, Strategy and Business Development.
Mr. Huggins received a B.S. in aerospace engineering from
Virginia Polytechnic Institute.
|
|
|
Jerry S. Lee, age 63, Senior Vice President,
Technology and Innovation |
Mr. Lee joined the Company in 1979 as Manager of
Engineering Science, Engineered Products Group. He later served
as Director of R&D, Goodrich Aerospace from 1983 to 1988,
Vice President — Technology from 1989 — 1998
and Vice President — Technology and Innovation from
1998 to 2000. In 2000, Mr. Lee was elected Senior Vice
President — Technology and Innovation. Mr. Lee
received a B.S. in mechanical engineering and Ph.D. in
mechanical engineering from North Carolina State University.
|
|
|
Jennifer Pollino, age 40, Senior Vice President,
Human Resources |
Ms. Pollino joined the Company in 1992 as an Accounting
Manager at Aircraft Evacuation Systems and since that time has
served in a variety of positions, including Controller of
Aircraft Evacuation Systems from 1995 to 1998, Vice President,
Finance of the Safety Systems from 1999 to 2000, Vice President
and General Manager of Aircraft Seating Products from 2000 to
2001, President and General Manager of Turbomachinery Products
from 2001 to 2002 and President and General Manager of the
Aircraft Wheels and Brakes from 2002 to 2005. She was elected as
Senior Vice President, Human Resources in February 2005. Prior
to joining Goodrich, Ms. Pollino served as a Field
Accounting Officer for the Resolution Trust Corporation
from 1990 to 1992, as Controller of Lincoln Savings and
Loan Association from 1987 to 1990 and as an Auditor for
Peat Marwick Main & Co. from 1986 to 1987.
Ms. Pollino received a B.B.A. in accounting from the
University of Notre Dame.
|
|
|
John J. Carmola, age 49, Vice President and Segment
President, Engine Systems |
Mr. Carmola joined the Company in 1996 as President of the
Landing Gear Division. He served in that position until 2000,
when he was appointed President of the Engine Systems Division.
Later in 2000, Mr. Carmola was elected a Vice President of
the Company and Group President, Engine and Safety Systems. In
2002, he was elected Vice President and Group President,
Electronic Systems. In 2003, he was elected Vice President and
Segment President, Engine Systems. Prior to joining the Company,
Mr. Carmola served in various management positions with
General Electric Company. Mr. Carmola received a B.S. in
mechanical and aerospace engineering from the University of
Rochester and an M.B.A. in finance from Xavier University.
|
|
|
Cynthia M. Egnotovich, age 47, Vice President and
Segment President, Electronic Systems |
Ms. Egnotovich joined the Company in 1986 and served in
various positions with the Ice Protection Systems Division,
including Controller from 1993 to 1996, Director of Operations
from 1996 to 1998 and Vice President and General Manager from
1998 to 2000. Ms. Egnotovich was appointed as Vice
President and General Manager of Commercial Wheels and Brakes in
2000. She was elected a Vice President of the Company and Group
President, Engine and Safety Systems in 2002. In 2003, she was
elected Vice President and Segment President, Electronic
17
Systems. Ms. Egnotovich received a B.B.A. in accounting
from Kent State University and a B.S. in biology from Immaculata
College.
|
|
|
John J. Grisik, age 58, Vice President and Segment
President, Airframe Systems |
Mr. Grisik joined the Company in 1991 as General Manager of
the De-Icing Systems Division. He served in that position until
1993, when he was appointed General Manager of the Landing Gear
Division. In 1995, he was appointed Group Vice President of
Safety Systems and served in that position until 1996 when he
was appointed Group Vice President of Sensors and Integrated
Systems. In 2000, Mr. Grisik was elected a Vice President
of the Company and Group President, Landing Systems. He was
elected Vice President and Segment President, Airframe Systems,
in 2003. Prior to joining the Company, Mr. Grisik served in
various management positions with General Electric Company and
United States Steel Company. Mr. Grisik received a B.S.,
M.S. and D.S. in engineering from the University of Cincinnati
and an M.S. in management from Stanford University.
|
|
|
Scott E. Kuechle, age 45, Vice President and
Controller |
Mr. Kuechle joined the Company in 1983 as a Financial
Analyst in the Company’s former Tire Division. He has held
several subsequent management positions, including Manager of
Planning and Analysis in the Tire Division, Manager of Analysis
in Corporate Analysis and Control as well as Director of
Planning and Control for the Company’s former Water Systems
and Services Group. He was promoted to Director of Finance and
Banking in 1994. He was elected Vice President and Treasurer in
1998 and was named Vice President and Controller in September
2004. Mr. Kuechle received a B.B.A. in economics from the
University of Wisconsin — Eau Claire in 1981 and an
M.S.I.A. in finance from Carnegie-Mellon University.
18
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity and Related
Stockholder Matters |
Our common stock (symbol GR) is listed on the New York Stock
Exchange. The following table sets forth on a per share basis
the high and low sale prices for our common stock for the
periods indicated as reported on the New York Stock Exchange
composite transactions reporting system, as well as the cash
dividends declared on our common stock for these periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter |
|
High | |
|
Low | |
|
Dividend | |
| |
|
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First
|
|
$ |
32.60 |
|
|
$ |
26.75 |
|
|
$ |
.20 |
|
| |
Second
|
|
|
32.33 |
|
|
|
27.03 |
|
|
|
.20 |
|
| |
Third
|
|
|
33.33 |
|
|
|
29.71 |
|
|
|
.20 |
|
| |
Fourth
|
|
|
33.55 |
|
|
|
29.57 |
|
|
|
.20 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First
|
|
$ |
20.05 |
|
|
$ |
13.10 |
|
|
$ |
.20 |
|
| |
Second
|
|
|
21.14 |
|
|
|
12.20 |
|
|
|
.20 |
|
| |
Third
|
|
|
26.48 |
|
|
|
20.25 |
|
|
|
.20 |
|
| |
Fourth
|
|
|
30.30 |
|
|
|
24.16 |
|
|
|
.20 |
|
As of December 31, 2004, there were 9,922 holders of record
of our common stock.
Our debt agreements contain various restrictive covenants that,
among other things, place limitations on the payment of cash
dividends and our ability to repurchase our capital stock. Under
the most restrictive of these agreements, $531.6 million of
income retained in the business and additional capital was free
from such limitations at December 31, 2004.
The following table summarizes our purchases of our common stock
for the quarter ending December 31, 2004:
ISSUER PURCHASES OF EQUITY SECURITIES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(c) | |
|
(d) | |
| |
|
|
|
|
|
Total Number | |
|
Maximum Number | |
| |
|
|
|
|
|
of Shares | |
|
(or Approximate | |
| |
|
(a) | |
|
|
|
Purchased as | |
|
Dollar Value) of | |
| |
|
Total | |
|
|
|
Part of Publicly | |
|
Shares that May | |
| |
|
Number | |
|
(b) | |
|
Announced | |
|
Yet Be Purchased | |
| |
|
of Shares | |
|
Average Price | |
|
Plans or | |
|
Under the Plans | |
| Period |
|
Purchased(1) | |
|
Paid Per Share | |
|
Programs(2) | |
|
or Programs(2) | |
| |
|
| |
|
| |
|
| |
|
| |
|
October 2004
|
|
|
65 |
|
|
$ |
30.69 |
|
|
|
N/A |
|
|
|
N/A |
|
|
November 2004
|
|
|
3,232 |
|
|
$ |
29.06 |
|
|
|
N/A |
|
|
|
N/A |
|
|
December 2004
|
|
|
3,609 |
|
|
$ |
31.78 |
|
|
|
N/A |
|
|
|
N/A |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
6,906 |
|
|
$ |
30.51 |
|
|
|
N/A |
|
|
|
N/A |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The issuer purchases during the period reflected in the table
represent shares delivered to us by employees to pay the
exercise price of employee stock options and to pay withholding
taxes due upon vesting of a restricted stock award and the
payout of a long-term incentive plan award. |
| |
| (2) |
In connection with the exercise and vesting of stock option and
restricted stock awards and payout of long-term incentive plan
awards, we from time to time accept delivery of shares to pay
the exercise price of employee stock options or to pay
withholding taxes due upon the exercise of employee stock
options, the vesting of restricted stock awards or the payout of
long-term incentive plan awards. We do not otherwise have any
plan or program to purchase our common stock. |
19
|
|
| Item 6. |
Selected Financial Data |
Selected Financial Data(a)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004(b)(c)(d) | |
|
2003(e) | |
|
2002(f) | |
|
2001(f) | |
|
2000(f) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions, except per share amounts) | |
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
4,724.5 |
|
|
$ |
4,382.9 |
|
|
$ |
3,808.5 |
|
|
$ |
4,062.2 |
|
|
$ |
3,579.4 |
|
|
Operating income
|
|
|
399.8 |
|
|
|
245.0 |
|
|
|
358.6 |
|
|
|
378.8 |
|
|
|
468.6 |
|
|
Income from continuing operations
|
|
|
156.0 |
|
|
|
38.5 |
|
|
|
164.2 |
|
|
|
172.9 |
|
|
|
228.0 |
|
|
Net income
|
|
|
172.2 |
|
|
|
100.4 |
|
|
|
117.9 |
|
|
|
289.2 |
|
|
|
325.9 |
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
6,217.5 |
|
|
$ |
5,951.5 |
|
|
$ |
6,041.7 |
|
|
$ |
5,219.0 |
|
|
$ |
6,090.7 |
|
|
Long-term debt and capital lease obligations
|
|
|
1,899.4 |
|
|
|
2,136.6 |
|
|
|
2,129.0 |
|
|
|
1,307.2 |
|
|
|
1,301.4 |
|
|
Mandatorily redeemable preferred securities of trust
|
|
|
— |
|
|
|
— |
|
|
|
125.4 |
|
|
|
125.0 |
|
|
|
124.5 |
|
|
Total shareholders’ equity
|
|
|
1,342.9 |
|
|
|
1,193.5 |
|
|
|
932.9 |
|
|
|
1,361.4 |
|
|
|
1,228.5 |
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
492.8 |
|
|
$ |
316.4 |
|
|
$ |
419.2 |
|
|
$ |
440.5 |
|
|
$ |
562.5 |
|
|
Operating cash flow
|
|
|
415.6 |
|
|
|
553.1 |
|
|
|
524.2 |
|
|
|
374.8 |
|
|
|
168.2 |
|
|
Investing cash flow
|
|
|
(141.1 |
) |
|
|
57.3 |
|
|
|
(1,507.8 |
) |
|
|
(278.1 |
) |
|
|
(349.4 |
) |
|
Financing cash flow
|
|
|
(358.1 |
) |
|
|
(525.4 |
) |
|
|
1,163.6 |
|
|
|
(925.0 |
) |
|
|
80.6 |
|
|
Capital expenditures
|
|
|
152.0 |
|
|
|
125.1 |
|
|
|
106.1 |
|
|
|
187.4 |
|
|
|
133.8 |
|
|
Depreciation and amortization
|
|
|
222.9 |
|
|
|
219.1 |
|
|
|
180.8 |
|
|
|
169.5 |
|
|
|
111.9 |
|
|
Cash dividends
|
|
|
94.7 |
|
|
|
94.0 |
|
|
|
96.9 |
|
|
|
113.7 |
|
|
|
117.6 |
|
|
Distributions on trust preferred securities
|
|
|
— |
|
|
|
7.9 |
|
|
|
10.5 |
|
|
|
10.5 |
|
|
|
10.5 |
|
|
Per Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, diluted
|
|
$ |
1.30 |
|
|
$ |
0.33 |
|
|
$ |
1.56 |
|
|
$ |
1.62 |
|
|
$ |
2.09 |
|
|
Net income, diluted
|
|
|
1.43 |
|
|
|
0.85 |
|
|
|
1.14 |
|
|
|
2.76 |
|
|
|
3.04 |
|
|
Cash dividends declared
|
|
|
0.80 |
|
|
|
0.80 |
|
|
|
0.88 |
|
|
|
1.10 |
|
|
|
1.10 |
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income as a percent of sales (%)
|
|
|
10.4 |
|
|
|
7.2 |
|
|
|
11.0 |
|
|
|
10.8 |
|
|
|
15.7 |
|
|
Effective income tax rate (%)(g)
|
|
|
21.8 |
|
|
|
33.0 |
|
|
|
34.5 |
|
|
|
33.5 |
|
|
|
33.1 |
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of year (millions)
|
|
|
119.1 |
|
|
|
117.7 |
|
|
|
117.1 |
|
|
|
101.7 |
|
|
|
102.3 |
|
|
Number of employees at end of year(h)
|
|
|
21,300 |
|
|
|
20,600 |
|
|
|
22,900 |
|
|
|
24,000 |
|
|
|
26,300 |
|
|
|
|
|
(a) |
|
Except as otherwise indicated, the historical amounts presented
above have been restated to present our former Performance
Materials, Engineered Industrial Products, Avionics, and
Passenger Restraints Systems businesses as discontinued
operations. We acquired TRW’s Aeronautical Systems business
on October 1, 2002. Financial results for Aeronautical
Systems have been included subsequent to that date. |
| |
|
(b) |
|
Effective January 1, 2004, the Company changed two aspects
of its method of contract accounting for its Aerostructures
business. The impact of the changes in accounting |
20
|
|
|
|
|
|
methods was to record an after tax gain of $16.2 million
($23.3 million before tax gain) as a Cumulative Effect of a
Change in Accounting representing the cumulative profit that
would have been recognized prior to January 1, 2004 had
these methods of accounting been in effect in prior periods. See
Note A “Significant Accounting Policies.” |
| |
|
(c) |
|
Effective January 1, 2004, the Company began expensing
stock options and the shares issued under its employee stock
purchase plan. The expense is recognized over the period the
stock options and shares are earned and vest. The adoption
reduced before tax income by $12.1 million, or
$7.7 million after tax, for the year ended
December 31, 2004. The change in accounting reduced EPS-net
income (diluted) by $0.06 per share. See Note V
“Stock Based Compensation.” |
| |
|
(d) |
|
The Company entered into a partial settlement with Northrop
Grumman on December 27, 2004 in which Northrop Grumman paid
the Company approximately $99 million to settle certain
claims relating to customer warranty and other contract claims
for products designed, manufactured or sold by TRW prior to the
acquisition, as well as certain other miscellaneous claims.
Under the terms of the settlement, the Company has assumed
certain liabilities associated with future customer warranty and
other contract claims for these products. The Company recorded a
charge of $23.4 million to Cost of Sales, or
$14.7 million after tax, representing the amount by which
the Company’s estimated undiscounted future liabilities
plus its receivable from Northrop Grumman for these matters
exceeded the settlement amount. See Note B
“Acquisitions and Dispositions.” |
| |
|
(e) |
|
Effective October 1, 2003, the Company adopted Financial
Accounting Standards Board Interpretation No. 46,
“Consolidation of Variables Interest Entities, an
Interpretation of Accounting Research Bulletin No.
51,” and deconsolidated BFGoodrich Capital. As a result,
the Company’s 8.3 percent Junior Subordinated
Debentures, Series A, held by BFGoodrich Capital (QUIP
Debentures) were reported as debt beginning in October 2003 and
the corresponding interest payments on such debentures were
reported as interest expense. Prior periods have not been
restated. On October 6, 2003, we redeemed $63 million
of the outstanding Cumulative Quarterly Income Preferred
Securities, Series A (QUIPS) and related QUIP
Debentures, and on March 2, 2004, we completed the
redemption of the remaining $63.5 million of outstanding
QUIPS and QUIP Debentures. |
| |
|
(f) |
|
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. At that time, the Company completed its
measurement of the goodwill impairment and recognized an
impairment of $36.1 million (representing total goodwill of
a reporting unit). See Note J “Goodwill and
Identifiable Intangible Assets.” Prior to January 1,
2002, goodwill was amortized on a straight-line basis over a
period not exceeding 40 years. |
| |
|
(g) |
|
In calculating the Company’s effective tax rate, the
Company accounts for tax contingencies according to SFAS 5.
See Note N “Income Taxes” and Note X
“Contingencies” for a discussion of the Company’s
effective tax rate and material tax contingencies. |
| |
|
(h) |
|
Includes employees of our former Performance Materials (through
2000) and Engineered Industrial Products (through 2001) segments
and the Avionics and Passenger Restraints Systems (through 2002)
businesses, rounded to the nearest hundred. |
21
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN
CONJUNCTION WITH OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS DOCUMENT.
THIS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING
STATEMENTS. SEE “FORWARD-LOOKING INFORMATION IS SUBJECT TO
RISK AND UNCERTAINTY” FOR A DISCUSSION OF CERTAIN OF THE
UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE
STATEMENTS.
OUR FORMER AVIONICS BUSINESS, PASSENGER RESTRAINT SYSTEMS
BUSINESS (PRS) AND ENGINEERED INDUSTRIAL PRODUCTS SEGMENT
HAVE BEEN ACCOUNTED FOR AS DISCONTINUED OPERATIONS. UNLESS
OTHERWISE NOTED HEREIN, DISCLOSURES PERTAIN ONLY TO OUR
CONTINUING OPERATIONS.
OVERVIEW
We are one of the largest worldwide suppliers of aerospace
components, systems and services to the commercial, regional,
business and general aviation markets. We are also a leading
supplier of systems and products to the global military and
space markets. Our business is conducted globally with
manufacturing, service and sales undertaken in various locations
throughout the world. Our products and services are principally
sold to customers in North America, Europe and Asia.
For the year ended December 31, 2004, we reported net
income of $172 million, or $1.43 per diluted share.
Sales for the year ended December 31, 2004 were
$4,725 million. For the year ended December 31, 2003,
we reported net income of $100 million, or $0.85 per
diluted share. Sales for the year ended December 31, 2003
were $4,383 million. Foreign currency translation was
responsible for approximately $84 million of the
$342 million increase in sales. The remaining increase
resulted primarily from increased sales of military and space,
large commercial aircraft aftermarket and regional, business and
general aviation original equipment and aftermarket parts and
services. Net income for both periods included certain charges,
including charges for the partial settlement with Northrop
Grumman related to the acquisition of TRW’s Aeronautical
Systems businesses, as described in the “Results of
Operations” and “Business Segment Performance”
sections. In addition, on January 1, 2004, we changed
certain aspects of our contract accounting policy and began
expensing stock-based compensation.
Income from continuing operations for the year ended
December 31, 2004, increased $118 million over the
year ended December 31, 2003. The increase was primarily
due to reduced charges for facility closure and headcount
reduction actions and reduced asset impairment expenses which
totaled $14 million after tax ($0.12 per diluted
share) for the year ended December 31, 2004 and
$103 million after tax ($0.87 per diluted share) for
the year ended December 31, 2003. Also, in the year ended
December 31, 2004, we reported a charge for the partial
settlement with Northrop Grumman of $15 million after tax,
or $0.12 per diluted share, charges for premiums and
associated costs related to the early retirement of long-term
debt of $10 million after tax, or $0.08 per diluted
share, and a charge for the early conclusion of Boeing 717
production of $4 million after tax, or $0.04 per
diluted share. The 2003 results included a charge for the early
termination of original equipment (OE) deliveries of PW4000
engine nacelle components of $10 million after tax, or
$0.08 per diluted share, and a gain on the sale of the
Noveon International, Inc. payment-in-kind notes (Noveon PIK
Notes) issued to us in 2001 in connection with the sale of the
Performance Materials segment of $5 million after tax, or
$0.04 per diluted share. These items, which totaled
$108 million after tax, or $0.91 per diluted share,
during the year ended December 31, 2003, were reduced to
$43 million after tax, or $0.36 per diluted share,
during the year ended December 31, 2004. In the year ended
December 31, 2004, we experienced reduced earnings relating
to foreign
22
currency translation of non-U.S. Dollar net expenses of
approximately $10 million after tax, or $0.08 per
diluted share, compared to the year ended December 31,
2003. Also in the year ended December 31, 2004, we
experienced reduced earnings totaling approximately
$7 million after tax, or $0.06 per diluted share,
compared to the year ended December 31, 2003, relating to
certain medical expenses, liability insurance premiums,
litigation costs and performance-based management incentive
compensation expenses. We also adjusted our effective tax rate
to 21.8 percent during the year ended December 31,
2004 compared to 33 percent during the year ended
December 31, 2003. The lower rate in the year ended
December 31, 2004 as compared to the year ended
December 31, 2003 reflected favorable state and foreign tax
settlements, adjustments related to state income taxes and
finalization of our 2003 federal tax return, offset in part by
additional reserves for certain income tax issues.
We recorded income from discontinued operations of
$62 million during the year ended December 31, 2003,
associated with the gain on the sale of our Avionics business.
Net cash from operating activities was $416 million in the
year ended December 31, 2004 and $553 million in the
year ended December 31, 2003. Net cash provided by
operating activities of continuing operations in the year ended
December 31, 2004 included cash received from the partial
settlement with Northrop Grumman of $99 million. Worldwide
pension contributions increased from $63 million in the
year ended December 31, 2003 to $128 million in the
year ended December 31, 2004. Net cash from operating
activities included tax refunds of $107 million in the year
ended December 31, 2003. There were net income tax payments
during the year ended December 31, 2004 of approximately
$32 million. Net cash from operating activities in the year
ended December 31, 2004 included cash received from the
termination of certain life insurance policies of
$23 million and commutation of a general liability
insurance policy of $18 million, offset in part by a
reduction of $25 million in receivables sold under our
receivables securitization program and the acquisition of
certain aftermarket rights of $15 million.
Net cash used by investing activities was $141.1 million in
the year ended December 31, 2004, compared to net cash
provided by investing activities of $57.3 million in the
year ending December 31, 2003. Net cash used by investing
activities included $152 million of capital expenditures in
the year ended December 31, 2004 as compared with
$125 million in the year ended December 31, 2003.
Proceeds of $152 million from the sale of the Noveon PIK
Notes provided net cash to investing activities in the year
ended December 31, 2003.
Net cash used by financing activities was $358 million in
the year ended December 31, 2004 which was primarily due to
the repurchase of $142 million principal value of long-term
debt, the redemption of the $63.5 million of 8.30%
Cumulative Quarterly Income Preferred Securities, Series A
(QUIPS Debentures), the redemption of $60 million of
Special Facilities Airport Revenue Bonds, the redemption of
$6 million of industrial revenue bonds and common stock
dividend payments of $95 million. Net cash used by
financing activities was $525 million in the year ended
December 31, 2003 primarily due to the repayment of debt
with the proceeds from the sale of the Avionics business and the
sale of the Noveon PIK Notes.
Long-term debt and capital lease obligations, including current
maturities of long-term debt and capital lease obligations, at
December 31, 2004 was $1,902 million compared to
$2,212 million at December 31, 2003. At
December 31, 2004, we had cash and marketable securities of
$298 million as compared to $378 million at
December 31, 2003. The reduction in debt and cash and
marketable securities from the December 31, 2003 levels
resulted primarily from the repayment of the QUIPS Debentures,
the redemption of Special Facilities Airport Revenue Bonds and
industrial revenue bonds, the repurchase of long-term debt and
the revision of the accounting treatment of a technology
development grant from a non-U.S. government entity.
23
We maintain a committed syndicated revolving credit facility
expiring in August 2006 that permits borrowing, including
letters of credit, up to a maximum of $500 million. At
December 31, 2004, there were no borrowings and
$26 million in letters of credit outstanding under this
facility. At December 31, 2004, we had borrowing capacity
under this facility of $474 million, after reductions for
letters of credit outstanding. At December 31, 2004, we
maintained $25 million of uncommitted domestic money market
facilities and $21 million of uncommitted and committed
foreign working capital facilities with various banks to meet
short-term borrowing requirements. At December 31, 2004,
there were no borrowings under these facilities. We maintain a
shelf registration that allows us to issue up to
$1.4 billion of debt securities, series preferred stock,
common stock, stock purchase contracts and stock purchase units.
Our sales for 2005 are expected to grow about 6 to
8 percent from 2004 levels, to a range of $5 billion
to $5.1 billion. Margin growth in excess of the growth in
sales is expected to result in diluted earnings per share from
continuing operations in the range of $1.60 per share to
$1.80 per share, an increase of 23 to 38 percent from
the 2004 diluted earnings from continuing operations. We expect
cash flow from operations, minus capital expenditures, to exceed
75 percent of net income in 2005. We expect 2005 capital
expenditures to be in the range of $190 million to
$210 million. Refer to “Outlook” for specific
assumptions relating to our outlook for 2005.
Our business balance across the aerospace and defense markets
continues to be an important strategic aspect of our business.
We believe that trends in these markets will have an important
impact on future sales. Looking at our 2004 sales by market
channel, military and space sales represented approximately
30 percent of sales, total commercial aircraft original
equipment sales, including regional, business and general
aviation original equipment sales, represented approximately
29 percent of our sales and total commercial aircraft
aftermarket sales for these same aircraft and for aircraft heavy
maintenance represented approximately 35 percent of sales.
Other areas, including industrial gas turbine components, made
up the remaining 6 percent. Overall, our aftermarket sales
both for commercial aircraft and in the military and space
markets represented approximately 43 percent of total sales.
We are currently under contract to supply components and systems
for a number of new commercial and military aircraft programs,
including the Airbus A380 and A350, the Boeing 787 Dreamliner,
the Embraer 190 and the Lockheed Martin F-35 Joint Striker
Fighter, which should fuel consistent long-term growth.
We expect continued growth in our key markets in 2005. In this
environment, we are carefully focused on resource allocation to
deliver maximum long-term value for all of our stakeholders.
OUTLOOK
Sales for 2005 are expected to grow about 6 to 8 percent
from 2004 levels, to a range of $5 billion to
$5.1 billion. Margin growth in excess of the growth in
sales is expected to result in diluted earnings per share
(EPS) from continuing operations in the range of
$1.60 per share to $1.80 per share, an increase of 23
to 38 percent from the 2004 diluted EPS from continuing
operations. Our outlook assumes an effective tax rate of
32 percent for 2005, compared to 22 percent in 2004.
Our 2005 outlook is based on the following market assumptions:
|
|
|
| |
• |
Deliveries of Airbus and Boeing large commercial aircraft are
expected to be significantly higher in 2005, compared to 2004.
Airbus and Boeing reported actual deliveries for 2004 of 605
aircraft. Their deliveries for 2005 are expected to increase by
approximately 11 percent, to about 670 aircraft. |
24
|
|
|
| |
• |
Capacity in the global airline system, as measured by available
seat miles (ASMs), is expected to continue to grow. We expect
global ASM growth of about 5 percent in 2005, compared to
2004. Our sales to airlines for large commercial and regional
aircraft aftermarket parts and service are expected to grow
approximately in-line with increases in capacity. |
| |
| |
• |
Total regional and business aircraft production is expected to
be relatively flat in 2005, compared to 2004, as deliveries of
business jets are expect to increase, offsetting the expected
decrease in regional aircraft deliveries. |
| |
| |
• |
Military sales (OE and aftermarket) are expected to increase
roughly in line with global military budgets, which are expected
to grow in the low single digit range for 2005, compared to 2004. |
We expect cash flow from operations, minus capital expenditures,
to exceed 75 percent of net income in 2005. We expect 2005
capital expenditures to be in the range of $190 million to
$210 million.
The current earnings and cash flow from operations outlook for
2005 does not include resolution of the previously disclosed
Rohr and Coltec tax litigation or any premiums and associated
costs, or interest expense savings related to further early
retirement of debt during 2005. We currently expect to continue
our debt reduction efforts with a target of $150 million to
$200 million in debt reduction in 2005.
RESULTS OF OPERATIONS
Changes in Accounting Methods
Effective January 1, 2004, we changed two aspects of the
application of contract accounting to preferable methods for our
aerostructures business, which is included in the Engine Systems
segment. The first is a change to the cumulative catch-up method
from the reallocation method for accounting for changes in
contract estimates of revenue and costs. The change was effected
by adjusting contract profit rates from the balance to complete
gross profit rate to the estimated gross profit rate at
completion of the contract. The second change related to
pre-certification costs. Under the old policy, pre-certification
costs exceeding the level anticipated in our original investment
model used to negotiate contractual terms were expensed when
determined regardless of overall contract profitability. Under
the new policy, pre-certification costs, including those in
excess of original estimated levels, will be included in total
contract costs used to evaluate overall contract profitability.
The impact of the changes in accounting method was to record a
$16.2 million after tax gain ($23.3 million before tax
gain) as a Cumulative Effect of Change in Accounting. Had these
methods of accounting been in effect during 2003, the segment
operating income as previously reported for the Engine Systems
segment, as well as our total operating income for the year
ended December 31, 2003, would have been $21.4 million
lower. Had these methods of accounting been in effect during
2002, the segment operating income as previously reported for
the Engine Systems segment, as well as our total operating
income for the year ended December 31, 2002, would have
been $20.4 million lower.
Also effective January 1, 2004, we changed our method of
accounting for stock-based compensation. We previously accounted
for stock-based compensation under APB No. 25. We have
adopted the provisions of Financial Accounting Standard
No. 123 “Accounting for Stock-Based Compensation”
(FASB No. 123) and Financial Accounting Standard
No. 148 “Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123.” As such, we now expense stock
options and the shares issued under our employee stock purchase
plan. The expense is recognized over the period the stock
options and shares
25
are earned and vest. The adoption of FASB No. 123 reduced
before tax income by $12.1 million ($7.7 million after
tax, $0.06 per diluted share) for the year ended
December 31, 2004.
The U.S. Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Medicare Act) was signed into law
on December 8, 2003. Effective with the second quarter
2004, we adopted retroactively to January 1, 2004, the
Financial Accounting Standards Board Staff Position
No. FAS 106-2 “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003.” The effect of
the Medicare Act was measured as of January 1, 2004 and is
now reflected in our Consolidated Financial Statements. The
effect of the Medicare Act is a $34 million reduction of
the accumulated postretirement benefit obligation for our
retiree benefit plans as well as a reduction in the net periodic
postretirement benefit cost. The effect of the reduction in net
periodic postretirement benefit cost is an increase to before
tax income from continuing operations of $5 million
($3.2 million after tax) for the year ended
December 31, 2004.
Partial Settlement with Northrop Grumman
During the fourth quarter 2004, we entered into a
$99 million partial settlement agreement with Northrop
Grumman relating to our acquisition of TRW’s Aeronautical
Systems businesses in October 2002. The partial settlement
agreement primarily relates to customer warranty and other
contract claims for products that were designed, manufactured or
sold by TRW prior to our purchase of Aeronautical Systems. Under
the terms of the settlement, we have assumed certain liabilities
associated with future customer warranty and other contract
claims for these products. The settlement excluded amounts
associated with any claims that we may have against Northrop
Grumman relating to the Airbus 380 actuation systems development
program and certain other liabilities retained by TRW under the
acquisition agreement. As a result of the partial settlement, we
recorded a liability for the estimated undiscounted future
liabilities of $71.7 million that we assumed. We recorded a
charge of $23.4 million to Cost of Sales representing the
amount by which our estimated undiscounted future liabilities
plus our receivable from Northrop Grumman for these matters
exceeded the settlement amount. The charge is reflected in the
applicable segments’ operating income.
Year Ended December 31, 2004 Compared with Year Ended
December 31, 2003
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Sales
|
|
$ |
4,724.5 |
|
|
$ |
4,382.9 |
|
| |
|
|
|
|
|
|
|
Segment Operating Income
|
|
$ |
492.8 |
|
|
$ |
316.4 |
|
|
Corporate General and Administrative Costs
|
|
|
(93.0 |
) |
|
|
(71.4 |
) |
| |
|
|
|
|
|
|
| |
Total Operating Income
|
|
|
399.8 |
|
|
|
245.0 |
|
|
Net Interest Expense
|
|
|
(139.8 |
) |
|
|
(149.5 |
) |
|
Other Income (Expense) — Net
|
|
|
(60.7 |
) |
|
|
(26.3 |
) |
|
Income Tax (Expense)
|
|
|
(43.3 |
) |
|
|
(22.8 |
) |
|
Distribution on Trust Preferred Securities
|
|
|
— |
|
|
|
(7.9 |
) |
| |
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
156.0 |
|
|
|
38.5 |
|
|
Income from Discontinued Operations
|
|
|
— |
|
|
|
62.4 |
|
|
Cumulative Effect of Change in Accounting
|
|
|
16.2 |
|
|
|
(0.5 |
) |
| |
|
|
|
|
|
|
| |
Net Income
|
|
$ |
172.2 |
|
|
$ |
100.4 |
|
| |
|
|
|
|
|
|
26
Changes in sales and segment operating income are discussed
within the “Business Segment Performance” section
below.
Corporate general and administrative costs of $93 million
for the year ended December 31, 2004 increased
$21.6 million, or 30.3 percent, from
$71.4 million for the year ended December 31, 2003
primarily due to higher incentive compensation costs including
expensing of stock-based compensation, higher tax litigation
expenses and expenses to comply with the Sarbanes-Oxley Act of
2002. Corporate general and administrative costs as a percentage
of sales were 2 percent in the year ended December 31,
2004 and 1.6 percent in the year ended December 31,
2003.
Net interest expense decreased $9.7 million, or
6.5 percent, primarily due to a lower debt level in 2004
and the favorable effect of interest rate swaps entered into in
2003. This was offset in part by lower interest income due to
the sale of the Noveon PIK Notes in the first quarter of
2003.
Other Income (Expense) — Net increased by
$34.4 million, or 130.8 percent, to expense of
$60.7 million in the year ended December 31, 2004 from
expense of $26.3 million in the year ended
December 31, 2003. The increase in expense resulted from
$15.1 million for premiums and associated costs related to
the early retirement of debt, a $7 million impairment of a
note receivable, the absence in the year ended December 31,
2004 of the $6.9 million gain on the sale of the Noveon PIK
Notes, which was recognized in the first quarter 2003,
$7.9 million in costs associated with businesses previously
sold, including settlement of a lawsuit and higher life
insurance expense, $2.8 million of lower income from
affiliated companies and $1.6 million of higher minority
interest expense offset in part by a $1.5 million gain on
the sale of a product line. Included in the first quarter 2003
was the write-off of our equity investment in Cordiem LLC of
$11.7 million.
Our effective tax rate from continuing operations was
21.8 percent during the year ended December 31, 2004
and 33 percent during the year ended December 31,
2003. The lower rate in the year ended December 31, 2004 as
compared to the year ended December 31, 2003 reflected
favorable state and foreign tax settlements and adjustments
related to state income taxes and to the finalization of our
2003 federal tax return, offset in part by additional reserves
for certain income tax issues.
Income from discontinued operations, after tax, was
$62.4 million during the year ended December 31, 2003
primarily representing the $63 million gain on the sale of
the Avionics business. Income from discontinued operations for
Avionics and PRS was a loss of $0.6 million in the year
ended December 31, 2003. Our PRS business ceased operations
in the first quarter of 2003. Refer to Note W
“Discontinued Operations” of the Consolidated
Financial Statements.
As noted above, effective January 1, 2004, we changed two
aspects of the application of contract accounting for our
aerostructures business which resulted in a $16.2 million
after tax gain ($23.3 million before tax gain) that was
recorded as a Cumulative Effect of Change in Accounting in the
first quarter 2004.
The Cumulative Effect of Change in Accounting for the year ended
December 31, 2003 of a loss of $0.5 million, after
tax, represented the adoption of Statement of Financial
Accounting Standards No. 143 “Accounting for Asset
Retirement Obligations.” We established a liability for
contractual obligations for the retirement of long-lived assets.
27
Year Ended December 31, 2003 Compared with Year Ended
December 31, 2002
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Sales
|
|
$ |
4,382.9 |
|
|
$ |
3,808.5 |
|
| |
|
|
|
|
|
|
|
Segment Operating Income
|
|
$ |
316.4 |
|
|
$ |
419.2 |
|
|
Corporate General and Administrative Costs
|
|
|
(71.4 |
) |
|
|
(60.6 |
) |
| |
|
|
|
|
|
|
| |
Total Operating Income
|
|
|
245.0 |
|
|
|
358.6 |
|
|
Net Interest Expense
|
|
|
(149.5 |
) |
|
|
(73.6 |
) |
|
Other Income (Expense) — Net
|
|
|
(26.3 |
) |
|
|
(18.1 |
) |
|
Income Tax Expense
|
|
|
(22.8 |
) |
|
|
(92.2 |
) |
|
Distribution on Trust Preferred Securities
|
|
|
(7.9 |
) |
|
|
(10.5 |
) |
| |
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
38.5 |
|
|
|
164.2 |
|
|
Income (Loss) from Discontinued Operations
|
|
|
62.4 |
|
|
|
(10.2 |
) |
|
Cumulative Effect of Change in Accounting
|
|
|
(0.5 |
) |
|
|
(36.1 |
) |
| |
|
|
|
|
|
|
| |
Net Income
|
|
$ |
100.4 |
|
|
$ |
117.9 |
|
| |
|
|
|
|
|
|
Included in the results from continuing operations for 2003 was
increased pension expense, from $35 million in 2002 to
$88 million in 2003. The increase in pension expense was
primarily due to the weak performance of the U.S. and
international equity markets in 2002, in which approximately
50 percent of the U.S. qualified defined benefit
pension plans trust assets were invested. Approximately
89 percent of pension expense in 2003 was recorded in
segment operating income. Foreign exchange also negatively
impacted the financial results in our business segments. In
2003, approximately 10 percent of our revenues and
25 percent of our costs were denominated in currencies
other than the U.S. Dollar. Over 95 percent of these
net costs were in Euros, Great Britain Pounds Sterling and
Canadian Dollars. We hedged a portion of our exposure on an
ongoing basis. When the U.S. Dollar weakened, our unhedged
net costs rose in U.S. Dollar terms. On a weighted basis,
the U.S. Dollar declined about 12.5 percent against
these currencies in 2003.
Changes in sales and segment operating income are discussed
within the “Business Segment Performance” section
below.
Corporate general and administrative costs of $71.4 million
for the year ended December 31, 2003 increased
$10.8 million, or 17.8 percent, from
$60.6 million for the year ended December 31, 2002
primarily due to higher non-qualified pension costs and higher
incentive compensation costs. Corporate general and
administrative costs as a percentage of sales were
1.6 percent in the year ended December 31, 2003 and
December 31, 2002.
Net interest expense increased $75.9 million, or
103.1 percent, primarily due to interest of
$58.4 million on the $800 million of long-term debt
issued in the fourth quarter of 2002 to partially finance the
acquisition of Aeronautical Systems. Net interest expense also
increased due to lower interest income of $26.6 million,
primarily due to the sale of the Noveon PIK Notes in the first
quarter of 2003. Lower short-term debt in 2003 as compared to
2002 somewhat mitigated interest expense by approximately
$10 million.
Other Income (Expense) — Net increased by
$8.2 million, or 45.3 percent, to expense of
$26.3 million in the year ended December 31, 2003 from
expense of $18.1 million in the year ended
December 31, 2002. The increase in expense resulted from
the impairment of our equity investment in Cordiem LLC of
$11.7 million in 2003 and the absence in 2003 of an
$11.8 million gain on the sale of an intangible asset and a
$2.4 million gain from the sale of a portion of an
28
investment in a subsidiary sold in 2002. These items were offset
in part by several favorable 2003 items, including a gain on the
sale of the Noveon PIK Notes of $6.9 million, favorable
foreign exchange of $4.8 million, affiliate income of
$4 million and favorable employee benefit and divested
operations costs of $3.1 million.
Our effective tax rate from continuing operations was
33 percent during the year ended December 31, 2003 and
34.5 percent during the year ended December 31, 2002.
The higher effective tax rate in 2002 compared to 2003 was due
to lower tax benefits from export sales expressed as a
percentage of income from operations before taxes and trust
distributions, a higher incremental U.S. tax on the deemed
repatriation of foreign earnings and the write-off of in-process
research and development with no tax benefit in 2002. Refer to
Note N “Income Taxes” of the Consolidated
Financial Statements.
Income (loss) from discontinued operations, after tax, was
$62.4 million during the year ended December 31, 2003
primarily representing the $63 million gain on the sale of
the Avionics business in the first quarter of 2003. Income
(loss) from discontinued operations for the Avionics and PRS
operating results was a loss of $0.6 million in the year
ended December 31, 2003 and income of $1.7 million in
the year ended December 31, 2002. Our PRS business ceased
operations in the first quarter of 2003. Also included in income
(loss) from discontinued operations was a loss of
$12 million in the year ended December 31, 2002 for
the Engineered Industrial Products segment, which was spun-off
to shareholders on May 31, 2002. A charge of
$7.4 million for a court ruling related to an employee
benefit matter of a discontinued business and fees and expenses
related to the spin-off of the segment contributed to the loss.
The cumulative effect of an accounting change for the year ended
December 31, 2003 of a loss of $0.5 million, after
tax, represents the adoption of Statement of Financial
Accounting Standards No. 143 “Accounting for Asset
Retirement Obligations.” We established a liability for
contractual obligations for the retirement of long-lived assets.
The cumulative effect of an accounting change for the year ended
December 31, 2002 of a loss of $36.1 million, after
tax, represents the adoption of Statement of Financial
Accounting Standards No. 142 “Goodwill and Other
Intangible Assets.” Based upon the impairment test of
goodwill and indefinite lived intangible assets, we determined
that goodwill relating to the Aviation Technical Services (ATS)
reporting unit, reported in the Airframe Systems segment, had
been impaired. As a result, we recognized an impairment charge,
representing total goodwill of the ATS reporting unit. The
goodwill write-off was non-deductible for tax purposes.
BUSINESS SEGMENT PERFORMANCE
Our operations are reported as three business segments: Airframe
Systems, Engine Systems and Electronic Systems. Effective
January 1, 2004, we realigned the business units within our
three reportable segments. These segments are described in
Note O “Business Segment Information” to our
Consolidated Financial Statements. Effective January 1,
2004, the customer services business unit that supports
aftermarket products for the businesses that were acquired as
part of Aeronautical Systems was transferred from the Airframe
Systems segment to the Engine Systems segment to better align
our enterprise resources with our global customer base and to
streamline the business to support future growth. In addition,
the costs and sales associated with products or services
provided to customers through the customer services business are
allocated to the business providing the product or service
rather than allocated to the customer services business. Prior
periods have been reclassified to conform to the current year
presentation.
29
An analysis of Net Customer Sales and Operating Income by
business segment follows.
In the following tables, segment operating income is total
segment revenue reduced by operating expenses directly
identifiable with that business segment.
Year Ended December 31, 2004 Compared with the Year
Ended December 31, 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
|
|
% | |
|
% of Sales | |
| |
|
|
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
|
|
|
|
|
|
NET CUSTOMER SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
1,629.7 |
|
|
$ |
1,563.8 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
Engine Systems
|
|
|
1,939.6 |
|
|
|
1,714.9 |
|
|
|
13.1 |
|
|
|
|
|
|
|
|
|
|
Electronic Systems
|
|
|
1,155.2 |
|
|
|
1,104.2 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Sales
|
|
$ |
4,724.5 |
|
|
$ |
4,382.9 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT OPERATING INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
90.1 |
|
|
$ |
79.1 |
|
|
|
13.9 |
|
|
|
5.5 |
|
|
|
5.1 |
|
|
Engine Systems
|
|
|
264.9 |
|
|
|
97.3 |
|
|
|
172.3 |
|
|
|
13.7 |
|
|
|
5.7 |
|
|
Electronic Systems
|
|
|
137.8 |
|
|
|
140.0 |
|
|
|
(1.6 |
) |
|
|
11.9 |
|
|
|
12.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Segment Operating Income
|
|
$ |
492.8 |
|
|
$ |
316.4 |
|
|
|
55.8 |
|
|
|
10.4 |
|
|
|
7.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems: Airframe Systems segment sales
of $1,629.7 million in the year ended December 31,
2004 increased $65.9 million, or 4.2 percent, from
$1,563.8 million in the year ended December 31, 2003.
The increase was due to:
|
|
|
| |
• |
Favorable currency translation on non-U.S. Dollar sales and
the impact of foreign currency hedge gains, primarily in the
actuation systems and landing gear businesses; and |
| |
| |
• |
Higher sales volume of commercial aircraft wheels and brakes,
landing gear and engineered polymer products. |
Partially offsetting the higher sales were decreased sales
volumes in military aircraft wheels and brakes.
Airframe Systems segment operating income increased
$11 million, or 13.9 percent, from $79.1 million
in the year ended December 31, 2003 to $90.1 million
in the year ended December 31, 2004. The increase in
operating income was primarily due to the following:
|
|
|
| |
• |
Lower asset impairment, facility closure and headcount reduction
charges. Asset impairment, including rotable landing gear,
facility closure and headcount reduction charges were
$17.4 million for the year ended December 31, 2003 and
$2 million for the year ended December 31, 2004; |
| |
| |
• |
Increase in sales volume as described above; |
| |
| |
• |
Lower operating costs; and |
| |
| |
• |
Favorable income effect of $6 million before tax from the
revision of the accounting treatment of a technology development
grant from a non-U.S. government entity. |
Partially offsetting the increase in segment operating income
were the following:
|
|
|
| |
• |
Unfavorable foreign exchange translation of non-U.S. Dollar
net expenses primarily in the actuation systems and landing gear
businesses; |
30
|
|
|
| |
• |
Higher new program research and development expenditures
primarily in the actuation systems business; |
| |
| |
• |
A charge of $9.2 million for the partial settlement with
Northrop Grumman; and |
| |
| |
• |
Unfavorable effect of downward pressure on pricing from
commercial customers. |
Engine Systems: Engine Systems segment sales in
the year ended December 31, 2004 of $1,939.6 million
increased $224.7 million, or 13.1 percent, from
$1,714.9 million in the year ended December 31, 2003.
The increase was due to the following:
|
|
|
| |
• |
Higher aerostructures maintenance, repair and overhaul (MRO),
engine OE and aftermarket sales volume; |
| |
| |
• |
Higher cargo systems aftermarket sales volume; |
| |
| |
• |
Favorable currency translation on non-U.S. Dollar sales and
the impact of foreign currency hedge gains, primarily in the
engine controls business; |
| |
| |
• |
Increased sales volume of U.S. military original equipment
and aftermarket engine controls; and |
| |
| |
• |
Higher sales volume of turbine fuel engine components for
U.S. military and regional aircraft applications and to the
power generation market. |
The increase was partially offset by lower U.S. military
turbomachinery repair sales.
Engine Systems segment operating income increased
$167.6 million, or 172.3 percent, from
$97.3 million in the year ended December 31, 2003 to
$264.9 million in the year ended December 31, 2004.
Segment operating income was higher due to:
|
|
|
| |
• |
The absence in 2004 of non-cash write-downs of inventory and
long-term receivables relating to the Super 27 re-engining
program of $79.9 million and non-cash asset impairment
charges related to a facility held for sale of
$24.4 million, which were recorded in 2003; |
| |
| |
• |
The absence in 2004 of a $15.1 million charge associated
with early termination of original equipment deliveries of
Pratt & Whitney PW4000 engine nacelle components, which
was recorded in 2003; |
| |
| |
• |
Higher sales volume as described above; and |
| |
| |
• |
Favorable mix of sales for aftermarket applications. |
The increase in Engine Systems segment operating income was
partially offset by the following:
|
|
|
| |
• |
A charge of $10.6 million for the partial settlement with
Northrop Grumman; |
| |
| |
• |
Increased aerostructures contract costs for certain commercial,
military and regional jet applications; |
| |
| |
• |
A charge in 2004 of $6.8 million related to the early
conclusion of Boeing 717 production; |
| |
| |
• |
Increased new program development costs for the aerostructures
and engine controls businesses; and |
| |
| |
• |
Unfavorable currency translation of non-U.S. Dollar costs,
primarily in the aerostructures business. |
31
Electronic Systems: Electronic Systems segment
sales of $1,155.2 million in the year ended
December 31, 2004 increased $51 million, or
4.6 percent, from $1,104.2 million in the year ended
December 31, 2003. The increase was primarily due to:
|
|
|
| |
• |
Increased sales volume for all businesses for the regional and
business OE and aftermarket markets; and |
| |
| |
• |
Increased sales volume in military and space OE in our optical
and space systems, power systems and sensor systems businesses. |
The increase in Electronic Systems segment sales was partially
offset by the following:
|
|
|
| |
• |
Lower military aftermarket sales volume in our sensor systems
and fuel and utility systems businesses; and |
| |
| |
• |
Lower commercial OE sales volume in our aircraft interior
products, lighting systems and power businesses and lower
commercial aftermarket sales volume in our fuel and utility
systems and power systems businesses. |
Electronic Systems segment operating income decreased
$2.2 million, or 1.6 percent, from $140 million
in the year ended December 31, 2003 to $137.8 million
in the year ended December 31, 2004. Segment operating
income was unfavorably affected by:
|
|
|
| |
• |
The decline in sales volume of commercial OE and aftermarket
discussed above; |
| |
| |
• |
A charge of $3.6 million for the partial settlement with
Northrop Grumman; |
| |
| |
• |
Unfavorable costs resulting from operating inefficiencies in our
propulsion products and optical and space businesses; |
| |
| |
• |
Less favorable product mix in our fuel and utility systems
business; |
| |
| |
• |
Unfavorable currency translation of non-U.S. Dollar costs
in our lighting systems and power systems businesses; and |
| |
| |
• |
Increased research and development costs and bid and proposal
costs on potential new programs. |
The decrease in operating income was partially offset by lower
restructuring costs. Restructuring costs for the year ended
December 31, 2004 were $7.7 million, compared to
$9 million for the year ended December 31, 2003.
32
Year Ended December 31, 2003 Compared with Year Ended
December 31, 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
|
|
% | |
|
% of Sales | |
| |
|
|
|
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Change | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
|
|
|
|
|
|
NET CUSTOMER SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
1,563.8 |
|
|
$ |
1,390.1 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
Engine Systems
|
|
|
1,714.9 |
|
|
|
1,466.0 |
|
|
|
17.0 |
|
|
|
|
|
|
|
|
|
|
Electronic Systems
|
|
|
1,104.2 |
|
|
|
952.4 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Sales
|
|
$ |
4,382.9 |
|
|
$ |
3,808.5 |
|
|
|
15.1 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT OPERATING INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
79.1 |
|
|
$ |
102.5 |
|
|
|
(22.8 |
) |
|
|
5.1 |
|
|
|
7.4 |
|
|
Engine Systems
|
|
|
97.3 |
|
|
|
168.9 |
|
|
|
(42.4 |
) |
|
|
5.7 |
|
|
|
11.5 |
|
|
Electronic Systems
|
|
|
140.0 |
|
|
|
147.8 |
|
|
|
(5.3 |
) |
|
|
12.7 |
|
|
|
15.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Segment Operating Income
|
|
$ |
316.4 |
|
|
$ |
419.2 |
|
|
|
(24.5 |
) |
|
|
7.2 |
|
|
|
11.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems: Airframe Systems segment sales
of $1,563.8 million in the year ended December 31,
2003 increased $173.7 million, or 12.5 percent, from
$1,390.1 million in the year ended December 31, 2002.
The increase was primarily due to the sales associated with the
acquisition of the Aeronautical Systems businesses in this
segment, which represented approximately $311 million in
sales for the first nine months of 2003.
The increase in sales was offset in part by the following:
|
|
|
| |
• |
Lower sales volume for landing gear OE; |
| |
| |
• |
Lower sales volume for wheel and brake repair services; and |
| |
| |
• |
Lower sales volume for airframe heavy maintenance. |
Airframe Systems segment operating income decreased
$23.4 million, or 22.8 percent, from
$102.5 million in the year ended December 31, 2002 to
$79.1 million in the year ended December 31, 2003. The
decrease in operating income for the year ended
December 31, 2003 as compared to the year ended
December 31, 2002 was primarily due to the following:
|
|
|
| |
• |
Higher asset impairments in the year ended December 31,
2003 of $17.4 million, including rotable landing gears,
facility closure and headcount reductions as compared to
$3.6 million in the year ended December 31, 2002; |
| |
| |
• |
Lower profit from decreased sales for landing gear, wheel and
brake repair services and airframe heavy maintenance; |
| |
| |
• |
Increased pension expense, unfavorable foreign exchange, and an
impairment charge related to the Boeing 767 program in
2003; and |
| |
| |
• |
A favorable insurance settlement in the year ended
December 31, 2002 that did not recur in the year ended
December 31, 2003. |
These items were partially offset by:
|
|
|
| |
• |
Increased profit from higher sales of aftermarket wheels and
brakes; |
| |
| |
• |
A charge for inventory, capitalized sales incentive and supplier
termination costs relating to the Fairchild Dornier 728 and
928 programs in the year ended December 31, 2002 that did
not recur in the year ended December 31, 2003; |
33
|
|
|
| |
• |
A charge of $26.8 million for the inventory step-up
adjustment related to the acquisition of Aeronautical Systems in
the year ended December 31, 2002. The inventory for the
Aeronautical Systems business in the Airframe Systems segment
was increased to record the inventory at its fair market value
at the time of the acquisition. Subsequent sale of the acquired
inventory increased cost of sales and reduced our profit
margin; and |
| |
| |
• |
A charge of $12.5 million for in-process research and
development in the year ended December 31, 2002. The charge
reflects the valuation of the actuation and flight controls
business in-process research and development projects that had
not reached technical feasibility and had no alternative future
use. |
Engine Systems: Engine Systems segment sales in
the year ended December 31, 2003 of $1,714.9 million
increased $248.9 million, or 17 percent, from
$1,466 million in the year ended December 31, 2002.
The increase was due to the following:
|
|
|
| |
• |
Sales associated with the acquisition of the Aeronautical
Systems businesses in this segment, which represented
approximately $290 million for the first nine months of
2003; and |
| |
| |
• |
Higher sales of aerostructures military and MRO businesses. |
The increase in Engine Systems segment sales was partially
offset by:
|
|
|
| |
• |
Lower aerostructures OE and aftermarket spares sales; and |
| |
| |
• |
Declines in demand for industrial gas turbine components
resulting in lower sales of engine components and fuel delivery
systems. |
Engine Systems segment operating income decreased
$71.6 million, or 42.4 percent, from
$168.9 million in the year ended December 31, 2002 to
$97.3 million in the year ended December 31, 2003.
Segment operating income was lower due to:
|
|
|
| |
• |
Non-cash write-downs of inventory and long-term receivables
relating to the Super 27 re-engining program of
$79.9 million and the $24.4 million non-cash asset
impairment of a facility held for sale in the year ended
December 31, 2003; |
| |
| |
• |
A $15.1 million charge for a contract termination for the
PW4000 engine nacelles in the year ended December 31, 2003; |
| |
| |
• |
A favorable reserve adjustment of $7 million related to the
implementation of a new SAP system at aerostructures in the year
ended December 31, 2002 that did not recur in the year
ended December 31, 2003; and |
| |
| |
• |
Reduced volume, higher initial costs for the next generation 747
cargo systems introduced in the first quarter 2003 and higher
pension cost. |
The decrease in Engine Systems segment operating income was
partially offset by:
|
|
|
| |
• |
Contract loss provisions on five contracts of $26.8 million
in the aerostructures business in the year ended
December 31, 2002 that did not recur in the year ended
December 31, 2003. The loss provisions resulted from
increased overhead rates, due in part to a lower manufacturing
base as volume declined consistent with the lower level of
aircraft production rates; |
| |
| |
• |
A charge of $24.1 million for the inventory step-up
adjustment related to the acquisition of Aeronautical Systems in
the year ended December 31, 2002. The inventory for the
Aeronautical Systems business in the Engine Systems segment was
increased to record the inventory at its fair market value at
the time of the acquisition. Subsequent sale of the acquired
inventory increased cost of sales and reduced our profit margin; |
34
|
|
|
| |
• |
Lower restructuring and consolidation and other asset impairment
costs in the year ended December 31, 2003 of
$6.5 million as compared to $26.1 million in the year
ended December 31, 2002; and |
| |
| |
• |
Cost controls in the aerostructures and engine components
businesses reflecting the benefit from prior downsizings. |
Electronic Systems: Electronic Systems segment
sales of $1,104.2 million in the year ended
December 31, 2003 increased $151.8 million, or
15.9 percent, from $952.4 million in the year ended
December 31, 2002. The increase was primarily due to:
|
|
|
| |
• |
Sales associated with the acquisition of the Aeronautical
Systems businesses in this segment, which represented
approximately $154 million for the first nine months of
2003; and |
| |
| |
• |
Higher sales volume in propulsion products, sensor systems and
lighting systems. |
Partially offsetting the increase in sales were decreased sales
volume for evacuation slides and seats, fuel monitoring systems
and optical and space systems.
Electronic Systems segment operating income decreased
$7.8 million, or 5.3 percent, from $147.8 million
in the year ended December 31, 2002 to $140 million in
the year ended December 31, 2003. The decrease in segment
operating income was due to:
|
|
|
| |
• |
Lower sales in optical and space systems; |
| |
| |
• |
Increased investments in research and development costs
primarily at aircraft electrical power systems and aircraft
evacuation slides and seats businesses; |
| |
| |
• |
Unfavorable foreign exchange and higher pension costs; and |
| |
| |
• |
Higher restructuring and consolidation costs of $9 million
in the year ended December 31, 2003 and $7.4 million
in the year ended December 31, 2002. |
The decrease in operating income was partially offset by a
charge of $7.9 million for the inventory step-up adjustment
related to the acquisition of Aeronautical Systems in the year
ended December 31, 2002. The inventory for the Aeronautical
Systems business in the Electronic Systems segment was increased
to record the inventory at its fair market value at the time of
the acquisition. Subsequent sale of the acquired inventory
increased cost of sales and reduced our profit margin.
FOREIGN OPERATIONS
We are engaged in business in foreign markets. Our manufacturing
and service facilities are located in Australia, Canada, China,
England, France, Germany, India, Indonesia, Mexico, Poland,
Scotland and Singapore. We market our products and services
through sales subsidiaries and distributors in a number of
foreign countries. We also have joint venture agreements with
various foreign companies.
Currency fluctuations, tariffs and similar import limitations,
price controls and labor regulations can affect our foreign
operations, including foreign affiliates. Other potential
limitations on our 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. We
do not believe that such restrictions or regulations would have
a materially adverse effect on our business, in the aggregate.
35
Sales to non-U.S. customers were $2,224.2 million or
47 percent of total sales, $1,860.5 million or
42 percent of total sales, and $1,423.9 million or
37 percent of total sales, for the years ended
December 31, 2004, 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect to fund expenditures for capital
requirements as well as liquidity needs from a combination of
cash, internally generated funds and financing arrangements. We
believe that our internal liquidity, together with access to
external capital resources, will be sufficient to satisfy
existing commitments and plans and also provide adequate
financial flexibility.
Cash
At December 31, 2004, we had cash and marketable securities
of $297.9 million, as compared to $378.4 million at
December 31, 2003.
Credit Facilities
We have a committed syndicated revolving credit facility
expiring in August 2006 that permits borrowing, including
letters of credit, up to a maximum of $500 million. At
December 31, 2004, there were no borrowings and
$26.2 million in letters of credit outstanding under this
facility. At December 31, 2003, there were no borrowings
and $17.1 million in letters of credit outstanding under
this facility.
The level of unused borrowing capacity under our committed
syndicated revolving credit facility varies from time to time
depending in part upon our consolidated net worth and leverage
ratio levels. In addition, our ability to borrow under this
facility is conditioned upon compliance with financial and other
covenants set forth in the related agreement, including the
consolidated net worth requirement and maximum leverage ratio.
We are currently in compliance with all such covenants. As of
December 31, 2004, we had borrowing capacity under this
facility of $473.8 million, after reductions for letters of
credit outstanding.
At December 31, 2004, we maintained $25 million of
uncommitted domestic money market facilities and
$21 million of uncommitted and committed foreign working
capital facilities with various banks to meet short-term
borrowing requirements. As of December 31, 2004 and
December 31, 2003, there were no borrowings under these
facilities. These credit facilities are provided by a small
number of commercial banks that also provide us with committed
credit through the syndicated revolving credit facility and with
various cash management, trust and other services.
Our credit facilities do not contain any credit rating downgrade
triggers that would accelerate the maturity of our indebtedness.
However, a ratings downgrade would result in an increase in the
interest rate and fees payable under our committed syndicated
revolving credit facility. Such a downgrade also could adversely
affect our ability to renew existing or obtain access to new
credit facilities in the future and could increase the cost of
such new facilities.
QUIPS
On March 2, 2004, we completed the redemption of all of the
$63.5 million in outstanding 8.30% Cumulative Quarterly
Income Preferred Securities, Series A (QUIPS) issued
by BFGoodrich Capital, a Delaware business trust, all of the
common equity of which is owned by us. The QUIPS were supported
by our 8.30% Junior Subordinated Debentures, Series A
(QUIPS Debentures), which were also redeemed on March 2,
2004.
36
Long-Term Financing
At December 31, 2004, we had long-term debt and capital
lease obligations, including current maturities, of
$1,901.8 million with maturities ranging from 2005 to 2046.
On August 1, 2004, we redeemed $60 million principal
amount of Special Facilities Airport Revenue Bonds and in May
2004 redeemed $5.9 million principal amount of industrial
revenue bonds. During the third and fourth quarters of 2004, we
repurchased $15.2 million and $127 million,
respectively, principal amount of long-term debt securities with
stated interest of 6.45 percent. Approximately
$117.9 million of the long-term debt securities were due in
2007 and approximately $24.3 million were due in 2008. We
recorded $15.1 million of expenses in Other Income
(Expense) — Net for premiums and associated costs
related to the redemptions. We also revised the accounting for a
technology development grant from a non-U.S. government
entity resulting in a reduction of long-term debt of
$25 million, which had no cash impact. The earliest
maturity of a material long-term debt obligation is December
2007. We also maintain a shelf registration statement that
allows us to issue up to $1.4 billion of debt securities,
series preferred stock, common stock, stock purchase contracts
and stock purchase units.
Off-Balance Sheet Arrangements
We utilize several forms of off-balance sheet financing
arrangements. At December 31, 2004, these arrangements
included:
| |
|
|
|
|
|
|
|
|
| |
|
Undiscounted | |
|
|
| |
|
Minimum | |
|
|
| |
|
Future Lease | |
|
Receivables | |
| |
|
Payments | |
|
Sold | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Tax Advantaged Operating Leases
|
|
$ |
49.3 |
|
|
|
|
|
|
Standard Operating Leases
|
|
|
152.3 |
|
|
|
|
|
| |
|
|
|
|
|
|
| |
|
$ |
201.6 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Short-term Receivables Securitization Program
|
|
|
|
|
|
$ |
72.3 |
|
| |
|
|
|
|
|
|
We finance our use of certain equipment, including corporate
aircraft, under committed lease arrangements provided by
financial institutions. Certain of these arrangements allow us
to claim a deduction for the tax depreciation on the assets,
rather than the lessor, and allow us to lease equipment having a
maximum unamortized value of $90 million at
December 31, 2004. At December 31, 2004,
$49.3 million of future minimum lease payments were
outstanding under these arrangements. The other arrangements are
standard operating leases. Future minimum lease payments under
the standard operating leases approximated $152.3 million
at December 31, 2004.
Under certain operating lease agreements, we receive rent
holidays which represent periods of free or reduced rent. Rent
holidays are recorded as a liability and recognized on a
straight-line basis over the lease term. In addition, we may
receive incentives or allowances from the lessor as part of the
lease agreement. We recognize these payments as a liability and
amortize them as reductions to lease expense over the lease
term. We capitalize leasehold improvements and amortize them
over the lesser of the lease term or the asset’s useful
life.
At December 31, 2004, we had in place a variable rate trade
receivables securitization program pursuant to which we could
sell receivables up to a maximum of $140 million. Accounts
receivable sold under this program were $72.3 million at
December 31, 2004. Continued
37
availability of the securitization program is conditioned upon
compliance with covenants, related primarily to operation of the
securitization, set forth in the related agreements. We are
currently in compliance with all such covenants. The
securitization does not contain any credit rating downgrade
triggers pursuant to which the program could be terminated.
Cash Flow Hedges
We have subsidiaries that conduct a substantial portion of their
business in Euros, Great Britain Pounds Sterling, Canadian
Dollars and Polish Zlotys, but have significant sales contracts
that are denominated in U.S. Dollars. Approximately
10 percent of our revenues and approximately
25 percent of our costs are denominated in currencies other
than the U.S. Dollar. Over 95 percent of these net
costs are in Euros, Great Britain Pounds Sterling and Canadian
Dollars. Periodically, we enter into forward contracts to
exchange U.S. Dollars for Euros, Great Britain Pounds
Sterling, Canadian Dollars, and Polish Zlotys to hedge a portion
of our exposure. When the U.S. Dollar weakens, our unhedged
net costs rise in U.S. Dollar terms and our average hedge
rates also rise over time.
The forward contracts described above are used to mitigate the
potential volatility of earnings and cash flow arising from
changes in currency exchange rates that impact our
non-U.S. Dollar sales and expenses. The forward contracts
are being accounted for as cash flow hedges. The forward
contracts are recorded on our Consolidated Balance Sheet at fair
value with the net change in fair value reflected in Accumulated
Other Comprehensive Income, net of deferred taxes. The notional
value of the forward contracts at December 31, 2004 was
$712.8 million. The fair value of the forward contracts at
December 31, 2004 was an asset of $110.3 million, of
which $81.1 million is recorded in Prepaid Expenses and
Other Assets and $29.2 million is recorded in Other Assets.
The total fair value of the forward contracts of
$110.3 million (before deferred taxes of
$38.6 million), including terminated forward contracts as
discussed below, were recorded in Accumulated Other
Comprehensive Income and were reflected in income as the
individual contracts matured, which will offset the earnings
effect of the hedged item. As of December 31, 2004, the
portion of the $110.3 million fair value that would be
reclassified into earnings as an increase in sales to offset the
effect of the hedged item in the next 12 months is a gain
of $81.1 million.
In 2003, we terminated certain forward contracts prior to their
scheduled maturities in 2004 and received cash of
$3.8 million. As of December 31, 2004, all of the gain
was reflected in income and sales when the original forward
contracts would have matured.
Fair Value Hedges
In September 2002, we terminated an interest rate swap
agreement, prior to its maturity in 2009, on our
$200 million in principal amount of 6.6 percent senior
notes due in 2009. At termination, we received
$29.4 million in cash, comprised of a $2.6 million
receivable representing the amount owed on the interest rate
swap from the previous settlement date and $26.8 million
representing the fair value of the interest rate swap at the
time of termination. The carrying amount of the notes was
increased by $26.8 million representing the fair value of
the debt due to changes in interest rates for the period hedged.
This amount is being amortized as a reduction to interest
expense over the remaining term of the debt.
In July 2003, we entered into a $100 million
fixed-to-floating interest rate swap on our 6.45 percent
senior notes due in 2007. In October 2003, we entered into two
$50 million fixed-to-floating interest rate swaps. One
$50 million swap is on our 7.5 percent senior notes
due in 2008 and the other $50 million swap is on our
6.45 percent medium-term notes due in 2008. In December
2003, we entered into a $50 million fixed-to-floating
interest rate swap on our 7.5 percent senior notes due in
2008. The purpose of entering into these swaps was to
38
increase our exposure to variable interest rates. The settlement
and maturity dates on each swap are the same as those on the
related notes. In accordance with Statement of Financial
Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” the
interest rate swaps are being accounted for as fair value hedges
and the carrying value of the notes has been adjusted to reflect
the fair values of the related interest rate swaps. The fair
value of the interest rate swaps was a liability (loss) of
$1.1 million at December 31, 2004.
Other Forward Contracts
As a supplement to our foreign exchange cash flow hedging
program, in January 2004 we began to enter into forward
contracts to manage our foreign currency risk related to the
translation of monetary assets and liabilities denominated in
currencies other than the relevant functional currency. These
forward contracts mature monthly and the notional amounts are
adjusted periodically to reflect changes in net monetary asset
balances. The gains or losses on these forward contracts are
being recorded in earnings when realized in order to mitigate
the earnings impact of the translation of net monetary assets.
As of December 31, 2004, we had forward contracts with a
notional value of $81 million to buy Great Britain Pounds
Sterling, contracts with a notional value of $11 million to
buy Euros and contracts with a notional value of
$5.4 million to sell Canadian Dollars.
Contractual Obligations and Other Commercial Commitments
The following charts reflect our contractual obligations and
commercial commitments as of December 31, 2004. Commercial
commitments include lines of credit, guarantees and other
potential cash outflows resulting from a contingent event that
requires performance by us pursuant to a funding commitment.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total | |
|
2005 | |
|
2006-2007 | |
|
2008-2009 | |
|
Thereafter | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Short-Term and Long-Term Debt
|
|
$ |
1,892.0 |
|
|
$ |
1.9 |
|
|
$ |
183.3 |
|
|
$ |
591.2 |
|
|
$ |
1,115.6 |
|
| |
Capital Lease Obligations
|
|
|
18.7 |
|
|
|
1.8 |
|
|
|
2.3 |
|
|
|
2.2 |
|
|
|
12.4 |
|
| |
Operating Leases
|
|
|
201.6 |
|
|
|
44.3 |
|
|
|
59.2 |
|
|
|
39.4 |
|
|
|
58.7 |
|
| |
Purchase Obligations (1)
|
|
|
495.8 |
|
|
|
454.6 |
|
|
|
33.0 |
|
|
|
7.6 |
|
|
|
0.6 |
|
| |
Other Long-Term Obligations
|
|
|
47.2 |
|
|
|
26.4 |
|
|
|
13.7 |
|
|
|
2.6 |
|
|
|
4.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2.655.3 |
|
|
$ |
529.0 |
|
|
$ |
291.5 |
|
|
$ |
643.0 |
|
|
$ |
1,191.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitments that Expire per Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Lines of Credit (2)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Standby Letters of Credit & Bank Guarantees
|
|
|
62.9 |
|
|
|
61.9 |
|
|
|
0.9 |
|
|
|
0.1 |
|
|
|
— |
|
| |
Guarantees
|
|
|
160.5 |
|
|
|
7.2 |
|
|
|
6.3 |
|
|
|
2.0 |
|
|
|
145.0 |
|
| |
Standby Repurchase Obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other Commercial Commitments
|
|
|
31.8 |
|
|
|
12.0 |
|
|
|
14.4 |
|
|
|
5.4 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
255.2 |
|
|
$ |
81.1 |
|
|
$ |
21.6 |
|
|
$ |
7.5 |
|
|
$ |
145.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Purchase obligations include an estimated amount of agreements
to purchase goods or services that are enforceable and legally
binding on us and that specify all significant terms, including
fixed or minimum quantities to be purchased, minimum or variable
price provisions and the approximate timing of the purchase. |
39
|
|
| (2) |
As of December 31, 2004, we had in place (a) a
committed syndicated revolving credit facility which expires in
August 2006 and permits borrowing up to a maximum of
$500 million; (b) $25 million of uncommitted
domestic money market facilities; and (c) $21 million
of uncommitted and committed foreign working capital facilities.
As of December 31, 2004, we had borrowing capacity under
our committed syndicated revolving credit facility of
$473.8 million. |
The table excludes our pension and other postretirement benefits
obligations. We made pension contributions of
$128.6 million and $62.7 million worldwide in the
years ended December 31, 2004 and 2003, respectively. These
contributions include both voluntary and required employer
contributions, as well as pension benefits paid directly by us.
Of these amounts, $116 million and $40 million were
contributed voluntarily to the qualified U.S. Trust in the
years ended December 31, 2004 and 2003, respectively. We
expect to contribute $50 million to $75 million
worldwide during 2005. Our postretirement benefits other than
pensions are not required to be funded in advance, so benefit
payments, including medical costs and life insurance, are paid
as they are incurred. We made postretirement benefit payments
other than pension of $38 million and $37 million in
the years ended December 31, 2004 and 2003, respectively.
We expect to pay $40 million during 2005. See Note M
“Pensions and Postretirement Benefits” of the Notes to
Consolidated Financial Statements for a further discussion of
our pension and postretirement other than pension plans.
CASH FLOW
The following table summarizes our cash flow activity for the
years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| Net Cash Provided by (Used by): |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Operating activities of continuing operations
|
|
$ |
415.6 |
|
|
$ |
553.1 |
|
|
$ |
524.2 |
|
|
Investing activities of continuing operations
|
|
$ |
(141.1 |
) |
|
$ |
57.3 |
|
|
$ |
(1,507.8 |
) |
|
Financing activities of continuing operations
|
|
$ |
(358.1 |
) |
|
$ |
(525.4 |
) |
|
$ |
1,163.6 |
|
|
Discontinued operations
|
|
$ |
— |
|
|
$ |
138.1 |
|
|
$ |
(118.7 |
) |
Year Ended December 31, 2004 as Compared to
December 31, 2003
|
|
|
Operating Activities of Continuing Operations |
Net cash provided by operating activities of continuing
operations decreased $137.5 million from
$553.1 million during the year ended December 31, 2003
to $415.6 million during the year ended December 31,
2004. Net cash provided by operating activities of continuing
operations in the year ended December 31, 2004 included
cash received from the partial settlement with Northrop Grumman
of $99 million, termination of certain life insurance
policies of $23 million and commutation of a general
liability insurance policy of $18 million, offset in part
by a reduction of $25 million in receivables sold under our
receivables securitization program and cash paid to acquire
certain aftermarket rights of $15 million. Net cash
provided by operating activities of continuing operations in the
year ended December 31, 2003 included tax refunds of
$107 million. There were net income tax payments during the
year ended December 31, 2004 of approximately
$32 million. Net cash provided by operating activities of
continuing operations was reduced by worldwide pension
contributions of $128.6 million in the year ended
December 31, 2004 and $62.7 million in the year ended
December 31, 2003. Increased working capital, including
higher inventory, also contributed to lower net cash provided by
operating activities of continuing operations in the year ended
December 31, 2004.
40
|
|
|
Investing Activities of Continuing Operations |
Net cash provided by (used by) investing activities of
continuing operations was a use of cash of $141.1 million
in the year ended December 31, 2004 and an inflow of cash
of $57.3 million in the year ended December 31, 2003.
Net cash used by investing activities of continuing operations
for the year ended December 31, 2004 included capital
expenditures of $152 million. Net cash provided by
investing activities of continuing operations in the year ended
December 31, 2003 included proceeds from the sale of the
Noveon PIK Notes of $151.9 million and the receipt of a
$35 million purchase adjustment related to the acquisition
of Aeronautical Systems, offset in part by capital expenditures
of $125.1 million. Capital expenditures for 2005 are
expected to increase to approximately $190 million to
$210 million from $152 million in 2004.
|
|
|
Financing Activities of Continuing Operations |
Net cash used by financing activities of continuing operations
was $358.1 million in the year ended December 31,
2004, compared to $525.4 million for the year ended
December 31, 2003. During the year ended December 31,
2004, we repurchased $142.2 million principal amount of
long-term debt, redeemed $60 million principal amount of
Special Facilities Airport Revenue Bonds, $5.9 million
principal amount of industrial revenue bonds and
$63.5 million principal amount of the QUIPS Debentures.
During the year ended December 31, 2003 we repaid
short-term debt and redeemed a portion of the QUIPS Debentures,
using the net after tax cash proceeds from the sale of our
Avionics business, cash proceeds from the sale of the Noveon PIK
Notes and cash provided by operating activities, net of
dividends and capital expenditures.
Net cash provided by discontinued operations of
$138.1 million in the year ended December 31, 2003
included $134.1 million of proceeds from the sale of the
Avionics business.
Year Ended December 31, 2003 as Compared to
December 31, 2002
|
|
|
Operating Activities of Continuing Operations |
Net cash provided by operating activities of continuing
operations increased $28.9 million from $524.2 million
during the year ended December 31, 2002 to
$553.1 million during the year ended December 31,
2003. Cash provided by operating activities included tax refunds
of $107 million in the year ended December 31, 2003
and $50 million in the year ended December 31, 2002.
Cash provided by operating activities was reduced by worldwide
pension contributions of $62.7 million in the year ended
December 31, 2003 and $47.4 million in the year ended
December 31, 2002. Net cash provided by operating
activities for the year ended December 31, 2003 also
included approximately $30 million for several items
related to the acquisition of Aeronautical Systems for which we
submitted claims for reimbursement to Northrop Grumman, which
claims were partially settled in 2004. Also included in 2002
cash provided by operating activities was approximately
$29.4 million resulting from the sale of an interest rate
swap agreement associated with $200 million of our
long-term debt and $30.8 million of cash received from the
sale of hedges acquired as part of the acquisition of
Aeronautical Systems.
|
|
|
Investing Activities of Continuing Operations |
Net cash provided by investing activities of continuing
operations was $57.3 million in the year ended
December 31, 2003 and a use of cash of
$1,507.8 million in the year ended December 31, 2002.
Cash provided by investing activities in the year ended
December 31, 2003 was due to proceeds from the sale of the
Noveon PIK Notes of $151.9 million and the receipt of a
$35 million purchase price adjustment related to the
acquisition of Aeronautical Systems
41
offset in part by capital expenditures of $125.1 million.
Cash used by investing activities in the year ended
December 31, 2002 resulted primarily from the acquisition
of Aeronautical Systems for $1,472.6 million and capital
expenditures of $106.1 million, offset in part by a receipt
of $49.8 million on the Noveon PIK Notes.
|
|
|
Financing Activities of Continuing Operations |
Net cash used by financing activities of continuing operations
was $525.4 million in the year ended December 31,
2003, compared to net cash provided by financing activities of
continuing operations of $1,163.6 million for the year
ended December 31, 2002. During the year ended
December 31, 2003, we repaid short-term debt and redeemed a
portion of the QUIPS Debentures using the net after-tax cash
proceeds from the sale of our Avionics business, cash proceeds
from the sale of the Noveon PIK Notes and cash provided by
operating activities net of dividends and capital expenditures.
Net cash provided by financing activities for the year ended
December 31, 2002 was due to the increase in long-term and
short-term debt and capital stock to finance the acquisition of
Aeronautical Systems in 2002.
Net cash provided by discontinued operations of
$138.1 million in the year ended December 31, 2003
included $134.1 million net after-tax proceeds from the
sale of the Avionics business. Net cash used by discontinued
operations of $118.7 million in the year ended
December 31, 2002 included $47 million of cash
included in the net assets of the EIP business distributed to
shareholders, $47 million paid, net of insurance receipts,
primarily for asbestos-related matters associated with the EIP
business prior to the distribution to shareholders and
$15.6 million relating to capital expenditures and debt
repayments.
CONTINGENCIES
General
There are pending or threatened against us or our 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. We believe 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 our consolidated financial position,
results of operations or cash flows. From time to time, we are
also involved in legal proceedings as a plaintiff involving tax,
contract, patent protection, environmental and other matters.
Gain contingencies, if any, are recognized when they are
realized. Legal costs are generally expensed when incurred.
Environmental
We are subject to various domestic and international
environmental laws and regulations which may require that we
investigate and remediate the effects of the release or disposal
of materials at sites associated with past and present
operations, including sites at which we have been identified as
a potentially responsible party under the federal Superfund laws
and comparable state laws. We are currently involved in the
investigation and remediation of a number of sites under these
laws.
The measurement of environmental liabilities by us is based on
currently available facts, present laws and regulations and
current technology. Such estimates take into consideration our
prior experience in site investigation and remediation, the data
concerning cleanup costs available from other companies and
regulatory authorities and the professional judgment of our
environmental specialists in consultation with outside
environmental specialists, when necessary. Estimates of our
environmental liabilities are further subject to uncertainties
42
regarding the nature and extent of site contamination, the range
of remediation alternatives available, evolving remediation
standards, imprecise engineering evaluations and estimates of
appropriate cleanup technology, methodology and cost, the extent
of corrective actions that may be required and the number and
financial condition of other potentially responsible parties, as
well as the extent of their responsibility for the remediation.
Accordingly, as investigation and remediation of these sites
proceed, it is likely that adjustments in our accruals will be
necessary to reflect new information. The amounts of any such
adjustments could have a material adverse effect on our results
of operations in a given period, but the amounts, and the
possible range of loss in excess of the amounts accrued, are not
reasonably estimable. Based on currently available information,
however, we do not believe that future environmental costs in
excess of those accrued with respect to sites for which we have
been identified as a potentially responsible party are likely to
have a material adverse effect on our financial condition. There
can be no assurance, however, that additional future
developments, administrative actions or liabilities relating to
environmental matters will not have a material adverse effect on
our results of operations or cash flows in a given period.
Environmental liabilities, including legal costs, are recorded
when our liability is probable and the costs are reasonably
estimable, which generally is not later than at completion of a
feasibility study or when we have recommended a remedy or have
committed to an appropriate plan of action. The liabilities are
reviewed periodically and, as investigation and remediation
proceed, adjustments are made as necessary. Liabilities for
losses from environmental remediation obligations do not
consider the effects of inflation and anticipated expenditures
are not discounted to their present value. The liabilities are
not reduced by possible recoveries from insurance carriers or
other third parties, but do reflect anticipated allocations
among potentially responsible parties at federal Superfund sites
or similar state-managed sites and an assessment of the
likelihood that such parties will fulfill their obligations at
such sites.
Our Consolidated Balance Sheet included an accrued liability for
environmental remediation obligations of $88.5 million and
$87.8 million at December 31, 2004 and
December 31, 2003, respectively. At December 31, 2004
and December 31, 2003, $16.2 million and
$17.6 million, respectively, of the accrued liability for
environmental remediation was included in current liabilities as
Accrued Expenses. At December 31, 2004 and
December 31, 2003, $29.6 million and
$24.9 million, respectively, was associated with ongoing
operations and $58.9 million and $62.9 million,
respectively, was associated with businesses previously disposed
of or discontinued.
The timing of expenditures depends on a number of factors that
vary by site, including the nature and extent of contamination,
the number of potentially responsible parties, the timing of
regulatory approvals, the complexity of the investigation and
remediation, and the standards for remediation. We expect that
we will expend present accruals over many years, and will
complete remediation in less than 30 years on all sites for
which we have been identified as a potentially responsible
party. This period includes operation and monitoring costs that
are generally incurred over 15 to 25 years.
Asbestos
We and a number of our subsidiaries have been named as
defendants in various actions by plaintiffs alleging injury or
death as a result of exposure to asbestos fibers in products, or
which may have been present in our facilities. A number of these
cases involve maritime claims, which have been and are expected
to continue to be administratively dismissed by the court. These
actions primarily relate to previously owned businesses. We
believe that pending and reasonably anticipated future actions,
net of anticipated insurance recoveries, are not likely to have
a material adverse effect on our financial condition, results of
operations or cash flows.
43
There can be no assurance, however, that future legislative or
other developments will not have a material adverse effect on
our results of operations in a given period.
We believe that we have substantial insurance coverage available
to us related to any remaining claims. However, the primary
layer of insurance coverage for some of these claims is provided
by the Kemper Insurance Companies. Kemper has indicated that,
due to capital constraints and downgrades from various rating
agencies, it has ceased underwriting new business and now
focuses on administering policy commitments from prior years.
Kemper has also indicated that it is currently operating under a
“run-off” plan approved by the Illinois Department of
Insurance. We cannot predict the impact of Kemper’s
financial position on the availability of the Kemper insurance.
In addition, a portion of our primary and excess layers of
general liability insurance coverage for some of these claims
was provided by insurance subsidiaries of London United
Investments plc (KWELM). KWELM is insolvent and in the process
of distributing its assets and dissolving. In September 2004, we
entered into a settlement agreement with KWELM pursuant to which
we agreed to give up our rights with respect to the KWELM
insurance policies in exchange for $18.3 million. The
settlement amount is subject to increase under certain
circumstances. The settlement represents a negotiated payment
for our loss of insurance coverage, as we no longer have the
KWELM insurance available for claims that would have qualified
for coverage. The settlement amount of $18.3 million was
recorded as a deferred settlement credit.
Liabilities of Divested Businesses
At the time of the EIP spin-off in 2002, two subsidiaries of
Coltec were defendants in a significant number of personal
injury claims relating to alleged asbestos-containing products
sold by those subsidiaries. It is possible that asbestos-related
claims might be asserted against us on the theory that we have
some responsibility for the asbestos-related liabilities of
EnPro, Coltec or its subsidiaries, even though the activities
that led to those claims occurred prior to our ownership of any
of those subsidiaries. Also, it is possible that a claim might
be asserted against us that Coltec’s dividend of its
aerospace business to us prior to the spin-off was made at a
time when Coltec was insolvent or caused Coltec to become
insolvent. Such a claim could seek recovery from us on behalf of
Coltec of the fair market value of the dividend.
A limited number of asbestos-related claims have been asserted
against us as “successor” to Coltec or one of its
subsidiaries. We believe that we have substantial legal defenses
against these claims, as well as against any other claims that
may be asserted against us on the theories described above. In
addition, the agreement between EnPro and us that was used to
effectuate the spin-off provides us with an indemnification from
EnPro covering, among other things, these liabilities. The
success of any such asbestos-related claims would likely
require, as a practical matter, that Coltec’s subsidiaries
were unable to satisfy their asbestos-related liabilities and
that Coltec was found to be responsible for these liabilities
and was unable to meet its financial obligations. We believe any
such claims would be without merit and that Coltec was solvent
both before and after the dividend of its aerospace business to
us. If we are ultimately found to be responsible for the
asbestos-related liabilities of Coltec’s subsidiaries, we
believe it would not have a material adverse effect on our
financial condition, but could have a material adverse effect on
our results of operations and cash flows in a particular period.
However, because of the uncertainty as to the number, timing and
payments related to future asbestos-related claims, there can be
no assurance that any such claims will not have a material
adverse effect on our financial condition, results of operations
and cash flows. If a claim related to the dividend of
Coltec’s aerospace business were successful, it could have
a material adverse impact on our financial condition, results of
operations and cash flows.
44
In connection with the divestiture of our tire, vinyl and other
businesses, we have received contractual rights of
indemnification from third parties for environmental and other
claims arising out of the divested businesses. Failure of these
third parties to honor their indemnification obligations could
have a material adverse effect on our financial condition,
results of operations and cash flows.
Guarantees
We have guaranteed amounts owed by Coltec Capital Trust with
respect to the $145 million of outstanding TIDES and have
guaranteed Coltec’s performance of its obligations with
respect to the TIDES and the underlying Coltec convertible
subordinated debentures. Following the spin-off of the EIP
segment, the TIDES remained outstanding as an obligation of
Coltec Capital Trust and our guarantee with respect to the TIDES
remains an obligation of ours. EnPro, Coltec and Coltec Capital
Trust have agreed to indemnify us for any costs and liabilities
arising under or related to the TIDES after the spin-off.
In addition to our guarantee of the TIDES, at December 31,
2004, we have an outstanding contingent liability for guarantees
of debt and lease payments of $2.8 million, letters of
credit and bank guarantees of $62.9 million, residual value
of leases of $54.6 million and executive loans to purchase
our stock of $4.4 million.
Commercial Airline Customers
Several of our commercial airline customers are experiencing
financial difficulties. We perform ongoing credit evaluations on
the financial condition of all of our customers and maintain
reserves for uncollectible accounts receivable based upon
expected collectibility. Although we believe our reserves are
adequate, we are not able to predict the future financial
stability of these customers. Any material change in the
financial status of any one or group of customers could have a
material adverse effect on our financial condition, results of
operations or cash flows. The extent to which extended payment
terms are granted to customers may negatively affect future cash
flow.
Tax
In 2000, Coltec, our former subsidiary, made a
$113.7 million payment to the Internal Revenue Service
(IRS) for an income tax assessment and the related accrued
interest arising out of certain capital loss deductions and tax
credits taken in 1996. On February 13, 2001, Coltec filed
suit against the U.S. Government in the U.S. Court of
Federal Claims seeking a refund of this payment. The trial
portion of the case was completed in May 2004. On
November 2, 2004, we were notified that the trial
court ruled in favor of Coltec and ordered the Government to
refund federal tax payments of $82.8 million to Coltec.
This tax refund will also bear interest to the date of payment.
As of December 31, 2004, the interest amount was
approximately $46.6 million before tax, or
$30.3 million after tax. A final judgment was entered in
this case by the U.S. Court of Federal Claims on
February 15, 2005. The Government has until April 18,
2005 to appeal the decision to the United States Court of
Appeals for the Federal Circuit. If the Government does not
appeal the decision or the trial court judge’s decision is
ultimately upheld, we will be entitled to this tax refund and
related interest pursuant to an agreement with Coltec. If we
receive these amounts, we expect to record net income of
approximately $145 million, based on interest through
December 31, 2004, and including the release of previously
established reserves. If the IRS were to appeal the judgment and
ultimately prevail in this case, Coltec will not owe any
additional interest or taxes with respect to 1996. We may,
however, be required by the IRS to pay up to $32.7 million
plus accrued interest with respect to the same items claimed by
Coltec in its tax returns for 1997 through 2000. The amount of
45
the previously estimated tax liability if the IRS were to
prevail for the 1997 through 2000 period remains fully reserved.
In 2000, the IRS issued a statutory notice of deficiency
asserting that Rohr, Inc. (Rohr), our subsidiary, was liable for
$85.3 million of additional income taxes for the fiscal
years ended July 31, 1986 through 1989. In 2003, the IRS
issued an additional statutory notice of deficiency asserting
that Rohr was liable for $23 million of additional income
taxes for the fiscal years ended July 31, 1990 through
1993. The proposed assessments relate primarily to the timing of
certain tax deductions and tax credits. Rohr has filed petitions
in the U.S. Tax Court opposing the proposed assessments.
Rohr expects that these cases may be scheduled for trial in 2005
and that it will ultimately be successful in these cases. At the
time of settlement or final determination by the court, there
will be a net cash cost to us due at least in part to the
reversal of a timing item. We believe that our total net cash
cost is unlikely to exceed $100 million. We are reserved
for the estimated liability associated with these cases and as a
result, we do not expect a charge to earnings to result from the
resolution of these matters.
We are continuously undergoing examination by the IRS, as well
as various state and foreign jurisdictions. The IRS and other
taxing authorities routinely challenge certain deductions and
credits reported by us on our income tax returns. In accordance
with SFAS 109, “Accounting for Income Taxes,” and
SFAS 5, “Accounting for Contingencies,” we
establish reserves for tax contingencies that reflect our best
estimate of the deductions and credits that we may be unable to
sustain, or that we could be willing to concede as part of a
broader tax settlement. As of December 31, 2004, we have
recorded tax contingency reserves of approximately
$316 million.
The current IRS examination audit cycle began in March, 2002 and
relates to the following consolidated income tax groups for the
following years:
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Rohr, Inc. and Subsidiaries
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July, 1995 — December, 1997 (through date of
acquisition) |
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Coltec Industries Inc and Subsidiaries
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December, 1997 — July, 1999 (through date of
acquisition) |
|
Goodrich Corporation and Subsidiaries
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1998-1999 (including Rohr and Coltec) |
There are numerous tax issues that have been raised during the
examination by the IRS, including, but not limited to, transfer
pricing, research and development credits, foreign tax credits,
tax accounting for long-term contracts, tax accounting for
inventory, tax accounting for stock options, depreciation,
amortization and the proper timing for certain other deductions
for income tax purposes.
One of our subsidiaries, Rohr, Inc. (Rohr) has been under
examination by the State of California for the tax years ending
July 31, 1985, 1986 and 1987. The State of California has
disallowed certain expenses incurred by one of Rohr’s
subsidiaries in connection with the lease of certain tangible
property. California’s State Board of Equalization has held
that the deductions associated with the leased equipment were
non-business deductions, resulting in an additional tax
assessment of approximately $5.5 million. The amount of
interest on the tax assessment is approximately
$23.5 million. We continue to contest the assessment. We
are adequately reserved for this contingency.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) recently
issued Statement of Financial Accounting Standards No. 151
(SFAS 151), “Inventory Costs”, an amendment of
ARB No. 43, Chapter 4. Adoption of SFAS 151 is
required by the year beginning January 1, 2006. We plan to
adopt SFAS 151 no later than that date. The amendments made
by SFAS 151 clarify that
46
abnormal amounts of idle facility expense, freight, handling
costs and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. While SFAS 151 enhances
ARB 43 and clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted
material (spoilage), the statement also removes inconsistencies
between ARB 43 and IAS 2 and amends ARB 43 to
clarify that abnormal amounts of costs should be recognized as
period costs. Under some circumstances, according to
ARB 43, the above listed costs may be so abnormal as to
require treatment as current period charges. SFAS 151
requires these items be recognized as current-period charges
regardless of whether they meet the criterion of “so
abnormal” and requires allocation of fixed production
overheads to the costs of conversion. This statement will apply
to our businesses if they become subject to “abnormal
costs” as defined in SFAS 151. We are currently
evaluating the impact, if any, that adoption of SFAS 151
will have on our Consolidated Statement of Income and
Consolidated Balance Sheet.
On December 16, 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004)
(SFAS 123(R)), “Share-Based Payment”, which is a
revision of SFAS No. 123, “Accounting for
Stock-Based Compensation”. SFAS 123(R) supersedes APB
Opinion No. 25, “Accounting for Stock Issued to
Employees” (SFAS 123), and amends Statement of
Financial Accounting Standards No. 95, “Statement of
Cash Flows”. Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. We adopted
the SFAS 123 fair-value-based method of accounting for
share-based payments effective January 1, 2004 using the
“modified prospective method” described in Statement
of Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation-Transition and Disclosure”.
Currently, we use the Black-Scholes formula to estimate the
value of stock options granted to employees. SFAS 123(R)
requires that we use the valuation technique that best fits the
circumstances. We are currently evaluating other techniques.
SFAS 123(R) requires that the benefits of tax deductions in
excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow;
thus, reducing net operating cash flows and increasing net
financing cash flows in the periods after the effective date.
While we cannot estimate what those amounts will be in the
future because they depend on, among other things, when
employees exercise stock options, the amounts of operating cash
flow recognized in prior periods for such excess tax deductions
for stock-based compensation were $3.5 million,
$0.4 million and $0.5 million in 2004, 2003 and 2002,
respectively. SFAS 123(R) also requires that we estimate
the number of awards that are expected to vest and to revise the
estimate as the actual forfeitures differ from the estimate. The
effect of these items and other changes in SFAS 123(R) as
well as the potential impact on our future consolidated
statement of income and consolidated balance sheet is currently
being evaluated. We will adopt SFAS 123(R) no later than
July 1, 2005.
On December 21, 2004, the FASB issued FASB Staff
Position 109-1 (FSP 109-1) and 109-2 (FSP 109-2).
FSP 109-1 provides guidance on the application of SFAS 109,
“Accounting for Income Taxes”, with regard to the tax
deduction on qualified production activities provision within
H.R. 4520 The American Jobs Creation Act of 2004 (Act) that was
enacted on October 22, 2004. FSP 109-2 provides guidance on
a special one-time dividends received deduction on the
repatriation of certain foreign earnings to qualifying
U.S. taxpayers. The Act contains numerous provisions
related to corporate and international taxation including repeal
of the Extraterritorial Income (ETI) regime, creation of a new
Domestic Production Activities (DPA) deduction and a
temporary dividends received deduction related to repatriation
of foreign earnings. The Act contains various effective dates
and transition periods related to its provisions. Under the
guidance provided in FSP 109-1 the new DPA deduction will be
treated as a “special deduction” as described in
SFAS 109. As such, the special deduction has no effect on
the Company’s deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will
be reported in the period in which the deduction is claimed on
our
47
income tax return. The repeal of ETI and its replacement with a
DPA deduction were not in effect in 2004 and therefore, did not
have an affect on our income tax provision for the year ended
December 31, 2004. We do not expect the net effect of the
phase-out of the ETI deduction and phase-in of the new DPA
deduction to result in a material impact on our effective income
tax rate in 2005. In FSP 109-2, the Financial Accounting
Standards Board acknowledged that, due to the proximity of the
Act’s enactment date to many companies’ year-ends and
the fact that numerous provisions within the Act are complex and
pending further regulatory guidance, many companies may not be
in a position to assess the impacts of the Act on their plans
for repatriation or reinvestment of foreign earnings. Therefore,
the FSP provided companies with a practical exception to the
permanent reinvestment standards of SFAS 109 and APB
No. 23 by providing additional time to determine the amount
of earnings, if any, that they intend to repatriate under the
Act’s provisions. We are not yet in a position to decide
whether, and to what extent, we might repatriate foreign
earnings to the U.S. Therefore, under the guidance provided
in FSP 109-2, no deferred tax liability has been recorded in
connection with the repatriation provisions of the Act. We are
currently analyzing the impact of the temporary dividends
received deduction provisions contained in the Act.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and
results of operations is based upon our Consolidated Financial
Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing
basis, we evaluate our estimates, including those related to
customer programs and incentives, product returns, bad debts,
inventories, investments, intangible assets, income taxes,
financing obligations, warranty obligations, excess component
order cancellation costs, restructuring, long-term service
contracts, pensions and other postretirement benefits, and
contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our Consolidated Financial Statements.
REVENUE RECOGNITION
For revenues not recognized under the contract method of
accounting, we recognize revenues from the sale of products at
the point of passage of title, which typically is at the time of
shipment. Revenues earned from providing maintenance service are
recognized when the service is complete.
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Contract Accounting-Percentage of Completion |
Included in contract costs, or estimated revenues, are the
expected impact of specific contingencies that we believe are
probable. In the event that actual experience differs from
estimates or facts and circumstances change, estimated costs or
revenues will be revised. Effective January 1, 2004, we
changed two aspects of the application of contract accounting
for our aerostructures business unit, including a change to the
cumulative catch-up method from the reallocation method for
accounting for changes in contract estimates of revenue and
costs and a change to the accounting for certain
pre-certification costs. Pre-certification costs,
48
including those in excess of original estimated levels, are now
included in total contract costs used to evaluate overall
contract profitability. These contract accounting methods are
described below. The impact of these changes on our financial
statements was income of approximately $16 million after
tax or $23 million before tax, which was reported as a
Cumulative Effect of Change in Accounting in the first quarter
of 2004.
We have sales 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 in accordance with the
percentage-of-completion method of accounting, using the
units-of-delivery method. We follow 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), using the
cumulative catch-up method in accounting for revisions in
estimates. Under the cumulative catch-up method, the impact of
revisions in estimates related to units shipped to date is
recognized immediately when changes in estimated contract
profitability are known.
Profit is estimated based on the difference between total
estimated revenue and total estimated cost of a contract.
Changes in estimated total revenue and estimated total cost are
recognized as business or economic conditions change and the
impact on contract profitability is recorded immediately in that
period using the cumulative catch-up method. 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 as adjusted to the date of certification, or
those quantities which we now expect to deliver in the
timeframe/period assumed in the original contract pricing or at
the date of certification. Our policies only allow the estimated
number of production units to be delivered to exceed the
quantity assumed within the original contract pricing or at date
of certification when we receive firm orders for additional
units or we are required to begin manufacturing of units under
contractual production lead time. The assumed timeframe/period
is generally equal to the period specified in the contract. If
the contract is a “life of program” contract, then
such period is equal to the time period used in the original
pricing model adjusted, if appropriate, to the expected period
of production estimated at the date of certification. 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. We re-evaluate our contract
estimates periodically and reflect changes in estimates
immediately under the cumulative catch-up method for the impact
on shipments to date.
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 below.
49
Inventoried costs on long-term contracts include certain
preproduction costs, consisting primarily of tooling and design
costs and production costs, including applicable overhead. The
costs attributed to units delivered under long-term commercial
contracts are based on the estimated average cost of all units
expected to be produced and are determined under the learning
curve concept, which anticipates a predictable decrease in unit
costs as tasks and production techniques become more efficient
through repetition. This usually results in an increase in
inventory (referred to as “excess-over-average”)
during the early years of a contract.
If in-process inventory plus estimated costs to complete a
specific contract exceeds the anticipated remaining sales value
of such contract, such excess is charged to current earnings,
thus reducing inventory to estimated realizable value.
Income Taxes
In accordance with SFAS 109, APB Opinion No. 28, and
FIN No. 18, as of each reporting period, we estimate
an effective income tax rate that is expected to be applicable
for the full fiscal year. The estimate of our effective income
tax rate involves significant judgments regarding the
application of complex tax regulations across many jurisdictions
and estimates as to the amount and jurisdictional source of
income expected to be earned during the full fiscal year.
Further influencing this estimate are evolving interpretations
of new and existing tax laws, rulings by taxing authorities and
court decisions. Due to the subjectivity and complex nature of
these underlying issues our actual effective tax rate and
related tax liabilities may differ from our initial estimates.
Differences between our estimated and actual effective income
tax rates and related liabilities are recorded in the period
they become known. The resulting adjustment to our income tax
expense could have a material effect on our results of
operations in the period the adjustment is recorded.
In accordance with SFAS 5, we record tax contingencies when
the exposure item becomes probable and reasonably estimable. As
of December 31, 2004, we had recorded tax contingency
reserves of approximately $316 million.
In accordance with SFAS 109, deferred tax assets and
liabilities are recorded for tax carryforwards and the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting and income tax
purposes are measured using enacted tax laws and rates. A
valuation allowance is provided on deferred tax assets if it is
determined that it is more likely than not that the asset will
not be realized.
Identifiable Intangible Assets
Identifiable intangible assets are recorded at cost, or when
acquired as part of a business combination, at estimated fair
value. These assets include patents and other technology
agreements, sourcing contracts, trademarks, licenses, customer
relationships and non-compete agreements. Intangible assets are
generally amortized using the straight-line method over
estimated useful lives of 5 to 25 years for all
acquisitions completed on or prior to June 30, 2001. For
acquisitions completed subsequent to June 30, 2001,
identifiable intangible assets are amortized over their useful
life using undiscounted cash flows, a method that reflects the
pattern in which the economic benefits of the intangible assets
are consumed.
Impairments of identifiable intangible assets are recognized
when events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may
not be recoverable and our estimate of undiscounted cash flows
over the assets’ remaining useful lives is less than the
carrying value of the assets. The determination of undiscounted
cash flow is based on our segments’ plans. The revenue
growth is based upon aircraft build projections from aircraft
manufacturers and widely available external publications. The
profit
50
margin assumption is based upon the current cost structure and
anticipated cost reductions. Measurement of the amount of
impairment may be based upon an appraisal, market values of
similar assets or estimated discounted future cash flows
resulting from the use and ultimate disposition of the asset.
Sales Incentives
We offer sales incentives to certain airline customers in
connection with sales contracts. These incentives may consist of
up-front cash payments, merchandise credits and/or free
products. The cost of these incentives is recognized in the
period incurred unless recovery of these costs is specifically
guaranteed by the customer in the contract. If the contract
contains such a guarantee, then the cost of the sales incentive
is capitalized as Other Assets and amortized as Cost of Sales
over the contract period. At December 31, 2004 and 2003,
the carrying amount of sales incentives was $68.7 million
and $75.2 million, respectively.
Entry Fees-Investment in Risk and Revenue Sharing Programs
Certain businesses in our Engine Systems Segment make cash
payments, referred to as entry fees, to an original equipment
manufacturer (OEM) under long-term contractual arrangements
related to new engine programs. In return, we receive a
controlled access supply contract and a percentage of program
revenue generated by the OEM as part of these arrangements. The
program revenue generated by the OEM may result from the sale of
components produced by us or other program participants by
selling original equipment or aftermarket products (spares).
At the time of payment, the aircraft manufacturer has launched a
new aircraft platform, critical suppliers have been selected and
we have deemed our product to be technologically feasible.
Although our product is technologically feasible, we do not have
access to information on the technological feasibility of the
products of the OEM’s other critical suppliers. However, we
are not aware of any program for which we have entered into a
contract that has been cancelled prior to engine delivery due to
the lack of technological feasibility of the engine.
In our agreement with the OEM, there are no restrictions on the
use of the entry fees by the OEM; however, in the OEM’s
annual report, it states that entry fees have enabled it to
build a broad portfolio of engines, thereby reducing its
exposure to individual product risk. The OEM also states that
the primary financial benefit of entry fees to it is a reduction
of its own funding of research and development on new programs.
We account for entry fees similar to an investment in future
cash flows. We begin to receive cash payments from the OEM, at
the latest, after aircraft certification, which typically occurs
approximately four years after payment of the entry fee.
However, if the OEM’s customers place orders with the OEM
prior to that time, which frequently occurs, we will receive a
percentage of any related deposits. Activities during the
four-year period following our initial payment of entry fees
include continued refinement of the engine systems,
certification of the engine systems, flight certification of the
engine, flight certification of the aircraft and entry into
service of the aircraft.
As with any investment, there are risks inherent in recovering
the value of entry fees. Such risks are consistent with the
risks associated in acquiring a revenue-producing asset in which
market conditions may change or the risks that arise when a
manufacturer of a product on which a royalty is based has
business difficulties and cannot produce the product. Such risks
include but are not limited to the following:
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• |
Changes in market conditions that may affect product sales under
the program, including market acceptance and competition from
others; |
51
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• |
Performance of subcontract suppliers and other production risks; |
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• |
Bankruptcy or other less significant financial difficulties of
other program participants, including the aircraft manufacturer,
the OEM and other program suppliers or the aircraft
customer; and |
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• |
Availability of specialized raw materials in the marketplace. |
Entry fees are recorded as Other Assets and are amortized on a
straight-line basis to Cost of Sales over the program’s
estimated useful life following aircraft certification, which
typically approximates 20 years. The net carrying amount of
entry fees was $111.3 million and $91.4 million at
December 31, 2004 and 2003, respectively. The carrying
amount of entry fees is evaluated for impairment at least
annually or when other indicators of impairment exist.
Impairment is assessed based on the expected undiscounted cash
flow from the program over the remaining program life as
compared to the recorded amount of entry fees. If impairment
exists, a charge would be recorded for the amount by which the
carrying amount of the entry fee exceeds its fair value. No such
impairment charges were recorded in the years ended
December 31, 2004, 2003 or 2002.
Pension and Postretirement Benefits Other Than Pensions
Assumptions used in determining the benefit obligations and the
annual expense for our pension and postretirement benefits other
than pensions are evaluated by us in consultation with an
outside actuary. Changes in assumptions such as the rate of
compensation increase and the long-term rate of return on plan
assets are based upon our historical and benchmark data. Health
care cost projections are evaluated annually. The discount rate
is evaluated at December 31, 2004 using the appropriate
index (e.g., Moody’s Aa long-term high quality bond rate
for the U.S. Plans and iBoxx AA long-term high quality bond
rate for the U.K. plans). The appropriate assumptions are used
for the applicable country.
Following is a summary of our 2004 assumptions for determining
the pension and postretirement benefits other than pension
obligations and the annual cost for 2004.
Weighted-Average Assumptions Used to Determine the Benefit
Obligations as of December 31, 2004
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Other | |
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U.S. Plans | |
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U.K. Plans | |
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Non-U.S. Plans | |
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|
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|
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Discount rate
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|
5.875 |
% |
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|
5.50 |
% |
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|
5.75 |
% |
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Rate of compensation increase
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|
3.63 |
% |
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3.50 |
% |
|
|
3.50 |
% |
Weighted-Average Assumptions Used to Determine the Net
Periodic Pension Benefit Costs for the Year Ended
December 31, 2004
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Other | |
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U.S. Plans | |
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U.K. Plans | |
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Non-U.S. Plans | |
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|
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|
Discount rate
|
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|
6.25 |
% |
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|
5.75 |
% |
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6.25 |
% |
|
Expected long-term return on assets
|
|
|
9.00 |
% |
|
|
8.50 |
% |
|
|
8.43 |
% |
|
Rate of compensation increase
|
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|
3.63 |
% |
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3.25 |
% |
|
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3.25 |
% |
The weighted-average discount rate assumption used to determine
postretirement benefits other than pension obligations at
December 31, 2004 was 5.875 percent. Also, for
measurement purposes, a 9 percent annual rate of increase
in the per capita cost of covered health care benefits was
assumed for 2005. The rate was assumed to decrease gradually to
5 percent for 2008 and remain at that level thereafter. The
weighted-average discount rate assumption used to determine net
periodic postretirement benefit cost for the year ended
December 31, 2004 was 6.25 percent.
52
The table below quantifies the approximate impact of a
one-quarter percentage point change in the assumed discount rate
and expected long-term rate of return on plan assets for our
pension plan cost and liability holding all other assumptions
constant. The discount rate assumption is selected each year
based on market conditions in effect as of the disclosure date.
The rate selected is used to measure liabilities as of the
disclosure date and for calculating the following year’s
pension expense. The expected long-term rate of return on plan
assets assumption, although reviewed each year, is changed less
frequently due to the long-term nature of the assumption. This
assumption does not impact the measurement of assets or
liabilities as of disclosure date; rather, it is used only in
the calculation of pension expense.
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.25 Percentage | |
|
.25 Percentage | |
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Point Increase | |
|
Point Decrease | |
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(Dollars in millions) | |
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Increase (Decrease) in costs
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|
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|
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|
|
Discount rate
|
|
$ |
(8.2 |
) |
|
$ |
8.3 |
|
|
Expected long-term rate of return
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|
$ |
(6.1 |
) |
|
$ |
6.1 |
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|
Increase (Decrease) in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
$ |
(97 |
) |
|
$ |
100 |
|
The table below quantifies the impact of a one-percentage point
change in the assumed health care cost trend rate on our annual
cost and balance sheet liability for postretirement benefits
other than pension obligations holding all other assumptions
constant.
| |
|
|
|
|
|
|
|
|
| |
|
One Percentage | |
|
One Percentage | |
| |
|
Point Increase | |
|
Point Decrease | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Increase (Decrease) in total of service and interest cost
components
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate
|
|
$ |
1.9 |
|
|
$ |
(1.6 |
) |
|
Increase (Decrease) in accumulated postretirement benefit
obligation
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate
|
|
$ |
29.0 |
|
|
$ |
(25.1 |
) |
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND
UNCERTAINTY
Certain statements made in this document are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 regarding our future plans,
objectives and expected performance. Specifically, statements
that are not historical facts, including statements accompanied
by words such as “believe,” “expect,”
“anticipate,” “intend,” “should,”
“estimate,” or “plan,” are intended to
identify forward-looking statements and convey the uncertainty
of future events or outcomes. We caution readers that any such
forward-looking statements are based on assumptions that we
believe are reasonable, but are subject to a wide range of
risks, and actual results may differ materially.
Important factors that could cause actual results to differ
include, but are not limited to:
|
|
|
| |
• |
demand for and market acceptance of new and existing products,
such as the Airbus A380 and A350, the Boeing 787 Dreamliner, the
Embraer 190 and the Lockheed Martin F-35 Joint Strike Fighter; |
| |
| |
• |
our ability to extend our contracts with Boeing relating to the
787 Dreamliner beyond the initial contract period; |
| |
| |
• |
potential cancellation of orders by customers; |
| |
| |
• |
successful development of products and advanced technologies; |
53
|
|
|
| |
• |
the health of the commercial aerospace industry, including the
impact of bankruptcies in the airline industry; |
| |
| |
• |
global demand for aircraft spare parts and aftermarket services; |
| |
| |
• |
the possibility of additional contractual disputes with Northrop
Grumman related to the purchase of Aeronautical Systems; |
| |
| |
• |
the payment of premiums and associated costs by us in connection
with the early retirement of debt; |
| |
| |
• |
the resolution of tax litigation involving Coltec Industries Inc
and Rohr, Inc.; |
| |
| |
• |
the actual amount of future liabilities assumed by us pursuant
to the partial settlement with Northrop Grumman related to the
purchase of Aeronautical Systems; |
| |
| |
• |
the possibility of restructuring and consolidation actions
beyond those previously announced by us; |
| |
| |
• |
threats and events associated with and efforts to combat
terrorism, including the current situation in Iraq; |
| |
| |
• |
the extent to which expenses relating to employee and retiree
medical and pension benefits continue to rise; |
| |
| |
• |
competitive product and pricing pressures; |
| |
| |
• |
our ability to recover from third parties under contractual
rights of indemnification for environmental and other claims
arising out of the divestiture of our tire, vinyl and other
businesses; |
| |
| |
• |
possible assertion of claims against us on the theory that we,
as the former corporate parent of Coltec Industries Inc, bears
some responsibility for the asbestos-related liabilities of
Coltec and its subsidiaries, or that Coltec’s dividend of
its aerospace business to us prior to the EnPro spin-off was
made at a time when Coltec was insolvent or caused Coltec to
become insolvent; |
| |
| |
• |
the effect of changes in accounting policies; |
| |
| |
• |
domestic and foreign government spending, budgetary and trade
policies; |
| |
| |
• |
economic and political changes in international markets where we
compete, such as changes in currency exchange rates, inflation,
deflation, recession and other external factors over which we
have no control; and |
| |
| |
• |
the outcome of contingencies (including completion of
acquisitions, divestitures, litigation and environmental
remediation efforts). |
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in interest
rates and foreign currency exchange rates, which could impact
our financial condition, results of operations and cash flows.
We manage our exposure to these and other market risks through
regular operating and financing activities and through the use
of derivative financial instruments. We intend to use such
derivative financial instruments as risk management tools and
not for speculative investment purposes. Refer to Note Q
“Derivatives and Hedging Activities” in
Part 1 — Item 1 of this Form 10-K for a
description of current developments involving our hedging
activities.
54
Interest Rate Exposure
We are exposed to interest rate risk as a result of our
outstanding variable rate debt obligations and interest rate
swaps. The table below provides information about our financial
instruments that are sensitive to changes in interest rates. In
addition to those financial instruments, we had
$72.3 million outstanding at year-end under our variable
rate receivables securitization program. At December 31,
2004, a hypothetical 100 basis point unfavorable change in
interest rates would increase annual interest expense by
approximately $3.4 million.
In July 2003, we entered into a $100 million
fixed-to-floating interest rate swap on our 6.45 percent
senior notes due in 2007. In October 2003, we entered into two
$50 million fixed-to-floating interest rate swaps. One
$50 million swap is on our 7.5 percent senior notes
due in 2008 and the other $50 million swap is on our
6.45 percent medium-term notes due in 2008. In December
2003, we entered into a $50 million fixed-to-floating
interest rate swap on our 7.5 percent senior notes due in
2008. The purpose of the interest rates swaps was to increase
our exposure to variable interest rates. The settlement and
maturity dates on the swaps are the same as those on the related
notes. In accordance with Statement of Financial Accounting
Standards No. 133, the carrying values of the notes have
been adjusted to reflect the fair values of the related interest
rate swaps.
The table represents principal cash flows and related weighted
average interest rates by expected (contractual) maturity
dates (excluding the receivables securitization program). Also
included is information about our interest rate swaps.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expected Maturity Dates | |
| |
|
Fair | |
| Debt |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fixed Rate
|
|
$ |
0.7 |
|
|
$ |
0.7 |
|
|
$ |
182.2 |
|
|
$ |
372.6 |
|
|
$ |
218.2 |
|
|
$ |
1,099.0 |
|
|
$ |
1,873.4 |
|
|
$ |
2,108.0 |
|
| |
|
Average Interest Rate
|
|
|
5.0 |
% |
|
|
5.1 |
% |
|
|
6.4 |
% |
|
|
6.0 |
% |
|
|
6.6 |
% |
|
|
7.3 |
% |
|
|
6.9 |
% |
|
|
|
|
| |
Variable Rate
|
|
$ |
1.2 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
16.7 |
|
|
$ |
18.7 |
|
|
$ |
18.7 |
|
| |
|
Average Interest Rate
|
|
|
2.4 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
1.4 |
% |
|
|
1.5 |
% |
|
|
|
|
|
Capital Lease Obligations
|
|
$ |
1.8 |
|
|
$ |
1.2 |
|
|
$ |
1.1 |
|
|
$ |
1.1 |
|
|
$ |
1.1 |
|
|
$ |
12.4 |
|
|
$ |
18.7 |
|
|
$ |
10.7 |
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Swaps Fixed to Variable-Notional Value
|
|
|
|
|
|
|
|
|
|
$ |
100.0 |
|
|
$ |
150.0 |
|
|
|
|
|
|
|
|
|
|
$ |
250.0 |
|
|
$ |
(1.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
| |
|
|
Average Pay Rate
|
|
|
|
|
|
|
|
|
|
|
4.5 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
4.8 |
% |
|
|
|
|
| |
|
|
Average Receive Rate
|
|
|
|
|
|
|
|
|
|
|
6.5 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
6.8 |
% |
|
|
|
|
Foreign Currency Exposure
We are exposed to foreign currency risks that arise from normal
business operations. These risks include transactions
denominated in foreign currencies, the translation of monetary
assets and liabilities denominated in currencies other than the
relevant functional currency and translation of income and
expense and balance sheet amounts of our foreign subsidiaries to
the U.S. Dollar. Our objective is to minimize our exposure
to transaction and income risks through our normal operating
activities and, where appropriate, through foreign currency
forward exchange contracts.
Foreign exchange negatively impacted the financial results in
our business segments in 2004. Approximately 10 percent of
our revenues and approximately 25 percent of our costs are
denominated in currencies other than the U.S. Dollar. Over
95 percent of these net costs are in Euros, Great Britain
Pounds Sterling and Canadian Dollars. We do hedge a portion of
our
55
exposure on an ongoing basis. When the U.S. Dollar weakens,
our unhedged net costs rise in U.S. Dollar terms. With a
weakening U.S. Dollar trend, our average hedge rates also
become less favorable and thus have a negative impact on net
income.
As currency exchange rates fluctuate, translation of the
statements of income of international businesses into
U.S. Dollars will affect comparability of revenues and
expenses between years.
We have entered into foreign exchange forward contracts to sell
U.S. Dollars for Great Britain Pounds Sterling, Canadian
Dollars, Euros and Polish Zlotys. These forward contracts are
used to mitigate a portion of the potential volatility to cash
flows arising from changes in currency exchange rates. As of
December 31, 2004 we had forward contracts with an
aggregate notional amount of $332.3 million to buy Great
Britain Pounds Sterling, forward contracts with an aggregate
notional amount of $199.7 million to buy Canadian Dollars,
forward contracts with an aggregate notional amount of
$171.3 million to buy Euros and forward contracts with an
aggregate notional amount of $9.5 million to buy Polish
Zlotys. These forward contracts mature on a monthly basis with
maturity dates that range from January 2005 to April 2007.
At December 31, 2004, a hypothetical 10 percent
strengthening of the U.S. Dollar against other foreign
currencies would decrease the value of the forward contracts
described above by $74.7 million. The fair value of these
forward contracts was $110.3 million at December 31,
2004. Because we hedge only a portion of our exposure, a
strengthening of the U.S. Dollar as described above would
have a more than offsetting benefit to our financial results in
future periods.
In addition to the foreign exchange cash flow hedges, we have
entered into foreign exchange forward contracts to manage
foreign currency risk related to the translation of monetary
assets and liabilities denominated in currencies other than the
relevant functional currency. These forward contracts mature
monthly and the notional amounts are adjusted periodically to
reflect changes in net monetary asset balances. As of
December 31, 2004, we had forward contracts with a notional
value of $81 million to buy Great Britain Pounds, contracts
with a net notional value of $11 million to buy Euros and
contracts with a notional value of $5.4 million to sell
Canadian Dollars.
56
|
|
| Item 8. |
Financial Statements |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
57
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The management of Goodrich Corporation (Goodrich) is responsible
for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934.
Goodrich’s internal control system over financial reporting
is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. The company’s
internal control over financial reporting includes those
policies and procedures that:
|
|
|
| |
(i) |
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; |
|
|
|
| |
(ii) |
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and |
|
|
|
| |
(iii) |
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements. |
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to
risk that controls may become inadequate because of changes in
condition, or that the degree of compliance with the policies or
procedures may deteriorate.
Goodrich’s management assessed the effectiveness of
Goodrich’s internal control over financial reporting as of
December 31, 2004. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on management’s
assessment and those criteria, management believes that Goodrich
maintained effective internal control over financial reporting
as of December 31, 2004.
Goodrich’s independent registered public accounting firm,
Ernst & Young LLP, has issued an audit report on
management’s assessment and the effectiveness of
Goodrich’s internal control over financial reporting. This
report appears on page 60.
|
|
|
/s/ Marshall O. Larsen
|
|
|
|
|
|
Marshall O. Larsen |
|
|
Chairman, President and |
|
|
Chief Executive Officer |
|
| |
|
/s/ Ulrich Schmidt
|
|
|
|
|
|
Ulrich Schmidt |
|
|
Executive Vice President and |
|
|
Chief Financial Officer |
|
| |
|
/s/ Scott E. Kuechle
|
|
|
|
|
|
Scott E. Kuechle |
|
|
Vice President and Controller |
|
February 25, 2005
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders and Board of Directors of Goodrich
Corporation
We have audited the accompanying consolidated balance sheet of
Goodrich Corporation as of December 31, 2004 and 2003, and
the related consolidated statements of income,
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2004. 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 the standards of the
Public Company Accounting Oversight Board (United States). 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, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Goodrich Corporation at December 31,
2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
As described in Notes E, M and V to the consolidated
financial statements, in 2004 the Company changed its method of
accounting for certain aspects of the application of contract
accounting, early adopted accounting guidance related to
postretirement benefit obligations and changed its method of
accounting for stock-based compensation. As described in
Note J, in 2002 the Company adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible
Assets.
Charlotte, North Carolina
February 25, 2005
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON MANAGEMENT’S ASSESSMENT AND THE EFFECTIVENESS OF
INTERNAL CONTROL OVER
FINANCIAL REPORTING
To the Shareholders and Board of Directors of Goodrich
Corporation
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting, that Goodrich Corporation maintained
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Goodrich Corporation’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Goodrich
Corporation maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Goodrich Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2004, based on the COSO criteria.
60
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet as of December 31, 2004 and 2003
and the related consolidated statements of income,
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2004 of Goodrich
Corporation and our report dated February 25, 2005
expressed an unqualified opinion thereon.
Charlotte, North Carolina
February 25, 2005
61
CONSOLIDATED STATEMENT OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions, except per share | |
| |
|
amounts) | |
|
Sales
|
|
$ |
4,724.5 |
|
|
$ |
4,382.9 |
|
|
$ |
3,808.5 |
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales
|
|
|
3,507.1 |
|
|
|
3,365.9 |
|
|
|
2,893.5 |
|
| |
Selling and administrative costs
|
|
|
803.9 |
|
|
|
720.9 |
|
|
|
519.0 |
|
| |
Restructuring and consolidation costs
|
|
|
13.7 |
|
|
|
51.1 |
|
|
|
37.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
4,324.7 |
|
|
|
4,137.9 |
|
|
|
3,449.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
399.8 |
|
|
|
245.0 |
|
|
|
358.6 |
|
|
Interest expense
|
|
|
(143.2 |
) |
|
|
(155.5 |
) |
|
|
(106.2 |
) |
|
Interest income
|
|
|
3.4 |
|
|
|
6.0 |
|
|
|
32.6 |
|
|
Other income (expense) — net
|
|
|
(60.7 |
) |
|
|
(26.3 |
) |
|
|
(18.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and trust
distributions
|
|
|
199.3 |
|
|
|
69.2 |
|
|
|
266.9 |
|
|
Income tax expense
|
|
|
(43.3 |
) |
|
|
(22.8 |
) |
|
|
(92.2 |
) |
|
Distributions on trust preferred securities
|
|
|
— |
|
|
|
(7.9 |
) |
|
|
(10.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income From Continuing Operations
|
|
|
156.0 |
|
|
|
38.5 |
|
|
|
164.2 |
|
|
Income (loss) from discontinued operations — net of
taxes
|
|
|
— |
|
|
|
62.4 |
|
|
|
(10.2 |
) |
|
Cumulative effect of change in accounting
|
|
|
16.2 |
|
|
|
(0.5 |
) |
|
|
(36.1 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net Income
|
|
$ |
172.2 |
|
|
$ |
100.4 |
|
|
$ |
117.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing operations
|
|
$ |
1.32 |
|
|
$ |
0.33 |
|
|
$ |
1.58 |
|
| |
Discontinued operations
|
|
|
— |
|
|
|
0.52 |
|
|
|
(0.09 |
) |
| |
Cumulative effect of change in accounting
|
|
|
0.13 |
|
|
|
— |
|
|
|
(0.35 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net Income
|
|
$ |
1.45 |
|
|
$ |
0.85 |
|
|
$ |
1.14 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing operations
|
|
$ |
1.30 |
|
|
$ |
0.33 |
|
|
$ |
1.56 |
|
| |
Discontinued operations
|
|
|
— |
|
|
|
0.52 |
|
|
|
(0.08 |
) |
| |
Cumulative effect of change in accounting
|
|
|
0.13 |
|
|
|
— |
|
|
|
(0.34 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net Income
|
|
$ |
1.43 |
|
|
$ |
0.85 |
|
|
$ |
1.14 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
62
CONSOLIDATED BALANCE SHEET
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions, | |
| |
|
except share amounts) | |
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
297.9 |
|
|
$ |
378.4 |
|
|
Accounts and notes receivable — net
|
|
|
654.4 |
|
|
|
608.5 |
|
|
Inventories — net
|
|
|
1,166.8 |
|
|
|
964.2 |
|
|
Deferred income taxes
|
|
|
118.9 |
|
|
|
114.3 |
|
|
Prepaid expenses and other assets
|
|
|
118.8 |
|
|
|
82.7 |
|
| |
|
|
|
|
|
|
| |
Total Current Assets
|
|
|
2,356.8 |
|
|
|
2,148.1 |
|
| |
|
|
|
|
|
|
|
Property, plant and equipment — net
|
|
|
1,165.0 |
|
|
|
1,175.9 |
|
|
Prepaid pension
|
|
|
275.5 |
|
|
|
219.5 |
|
|
Goodwill
|
|
|
1,266.3 |
|
|
|
1,259.5 |
|
|
Identifiable intangible assets — net
|
|
|
507.0 |
|
|
|
484.7 |
|
|
Deferred income taxes
|
|
|
44.7 |
|
|
|
23.5 |
|
|
Other assets
|
|
|
602.2 |
|
|
|
640.3 |
|
| |
|
|
|
|
|
|
| |
Total Assets
|
|
$ |
6,217.5 |
|
|
$ |
5,951.5 |
|
| |
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$ |
1.0 |
|
|
$ |
2.7 |
|
|
Accounts payable
|
|
|
511.5 |
|
|
|
414.5 |
|
|
Accrued expenses
|
|
|
733.2 |
|
|
|
648.2 |
|
|
Income taxes payable
|
|
|
294.4 |
|
|
|
290.7 |
|
|
Deferred income taxes
|
|
|
22.0 |
|
|
|
15.7 |
|
|
Current maturities of long-term debt and capital lease
obligations
|
|
|
2.4 |
|
|
|
75.6 |
|
| |
|
|
|
|
|
|
| |
Total Current Liabilities
|
|
|
1,564.5 |
|
|
|
1,447.4 |
|
| |
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
|
1,899.4 |
|
|
|
2,136.6 |
|
|
Pension obligations
|
|
|
761.7 |
|
|
|
642.0 |
|
|
Postretirement benefits other than pensions
|
|
|
302.7 |
|
|
|
319.2 |
|
|
Deferred income taxes
|
|
|
33.7 |
|
|
|
15.1 |
|
|
Other non-current liabilities
|
|
|
312.6 |
|
|
|
197.7 |
|
|
Commitments and contingent liabilities
|
|
|
— |
|
|
|
— |
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Common stock — $5 par value
|
|
|
|
|
|
|
|
|
|
Authorized 200,000,000 shares; issued
132,709,310 shares at December 31, 2004 and
131,265,173 shares at December 31, 2003 (excluding
14,000,000 shares held by a wholly-owned subsidiary)
|
|
|
663.5 |
|
|
|
656.3 |
|
|
Additional paid-in capital
|
|
|
1,077.9 |
|
|
|
1,035.8 |
|
|
Income retained in the business
|
|
|
119.5 |
|
|
|
42.4 |
|
|
Accumulated other comprehensive income (loss)
|
|
|
(103.7 |
) |
|
|
(126.1 |
) |
|
Unearned compensation
|
|
|
— |
|
|
|
(1.4 |
) |
|
Common stock held in treasury, at cost (13,566,071 shares
at December 31, 2004 and 13,539,820 shares at
December 31, 2003)
|
|
|
(414.3 |
) |
|
|
(413.5 |
) |
| |
|
|
|
|
|
|
| |
Total Shareholders’ Equity
|
|
|
1,342.9 |
|
|
|
1,193.5 |
|
| |
|
|
|
|
|
|
| |
Total Liabilities And Shareholders’ Equity
|
|
$ |
6,217.5 |
|
|
$ |
5,951.5 |
|
| |
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
63
CONSOLIDATED STATEMENT OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
156.0 |
|
|
$ |
38.5 |
|
|
$ |
164.2 |
|
|
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restructuring and consolidation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expenses
|
|
|
13.3 |
|
|
|
51.1 |
|
|
|
37.4 |
|
| |
|
Payments
|
|
|
(27.6 |
) |
|
|
(46.6 |
) |
|
|
(51.5 |
) |
| |
In-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
12.5 |
|
| |
Aeronautical Systems inventory step-up
|
|
|
— |
|
|
|
— |
|
|
|
58.8 |
|
| |
Asset impairments
|
|
|
0.4 |
|
|
|
86.1 |
|
|
|
— |
|
| |
Depreciation and amortization
|
|
|
222.9 |
|
|
|
219.1 |
|
|
|
180.8 |
|
| |
Stock-based compensation expense
|
|
|
18.0 |
|
|
|
2.8 |
|
|
|
1.3 |
|
| |
Loss on extinguishment of debt
|
|
|
15.1 |
|
|
|
— |
|
|
|
— |
|
| |
Deferred income taxes
|
|
|
32.0 |
|
|
|
41.6 |
|
|
|
(2.3 |
) |
| |
Net gains on sale of businesses
|
|
|
— |
|
|
|
— |
|
|
|
(2.5 |
) |
| |
Noveon PIK Notes interest income
|
|
|
— |
|
|
|
(4.3 |
) |
|
|
(23.3 |
) |
| |
Change in assets and liabilities, net of effects of acquisitions
and dispositions of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Receivables
|
|
|
16.6 |
|
|
|
96.8 |
|
|
|
109.1 |
|
| |
|
Change in receivables sold, net
|
|
|
(25.0 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Inventories
|
|
|
(174.2 |
) |
|
|
(18.4 |
) |
|
|
55.1 |
|
| |
|
Other current assets
|
|
|
(82.1 |
) |
|
|
(5.9 |
) |
|
|
(18.6 |
) |
| |
|
Accounts payable
|
|
|
81.4 |
|
|
|
(52.2 |
) |
|
|
(97.1 |
) |
| |
|
Accrued expenses
|
|
|
87.8 |
|
|
|
28.7 |
|
|
|
(27.8 |
) |
| |
|
Income taxes payable
|
|
|
(0.1 |
) |
|
|
108.2 |
|
|
|
129.8 |
|
| |
|
Tax benefit on non-qualified options
|
|
|
3.5 |
|
|
|
0.4 |
|
|
|
0.5 |
|
| |
|
Other non-current assets and liabilities
|
|
|
77.6 |
|
|
|
7.2 |
|
|
|
(2.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Operating Activities
|
|
|
415.6 |
|
|
|
553.1 |
|
|
|
524.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(152.0 |
) |
|
|
(125.1 |
) |
|
|
(106.1 |
) |
|
Proceeds from sale of property, plant and equipment
|
|
|
11.4 |
|
|
|
6.9 |
|
|
|
15.1 |
|
|
Proceeds from sale of businesses
|
|
|
— |
|
|
|
— |
|
|
|
6.0 |
|
|
Proceeds from redemption of the Noveon PIK Notes
|
|
|
— |
|
|
|
151.9 |
|
|
|
49.8 |
|
|
Payments received (made) in connection with acquisitions,
net of cash acquired
|
|
|
(0.5 |
) |
|
|
23.6 |
|
|
|
(1,472.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) By Investing Activities
|
|
|
(141.1 |
) |
|
|
57.3 |
|
|
|
(1,507.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in short-term debt, net
|
|
|
(2.8 |
) |
|
|
(377.4 |
) |
|
|
264.0 |
|
|
Proceeds from issuance of long-term debt
|
|
|
— |
|
|
|
20.0 |
|
|
|
793.1 |
|
|
Repayment of long-term debt and capital lease obligations
|
|
|
(274.8 |
) |
|
|
(74.9 |
) |
|
|
(1.4 |
) |
|
Loss on extinguishment of debt
|
|
|
(13.1 |
) |
|
|
— |
|
|
|
— |
|
|
Proceeds from issuance of common stock
|
|
|
27.5 |
|
|
|
9.1 |
|
|
|
220.2 |
|
|
Purchases of treasury stock
|
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(4.9 |
) |
|
Dividends
|
|
|
(94.7 |
) |
|
|
(94.0 |
) |
|
|
(96.9 |
) |
|
Distributions on trust preferred securities
|
|
|
— |
|
|
|
(7.9 |
) |
|
|
(10.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) By Financing Activities
|
|
|
(358.1 |
) |
|
|
(525.4 |
) |
|
|
1,163.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by discontinued operations
|
|
|
— |
|
|
|
138.1 |
|
|
|
(118.7 |
) |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
3.1 |
|
|
|
5.4 |
|
|
|
2.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(80.5 |
) |
|
|
228.5 |
|
|
|
64.1 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
378.4 |
|
|
|
149.9 |
|
|
|
85.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
297.9 |
|
|
$ |
378.4 |
|
|
$ |
149.9 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
64
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Unearned | |
|
|
|
|
| |
|
|
|
|
|
Income | |
|
Accumulated | |
|
Portion of | |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
Retained | |
|
Other | |
|
Restricted | |
|
|
|
|
| |
|
| |
|
Paid-In | |
|
In The | |
|
Comprehensive | |
|
Stock | |
|
Treasury | |
|
|
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Business | |
|
Income (Loss) | |
|
Awards | |
|
Stock | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In | |
|
|
| |
|
thousands) | |
|
(Dollars in millions) | |
|
Balance December 31, 2001
|
|
|
115,145 |
|
|
$ |
575.7 |
|
|
$ |
973.5 |
|
|
$ |
333.7 |
|
|
$ |
(110.1 |
) |
|
$ |
(0.6 |
) |
|
$ |
(410.8 |
) |
|
$ |
1,361.4 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117.9 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.4 |
|
|
|
|
|
|
|
|
|
|
|
37.4 |
|
|
Minimum pension liability
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(327.8 |
) |
|
|
|
|
|
|
|
|
|
|
(327.8 |
) |
|
Unrealized gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
|
19.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153.1 |
) |
|
Sale of common stock under public offering, net of expenses
|
|
|
14,950 |
|
|
|
74.8 |
|
|
|
141.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216.2 |
|
|
Employee award programs
|
|
|
474 |
|
|
|
2.4 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
(1.0 |
) |
|
|
(2.0 |
) |
|
|
9.3 |
|
|
Tax benefit from employees share-based compensation programs
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
EnPro spin-off
|
|
|
|
|
|
|
|
|
|
|
(97.9 |
) |
|
|
(323.2 |
) |
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
(409.1 |
) |
|
Dividends (per share—$0.875)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
130,569 |
|
|
$ |
652.9 |
|
|
$ |
1,027.4 |
|
|
$ |
36.1 |
|
|
$ |
(369.1 |
) |
|
$ |
(1.6 |
) |
|
$ |
(412.8 |
) |
|
$ |
932.9 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.4 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131.3 |
|
|
|
|
|
|
|
|
|
|
|
131.3 |
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.2 |
|
|
|
|
|
|
|
|
|
|
|
62.2 |
|
|
Unrealized gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49.5 |
|
|
|
|
|
|
|
|
|
|
|
49.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343.4 |
|
|
Employee award programs
|
|
|
696 |
|
|
|
3.4 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
(0.7 |
) |
|
|
10.9 |
|
|
Tax benefit from employees share-based compensation programs
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
Dividends (per share—$0.80)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
131,265 |
|
|
$ |
656.3 |
|
|
$ |
1,035.8 |
|
|
$ |
42.4 |
|
|
$ |
(126.1 |
) |
|
$ |
(1.4 |
) |
|
$ |
(413.5 |
) |
|
$ |
1,193.5 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172.2 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.4 |
|
|
|
|
|
|
|
|
|
|
|
89.4 |
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69.8 |
) |
|
|
|
|
|
|
|
|
|
|
(69.8 |
) |
|
Unrealized gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194.6 |
|
|
Employee award programs
|
|
|
1,444 |
|
|
|
7.2 |
|
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
(0.8 |
) |
|
|
28.4 |
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.0 |
|
|
Tax benefit from employees share-based compensation programs
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
Dividends (per share—$0.80)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
132,709 |
|
|
$ |
663.5 |
|
|
$ |
1,077.9 |
|
|
$ |
119.5 |
|
|
$ |
(103.7 |
) |
|
$ |
— |
|
|
$ |
(414.3 |
) |
|
$ |
1,342.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Significant Accounting Policies
Basis of Presentation. The Consolidated Financial
Statements reflect the accounts of Goodrich Corporation and its
majority-owned subsidiaries (“the Company” or
“Goodrich”). Effective October 1, 2003, the
Company adopted Financial Accounting Standards Board
Interpretation No. 46, “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51”
and deconsolidated BFGoodrich Capital. Investments in 20 to
50 percent-owned affiliates are accounted for using the
equity method. Equity in earnings (losses) from these businesses
is included in Other Income (Expense) — Net.
Intercompany accounts and transactions are eliminated.
As discussed in Note W, “Discontinued Operations”
the Company’s Avionics, Passenger Restraints Systems
(PRS) and Engineered Industrial Products businesses have
been accounted for as discontinued operations. Unless otherwise
noted, disclosures herein pertain to the Company’s
continuing operations.
Cash Equivalents. Cash equivalents consist of
highly liquid investments with a maturity of three months or
less at the time of purchase.
Allowance for Doubtful Accounts. The Company
evaluates the collectibility of trade receivables based on a
combination of factors. The Company regularly analyzes
significant customer accounts and, when the Company becomes
aware of a specific customer’s inability to meet its
financial obligations to the Company, such as in the case of
bankruptcy filings or deterioration in the customer’s
operating results or financial position, the Company records a
specific reserve for bad debt to reduce the related receivable
to the amount the Company reasonably believes is collectible.
The Company also records reserves for bad debt for all other
customers based on a variety of factors including the length of
time the receivables are past due, the financial health of the
customer, macroeconomic considerations and historical
experience. If circumstances related to specific customers
change, the Company’s estimates of the recoverability of
receivables could be further adjusted.
Sale of Accounts Receivable. The Company follows
the provisions of Statement of Financial Accounting Standards
No. 140 (SFAS 140), “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities,” and as such, trade accounts receivable sold
are removed from the Balance Sheet at the time of sale.
Inventories. Inventories, other than inventoried
costs relating to long-term contracts, are stated at the lower
of cost or market. Certain domestic inventories are valued by
the last-in, first-out (LIFO) cost method. Inventories not
valued by the LIFO method are valued principally by the
average cost method.
Inventoried costs on long-term contracts include certain
preproduction costs, consisting primarily of tooling and design
costs and production costs, including applicable overhead. The
costs attributed to units delivered under long-term commercial
contracts are based on the estimated average cost of all units
expected to be produced and are determined under the learning
curve concept, which anticipates a predictable decrease in unit
costs as tasks and production techniques become more efficient
through repetition. This usually results in an increase in
inventory (referred to as “excess-over average”)
during the early years of a contract.
If in-process inventory plus estimated costs to complete a
specific contract exceeds the anticipated remaining sales value
of such contract, such excess is charged to current earnings,
thus reducing inventory to estimated realizable value.
In accordance with industry practice, costs in inventory include
amounts relating to contracts with long production cycles, some
of which are not expected to be realized within one year.
66
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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; and machinery and equipment, 5 to
15 years. In the case of capitalized lease assets,
amortization is recognized over the lease term if shorter.
Repairs and maintenance costs are expensed as incurred.
Goodwill. Goodwill represents the excess of the
purchase price over the fair value of the net assets of acquired
businesses. Under the provisions of SFAS 142, intangible
assets deemed to have indefinite lives and goodwill are not
subject to amortization, but are reviewed for impairment
annually, or more frequently, if indicators of potential
impairment exist.
Identifiable Intangible Assets. Identifiable
intangible assets are recorded at cost or, when acquired as part
of a business combination, at estimated fair value. These assets
include patents and other technology agreements, sourcing
contacts, trademarks, licenses, customer relationships and
non-compete agreements. For acquisitions completed subsequent to
June 30, 2001, identifiable intangible assets are amortized
over their useful life using undiscounted cash flows, a method
that reflects the pattern in which the economic benefits of the
intangible assets are consumed.
Impairments of identifiable intangible assets are recognized
when events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may
not be recoverable and the Company’s estimate of
undiscounted cash flows over the assets’ remaining useful
lives is less than the carrying value of the assets. The
determination of undiscounted cash flow is based on the
Company’s segments’ plans. The revenue growth is based
upon aircraft build projections from aircraft manufacturers and
widely available external publications. The profit margin
assumption is based upon the current cost structure and
anticipated cost reductions. Measurement of the amount of
impairment may be based upon an 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 generally at the time of shipment.
Revenues earned from providing maintenance service are
recognized when the service is complete.
For revenues recognized under the contract method of accounting,
the Company recognizes sales and profits on each contract in
accordance with the percentage-of-completion method of
accounting, generally using the units-of-delivery method. The
Company follows the guidelines of American Institute of
Certified Public Accounting Statement of Position
81-1 (SOP 81-1), “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts”
(the contract method of accounting). 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.
Effective January 1, 2004, the Company changed its method
of accounting for revisions in estimates of total revenue, total
costs or extent of progress on a contract from the reallocation
method to the cumulative catch-up method. A significant portion
of the Company’s sales in the aerostructures business in
the Engines Systems Segment
67
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Included in Accounts Receivable at December 31, 2004 and
2003, were receivable amounts under contracts in progress of
$66.9 million and $86.9 million, respectively, that
represent amounts earned but not billable at the respective
Balance Sheet dates. These amounts become billable according to
their contract terms, which usually consider the passage of
time, achievement of milestones or completion of the project.
Income Taxes. Income taxes are accounted for in
accordance with FAS No. 109, “Accounting for
Income Taxes,” which requires that deferred taxes and
liabilities are based on differences between financial reporting
and tax bases of assets and liabilities and are measured using
enacted tax laws and rates. A valuation allowance is provided on
deferred tax assets if it is determined that it is more likely
than not that the asset will not be realized. The Company
records interest on potential tax contingencies as a component
of its tax expense and records the interest net of any
applicable related tax benefit.
Entry Fees. Certain businesses in the
Company’s Engine Systems Segment make cash payments to an
original equipment manufacturer (OEM) under long-term
contractual arrangements related to new engine programs. The
payments are referred to as entry fees and entitle the Company
to a controlled access supply contract and a percentage of total
program revenue generated by the OEM. Entry fees are capitalized
in Other Assets when contractually due and are amortized on a
straight-line basis to Cost of Sales over the program’s
estimated useful life following aircraft certification, which
typically approximates 20 years. As of December 31,
2004 and 2003, the net carrying amount of entry fees was
$111.3 million and $91.4 million, respectively. The
carrying amount of entry fees is evaluated for impairment at
least annually or when other indicators of impairment exist.
Impairment is assessed based on the expected cash flow from the
program over the remaining program life as compared to the
recorded amount of entry fees. If impairment exists, a charge
would be recorded for the amount by which the carrying amount of
the entry fee exceeds its fair value. No such impairment charges
were recorded in the years ended December 31, 2004, 2003 or
2002.
Sales Incentives. The Company offers sales
incentives to certain airline customers in connection with sales
contracts. These incentives may consist of up-front cash
payments, merchandise credits and/or free products. The cost of
these incentives is recognized in the period incurred unless
recovery of these costs is specifically guaranteed by the
customer in the contract. If the contract contains such a
guarantee, then the cost of the sales incentive is capitalized
as Other Assets and amortized as Cost of Sales over the contract
period. At December 31, 2004 and 2003, the carrying amount
of sales incentives was $68.7 million and
$75.2 million, respectively.
Flight Certification Costs. Certain businesses in
the Company make cash payments under long-term contractual
arrangements for flight certification payments related to new
aircraft programs. Flight certification costs are costs paid to,
or ultimately paid to, outside aviation authorities, including
the Federal Aviation Administration (FAA) in the United States,
to certify aircraft systems/components for the aircraft’s
airworthiness. The flight certification allows the aircraft to
be flown and thus sold in the country certifying the aircraft.
Flight certification costs are capitalized in Other Assets when
contractually due and are amortized over the projected number of
aircraft to be manufactured to Cost of Sales. As of
December 31, 2004 and 2003, the net carrying amount of
flight certification costs was $28.3 million and
$26.9 million, respectively. The carrying amount of flight
certification costs is evaluated for impairment at least
annually or when other indicators of impairment exist.
Impairment is assessed based on
68
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the expected number of aircraft to be manufactured over the
remaining program life as compared to the carrying amount of
flight certification costs. If impairment exists, a charge would
be recorded for the amount by which the carrying amount of the
flight certification costs exceeds the estimated number of
aircraft to be manufactured over the remaining program life. An
impairment charge of $2.1 million was recorded in the year
ended December 31, 2003. No such impairment charges were
recorded in the years ended December 31, 2004 or 2002.
Shipping and Handling. Shipping and handling costs
are recorded in Cost of Sales.
Financial Instruments. The Company’s
financial instruments include cash and cash equivalents,
accounts and notes receivable, foreign currency forward
contracts, 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 quoted market prices or on rates available to the
Company for debt with similar terms and maturities.
The Company accounts for derivative financial instruments in
accordance with Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (SFAS 133). Under SFAS 133,
derivatives are carried on the Balance Sheet at fair value. The
fair value of derivatives is based on quoted market prices.
Stock-Based Compensation. Effective
January 1, 2004, the Company adopted the provisions of
Financial Accounting Standards No. 123 “Accounting for
Stock-Based Compensation” (SFAS 123) and Financial
Accounting Standards No. 148 (SFAS 148)
“Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123.” As
such, the Company expenses stock options and the shares issued
under its employee stock purchase plan. The expense is
recognized over the period the stock options and shares are
earned and vest. The Company adopted SFAS 123 and
SFAS 148 on a modified prospective basis and therefore
periods prior to January 1, 2004 have not been restated.
The adoption of SFAS 123 also impacted the Company’s
accounting for certain other stock-based compensation
arrangements that were accounted for using mark-to-market
accounting prior to adoption of FAS 123, that are now being
expensed using the grant date fair value. Prior to
January 1, 2004, the Company accounted for stock-based
employee compensation in accordance with the provisions of APB
Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations.
Earnings Per Share. Earnings per share is computed
in accordance with Statement of Financial Accounting Standards
No. 128, “Earnings per Share.”
Research and Development Expense. The Company
performs research and development under company-funded programs
for commercial products, and under contracts with others.
Research and development under contracts with others is
performed on both military and commercial products. Total
research and development expenditures from continuing operations
in 2004, 2003 and 2002 were $348.3 million,
$289.6 million and $190.7 million, respectively. Of
these amounts, $99.5 million, $87.9 million and
$47.3 million, respectively, were funded by customers.
Research and development expense in 2002 includes the
$12.5 million of in-process research and development
expense written-off related to the Aeronautical Systems
acquisition.
Reclassifications. Certain amounts in prior year
financial statements have been reclassified to conform to the
current year presentation.
Use of Estimates. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
69
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Environmental Liabilities. The Company establishes
a liability for environmental liabilities when it is probable
that a liability has been incurred and the Company has the
ability to reasonably estimate the liability. The Company
capitalizes environmental costs only if the costs are
recoverable and (1) the costs extend the life, increase the
capacity, or improve the safety or efficiency of property owned
by the Company as compared with the condition of that property
when originally constructed or acquired; (2) the costs
mitigate or prevent environmental contamination that has yet to
occur and that otherwise may result from future operations or
activities and the costs improve the property compared with its
condition when constructed or acquired; or (3) the costs
are incurred in preparing for sale property that is currently
held for sale. All other environmental costs are expensed.
Toxic Tort. The Company establishes a liability
for toxic tort liabilities, including asbestos, when it is
probable that a liability has been incurred and the Company has
the ability to reasonably estimate the liability. The Company
typically records a liability for tort when legal actions are in
advanced stages (proximity to trial or settlement). It is the
Company’s policy to expense legal costs for tort issues
when they are incurred. When a liability is recorded, a claim
for recovery by insurance is investigated and a receivable, if
any, is valued and recorded at the same time.
New Accounting Standards. The Financial Accounting
Standards Board (FASB) recently issued Statement of
Accounting Standards No. 151 (SFAS 151),
“Inventory Costs”, an amendment of ARB No. 43,
Chapter 4. Adoption of SFAS 151 is required by the
year beginning January 1, 2006. The Company plans to adopt
SFAS 151 no later than that date. The amendments made by
SFAS 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. While SFAS 151 enhances ARB 43 and
clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage),
the statement also removes inconsistencies between ARB 43
and IAS 2 and amends ARB 43 to clarify that abnormal
amounts of costs should be recognized as period costs. Under
some circumstances, according to ARB 43, the above listed
costs may be so abnormal as to require treatment as current
period charges. SFAS 151 requires these items be recognized
as current-period charges regardless of whether they meet the
criterion of “so abnormal” and requires allocation of
fixed production overheads to the costs of conversion. This
statement will apply to the Company’s businesses if they
become subject to “abnormal costs” as defined in
SFAS 151. The Company is currently evaluating the impact,
if any, that adoption of SFAS 151 will have on the
Company’s Consolidated Statement of Income and Consolidated
Balance Sheet.
On December 16, 2004, the FASB issued Financial
Accounting Standards No. 123 (revised 2004)
(SFAS 123(R)), “Share-Based Payment”, which is a
revision of SFAS 123, “Accounting for Stock-Based
Compensation”. SFAS 123(R) supersedes APB Opinion
No. 25, “Accounting for Stock Issued to
Employees”, and amends SFAS 95, “Statement of
Cash Flows”. Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. The Company
adopted the SFAS 123 fair-value-based method of accounting
for share-based payments effective January 1, 2004 using
the “modified prospective method” described in
SFAS 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure”. Currently, the
Company uses the Black-Scholes formula to estimate the value of
stock options granted to employees. SFAS 123(R) requires
the Company to use the valuation technique that best fits the
circumstances. The Company is currently evaluating other
techniques. SFAS 123(R) requires that the benefits of tax
deductions in excess of recognized compensation cost be reported
as a financing cash flow, rather than as an operating cash flow;
thus, reducing net operating cash flows and increasing net
financing cash flows in the periods after the effective date.
While the
70
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company cannot estimate what those amounts will be in the future
because they depend on, among other things, when employees
exercise stock options, the amounts of operating cash flows
recognized in prior periods for such excess tax deductions of
stock based compensation were $3.5 million,
$0.4 million and $0.5 million in 2004, 2003
and 2002, respectively. SFAS 123(R) also requires that
the Company estimate the number of awards that are expected to
vest and to revise the estimate as the actual forfeitures differ
from the estimate. The effect of these items and other changes
in SFAS 123(R) as well as the potential impact on the
Company’s future Consolidated Statement of Income and
Consolidated Balance Sheet are currently being evaluated. The
Company will adopt SFAS 123(R) no later than July 1,
2005.
On December 21, 2004, the FASB issued FASB Staff
Position 109-1 (FSP 109-1) and
109-2 (FSP 109-2). FSP 109-1 provides guidance on
the application of SFAS 109, “Accounting for Income
Taxes”, with regard to the tax deduction on qualified
production activities provision within H.R. 4520 The
American Jobs Creation Act of 2004 (Act) that was enacted
on October 22, 2004. FSP 109-2 provides guidance on a
special one-time dividends received deduction on the
repatriation of certain foreign earnings to qualifying
U.S. taxpayers. The Act contains numerous provisions
related to corporate and international taxation including repeal
of the Extraterritorial Income (ETI) regime, creation
of a new Domestic Production
Activities (DPA) deduction and a temporary dividends
received deduction related to repatriation of foreign earnings.
The Act contains various effective dates and transition periods
related to its provisions. Under the guidance provided in
FSP 109-1 the new DPA deduction will be treated as a
“special deduction” as described in SFAS 109. As
such, the special deduction has no effect on the Company’s
deferred tax assets and liabilities existing at the enactment
date. Rather, the impact of this deduction will be reported in
the period in which the deduction is claimed on the
Company’s income tax return. The repeal of ETI and its
replacement with a DPA deduction were not in effect
in 2004 and therefore, did not have an affect on the
Company’s income tax provision for the year ended
December 31, 2004. The Company does not expect the net
effect of the phase-out of the ETI deduction and phase-in
of the new DPA deduction to result in a material impact on
its effective income tax rate in 2005. In FSP 109-2
the Financial Accounting Standards Board acknowledged that, due
to the proximity of the Act’s enactment date to many
companies’ year-ends and the fact that numerous provisions
within the Act are complex and pending further regulatory
guidance, many companies may not be in a position to assess the
impacts of the Act on their plans for repatriation or
reinvestment of foreign earnings. Therefore, the FSP
provided companies with a practical exception to the permanent
reinvestment standards of SFAS 109 and APB No. 23
by providing additional time to determine the amount of
earnings, if any, that they intend to repatriate under the
Act’s provisions. The Company is not yet in a position to
decide whether, and to what extent, it might repatriate foreign
earnings to the U.S. Therefore, under the guidance provided
in FSP 109-2, no deferred tax liability has been recorded
in connection with the repatriation provisions of the Act.
The Company is currently analyzing the impact of the temporary
dividends received deduction provisions contained in
the Act.
Note B. Acquisitions and Dispositions
Acquisitions
Aeronautical Systems
On October 1, 2002, the Company completed its acquisition
of TRW Inc.’s Aeronautical Systems businesses
(Aeronautical Systems). The purchase price for these businesses,
after giving effect to post-closing purchase price adjustments,
was approximately $1.4 billion. The acquisition included
the purchase of substantially all of the Aeronautical Systems
businesses assets and the assumption of certain liabilities as
defined in the Master Agreement of Purchase and Sale
71
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Purchase Agreement). The acquisition has been accounted for
using the purchase method in accordance with Statement of
Financial Accounting Standards No. 141 “Business
Combinations.” The acquired businesses design and
manufacture commercial and military aerospace systems and
equipment, including engine controls, flight controls, power
systems, cargo systems, hoists and winches and actuation
systems. At the time of acquisition, these businesses employed
approximately 6,200 employees in 22 facilities in nine
countries, including manufacturing and service operations in the
United Kingdom, France, Germany, Canada, the United States
and several Asia/ Pacific countries. The acquired businesses
expanded the number of products, systems and services that the
Company delivers to aircraft manufacturers and operators.
Subsequent to the acquisition, the Company submitted claims
to Northrop Grumman Space & Mission Systems Corp.
(Northrop Grumman), which acquired TRW, for reimbursement
of certain items related to liabilities and obligations that
were retained by TRW under the Purchase Agreement, but
which were administered by the Company after the closing.
The Company entered into a partial settlement with Northrop
Grumman on December 27, 2004. Under the terms of the
partial settlement agreement, Northrop Grumman has paid
the Company approximately $99 million to settle
certain claims that have been made by the Company against
Northrop Grumman relating to customer warranty and other
contract claims for products designed, manufactured or sold
by TRW prior to the acquisition, as well as certain other
miscellaneous claims. Under the terms of the settlement,
the Company has assumed certain liabilities associated with
future customer product warranty and other contract claims for
these products. The Company recorded a charge of
$23.4 million to Cost of Sales representing the amount by
which the Company’s estimated undiscounted future
liabilities plus its receivable from Northrop Grumman for these
matters exceeded the settlement amount.
The $591.2 million in goodwill associated with the
Aeronautical Systems acquisition is fully deductible for
U.S. tax purposes. The fair value of in-process research
and development (IPR&D) was determined by an independent
valuation using the discounted cash flow method, a variation of
the income approach. The IPR&D technologies included in
the valuation related to variable frequency and
electrohydrostatic actuation products. The $12.5 million
assigned to research and development assets was written off at
the date of acquisition in accordance with FASB
Interpretation No. 4, “Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by
the Purchase Method”. These write-offs were included in
Selling and Administrative costs in 2002.
The following unaudited pro forma financial information presents
the combined results of operations of Goodrich and Aeronautical
Systems as if the acquisition had occurred at the beginning of
2002, the year of acquisition. The unaudited pro forma financial
information is not intended to represent or be indicative of the
consolidated results of operations or financial condition that
would have been reported had the acquisition been completed as
of the dates presented, and should not be taken as
representative of the future consolidated results of operations
or financial condition.
| |
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, 2002 | |
| |
|
| |
| |
|
(Dollars in millions, | |
| |
|
except per share | |
| |
|
amounts) | |
|
Sales
|
|
$ |
4,564.0 |
|
|
Income from continuing operations
|
|
$ |
177.3 |
|
|
Net income
|
|
$ |
131.0 |
|
|
Diluted per share:
|
|
|
|
|
| |
Income from continuing operations
|
|
$ |
1.69 |
|
| |
Net income
|
|
$ |
1.26 |
|
72
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Dispositions
During 2002, the Company sold a business and a minority interest
in a business, resulting in a pre-tax gain of $2.5 million,
which has been reported in Other Income (Expense)-Net.
For dispositions accounted for as discontinued operations, refer
to Note W “Discontinued Operations” to the
Consolidated Financial Statements.
Note C. Restructuring and Consolidation Costs and Other
Asset Impairments
The Company incurred restructuring and consolidation costs and
activity related to two types of restructuring and consolidation
programs: (1) the Company’s employee termination and
facility closure programs other than the opening balance sheet
restructuring and consolidation programs related to Aeronautical
Systems; and (2) the Aeronautical Systems business
restructuring programs. Information regarding each type of
restructuring program is disclosed separately as follows:
|
|
|
Restructuring and Consolidation Costs excluding
Aeronautical Systems Business Restructuring Program |
The Company expects to expense approximately $4.2 million,
mostly in the first half of 2005, related to restructuring
activities initiated prior to December 31, 2004. Of the
$4.2 million expected charge, $2.8 million,
$0.4 million and $1 million relate to the Airframe
Systems Segment, Engine Systems Segment and Electronic Systems
Segment, respectively. Charges relate primarily to the closure
of a facility in the U.K., completion of a facility closure in
the U.S. and employee termination expenses.
The Company incurred $13.7 million ($8.7 million after
tax), $51.1 million ($34.2 million after tax), and
$37.4 million ($25 million after tax) of restructuring
and consolidation costs in 2004, 2003 and 2002, respectively.
These charges, presented as the line item Restructuring and
Consolidation Costs on the Consolidated Statement of Income,
related to the following segments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Airframe Systems
|
|
$ |
2.0 |
|
|
$ |
11.2 |
|
|
$ |
3.6 |
|
|
Engine Systems
|
|
|
4.0 |
|
|
|
30.9 |
|
|
|
26.1 |
|
|
Electronic Systems
|
|
|
7.7 |
|
|
|
9.0 |
|
|
|
7.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total segment charges
|
|
|
13.7 |
|
|
|
51.1 |
|
|
|
37.1 |
|
|
Corporate
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
13.7 |
|
|
$ |
51.1 |
|
|
$ |
37.4 |
|
| |
|
|
|
|
|
|
|
|
|
73
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Restructuring and consolidation reserves at December 31,
2004, as well as activity during the year ended
December 31, 2004, consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Asset | |
|
|
| |
|
Balance | |
|
|
|
|
|
Impairments | |
|
Balance | |
| |
|
December 31, | |
|
|
|
Cash | |
|
and Other | |
|
December 31, | |
| |
|
2003 | |
|
Provision | |
|
Payments | |
|
Changes | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Personnel-related costs
|
|
$ |
3.5 |
|
|
$ |
9.9 |
|
|
$ |
(10.2 |
) |
|
$ |
(2.4 |
) |
|
$ |
0.8 |
|
|
Facility closure and other costs
|
|
|
6.0 |
|
|
|
3.8 |
|
|
|
(3.8 |
) |
|
|
(3.4 |
) |
|
|
2.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
9.5 |
|
|
$ |
13.7 |
|
|
$ |
(14.0 |
) |
|
$ |
(5.8 |
) |
|
$ |
3.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2004, approximately 215
employees were terminated as part of the personnel-related
restructuring activities described below. As of
December 31, 2004, the Company expects to spend
approximately $0.8 million of the reserve balance, mostly
during the first half of 2005, in connection with the
termination of an additional 55 employees as well as the
completion of severance payments to approximately 70 employees
who were terminated in 2004.
The $2.6 million balance at December 31, 2004 for
facility closure and other costs related primarily to
environmental expenses and remaining costs associated with the
closure of several facilities. Approximately $2 million of
the reserve balance is expected to be spent within the next
18 months and the remaining balance is expected to be spent
before the end of 2008.
The balance, by segment, of the restructuring reserves at
December 31, 2004 as well as the activity during the year
ended December 31, 2004 consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Asset | |
|
|
| |
|
Balance | |
|
|
|
Employee | |
|
Facility | |
|
Impairment | |
|
Balance | |
| |
|
December 31, | |
|
|
|
Termination | |
|
Closure | |
|
and Other | |
|
December 31, | |
| |
|
2003 | |
|
Provision | |
|
Benefits | |
|
Costs | |
|
Costs | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Airframe Systems
|
|
$ |
5.7 |
|
|
$ |
2.0 |
|
|
$ |
(1.3 |
) |
|
$ |
— |
|
|
$ |
(5.6 |
) |
|
$ |
0.8 |
|
|
Engine Systems
|
|
|
1.8 |
|
|
|
4.0 |
|
|
|
(2.6 |
) |
|
|
(2.0 |
) |
|
|
(0.2 |
) |
|
|
1.0 |
|
|
Electronic Systems
|
|
|
2.0 |
|
|
|
7.7 |
|
|
|
(6.3 |
) |
|
|
(1.8 |
) |
|
|
— |
|
|
|
1.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
9.5 |
|
|
$ |
13.7 |
|
|
$ |
(10.2 |
) |
|
$ |
(3.8 |
) |
|
$ |
(5.8 |
) |
|
$ |
3.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Consolidation Costs —
Provision |
The following is a description of key components of the
$13.7 million provision for restructuring and consolidation
costs incurred during the year ended December 31, 2004:
Airframe Systems: The segment recorded $2.0 million
in restructuring and consolidation costs, all of which related
to personnel costs for employee severance and benefits for
employees who were terminated or have been notified of
termination in 2004.
Engine Systems: The segment recorded $4.0 million in
restructuring and consolidation costs, consisting of
$2 million in personnel-related costs, which include
severance and benefits, $1.6 million in facility closure
costs related to the closure of a domestic manufacturing and a
domestic service facility, and $0.4 million in asset
impairments. The $1.6 million in facility closure costs
includes $0.8 million for the relocation of machinery and
equipment related to a
74
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
service operation, $0.4 million related to the transfer of
a manufacturing business to a different facility and
$0.4 million for plant shutdown costs.
Electronic Systems: The segment recorded
$7.7 million in restructuring and consolidation costs,
consisting of $5.9 million in personnel-related costs and
$1.8 million in facility closure and relocation costs. The
$5.9 million in personnel-related charges are for employee
severance, benefits and outplacement services. The
$1.8 million in facility closure costs were primarily for
relocation of production equipment and data conversion that were
expensed as incurred.
|
|
|
Restructuring and Consolidation Costs — Cash
Payments |
Restructuring activity during the year ended December 31,
2004 was $19.8 million of which $14 million was in
cash payments. The remaining $5.8 million of restructuring
activity related to asset impairments and other changes
discussed below. Cash payments were as follows:
Airframe Systems: Cash payments of $1.3 million were
related to employee termination benefits and severance costs.
Engine Systems: Of the cash payments of
$4.6 million, $2.6 million were related to employee
terminations and $2 million were related to facility
closure costs.
Electronic Systems: Of the cash payments of
$8.1 million, $6.3 million were related to employee
termination benefits and $1.8 million were related to
facility closure costs.
|
|
|
Restructuring and Consolidation Costs — Non-Cash
Activity |
The $5.8 million in non-cash asset impairment and other
changes for 2004 included the following:
Airframe Systems: During the year ended December 31,
2004, the $5.6 million in non-cash asset impairments and
other changes consisted of a $4.4 million reclassification
of certain long-term liabilities related to a facility closure
to other liabilities and $1.2 million related to non-cash
pension curtailment charges.
Engine Systems: The $0.2 million in non-cash asset
impairment charges during the year ended December 31, 2004
related primarily to the impairment of production assets at a
foreign facility.
Restructuring and consolidation reserves at December 31,
2003, as well as activity during the year ended
December 31, 2003, consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Asset | |
|
|
| |
|
Balance | |
|
|
|
|
|
Impairments | |
|
Balance | |
| |
|
December 31, | |
|
|
|
Cash | |
|
and Other | |
|
December 31, | |
| |
|
2002 | |
|
Provision | |
|
Payments | |
|
Changes | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Personnel-related costs
|
|
$ |
13.3 |
|
|
$ |
17.7 |
|
|
$ |
(26.0 |
) |
|
$ |
(1.5 |
) |
|
$ |
3.5 |
|
|
Facility closure and other costs
|
|
|
5.7 |
|
|
|
33.4 |
|
|
|
(10.0 |
) |
|
|
(23.1 |
) |
|
|
6.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
19.0 |
|
|
$ |
51.1 |
|
|
$ |
(36.0 |
) |
|
$ |
(24.6 |
) |
|
$ |
9.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The balance, by segment, of the restructuring reserves at
December 31, 2003 as well as the activity during the year
ended December 31, 2003 consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Asset | |
|
|
| |
|
Balance | |
|
|
|
Employee | |
|
Facility | |
|
Impairment | |
|
Balance | |
| |
|
December 31, | |
|
|
|
Termination | |
|
Closure | |
|
and Other | |
|
December 31, | |
| |
|
2002 | |
|
Provision | |
|
Benefits | |
|
Costs | |
|
Costs | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Airframe Systems
|
|
$ |
4.7 |
|
|
$ |
11.2 |
|
|
$ |
(7.0 |
) |
|
$ |
(0.5 |
) |
|
$ |
(2.7 |
) |
|
$ |
5.7 |
|
|
Engine Systems
|
|
|
9.9 |
|
|
|
30.9 |
|
|
|
(11.6 |
) |
|
|
(3.0 |
) |
|
|
(24.4 |
) |
|
|
1.8 |
|
|
Electronic Systems
|
|
|
4.4 |
|
|
|
9.0 |
|
|
|
(8.9 |
) |
|
|
(2.4 |
) |
|
|
(0.1 |
) |
|
|
2.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
19.0 |
|
|
$ |
51.1 |
|
|
$ |
(27.5 |
) |
|
$ |
(5.9 |
) |
|
$ |
(27.2 |
) |
|
$ |
9.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Consolidation Costs —
Provision |
The following is a description of key components of the
$51.1 million provision for restructuring and consolidation
costs in 2003:
Airframe Systems: The segment recorded $11.2 million
in restructuring, facility closure and other costs, consisting
of $6.9 million in personnel-related costs and
$4.3 million in consolidation costs. Of the
$11.2 million provision, $4.4 million of the charge
represents non-cash charges consisting of $2.7 million in
asset impairment charges and $1.7 million in pension
curtailment charges. The personnel-related charges were for
employee severance and employee termination benefits.
Engine Systems: The segment recorded $30.9 million
in restructuring and consolidation costs, consisting of
$3.4 million in personnel-related costs and
$27.5 million in facility closure and other costs. The
personnel-related costs included charges for employee severance
and benefits and a $1.6 million pension curtailment charge.
The facility closure and other costs relate to the closure of
manufacturing locations for three businesses and include
$22.5 million in asset impairment charges.
Electronic Systems: The segment recorded $9 million
in restructuring and consolidation costs, consisting of
$7.4 million in personnel-related costs and
$1.6 million in facility closure and other costs. The
personnel-related costs include charges for employee severance
and benefits and a $1.2 million pension curtailment charge.
The facility closure and other costs relate to the closure of a
domestic manufacturing location and include $0.2 million in
asset impairment charges.
|
|
|
Restructuring and Consolidation Costs — Cash
Payments |
Restructuring activity during the year ended December 31,
2003 was $60.6 million of which $36 million
represented cash payments. The remaining $24.6 million in
activity included non-cash asset impairments and costs related
to facility closures discussed below. Cash payments were as
follows:
Airframe Systems: Cash payments of $6 million
consisted of $5.5 million in employee termination benefits
and severance costs and $0.5 million related to the closure
of a facility.
Engine Systems: Cash payments of $19.4 million
consisted of $11.6 million in employee termination benefits
and severance costs and $7.8 million related to facility
closure costs.
Electronic Systems: Cash payments of $10.6 million
related to $8.9 million in employee termination benefits
and severance costs and $1.7 million related to facility
closure costs.
76
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Restructuring and Consolidation Costs — Non-Cash
Activity |
The $24.6 million in non-cash facility closure costs, asset
impairments and other changes for 2003 included the following:
Airframe Systems: Of the $4.2 million in non-cash
activity, $1.5 million related to employee retirement
benefits and $2.7 million in other costs related to the
environmental remediation of a surplus building incurred in
connection with a facility closure.
Engine Systems: The $19.6 million in costs related
to the impairment of an asset and machinery and equipment
write-downs as part of the relocation of a business to another
facility.
Electronic Systems: The $0.8 million in asset
impairment and other costs consisted of $0.7 million in
costs related to facility closures and $0.1 million related
to accelerated depreciation incurred in connection with a
facility closure.
Other Asset Impairments
During 2003, the Company’s Engine Systems segment recorded
a non-cash $79.9 million pre-tax asset impairment charge to
Cost of Sales for the Company’s Super 27 re-engining
program, reflecting a revaluation of the assets in light of
current market conditions. The Company repossessed four 727
aircraft from a receivable obligor who was in financial
difficulty and also received a revised cash flow forecast
indicating a significant decline in the financial strength of
another receivable obligor. In addition, the deterioration in
the commercial airline market resulting from the conflict in
Iraq and SARS made available more aircraft which compete with or
are newer than the Super 27 aircraft. Because of these events,
the Company concluded that its ability to recover the recorded
values of the Company’s inventory and notes receivable was
significantly affected. The $79.9 million pre-tax tax
charge included: (a) $33.4 million write-down of the
Company’s inventory to equal the estimated market value
based on an independent appraisal and the Company’s
assessment of then current market conditions;
(b) $0.4 million write-off of related trade
receivables; and (c) $46.1 million write-off of notes
receivable from a receivable obligor.
Also during the first quarter 2003, the Company recorded a
non-cash $11.7 million pre-tax asset impairment charge
related to its equity investment in Cordiem LLC and a non-cash
$6.2 million pre-tax impairment charge on rotable landing
gear assets.
Restructuring and consolidation reserves at December 31,
2002, as well as activity during the year ended
December 31, 2002, consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Asset | |
|
|
| |
|
Balance | |
|
|
|
|
|
Impairments | |
|
Balance | |
| |
|
December 31, | |
|
|
|
Cash | |
|
and Other | |
|
December 31, | |
| |
|
2001 | |
|
Provision | |
|
Payments | |
|
Changes | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Personnel-related costs
|
|
$ |
25.9 |
|
|
$ |
28.7 |
|
|
$ |
(41.3 |
) |
|
$ |
— |
|
|
$ |
13.3 |
|
|
Facility closure and other costs
|
|
|
18.5 |
|
|
|
8.7 |
|
|
|
(10.2 |
) |
|
|
(11.3 |
) |
|
|
5.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
44.4 |
|
|
$ |
37.4 |
|
|
$ |
(51.5 |
) |
|
$ |
(11.3 |
) |
|
$ |
19.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The balance, by segment, of the restructuring reserves at
December 31, 2002 as well as the activity during the year
ended December 31, 2002 consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Asset | |
|
|
| |
|
Balance | |
|
|
|
Employee | |
|
Facility | |
|
Impairment | |
|
Balance | |
| |
|
December 31, | |
|
|
|
Termination | |
|
Closure | |
|
and Other | |
|
December 31, | |
| |
|
2001 | |
|
Provision | |
|
Benefits | |
|
Costs | |
|
Costs | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Airframe Systems
|
|
$ |
11.9 |
|
|
$ |
3.6 |
|
|
$ |
(5.6 |
) |
|
$ |
(4.4 |
) |
|
$ |
(0.8 |
) |
|
$ |
4.7 |
|
|
Engine Systems
|
|
|
15.8 |
|
|
|
26.1 |
|
|
|
(22.6 |
) |
|
|
(6.6 |
) |
|
|
(2.8 |
) |
|
|
9.9 |
|
|
Electronic Systems
|
|
|
15.3 |
|
|
|
7.4 |
|
|
|
(11.4 |
) |
|
|
(4.1 |
) |
|
|
(2.8 |
) |
|
|
4.4 |
|
|
Corporate
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
(1.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
44.4 |
|
|
$ |
37.4 |
|
|
$ |
(41.3 |
) |
|
$ |
(15.1 |
) |
|
$ |
(6.4 |
) |
|
$ |
19.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Consolidation Costs —
Provision |
The following is a description of key components of the
$37.4 million provision for restructuring and consolidation
costs in 2002:
Airframe Systems: The segment recorded $3.6 million
in restructuring costs, consisting of $3 million in
personnel-related costs and $0.6 million in non-cash asset
impairment charges. The personnel-related charges were for
employee severance and for voluntary termination benefits. The
consolidation costs related to machinery and equipment
relocation costs incurred in connection with a facility
consolidation or closure, which were expensed as incurred, and
asset impairment charges.
Engine Systems: The segment recorded $26.1 million
in restructuring costs, consisting of $19.9 million in
personnel-related costs, $2.6 million in non-cash asset
impairment charges and $3.6 million in facility closure
costs. The personnel-related charges were for employee severance
and benefits. The $2.6 million in asset impairment charges
relate to the accelerated depreciation of impaired assets. The
facility closure costs include $2.9 million in equipment
relocations and $0.7 million in environmental clean up
costs related to facility closure costs.
Electronic Systems: The segment recorded
$7.4 million in restructuring costs, consisting of
$5.5 million in personnel-related costs, $1.6 million
in facility closure costs and $0.3 million in non-cash
asset impairment charges. The personnel-related charges relate
to employee severance and benefits. The $1.6 million in
facility closure costs relate to equipment relocation costs and
the $0.3 million in asset impairment charges relate to the
accelerated depreciation of impaired assets.
Corporate: Restructuring and consolidation costs of
$0.3 million represented employee outplacement services and
relocation costs.
|
|
|
Restructuring and Consolidation Costs — Cash
Payments |
Of the $62.8 million in activity during the year ended
December 31, 2002, $51.5 million represented cash
payments. The remaining $11.3 million in activity consisted
of non-cash asset write-offs and impairment costs related to
facility closures described below. Cash payments were as follows:
Airframe Systems: Cash payments of $10.0 million
consisted of $5.6 million in employee terminations and
benefit payments and $4.4 million related to facility
closures.
Engine Systems: Cash payments of $24.9 million
consisted of $22.6 million in employee terminations and
benefit payments and $2.3 million related to facility
closures.
78
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Electronic Systems: Cash payments of $14.9 million
consisted of $11.4 million in employee terminations and
benefit payments and $3.5 million related to facility
closures.
Corporate: Cash payments of $1.7 million were
related to employee terminations and benefit payments.
|
|
|
Restructuring and Consolidation Costs — Non-Cash
Activity |
The $11.3 million in non-cash facility closure costs, asset
impairments and other changes for 2002 included the following:
Airframe Systems: The non-cash activity consisted of
$0.8 million in asset impairment and other costs related to
asset write-offs.
Engine Systems: The $7.1 million in non-cash
activity consisted of $4.5 million related to the closure
of an aerostructures facility, $2.2 million in accelerated
depreciation and pension curtailment as part of a domestic
facility closure and $0.4 million in asset impairments.
Electronic Systems: The $3.4 million in non-cash
activity consisted of $2.8 million in asset impairments and
accelerated depreciation and $0.6 million related to two
facility closures.
Opening Balance Sheet — Aeronautical Systems
Business Restructuring Programs
Restructuring reserves were recorded in the opening balance
sheet related to the acquisition of the Aeronautical Systems.
These consolidation and restructuring reserves relate primarily
to personnel-related costs for employee termination benefits
that the Company recorded as part of its integration effort in
accordance with EITF Issue No. 95-3, “Recognition of
Liabilities in Connection with a Purchase Business
Combination.”
During the year ended December 31, 2004, no additional
reserves were recorded related to the Aeronautical Systems
acquisition. Restructuring and consolidation reserves at
December 31, 2004 as well as the activity during the year
consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Asset | |
|
|
| |
|
Balance | |
|
|
|
Impairments | |
|
Balance | |
| |
|
December 31, | |
|
Cash | |
|
and Other | |
|
December 31, | |
| |
|
2003 | |
|
Payments | |
|
Changes | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Personnel-related costs
|
|
$ |
12.9 |
|
|
$ |
(8.8 |
) |
|
$ |
(0.2 |
) |
|
$ |
3.9 |
|
|
Facility closure and other costs
|
|
|
5.2 |
|
|
|
(4.8 |
) |
|
|
0.4 |
|
|
|
0.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
18.1 |
|
|
$ |
(13.6 |
) |
|
$ |
0.2 |
|
|
$ |
4.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The balance, by segment, of the opening balance sheet
restructuring reserves for December 31, 2004 as well as the
activity during the year consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance | |
|
Employee | |
|
Employee | |
|
|
|
|
|
|
|
Balance | |
| |
|
December 31, | |
|
Termination | |
|
Relocation | |
|
Facility | |
|
|
|
Other | |
|
December 31, | |
| |
|
2003 | |
|
Benefits | |
|
Costs | |
|
Closure | |
|
Transfers | |
|
Changes | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Airframe Systems
|
|
$ |
— |
|
|
$ |
(0.2 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.3 |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
Engine Systems
|
|
|
8.9 |
|
|
|
(4.1 |
) |
|
|
(1.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.5 |
|
|
Electronic Systems
|
|
|
6.6 |
|
|
|
(3.2 |
) |
|
|
(0.7 |
) |
|
|
(1.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
0.9 |
|
|
Corporate
|
|
|
2.6 |
|
|
|
— |
|
|
|
— |
|
|
|
(2.3 |
) |
|
|
(0.3 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
18.1 |
|
|
$ |
(7.5 |
) |
|
$ |
(2.0 |
) |
|
$ |
(4.1 |
) |
|
$ |
— |
|
|
$ |
0.2 |
|
|
$ |
4.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the year ended December 31, 2004, approximately 220
employees were terminated as part of the restructuring
activities detailed in the above table. As of December 31,
2004, the Company expects to further reduce employment levels by
approximately 40 employees as part of those restructuring
activities. The remaining reserves will be used for future lease
payments related to a redundant facility, costs to return a
redundant facility to its original condition and a special early
retirement program at an overseas operation.
|
|
|
Restructuring and Consolidation Costs — Cash
Payments and Non-Cash Activity |
During the year ended December 31, 2004, the net
$13.4 million in activity included $13.6 million in
cash payments. The remaining $(0.2) million was related to
non-cash activity and foreign currency translation adjustments.
Cash payments were as follows:
Airframe Systems: Cash payments of $0.2 million were
for employee termination benefits at an operating facility in
France. The offsetting $0.5 million increase in the reserve
balance resulted from the transfer of a $0.3 million
reserve balance from a corporate entity to the operating
facility in France and $0.2 million in foreign currency
translation and other adjustments. The balance of
$0.3 million at December 31, 2004 will be used for
employee termination benefits in 2005.
Engine Systems: Cash payments of $5.4 million
consisted of $4.1 million for employee terminations and
benefits and $1.3 million for employee relocations within
the customer services business.
Electronic Systems: Cash payments of $5.7 million
included $3.2 million for employee terminations and
benefits, related primarily to the closure of a domestic
manufacturing and service facility. Cash payments of
$1.8 million for facility closures and $0.7 for employee
relocations were incurred as part of this facility closure.
Corporate: Cash payments of $2.3 million represented
facility closure costs at the Company’s U.K. headquarters.
A transfer of $0.3 million in restructuring reserves for
employee terminations was made to an operating facility in
France for employee termination benefits to be paid in 2005.
The restructuring and consolidation reserves at
December 31, 2003 as well as the activity during the year
consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Opening | |
|
|
|
|
| |
|
Balance | |
|
Balance | |
|
|
|
Balance | |
| |
|
December 31, | |
|
Sheet | |
|
Cash | |
|
December 31, | |
| |
|
2002 | |
|
Adjustments | |
|
Payments | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Personnel-related costs
|
|
$ |
4.3 |
|
|
$ |
18.3 |
|
|
$ |
(9.7 |
) |
|
$ |
12.9 |
|
|
Facility closure and other costs
|
|
|
— |
|
|
|
6.1 |
|
|
|
(0.9 |
) |
|
|
5.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
4.3 |
|
|
$ |
24.4 |
|
|
$ |
(10.6 |
) |
|
$ |
18.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
80
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The balance, by segment, of the opening balance sheet
restructuring reserves at December 31, 2002 and
December 31, 2003 as well as the activity during the year
ended December 31, 2003 consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Opening | |
|
|
|
|
|
|
| |
|
Balance | |
|
Balance | |
|
Employee | |
|
|
|
Balance | |
| |
|
December 31, | |
|
Sheet | |
|
Termination | |
|
Facility | |
|
December 31, | |
| |
|
2002 | |
|
Adjustments | |
|
Benefits | |
|
Closure | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Airframe Systems
|
|
$ |
— |
|
|
$ |
0.2 |
|
|
$ |
(0.2 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
Engine Systems
|
|
|
1.6 |
|
|
|
11.6 |
|
|
|
(4.3 |
) |
|
|
— |
|
|
|
8.9 |
|
|
Electronic Systems
|
|
|
— |
|
|
|
10.0 |
|
|
|
(2.5 |
) |
|
|
(0.9 |
) |
|
|
6.6 |
|
|
Corporate
|
|
|
2.7 |
|
|
|
2.6 |
|
|
|
(2.7 |
) |
|
|
— |
|
|
|
2.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
4.3 |
|
|
$ |
24.4 |
|
|
$ |
(9.7 |
) |
|
$ |
(0.9 |
) |
|
$ |
18.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2003, $24.4 million
in reserves were recorded from the opening balance sheet as part
of the acquisition of the Aeronautical Systems business.
|
|
|
Restructuring and Consolidation Costs — Cash
Payments |
During the year ended December 31, 2003, cash payments of
$10.6 million were related to employee termination costs
and the closure of a domestic manufacturing facility as part of
the restructuring of the Aeronautical Systems businesses. Cash
payments were as follows:
Airframe Systems: Cash payments of $0.2 million
represented employee termination and benefit costs at a facility
in the U.K. and a facility in France.
Engine Systems: Cash payments of $4.3 million
represented employee termination and benefit costs at operations
in the U.S., Canada, Germany and in the U.K.
Electronic Systems: Cash payments of $3.4 million
consisted of $2.5 million for employee termination and
benefit costs at two domestic operations and $0.9 million
related to the closure of a domestic manufacturing and service
facility.
Corporate: Cash payments of $2.7 million represented
employee termination and benefit costs incurred at the
Company’s U.K. Corporate headquarters.
During the year ended December 31, 2002, accruals were
recorded to the opening balance sheet related to the
Aeronautical Systems acquisition. The restructuring and
consolidation reserves at December 31, 2002 consisted of:
| |
|
|
|
|
|
|
|
|
| |
|
Opening | |
|
|
| |
|
Balance | |
|
Balance | |
| |
|
Sheet | |
|
December 31, | |
| |
|
Adjustments | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Personnel-related costs
|
|
$ |
4.3 |
|
|
$ |
4.3 |
|
|
Facility closure and other costs
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
$ |
4.3 |
|
|
$ |
4.3 |
|
| |
|
|
|
|
|
|
81
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The balance, by segment, of the opening balance sheet
restructuring reserves and the balance at December 31, 2002
as well as the activity during the year ended December 31,
2002 consisted of:
| |
|
|
|
|
|
|
|
|
| |
|
Opening | |
|
|
| |
|
Balance | |
|
Balance | |
| |
|
Sheet | |
|
December 31, | |
| |
|
Adjustments | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Engine Systems
|
|
$ |
1.6 |
|
|
$ |
1.6 |
|
|
Corporate
|
|
|
2.7 |
|
|
|
2.7 |
|
| |
|
|
|
|
|
|
| |
|
$ |
4.3 |
|
|
$ |
4.3 |
|
| |
|
|
|
|
|
|
Note D. Other Income (Expense) — Net
Other Income (Expense) — Net consisted of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Retiree health care expenses related to divested businesses
|
|
$ |
(18.9 |
) |
|
$ |
(20.7 |
) |
|
$ |
(18.1 |
) |
|
Losses from the early retirement of long-term debt
|
|
|
(15.1 |
) |
|
|
— |
|
|
|
— |
|
|
Expenses related to divested businesses
|
|
|
(11.7 |
) |
|
|
(7.1 |
) |
|
|
(3.7 |
) |
|
Minority interest and equity in affiliated companies
|
|
|
(9.1 |
) |
|
|
(4.7 |
) |
|
|
(7.4 |
) |
|
Impairment of a note receivable
|
|
|
(7.0 |
) |
|
|
— |
|
|
|
— |
|
|
Gain on the sale of an intangible asset
|
|
|
— |
|
|
|
— |
|
|
|
11.8 |
|
|
Gain on the sale of the Noveon PIK Notes
|
|
|
— |
|
|
|
6.9 |
|
|
|
— |
|
|
Write-off of investment in Cordiem LLC
|
|
|
— |
|
|
|
(11.7 |
) |
|
|
— |
|
|
Other — net
|
|
|
1.1 |
|
|
|
11.0 |
|
|
|
(0.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other income (expense) — net
|
|
$ |
(60.7 |
) |
|
$ |
(26.3 |
) |
|
$ |
(18.1 |
) |
| |
|
|
|
|
|
|
|
|
|
Note E. Cumulative Effect of Change in Accounting
In conjunction with the Audit Review Committee of the
Company’s Board of Directors, management reassessed the
application of contract accounting at its aerostructures
business. Specifically, consideration was given to whether or
not the accounting methods used by the Company were appropriate
given the predominance of an alternative method used by peer
companies and changes in the nature of contractual relationships
with the Company’s customers. Effective January 1,
2004, the Company changed two aspects of the application of
contract accounting to preferable methods at its aerostructures
business that is included in the Engines Systems segment.
The Company changed its method of accounting for revisions in
estimates of total revenue, total costs or extent of progress of
a contract from the reallocation method to the cumulative
catch-up method. Although both methods are used in practice to
account for changes in estimates, American Institute of
Certified Public Accountants Statement of Position 81-1,
“Accounting for Performance of Construction-Type and
Certain Production-Type Contracts” (SOP 81-1),
indicates that the cumulative catch-up method is preferable. A
contemporaneous review of accounting policy disclosures of peer
companies in the same or similar industry indicated that the
cumulative catch-up method was the predominant method of
accounting for changes in estimates. The Company believes that
consistency in financial reporting with peer
82
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
companies, as well as with less significant business units
within the consolidated group which already use the cumulative
catch-up method, will enhance the comparability of financial
data. The change was effected by adjusting contract profit rates
from the balance to complete gross profit rate to the estimated
gross profit rate at completion of the contract.
The Company also changed its accounting for pre-certification
costs. Under the previous policy, pre-certification costs
exceeding the level anticipated in the Company’s original
investment model used to negotiate contractual terms were
expensed when determined regardless of overall contract
profitability. This policy was appropriate in the past because
aircraft and engine manufacturers typically reimbursed component
suppliers directly for pre-certification costs up to an
agreed-upon level. Recently, however, aircraft and engine
manufacturers have begun to require component suppliers to
participate more in the initial design and certification costs
for products and are no longer specifically reimbursing
non-recurring costs. Instead, the component supplier now
typically absorbs these non-recurring costs and recovers those
costs over the contract term through the price and margin of its
product sales. Under the new policy, which was adopted
January 1, 2004, pre-certification costs, including those
in excess of original estimated levels, are included in total
contract costs used to evaluate overall contract profitability.
The Company believes the new method better reflects the
substance of its current contractual arrangements and is more
consistent with SOP 81-1, which indicates that all direct
costs and indirect costs allocable to contracts should be
included in the total contract cost.
The impact of the changes in accounting methods was to record a
before tax gain of $23.3 million ($16.2 million after
tax) as a Cumulative Effect of Change in Accounting representing
the cumulative profit that would have been recognized prior to
January 1, 2004 had these methods of accounting been in
effect in prior periods.
The following table indicates pro forma financial results as if
these methods of contract accounting had been in effect in 2003
and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
December 31, 2003 | |
|
December 31, 2002 | |
| |
|
| |
|
| |
| |
|
As Reported | |
|
Pro forma | |
|
As Reported | |
|
Pro forma | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions, except per share amounts) | |
|
Income from continuing operations
|
|
$ |
38.5 |
|
|
$ |
24.9 |
|
|
$ |
164.2 |
|
|
$ |
151.2 |
|
|
Net income
|
|
$ |
100.4 |
|
|
$ |
86.8 |
|
|
$ |
117.9 |
|
|
$ |
104.9 |
|
|
Earnings per share — net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.85 |
|
|
$ |
0.74 |
|
|
$ |
1.14 |
|
|
$ |
1.01 |
|
| |
Diluted
|
|
$ |
0.85 |
|
|
$ |
0.73 |
|
|
$ |
1.14 |
|
|
$ |
0.99 |
|
The Cumulative Effect of Change in Accounting, as presented
after taxes, for the year ended December 31, 2003 of a loss
of $0.5 million represents the adoption of Statement of
Financial Accounting Standards No. 143 “Accounting for
Asset Retirement Obligations.” The Company established a
liability for contractual obligations for the retirement of
long-lived assets.
The Cumulative Effect of Change in Accounting, as presented
after taxes, for the year ended December 31, 2002 of a loss
of $36.1 million represents the adoption of Statement of
Financial Accounting Standards No. 142 “Goodwill and
Other Intangible Assets.” Based upon the impairment test of
goodwill and indefinite lived intangible assets, it was
determined that goodwill relating to the Aviation Technical
Services (ATS) reporting unit, reported in the Airframe
Systems segment, had been impaired. As a result, the Company
recognized an impairment charge, representing total goodwill of
the ATS reporting unit. The goodwill write-off was
non-deductible for tax purposes.
83
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note F. Earnings Per Share
The computation of basic and diluted earnings per share for
income from continuing operations is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share | |
| |
|
amounts) | |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Numerator for basic and diluted earnings per share —
income from continuing operations
|
|
$ |
156.0 |
|
|
$ |
38.5 |
|
|
$ |
164.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Denominator for basic earnings per share —
weighted-average shares
|
|
|
118.6 |
|
|
|
117.4 |
|
|
|
103.7 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Stock options, employee stock purchase plan, restricted shares
and restricted share units
|
|
|
1.6 |
|
|
|
0.5 |
|
|
|
0.4 |
|
| |
Board of Directors deferred compensation shares
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
| |
Performance share plans
|
|
|
— |
|
|
|
0.3 |
|
|
|
0.2 |
|
| |
Convertible preferred securities
|
|
|
— |
|
|
|
— |
|
|
|
1.2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Dilutive potential common shares
|
|
|
1.7 |
|
|
|
0.8 |
|
|
|
1.8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Denominator for diluted earnings per share — adjusted
Weighted-average shares and assumed conversion
|
|
|
120.3 |
|
|
|
118.2 |
|
|
|
105.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Per share income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
1.32 |
|
|
$ |
0.33 |
|
|
$ |
1.58 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Diluted
|
|
$ |
1.30 |
|
|
$ |
0.33 |
|
|
$ |
1.56 |
|
| |
|
|
|
|
|
|
|
|
|
At December 31, 2004, 2003 and 2002 the Company had
approximately 10 million, 10.6 million and
9.5 million stock options outstanding, respectively (see
Note V “Stock-Based Compensation”). Stock options
are included in the diluted earnings per share calculation using
the treasury stock method, unless the effect of including the
stock options would be anti-dilutive. Of the 10 million,
10.6 million and 9.5 million stock options
outstanding, 4.5 million, 4.7 million and
9.5 million were anti-dilutive stock options excluded from
the diluted earnings per share calculation at December 31,
2004, 2003 and 2002, respectively.
Note G. Sale of Receivables
At December 31, 2004, the Company had in place a variable
rate trade receivables securitization program pursuant to which
the Company could sell receivables up to a maximum of
$140 million. Accounts receivable sold under this program
were $72.3 million and $97.3 million at
December 31, 2004 and December 31, 2003, respectively.
Continued availability of the securitization program is
conditioned upon compliance with covenants, related primarily to
operation of the securitization, set forth in the related
agreements. The Company is currently in compliance with all such
covenants. The securitization does not contain any credit rating
downgrade triggers.
84
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note H. Payment-in-Kind Notes Receivable
The proceeds from the sale of the Company’s Performance
Materials segment included $172 million in debt securities
(Noveon PIK Notes) 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 had an
original term of 10.5 years and bore interest at a rate of
13 percent.
The Company initially recorded a discount of $21.2 million
to reduce the notes to fair value based on a 14 percent
discount rate. In July 2002, the Company entered into an
agreement with Noveon to amend certain provisions of the Noveon
PIK Notes held by the Company to give Noveon the option to
prepay the securities at a discount greater than the original
discount if they prepaid on or before February 28, 2003. As
a result of prepayments made in June and October 2002, Noveon
prepaid a total of $62.5 million of the outstanding
principal of the Noveon PIK Notes for $49.8 million in
cash. Because the prepayments did not exceed the original
discount recorded at the inception of the note, no gain or loss
was recognized at the time of prepayment.
In March 2003, the Company sold the remaining
$155.8 million in aggregate principal amount of the Noveon
PIK Notes, which resulted in a gain of $4.6 million after
tax.
Note I. Inventories
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
FIFO or average cost (which approximates current costs):
|
|
|
|
|
|
|
|
|
| |
Finished products
|
|
$ |
185.9 |
|
|
$ |
185.2 |
|
| |
In process
|
|
|
775.7 |
|
|
|
644.6 |
|
| |
Raw materials and supplies
|
|
|
292.0 |
|
|
|
241.6 |
|
| |
|
|
|
|
|
|
|
Total
|
|
|
1,253.6 |
|
|
|
1,071.4 |
|
|
Less:
|
|
|
|
|
|
|
|
|
| |
Reserve to reduce certain inventories to LIFO basis
|
|
|
(40.3 |
) |
|
|
(40.6 |
) |
| |
Progress payments and advances
|
|
|
(46.5 |
) |
|
|
(66.6 |
) |
| |
|
|
|
|
|
|
|
Total
|
|
$ |
1,166.8 |
|
|
$ |
964.2 |
|
| |
|
|
|
|
|
|
Approximately 11 percent of inventory was valued by the
LIFO method in 2004 and 2003.
85
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In-process inventories as of December 31, 2004, which
include deferred costs, are summarized by platform as follows
(dollars in millions, except quantities which are number of
aircraft or number of engines if the engine is used on multiple
aircraft platforms):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Process Inventory | |
| |
|
|
|
|
|
|
|
| |
| |
|
Aircraft Order Status(1) | |
|
|
|
Company Order Status | |
|
|
|
Pre- | |
|
|
| |
|
| |
|
|
|
| |
|
|
|
Production | |
|
|
| |
|
Delivered | |
|
|
|
|
|
|
|
Firm | |
|
|
|
|
|
and Excess- | |
|
|
| |
|
to | |
|
Unfilled | |
|
Unfilled | |
|
Contract | |
|
|
|
Unfilled | |
|
Year | |
|
|
|
Over- | |
|
|
| |
|
Airlines | |
|
Orders | |
|
Options | |
|
Quantity(2) | |
|
Delivered | |
|
Orders(3) | |
|
Complete(4) | |
|
Production | |
|
Average | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Aircraft Platforms — number of aircraft |
| |
717-200
|
|
|
138 |
|
|
|
18 |
|
|
|
— |
|
|
|
156 |
|
|
|
141 |
|
|
|
15 |
|
|
|
2006 |
|
|
$ |
1.9 |
|
|
$ |
28.2 |
|
|
$ |
30.1 |
|
| |
Embraer ERJ 170/ 190 Tailcone
|
|
|
57 |
|
|
|
282 |
|
|
|
382 |
|
|
|
800 |
|
|
|
88 |
|
|
|
10 |
|
|
|
2013 |
|
|
|
2.7 |
|
|
|
12.4 |
|
|
|
15.1 |
|
| |
A 380
|
|
|
— |
|
|
|
139 |
|
|
|
62 |
|
|
|
400 |
|
|
|
— |
|
|
|
19 |
|
|
|
2019 |
|
|
|
3.8 |
|
|
|
17.5 |
|
|
|
21.3 |
|
| |
7Q7
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
2010 |
|
|
|
0.3 |
|
|
|
21.3 |
|
|
|
21.6 |
|
| |
787
|
|
|
— |
|
|
|
56 |
|
|
|
— |
|
|
|
1,335 |
|
|
|
— |
|
|
|
— |
|
|
|
2021 |
|
|
|
— |
|
|
|
8.7 |
|
|
|
8.7 |
|
|
Engine Type — number of engines (engines are used on
multiple aircraft platforms) |
| |
CF34-10
|
|
|
6 |
|
|
|
340 |
|
|
|
450 |
|
|
|
1,188 |
|
|
|
4 |
|
|
|
16 |
|
|
|
2018 |
|
|
|
9.9 |
|
|
|
56.5 |
|
|
|
66.4 |
|
| |
Trent 900
|
|
|
— |
|
|
|
196 |
|
|
|
132 |
|
|
|
900 |
|
|
|
— |
|
|
|
— |
|
|
|
2021 |
|
|
|
16.8 |
|
|
|
13.4 |
|
|
|
30.2 |
|
| |
V2500
|
|
|
1,930 |
|
|
|
922 |
|
|
|
598 |
|
|
|
2,718 |
|
|
|
1,978 |
|
|
|
78 |
|
|
|
2007 |
|
|
|
26.1 |
|
|
|
14.3 |
|
|
|
40.4 |
|
| |
| |
Other in-process inventory related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.4 |
|
|
|
11.4 |
|
|
|
32.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total in-process inventory related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82.9 |
|
|
|
183.7 |
|
|
|
266.6 |
|
| |
| |
A380 production and pre- production inventory not related to
long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.6 |
|
|
|
32.0 |
|
|
|
65.6 |
|
| |
Other in-process inventory not related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
419.4 |
|
|
|
24.1 |
|
|
|
443.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total in-process inventory not related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
453.0 |
|
|
|
56.1 |
|
|
|
509.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
535.9 |
|
|
$ |
239.8 |
|
|
$ |
775.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In-process inventories as of December 31, 2003, which
include deferred costs, are summarized by contract as follows
(dollars in millions, except quantities which are number of
aircraft or number of engines if the engine is used on multiple
aircraft platforms):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Process Inventory | |
| |
|
|
|
|
|
|
|
| |
| |
|
Aircraft Order Status(1) | |
|
|
|
Company Order Status | |
|
|
|
Pre- | |
|
|
| |
|
| |
|
|
|
| |
|
|
|
Production | |
|
|
| |
|
Delivered | |
|
|
|
|
|
|
|
Firm | |
|
|
|
|
|
and Excess- | |
|
|
| |
|
to | |
|
Unfilled | |
|
Unfilled | |
|
Contract | |
|
|
|
Unfilled | |
|
Year | |
|
Pro- | |
|
Over- | |
|
|
| |
|
Airlines | |
|
Orders | |
|
Options | |
|
Quantity(2) | |
|
Delivered | |
|
Orders(3) | |
|
Complete(4) | |
|
duction | |
|
Average | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Aircraft Platforms — number of aircraft |
|
717-200
|
|
|
126 |
|
|
|
36 |
|
|
|
38 |
|
|
|
200 |
|
|
|
129 |
|
|
|
45 |
|
|
|
2007 |
|
|
$ |
5.3 |
|
|
$ |
35.6 |
|
|
$ |
40.9 |
|
|
Embraer ERJ 170/ 190 Tailcone
|
|
|
9 |
|
|
|
245 |
|
|
|
310 |
|
|
|
600 |
|
|
|
4 |
|
|
|
— |
|
|
|
2014 |
|
|
|
1.4 |
|
|
|
18.3 |
|
|
|
19.7 |
|
|
A 380
|
|
|
— |
|
|
|
129 |
|
|
|
62 |
|
|
|
400 |
|
|
|
— |
|
|
|
— |
|
|
|
2018 |
|
|
|
— |
|
|
|
10.8 |
|
|
|
10.8 |
|
|
PW4000
|
|
|
336 |
|
|
|
13 |
|
|
|
— |
|
|
|
356 |
|
|
|
348 |
|
|
|
7 |
|
|
|
2005 |
|
|
|
1.4 |
|
|
|
— |
|
|
|
1.4 |
|
|
7Q7
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
2006 |
|
|
|
0.3 |
|
|
|
21.3 |
|
|
|
21.6 |
|
|
Engine Type — number of engines (engines are used on
multiple aircraft platforms) |
|
CF34-10
|
|
|
— |
|
|
|
250 |
|
|
|
304 |
|
|
|
1,500 |
|
|
|
— |
|
|
|
— |
|
|
|
2020 |
|
|
|
— |
|
|
|
49.6 |
|
|
|
49.6 |
|
|
Trent 900
|
|
|
— |
|
|
|
172 |
|
|
|
132 |
|
|
|
1,068 |
|
|
|
— |
|
|
|
— |
|
|
|
2019 |
|
|
|
2.3 |
|
|
|
8.4 |
|
|
|
10.7 |
|
|
V2500
|
|
|
1,712 |
|
|
|
706 |
|
|
|
652 |
|
|
|
2,716 |
|
|
|
1,762 |
|
|
|
92 |
|
|
|
2008 |
|
|
|
18.2 |
|
|
|
5.3 |
|
|
|
23.5 |
|
| |
|
Other in process-inventory related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49.0 |
|
|
|
11.1 |
|
|
|
60.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in-process inventory related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77.9 |
|
|
|
160.4 |
|
|
|
238.3 |
|
| |
|
A380 pre-production inventory not related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
31.2 |
|
|
|
31.2 |
|
|
Other in-process inventory not related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352.0 |
|
|
|
23.1 |
|
|
|
375.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in-process inventory not related to long-term contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352.0 |
|
|
|
54.3 |
|
|
|
406.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
429.9 |
|
|
$ |
214.7 |
|
|
$ |
644.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Represents the aircraft order status as reported by independent
sources for options of the related number of aircraft or the
number of engines as noted. |
| |
| (2) |
Represents the number of aircraft or the number of engines as
noted used to obtain average unit cost. |
| |
| (3) |
Represents the number of aircraft or the number of engines as
noted for which the Company has firm unfilled orders. |
| |
| (4) |
The year presented represents the year in which the final
production units included in the contract quantity are expected
to be delivered. The contract may continue in effect beyond this
date. |
On January 13, 2005, the Company received formal
notification from Boeing that they will no longer produce the
B717-200 after customer commitments are fulfilled. As a result,
the Company has adjusted the remaining estimated units to be
produced to the current firm orders
87
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of remaining aircraft to be delivered by Boeing. This change in
estimate, along with estimates for remaining cost to
manufacture, cost for program termination and estimated
contractual recovery of preproduction costs from Boeing,
resulted in a write down of inventory of $6.8 million. This
inventory write down is included in Cost of Sales in the year
ended December 31, 2004.
The Company revised the accounting treatment of a technology
development grant from a non-U.S. government entity in
2004. See Note K “Financing Arrangements”. As a
result, approximately $16 million of funds received under
the grant were reclassified from Long-Term Debt and applied and
reported as a reduction of the value of Inventory on the
Company’s December 31, 2004 Consolidated Balance Sheet.
The impact of the cumulative effect of change in contract
accounting resulted in an increase to the Inventory balance of
$23.3 million as of January 1, 2004. See Note A
“Significant Accounting Policies” and Note E
“Cumulative Effect of Change in Accounting.”
Note J. Goodwill and Identifiable Intangible Assets
Under SFAS 142, intangible assets deemed to have indefinite
lives and goodwill are subject to annual impairment testing
using the guidance and criteria described in the standard. This
testing requires comparison of carrying values to fair values,
and when appropriate, the carrying value of impaired assets is
reduced to fair value.
Subsequent to the adoption of SFAS 142 on January 1,
2002, the Company performed the first of the required impairment
tests of goodwill and indefinite lived intangible assets. Based
on those results, the Company determined that it was likely that
goodwill relating to the Aviation Technical Services
“reporting unit” (ATS) had been impaired. ATS is
included in the Airframe Systems segment. During the third
quarter 2002, the Company completed its measurement of the
goodwill impairment and recognized an impairment of
$36.1 million (representing total goodwill of this
reporting unit) which was non-deductible for income tax purposes
and was reported as a Cumulative Effect of Change in Accounting
retroactively to January 1, 2002.
The changes in the carrying amount of goodwill by segment are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Business | |
|
|
|
|
|
|
|
|
|
|
| |
|
Balance | |
|
Combinations | |
|
Foreign | |
|
|
|
Balance | |
|
Foreign | |
|
Balance | |
| |
|
December 31, | |
|
Completed or | |
|
Currency | |
|
|
|
December 31, | |
|
Currency | |
|
December 31, | |
| |
|
2002 | |
|
Finalized | |
|
Translation | |
|
Disposition | |
|
2003 | |
|
Translation | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Airframe Systems
|
|
$ |
181.4 |
|
|
$ |
28.6 |
|
|
$ |
34.8 |
|
|
$ |
— |
|
|
$ |
244.8 |
|
|
$ |
15.4 |
|
|
$ |
260.2 |
|
|
Engine Systems
|
|
|
410.3 |
|
|
|
33.2 |
|
|
|
44.6 |
|
|
|
— |
|
|
|
488.1 |
|
|
|
21.3 |
|
|
|
509.4 |
|
|
Electronic Systems
|
|
|
602.5 |
|
|
|
37.8 |
|
|
|
(67.4 |
) |
|
|
(46.3 |
) |
|
|
526.6 |
|
|
|
(29.9 |
) |
|
|
496.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,194.2 |
|
|
$ |
99.6 |
|
|
$ |
12.0 |
|
|
$ |
(46.3 |
) |
|
$ |
1,259.5 |
|
|
$ |
6.8 |
|
|
$ |
1,266.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The heading “Business Combinations Completed or
Finalized” included the final purchase price allocation
resulting from the Company’s acquisition of the
Aeronautical Systems acquisition and $1 million related to
the adjustment of the purchase price of an acquisition due to an
earn-out agreement.
88
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Identifiable intangible assets as of December 31, 2004 are
comprised of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross | |
|
Amortization | |
|
|
| |
|
Amount | |
|
Accumulated | |
|
Net | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Patents, trademarks and licenses
|
|
$ |
181.4 |
|
|
$ |
(59.6 |
) |
|
$ |
121.8 |
|
| |
Customer relationships
|
|
|
309.7 |
|
|
|
(22.6 |
) |
|
|
287.1 |
|
| |
Technology
|
|
|
97.4 |
|
|
|
(2.3 |
) |
|
|
95.1 |
|
| |
Non-compete agreements
|
|
|
6.3 |
|
|
|
(4.9 |
) |
|
|
1.4 |
|
| |
Sourcing contracts
|
|
|
6.7 |
|
|
|
(5.1 |
) |
|
|
1.6 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
601.5 |
|
|
$ |
(94.5 |
) |
|
$ |
507.0 |
|
| |
|
|
|
|
|
|
|
|
|
Identifiable intangible assets as of December 31, 2003 are
comprised of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross | |
|
Amortization | |
|
|
| |
|
Amount | |
|
Accumulated | |
|
Net | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Patents, trademarks and licenses
|
|
$ |
162.1 |
|
|
$ |
(48.6 |
) |
|
$ |
113.5 |
|
| |
Customer relationships
|
|
|
288.1 |
|
|
|
(13.5 |
) |
|
|
274.6 |
|
| |
Technology
|
|
|
92.2 |
|
|
|
(1.1 |
) |
|
|
91.1 |
|
| |
Non-compete agreements
|
|
|
6.6 |
|
|
|
(4.8 |
) |
|
|
1.8 |
|
| |
Sourcing contracts
|
|
|
6.2 |
|
|
|
(2.5 |
) |
|
|
3.7 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
555.2 |
|
|
$ |
(70.5 |
) |
|
$ |
484.7 |
|
| |
|
|
|
|
|
|
|
|
|
Amortization expense related to these intangible assets for the
years ended December 31, 2004 and December 31, 2003
was $22.9 million and $19.9 million, respectively.
Amortization expense for these intangible assets is estimated to
be approximately $24 million per year from 2005 to 2009.
There were no indefinite lived identifiable intangible assets as
of December 31, 2004.
During 2004, the Company acquired certain aftermarket rights
classified as patents, trademarks and licenses for approximately
$15 million.
Note K. Financing Arrangements
At December 31, 2004, the Company had a committed
syndicated revolving credit facility expiring in August 2006
that permits borrowing, including letters of credit, up to a
maximum of $500 million. Borrowings under this facility
bear interest, at the Company’s option, at rates tied to
the agent bank’s prime rate or for U.S. Dollar or
Great Britain Pounds Sterling borrowings, the London interbank
offered rate, and for Euro Dollar borrowings, the
EURIBO rate. The Company is required to pay a facility fee
of 20 basis points per annum on the total $500 million
committed line. Further, if the amount outstanding on the line
of credit exceeds 33 percent of the total commitment, a
usage fee of 25 basis points per annum on the loan
outstanding is payable by the Company. These fees and the
interest rate margin on outstanding revolver borrowings are
subject to change as the Company’s credit ratings change.
At December 31, 2004, there were no borrowings and
$26.2 million in letters of credit outstanding under this
facility. At December 31, 2003, there were no borrowings
and $17.1 million in letters of credit outstanding under
this facility.
89
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The level of unused borrowing capacity under the Company’s
committed syndicated revolving credit facility varies from time
to time depending in part upon its consolidated net worth and
leverage ratio levels. In addition, the Company’s ability
to borrow under this facility is conditioned upon compliance
with financial and other covenants set forth in the related
agreement, including the consolidated net worth requirement and
maximum leverage ratio. The Company is currently in compliance
with all such covenants. As of December 31, 2004, the
Company had borrowing capacity under this facility of
$473.8 million, after reductions for letters of credit
outstanding.
The Company also maintains $25 million of uncommitted
domestic money market facilities and $21 million of
uncommitted and committed foreign working capital facilities
with various banks to meet short-term borrowing requirements. At
December 31, 2004 and December 31, 2003, there were no
borrowings under these facilities. These credit facilities are
provided by a small number of commercial banks that also provide
the Company with committed credit through the syndicated
revolving credit facility and with various cash management,
trust and other services.
The Company’s credit facilities do not contain any credit
rating downgrade triggers that would accelerate the maturity of
its indebtedness. However, a ratings downgrade would result in
an increase in the interest rate and fees payable under its
committed syndicated revolving credit facility. Such a downgrade
also could adversely affect the Company’s ability to renew
existing or obtain access to new credit facilities in the future
and could increase the cost of such new facilities.
Weighted-average interest rates on short-term borrowings were
2.6 percent, 2.2 percent and 2.8 percent during
2004, 2003 and 2002, respectively.
The Company has an outstanding contingent liability for
guaranteed debt and lease payments of $2.8 million,
exclusive of the TIDES, and for letters of credit and bank
guarantees of $62.9 million. It was not practical to obtain
independent estimates of the fair values for the contingent
liability for guaranteed debt and lease payments and for letters
of credit. In the opinion of management, non-performance by the
other parties to the contingent liabilities will not have a
material effect on the Company’s results of operations or
financial condition.
The Company’s committed syndicated revolving credit
facility contains 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 covenants, $531.6 million of
income retained in the business and additional capital was free
from such limitations at December 31, 2004.
90
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At December 31, long-term debt and capital lease
obligations, excluding the current maturities of long-term debt
and capital lease obligations, consisted of:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
MTN notes payable
|
|
$ |
673.2 |
|
|
$ |
699.3 |
|
|
6.45% senior notes, maturing in 2007
|
|
|
181.5 |
|
|
|
301.0 |
|
|
7.5% senior notes, maturing in 2008
|
|
|
296.6 |
|
|
|
297.8 |
|
|
6.6% senior notes, maturing in 2009
|
|
|
217.5 |
|
|
|
221.6 |
|
|
7.625% senior notes, maturing in 2012
|
|
|
498.6 |
|
|
|
500.0 |
|
|
IDRBs, maturing in 2023, 6.0%
|
|
|
— |
|
|
|
60.0 |
|
|
Other debt, maturing through 2020 (interest rates from 0.009% to
5.2%)
|
|
|
22.8 |
|
|
|
47.5 |
|
| |
|
|
|
|
|
|
| |
|
|
1,890.2 |
|
|
|
2,127.2 |
|
|
Capital lease obligation (Note L)
|
|
|
9.2 |
|
|
|
9.4 |
|
| |
|
|
|
|
|
|
|
Total
|
|
$ |
1,899.4 |
|
|
$ |
2,136.6 |
|
| |
|
|
|
|
|
|
Aggregate maturities of long-term debt, exclusive of capital
lease obligations, during the five years subsequent to
December 31, 2004, are as follows (in millions):
2005 — $0.9 (classified as current maturities of
long-term debt); 2006 — $0.9; 2007 — $182.4;
2008 — $372.8; and 2009 — $218.4.
The Company maintains a shelf registration statement that allows
the Company to issue up to $1.4 billion of debt securities,
series preferred stock, common stock, stock purchase contracts
and stock purchase units.
During the year ended December 31, 2004, the Company
revised the accounting treatment of a technology development
grant from a non-U.S. government entity. Prior to the
revision, the Company reported the grant as Long-Term Debt.
After an analysis of the matter during the third quarter 2004,
the Company revised the accounting for the government grant to
reflect the funds received as a reduction of qualifying expenses
or reduction of the cost of a qualifying asset. As a result of
the Company’s revision of the accounting treatment, at
December 31, 2004, long-term debt was reduced by
$24.5 million, inventory was reduced by $16 million,
property, plant and equipment was reduced by $2.1 million
and foreign exchange was impacted by $0.2 million. The
Company realized a before tax gain of $5.8 million related
to qualifying costs, which had been expensed in years prior to
January 1, 2004 and a before tax gain of $0.6 million
related to the year ended December 31, 2004.
In December 2002, the Company issued $300 million of
6.45 percent senior notes due in 2007 and $500 million
of 7.625 percent senior notes due in 2012. The net proceeds
from the issuance of the notes were used to repay a portion of
the amount outstanding under a $1.5 billion, 364-day credit
facility that was entered into in connection with the
Aeronautical Systems acquisition.
In July 2003, the Company entered into a $100 million
fixed-to-floating interest rate swap on its 6.45 percent
senior notes due in 2007. In October 2003, the Company entered
into a $50 million fixed-to-floating interest rate swap on
its 7.5 percent senior notes due in 2008. In December 2003,
the Company entered into a $50 million fixed-to-floating
interest rate swap on
91
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
its 7.5 percent senior notes due in 2008. The purpose of
entering into the swaps was to increase the Company’s
exposure to variable interest rates. The settlement and maturity
dates on the swaps are the same as those on the notes. In
accordance with Statement of Financial Accounting Standards
No. 133, the carrying values of the notes have been
adjusted to reflect the fair values of the interest rate swaps.
During the quarters ended September 30, 2004 and
December 31, 2004, the Company repurchased and retired
$7.4 million and $110.5 million, respectively,
principal amount of its 6.45 percent senior notes due in
2007. The Company recorded $11.1 million of debt premiums
and associated costs in Other Income (Expense) — Net.
|
|
|
Medium Term Notes Payable |
The Company has periodically issued long-term debt securities in
the public markets through a medium-term note program (referred
to as the MTN program), which commenced in 1995. MTN notes
outstanding at December 31, 2004, consisted entirely of
fixed-rate non-callable debt securities. All MTN notes
outstanding were issued between 1995 and 1998, with interest
rates ranging from 6.5 percent to 8.7 percent and
maturity dates ranging from 2008 to 2046.
In October 2003, the Company entered into a $50 million
fixed to floating interest rate swap on its 6.45 percent
medium-term notes due in 2008 to increase the Company’s
exposure to variable interest rates. The settlement and maturity
dates on the swap are the same as those on the notes. In
accordance with FASB Statement No. 133, the carrying value
of the notes has been adjusted to reflect the fair value of the
interest rate swap.
During the quarters ended September 30, 2004 and
December 31, 2004, the Company repurchased and retired
$7.8 million and $16.5 million, respectively,
principal amount of its 6.45 percent medium-term notes due
in 2008. The Company recorded $2.2 million of debt premiums
and associated costs in Other Income (Expense) — Net.
|
|
|
Industrial Development Revenue Bonds |
On August 1, 2004, the Company redeemed $60 million
principal amount of Special Facilities Airport Revenue Bonds and
in May 2004 redeemed $5.9 million principal amount of
industrial revenue bonds. The Company recorded $1.8 million
of debt premiums and associated costs in Other Income
(Expense) — Net related to the redemption of the bonds.
Note L. Lease Commitments
The Company finances its use of certain of its office and
manufacturing facilities as well as machinery and equipment,
including corporate aircraft, under various committed lease
arrangements provided by financial institutions. Certain of
these arrangements allow the Company to claim a deduction for
tax depreciation on the assets, rather than the lessor, and
allow the Company to lease equipment having a maximum
unamortized value of $90 million at December 31, 2004.
At December 31, 2004, $49.3 million of future minimum
lease payments were outstanding under these arrangements. The
other arrangements are standard operating leases.
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
92
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
noncancelable lease terms in excess of one year, consisted of
the following at December 31, 2004:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Noncancelable | |
| |
|
Capital | |
|
Operating | |
| |
|
Leases | |
|
Leases | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
2005
|
|
$ |
1.8 |
|
|
$ |
44.3 |
|
|
2006
|
|
|
1.2 |
|
|
|
33.6 |
|
|
2007
|
|
|
1.1 |
|
|
|
25.6 |
|
|
2008
|
|
|
1.1 |
|
|
|
20.6 |
|
|
2009
|
|
|
1.1 |
|
|
|
18.8 |
|
|
Thereafter
|
|
|
12.4 |
|
|
|
58.7 |
|
| |
|
|
|
|
|
|
|
Total minimum payments
|
|
|
18.7 |
|
|
$ |
201.6 |
|
| |
|
|
|
|
|
|
|
Amounts representing interest
|
|
|
(8.0 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
10.7 |
|
|
|
|
|
|
Current portion of capital lease obligations
|
|
|
(1.5 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
TOTAL
|
|
$ |
9.2 |
|
|
|
|
|
| |
|
|
|
|
|
|
Net rent expense from continuing operations consisted of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Minimum rentals
|
|
$ |
45.8 |
|
|
$ |
47.1 |
|
|
$ |
41.0 |
|
|
Contingent rentals
|
|
|
1.6 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
Sublease rentals
|
|
|
(0.5 |
) |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
46.9 |
|
|
$ |
47.0 |
|
|
$ |
41.0 |
|
| |
|
|
|
|
|
|
|
|
|
Note M. Pensions and Postretirement Benefits
The Company has several defined benefit pension plans covering
eligible employees. U.S. 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 non-union employees generally provide benefit payments
of stated amounts for each year of service. Plans outside of the
U.S. generally provide benefit payments to eligible
employees that relate to an employee’s compensation and
length of service. The Company also sponsors several unfunded
defined benefit postretirement plans that provide certain
health-care and life insurance benefits to eligible employees.
The health-care plans are both contributory, with retiree
contributions adjusted periodically, and non-contributory, and
can contain other cost-sharing features, such as deductibles and
coinsurance. The life insurance plans are generally
noncontributory.
The Company uses a December 31 measurement date for the
majority of its plans.
Amortization of prior service cost is recognized on a
straight-line basis over the average remaining service period of
active employees. Amortization of gains and losses are
recognized using the “corridor approach”, which is the
minimum amortization required by Statement of Financial
Accounting Standards No. 87. Under the corridor approach,
the net gain or loss in excess of 10 percent of the greater
of the projected benefit obligation or the market-related
93
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
value of the assets is amortized on a straight-line basis over
the average remaining service period of the active employees.
PENSIONS
The following table sets forth the Company’s defined
benefit pension plans as of December 31, 2004 and 2003, and
the amounts recorded in the Consolidated Balance Sheet at these
dates. Company contributions include amounts contributed
directly to plan assets and indirectly as benefits are paid from
the Company’s assets. Benefit payments reflect the total
benefits paid from the plan and the Company’s assets.
Information on the U.S. Plans includes both the qualified
and non-qualified plans. The Fair Value of Assets for the
U.S. Plans excludes $75 million and $73 million
held in a Rabbi Trust designated for the non-qualified plans as
of December 31, 2004 and December 31, 2003,
respectively.
94
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The pension obligations retained by the Company for former
employees of discontinued operations are included in the amounts
below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Other | |
| |
|
U.S. Plans | |
|
U.K. Plans | |
|
Non-U.S. Plans | |
| |
|
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
CHANGE IN PROJECTED BENEFIT OBLIGATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Projected benefit obligation at beginning of year
|
|
$ |
2,323.9 |
|
|
$ |
2,180.8 |
|
|
$ |
405.0 |
|
|
$ |
312.7 |
|
|
$ |
56.0 |
|
|
$ |
42.9 |
|
| |
Service cost
|
|
|
38.5 |
|
|
|
36.7 |
|
|
|
20.0 |
|
|
|
16.3 |
|
|
|
2.4 |
|
|
|
2.1 |
|
| |
Interest cost
|
|
|
148.1 |
|
|
|
146.1 |
|
|
|
25.2 |
|
|
|
19.3 |
|
|
|
3.9 |
|
|
|
3.2 |
|
| |
Amendments
|
|
|
2.5 |
|
|
|
12.5 |
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
0.1 |
|
| |
Actuarial (gains) losses
|
|
|
195.5 |
|
|
|
130.0 |
|
|
|
62.1 |
|
|
|
35.2 |
|
|
|
5.0 |
|
|
|
— |
|
| |
Participant contributions
|
|
|
— |
|
|
|
— |
|
|
|
4.5 |
|
|
|
4.4 |
|
|
|
1.3 |
|
|
|
1.2 |
|
| |
Acquisitions
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(19.5 |
) |
|
|
— |
|
|
|
0.1 |
|
| |
Divestitures
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.9 |
|
|
|
4.9 |
|
|
|
— |
|
| |
Curtailments
|
|
|
— |
|
|
|
(0.6 |
) |
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
| |
Settlements
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.3 |
) |
| |
Special Termination Benefits
|
|
|
0.1 |
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
35.9 |
|
|
|
38.1 |
|
|
|
4.8 |
|
|
|
8.8 |
|
| |
Benefits paid
|
|
|
(181.5 |
) |
|
|
(181.2 |
) |
|
|
(10.9 |
) |
|
|
(3.4 |
) |
|
|
(2.1 |
) |
|
|
(2.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Projected benefit obligation at end of year
|
|
$ |
2,527.1 |
|
|
$ |
2,323.9 |
|
|
$ |
543.8 |
|
|
$ |
405.0 |
|
|
$ |
76.7 |
|
|
$ |
56.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED BENEFIT OBLIGATION AT END OF YEAR
|
|
$ |
2,434.5 |
|
|
$ |
2,245.1 |
|
|
$ |
378.2 |
|
|
$ |
260.7 |
|
|
$ |
63.4 |
|
|
$ |
46.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS AS OF DECEMBER 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discount rate
|
|
|
5.875 |
% |
|
|
6.25 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
| |
Rate of compensation increase
|
|
|
3.63 |
% |
|
|
3.63 |
% |
|
|
3.50 |
% |
|
|
3.25 |
% |
|
|
3.50 |
% |
|
|
3.25 |
% |
|
CHANGE IN PLAN ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at beginning of year
|
|
$ |
1,832.1 |
|
|
$ |
1,626.7 |
|
|
$ |
436.8 |
|
|
$ |
337.6 |
|
|
$ |
37.1 |
|
|
$ |
25.6 |
|
| |
Actual return on plan assets
|
|
|
193.1 |
|
|
|
333.4 |
|
|
|
53.2 |
|
|
|
63.2 |
|
|
|
3.6 |
|
|
|
3.5 |
|
| |
Acquisitions
|
|
|
— |
|
|
|
2.7 |
|
|
|
— |
|
|
|
(11.1 |
) |
|
|
— |
|
|
|
— |
|
| |
Divestitures
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.5 |
|
|
|
— |
|
| |
Participant contributions
|
|
|
— |
|
|
|
— |
|
|
|
4.5 |
|
|
|
4.4 |
|
|
|
1.3 |
|
|
|
1.2 |
|
| |
Company contributions
|
|
|
124.7 |
|
|
|
50.5 |
|
|
|
0.2 |
|
|
|
8.2 |
|
|
|
3.7 |
|
|
|
4.0 |
|
| |
Foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
36.2 |
|
|
|
37.8 |
|
|
|
2.9 |
|
|
|
4.8 |
|
| |
Benefits paid
|
|
|
(181.5 |
) |
|
|
(181.2 |
) |
|
|
(10.9 |
) |
|
|
(3.3 |
) |
|
|
(2.1 |
) |
|
|
(2.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at end of year
|
|
$ |
1,968.4 |
|
|
$ |
1,832.1 |
|
|
$ |
520.0 |
|
|
$ |
436.8 |
|
|
$ |
52.0 |
|
|
$ |
37.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUNDED STATUS (UNDERFUNDED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Funded status
|
|
$ |
(558.7 |
) |
|
$ |
(491.8 |
) |
|
$ |
(23.8 |
) |
|
$ |
31.8 |
|
|
$ |
(24.7 |
) |
|
$ |
(18.9 |
) |
| |
Unrecognized net actuarial (gain) loss
|
|
|
689.2 |
|
|
|
567.7 |
|
|
|
7.7 |
|
|
|
(38.2 |
) |
|
|
11.0 |
|
|
|
5.7 |
|
| |
Unrecognized prior service cost
|
|
|
42.4 |
|
|
|
49.6 |
|
|
|
— |
|
|
|
— |
|
|
|
0.9 |
|
|
|
0.5 |
|
| |
Unrecognized net transition asset
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net amount recognized
|
|
$ |
172.9 |
|
|
$ |
125.5 |
|
|
$ |
(16.1 |
) |
|
$ |
(6.4 |
) |
|
$ |
(12.9 |
) |
|
$ |
(12.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Prepaid benefit cost
|
|
$ |
269.6 |
|
|
$ |
216.5 |
|
|
$ |
— |
|
|
$ |
0.3 |
|
|
$ |
5.9 |
|
|
$ |
3.0 |
|
| |
Intangible asset
|
|
|
42.4 |
|
|
|
49.4 |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.1 |
|
| |
Accumulated other comprehensive (income) loss
|
|
|
596.6 |
|
|
|
489.4 |
|
|
|
— |
|
|
|
— |
|
|
|
0.5 |
|
|
|
0.3 |
|
| |
Additional minimum liability
|
|
|
(639.0 |
) |
|
|
(538.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
(0.4 |
) |
| |
Accrued benefit liability
|
|
|
(96.7 |
) |
|
|
(91.0 |
) |
|
|
(16.1 |
) |
|
|
(6.7 |
) |
|
|
(18.8 |
) |
|
|
(15.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net amount recognized
|
|
$ |
172.9 |
|
|
$ |
125.5 |
|
|
$ |
(16.1 |
) |
|
$ |
(6.4 |
) |
|
$ |
(12.9 |
) |
|
$ |
(12.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Defined benefit plans with an accumulated benefit obligation
exceeding the fair value of plan assets had the following
obligations and plan assets at December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other | |
| |
|
|
|
|
|
Non-U.S. | |
| |
|
U.S. Plans | |
|
U.K. Plans |
|
Plans | |
| |
|
| |
|
|
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Aggregate fair value of plan assets
|
|
$ |
1,968.4 |
|
|
$ |
1,832.1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4.2 |
|
|
$ |
3.4 |
|
|
Aggregate projected benefit obligation
|
|
$ |
2,527.1 |
|
|
$ |
2,323.9 |
|
|
$ |
0.4 |
|
|
$ |
— |
|
|
$ |
24.7 |
|
|
$ |
18.0 |
|
|
Aggregate accumulated benefit obligations
|
|
$ |
2,434.5 |
|
|
$ |
2,245.1 |
|
|
$ |
0.4 |
|
|
$ |
— |
|
|
$ |
20.7 |
|
|
$ |
15.5 |
|
Defined benefit plans with a projected benefit obligation
exceeding the fair value of plan assets had the following
obligations and plan assets at December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other | |
| |
|
|
|
|
|
Non-U.S. | |
| |
|
U.S. Plans | |
|
U.K. Plans | |
|
Plans | |
| |
|
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Aggregate fair value of plan assets
|
|
$ |
1,968.4 |
|
|
$ |
1,832.1 |
|
|
$ |
520.0 |
|
|
$ |
8.2 |
|
|
$ |
45.1 |
|
|
$ |
36.4 |
|
|
Aggregate projected benefit obligation
|
|
$ |
2,527.1 |
|
|
$ |
2,323.9 |
|
|
$ |
543.8 |
|
|
$ |
8.6 |
|
|
$ |
70.7 |
|
|
$ |
55.6 |
|
|
Aggregate accumulated benefit obligations
|
|
$ |
2,434.5 |
|
|
$ |
2,245.1 |
|
|
$ |
378.2 |
|
|
$ |
7.4 |
|
|
$ |
58.3 |
|
|
$ |
46.3 |
|
The components of net periodic benefit costs (income) and
special termination benefit charges for December 31, 2004,
2003 and 2002 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
| |
|
|
|
|
|
Non-U.S. | |
| |
|
U.S. Plans | |
|
U.K. Plans | |
|
Plans | |
| |
|
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Service cost
|
|
$ |
38.5 |
|
|
$ |
36.7 |
|
|
$ |
30.8 |
|
|
$ |
20.0 |
|
|
$ |
16.3 |
|
|
$ |
4.7 |
|
|
$ |
2.4 |
|
|
$ |
2.1 |
|
|
$ |
1.4 |
|
| |
Interest cost
|
|
|
148.1 |
|
|
|
146.1 |
|
|
|
147.7 |
|
|
|
25.2 |
|
|
|
19.3 |
|
|
|
4.8 |
|
|
|
3.9 |
|
|
|
3.2 |
|
|
|
2.0 |
|
| |
Expected return on plan assets
|
|
|
(162.5 |
) |
|
|
(150.1 |
) |
|
|
(166.9 |
) |
|
|
(38.2 |
) |
|
|
(29.0 |
) |
|
|
(7.0 |
) |
|
|
(3.6 |
) |
|
|
(2.5 |
) |
|
|
(1.9 |
) |
| |
Amortization of prior service cost
|
|
|
9.7 |
|
|
|
10.2 |
|
|
|
9.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of transition obligation
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Recognized net actuarial (gain) loss
|
|
|
43.4 |
|
|
|
35.7 |
|
|
|
8.4 |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Periodic benefit cost (income)
|
|
|
77.2 |
|
|
|
78.6 |
|
|
|
30.7 |
|
|
|
7.0 |
|
|
|
6.6 |
|
|
|
2.6 |
|
|
|
2.9 |
|
|
|
3.1 |
|
|
|
1.6 |
|
| |
Settlement (gain)/loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Curtailment (gain)/loss
|
|
|
— |
|
|
|
4.6 |
|
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
1.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net benefit cost (income)
|
|
$ |
77.2 |
|
|
$ |
83.2 |
|
|
$ |
31.2 |
|
|
$ |
7.4 |
|
|
$ |
6.6 |
|
|
$ |
2.6 |
|
|
$ |
3.0 |
|
|
$ |
3.1 |
|
|
$ |
2.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Special termination benefit charge
|
|
|
0.1 |
|
|
|
— |
|
|
|
1.9 |
|
|
|
1.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC
BENEFIT COSTS FOR THE YEARS ENDED DECEMBER 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discount rate
|
|
|
6.25 |
% |
|
|
6.875 |
% |
|
|
7.50 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
5.51 |
% |
|
|
6.25 |
% |
|
|
6.35 |
% |
|
|
6.55 |
% |
| |
Expected long-term return on assets
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
9.25 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.23 |
% |
|
|
8.43 |
% |
|
|
8.43 |
% |
|
|
7.96 |
% |
| |
Rate of compensation increase
|
|
|
3.63 |
% |
|
|
3.86 |
% |
|
|
4.06 |
% |
|
|
3.25 |
% |
|
|
3.25 |
% |
|
|
3.70 |
% |
|
|
3.25 |
% |
|
|
3.47 |
% |
|
|
3.61 |
% |
The special termination benefit charge in the year ended
December 31, 2004 relates primarily to the announced
closure of a facility in the U.K. The special termination
benefit charge in the
96
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
year ended December 31, 2002 relates primarily to special
benefits in connection with retirements.
As of December 31, 2004 and 2003, the amounts included in
Accumulated Other Comprehensive Income (Loss) due to a change in
the additional minimum liability are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Pre-tax accumulated other comprehensive income (loss)
|
|
$ |
(597.1 |
) |
|
$ |
(489.7 |
) |
|
Deferred income tax asset
|
|
|
209.0 |
|
|
|
171.4 |
|
| |
|
|
|
|
|
|
|
After tax accumulated other comprehensive income (loss)
|
|
$ |
(388.1 |
) |
|
$ |
(318.3 |
) |
| |
|
|
|
|
|
|
Expected Pension Benefit Payments
Benefit payments for pensions, which reflect expected future
service, as appropriate, are expected to be as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Other | |
| Year |
|
U.S. Plans | |
|
U.K. Plans | |
|
Non-U.S. Plans | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
2005
|
|
$ |
179.4 |
|
|
$ |
5.5 |
|
|
$ |
10.9 |
|
|
2006
|
|
|
177.5 |
|
|
|
6.4 |
|
|
|
2.4 |
|
|
2007
|
|
|
176.6 |
|
|
|
7.9 |
|
|
|
2.7 |
|
|
2008
|
|
|
177.2 |
|
|
|
9.3 |
|
|
|
2.9 |
|
|
2009
|
|
|
177.2 |
|
|
|
11.2 |
|
|
|
3.4 |
|
|
2010 – 2014
|
|
|
903.9 |
|
|
|
95.0 |
|
|
|
19.4 |
|
Asset Allocation and Investment Policy
|
|
|
U.S. Qualified Pension Plans |
The Company’s U.S. qualified pension plans are
underfunded. Approximately 79 percent of the plans’
liabilities relate to retired and inactive employees. Annual
benefit payments from the trust fund were $172 million in
2004 and $171 million in 2003.
The Company’s asset allocation strategy for the trust fund
is designed to balance the objectives of achieving high rates of
return while reducing the volatility of the plans’ funded
status and the Company’s pension expense and contribution
requirements. The trust’s core asset allocation is about
60 percent equities, 33 percent fixed income and
7 percent real estate. The expected long-term rate of
return for this portfolio is 9 percent per year.
At December 31, 2004 and 2003, 2.1 percent and
3.3 percent, respectively, of the plan’s assets were
held in Goodrich common stock with a fair value of
$41 million at December 31, 2004 and $60 million
at December 31, 2003. Approximately $1.5 million in
dividends was received by the Trust during 2004. The Trust
reduced its holdings of Goodrich common stock by approximately
800,000 shares throughout 2004.
The trust fund’s fixed income assets have a duration of 10
to 15 years, which is longer than typical pension plan
fixed income portfolios, and is designed to offset
35 percent to 50 percent of the effect of interest
rate changes on the plan’s funded status. By investing in
long-duration bonds, the trust is able to invest more assets in
equities and real estate, which historically have generated
higher returns over time, while reducing the volatility of the
plan’s funded status.
97
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The table below sets forth the trust fund’s target asset
allocation for 2005 and the actual allocations at
December 31, 2004 and December 31, 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Target Allocation | |
|
Actual Allocation | |
|
Actual Allocation | |
| Asset Category |
|
2005 | |
|
At December 31, 2004 | |
|
At December 31, 2003 | |
| |
|
| |
|
| |
|
| |
|
Equities – U.S. Large Cap
|
|
|
30-40% |
|
|
|
43% |
|
|
|
41% |
|
|
Equities – U.S. Mid Cap
|
|
|
3-5% |
|
|
|
5% |
|
|
|
4% |
|
|
Equities – U.S. Small Cap
|
|
|
3-5% |
|
|
|
4% |
|
|
|
4% |
|
|
Equities – International
|
|
|
10-15% |
|
|
|
13% |
|
|
|
12% |
|
|
Equities – Total
|
|
|
50-60% |
|
|
|
65% |
|
|
|
61% |
|
|
Fixed Income – U.S.
|
|
|
30-40% |
|
|
|
30% |
|
|
|
32% |
|
|
Real Estate
|
|
|
5-10% |
|
|
|
5% |
|
|
|
6% |
|
|
Cash
|
|
|
0-1% |
|
|
|
0% |
|
|
|
1% |
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
Approximately 85 to 90 percent of the assets of the
portfolio are invested in U.S. and international equities, fixed
income securities and real estate consistent with the target
asset allocation and this portion of the portfolio is rebalanced
to the target on a regular basis. The remaining 10 to
15 percent is actively managed in a global tactical asset
allocation strategy where day-to-day allocation decisions are
made by the investment manager based on relative expected
returns of stocks, bonds and cash in the U.S. and several
international markets.
Tactical changes to the duration of the fixed income portfolio
are also made periodically. The actual duration of the fixed
income portfolio was approximately 10 years at
December 31, 2004 and 2003.
The Company’s largest U.K. pension plan, associated with
the Aeronautical Systems business, consists almost entirely of
active employees. Consequently, the primary asset allocation
objective is to generate returns that, over time, will meet the
future payment obligations of the trust without requiring
material levels of cash contributions.
The trust’s core asset allocation is about 75 percent
equities and 25 percent fixed income securities. Since the
trust’s obligations are paid in British Pounds Sterling,
the trust invests 63 percent of its assets in
U.K.-denominated securities. Fixed income assets have a duration
of about 12 years and offset approximately 12 percent
of the effect of interest rate changes on the plan’s funded
status. The assets of the trust fund are rebalanced to the
target on a periodic basis.
The table below sets forth the trust fund’s target asset
allocation for 2004 and the actual allocations at
December 31, 2004 and December 31, 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Target Allocation | |
|
Actual Allocation | |
|
Actual Allocation | |
| Asset Category |
|
2005 | |
|
At December 31, 2004 | |
|
At December 31, 2003 | |
| |
|
| |
|
| |
|
| |
|
Equities – U.K.
|
|
|
37.5% |
|
|
|
39% |
|
|
|
38% |
|
|
Equities – non-U.K.
|
|
|
37.5% |
|
|
|
37% |
|
|
|
37% |
|
|
Equities – Total
|
|
|
75% |
|
|
|
76% |
|
|
|
75% |
|
|
Fixed Income – U.K.
|
|
|
25% |
|
|
|
24% |
|
|
|
25% |
|
|
Real Estate
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
98
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Long-term Asset Return Assumptions
|
|
|
U.S. Qualified Pension Plans |
The long-term asset return assumption for the U.S. plans is
9 percent. This assumption is based on an analysis of
historical returns for equity, fixed income and real estate
markets and the Company’s portfolio allocation as of
December 31, 2004.
Equity returns were determined by analysis of historical
benchmark market data through 2002. Returns in each class of
equity were developed from up to 76 years of historical
data. The weighted average return of all equity classes was
10.7 percent.
Real estate returns were determined using the five-year
historical average returns for the primary real estate fund in
the pension trust. The resulting return was 10 percent.
The return estimate for the fixed income portion of the trust
portfolio is based on the average yield to maturity of the
assets as of December 15, 2004. At that time the yield was
5.2 percent. The fixed income portion of the portfolio is
based on a long duration strategy (10 to 15 years). As a
result, the yield on this portfolio may be higher than that of
the typical fixed income portfolio in a normal yield curve
environment.
The long-term asset return assumption for the U.K. plans is
8.5 percent. This assumption is based on an analysis of
historical returns for equity and fixed income denominated in
the British Pounds Sterling.
Equity returns were determined by analysis of historical
benchmark market data through 2002. Returns for equity were
developed from 15 years of historical data. The weighted
average return was approximately 9.5 percent.
The return estimate for the fixed income portion of the
portfolio is based on the average yield to maturity of the
assets as of November 30, 2004. At that time the yield was
approximately 5.25 percent.
|
|
|
Anticipated Contributions to Defined Benefit Trusts |
During 2005, the Company expects to contribute $50 million
to $75 million to its worldwide qualified and non-qualified
pension plans.
|
|
|
U.S. Non-Qualified Pension Plan Funding |
The Company maintains non-qualified pension plans in the
U.S. to accrue retirement benefits in excess of Internal
Revenue Code limitations and other contractual obligations. As
of December 31, 2004 and December 31, 2003,
respectively, $75 million and $73 million fair market
value of assets were held in a rabbi trust for payment of future
non-qualified pension benefits for certain retired, terminated
and active employees. The assets consist of the cash surrender
value of split dollar life insurance policies, equities, fixed
income securities and cash. The assets of the rabbi trust, which
do not qualify as plan assets and therefore are not included in
the tables in this note, are available to pay pension benefits
to these individuals but are otherwise unavailable to the
Company. The assets, other than approximately $31 million
and $29 million as of December 31, 2004 and
December 31, 2003, respectively, which are assigned to
certain individuals in the event benefit payments to these
individuals are not made when due, are available to the
Company’s general creditors in the event of insolvency.
99
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Postretirement Benefits Other Than Pensions
The following table sets forth the status of the Company’s
defined benefit postretirement plans as of December 31,
2004 and 2003, and the amounts recorded in the Consolidated
Balance Sheet at these dates. The postretirement benefits
related to discontinued operations retained by the Company are
included in the amounts below.
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Change in Projected Benefit Obligations
|
|
|
|
|
|
|
|
|
| |
Projected benefit obligation at beginning of year
|
|
$ |
452.4 |
|
|
$ |
408.5 |
|
| |
Service cost
|
|
|
1.4 |
|
|
|
1.3 |
|
| |
Interest cost
|
|
|
25.0 |
|
|
|
28.2 |
|
| |
Amendments
|
|
|
— |
|
|
|
— |
|
| |
Actuarial (gains) losses
|
|
|
(10.9 |
) |
|
|
50.5 |
|
| |
Acquisitions
|
|
|
— |
|
|
|
0.4 |
|
| |
Divestitures
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
0.8 |
|
|
|
0.8 |
|
| |
Curtailments
|
|
|
— |
|
|
|
(0.4 |
) |
| |
Settlements
|
|
|
— |
|
|
|
— |
|
| |
Benefits paid
|
|
|
(37.5 |
) |
|
|
(36.9 |
) |
| |
|
|
|
|
|
|
| |
Projected benefit obligation at end of year
|
|
$ |
431.2 |
|
|
$ |
452.4 |
|
| |
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at beginning of year
|
|
$ |
— |
|
|
$ |
— |
|
| |
Company contributions
|
|
|
37.5 |
|
|
|
36.9 |
|
| |
Benefits paid
|
|
|
(37.5 |
) |
|
|
(36.9 |
) |
| |
|
|
|
|
|
|
| |
Fair value of plan assets at end of year
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Funded Status (Underfunded)
|
|
|
|
|
|
|
|
|
| |
Funded status
|
|
$ |
(431.2 |
) |
|
$ |
(452.4 |
) |
| |
Unrecognized net actuarial (gain) loss
|
|
|
85.2 |
|
|
|
98.0 |
|
| |
Unrecognized prior service cost
|
|
|
(0.7 |
) |
|
|
(0.8 |
) |
| |
|
|
|
|
|
|
| |
Accrued benefit cost
|
|
$ |
(346.7 |
) |
|
$ |
(355.2 |
) |
| |
|
|
|
|
|
|
|
Weighted-Average Assumptions used to Determine Benefit
Obligations as of December 31
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.875 |
% |
|
|
6.25 |
% |
For measurement purposes, a 9 percent annual rate of
increase in the per capita cost of covered health care benefits
was assumed for 2005. The rate was assumed to decrease gradually
to 5 percent for 2008 and remain at that level thereafter.
100
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Components of Net Periodic Benefit Cost (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Service cost
|
|
$ |
1.4 |
|
|
$ |
1.2 |
|
|
$ |
1.6 |
|
| |
Interest cost
|
|
|
25.0 |
|
|
|
28.2 |
|
|
|
25.5 |
|
| |
Amortization of prior service cost
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
| |
Recognized net actuarial (gain) loss
|
|
|
1.9 |
|
|
|
2.4 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Periodic benefit cost (income)
|
|
|
28.2 |
|
|
|
31.7 |
|
|
|
27.0 |
|
| |
Settlement (gain)/loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Curtailment (gain)/loss
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net Benefit Cost (Income)
|
|
$ |
28.2 |
|
|
$ |
31.6 |
|
|
$ |
27.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions used to Determine Net Periodic
Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discount rate
|
|
|
6.25 |
% |
|
|
6.875 |
% |
|
|
7.48 |
% |
The table below quantifies the impact of a one-percentage point
change in the assumed health care cost trend rate.
| |
|
|
|
|
|
|
|
|
| |
|
One Percentage | |
|
One Percentage | |
| |
|
Point | |
|
Point | |
| |
|
Increase | |
|
Decrease | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Increase (Decrease) in
|
|
|
|
|
|
|
|
|
|
Total of service and interest cost components in 2004
|
|
$ |
1.9 |
|
|
$ |
(1.6 |
) |
|
Accumulated postretirement benefit obligation as of
December 31, 2004
|
|
$ |
29.0 |
|
|
$ |
(25.1 |
) |
|
|
|
Medicare Prescription Drug, Improvement and Modernization
Act of 2003 |
The U.S. Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Medicare Act) was signed into law
on December 8, 2003. The Company anticipates receipt of
federal subsidy payments beginning in 2006 for retiree
prescription drug benefits in plans without fixed dollar company
contribution limits. Subsidy amounts are assumed to be shared
with participants in proportion to applicable premium sharing
percentage for each retiree group in each future year. No other
assumptions have been changed for this measurement. Effective
with the second quarter 2004, the Company has adopted
retroactively to January 1, 2004 the Financial Accounting
Standards Board Staff Position No. FAS 106-2
“Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003”. The effect of the Medicare Act was measured as of
January 1, 2004 and is now reflected in the Company’s
consolidated financial statements and accompanying notes. The
effect of the Medicare Act is a $34 million reduction on
the accumulated postretirement benefit obligation for the
Company’s retiree benefit plans as well as a reduction in
the net periodic postretirement benefit cost. The effect of the
reduction in net periodic postretirement benefit cost is an
increase to income from continuing operations of $5 million
($3.2 million after tax) for the year ended
December 31, 2004.
101
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table provides the effect of the Medicare Act on
the net periodic benefit costs for the year ended
December 31, 2004.
| |
|
|
|
|
| |
|
(Dollars in millions) | |
| |
|
| |
|
Service cost
|
|
$ |
(0.2 |
) |
|
Interest cost
|
|
|
(2.1 |
) |
|
Amortization of actuarial (gain) loss
|
|
|
(2.7 |
) |
| |
|
|
|
|
Net benefit cost (income)
|
|
$ |
(5.0 |
) |
| |
|
|
|
On January 21, 2005, the Centers for Medicare and Medicaid
Services (CMS) released final regulations to implement the
new prescription drug benefit under Part D of the Medicare
Act. The Company is currently evaluating these regulations.
However, under the assumptions used to measure the effect of the
Medicare Act, the Company does not believe these regulations
will have a material additional impact on the accumulated
postretirement benefit obligation, the net periodic
postretirement benefit cost or the estimated subsidy payments
reported in this Note.
Expected Postretirement Benefit Payments Other Than
Pensions
Benefit payments for other postretirement obligations other than
pensions, which reflect expected future service, as appropriate,
are expected to be paid as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expected | |
|
|
|
|
| |
|
Employer | |
|
Medicare | |
|
|
| Year |
|
Payments | |
|
Subsidy | |
|
Net Payments | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
2005
|
|
$ |
40.5 |
|
|
$ |
— |
|
|
$ |
40.5 |
|
|
2006
|
|
|
41.1 |
|
|
|
(4.0 |
) |
|
|
37.1 |
|
|
2007
|
|
|
41.2 |
|
|
|
(4.1 |
) |
|
|
37.1 |
|
|
2008
|
|
|
40.9 |
|
|
|
(4.1 |
) |
|
|
36.8 |
|
|
2009
|
|
|
40.0 |
|
|
|
(4.1 |
) |
|
|
35.9 |
|
|
2010 to 2014
|
|
|
204.0 |
|
|
|
(19.8 |
) |
|
|
184.2 |
|
Defined Contribution Plans
In the U.S., the Company also maintains voluntary
U.S. retirement savings plans for salaried and wage
employees. Under provisions of these plans, certain eligible
employees can receive Company matching contributions of
50 percent up to the first 6 percent of their eligible
earnings. Prior to June 2003, participants generally received
100 percent Company matching contribution on the first
6 percent of eligible earnings. For the years ended
December 31, 2004, 2003 and 2002, Company contributions
amounted to $20.1 million, $27.5 million and
$47 million, respectively. Company contributions include
amounts related to employees of discontinued operations.
The Company also maintains defined contribution retirement plans
for certain non-U.S. subsidiaries. For the years ended
December 31, 2004, 2003 and 2002 the Company’s
contributions amounted to $2.4 million, $2.2 million
and $1.5 million, respectively.
102
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Domestic
|
|
$ |
163.4 |
|
|
$ |
43.8 |
|
|
$ |
266.3 |
|
|
Foreign
|
|
|
35.9 |
|
|
|
25.4 |
|
|
|
0.6 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL
|
|
$ |
199.3 |
|
|
$ |
69.2 |
|
|
$ |
266.9 |
|
| |
|
|
|
|
|
|
|
|
|
A summary of income tax (expense) benefit from continuing
operations in the Consolidated Statement of Income is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
(4.5 |
) |
|
$ |
(27.1 |
) |
|
$ |
(5.5 |
) |
| |
Foreign
|
|
|
(11.5 |
) |
|
|
2.9 |
|
|
|
0.8 |
|
| |
State
|
|
|
2.7 |
|
|
|
— |
|
|
|
(3.9 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(13.3 |
) |
|
|
(24.2 |
) |
|
|
(8.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
(49.4 |
) |
|
|
11.1 |
|
|
|
(82.2 |
) |
| |
Foreign
|
|
|
15.3 |
|
|
|
(9.7 |
) |
|
|
(1.4 |
) |
| |
State
|
|
|
4.0 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(30.1 |
) |
|
|
1.4 |
|
|
|
(83.6 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
TOTAL
|
|
$ |
(43.4 |
) |
|
$ |
(22.8 |
) |
|
$ |
(92.2 |
) |
| |
|
|
|
|
|
|
|
|
|
103
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Significant components of deferred income tax assets and
liabilities at December 31, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
| |
Accrual for postretirement benefits other than pensions
|
|
$ |
123.2 |
|
|
$ |
124.5 |
|
| |
Inventories
|
|
|
22.8 |
|
|
|
26.6 |
|
| |
Other nondeductible accruals
|
|
|
98.7 |
|
|
|
72.2 |
|
| |
Tax credit and net operating loss carryovers
|
|
|
46.8 |
|
|
|
19.2 |
|
| |
Employee benefits plans
|
|
|
12.9 |
|
|
|
1.7 |
|
| |
Pensions
|
|
|
224.4 |
|
|
|
191.3 |
|
| |
Other
|
|
|
61.4 |
|
|
|
66.3 |
|
| |
|
|
|
|
|
|
| |
|
Deferred income tax assets
|
|
|
590.2 |
|
|
|
501.8 |
|
| |
|
Less: valuation allowance
|
|
|
(11.9 |
) |
|
|
(4.0 |
) |
| |
|
|
|
|
|
|
| |
|
Total deferred income tax assets
|
|
$ |
578.3 |
|
|
$ |
497.8 |
|
| |
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Tax over book depreciation
|
|
|
(183.3 |
) |
|
|
(139.9 |
) |
| |
Tax over book intangible amortization
|
|
|
(158.9 |
) |
|
|
(129.4 |
) |
| |
Tax over book interest expense
|
|
|
(89.6 |
) |
|
|
(89.6 |
) |
| |
SFAS 133
|
|
|
(38.6 |
) |
|
|
(31.9 |
) |
| |
Other
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total deferred income tax liabilities
|
|
|
(470.4 |
) |
|
|
(390.8 |
) |
| |
|
|
|
|
|
|
|
NET DEFERRED INCOME TAX ASSET
|
|
$ |
107.9 |
|
|
$ |
107.0 |
|
| |
|
|
|
|
|
|
In accordance with SFAS 109, deferred tax assets and
liabilities are recorded for tax carryforwards and the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting and income tax
purposes and are measured using enacted tax laws and rates. A
valuation allowance is provided on deferred tax assets if it is
determined that it is more likely than not that the asset will
not be realized. The Company records interest on potential tax
contingencies as a component of its tax expense and records the
interest net of any applicable related tax benefit.
At December 31, 2004, the Company has net operating loss
and tax credit carryover benefits of approximately
$46.8 million that expire in the years 2005 through 2014.
For financial reporting purposes a valuation allowance of
$11.9 million has been recognized to offset the deferred
tax asset relating to those carry-forward benefits. The net
change in the total valuation allowance for the year ended
December 31, 2004 was an increase of $7.9 million.
104
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The effective income tax rate from continuing operations varied
from the statutory federal income tax rate as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(Dollars in | |
|
|
|
(Dollars in | |
|
|
|
(Dollars in | |
| |
|
% | |
|
Millions) | |
|
% | |
|
Millions) | |
|
% | |
|
Millions) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Income from operations before taxes and trust distributions
|
|
|
|
|
|
$ |
199.3 |
|
|
|
|
|
|
$ |
69.2 |
|
|
|
|
|
|
$ |
266.9 |
|
|
Statutory federal income tax rate
|
|
|
35.0 |
% |
|
|
|
|
|
|
35.0 |
% |
|
|
|
|
|
|
35.0 |
% |
|
|
|
|
|
State and local taxes
|
|
|
0.7 |
% |
|
$ |
1.4 |
|
|
|
(0.4 |
)% |
|
$ |
(0.3 |
) |
|
|
0.9 |
% |
|
$ |
2.5 |
|
|
Tax exempt income from foreign sales corporation
|
|
|
(10.1 |
)% |
|
$ |
(20.2 |
) |
|
|
(15.3 |
)% |
|
$ |
(10.6 |
) |
|
|
(5.7 |
)% |
|
$ |
(15.3 |
) |
|
Trust distributions
|
|
|
— |
|
|
|
— |
|
|
|
(4.0 |
)% |
|
$ |
(2.7 |
) |
|
|
(1.4 |
)% |
|
$ |
(3.6 |
) |
|
In-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.6 |
% |
|
$ |
4.3 |
|
|
Deemed repatriation of non-U.S. earnings
|
|
|
4.6 |
% |
|
$ |
9.1 |
|
|
|
— |
|
|
|
— |
|
|
|
3.1 |
% |
|
$ |
8.4 |
|
|
Differences in rates on foreign subsidiaries
|
|
|
(21.5 |
)% |
|
$ |
(42.9 |
) |
|
|
(24.9 |
)% |
|
$ |
(17.2 |
) |
|
|
0.1 |
% |
|
$ |
0.3 |
|
|
Interest on potential tax liabilities
|
|
|
7.9 |
% |
|
$ |
15.8 |
|
|
|
33.6 |
% |
|
$ |
23.2 |
|
|
|
6.1 |
% |
|
$ |
16.7 |
|
|
Tax settlements and other adjustments to tax reserves
|
|
|
3.7 |
% |
|
$ |
7.4 |
|
|
|
5.2 |
% |
|
$ |
3.6 |
|
|
|
(3.7 |
)% |
|
$ |
(10.3 |
) |
|
Other items
|
|
|
1.5 |
% |
|
$ |
3.0 |
|
|
|
3.8 |
% |
|
$ |
2.6 |
|
|
|
(1.5 |
)% |
|
$ |
(2.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Effective income tax rate
|
|
|
21.8 |
% |
|
|
|
|
|
|
33.0 |
% |
|
|
|
|
|
|
34.5 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS 109, APB Opinion No. 28, and
FIN 18, as of each reporting period the Company estimates
an effective income tax rate that is expected to be applicable
for the full fiscal year. The estimate of the Company’s
effective income tax rate involves significant judgments
regarding the application of complex tax regulations across many
jurisdictions and estimates as to the amount and jurisdictional
source of income expected to be earned during the full fiscal
year. Evolving interpretations of new and existing tax laws,
rulings by taxing authorities, and court decisions further
influence this estimate. Due to the subjectivity and complex
nature of these underlying issues the Company’s actual
effective tax rate and related tax liabilities may differ from
its initial estimates. Differences between the estimated and
actual effective income tax rates and related liabilities are
recorded in the period they become known. The resulting
adjustment to the Company’s income tax expense could have a
material effect on its results of operations in the period the
adjustment is recorded.
The Company’s effective tax rate from continuing operations
was 21.8 percent during the year ended December 31,
2004. The Company’s effective tax rate benefited from
favorable tax rates imposed on foreign earnings, including the
benefit of tax holidays and other local tax incentives including
research credits. In addition, the effective tax rate was
impacted by favorable state and foreign tax settlements,
adjustments related to state income taxes, and to the
finalization of the Company’s 2003 federal tax return,
offset in part by adjustments to reserves for certain income tax
issues.
On October 22, 2004 the President signed the American Jobs
Creation Act of 2004 (the “Act”). The Act provides a
deduction for income from qualified domestic production
activities, which will be phased in from 2005 through 2010. The
Act provides for a two-year phase-out of the
105
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
existing Extraterritorial Income (“ETI”) deduction for
export sales that was ruled by the World Trade Organization to
be inconsistent with international trade protocols. The Company
does not expect the net effect of the phase-out of the ETI and
the phase-in of this new deduction to result in a material
impact to its effective tax rate in 2005.
Under the guidance provided in FASB Staff Position
No. FAS 109-1, Application of SFAS 109,
“Accounting for Income Taxes,” to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs
Creation Act of 2004, the deduction will be treated as a
“special deduction” as described in SFAS 109. As
such, the special deduction has no effect on the Company’s
deferred tax assets and liabilities existing at the enactment
date. Rather, the impact of this deduction will be reported in
the period in which the deduction is claimed on the
Company’s tax return.
The Act also creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of
limitations and, as of December 31, 2004, the Company
remains uncertain as to how to interpret numerous provisions in
the Act. It is the Company’s current intention to continue
to indefinitely reinvest its undistributed earnings and,
accordingly, no deferred tax liability has been recorded in
connection therewith. The Company is currently analyzing the
impact of the temporary dividends received deduction provisions
in the Act and may reach a different conclusion in 2005.
The Company has not provided for U.S. federal and foreign
withholding taxes on $347 million of foreign
subsidiaries’ undistributed earnings as of
December 31, 2004, 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
$25.3 million.
In accordance with SFAS 5, the Company records tax
contingencies when the exposure item becomes probable and
reasonably estimable. As of January 1, 2004, the Company
had tax contingency reserves of approximately
$301.7 million. During 2004, the Company recorded a
provision of $23.2 million (net of favorable adjustments
for state and foreign settlements and other miscellaneous
reserve adjustments) and made payments of $9.1 million. As
of December 31, 2004, the Company has recorded tax
contingency reserves of approximately $315.8 million. The
contingencies that comprise the reserves are more fully
described in Note X, “Contingencies.”
Note O. Business Segment Information
The Company has three business segments: Airframe Systems,
Engine Systems and Electronic Systems. Effective January 1,
2004, the customer services business unit that primarily
supports aftermarket products for the businesses that were
acquired as part of Aeronautical Systems was transferred from
the Airframe Systems segment to the Engine Systems segment. Also
effective January 1, 2004, costs and sales associated with
products or services provided to customers through the customer
services business are reflected in the business providing the
product or service rather than the customer services business.
Segment financial results and amounts for prior periods have
been restated to reflect the new organization and reclassified
to conform to the current year presentation.
106
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Airframe Systems provides systems and components pertaining to
aircraft taxi, take-off, landing and stopping. Several business
units within the segment are linked by their ability to
contribute to the integration, design, manufacture and service
of entire aircraft undercarriage systems, including landing
gear, wheels and brakes and certain brake controls. Airframe
Systems also includes the aviation technical services business
unit, which performs comprehensive total aircraft maintenance,
repair, overhaul and modification services for many commercial
airlines, independent operators, aircraft leasing companies and
airfreight carriers. The segment includes the actuation systems
and flight controls business units that were acquired as part of
Aeronautical Systems. The actuation systems business unit
provides systems that control the movement of steering systems
for missiles and electro-mechanical systems that are
characterized by high power, low weight, low maintenance,
resistance to extreme temperatures and vibrations and high
reliability. The actuation systems business unit also provides
actuators for primary flight control systems that operate
elevators, ailerons and rudders, and secondary flight controls
systems such as flaps and slats. The engineered polymer products
business unit provides large-scale marine composite structures,
marine acoustic materials, acoustic/vibration damping
structures, fireproof composites and high performance elastomer
formulations to government and commercial customers.
Engine Systems includes the aerostructures business unit, a
leading supplier of nacelles, pylons, thrust reversers and
related aircraft engine housing components. The segment also
produces engine and fuel controls, pumps, fuel delivery systems,
and structural and rotating components such as discs, blisks,
shafts and airfoils for both aerospace and industrial gas
turbine applications. The segment includes the cargo systems,
engine controls and customer services business units, which were
acquired as part of Aeronautical Systems. The cargo systems
business unit produces fully integrated main deck and lower lobe
cargo systems for wide body aircraft. The engine controls
business unit provides engine control systems and components for
jet engines used on commercial and military aircraft, including
fuel metering controls, fuel pumping systems, electronic control
software and hardware, variable geometry actuation controls,
afterburner fuel pump and metering unit nozzles, and engine
health monitoring systems. The customer services business unit
primarily supports aftermarket products for the businesses that
were acquired as part of Aeronautical Systems.
Electronic Systems produces a wide array of products that
provide flight performance measurements, flight management, and
control and safety data. Included are a variety of sensors
systems that measure and manage aircraft fuel and monitor oil
debris, engine and transmission, and structural health. The
segment’s products also include ice detection systems, test
equipment, aircraft lighting systems, landing gear cables and
harnesses, satellite control, data management and payload
systems, launch and missile telemetry systems, airborne
surveillance and reconnaissance systems, laser warning systems,
aircraft evacuation systems, de-icing systems, ejection seats,
and crew and attendant seating. The power systems business unit,
which was acquired as part of Aeronautical Systems, provides
systems that produce and control electrical power for commercial
and military aircraft, including electric generators for both
main and back-up electrical power, electric starters and
electric starter generating systems and power management and
distribution systems. Also acquired as part of Aeronautical
Systems was the hoists and winches business unit, which provides
airborne hoists and winches used on both helicopters and fixed
wing aircraft, and a business that produces engine shafts
primarily for helicopters.
107
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Segment operating income is total segment revenue reduced by
operating expenses identifiable with that business segment. The
accounting policies of the reportable segments are the same as
those for Goodrich consolidated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
1,629.7 |
|
|
$ |
1,563.8 |
|
|
$ |
1,390.1 |
|
|
Engine Systems
|
|
|
1,939.6 |
|
|
|
1,714.9 |
|
|
|
1,466.0 |
|
|
Electronic Systems
|
|
|
1,155.2 |
|
|
|
1,104.2 |
|
|
|
952.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL SALES
|
|
$ |
4,724.5 |
|
|
$ |
4,382.9 |
|
|
$ |
3,808.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Intersegment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
53.5 |
|
|
$ |
55.2 |
|
|
$ |
17.7 |
|
|
Engine Systems
|
|
|
21.3 |
|
|
|
39.6 |
|
|
|
4.4 |
|
|
Electronic Systems
|
|
|
34.0 |
|
|
|
42.4 |
|
|
|
16.7 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL INTERSEGMENT SALES
|
|
$ |
108.8 |
|
|
$ |
137.2 |
|
|
$ |
38.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
90.1 |
|
|
$ |
79.1 |
|
|
$ |
102.5 |
|
|
Engine Systems
|
|
|
264.9 |
|
|
|
97.3 |
|
|
|
168.9 |
|
|
Electronic Systems
|
|
|
137.8 |
|
|
|
140.0 |
|
|
|
147.8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
492.8 |
|
|
|
316.4 |
|
|
|
419.2 |
|
|
Corporate General and Administrative Expenses
|
|
|
(93.0 |
) |
|
|
(71.4 |
) |
|
|
(60.6 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL OPERATING INCOME
|
|
$ |
399.8 |
|
|
$ |
245.0 |
|
|
$ |
358.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
1,796.1 |
|
|
$ |
1,677.6 |
|
|
$ |
1,562.2 |
|
|
Engine Systems
|
|
|
2,266.7 |
|
|
|
2,078.5 |
|
|
|
2,048.5 |
|
|
Electronic Systems
|
|
|
1,419.0 |
|
|
|
1,401.7 |
|
|
|
1,333.0 |
|
|
Assets of Discontinued Operations
|
|
|
— |
|
|
|
— |
|
|
|
191.8 |
|
|
Corporate
|
|
|
735.7 |
|
|
|
793.7 |
|
|
|
906.2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL ASSETS
|
|
$ |
6,217.5 |
|
|
$ |
5,951.5 |
|
|
$ |
6,041.7 |
|
| |
|
|
|
|
|
|
|
|
|
The Company has five categories of substantially similar
products that share common customers, similar technologies and
similar end-use applications and share similar risks and growth
opportunities. Product categories cross the Company’s
business segments and do not reflect the management structure of
the Company. The Company’s sales by these product
categories are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Engine Products & Services
|
|
$ |
1,755.4 |
|
|
$ |
1,557.5 |
|
|
$ |
1,402.6 |
|
|
Landing System Products & Services
|
|
|
889.0 |
|
|
|
871.4 |
|
|
|
962.2 |
|
|
Electrical and Optical Products & Services
|
|
|
714.4 |
|
|
|
707.5 |
|
|
|
617.2 |
|
|
Safety Products & Services
|
|
|
362.5 |
|
|
|
339.1 |
|
|
|
320.8 |
|
|
Airframe Products & Services
|
|
|
908.6 |
|
|
|
841.6 |
|
|
|
470.7 |
|
|
Other Products & Services
|
|
|
94.6 |
|
|
|
65.8 |
|
|
|
35.0 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total Sales
|
|
$ |
4,724.5 |
|
|
$ |
4,382.9 |
|
|
$ |
3,808.5 |
|
| |
|
|
|
|
|
|
|
|
|
108
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
61.8 |
|
|
$ |
52.2 |
|
|
$ |
39.0 |
|
|
Engine Systems
|
|
|
53.5 |
|
|
|
40.3 |
|
|
|
35.0 |
|
|
Electronic Systems
|
|
|
32.7 |
|
|
|
28.8 |
|
|
|
23.2 |
|
|
Corporate
|
|
|
4.0 |
|
|
|
3.8 |
|
|
|
8.9 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL CAPITAL EXPENDITURES
|
|
$ |
152.0 |
|
|
$ |
125.1 |
|
|
$ |
106.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airframe Systems
|
|
$ |
89.7 |
|
|
$ |
92.4 |
|
|
$ |
71.6 |
|
|
Engine Systems
|
|
|
85.9 |
|
|
|
79.2 |
|
|
|
63.8 |
|
|
Electronic Systems
|
|
|
41.8 |
|
|
|
40.0 |
|
|
|
37.1 |
|
|
Corporate
|
|
|
5.5 |
|
|
|
7.5 |
|
|
|
8.3 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL DEPRECIATION AND AMORTIZATION
|
|
$ |
222.9 |
|
|
$ |
219.1 |
|
|
$ |
180.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Geographic Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
2,500.3 |
|
|
$ |
2,522.4 |
|
|
$ |
2,384.6 |
|
|
Canada
|
|
|
175.7 |
|
|
|
180.1 |
|
|
|
150.9 |
|
|
Europe(1)
|
|
|
1,472.9 |
|
|
|
1,198.9 |
|
|
|
909.2 |
|
|
Other Foreign
|
|
|
575.6 |
|
|
|
481.5 |
|
|
|
363.8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL
|
|
$ |
4,724.5 |
|
|
$ |
4,382.9 |
|
|
$ |
3,808.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment-net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
807.1 |
|
|
$ |
816.1 |
|
|
$ |
821.4 |
|
|
Canada
|
|
|
67.0 |
|
|
|
67.1 |
|
|
|
63.0 |
|
|
Europe
|
|
|
256.5 |
|
|
|
256.9 |
|
|
|
317.1 |
|
|
Other Foreign
|
|
|
34.4 |
|
|
|
35.8 |
|
|
|
20.9 |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL
|
|
$ |
1,165.0 |
|
|
$ |
1,175.9 |
|
|
$ |
1,222.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Sales to customers in the United Kingdom in 2004, 2003, and 2002
represented 28 percent, 28 percent and
39 percent, respectively, of European sales. Sales to
customers in France in 2004, 2003, and 2002 represented
41 percent, 34 percent and 33 percent,
respectively, of European sales. Sales were allocated to
geographic areas based on the country to which the product was
shipped. |
In the years ended December 31, 2004, 2003, and 2002,
direct and indirect sales to Airbus totaled approximately
16 percent, 14 percent and 13 percent,
respectively, of consolidated sales.
In the years ended December 31, 2004, 2003 and 2002, direct
and indirect sales to Boeing totaled approximately
13 percent, 17 percent and 20 percent,
respectively, of consolidated sales.
In the years ended December 31, 2004, 2003 and 2002, direct
and indirect sales to the U.S. government totaled
approximately 20 percent, 19 percent and
20 percent, respectively, of consolidated sales.
109
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note P. Supplemental Balance Sheet Information
As of December 31, balances for the accounts receivable
allowance for doubtful accounts were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Charged | |
|
Foreign | |
|
|
|
|
| |
|
Balance | |
|
to Costs | |
|
Currency | |
|
Write-Off | |
|
Balance | |
| |
|
Beginning | |
|
and | |
|
Translation | |
|
of Doubtful | |
|
at end | |
| |
|
of Year | |
|
Expense | |
|
and Other | |
|
Accounts | |
|
of Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Receivable Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
$ |
28.2 |
|
|
$ |
3.2 |
|
|
$ |
(0.1 |
) |
|
$ |
(11.8 |
) |
|
$ |
19.5 |
|
|
Long-Term(1)
|
|
|
65.7 |
|
|
|
— |
|
|
|
— |
|
|
|
(34.8 |
) |
|
|
30.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
93.9 |
|
|
$ |
3.2 |
|
|
$ |
(0.1 |
) |
|
$ |
(46.6 |
) |
|
$ |
50.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
$ |
31.4 |
|
|
$ |
8.5 |
|
|
$ |
0.9 |
|
|
$ |
(12.6 |
) |
|
$ |
28.2 |
|
|
Long-Term(1)
|
|
|
19.6 |
|
|
|
46.1 |
|
|
|
— |
|
|
|
— |
|
|
|
65.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$ |
51.0 |
|
|
$ |
54.6 |
|
|
$ |
0.9 |
|
|
$ |
(12.6 |
) |
|
$ |
93.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
$ |
41.5 |
|
|
$ |
7.4 |
|
|
$ |
(4.8 |
) |
|
$ |
(12.7 |
) |
|
$ |
31.4 |
|
|
Long-Term(1)
|
|
|
14.5 |
|
|
|
6.9 |
|
|
|
— |
|
|
|
1.8 |
|
|
|
19.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2002
|
|
$ |
56.0 |
|
|
$ |
14.3 |
|
|
$ |
(4.8 |
) |
|
$ |
(14.5 |
) |
|
$ |
51.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Long-term allowance is related to the Company’s notes
receivable in Other Assets from a receivable obligor. |
As of December 31, balances for property, plant and
equipment and allowances for depreciation were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Property, Plant and Equipment-net
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
71.1 |
|
|
$ |
74.4 |
|
|
Buildings and improvements
|
|
|
701.6 |
|
|
|
650.4 |
|
|
Machinery and equipment
|
|
|
1,511.9 |
|
|
|
1,465.0 |
|
|
Construction in progress
|
|
|
94.5 |
|
|
|
74.8 |
|
| |
|
|
|
|
|
|
| |
|
|
2,379.1 |
|
|
|
2,264.6 |
|
|
Less allowances for depreciation
|
|
|
(1,214.1 |
) |
|
|
(1,088.7 |
) |
| |
|
|
|
|
|
|
|
TOTAL
|
|
$ |
1,165.0 |
|
|
$ |
1,175.9 |
|
| |
|
|
|
|
|
|
Property includes assets acquired under capital leases,
principally buildings and machinery and equipment, of
$22.2 million and $24.5 million at December 31,
2004 and 2003, respectively. Related allowances for depreciation
are $6.4 million and $8.1 million at December 31,
2004 and 2003, respectively. Interest costs capitalized from
continuing operations were $0.5 million, $0.1 million
and $0.4 million in 2004, 2003 and 2002, respectively.
110
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, accrued expenses consisted of the
following:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Accrued Expenses
|
|
|
|
|
|
|
|
|
|
Wages, vacations, pensions and other employment costs
|
|
$ |
221.8 |
|
|
$ |
179.6 |
|
|
Postretirement benefits other than pensions
|
|
|
44.0 |
|
|
|
36.0 |
|
|
Taxes other than federal and foreign income taxes
|
|
|
19.9 |
|
|
|
31.3 |
|
|
Accrued interest
|
|
|
18.7 |
|
|
|
36.8 |
|
|
Accrued environmental liabilities
|
|
|
15.2 |
|
|
|
13.2 |
|
|
Restructuring and consolidation — environmental
|
|
|
1.0 |
|
|
|
4.4 |
|
|
Restructuring and consolidation
|
|
|
7.1 |
|
|
|
23.2 |
|
|
Deferred revenue
|
|
|
141.3 |
|
|
|
103.7 |
|
|
Warranties
|
|
|
69.0 |
|
|
|
62.9 |
|
|
Other
|
|
|
195.2 |
|
|
|
157.1 |
|
| |
|
|
|
|
|
|
|
TOTAL
|
|
$ |
733.2 |
|
|
$ |
648.2 |
|
| |
|
|
|
|
|
|
For the year ended December 31, total comprehensive income
consisted of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
172.2 |
|
|
$ |
100.4 |
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
| |
Unrealized foreign currency translation gains during period
|
|
|
89.4 |
|
|
|
131.3 |
|
| |
Minimum pension liability adjustments during the period
|
|
|
(69.8 |
) |
|
|
62.2 |
|
| |
Gain on cash flow hedges
|
|
|
2.8 |
|
|
|
49.5 |
|
| |
|
|
|
|
|
|
|
TOTAL
|
|
$ |
194.6 |
|
|
$ |
343.4 |
|
| |
|
|
|
|
|
|
Accumulated other comprehensive income (loss) as of
December 31, consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
Cumulative unrealized foreign currency translation gains
|
|
$ |
212.7 |
|
|
$ |
123.3 |
|
|
Minimum pension liability adjustments
|
|
|
(388.1 |
) |
|
|
(318.3 |
) |
|
Accumulated gain on cash flow hedges
|
|
|
71.7 |
|
|
|
68.9 |
|
| |
|
|
|
|
|
|
|
TOTAL
|
|
$ |
(103.7 |
) |
|
$ |
(126.1 |
) |
| |
|
|
|
|
|
|
The minimum pension liability amounts above are net of deferred
taxes of $209 million and $171.4 million in 2004 and
2003, respectively. The accumulated gain on cash flow hedges
above is net of deferred taxes of $38.6 million and
$31.9 million in 2004 and 2003, respectively. No income
taxes are provided on foreign currency translation gains as
foreign earnings are considered permanently invested.
Fair Values of Financial Instruments
The Company’s accounting policies with respect to financial
instruments are described in Note A.
111
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The carrying amounts of the Company’s significant balance
sheet financial instruments and their fair values are presented
below as of December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
| |
|
Value | |
|
Value | |
|
Value | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Long-term debt
|
|
$ |
1,901.8 |
|
|
$ |
2,136.4 |
|
|
$ |
2,212.2 |
|
|
$ |
2,424.5 |
|
Derivative financial instruments at December 31, 2004 and
2003 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Contract/ | |
|
|
|
Contract/ | |
|
|
| |
|
Notional | |
|
Fair | |
|
Notional | |
|
Fair | |
| |
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Interest rate swaps
|
|
$ |
250.0 |
|
|
$ |
(1.1 |
) |
|
$ |
250.0 |
|
|
$ |
2.2 |
|
|
Foreign currency forward contracts
|
|
|
712.8 |
|
|
|
110.3 |
|
|
|
598.1 |
|
|
|
96.7 |
|
Guarantees
The Company extends financial and product performance guarantees
to third parties. As of December 31, 2004, the following
environmental remediation and indemnification and financial
guarantees were outstanding:
| |
|
|
|
|
|
|
|
|
|
| |
|
Maximum | |
|
Carrying | |
| |
|
Potential | |
|
Amount of | |
| |
|
Payment | |
|
Liability | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Environmental remediation indemnification (Note X
“Contingencies”)
|
|
|
No limit |
|
|
$ |
18.7 |
|
|
Financial Guarantees:
|
|
|
|
|
|
|
|
|
| |
TIDES
|
|
$ |
145.0 |
|
|
$ |
— |
|
| |
Debt and lease payments
|
|
$ |
2.8 |
|
|
$ |
— |
|
| |
Residual value on leases
|
|
$ |
54.6 |
|
|
$ |
— |
|
| |
Executive loans to purchase company stock
|
|
$ |
4.4 |
|
|
$ |
— |
|
Prior to the adoption of Financial Accounting Standards Board
Interpretation No. 45, “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others” (FIN 45), the
Company accrued for costs associated with guarantees when it was
probable that a liability has been incurred and the amount could
be reasonably estimated. The most likely cost to be incurred was
accrued based on an evaluation of currently available facts and,
where no amount within a range of estimates was more likely, the
minimum was accrued. Guarantees extended subsequent to the
adoption of FIN 45 will be recorded at fair value.
In connection with the Company’s acquisition of Coltec
Industries Inc. on July 12, 1999, the Company
guaranteed amounts owed by Coltec Capital Trust with respect to
the $145 million of outstanding Coltec Capital
Trust 51/4% convertible
trust preferred securities (TIDES) and has guaranteed
Coltec’s performance of its obligations with respect to
Coltec’s guarantee of the TIDES and the underlying Coltec
convertible junior subordinated debentures. Following the
spin-off of the Company’s engineered industrial products
(EIP) segment, the TIDES remained outstanding as an obligation
of Coltec Capital Trust and the Company’s guarantee with
respect to the TIDES remains an obligation of the Company. EnPro
Industries, Inc., Coltec and Coltec
112
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Capital Trust have agreed to indemnify the Company for any costs
and liabilities arising under or relating to the TIDES after the
spin-off.
The Company’s guarantee requires that the Company pay, to
the extent not paid by Coltec Capital Trust, distributions or
other payments on the TIDES to the extent that Coltec Capital
Trust has funds available therefore at such time, and that it
pay or perform, to the extent not paid or performed by Coltec,
Coltec’s obligations under its guarantee of the TIDES and
under the underlying Coltec convertible junior subordinated
debentures. The Company’s guarantee is unsecured and is
subordinated in right of payment to all of the Company’s
senior debt that is currently outstanding or that may be
incurred in the future.
The Company’s guarantee will terminate upon full payment of
the redemption price for the TIDES, the distribution of the
Coltec convertible junior subordinated debentures or full
payment of the amounts payable upon liquidation of Coltec
Capital Trust.
The debt and lease payments primarily represent obligations of
the Company under industrial development revenue bonds to
finance additions to facilities that have since been divested.
Each of these obligations was assumed by a third party in
connection with the Company’s divestiture of the related
facilities. If the assuming parties default, the Company will be
liable for payment of the obligations. The industrial
development revenue bonds mature in February 2008.
Residual value on leases relate to corporate aircraft and
production equipment leases pursuant to which the Company is
obligated to either purchase the leased equipment at the end of
the lease term or remarket the leased equipment. The residual
values were established at lease inception. The lease terms for
the corporate aircraft mature in 2011 and 2012. The lease term
for the production equipment matures in 2005 but may be extended.
|
|
|
Executive Loans to Purchase Company Stock |
The executive loans to purchase Company stock are full-recourse
bank loans made pursuant to the Company’s Executive Stock
Purchase Program (the Program). The Company has guaranteed the
loans in the event of default, but has recourse to the
executives if the Company incurs a loss under the guarantee.
Participants in the Program are fully liable for any losses, as
well as for the repayment of the loans when they come due. Each
of the loans has a maturity date of September 30, 2006,
with the exception of one loan to a former officer that matures
on March 31, 2005. The Program was suspended effective
August 16, 2002, and no further loans may be made under the
Program. None of the loans has been modified since the Company
suspended the Program.
Service and Product Warranties
The Company provides service and warranty policies on its
products. Liability under service and warranty policies is based
upon specific claims and a review of historical warranty and
service claim experience. Adjustments are made to accruals as
claim data and historical experience change. In addition, the
Company incurs discretionary costs to service its products in
connection with product performance issues.
113
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The changes in the carrying amount of service and product
warranties are as follows:
| |
|
|
|
|
|
| |
|
(Dollars In millions) | |
| |
|
| |
|
Balance at December 31, 2002
|
|
$ |
67.9 |
|
| |
Service and product warranty provision
|
|
|
42.7 |
|
| |
Payments
|
|
|
(32.5 |
) |
| |
Foreign currency translation
|
|
|
0.5 |
|
| |
|
|
|
|
Balance at December 31, 2003
|
|
|
78.6 |
|
| |
|
|
|
| |
Service and product warranty provision
|
|
|
38.2 |
|
| |
Obligations assumed in the partial settlement with Northrop
Grumman
|
|
|
71.7 |
|
| |
Payments
|
|
|
(22.3 |
) |
| |
Foreign currency translation
|
|
|
0.3 |
|
| |
|
|
|
|
Balance at December 31, 2004
|
|
$ |
166.5 |
|
| |
|
|
|
The partial settlement with Northrop Grumman relates to the
Company’s assumption of certain customer warranty claims
for products designed, manufactured or sold by TRW prior to the
acquisition of the Aeronautical Systems business by the Company.
See Note Y “Partial Settlement with Northrop
Grumman.”
As of December 31, the current and long-term portions of
service and product warranties were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in | |
| |
|
millions) | |
|
Short-term liabilities
|
|
$ |
69.0 |
|
|
$ |
62.9 |
|
|
Long-term liabilities
|
|
|
97.5 |
|
|
|
15.7 |
|
| |
|
|
|
|
|
|
|
TOTAL
|
|
$ |
166.5 |
|
|
$ |
78.6 |
|
| |
|
|
|
|
|
|
Note Q. Derivatives and Hedging Activities
Cash Flow Hedges
The Company has subsidiaries that conduct a substantial portion
of their business in Euros, Great Britain Pounds Sterling,
Canadian Dollars and Polish Zlotys but have significant sales
contracts that are denominated in U.S. Dollars.
Periodically, the Company enters into forward contracts to
exchange U.S. Dollars for Euros, Great Britain Pounds
Sterling, Canadian Dollars and Polish Zlotys.
The forward contracts described above are used to mitigate the
potential volatility to earnings and cash flow arising from
changes in currency exchange rates. The forward contracts are
being accounted for as cash flow hedges. The forward contracts
are recorded in the Company’s Consolidated Balance Sheet at
fair value with the offset reflected in Accumulated Other
Comprehensive Income, net of deferred taxes. The notional value
of the forward contracts at December 31, 2004 was
$712.8 million. The fair value of the forward contracts at
December 31, 2004 was an asset of $110.3 million, of
which $81.1 million is recorded in Prepaid Expenses and
Other Assets and $29.2 million is recorded in Other Assets.
The total fair value of the forward contracts of
$110.3 million (before deferred taxes of
$38.6 million), including terminated forward contracts as
discussed below, was recorded in
114
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accumulated Other Comprehensive Income and will be reflected in
income as the individual contracts mature which will offset the
earnings effect of the hedged item. As of December 31,
2004, the portion of the $110.3 million fair value that
would be reclassified into earnings as an increase in sales to
offset the effect of the hedged item in the next 12 months
is a gain of $81.1 million.
In 2003, the Company terminated certain forward contracts prior
to their scheduled maturities in 2004 and received cash of
$3.8 million. As of December 31, 2004, all of the gain
related to these terminated contracts has been reflected in
income and sales when the original contracts would have matured.
Fair Value Hedges
In September 2002, the Company terminated an interest rate swap
agreement, prior to its maturity in 2009, on its
$200 million in principal amount of 6.6 percent senior
notes due in 2009. At termination, the Company received
$29.4 million in cash, comprised of a $2.6 million
receivable representing the amount owed on the interest rate
swap from the previous settlement date and $26.8 million
representing the fair value of the interest rate swap at the
time of termination. The carrying amount of the notes was
increased by $26.8 million representing the fair value of
the debt due to changes in interest rates for the period hedged.
This amount is being amortized as a reduction to interest
expense over the remaining term of the debt.
In July 2003, the Company entered into a $100 million
fixed-to-floating interest rate swap on the 6.45 percent
senior notes due in 2007. In October 2003, the Company entered
into two $50 million fixed-to-floating interest rate swaps.
One $50 million swap is on the Company’s
7.5 percent senior notes due in 2008 and the other
$50 million swap is on the Company’s 6.45 percent
medium-term notes due in 2008. In December 2003, the Company
entered into a $50 million fixed-to-floating interest rate
swap on its 7.5 percent senior notes due in 2008. The
purpose of entering into these swaps was to increase the
Company’s exposure to variable interest rates. The
settlement and maturity dates on each swap are the same as those
on the referenced notes. In accordance with Financial Accounting
Standards Board Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” the
interest rate swaps are being accounted for as fair value hedges
and the carrying value of the notes has been adjusted to reflect
the fair values of the interest rate swaps. The fair value of
the interest rate swaps was a liability (loss) of
$1.1 million at December 31, 2004.
Other Forward Contracts
As a supplement to the foreign exchange cash flow hedging
program, in January 2004 the Company began to enter into forward
contracts to manage its foreign currency risk related to the
translation of monetary assets and liabilities denominated in
currencies other than the relevant functional currency. These
forward contracts mature monthly and the notional amounts are
adjusted periodically to reflect changes in net monetary asset
balances. The gains or losses on these forward contracts are
being recorded in earnings when realized in order to mitigate
the earnings impact of the translation of net monetary assets.
As of December 31, 2004, the Company had forward contracts
with a notional value of $81 million to buy Great Britain
Pounds Sterling, contracts with a net notional value of
$11 million to buy Euros and contracts with a notional
value of $5.4 million to sell Canadian Dollars.
115
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note R. Supplemental Cash Flow Information
The following table sets forth other cash flow information
including acquisitions accounted for under the purchase method.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Estimated fair value of tangible assets acquired
|
|
$ |
— |
|
|
$ |
2.1 |
|
|
$ |
1,002.7 |
|
|
Goodwill and identifiable intangible assets acquired
|
|
|
— |
|
|
|
(26.4 |
) |
|
|
830.1 |
|
|
Cash (paid) received
|
|
|
(0.5 |
) |
|
|
23.6 |
|
|
|
(1,472.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed or (extinguished)
|
|
$ |
(0.5 |
) |
|
$ |
(0.7 |
) |
|
$ |
360.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
Interest paid (net of amount capitalized)
|
|
$ |
142.8 |
|
|
$ |
151.5 |
|
|
$ |
87.2 |
|
|
Income taxes paid (refunds received), net
|
|
$ |
31.7 |
|
|
$ |
(76.5 |
) |
|
$ |
(46.7 |
) |
Interest and income taxes paid includes amounts related to
discontinued operations.
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, 2004, 2,401,673 shares of
Series Preferred Stock have been redeemed, and no shares of
Series Preferred Stock were outstanding. The Board of
Directors establishes and designates the series and fixes the
number of shares and the relative rights, preferences and
limitations of the respective series of the
Series Preferred Stock.
|
|
|
Cumulative Participating Preferred Stock —
Series F |
The Company has 200,000 shares of Junior Participating
Preferred Stock — Series F —
$1 par value Series F Stock authorized at
December 31, 2004. Series F Stock has preferential
voting, dividend and liquidation rights over the Company’s
common stock. At December 31, 2004, no Series F Stock
was issued or outstanding.
Each outstanding share of the Company’s common stock
carries with it one preferred share purchase right which allows
the registered holder to purchase directly from the Company one
one-thousandth of a share of Series F Stock for a purchase
price of $200 (subject to adjustment). The terms of the rights
are described in a rights agreement, dated as of June 2,
1997, between the Company and The Bank of New York, as rights
agent. Each share of Series F Stock generally has voting
and dividend rights that are intended to be equivalent to one
thousand shares of the Company’s common stock.
The preferred share purchase rights are generally not
exercisable or transferable until the earlier of ten business
days after a public announcement that a person has become an
acquiring person, or ten business days after the commencement
of, or announcement of an intention to commence, a tender or
exchange offer that would result in a person becoming an
acquiring person. Under the plan, a person (other than the
Company or any of the Company’s employee benefit plans)
will become an acquiring person if that person, together with
any affiliated or associated persons, acquires, or obtains the
right to acquire or vote, 20% or more of the Company’s
outstanding common stock, subject to certain exceptions
described in the plan.
116
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
If a person becomes an acquiring person, the holder of each
right (other than the acquiring person and its affiliates and
associates) may exercise the right into a number of shares of
the Company’s common stock having a then current market
value of two times the purchase price of the right. If there are
an insufficient number of shares of common stock to permit the
exercise of the rights in full, the Company will substitute
shares of Series F Stock or fractions thereof that have the
same market value as the shares of common stock that would
otherwise be issued upon exercise of the rights. In addition, if
the Company is acquired in a merger or other business
combination transaction or 50% or more of the Company’s
consolidated assets or earning power is sold after a person has
become an acquiring person, arrangements will be made so that
the holder of each right may exercise the right into a number of
shares of common stock of the acquiring company that have a then
current market value of two times the purchase price of the
right.
If a person has become an acquiring person but has not acquired
beneficial ownership of 50% or more of the Company’s
outstanding common stock, the Company may exchange the rights in
whole or in part for shares of the Company’s common stock
at an exchange ratio of one share of common stock per right, or
if the Company does not have a sufficient number of shares of
the Company’s common stock to permit the exchange, shares
of Series F Stock or fraction thereof having a market value
equal to one share of common stock.
Until a person has become an acquiring person, the Company may
redeem the rights in whole, but not in part, at a price of
$0.01 per right, and supplement or amend the rights
agreement without the approval of the holders of the rights.
After a person has become an acquiring person, the Company may
not amend the rights agreement in any manner that would
adversely affect the holders of the rights.
The rights will expire at the close of business on
August 2, 2007, or earlier if the Company redeems them, or
the Company exchanges them for shares of the Company’s
common stock or Series F Stock.
Note T. Common Stock
During 2004, 2003 and 2002, 1.444 million,
0.696 million and 0.474 million shares, respectively,
of authorized but unissued shares of common stock were issued
under the Stock Option Plan and other employee stock-based
compensation plans.
During 2002, the Company sold 14.950 million shares of
common stock in a public offering for net proceeds of
$216.2 million.
The Company acquired 0.026 million, 0.033 million, and
0.060 million shares of treasury stock in 2004, 2003 and
2002, respectively.
As of December 31, 2004, there were 14.3 million
shares of common stock reserved for future issuance under the
Stock Option Plan and other employee stock-based compensation
plans.
Note U. Preferred Securities of Trust
On July 6, 1995, BFGoodrich Capital, a wholly owned
Delaware statutory business trust (Trust), which was
consolidated by the Company prior to the fourth quarter 2003,
received $122.5 million, net of the underwriting
commission, from the issuance of 8.30% Cumulative Quarterly
Income Preferred Securities, Series A (QUIPS). The Trust
invested the proceeds in 8.30% Junior Subordinated Debentures,
Series A, due 2025 (QUIPS 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.
117
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On October 6, 2003 the Company redeemed approximately
$63 million of the QUIPS and on March 2, 2004, the
Company completed the redemption of the remaining
$63.5 million of the QUIPS outstanding. The QUIPS were
supported by the QUIPS Debentures which were also redeemed on
October 6, 2003 and March 2, 2004. In 2003 and 2004,
the Company recorded expenses of $0.4 million and
$0.3 million, respectively, for associated costs in Other
Income (Expense) — Net related to the redemptions.
Note V. Stock-Based Compensation
The Company administers the Goodrich 2001 Stock Option Plan
(Plan) as part of its long-term incentive compensation plan. The
Plan, as approved by the Company’s shareholders, allows the
Company to use stock options, performance shares, restricted
stock awards, restricted stock options and several other
equity-based compensation tools. Currently, the Plan, which will
expire on April 17, 2011, unless renewed, makes
6,500,000 shares of common stock of the Company available
for grant, together with shares of common stock available as of
April 17, 2001 for future awards under the Company’s
1999 stock option plan, and any shares of common stock
representing outstanding 1999 stock option plan awards as of
April 17, 2001 that are not issued or otherwise are
returned to the Company after that date. Generally, options
granted on or after January 1, 2004 are exercisable at the
rate of
331/3 percent
after one year,
662/3 percent
after two years and 100 percent after three years. Options
granted before that date are exercisable at the rate of
35 percent after one year, 70 percent after two years
and 100 percent after three years, except that options
granted to the Company’s Executive Officers 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 fair market value on the date of grant.
During 2004, the Company granted stock options under the plan to
certain employees and administered an employee stock purchase
plan. Effective January 1, 2004, the Company changed its
method of accounting for stock-based compensation. The Company
adopted the accounting provisions of Statement of Financial
Accounting Standards No. 123 “Accounting for
Stock-Based Compensation” (SFAS No. 123) and
Statement of Financial Accounting Standards No. 148
“Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123”
(SFAS No. 148). As provided for by these standards,
the Company began to expense stock options and the shares issued
under its employee stock purchase plan on a modified prospective
basis. Under this transition method, new grants will be valued
at the date issued and expensed. The expense will be recognized
over the period the stock options and shares are earned and
vest. Prior periods have not been restated. The fair value for
options issued in 2004 under SFAS 123 was estimated at the
date of grant using a Black-Scholes option-pricing model with
the following weighted-average assumptions:
| |
|
|
|
|
| |
|
2004 | |
| |
|
| |
|
Risk-Free Interest Rate (%)
|
|
|
4.1 |
|
|
Dividend Yield (%)
|
|
|
3.3 |
|
|
Volatility Factor (%)
|
|
|
44.5 |
|
|
Weighted-Average Expected Life of the Options (years)
|
|
|
7.0 |
|
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 value of stock options granted during
2004 was $11.06 per share. The adoption reduced before tax
income by $12.1 million, or $7.7 million after tax,
for the year ended December 31, 2004 as compared to
accounting for stock-based compensation in accordance
118
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (APB
No. 25).
Prior to January 1, 2004, the Company granted stock options
and performance shares under the plan to certain employees and
administered an employee stock purchase plan; however, prior to
that date, the stock-based employee compensation was accounted
for in accordance with APB No. 25 and no compensation
expense was included in net income for stock options or employee
stock purchase plan shares. The Company also has outstanding
stock options under the pre-merger plans of Coltec and Rohr.
These stock options are included in the disclosures below.
Prior to the Company’s adoption of SFAS No. 123
and SFAS No. 148, SFAS No. 123 required the
Company to provide pro forma information regarding net income
and earnings per share 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:
| |
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
Risk-Free Interest Rate (%)
|
|
|
3.7 |
|
|
|
3.7 |
|
|
Dividend Yield (%)
|
|
|
3.6 |
|
|
|
3.6 |
|
|
Volatility Factor (%)
|
|
|
47.4 |
|
|
|
47.4 |
|
|
Weighted-Average Expected Life of the Options (years)
|
|
|
7.0 |
|
|
|
7.0 |
|
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
2003 and 2002 were $6.80 and $9.50, 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 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:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions, | |
| |
|
except per share | |
| |
|
amounts) | |
|
Net income:
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
100.4 |
|
|
$ |
117.9 |
|
| |
Pro forma
|
|
|
81.5 |
|
|
|
100.4 |
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.85 |
|
|
$ |
1.14 |
|
| |
Pro forma
|
|
|
0.69 |
|
|
|
0.97 |
|
|
Diluted:
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.85 |
|
|
$ |
1.14 |
|
| |
Pro forma
|
|
|
0.69 |
|
|
|
0.97 |
|
The effects of applying SFAS 123 in this pro forma
disclosure are not likely to be representative of effects on
reported net income for years after those presented.
119
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the Company’s stock option activity and
related information follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted-Average | |
| |
|
Options | |
|
Exercise Price | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
10,648.1 |
|
|
$ |
29.54 |
|
| |
Granted
|
|
|
715.7 |
|
|
|
30.53 |
|
| |
Exercised
|
|
|
(1,013.7 |
) |
|
|
21.73 |
|
| |
Forfeited
|
|
|
(321.9 |
) |
|
|
29.35 |
|
| |
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
10,028.2 |
|
|
|
29.44 |
|
| |
|
|
|
|
|
|
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
9,460.5 |
|
|
$ |
30.93 |
|
| |
Granted
|
|
|
2,371.0 |
|
|
|
18.65 |
|
| |
Exercised
|
|
|
(138.3 |
) |
|
|
20.16 |
|
| |
Forfeited
|
|
|
(1,045.1 |
) |
|
|
26.67 |
|
| |
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
10,648.1 |
|
|
|
29.54 |
|
| |
|
|
|
|
|
|
|
Year Ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
8,145.9 |
|
|
$ |
33.60 |
|
| |
Granted — before EnPro spin-off
|
|
|
1,916.7 |
|
|
|
26.19 |
|
| |
Exercised — before EnPro spin-off
|
|
|
(157.7 |
) |
|
|
24.05 |
|
| |
Forfeited — before EnPro spin-off
|
|
|
(408.8 |
) |
|
|
31.44 |
|
| |
Adjustment to outstanding options due to EnPro spin-off (1)
|
|
|
420.5 |
|
|
|
|
|
| |
Exercised — after EnPro spin-off
|
|
|
(19.1 |
) |
|
|
26.09 |
|
| |
Forfeited — after EnPro spin-off
|
|
|
(437.0 |
) |
|
|
36.24 |
|
| |
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
9,460.5 |
|
|
|
30.93 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
At the time of the EnPro spin-off, the number of options and the
exercise price per option were adjusted based on the ratio of
the Company’s stock price before and after the spin-off. |
The following table summarizes information about the
Company’s stock options outstanding at December 31,
2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
| |
|
Number | |
|
Weighted-Average | |
|
Average | |
|
Number | |
|
Average | |
| Range of |
|
Outstanding | |
|
Remaining | |
|
Exercise | |
|
Exercisable | |
|
Exercise | |
| Exercise Prices |
|
(In thousands) | |
|
Contractual Life | |
|
Price | |
|
(In thousands) | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$14.29 — $22.25
|
|
|
1,976.8 |
|
|
|
7.8 years |
|
|
$ |
18.58 |
|
|
|
1,097.0 |
|
|
$ |
18.47 |
|
|
$25.10 — $30.98
|
|
|
3,598.3 |
|
|
|
6.5 years |
|
|
|
26.44 |
|
|
|
2,620.9 |
|
|
|
25.51 |
|
|
$32.02 — $38.84
|
|
|
3,744.8 |
|
|
|
4.2 years |
|
|
|
36.00 |
|
|
|
3,744.8 |
|
|
|
36.00 |
|
|
$39.02 — $47.02
|
|
|
708.3 |
|
|
|
3.0 years |
|
|
|
40.21 |
|
|
|
708.3 |
|
|
|
40.21 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,028.2 |
|
|
|
5.6 years |
|
|
|
|
|
|
|
8,171.0 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the years ended December 31, 2004, 2003 and 2002,
restricted stock awards for 4,200, 58,603 and
74,340 shares, respectively, were made under the Plan,
including those made to employees of discontinued operations.
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 generally vest three years after
the award date. Cash dividends are paid to participants each
quarter. The cost of these awards, determined as the market
value of the shares at the date of grant, is being amortized
over the vesting period. During 2004, 2003 and 2002, 8,378,
6,600 and no shares of restricted stock, respectively, were
forfeited. In 2004, 2003 and 2002, $0.7 million,
$1.0 million and $0.8 million, respectively, was
charged to expense of continuing operations for restricted stock
awards.
During the year ended December 31, 2004, restricted stock
unit awards for 591,750 units were made under the Plan.
Restricted stock units may be granted subject to conditions
established by the Board of Directors. Under the terms of the
restricted stock units, the units either vest three years after
the award date or vest 50 percent at the end of the third
year, 75 percent at the end of the fourth year and
100 percent at the end of the fifth year or 100 percent at
the end of the third year with provisions for accelerated
vesting in certain circumstances. Cash dividend equivalents are
paid to participants each quarter. The cost of these awards,
determined as the market value of the shares at the date of
grant, plus dividends declared is being amortized over the
vesting period. During 2004, 28,100 restricted stock units were
forfeited. In the year ended December 31, 2004,
$4.9 million was charged to expense of continuing
operations for restricted stock units.
The Plan provides for the issuance of performance units that may
be earned and paid in cash to the Company’s management
based on the achievement of certain financial goals over a three
year measurement period. Dividends accrue on performance units
during the measurement period and are reinvested in additional
performance units. Compensation expense is recorded consistent
with the achievement of performance objectives. During 2004,
2003 and 2002, the Company issued 198,900, 361,000 and 283,000
performance units, respectively. During 2004, 2003 and 2002,
45,600, 18,630, and 15,700 performance units, respectively, were
forfeited. In 2004, $2.3 million before tax was charged to
expense, in 2003, $4.1 million before tax was charged to
expense and in 2002, $1.4 million before tax was recognized
as income of continuing operations for performance units.
Note W. Discontinued Operations
The disposition of the Engineered Industrial Products segment
and Avionics business and the closure of the PRS business are
reported as discontinued operations. Accordingly, the revenues,
costs and expenses, assets and liabilities, and cash flows of
Engineered Industrial Products, Avionics and PRS have been
segregated in the Consolidated Statement of Income, Consolidated
Balance Sheet and Consolidated Statement of Cash Flows.
121
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes the results of discontinued operations:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Dollars in millions) | |
|
Sales:
|
|
|
|
|
|
|
|
|
| |
Engineered Industrial Products
|
|
$ |
— |
|
|
$ |
289.5 |
|
| |
Avionics and Passenger Restraint Systems
|
|
|
24.3 |
|
|
|
101.7 |
|
| |
|
|
|
|
|
|
| |
|
$ |
24.3 |
|
|
$ |
391.2 |
|
| |
|
|
|
|
|
|
|
Pretax income (loss) from operations:
|
|
|
|
|
|
|
|
|
| |
Engineered Industrial Products
|
|
$ |
— |
|
|
$ |
(13.5 |
) |
| |
Avionics and Passenger Restraint Systems
|
|
|
(0.9 |
) |
|
|
2.7 |
|
| |
|
|
|
|
|
|
| |
|
|
(0.9 |
) |
|
|
(10.8 |
) |
|
Income tax benefit
|
|
|
0.3 |
|
|
|
3.9 |
|
|
Distributions on trust preferred securities
|
|
|
— |
|
|
|
(3.3 |
) |
|
Gain on the sale of Avionics (net of income tax expense of
$39.1 million)
|
|
|
63.0 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$ |
62.4 |
|
|
$ |
(10.2 |
) |
| |
|
|
|
|
|
|
Spin-off of Engineered Industrial Products
On May 31, 2002, the Company completed the tax-free
spin-off of its Engineered Industrial Products
(EIP) segment. The spin-off was effected through a tax-free
distribution to the Company’s shareholders of all of the
capital stock of EnPro Industries, Inc. (EnPro), a subsidiary
that the Company formed in connection with the spin-off. In the
spin-off, the Company’s shareholders received one share of
EnPro common stock for every five shares of the Company’s
common stock owned on May 28, 2002, the record date.
At the time of the spin-off, EnPro’s only material asset
was all of the capital stock and certain indebtedness of Coltec
Industries Inc (Coltec). Coltec and its subsidiaries owned
substantially all of the assets and liabilities of the EIP
segment, including the associated asbestos liabilities and
related insurance.
Prior to the spin-off, Coltec also owned and operated an
aerospace business. Before completing the spin-off,
Coltec’s aerospace business assumed all intercompany
balances outstanding between Coltec and the Company and Coltec
then transferred to the Company as a dividend all the assets,
liabilities and operations of its aerospace business, including
these assumed balances. Following this transfer and prior to the
spin-off, all of the capital stock of Coltec was contributed to
EnPro, with the result that at the time of the spin-off Coltec
was a wholly-owned subsidiary of EnPro.
In connection with the spin-off, the Company and EnPro entered
into a distribution agreement, a tax matters agreement, a
transition services agreement, an employee matters agreement and
an indemnification agreement, which govern the relationship
between the Company and EnPro after the spin-off and provide for
the allocation of employee benefits, tax and other liabilities
and obligations attributable to periods prior to the spin-off.
The spin-off was recorded as a dividend and resulted in a
reduction of the Company’s shareholders’ equity of
$409.1 million representing the recorded value of the net
assets of the business distributed, including cash of
$47 million. The distribution agreement provided for
122
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
certain post-distribution adjustments relating to the amount of
cash to be included in the net assets distributed, which
adjustments resulted in a cash payment by EnPro to the Company
of $0.6 million.
The $150 million of outstanding Coltec Capital
Trust 51/4% convertible
trust preferred securities (TIDES) that were reflected in
liabilities of discontinued operations remained outstanding as
part of the EnPro capital structure following the spin-off. The
TIDES are convertible into shares of both Goodrich and EnPro
common stock until April 15, 2028. As of December 31,
2004, $145 million of the TIDES remained outstanding. The
Company has guaranteed amounts owed by Coltec Capital Trust with
respect to the TIDES and has guaranteed Coltec’s
performance of its obligations with respect to the TIDES and the
underlying Coltec convertible subordinated debentures. EnPro,
Coltec and Coltec Capital Trust have agreed to indemnify the
Company for any costs and liabilities arising under or related
to the TIDES after the spin-off.
Prior to the spin-off, Coltec acquired certain call options on
the Company’s common stock in order to partially hedge its
exposure to fluctuations in the market price of the
Company’s stock resulting from the TIDES. These call
options remained an asset of Coltec following the spin-off.
Avionics and Passenger Restraint Systems
On March 28, 2003, the Company completed the sale of its
Avionics business to L-3 Communications Corporation for
$188 million, or $181 million net of fees and
expenses. The gain on the sale was $63 million after tax,
which was reported as Income from Discontinued Operations. The
Avionics business marketed a variety of state-of-the art
avionics instruments and systems primarily for general aviation,
business jet and military aircraft. The Company’s PRS
business ceased operations in the first quarter of 2003. Prior
periods have been restated to reflect the Avionics and PRS
businesses as discontinued operations.
Note X. Contingencies
General
There are pending or threatened against the Company 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. The
Company 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 its
consolidated financial position, results of operations or cash
flow. From time to time, the Company is also involved in legal
proceedings as a plaintiff involving tax, contract, patent
protection, environmental and other matters. Gain contingencies,
if any, are recognized when they are realized. Legal costs are
generally expensed as incurred.
Environmental
The Company is subject to various domestic and international
environmental laws and regulations which may require that it
investigate and remediate the effects of the release or disposal
of materials at sites associated with past and present
operations, including sites at which the Company has been
identified as a potentially responsible party under the federal
Superfund laws and comparable state laws. The Company is
currently involved in the investigation and remediation of a
number of sites under these laws.
The measurement of environmental liabilities by the Company is
based on currently available facts, present laws and regulations
and current technology. Such estimates take into consideration
the Company’s prior experience in site investigation and
remediation, the data
123
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
concerning cleanup costs available from other companies and
regulatory authorities and the professional judgment of the
Company’s environmental specialists in consultation with
outside environmental specialists, when necessary. Estimates of
the Company’s environmental liabilities are further subject
to uncertainties regarding the nature and extent of site
contamination, the range of remediation alternatives available,
evolving remediation standards, imprecise engineering
evaluations and estimates of appropriate cleanup technology,
methodology and cost, the extent of corrective actions that may
be required and the number and financial condition of other
potentially responsible parties, as well as the extent of their
responsibility for the remediation.
Accordingly, as investigation and remediation of these sites
proceed, it is likely that adjustments in the Company’s
accruals will be necessary to reflect new information. The
amounts of any such adjustments could have a material adverse
effect on the Company’s results of operations in a given
period, but the amounts, and the possible range of loss in
excess of the amounts accrued, are not reasonably estimable.
Based on currently available information, however, the Company
does not believe that future environmental costs in excess of
those accrued with respect to sites for which it has been
identified as a potentially responsible party are likely to have
a material adverse effect on the Company’s financial
condition. There can be no assurance, however, that additional
future developments, administrative actions or liabilities
relating to environmental matters will not have a material
adverse effect on the Company’s results of operations or
cash flows in a given period.
Environmental liabilities, including legal costs, are recorded
when the Company’s liability is probable and the costs are
reasonably estimable, which generally is not later than at
completion of a feasibility study or when the Company has
recommended a remedy or has committed to an appropriate plan of
action. The liabilities are reviewed periodically and, as
investigation and remediation proceed, adjustments are made as
necessary. Liabilities for losses from environmental remediation
obligations do not consider the effects of inflation and
anticipated expenditures are not discounted to their present
value. The liabilities are not reduced by possible recoveries
from insurance carriers or other third parties, but do reflect
anticipated allocations among potentially responsible parties at
federal Superfund sites or similar state-managed sites and an
assessment of the likelihood that such parties will fulfill
their obligations at such sites.
The Company’s Consolidated Balance Sheet included an
accrued liability for environmental remediation obligations of
$88.5 million and $87.8 million at December 31,
2004 and December 31, 2003, respectively. At
December 31, 2004 and December 31, 2003,
$16.2 million and $17.6 million, respectively, of the
accrued liability for environmental remediation was included in
current liabilities as Accrued Expenses. At December 31,
2004 and December 31, 2003, $29.6 million and
$24.9 million, respectively, was associated with ongoing
operations and $58.9 million and $62.9 million,
respectively, was associated with businesses previously disposed
of or discontinued.
The timing of expenditures depends on a number of factors that
vary by site, including the nature and extent of contamination,
the number of potentially responsible parties, the timing of
regulatory approvals, the complexity of the investigation and
remediation, and the standards for remediation. The Company
expects that it will expend present accruals over many years,
and will complete remediation in less than 30 years at all
sites for which it has been identified as a potentially
responsible party. This period includes operation and monitoring
costs that are generally incurred over 15 to 25 years.
124
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Asbestos
The Company and a number of its subsidiaries have been named as
defendants in various actions by plaintiffs alleging injury or
death as a result of exposure to asbestos fibers in products, or
which may have been present in the Company’s facilities. A
number of these cases involve maritime claims, which have been
and are expected to continue to be administratively dismissed by
the court. These actions primarily relate to previously owned
businesses. The Company believes that pending and reasonably
anticipated future actions, net of anticipated insurance
recoveries, are not likely to have a material adverse effect on
the Company’s financial condition, results of operations or
cash flows. There can be no assurance, however, that future
legislative or other developments will not have a material
adverse effect on the Company’s results of operations in a
given period.
The Company believes that it has substantial insurance coverage
available to it related to any remaining claims. However, the
primary layer of insurance coverage for some of these claims is
provided by the Kemper Insurance Companies (Kemper). Kemper has
indicated that, due to capital constraints and downgrades from
various rating agencies, it has ceased underwriting new business
and now focuses on administering policy commitments from prior
years. Kemper has also indicated that it is currently operating
under a “run-off” plan approved by the Illinois
Department of Insurance. The Company cannot predict the impact
of Kemper’s financial position on the availability of the
Kemper insurance.
In addition, a portion of the Company’s primary and excess
layers of general liability insurance coverage for some of these
claims was provided by insurance subsidiaries of London United
Investments plc (KWELM). KWELM is insolvent and in the process
of distributing its assets and dissolving. In September 2004,
the Company entered into a settlement agreement with KWELM
pursuant to which the Company agreed to give up its rights with
respect to the KWELM insurance policies in exchange for
$18.3 million. The settlement amount is subject to increase
under certain circumstances. The settlement represents a
negotiated payment for the Company’s loss of insurance
coverage, as it no longer has the KWELM insurance available for
claims that would have qualified for coverage. The settlement
amount of $18.3 million was recorded as a deferred
settlement credit.
Liabilities of Divested Businesses
At the time of the EIP spin-off in 2002, two subsidiaries of
Coltec were defendants in a significant number of personal
injury claims relating to alleged asbestos-containing products
sold by those subsidiaries. It is possible that asbestos-related
claims might be asserted against the Company on the theory that
the Company has some responsibility for the asbestos-related
liabilities of EnPro Industries, Inc. (EnPro), Coltec or its
subsidiaries, even though the activities that led to those
claims occurred prior to the Company’s ownership of any of
those subsidiaries. Also, it is possible that a claim might be
asserted against the Company that Coltec’s dividend of its
aerospace business to the Company prior to the spin-off was made
at a time when Coltec was insolvent or caused Coltec to become
insolvent. Such a claim could seek recovery from the Company on
behalf of Coltec of the fair market value of the dividend.
A limited number of asbestos-related claims have been asserted
against the Company as “successor” to Coltec or one of
its subsidiaries. The Company believes that it has substantial
legal defenses against these claims, as well as against any
other claims that may be asserted against the Company on the
theories described above. In addition, the agreement between
EnPro and the Company that was used to effectuate the spin-off
provides the Company with an indemnification from EnPro
covering, among other things, these liabilities. The success of
125
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
any such asbestos-related claims would likely require, as a
practical matter, that Coltec’s subsidiaries were unable to
satisfy their asbestos-related liabilities and that Coltec was
found to be responsible for these liabilities and was unable to
meet its financial obligations. The Company believes any such
claims would be without merit and that Coltec was solvent both
before and after the dividend of its aerospace business to the
Company. If the Company is ultimately found to be responsible
for the asbestos-related liabilities of Coltec’s
subsidiaries, the Company believes it would not have a material
adverse effect on its financial condition, but could have a
material adverse effect on its results of operations and cash
flows in a particular period. However, because of the
uncertainty as to the number, timing and payments related to
future asbestos-related claims, there can be no assurance that
any such claims will not have a material adverse effect on the
Company’s financial condition, results of operations and
cash flows. If a claim related to the dividend of Coltec’s
aerospace business were successful, it could have a material
adverse impact on the Company’s financial condition,
results of operations and cash flows.
In connection with the divestiture of the Company’s tire,
vinyl and other businesses, the Company has received contractual
rights of indemnification from third parties for environmental
and other claims arising out of the divested businesses. Failure
of these third parties to honor their indemnification
obligations could have a material adverse effect on the
Company’s financial condition, results of operations and
cash flows.
Guarantees
In connection with the Company’s acquisition of Coltec
Industries Inc. on July 12, 1999, the Company
guaranteed amounts owed by Coltec Capital Trust with respect to
the $145 million of outstanding Coltec Capital
Trust 51/4% convertible
trust preferred securities (TIDES) and have guaranteed
Coltec’s performance of its obligations with respect to
Coltec’s guarantee of the TIDES and the underlying Coltec
convertible junior subordinated debentures. Following the
spin-off of the Company’s engineered industrial products
(EIP) segment, the TIDES remained outstanding as an obligation
of Coltec Capital Trust and the Company’s guarantee with
respect to the TIDES remains an obligation of the Company. EnPro
Industries, Inc., Coltec and Coltec Capital Trust have agreed to
indemnify the Company for any costs and liabilities arising
under or relating to the TIDES after the spin-off.
The Company’s guarantee requires that the Company pay, to
the extent not paid by Coltec Capital Trust, distributions or
other payments on the TIDES to the extent that Coltec Capital
Trust has funds available therefore at such time, and that it
pay or perform, to the extent not paid or performed by Coltec,
Coltec’s obligations under its guarantee of the TIDES and
under the underlying Coltec convertible junior subordinated
debentures. The Company’s guarantee is unsecured and is
subordinated in right of payment to all of the Company’s
senior debt that is currently outstanding or that may be
incurred in the future.
The Company’s guarantee will terminate upon full payment of
the redemption price for the TIDES, the distribution of the
Coltec convertible junior subordinated debentures or full
payment of the amounts payable upon liquidation of Coltec
Capital Trust.
In addition to the Company’s guarantee of the TIDES, at
December 31, 2004, the Company has an outstanding
contingent liability for guarantees of debt and lease payments
of $2.8 million, letters of credit and bank guarantees of
$62.9 million, residual value of leases of
$54.6 million and executive loans to purchase the
Company’s stock of $4.4 million.
126
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Commercial Airline Customers
Several of the Company’s commercial airline customers are
experiencing financial difficulties. The Company performs
ongoing credit evaluations on the financial condition of all of
its customers and maintains reserves for uncollectible accounts
receivable based upon expected collectibility. Although the
Company believes that its reserves are adequate, it is not able
to predict the future financial stability of these customers.
Any material change in the financial status of any one or group
of customers could have a material adverse effect on the
Company’s financial condition, results of operations or
cash flows. The extent to which extended payment terms are
granted to customers may negatively affect future cash flow.
Tax
In 2000, Coltec, the Company’s former subsidiary, made a
$113.7 million payment to the Internal Revenue Service
(IRS) for an income tax assessment and the related accrued
interest arising out of certain capital loss deductions and tax
credits taken in 1996. On February 13, 2001, Coltec filed
suit against the U.S. Government in the U.S. Court of
Federal Claims seeking a refund of this payment. The trial
portion of the case was completed in May 2004. On
November 2, 2004, the Company was notified that the
trial court ruled in favor of Coltec and ordered the Government
to refund federal tax payments of $82.8 million to Coltec.
This tax refund will also bear interest to the date of payment.
As of December 31, 2004, the interest amount was
approximately $46.6 million before tax, or
$30.3 million after tax. A final judgment was entered in
this case by the U.S. Court of Federal Claims on
February 15, 2005. The Government has until April 18,
2005 to appeal the decision to the United States Court of
Appeals for the Federal Circuit. If the Government does not
appeal the decision or the trial court judge’s decision is
ultimately upheld, the Company will be entitled to this tax
refund and related interest pursuant to an agreement with
Coltec. If the Company receives these amounts, it expects to
record net income of approximately $145 million, based on
interest through December 31, 2004, and including the
release of previously established reserves. If the IRS were to
appeal the judgment and ultimately prevail in this case, Coltec
will not owe any additional interest or taxes with respect to
1996. The Company may, however, be required by the IRS to pay up
to $32.7 million plus accrued interest with respect to the
same items claimed by Coltec in its tax returns for 1997 through
2000. The amount of the previously estimated tax liability if
the IRS were to prevail for the 1997 through 2000 period remains
fully reserved.
In 2000, the IRS issued a statutory notice of deficiency
asserting that Rohr, Inc. (Rohr), the Company’s subsidiary,
was liable for $85.3 million of additional income taxes for
the fiscal years ended July 31, 1986 through 1989. In 2003,
the IRS issued an additional statutory notice of deficiency
asserting that Rohr was liable for $23 million of
additional income taxes for the fiscal years ended July 31,
1990 through 1993. The proposed assessments relate primarily to
the timing of certain tax deductions and tax credits. Rohr has
filed petitions in the U.S. Tax Court opposing the proposed
assessments. Rohr expects that these cases may be scheduled for
trial in 2005 and that it will ultimately be successful in these
cases. At the time of settlement or final determination by the
court, there will be a net cash cost to the Company due at least
in part to the reversal of a timing item. The Company believes
that its total net cash cost is unlikely to exceed
$100 million. The Company is reserved for the estimated
liability associated with these cases and as a result, it does
not expect a charge to earnings to result from the resolution of
these matters.
The Company is continuously undergoing examination by the IRS,
as well as various state and foreign jurisdictions. The IRS and
other taxing authorities routinely challenge certain deductions
and credits reported by the Company on its income tax returns.
In accordance with SFAS 109, “Accounting for Income
Taxes,” and SFAS 5, “Accounting for
Contingencies,” the
127
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company establishes reserves for tax contingencies that reflect
its best estimate of the deductions and credits that it may be
unable to sustain, or that it could be willing to concede as
part of a broader tax settlement. As of December 31, 2004,
the Company has recorded tax contingency reserves of
approximately $316 million.
The current IRS examination audit cycle began in March 2002 and
relates to the following consolidated income tax groups for the
following years:
| |
|
|
|
Rohr, Inc. and Subsidiaries
|
|
July, 1995 — December, 1997 (through date of
acquisition) |
|
Coltec Industries Inc and Subsidiaries
|
|
December, 1997 — July, 1999 (through date of
acquisition) |
|
Goodrich Corporation and Subsidiaries
|
|
1998-1999 (including Rohr and Coltec) |
There are numerous tax issues that have been raised during the
examination by the IRS, including, but not limited to, transfer
pricing, research and development credits, foreign tax credits,
tax accounting for long-term contracts, tax accounting for
inventory, tax accounting for stock options, depreciation,
amortization and the proper timing for certain other deductions
for income tax purposes.
One of our subsidiaries, Rohr, Inc. (Rohr) has been under
examination by the State of California for the tax years ending
July 31, 1985, 1986 and 1987. The State of California has
disallowed certain expenses incurred by one of Rohr’s
subsidiaries in connection with the lease of certain tangible
property. California’s State Board of Equalization has held
that the deductions associated with the leased equipment were
non-business deductions, resulting in an additional tax
assessment of approximately $5.5 million. The amount of
interest on the tax assessment is approximately
$23.5 million. The Company continues to contest the
assessment. The Company is adequately reserved for this
contingency.
|
|
| Note Y. |
Partial Settlement with Northrop Grumman |
During the fourth quarter 2004, the Company entered into a
$99 million partial settlement agreement with Northrop
Grumman relating to the Company’s acquisition of TRW’s
Aeronautical Systems businesses in October 2002. The partial
settlement agreement primarily relates to customer warranty and
other contract claims for products that were designed,
manufactured or sold by TRW prior to the Company’s purchase
of Aeronautical Systems. Under the terms of the settlement, the
Company has assumed certain liabilities associated with future
customer warranty and other contract claims for these products.
The settlement excluded amounts associated with any claims that
the Company may have against Northrop Grumman relating to the
Airbus 380 actuation systems development program and certain
other liabilities retained by TRW under the Purchase Agreement.
As a result of the partial settlement, the Company recorded a
liability for the estimated undiscounted future liabilities that
the Company assumed. The Company recorded a charge of
$23.4 million to Cost of Sales representing the amount by
which its estimated future undiscounted liabilities plus its
receivable from Northrop Grumman for these matters exceeded the
settlement amount. The charge is reflected in the applicable
segments’ operating income.
128
QUARTERLY FINANCIAL DATA (UNAUDITED)(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Quarters | |
|
2003 Quarters | |
| |
|
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in millions, except per share amounts) | |
|
BUSINESS SEGMENT SALES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Airframe Systems
|
|
$ |
402.6 |
|
|
$ |
403.8 |
|
|
$ |
399.5 |
|
|
$ |
423.8 |
|
|
$ |
402.1 |
|
|
$ |
395.4 |
|
|
$ |
373.6 |
|
|
$ |
392.7 |
|
| |
Engine Systems
|
|
|
498.5 |
|
|
|
449.2 |
|
|
|
474.5 |
|
|
|
517.4 |
|
|
|
423.6 |
|
|
|
423.8 |
|
|
|
420.1 |
|
|
|
447.4 |
|
| |
Electronic Systems
|
|
|
261.0 |
|
|
|
281.0 |
|
|
|
292.5 |
|
|
|
320.7 |
|
|
|
268.5 |
|
|
|
275.3 |
|
|
|
270.2 |
|
|
|
290.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
TOTAL SALES
|
|
$ |
1,162.1 |
|
|
$ |
1,134.0 |
|
|
$ |
1,166.5 |
|
|
$ |
1,261.9 |
|
|
$ |
1,094.2 |
|
|
$ |
1,094.5 |
|
|
$ |
1,063.9 |
|
|
$ |
1,130.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT(2)
|
|
$ |
293.3 |
|
|
$ |
307.5 |
|
|
$ |
313.0 |
|
|
$ |
303.6 |
|
|
$ |
194.4 |
|
|
$ |
274.9 |
|
|
$ |
278.7 |
|
|
$ |
269.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Airframe Systems
|
|
$ |
21.1 |
|
|
$ |
25.3 |
|
|
$ |
27.6 |
|
|
$ |
16.1 |
|
|
$ |
21.8 |
|
|
$ |
22.9 |
|
|
$ |
17.8 |
|
|
$ |
16.6 |
|
| |
Engine Systems
|
|
|
74.4 |
|
|
|
69.4 |
|
|
|
65.2 |
|
|
|
55.9 |
|
|
|
(35.2 |
) |
|
|
25.8 |
|
|
|
63.1 |
|
|
|
43.6 |
|
| |
Electronic Systems
|
|
|
22.9 |
|
|
|
31.8 |
|
|
|
38.8 |
|
|
|
44.3 |
|
|
|
32.2 |
|
|
|
32.0 |
|
|
|
37.0 |
|
|
|
38.8 |
|
| |
Corporate
|
|
|
(19.5 |
) |
|
|
(23.4 |
) |
|
|
(23.6 |
) |
|
|
(26.5 |
) |
|
|
(15.9 |
) |
|
|
(14.6 |
) |
|
|
(16.1 |
) |
|
|
(24.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING INCOME
|
|
$ |
98.9 |
|
|
$ |
103.1 |
|
|
$ |
108.0 |
|
|
$ |
89.8 |
|
|
$ |
2.9 |
|
|
$ |
66.1 |
|
|
$ |
101.8 |
|
|
$ |
74.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing Operations
|
|
$ |
30.6 |
|
|
$ |
38.8 |
|
|
$ |
49.9 |
|
|
$ |
36.7 |
|
|
$ |
(32.8 |
) |
|
$ |
14.7 |
|
|
$ |
34.0 |
|
|
$ |
22.6 |
|
| |
Discontinued Operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62.7 |
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
— |
|
| |
Cumulative Effect of Change in Accounting
|
|
|
16.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
46.8 |
|
|
$ |
38.8 |
|
|
$ |
49.9 |
|
|
$ |
36.7 |
|
|
$ |
29.4 |
|
|
$ |
14.4 |
|
|
$ |
34.0 |
|
|
$ |
22.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing Operations
|
|
$ |
0.26 |
|
|
$ |
0.33 |
|
|
$ |
0.42 |
|
|
$ |
0.31 |
|
|
$ |
(0.28 |
) |
|
$ |
0.13 |
|
|
$ |
0.29 |
|
|
$ |
0.19 |
|
| |
Discontinued Operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.53 |
|
|
|
(0.01 |
) |
|
|
— |
|
|
|
— |
|
| |
Cumulative Effect of Change in Accounting
|
|
|
0.14 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
0.40 |
|
|
$ |
0.33 |
|
|
$ |
0.42 |
|
|
$ |
0.31 |
|
|
$ |
0.25 |
|
|
$ |
0.12 |
|
|
$ |
0.29 |
|
|
$ |
0.19 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing Operations
|
|
$ |
0.26 |
|
|
$ |
0.32 |
|
|
$ |
0.41 |
|
|
$ |
0.30 |
|
|
$ |
(0.28 |
) |
|
$ |
0.12 |
|
|
$ |
0.29 |
|
|
$ |
0.19 |
|
| |
Discontinued Operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.53 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Cumulative Effect of Change in Accounting
|
|
|
0.13 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
0.39 |
|
|
$ |
0.32 |
|
|
$ |
0.41 |
|
|
$ |
0.30 |
|
|
$ |
0.25 |
|
|
$ |
0.12 |
|
|
$ |
0.29 |
|
|
$ |
0.19 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The historical amounts presented above have been restated to
present the Company’s Avionics and PRS businesses as
discontinued operations. |
| |
| (2) |
Gross profit represents sales less cost of sales. |
| |
| (3) |
The sum of the earnings per share for the four quarters in a
year does not necessarily equal the total year earnings per
share. |
The first quarter of 2004 includes a $1.8 million pre-tax
charge for restructuring and consolidation costs, a
$4.3 million increase in stock-based compensation expense
from the adoption of SFAS 123 and a $2.4 million
pre-tax charge from the cumulative catch-up adjustments recorded
by Aerostructures which changed its accounting for contracts in
2004. See Note E “Cumulative Effect of Change in
Accounting.” Effective with the second quarter of 2004, the
Company retroactively adopted the Financial Accounting Standards
Board Staff Position No. FAS 106-2 “Accounting
and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003.” The
retroactive adoption has resulted in an increase of
$0.4 million to Operating Income, an increase of
$0.9 million to Net
129
Income and an increase to Basic and Diluted Earnings per Share
for Continuing Operations and Net Income of $0.01 when compared
to the amounts previously reported in the first quarter 2004
10-Q.
The second quarter of 2004 includes a $3.1 million pre-tax
charge for restructuring and consolidation costs, a
$2.3 million increase in stock-based compensation expense
from the adoption of SFAS 123 and $8.7 million of
pre-tax income from the cumulative catch-up adjustments recorded
by Aerostructures which changed its accounting for contracts in
2004. See Note E “Cumulative Effect of Change in
Accounting.”.
The third quarter of 2004 includes a $3.6 million pre-tax
charge for restructuring and consolidation costs, a
$0.2 million pre-tax charge related to the impairment of
production assets at a foreign facility, a $2.8 million
increase in stock-based compensation expense from the adoption
of SFAS 123, a $6.4 million pre-tax charge from the
cumulative catch-up adjustments recorded by Aerostructures which
changed its accounting for contracts in 2004 (See Note E
“Cumulative Effect of Change in Accounting”) and a
before tax gain of $6.2 million related to the revised
accounting treatment of a technology development grant which had
been expensed in prior periods.
The fourth quarter of 2004 includes a $3.5 million pre-tax
charge for restructuring and consolidation costs,
$1.3 million for pension curtailment charges, a
$0.2 million pre-tax charge related to the impairment of
assets, a $2.7 million increase in stock-based compensation
expense from the adoption of SFAS 123, a $14.1 million
pre-tax charge from the cumulative catch-up adjustments recorded
by Aerostructures which changed its accounting for contracts in
2004 (See Note E “Cumulative Effect of Change in
Accounting”), a charge of $23.4 million pre-tax
related to the partial settlement with Northrop Grumman, a
$6.8 million pre-tax charge related to the early conclusion
of B717 production and an income tax benefit of
$0.3 million, reflecting favorable foreign tax settlements,
adjustments related to state income taxes and the finalization
of the Company’s 2003 federal tax return, offset in part by
additional reserves for certain income tax issues.
The first quarter of 2003 includes a $9.1 million pre-tax
charge for restructuring and consolidation costs. The first
quarter also includes a $79.9 million pre-tax asset
impairment charge for the Company’s Super 27
re-engining program, a non-cash $11.7 million impairment
charge related to the Company’s equity investment in
Cordiem and a $6.2 million pre-tax impairment charge on
rotable landing gear assets.
The second quarter of 2003 includes a $28.7 million pre-tax
charge for restructuring and consolidation costs.
The third quarter of 2003 includes a $6.1 million pre-tax
charge for restructuring and consolidation costs.
The fourth quarter of 2003 includes a $7.2 million pre-tax
charge including $2.7 million for restructuring and
consolidation costs and $4.5 million for a pension
curtailment charge. Results also include a pre-tax charge of
$15.1 million for a contract termination for the
PW4000 engine nacelles.
130
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e)) that are designed to provide
reasonable assurance that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and
communicated to our management, including our Chairman,
President and Chief Executive Officer and Executive Vice
President and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Management
necessarily applied its judgment in assessing the costs and
benefits of such controls and procedures, which, by their
nature, can provide only reasonable assurance regarding
management’s disclosure control objectives.
We have carried out an evaluation, under the supervision and
with the participation of our management, including our
Chairman, President and Chief Executive Officer and Executive
Vice President and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Annual
Report (the “Evaluation Date”). Based upon that
evaluation, our Chairman, President and Chief Executive Officer
and Executive Vice President and Chief Financial Officer
concluded that our disclosure controls and procedures were
effective as of the Evaluation Date to provide reasonable
assurance regarding management’s disclosure control
objectives.
Evaluation of Internal Control Over Financial Reporting
Management’s report on internal control over financial
reporting as of December 31, 2004 appears on page 58
and is incorporated herein by reference. The report of Ernst
& Young LLP on management’s assessment and the
effectiveness of internal control over financial reporting
appears on page 60 and is incorporated herein by reference.
Changes in Internal Control.
There were no changes in our internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f)) that
occurred during our most recent fiscal quarter that materially
affected, or are reasonable likely to materially affect, our
internal control over financial reporting.
131
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
Biographical information concerning our Directors appearing
under the caption “Proposals to Shareholders – 1.
Election of Directors – Nominees for Election” and
information under the captions “Governance of the Company
– Business Code of Conduct”, “Governance of the
Company – Director Independence; Audit Committee Financial
Expert”, “Governance of the Company – Board
Committees” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in our proxy statement
dated March 7, 2005 are incorporated herein by reference.
Biographical information concerning our Executive Officers is
contained in Part I of this Form 10-K under the
caption “Executive Officers of the Registrant.”
|
|
| Item 11. |
Executive Compensation |
Information concerning executive and director compensation
appearing under the captions “Executive Compensation”,
“Governance of the Company – Compensation of
Directors” and “Governance of the Company –
Indemnification; Insurance” in our proxy statement dated
March 7, 2005 is incorporated herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
|
|
|
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 our proxy statement dated March 7, 2005
are incorporated herein by reference.
|
|
|
Securities Authorized for Issuance under Equity
Compensation Plans |
Information concerning securities authorized for issuance under
equity compensation plans appearing under the caption
“Executive Compensation-Securities Authorized for Issuance
Under Equity Compensation Plans” in our proxy statement
dated March 7, 2005 is incorporated herein by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
Information appearing under the caption “Executive
Compensation – Executive Stock Purchase Program” in
our proxy statement dated March 7, 2005 is incorporated
herein by reference.
|
|
| Item 14. |
Principal Accounting Fees and Services |
Information appearing under the captions “Proposals to
Shareholders-2. Ratification of Appointment of Independent
Auditors – Fees to Independent Auditors for 2004 and
2003” and “Appointment of Independent
Auditors — Audit Review Committee Pre-Approval
Policy” in our proxy statement dated March 7, 2005 is
incorporated by reference herein.
|
|
| Item 15. |
Exhibits, Financial Statement Schedules |
(a) Documents filed as part of this report:
|
|
|
| |
(1) |
Consolidated Financial Statements. |
The consolidated financial statements filed as part of this
report are listed in Part II, Item 8 in the Index to
Consolidated Financial Statements.
132
|
|
|
| |
(2) |
Consolidated Financial Statement Schedules: Schedules have been
omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or
the Notes to the Consolidated Financial Statements. |
| |
| |
(3) |
Listing of Exhibits: A listing of exhibits is on pages 135
to 138 of this Form 10-K. |
|
|
| (b) |
Exhibits. See the Exhibit Index beginning at page 135
of this report. For a listing of all management contracts and
compensatory plans or arrangements required to be filed as
exhibits to this report, see the exhibits listed under
Exhibit Nos. 10(H) through 10(PP). |
133
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 28, 2005.
|
|
| |
Goodrich Corporation
|
| |
(Registrant) |
|
|
|
| |
By |
/s/ Marshall O. Larsen
|
|
|
| |
|
| |
Marshall O. Larsen, |
| |
Chairman, President and Chief Executive Officer |
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF
1934, THIS REPORT HAS BEEN SIGNED BELOW ON FEBRUARY 28,
2005 BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES INDICATED.
| |
|
|
| |
/s/ Marshall O. Larsen
Marshall
O. Larsen
Chairman, President and Chief
Executive Officer and Director
(Principal Executive Officer) |
|
/s/ James W. Griffith
----------------------------------------------
James W. Griffith
Director |
| |
/s/ Ulrich Schmidt
Ulrich
Schmidt
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer) |
|
/s/ William R. Holland
----------------------------------------------
William R. Holland
Director |
| |
/s/ Scott E. Kuechle
Scott
E. Kuechle
Vice President and Controller
(Principal Accounting Officer) |
|
/s/ Douglas E. Olesen
----------------------------------------------
Douglas E. Olesen
Director |
| |
/s/ Diane C. Creel
Diane
C. Creel
Director |
|
/s/ Alfred M.
Rankin, Jr.
----------------------------------------------
Alfred M. Rankin, Jr.
Director |
| |
/s/ George A. Davidson,
Jr
George
A. Davidson, Jr
Director |
|
/s/ James R. Wilson
----------------------------------------------
James R. Wilson
Director |
| |
/s/ Harris E. DeLoach,
Jr
Harris
E. DeLoach, Jr
Director |
|
/s/ A. Thomas Young
----------------------------------------------
A. Thomas Young
Director |
| |
/s/ James J. Glasser
James
J. Glasser
Director |
|
|
134
EXHIBIT INDEX
The Company will supply copies of the following exhibits to any
shareholder upon receipt of a written request addressed to the
Secretary, Goodrich Corporation, 2730 West Tyvola Road,
Charlotte, NC 28217 and the payment of $.50 per page to
help defray the costs of handling, copying and postage. The
exhibits marked with an asterisk (*) indicate exhibits
physically filed with this Report on Form 10-K. All other
exhibits are filed by incorporation by reference.
In most cases, documents incorporated by reference to exhibits
to our registration statements, reports or proxy statements
filed by the Company with the Securities and Exchange Commission
are available to the public over the Internet from the
SEC’s web site at http://www.sec.gov. You may also read and
copy any such document at the SEC’s public reference
room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549 under the Company’s SEC
file number (1-892).
| |
|
|
|
|
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description |
| |
|
|
|
|
|
2(A) |
|
— |
|
Agreement for Sale and Purchase of Assets Between The
B.F.Goodrich Company and PMD Group Inc., dated as of
November 28, 2000, filed as Exhibit 2(A) to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2000, is incorporated herein by reference. |
| |
|
2(B) |
|
— |
|
Distribution Agreement dated as of May 31, 2002 by and
among Goodrich Corporation, EnPro Industries, Inc. and
Coltec Industries Inc., filed as Exhibit 2(A) to
Goodrich Corporation’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, is incorporated herein by
reference. |
| |
|
2(C) |
|
— |
|
Master Agreement of Purchase and Sale dated as of June 18,
2002 between Goodrich Corporation and TRW Inc., filed as
Exhibit 2(B) to Goodrich Corporation’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference. |
| |
|
2(D) |
|
— |
|
Amendment No. 1 dated as of October 1, 2002 to Master
Agreement of Purchase and Sale dated as of June 18, 2002
between Goodrich Corporation and TRW Inc., filed as
Exhibit 2.2 to Goodrich Corporation’s Current Report
on Form 8-K filed October 16, 2002, is incorporated herein
by reference. |
| |
|
2(E) |
|
— |
|
Settlement Agreement effective as of December 27, 2004 by
and between Northrop Grumman Space & Mission
Systems Corp., as successor by merger to TRW, Inc.,
and Goodrich Corporation.* |
| |
|
3(A) |
|
— |
|
Restated Certificate of Incorporation of Goodrich Corporation,
filed as Exhibit 3.1 to Goodrich Corporation’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, is incorporated herein by reference. |
| |
|
3(B) |
|
— |
|
By-Laws of Goodrich Corporation, as amended, filed as
Exhibit 4(B) to Goodrich Corporation’s Registration
Statement on Form S-3 (File No. 333-98165), is
incorporated herein by reference. |
| |
|
4(A) |
|
— |
|
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, filed
as Exhibit 1 to the Company’s Registration Statement
on Form 8-A filed June 19, 1997, is incorporated
herein by reference. |
| |
|
4(B) |
|
— |
|
Indenture dated as of May 1, 1991 between Goodrich
Corporation and The Bank of New York, as successor to
Harris Trust and Savings Bank, as Trustee, filed as
Exhibit 4 to Goodrich Corporation’s Registration
Statement on Form S-3 (File No. 33-40127), is incorporated
herein by reference. |
135
| |
|
|
|
|
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description |
| |
|
|
|
|
| |
|
4(C) |
|
— |
|
Agreement of Resignation, Appointment and Acceptance effective
February 4, 2005 by and among Goodrich Corporation, The
Bank of New York and The Bank of New York Trust Company, N.A.* |
| |
| |
|
|
|
Information relating to the Company’s long-term debt is set
forth in Note K — ‘Financing
Arrangements‘ to the Company’s financial statements,
which are filed as part of this Annual Report on Form 10-K.
Except for Exhibit 4(B), instruments defining the rights of
holders of such long-term debt are not filed herewith since no
single item exceeds 10% of consolidated assets. |
| |
| |
|
|
|
Copies of such instruments will be furnished to the Commission
upon request. |
| |
|
10(A) |
|
— |
|
Amended and Restated Assumption of Liabilities and
Indemnification Agreement between the Company and The Geon
Company, filed as Exhibit 10.3 to the Registration
Statement on Form S-1 (No. 33-70998) of
The Geon Company, is incorporated herein by reference. |
| |
|
10(B) |
|
— |
|
Tax Matters Arrangements dated as of May 31, 2002 between
Goodrich Corporation and EnPro Industries, Inc., filed as
Exhibit 10(LL) to Goodrich Corporation’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference. |
| |
|
10(C) |
|
— |
|
Transition Services Agreement dated as of May 31, 2002
between Goodrich Corporation and EnPro Industries, Inc.,
filed as Exhibit 10(MM) to Goodrich Corporation’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, is incorporated herein by reference. |
| |
|
10(D) |
|
— |
|
Employee Matters Agreement dated as of May 31, 2002 between
Goodrich Corporation and EnPro Industries, Inc., filed as
Exhibit 10(NN) to Goodrich Corporation’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference. |
| |
|
10(E) |
|
— |
|
Indemnification Agreement dated as of May 31, 2002 among
Goodrich Corporation, EnPro Industries, Inc., Coltec
Industries Inc and Coltec Capital Trust, filed as
Exhibit 10(OO) to Goodrich Corporation’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference. |
| |
|
10(F) |
|
— |
|
Three Year Credit Agreement dated as of August 30, 2003
among Goodrich Corporation, the lenders parties thereto and
Citibank, N.A., as paying agent for such lenders, filed as
Exhibit 10.1 to Goodrich Corporation’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2003, is incorporated herein by reference. |
| |
|
10(G) |
|
— |
|
Amendment No. 1 dated as of December 5, 2003 to the
Three Year Credit Agreement dated as of August 20, 2003
among Goodrich Corporation, the lenders parties thereto and
Citibank, N.A., as paying agent for such lenders, filed as
Exhibit 10(G) to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003, is
incorporated herein by reference. |
| |
|
10(H) |
|
— |
|
Key Employees’ Stock Option Plan (effective April 15,
1991), filed as Exhibit 10(K) to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2002,
is incorporated herein by reference. |
| |
|
10(I) |
|
— |
|
Stock Option Plan (effective April 15, 1996), filed as
Exhibit 10 (A) to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1998, is
incorporated herein by reference. |
| |
|
10(J) |
|
— |
|
Stock Option Plan (effective April 19, 1999), filed as
Appendix B to the Company’s definitive proxy statement
filed March 4, 1999, is incorporated herein by reference. |
| |
|
10(K) |
|
— |
|
2001 Stock Option Plan, filed as Exhibit D to the
Company’s 2001 Proxy Statement dated March 5,
2001, is incorporated herein by reference. |
| |
|
10(L) |
|
— |
|
Amendment Number One to the 2001 Stock Option Plan, filed
as Exhibit 10(JJ) to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2001, is incorporated herein by reference. |
136
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|
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|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description |
| |
|
|
|
|
| |
|
10(M) |
|
— |
|
Form of nonqualified stock option award agreement.* |
| |
|
10(N) |
|
— |
|
Form of restricted stock award agreement.* |
| |
|
10(O) |
|
— |
|
Form of restricted stock unit award agreement.* |
| |
|
10(P) |
|
— |
|
Form of performance unit award agreement.* |
| |
|
10(Q) |
|
— |
|
2002 — 2004 Long-Term Incentive Plan Summary Plan
Description and form of award, filed as Exhibit 10(JJ) to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002, is incorporated herein by
reference. |
| |
|
10(R) |
|
— |
|
2003 — 2005 Long-Term Incentive Plan Summary Plan
Description and form of award, filed as Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, is incorporated herein by
reference. |
| |
|
10(S) |
|
— |
|
Form of award letter for 2004 stock-based compensation
awards to executive officers, filed as Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004, is incorporated by reference
herein. |
| |
|
10(T) |
|
— |
|
Performance Share Deferred Compensation Plan Summary Plan
Description, filed as Exhibit 10(LL) to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, is incorporated herein by reference. |
| |
|
10(U) |
|
— |
|
Management Incentive Program, filed as Exhibit 10 (D)
to the Company’s Annual Report on Form 10-K for the year
ended December 31, 1998, is incorporated herein by
reference. |
| |
|
10(V) |
|
— |
|
Senior Executive Management Incentive Plan, filed as
Appendix B to the Company’s 2000 Proxy Statement
dated March 3, 2000, is incorporated herein by reference. |
| |
|
10(W) |
|
— |
|
Form of Disability Benefit Agreement, filed as
Exhibit 10(U) to the Company’s Annual Report on Form
10-K for the year ended December 31, 2003, is incorporated
by reference herein. |
| |
|
10(X) |
|
— |
|
Form of Supplemental Executive Retirement Plan Agreement.* |
| |
|
10(Y) |
|
— |
|
The B.F.Goodrich Company Benefit Restoration Plan, filed as
Exhibit 10(J) to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1992, is
incorporated herein by reference. |
| |
|
10(Z) |
|
— |
|
The B.F.Goodrich Company Savings Benefit Restoration Plan, filed
as Exhibit 4(b) to the Company’s Registration
Statement on Form S-8 (No. 333-19697), is incorporated
herein by reference. |
| |
|
10(AA) |
|
— |
|
Goodrich Corporation Severance Plan, filed as
Exhibit 10(II) to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001, is
incorporated herein by reference. |
| |
|
10(BB) |
|
— |
|
Form of Management Continuity Agreement entered into by Goodrich
Corporation and certain of its employees.* |
| |
|
10(CC) |
|
— |
|
Form of Director and Officer Indemnification Agreement between
Goodrich Corporation and certain of its directors, officers and
employees, filed as Exhibit 10(AA) to the Company’s
Annual Report on Form 10-K for the year ended
December 31, 2003, is incorporated by reference herein. |
| |
|
10(DD) |
|
— |
|
Letter dated January 7, 2003 relating to compensation and
benefits for David L. Burner, filed as Exhibit 10(DD)
to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2002, is incorporated herein by
reference. |
| |
|
10(EE) |
|
— |
|
Coltec Industries Inc 1992 Stock Option and
Incentive Plan (as amended through May 7, 1998), filed
as Exhibit 10(EE) to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2002, is
incorporated herein by reference. |
| |
|
10(FF) |
|
— |
|
Rohr, Inc. 1995 Stock Incentive Plan, filed as
Exhibit 10(FF) to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2002, is
incorporated herein by reference. |
137
| |
|
|
|
|
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description |
| |
|
|
|
|
| |
|
10(GG) |
|
— |
|
First Amendment to the Rohr, Inc. 1995 Stock Incentive
Plan, filed as Exhibit 10(GG) to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2002, is incorporated herein by reference. |
| |
|
10(HH) |
|
— |
|
Second Amendment to the Rohr, Inc. 1995 Stock Incentive
Plan, filed as Exhibit 10(HH) to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2002, is incorporated herein by reference. |
| |
|
10(II) |
|
— |
|
Employee Stock Purchase Plan, filed as Exhibit E to
the Company’s 2001 Proxy Statement dated
March 5, 2001, is incorporated herein by reference. |
| |
|
10(JJ) |
|
— |
|
Amendment Number One to the Employee Stock
Purchase Plan, filed as Exhibit 10(KK) to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001, is incorporated
herein by reference. |
| |
|
10(KK) |
|
— |
|
Directors’ Phantom Share Plan, as filed as
Exhibit 10(II) to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003, is
incorporated by reference herein. |
| |
|
10(LL) |
|
— |
|
Directors’ Deferred Compensation Plan, filed as
Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004, is
incorporated herein by reference. |
| |
|
10(MM) |
|
— |
|
Goodrich Corporation Outside Director Deferral Plan.* |
| |
|
10(NN) |
|
— |
|
Goodrich Corporation Outside Director Phantom Share Plan.* |
| |
|
10(OO) |
|
— |
|
Employment Arrangements for the Named Executive Officers* |
| |
|
10(PP) |
|
— |
|
Compensation Arrangements for Non-Management Directors* |
| |
|
21 |
|
— |
|
Subsidiaries.* |
| |
|
23(A) |
|
— |
|
Consent of Independent Registered Public Accounting
Firm — Ernst & Young LLP.* |
|
31 |
|
— |
|
Rule 13a-14(a)/15d-14(a) Certifications.* |
|
32 |
|
— |
|
Section 1350 Certifications.* |
138