BFGOODRICH   2000   ANNUAL   REPORT
Letter to Our Shareholders 10
Financial Summary 15
Aerospace 16
Engineered Industrial Products 18
Management Team 20
Board...
Over the past few years, we have shaped a
new and more powerful company – a premier
aerospace and industrial enterprise wi...
we’re ahead
  Innovation at Goodrich is really taking off. Like the company’s patented
  inflatable seat belt, and new tech...
Our new flexible silicon strain gage, featur-
          ing our miniature microelectromechanical
          systems (MEMS) t...
Flawless performance in mission-critical situations. Our customers come
  to Goodrich with their most demanding requiremen...
notch.

    5
we’re creating
     Finding new ways to create value has taken us to every
     corner of the planet and beyond. Since firs...
value.
People are the key to achieving
         our vision. We start with the best,
         then provide meaningful opportu-
   ...
rich.
Value creation for all our stakeholders starts with our people, whether
they assemble landing gear near Seattle, Was...
letter to our
  In 2000, Goodrich’s commitment to creating value
  through excellence in people, quality and innovation
  ...
shareholders



The company’s senior executive team (counter-clockwise from left): Dave Burner, Chairman, President and CE...
letter to shareholders




                                                               We are pleased with our scorecar...
portfolio since these two businesses share common              These initiatives, coupled with clear strategies and
skills...
2000 HIGHLIGHTS
• Reported higher earnings per share (EPS) for
  the sixth consecutive year. Excluding special
  items, EP...
financial summary                                                                                    (1)


 Sales         ...
review of operations




aerospace




Goodrich’s Aerostructures business provides aircraft structures, including aileron ...
2000 HIGHLIGHTS
                                                          • Operating income increased 6 percent to
      ...
review of operations




engineered industrial products




    Quincy Compressor, one of the largest industrial businesse...
2000 HIGHLIGHTS
                                                               • Operating income increased 3 percent to $...
management team
OFFICERS

David L. Burner                                         John J. Carmola
Chairman, President and ...
board of directors
David L. Burner                                             Richard de J. Osborne
Chairman, President a...
index to financials
Management’s Discussion & Analysis                    23


Consolidated Statement of Income           ...
Management’s Discussion and Analysis of Financial Condition and Results of Operations




We believe this management’s dis...
management’s discussion and analysis




their fair value less cost to sell and $4.7 million for an asset impair-     resu...
Other income (expense) – net: The table below allows other income
                                                        ...
management’s discussion and analysis




Special items related to discontinued operations, net of tax, included       “sma...
business segment performance                                                     to conform with this new group structure....
management’s discussion and analysis




Operating income increased $1.9 million, or 1.3 percent, from $147.1       Operat...
1999 compared with 1998
Aerospace

                                                                                       ...
management’s discussion and analysis




engineered industrial products
(dollars in millions)                1999         ...
EBITDA                                                                          investing cash flows
EBITDA is income from...
management’s discussion and analysis




Environmental                                                               In ac...
goodrich 5E35257A-109C-481D-BB9C-7923A0DA3D8A_2000ARfinal
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goodrich 5E35257A-109C-481D-BB9C-7923A0DA3D8A_2000ARfinal

  1. 1. BFGOODRICH 2000 ANNUAL REPORT
  2. 2. Letter to Our Shareholders 10 Financial Summary 15 Aerospace 16 Engineered Industrial Products 18 Management Team 20 Board of Directors 21 Index to Financials 22 The symbol on the cover, part of our proposed new corporate identity, reflects the dramatic transformation and high aspirations of the performance-driven, growing and dynamic com- pany we have become.To learn more about our new identity, which shareholders will be asked to approve at the 2001 Annual Meeting, turn to the Letter to Our Shareholders on page 10. we’re new stronger th
  3. 3. Over the past few years, we have shaped a new and more powerful company – a premier aerospace and industrial enterprise with leading market positions, world-class products and abundant opportunities to build on our record of strong, profitable growth. Our vision is to create value through excellence in people, quality and innovation, and we remain true to the underlying principles that have served us so well – technical excellence, strategic thinking, intense customer focus and accountability to shareholders, customers and ourselves. and an ever. Goodrich is the world’s leading supplier of landing gear systems and services. We provide innovative, efficient, state-of-the-art products, including sensors, landing gear, brake controls, and wheels and brakes, either as components or as integrated systems.These products are used on a variety of commercial, regional, business and military aircraft. 1
  4. 4. we’re ahead Innovation at Goodrich is really taking off. Like the company’s patented inflatable seat belt, and new technologies that are revolutionizing aircraft ice detection, avionics, fuel measurement, ejection seats, evacuation slides and more. Such great ideas don’t just happen. At Goodrich, innovation is a mindset – a restlessness to find a better way. It’s a strategy built into every business plan and funded so our best ideas reach the market profitably. The effort is paying off with a robust new product and technology pipeline that is keeping us ahead of the curve. 2
  5. 5. Our new flexible silicon strain gage, featur- ing our miniature microelectromechanical systems (MEMS) technology, was honored with the prestigious Best of Sensors Expo Fall 2000 award.The award recognizes innovative new products for the sensing industry. MEMS will be integral to innova- tive “smart” components for a broad range of aerospace and industrial applications. of the curve. 3
  6. 6. Flawless performance in mission-critical situations. Our customers come to Goodrich with their most demanding requirements, where failure is not an option. From sealing systems on the Alaskan pipeline to landing gear on the Space Shuttle to star tracker systems for satellites, our goal is to meet or exceed customer expectations regardless of the challenge. We always want to be top notch and top choice for our customers when quality counts the most. we’re top Garlock Sealing Technologies is a leading global producer of high-quality sealing products that protect equipment wherever performance is vital for economic, safety and environmental reasons. Garlock helps customers efficiently seal the toughest process fluids in the most demanding applications.The Fluidtec® GPA split collar seal shown here is ideal for pumps and mixers carrying abrasive, corrosive, crystallizing or clogging fluids. 4
  7. 7. notch. 5
  8. 8. we’re creating Finding new ways to create value has taken us to every corner of the planet and beyond. Since first developing space suits for the Mercury astronauts, we have helped make space exploration a reality with high-tech components, sensors, industrial sealing systems and data controls.Today, we are strategically expanding our presence in space. Through a series of recent acquisitions and internal growth, we have created a $250 million business in spacecraft attitude determination and control systems.The prospects for continued growth? As vast as outer space. We believe that we can best create value when we think and act like members of one global team with a common vision, sharing knowledge and best practices and leveraging our strength to benefit customers, shareholders, the company and each other. 6
  9. 9. value.
  10. 10. People are the key to achieving our vision. We start with the best, then provide meaningful opportu- nities to advance, develop and make a difference. Shown here are Debra Wilform, Manager, Human Resources; Harry Arnold, President, Fuel & Utility Systems; Lynne Degand,Vice President, Finance & Business Development, Engineered Industrial Products; and Bill Walthall, Group Vice President, Engineered Products. we’re good 8
  11. 11. rich. Value creation for all our stakeholders starts with our people, whether they assemble landing gear near Seattle, Washington, install systems on aircraft in Toulouse, France, or develop new highly engineered wheel systems in Longview,Texas. Our goal is to attract, retain, develop and reward high-performing people committed to our long-term success. That’s why we are looking closely at our “people” programs company-wide. Aligning these programs with our business strate- gies will make Goodrich an even better place to work – one where people work together to create value.
  12. 12. letter to our In 2000, Goodrich’s commitment to creating value through excellence in people, quality and innovation produced excellent results. Our total annual return to shareholders was 36%, a strong performance com- pared to many similar companies and the broader market indices. We delivered our sixth consecutive year of record operating results, despite a challenging busi- ness environment. At the same time, we continued to transform Goodrich into a top-tier aerospace and industrial company by acquiring seven businesses, developing innovative new technologies and products, and winning major contracts. To further our transfor- mation, we made the difficult decision to sell our Performance Materials business. 10
  13. 13. shareholders The company’s senior executive team (counter-clockwise from left): Dave Burner, Chairman, President and CEO; Ernie Schaub, Executive Vice President; President and COO, Engineered Industrial Products; Marshall Larsen, Executive Vice President; President and COO, Aerospace; Steve Huggins, Senior Vice President, Strategic Resources and Information Technology; Jerry Lee, Senior Vice President, Technology and Innovation; Rick Schmidt, Senior Vice President and CFO; and Terry Linnert, Senior Vice President, Human Resources and Administration, General Counsel and Secretary. 11
  14. 14. letter to shareholders We are pleased with our scorecard for 2000. On A SMALL CHANGE. a continuing operations basis, which excludes A BIG DIFFERENCE. Performance Materials, income was $318 million BFGoodrich is becoming Goodrich. At the excluding special items, or $2.97 per share, com- Annual Meeting, shareholders will be asked pared to $306 million, or $2.75 per share, in 1999. to approve Goodrich Corporation as the com- This increase was accomplished in a year of pany’s new name. While dropping two initials may seem a small matter, it represents a big reduced deliveries of commercial aircraft and soft- step in the evolution of a 130-year-old company. ness in industrial, trucking and related markets. Goodrich today is a new company. Once synony- Our performance reflects a balanced business port- mous with automobile tires, the company has folio, deriving approximately 50 percent of overall transformed itself into a leading global supplier revenues from aftermarket products and services. of aerospace and industrial products with a well-earned reputation for delivering results. In addition, ongoing productivity initiatives con- Clearly, the time is right for a corporate identity tributed to achieving operating income margins at that distances us from the tire business we levels consistent with top-performing companies. exited in 1986, while drawing on our rich heritage of innovation and creative solutions. Our decision to divest Performance Materials is The new Goodrich logo suggests energy, the right strategic course for this business and dynamism, growth and high aspirations. By design, it affirms that one of America’s for Goodrich’s ongoing aerospace and industrial oldest companies is now one of its newest. operations. With Performance Materials as a separate entity, its resources can be dedicated to concentrating on the specialty chemicals industry. At Goodrich, we can dedicate our resources to aerospace and engineered industrial products. We also can achieve substantial leverage across the 12
  15. 15. portfolio since these two businesses share common These initiatives, coupled with clear strategies and skills in manufacturing, management, technology, complementary acquisitions, are an effective and procurement and quality. As we communicated proven formula to create profitable growth for our in November, we expect to complete the sale of shareholders and increased capabilities for our cus- Performance Materials in the first quarter of 2001 tomers. They make Goodrich a formidable com- when we will announce plans for the use of the petitor, and strengthen our leadership positions. anticipated $1 billion in after-tax cash proceeds. Our plans for 2001 and beyond continue our While pleased with our accomplishments, we con- transformation and dedication to creating value. tinue to build for the future by focusing on excellence For shareholders, we measure value by delivering in people, quality and innovation. These are the superior returns. For customers, we deliver value cornerstones of our success, and the foundation for through product performance and reliability, com- delivering value to our customers and shareholders. petitive prices, and the confidence that comes from We invest in Goodrich people with leadership train- long-standing relationships and the resources inher- ing and career development programs. Our quality ent in doing business with Goodrich. And for our programs include lean manufacturing techniques people, value comes in the form of competitive pay and safety, health and environmental initiatives and benefits, professional growth opportunities and, throughout the company. The same is true in our above all, respect for their accomplishments. Guided innovation management process, where workshops by our vision, we will invest in the growth and pros- that blend the best of Goodrich experience and perity of the enterprise with business acquisitions, outside resources reach deep into our organization. new program and technology investments, and the pursuit of new markets and products. 13
  16. 16. 2000 HIGHLIGHTS • Reported higher earnings per share (EPS) for the sixth consecutive year. Excluding special items, EPS from continuing operations We will continue to anticipate and respond to a increased 8 percent to $2.97. changing global business environment that requires • Announced plans to divest Performance Materials and to focus on Aerospace and and rewards creativity, flexibility and innovation. Engineered Industrial Products. After-tax cash proceeds of $1 billion anticipated. With the old BFGoodrich now gone, today’s Goodrich needs a new name and identity that will • Completed seven acquisitions, including Raytheon’s Optical Systems business. stand for a very different company, an aerospace • Launched numerous new products and and industrial leader committed to being the best announced new aerospace contracts worth at all we do. When we change our identity over almost $2 billion in future revenues. the next few months, we will leave behind the last • Began implementing strategic plans to vestige of our tire heritage. And while we remain build upon sealing and compressor systems in Engineered Industrial Products. proud of our past, our company is sharply focused on the future. We sincerely appreciate our customers, our share- holders and our team of outstanding employees. Thanks for your part in the Goodrich transforma- tion and for being partners in our success in the years ahead. David L. Burner Chairman, President and CEO February 22, 2001 14
  17. 17. financial summary (1) Sales Earnings per Share(2) Segment Operating Income (billions of dollars) (dollars) (in millions) 4.3 4.3 4.4 2.97 2.75 714 3.8 677 2.48 632 3.2 1.89 465 473 1.44 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 2000 1999 Better/(Worse) For the Year (in millions) Sales $ 4,363.8 $ 4,319.8 1.0% Segment operating income $ 713.9 $ 676.9 5.5% Net income(2) $ 317.5 $ 305.9 3.8% Cash flow from operations $ 230.0 $ 243.3 (5.5)% Return on average shareholders’ equity (2) 25.2% 24.2% — Net Income per Share(2) Basic $ 3.03 $ 2.78 9.0% Diluted $ 2.97 $ 2.75 8.0% Dividends $ 1.10 $ 1.10 — Shares outstanding (millions) 102.3 110.2 N/A Total employees 23,077 23,662 N/A (1) Performance Materials treated as a discontinued operation (2) Excludes special items 15
  18. 18. review of operations aerospace Goodrich’s Aerostructures business provides aircraft structures, including aileron panels shown here that use GRID-LOCK® structural panel technology, an innovative method of making complex but strong and lightweight aircraft structures. 16
  19. 19. 2000 HIGHLIGHTS • Operating income increased 6 percent to $592 million as margins increased to a record 16.1 percent. Goodrich is one of the world’s leading suppliers to the aerospace industry, with an extensive range • Seven complementary acquisitions, plus others made in 1999, are expected to add $330 million of products, systems and services for aircraft and in 2001 sales, most notably in space flight and engine manufacturers, airlines and other opera- ejection seat systems. tors. The company’s 10-fold increase in aerospace • Innovative new products, such as IceHawk™ sales in as many years and strong financial ice detection systems, next generation evacu- performance have been driven by strategic acquisi- ation slides, SmartDeck™ avionics suites, tions and internal growth fueled by innovation and SmartBelt™ inflatable restraint systems were launched. and quality. From aerostructures and avionics to landing gear, engine components, sensors and • New contracts and programs announced in 2000 in landing systems, aerostructures, safety systems, Goodrich products are on almost and engine safety and electronic systems every aircraft in the world. could generate approximately $2 billion in Typically the market leader, Goodrich has earned future business. a reputation for delivering high-quality customer • New strategic partnerships for aircraft main- solutions that reflect the resources and expertise tenance were signed with Boeing, Rockwell Collins and others. of a large company coupled with small-company responsiveness. The company ranks among the • The company joined MyAircraft, the leading e-commerce aerospace site, as a participant top 10 on Fortune magazine’s list of “Most and equity investor. Admired Companies” in the aerospace industry and was just named to Forbes magazine’s Platinum List of America’s Best Big Companies. 17
  20. 20. review of operations engineered industrial products Quincy Compressor, one of the largest industrial businesses, is a leading producer of air compressors and vacuum pumps used around the world in manufacturing plants, hospitals and climate control systems. In 2000, Quincy developed a series of new reciprocating compressors to address growing needs in the industrial and commercial sectors of the compressed air market. Initial delivery is expected in the first quarter of 2001. 18
  21. 21. 2000 HIGHLIGHTS • Operating income increased 3 percent to $122 million in a challenging business environment as margins increased to 17.7 percent – again Goodrich’s engineered industrial products are at the highest in the company. work in the toughest manufacturing environments, • Consolidations initiated to improve effi- such as chemical, refining, and pulp and paper ciency and customer service are under plants – wherever fluids or gases need to be sealed way at three manufacturing locations and or compressed air is required. A leading supplier several warehouses. of sealing technologies and compressor systems, the • Lean manufacturing techniques introduced company also offers self-lubricating bearings, spray throughout the segment combined with reor- nozzles, heavy-duty truck wheel products and large ganizations led to cost reductions of $8 million. diesel engines. Close customer relationships, strong • New products were introduced at Stemco, distribution channels, and well-known brand names Quincy and Garlock. like Garlock®, Quincy®, Stemco® and Fairbanks • Goodrich’s competencies are being extended Morse® are hallmarks of this high-margin, high- throughout the business to further drive value, return segment. Now, with the cross-company quality and innovation. synergies inherent as a new part of Goodrich, the Engineered Industrial Products segment is positioned to deliver even greater value. and market penetration, acquisitions and global In 2000, its first full year as part of the company expansion. Most important, the strengths of the following the 1999 Coltec merger, this segment was Goodrich culture that created a leading global focused on continued integration and delivering aerospace franchise are taking hold. New resources, results in a tough business climate. At the same processes and technological know-how, coupled time, an experienced management team was put with strong competencies in strategic planning, in place to shape the future by targeting growth intelligent risk-taking and innovation, are making opportunities in sealing technologies and compres- these good businesses even better. sor systems through new product introductions 19
  22. 22. management team OFFICERS David L. Burner John J. Carmola Chairman, President and Chief Executive Officer Group President, Engine and Safety Systems Marshall O. Larsen John J. Grisik Executive Vice President; President and Chief Group President, Landing Systems Operating Officer, Aerospace Michael J. Piscatella Ernest F. Schaub Group President, Electronic Systems Executive Vice President; President and Chief Graydon A. Wetzler Operating Officer, Engineered Industrial Products Group President, Aerostructures and Stephen R. Huggins Aviation Services Senior Vice President, Strategic Resources and Information Technology Michael J. Leslie Jerry S. Lee Group President, Sealing Products Senior Vice President, Technology and Innovation William L. Walthall Terrence G. Linnert Group Vice President, Engineered Products Senior Vice President, Human Resources and Administration, General Counsel and Secretary Joseph F. Andolino Ulrich R. Schmidt Vice President, Business Development and Tax Senior Vice President and Chief Financial Officer Robert D. Koney, Jr. Vice President and Controller Scott E. Kuechle Vice President and Treasurer 20
  23. 23. board of directors David L. Burner Richard de J. Osborne Chairman, President and Chief Executive Officer Retired Chairman and Chief Executive Officer The BFGoodrich Company ASARCO Incorporated, a leading producer of Director since 1995 (1) nonferrous metals Director since 1996 (3,5) Diane C. Creel President and Chief Executive Officer Alfred M. Rankin, Jr. Earth Tech, an international consulting engineer- Chairman, President and Chief Executive Officer ing company NACCO Industries, Inc., an operating holding com- Director since 1997 (3,5) pany with interests in the mining and marketing of lignite, the manufacturing and marketing of forklift George A. Davidson, Jr. trucks and the manufacturing and marketing of Retired Chairman small household appliances Dominion Resources, Inc., a natural gas and electric Director since 1988 (1,3,4) power holding company Director since 1991(2, 4) James R. Wilson Retired Chairman, President and James J. Glasser Chief Executive Officer Chairman Emeritus Cordant Technologies, a leading producer of solid- GATX Corporation, a transportation, storage, propellant rocket motors and high-performance leasing and financial services company fasteners used in commercial aircraft and indus- Director since 1985 (1,2,4) trial applications William R. Holland Director since 1997 (2,5) Chairman A. Thomas Young United Dominion Industries, a diversified manu- Retired Executive Vice President facturer of proprietary engineered products Lockheed Martin Corporation, an aerospace and Director since 1999 (2, 3) defense company Douglas E. Olesen Director since 1995 (4,5) President and Chief Executive Officer C O M M I T T E E S O F T H E B OA R D Battelle Memorial Institute, a worldwide tech- nology organization working for government (1) Executive Committee and industry (2) Compensation Committee Director since 1996 (3,5) (3) Audit Review Committee (4) Committee on Governance (5) Financial Policy Committee 21
  24. 24. index to financials Management’s Discussion & Analysis 23 Consolidated Statement of Income 39 Consolidated Balance Sheet 40 Consolidated Statement of Cash Flows 41 Consolidated Statement of Shareholders’ Equity 42 Notes to Consolidated Financial Statements 43 Quarterly Financial Data (Unaudited) 63 Selected Financial Data 64 22
  25. 25. Management’s Discussion and Analysis of Financial Condition and Results of Operations We believe this management’s discussion and analysis contains well as certain contingent liabilities, of the segment as a condition forward-looking statements. See the last section for certain risks of sale (see Note B to the Consolidated Financial Statements for and uncertainties. additional discussion). The closing of the transaction, which is scheduled to occur in the first quarter of 2001, is subject to a significant events number of conditions including the ability of the buyer to obtain Net income increased $156.3 million from $169.6 million in 1999 to financing in the debt market on a best-efforts basis. $325.9 million in 2000. Income from continuing operations, excluding Possible uses for the proceeds of the divestiture include strategic special items, increased to $317.5 million, or $2.97 a diluted share in acquisitions, reduction of debt and the repurchase of additional 2000 as compared to $305.9 million, or $2.75 a diluted share in 1999. shares of stock, with the last requiring approval of the Company’s EBITDA, as defined under Liquidity and Capital Resources herein, Board of Directors. increased $54.7 million from $752.8 million in 1999 to $807.5 million in 2000. Operating cash flow decreased $13.3 million from $243.3 merger-related and consolidation costs million in 1999 to $230.0 million in 2000. (See Note D to the Consolidated Financial Statements for additional discussion.) Aerospace and Engineered Industrial Products operating income margins increased to 16.1 percent and 17.7 percent in 2000 as com- During 2000, the Company recorded net merger-related and con- pared to 15.4 percent and 16.8 percent in 1999. solidation costs of $45.6 million consisting of $20.1 million in personnel-related costs (offset by a credit of $2.1 million representing The Company recorded $45.6 million ($29.5 million after tax) and a revision of prior estimates) and $27.6 million in consolidation costs. $232.1 million ($172.8 million after tax) of merger-related and con- The $20.1 million in personnel-related costs includes $9.5 million solidation costs in 2000 and 1999, respectively. in settlement charges related to lump sum payments made under a nonqualified pension plan that were triggered by the Coltec merger. The Company decided to divest its Performance Materials Segment Personnel-related costs also include $3.3 million in employee reloca- during 2000. Accordingly, the results of operations, net assets and tion costs associated with the Coltec merger, $5.6 million for work cash flows of Performance Materials have been reflected as a discon- force reductions in the Company’s Aerospace Segment and $1.7 million tinued operation for all periods presented. Unless otherwise noted for work force reductions in the Company’s Engineered Industrial herein within MD&A, disclosures pertain to the Company’s con- Products Segment. Consolidation costs include a $14.3 million tinuing operations. non-cash charge related to the write-off of certain assets; accelerated The Company repurchased approximately 9.3 million shares of depreciation related to assets whose useful lives had been reduced as its common stock (approximately $300 million) during 2000 a result of consolidation activities and $13.3 million for realignment in accordance with a share repurchase program approved by its activities. The $30.9 million in activity during the year includes Board of Directors. reserve reductions of $58.4 million related to cash payments and $13.9 million related to the write-off of assets and accelerated depre- The Company reduced its effective tax rate from continuing opera- ciation. The activity during the year also includes a $41.4 million tions to approximately 34 percent during 2000. increase in reserves for restructuring associated with the sale of Performance Materials. Such costs will be included as a component proposed divestiture of performance of the gain on sale upon consummation of the transaction. materials segment On April 17, 2000, the Company announced that it intends to focus During 1999, the Company recorded merger-related and consolidation on its Aerospace and Engineered Industrial Products businesses and costs of $232.1 million, of which $9.4 million represents non-cash divest its Performance Materials segment. During the fourth quarter asset impairment charges. These costs related primarily to personnel of 2000, the Company announced that it had entered into a definitive related costs, transaction costs and consolidation costs. The merger- agreement to sell the segment to an investor group. The purchase related and consolidation reserves were reduced by $187.2 million price is approximately $1.4 billion, subject to adjustment at closing, during the year, of which $178.6 million represented cash payments. and is comprised of approximately $1.2 billion in cash and $0.2 billion During 1998, the Company recorded merger-related and consolidation in debt securities to be issued by the new company. The $0.2 billion costs of $10.5 million, related to costs associated with the closure of in debt securities will be in the form of unsecured notes with interest three aerospace facilities and an asset impairment charge. The charge payable in cash or payment in-kind, at the option of the investor included $4.0 million for employee termination benefits, $1.8 million group. The Company has also agreed to retain certain liabilities, as related to writing down the carrying value of the three facilities to 23
  26. 26. management’s discussion and analysis their fair value less cost to sell and $4.7 million for an asset impair- results of operations ment related to an assembly-service facility in Hamburg, Germany. Total Company The Company has identified additional merger-related and con- solidation costs of approximately $15 million that will be recorded (dollars in millions) 2000 1999 1998 throughout 2001. These charges will consist primarily of costs Sales: associated with the consolidation of its landing gear facilities, the Aerospace $ 3,673.6 $ 3,617.4 $ 3,479.3 reorganization of operating facilities and for the relocation of per- Engineered Industrial Products 690.2 702.4 779.9 sonnel. It is possible that additional costs will be incurred in 2001 as Total Sales $ 4,363.8 $ 4,319.8 $ 4,259.2 a result of additional consolidation activities that, as of yet, have not Operating Income: been specifically identified and that such amounts may be signifi- Aerospace $ 591.8 $ 558.7 $ 500.0 cant. The timing of these costs is dependent on the finalization of Engineered Industrial Products 122.1 118.2 131.6 management’s plans. Total Reportable Segments 713.9 676.9 631.6 Merger-Related and 2001 outlook Consolidation Costs (45.6) (232.1) (10.5) Corporate General and The Company expects that 2001 will be another year of sales and Administrative Costs (76.5) (74.3) (71.7) profit growth driven by the strength of the Aerospace segment. Higher Total Operating Income 591.8 370.5 549.4 expected deliveries of commercial transport aircraft, coupled with Net interest expense (105.5) (86.6) (80.7) the Company’s increasingly strong presence in the aftermarket and Other income (expense) – net (24.9) (1.7) 39.2 Income tax expense (156.7) (125.1) (182.1) in regional and business aircraft markets are expected to generate Distribution on Trust increasing year over year Aerospace results again in 2001. Engineered preferred securities (18.4) (18.4) (16.1) Industrial Products should experience modest top-line growth due Income from continuing to increased shipments of engines and compressors and the intro- operations $ 286.3 $ 138.7 $ 309.7 Income from discontinued duction of new products, offset by weakness in automotive, truck operations 39.6 30.9 48.3 and trailer, and general industrial markets. Higher new product Extraordinary item — — (4.3) development costs will contribute to relatively flat operating income Net Income $ 325.9 $ 169.6 $ 353.7 in this segment. Overall, the Company expects a strong operating margin performance and increased EBITDA (as defined in Liquidity Fluctuations in sales and segment operating income are discussed and Capital Resources below) in 2001; however, increased investments within the Business Segment Performance section below. in new products that will drive profitable growth in the future may lead to slightly lower margins as compared to 2000. Merger-related and consolidation costs: The Company has recorded merger-related and consolidation costs in each of the last three years. The Company expects free cash flow in 2001, defined as operating These costs are discussed in detail above and in Note D of the Notes cash flows adjusted for cash payments for special items, less capital to Consolidated Financial Statements. expenditures and dividends, to be lower than that generated in 2000. Primary factors for the reduction include: higher new product devel- Corporate general and administrative costs: Corporate general and opment costs; the sale of Performance Materials; increased capital administrative costs, as a percent of sales, have remained relatively expenditures (primarily for new information technology systems); constant between years. Corporate general and administrative costs, and the timing of insurance recoveries associated with asbestos- as a percent of sales, were 1.8 percent, 1.7 percent and 1.7 percent in related actions. 2000, 1999 and 1998, respectively. Net interest expense: Net interest expense increased by $18.9 million from $86.6 million in 1999 to $105.5 million in 2000. The increase is primarily attributable to increased borrowings in 2000 (approxi- mately $500 million) as a result of the Company’s $300 million share repurchase program and acquisitions. The $5.9 million increase in net interest expense between 1999 and 1998 was primarily due to an increase in average outstanding borrowings in 1999 as a result of the Coltec merger and a reduction in the amount of capitalized interest as a result of lower capital spending. 24
  27. 27. Other income (expense) – net: The table below allows other income Earnings Per Diluted Share 2000 1999 1998 (expense) – net to be evaluated on a comparable basis. Income from continuing operations $ 2.68 $ 1.26 $ 2.76 (dollars in millions) 2000 1999 1998 Net (gain) loss on sold businesses 0.02 (0.05) (0.34) As reported $ (24.9) $ (1.7) $ 39.2 Merger-related and Gains/(losses) on sale of consolidation costs 0.27 1.56 0.06 businesses and Dilutive impact of convertible demutualization of preferred securities — (0.02) — insurance companies (0.5) 17.0 55.3 Income from continuing Adjusted Other Income operations, excluding (expense) – Net $ (24.4) $ (18.7) $ (16.1) special items $ 2.97 $ 2.75 $ 2.48 Included within other income (expense) – net are gains and losses Income from continuing operations for the year ended December 31, from the sale of businesses, as well as gains in 1999 from the demu- 2000 included $29.5 million ($0.27 per share) of merger-related and tualization of certain insurance carriers. Excluding these items, other consolidation costs and a $1.7 million ($0.02 per share) impairment income (expense) – net was expense of $24.4 million, $18.7 million loss on a business held for sale. and $16.1 million in 2000, 1999 and 1998, respectively. The increase in costs between 1999 and 2000 was primarily attributable to lower Income from continuing operations for the year ended December 31, income from subsidiaries accounted for under the equity method of 1999 included (i) $162.2 million ($1.46 per share) for costs associated accounting, increased earnings attributable to minority interests and with the Coltec merger; (ii) a net gain on the sale of businesses of increased retiree health care benefit costs associated with previously $5.6 million ($0.05 per share); (iii) a charge of $10.6 million ($0.10 disposed of businesses. The increase in cost between 1998 and 1999 per share) related to segment restructuring activities; and (iv) the was primarily attributable to equity income related to an Asia Pacific dilutive impact of convertible preferred securities that were anti- aerospace joint venture recorded during 1998 but not in 1999. The dilutive on an as reported basis of $0.02 per share. remaining interest in the joint venture was acquired by the Company in 1999 resulting in its subsequent consolidation into the Company’s Income from continuing operations for the year ended December 31, financial statements. 1998 included $6.5 million ($0.06 per share) for costs associated with the Aerostructures Group’s closure of three facilities and the impair- Income tax expense: The Company’s effective tax rate from continu- ment of a fourth facility; and a $38.5 million ($0.34 per share) gain ing operations was 34.0 percent, 44.3 percent and 35.9 percent in on the sale of Holley Performance Products. 2000, 1999 and 1998, respectively. The decreased rate in 2000 was primarily attributable to significant non-deductible merger-related Income from discontinued operations: Income from discontinued costs incurred in 1999 that significantly increased the effective tax operations increased $8.7 million from $30.9 million in 1999 to rate in that year, lower state and local taxes and increased benefits $39.6 million in 2000. Income from discontinued operations, exclud- from R&D and foreign sales credits. The increase in rates from 1998 ing special items, decreased $16.3 million, or 29.2 percent from $55.8 to 1999 was primarily attributable to the significant non-deductible million in 1999 to $39.5 million in 2000. The decrease was primarily merger-related costs noted above. due to significantly higher raw material and energy costs (primarily toluene, PVC and natural gas), lower sales due to reduced volumes Income from continuing operations: Income from continuing opera- and prices and increased interest expense. These decreases were only tions included various charges or gains (referred to as special items) partially offset by volume strength in certain other product lines which affected reported earnings. Excluding the effects of special (primarily Carbopol, thermoplastic polyurethane and rubber chem- items, income from continuing operations in 2000 was $317.5 million, icals), reductions in manufacturing/overhead costs and a favorable or $2.97 per diluted share, compared with $305.9 million, or $2.75 sales mix. per diluted share in 1999, and $277.7 million, or $2.48 per diluted share in 1998. The following table presents the impact of special Income from discontinued operations decreased $17.4 million from items on earnings per diluted share. $48.3 million in 1998 to $30.9 million in 1999. Income from discon- tinued operation, excluding special items, increased $5.9 million, or 11.8 percent, from $49.9 million in 1998 to $55.8 million in 1999. The increase was primarily attributable to acquisitions, lower raw material costs and reduced manufacturing/overhead costs. 25
  28. 28. management’s discussion and analysis Special items related to discontinued operations, net of tax, included “smart” sensing and control devices. Total consideration aggregated $0.1 million of income related to a net adjustment of amounts previ- $56.5 million, of which $55.0 million represented goodwill. ously recorded for consolidation activities in 2000; $24.9 million of costs related to restructuring activities at Performance Materials in The purchase agreements for the manufacturer and developer of 1999; and a $1.6 million charge related to a business previously dis- micro-electromechanical systems provides for additional considera- posed of in 1998. tion to be paid over the next six years based on a percentage of net sales. The additional consideration for the first five years, however, Extraordinary items: The Company recorded an extraordinary item is guaranteed not to be less than $3.5 million. As the $3.5 million during 1998 related to the extinguishment of debt. of additional consideration is not contingent on future events, it has been included in the purchase price and allocated to the net assets acquisitions acquired. All additional contingent amounts payable under the pur- chase agreement will be recorded as additional purchase price when Pooling-of-Interests earned and amortized over the remaining useful life of the goodwill. On July 12, 1999, the Company completed a merger with Coltec Industries Inc. (“Coltec”) by exchanging 35.5 million shares of During 1998, the Company acquired a manufacturer of sealing prod- BFGoodrich common stock for all of the common stock of Coltec. ucts; the remaining 20 percent not previously owned of a subsidiary Each share of Coltec common stock was exchanged for .56 of one that produces self-lubricating bearings; and a small manufacturer of share of BFGoodrich common stock. The merger was accounted for energetic materials systems. Total consideration aggregated $143.5 as a pooling-of-interests, and all prior period financial statements million, of which $105.5 million represented goodwill. were restated to include the financial information of Coltec as The impact of these acquisitions was not material in relation to the though Coltec had always been a part of BFGoodrich. Company’s results of operations. Consequently, pro forma informa- tion is not presented. Purchases The following acquisitions were recorded using the purchase method dispositions of accounting. Their results of operations have been included in During 2000, the Company sold all of its interest in one business, the Company’s results since their respective dates of acquisition. resulting in a pre-tax gain of $2.0 million, which has been reported Acquisitions made by the Performance Materials Segment are not in other income (expense), net. discussed below. During 1999, the Company sold all or a portion of its interest in During 2000, the Company acquired a manufacturer of earth and three businesses, resulting in a pre-tax gain of $11.8 million, which sun sensors in attitude determination and control subsystems of has been reported in other income (expense), net. spacecraft; ejection seat technology; a manufacturer of fuel nozzles; a developer of avionics and displays; the assets of a developer of video In May 1998, the Company sold the capital stock of its Holley camera systems used on space vehicles and tactical aircraft; an equity Performance Products subsidiary for $100 million in cash. The pre- interest in a joint venture focused on developing and operating a tax gain of $58.3 million, net of liabilities retained, has been recorded comprehensive open electronic marketplace for aerospace aftermar- within other income (expense), net. The proceeds from this divesti- ket products and services; a manufacturer of advanced products and ture were applied toward reducing debt. In 1997, Holley had gross technologies used in space transport and payload applications; and a revenues and operating income of approximately $99.0 million and supplier of pyrotechnic devices for space, missile, and aircraft systems. $8.0 million, respectively. Total consideration aggregated $242.6 million, of which $105.4 million represented goodwill and other intangible assets. For dispositions accounted for as discontinued operations refer to Note B to the Consolidated Financial Statements. During 1999, the Company acquired a manufacturer of spacecraft attitude determination and control systems and sensor and imaging instruments; the remaining 50 percent interest in a joint venture, located in Singapore, that overhauls and repairs thrust reversers, nacelles and nacelle components; an ejection seat business; and a manufacturer and developer of micro-electromechanical systems, which integrate electrical and mechanical components to form 26
  29. 29. business segment performance to conform with this new group structure. These groups serve com- mercial, military, regional, business and general aviation markets. Segment Analysis The Company’s operations are classified into two reportable business Engineered Industrial Products is a single business group. This segments: BFGoodrich Aerospace (“Aerospace”) and BFGoodrich group manufactures industrial seals; gaskets; packing products; Engineered Industrial Products (“Engineered Industrial Products”). self-lubricating bearings; diesel, gas and dual fuel engines; air The Aerospace Segment reorganized during the first quarter of 2000 compressors; spray nozzles and vacuum pumps. creating the following new operating groups: Aerostructures and Corporate includes general and administrative costs. Segment oper- Aviation Services, Landing Systems, Engine and Safety Systems and ating income is total segment revenue reduced by operating expenses Electronic Systems. The segment’s maintenance, repair and overhaul directly identifiable with that business segment. Merger-related and businesses are now being reported with their respective original consolidation costs are presented separately (see further discussion equipment businesses. Prior period amounts have been reclassified in Note D of the Notes to the Consolidated Financial Statements). 2000 compared with 1999 Aerospace % of Sales (dollars in millions) 2000 1999 % Change 2000 1999 Sales: Aerostructures and Aviation Services $ 1,455.5 $ 1,476.9 (1.4) Landing Systems 1,057.7 1,060.6 (0.3) Engine and Safety Systems 617.5 565.6 9.2 Electronic Systems 542.9 514.3 5.6 Total sales $ 3,673.6 $ 3,617.4 1.6 Operating Income: Aerostructures and Aviation Services $ 209.0 $ 216.8 (3.6) 14.4 14.7 Landing Systems 149.0 147.1 1.3 14.1 13.9 Engine and Safety Systems 115.7 99.2 16.6 18.7 17.5 Electronic Systems 118.1 95.6 23.5 21.8 18.6 Total operating income $ 591.8 $ 558.7 5.9 16.1 15.4 Aerostructures and Aviation Services Group sales decreased $21.4 costs on the site consolidation project that began last year. The million, or 1.4 percent, from $1,476.9 million in 1999 to $1,455.5 decrease in operating income at aviation services was primarily million in 2000. The decrease was primarily attributable to the favor- attributable to lower volume, increased overhead costs, most of able settlement of a contract claim that resulted in approximately which related to retaining and training the current work force, $60 million in sales during 1999; lower sales on the B757, PW4000, inventory adjustments and the write-off of receivables due to the MD-11 and MD-80 programs (the MD-11 and MD-80 programs bankruptcy of National Airlines. are no longer in production); and lower sales of aftermarket aviation services. These decreases were partially offset by increased sales on the Landing Systems Group sales decreased $2.9 million from $1,060.6 mil- B717-200, A340, V2500 and Super 27 programs, as well as additional lion in 1999 to $1,057.7 million in 2000. The decrease was primarily aftermarket aerostructures services. Aviation services sales were lower attributable to lower sales of landing gear and of landing gear services, primarily due to lower component volume. Aerostructures aftermarket partially offset by increased sales of wheels and brakes and the favor- services posted higher sales than a year ago due to increased volume able settlement of claims for increased work scope on engineering from its Asian facility. changes related to existing landing gear products. Landing gear sales decreased as a result of reduced Boeing OE deliveries on the B777 and Operating income decreased $7.8 million, or 3.6 percent, from B757 aircraft and the discontinuation of new aircraft production on $216.8 million in 1999 to $209.0 million in 2000. The decrease was the MD11 and B737 classic aircraft. Sales for landing gear overhaul primarily attributable to lower results at aviation services (both air- services decreased due to fewer customer removals as a result of airline frame and component overhaul services recorded losses for the year), operating cost constraints caused by higher fuel costs. Sales of wheels partially offset by increased operating income from aerostructures. and brakes increased significantly year over year due to growth in the The increase in aerostructures operating income, despite the decrease commercial aftermarket, regional, business and military markets. in sales, is attributable to higher margins on certain contracts due to Programs most responsible for these increased sales included the productivity improvements and cost controls and significantly lower A319/320, B737 next generation, Embraer 145 and F16 aircraft. 27
  30. 30. management’s discussion and analysis Operating income increased $1.9 million, or 1.3 percent, from $147.1 Operating income increased $22.5 million, or 23.5 percent, from million in 1999 to $149.0 million in 2000. The increase resulted pri- $95.6 million in 1999 to $118.1 million in 2000. Higher volume marily from increased sales of wheels and brakes as noted above and in space/satellite products, primarily from acquisitions; increased the favorable settlement of claims for increased work scope on engi- demand for general aviation products; a favorable sales mix; produc- neering changes related to existing landing gear products. These tivity improvements; and lower new product development costs on increases in operating income were mostly offset by the impact of the helicopter health and usage management system accounted for lower landing gear sales, increased sales incentives and inefficiencies the increase in operating income. associated with the shutdown and transfer of production out of the Euless, Texas landing gear facility. engineered industrial products Engine and Safety Systems Group sales increased $51.9 million, or (dollars in millions) 2000 1999 % Change 9.2 percent, from $565.6 million in 1999 to $617.5 million in 2000. Sales $ 690.2 $ 702.4 (1.7) Sales were appreciably higher in Engine Systems as a result of con- Operating income $ 122.1 $ 118.2 3.3 tinued strong demand for aerospace OE and industrial gas turbine Operating income as a products. Engine products that experienced an increase in volume percent of sales 17.7% 16.8% included coated blades and vanes, fuel injection nozzles, discs and airfoils. Safety Systems posted a modest increase as a result Sales were lower by $12.2 million, or 1.7 percent, from $702.4 million of increased demand for evacuation products. in 1999 to $690.2 million in 2000. The decrease was primarily due to the completion of a significant diesel-engine program during 1999 Operating income for 2000 increased $16.5 million, or 16.6 percent, and the initiation of sales of a similar but lower revenue producing from $99.2 million in 1999 to $115.7 million in 2000. Operating program during 2000, lower sales of sealing products due in part to income results followed the increases in sales described above. In a weaker Euro and weakness in the domestic automotive and heavy- addition to overall stronger volume, Engine Systems recorded a small duty truck markets. These declines were partially offset by increased gain on the sale of land and Safety Systems recovered previously sales of compressed air products. expensed non-recurring engineering costs offsetting some of the higher R&D expenses related to continuing development of its auto- Operating income increased $3.9 million, or 3.3 percent. The motive products (SmartBelt™ systems). increase in operating income is primarily due to productivity improvements and lower non-recurring engineering costs, partially Electronic Systems Group sales increased $28.6 million, or 5.6 percent, offset by pressures related to foreign currency and lower sales as dis- from $514.3 million in 1999 to $542.9 million in 2000. The increase cussed above. Operating income as a percentage of sales increased was primarily attributable to acquisitions in space flight systems and from 16.8 percent to 17.7 percent as a result of these factors. increased OE and aftermarket demand for the group’s avionics prod- ucts. These increases were partially offset by the impact of a product line divestiture in 2000 and lower engine sensor sales. 28
  31. 31. 1999 compared with 1998 Aerospace % of Sales (dollars in millions) 1999 1998 % Change 1999 1998 Sales Aerostructures and Aviation Services $ 1,476.9 $ 1,454.9 1.5 Landing Systems 1,060.6 1,004.3 5.6 Engine and Safety Systems 565.6 524.8 7.8 Electronic Systems 514.3 495.3 3.8 Total sales $ 3,617.4 $ 3,479.3 4.0 Operating Income Aerostructures and Aviation Services $ 216.8 $ 201.0 7.9 14.7 13.8 Landing Systems 147.1 111.9 31.5 13.9 11.1 Engine and Safety Systems 99.2 92.4 7.4 17.5 17.6 Electronic Systems 95.6 94.7 1.0 18.6 19.1 Total operating income $ 558.7 $ 500.0 11.7 15.4 14.4 Aerostructures and Aviation Services Group sales increased $22.0 Operating income increased $35.2 million, or 31.5 percent, from million, or 1.5 percent, from $1,454.9 million in 1998 to $1,476.9 $111.9 million in 1998 to $147.1 million in 1999. The increase in million in 1999. The increase in sales was primarily attributable to sales noted above, together with an overall favorable sales mix, lower the acquisition of the remaining interest in a joint venture business sales incentives and operating efficiency improvements all con- in the Asia Pacific region, increased sales of production spares, addi- tributed to the higher results. tional aftermarket sales and the PW4000 settlement, partially offset by lower OE aerostructure sales. The Asia Pacific joint venture per- Engine and Safety Systems Group sales for 1999 increased $40.8 million, forms aerostructure overhaul services and was previously recorded or 7.8 percent, from $524.8 million in 1998, to $565.6 million in under the equity method of accounting. 1999. The increase was attributable to significantly higher sales in Safety Systems as a result of higher demand for aircraft seating prod- Operating income increased $15.8 million, or 7.9 percent, from ucts and an acquisition. Engine Systems had a more modest sales $201.0 million during 1998 to $216.8 million in 1999. The increase growth predominantly in industrial gas turbine products offsetting is primarily attributable to higher aftermarket sales that generally weakness in fuel pump and controls products. carry a higher margin than OE sales, a gain resulting from an exchange of land, consolidation of a joint venture previously Operating income for 1999 increased $6.8 million, or 7.4 percent, accounted for under the equity method and the settlement of the from $92.4 million in 1998 to $99.2 million in 1999. The increase in PW4000 claim, partially offset by higher manufacturing costs associ- operating income was primarily attributable to the increase in sales ated with the restructuring of several aerostructures facilities and the noted above. start-up of the Arkadelphia aerostructures facility. Electronic Systems Group sales increased $19.0 million, or 3.8 percent, Landing Systems Group sales increased $56.3 million, or 5.6 percent, from $495.3 million in 1998 to $514.3 million in 1999. The increase from $1,004.3 million in 1998 to $1,060.6 million in 1999. Landing was primarily attributable to increased sales of sensors, satellite, cock- gear sales increased primarily as a result of increased Boeing OE pit avionic and aircraft lighting products, as well as the impact of an deliveries on the B737 next generation and military spares on the acquisition in the space flight systems division. These increases were C-17, partially offset by lower deliveries on the B747 and MD11 pro- partially offset by lower sales of fuel control products. grams. Sales of wheels and brakes increased significantly year over Operating income increased $0.9 million, or 1.0 percent, from $94.7 year due to growth in the commercial aftermarket, regional, business million during 1998 to $95.6 million in 1999. This increase reflects and military markets. Programs most responsible for these increased the impact of higher sales volumes and a favorable sales mix of higher sales included the A330/340, B747, B777, Bombardier Global Express margin aftermarket spares, mostly offset by higher R&D spending, and the F16 programs. Sales of landing gear and wheel and brake primarily on the Health, Usage and Monitoring System (HUMS). overhaul services increased as compared to last year due to new cus- tomer awards during 1999 and increased Asia Pacific sales, respectively. 29
  32. 32. management’s discussion and analysis engineered industrial products (dollars in millions) 1999 1998 % Change Sales $ 702.4 $ 779.9 (9.9) Operating income $ 118.2 $ 131.6 (10.2) Operating income as a percent of sales 16.8% 16.9% Sales decreased $77.5 million, or 9.9 percent, from $779.9 million in 1998 to $702.4 million in 1999. The decrease in sales is primarily attributable to a 1998 disposition of a division ($37 million) and reduced volume in most of the Segment’s businesses ($38 million), partially offset by favorable prices ($3 million). As previously discussed, the reduced volume is attributable to weakness in most markets served by the Segment, especially in the businesses serving the domestic chemical and petroleum process industries, industrial machinery and equipment, and the defense capital goods markets. The Segment did experience growth in European sales in its sealing business following the 1998 acquisition of a French company (Cefilac). Further, the operations serving the automotive and heavy-duty vehicle markets experienced modest growth during 1999. Operating income decreased by $13.4 million, or 10.2 percent, from $131.6 million in 1998 to $118.2 million in 1999. Excluding the impact of dispositions ($6 million) and non-recurring charges ($13 million) during 1998, operating income decreased by approximately $20 million. The non-recurring charges in 1998 related to Y2K costs and a warranty issue related to previously sold diesel engines. Overall, the decrease in operat- ing income between periods was due to the market weakness noted above. Management was able to partially offset the decline in business with various initiatives designed to lower costs including facility consolidation, six sigma projects and the application of lean manufacturing initiatives. liquidity and capital resources Short-Term Debt During 2000, the Company increased its committed domestic The Company also maintains $547.4 million of uncommitted revolving credit agreements from $600.0 million to $900.0 million. domestic money market facilities with various banks to meet its These loan agreements are with various domestic banks. Lines of short-term borrowing requirements. As of December 31, 2000, credit totaling $300.0 million expire in February 2004. The Company $253.4 million of these facilities were unused and available. The has 364-day credit facilities with an aggregate commitment amount Company’s uncommitted credit facilities are provided by a small of $600.0 million, $300.0 million of which expire in March 2001. number of commercial banks that also provide the Company with all Management intends to renew the $300 million credit facility expir- of its domestic committed lines of credit and the majority of its cash ing in March 2001 and does not anticipate any problems therein. management, trust and investment management requirements. As a The $300.0 million facility added in 2000 expires in December 2001. result of these established relationships, the Company believes that This facility, however, is intended to be repaid and terminated in its uncommitted facilities are a highly reliable and cost-effective conjunction with the Company’s sale of its Performance Materials source of liquidity. Management intends to reduce its uncommitted segment. In addition, the Company had available formal foreign lines of credit by $155 million in conjunction with the sale of lines of credit and overdraft facilities, including the committed Performance Materials. multi-currency revolver of $241.1 million at December 31, 2000 of which $62.4 million was available. Also, reflected as short-term indebtedness of the Company at December 31, 2000, was $175.0 million of 9.625 percent notes The Company’s $125.0 million committed multi-currency revolving that mature in 2001. Due to their maturity within 12 months of credit facility, with various international banks, expires in the year year-end, such amount has been reclassified as a current liability. 2003. The Company intends to use this facility for short- and long- term local currency financing to support European operations growth. Long-term debt, absent the reclassification described above, At December 31, 2000, the Company had borrowed $96.1 million remained relatively constant between 1999 and 2000. denominated in various currencies at floating rates. The Company has effectively converted $20.5 million of this variable rate debt into fixed- rate debt with an interest rate swap. Management intends to reduce this committed multi-currency revolving credit facility to $80 million in conjunction with the sale of Performance Materials. 30
  33. 33. EBITDA investing cash flows EBITDA is income from continuing operations before distributions The Company used $363.2 million in investing activities in 2000 ver- on Trust preferred securities, income tax expense, net interest expense, sus $194.3 million in 1999. The increase was primarily attributable to depreciation and amortization and special items. EBITDA for the additional amounts spent on acquisitions, partially offset by reduced Company is summarized as follows: capital expenditures. The $34.3 million decrease in amounts spent on investing activities between 1998 and 1999 was primarily attribut- (dollars in millions) 2000 1999 1998 able to lower capital expenditures, significantly higher cash proceeds from divestitures in 1998 as compared to 1999 and reduced acquisi- Income from continuing tion activity. operations before taxes and trust distributions $ 461.4 $ 282.2 $ 507.9 Add: financing cash flows Net interest expense 105.5 86.6 80.7 Financing activities provided cash of $199.1 million in 1998, con- Depreciation and amortization 192.5 160.5 144.8 sumed $72.2 million of cash in 1999 and provided $80.6 million in Special items 48.1 223.5 (47.8) cash in 2000. Excess operating cash flows in each of these years was EBITDA $ 807.5 $ 752.8 $ 685.6 used to assist with the payment of dividends and distributions on trust preferred securities. The Company increased its borrowings operating cash flows in 2000 to finance the acquisitions discussed above, as well as the Operating cash flows decreased $13.3 million from $243.3 million Company’s share repurchase program. in 1999 to $230.0 million in 2000. The decrease was primarily attrib- utable to a $113.7 million payment to the Internal Revenue Service discontinued operations cash flow (“IRS”) and an increase in long-term receivables associated with cer- Cash flow from discontinued operations increased $28.8 million tain leasing activities (Super 27 program), partially offset by lower from $37.8 million in 1999 to $66.6 million in 2000. The increase merger-related and consolidation cost payments and proceeds from was primarily attributable to lower cash payments related to merger- the sale of receivables. related and consolidation costs in 2000, better utilization of working capital and reduced capital expenditures and acquisition related pay- The significant increase in receivables during 2000 was primarily ments. These increases were partially offset by lower cash earnings. attributable to an increase in asbestos-related insurance receivables (approximately $102 million). This increase was partially offset Cash flow from discontinued operations increased $419.8 million by an increase in asbestos-related amounts payable (approximately from a use of cash of $382.0 million in 1998 to positive cash flow $68 million). The net cash flow impact of asbestos-related payments of $37.8 million in 1999. The large fluctuation between years was versus insurance recoveries was a net use of $36.4 million in cash in primarily due to a significant acquisition made during 1998. 2000 and a net use of $19.3 million in cash in 1999. For a further discussion of asbestos-related matters, please see the Contingencies contingencies section below. General The payment to the IRS was for an income tax assessment and the There are pending or threatened against BFGoodrich or its sub- related accrued interest. The Company intends to pursue its admin- sidiaries various claims, lawsuits and administrative proceedings, all istrative and judicial remedies for a refund of this payment. A arising from the ordinary course of business with respect to commer- reasonable estimation of the Company’s potential refund cannot be cial, product liability, asbestos and environmental matters, which made at this time; accordingly, no receivable has been recorded. seek remedies or damages. BFGoodrich believes that any liability that may finally be determined with respect to commercial and non- The lower operating cash flow in 1999 as compared with 1998 was asbestos product liability claims should not have a material effect on primarily due to significantly higher merger-related and consolidation the Company’s consolidated financial position or results of operations. cost payments. These higher payments were primarily attributable From time to time, the Company is also involved in legal proceedings to costs associated with the Company’s merger with Coltec Industries as a plaintiff involving contract, patent protection, environmental in 1999. and other matters. Cash flow from operations has been more than adequate to finance At December 31, 2000, approximately 17 percent of the Company’s capital expenditures in each of the past three years. The Company labor force was covered by collective bargaining agreements. expects to have sufficient cash flow from operations to finance Approximately 3 percent of the labor force is covered by collective planned capital expenditures in 2001. bargaining agreements that will expire during 2001. 31
  34. 34. management’s discussion and analysis Environmental In accordance with the Company’s internal procedures for the pro- cessing of asbestos product liability actions and due to the proximity The Company and its subsidiaries are generators of both hazardous to trial or settlement, certain outstanding actions against Garlock wastes and non-hazardous wastes, the treatment, storage, trans- and Anchor have progressed to a stage where the Company can rea- portation and disposal of which are subject to various laws and sonably estimate the cost to dispose of these actions. These actions governmental regulations. Although past operations were in substan- are classified as actions in advanced stages and are included in the tial compliance with the then-applicable regulations, the Company table as such below. Garlock and Anchor are also defendants in other has been designated as a potentially responsible party (“PRP”) by the asbestos-related lawsuits or claims involving maritime workers, med- U.S. Environmental Protection Agency (“EPA”), or similar state agen- ical monitoring claimants, co-defendants and property damage cies, in connection with several sites. claimants. Based on its past experience, the Company believes that The Company initiates corrective and/or preventive environmental these categories of claims will not involve any material liability and projects of its own to ensure safe and lawful activities at its current are not included in the table below. operations. It also conducts a compliance and management systems With respect to outstanding actions against Garlock and Anchor, audit program. The Company believes that compliance with current which are in preliminary procedural stages, as well as any actions governmental regulations will not have a material adverse effect on that may be filed in the future, the Company lacks sufficient informa- its capital expenditures, earnings or competitive position. tion upon which judgments can be made as to the validity or ultimate The Company’s environmental engineers and consultants review and disposition of such actions, thereby making it difficult to estimate monitor environmental issues at past and existing operating sites, as with reasonable certainty what, if any, potential liability or costs well as off-site disposal sites at which the Company has been identified may be incurred by the Company. However, the Company believes as a PRP. This process includes investigation and remedial selection that Garlock and Anchor are in a favorable position compared to and implementation, as well as negotiations with other PRPs and many other defendants because, among other things, the asbestos governmental agencies. fibers in the asbestos-containing products sold by Garlock and Anchor were encapsulated. Subsidiaries of the Company discontin- At December 31, 2000 and 1999, the Company had recorded in ued distributing encapsulated asbestos-bearing products in the Accrued Expenses and in Other Non-Current Liabilities a total United States during 2000. of $119.9 million and $128.5 million, respectively, to cover future environmental expenditures. These amounts are recorded on an Anchor is an inactive and insolvent subsidiary of the Company. The undiscounted basis. insurance coverage available to it is fully committed. Anchor contin- ues to pay settlement amounts covered by its insurance and is not The Company believes that its reserves are adequate based on committing to settle any further actions. Considering the foregoing, currently available information. Management believes that it is as well as the experience of the Company’s subsidiaries and other reasonably possible that additional costs may be incurred beyond defendants in asbestos litigation, the likely sharing of judgments the amounts accrued as a result of new information. However, among multiple responsible defendants, recent bankruptcies of the amounts, if any, cannot be estimated and management believes other defendants, legislative efforts and given the substantial amount that they would not be material to the Company’s financial condi- of insurance coverage that Garlock expects to be available from its tion but could be material to the Company’s results of operations solvent carriers to cover the majority of its exposure, the Company in a given period. believes that pending and reasonably anticipated future actions against Garlock and Anchor are not likely to have a material adverse Asbestos effect on the Company’s financial condition, but could be material to Garlock Inc. and The Anchor Packing Company As of December 31, the Company’s results of operations in a given period. 2000 and 1999, these two subsidiaries of the Company were among a number of defendants (typically 15 to 40) in actions filed in various Although the insurance coverage which Garlock has available to it is states by plaintiffs alleging injury or death as a result of exposure to substantial (slightly in excess of $1.0 billion as of December 31, 2000), asbestos fibers. it should be noted that insurance coverage for asbestos claims is not available to cover exposures initially occurring on and after Settlements are generally made on a group basis with payments July 1, 1984. Garlock and Anchor continue to be named as defen- made to individual claimants over a period of one to four years. The dants in new actions, some of which allege initial exposure after Company recorded charges to operations amounting to approximately July 1, 1984. However, these cases are not significant and the $8.0 million in each of 2000, 1999 and 1998 related to payments not Company regularly rejects them for settlement. covered by insurance. 32

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