S E C U R I T I E S A N D E X C H A N G E C O M M I S S IO N
Washington, D. C. 20549
FORM 10-K/A
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 1996.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 1-8782
GLEASON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 16-1224655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 University Avenue
Rochester, New York 14692
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 473-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1.00 Par Value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K/A or any amendment to this
Form 10-K/A. ( )
The aggregate market value of registrant's voting stock held
by non-affiliates as of March 13, 1997 was approximately
$132,209,521.
The number of shares of Common Stock, $1.00 par value,
outstanding as of March 13, 1997 was 9,959,760.
Documents Incorporated by Reference
Portions of the Company's Annual Report to Stockholders for
the year ended December 31, 1996 are incorporated by
reference into Parts I and II of this Form 10-K/A.
Portions of the Company's proxy statement, dated March 31,
1997, filed in connection with its 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this Form 10-K/A. Certain documents previously filed with the
SEC have been incorporated by reference into Part IV of this
Form 10-K/A.
The exhibit index follows the signature page.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Gleason Corporation was incorporated in the State of Delaware
in 1984 and in May of 1984, by virtue of a merger, became a holding
company which owns all the outstanding stock of The Gleason Works.
The Gleason Works was incorporated in New York State in 1903 as
successor to the businesses of two corporations and has, with its
predecessors, been in business since 1865. As used herein, unless
the context otherwise indicates, "Company" includes Gleason
Corporation and its subsidiaries and divisions.
In 1995, the Company acquired certain assets and technology of
Hurth Maschinen und Werkzeuge GmbH, a Munich, Germany-based leader in
the design and production of cylindrical gear machinery and tooling.
Further information regarding the acquisition is presented in Note 2
of the Notes to the Consolidated Financial Statements in the Company's
Annual Report to Stockholders for the year ended December 31, 1996,
which is incorporated herein by reference.
In 1989, the Company announced that its Components Group, which
consisted of four businesses that manufacture industrial products
including powder metal parts, metal stampings and precision plastic
parts, was for sale. In December 1991, the Company sold Pennsylvania
Pressed Metals, Inc., the largest of its four Components Group
operations. In 1992, the Company sold two of the three remaining
businesses, Alliance Precision Plastics and Alliance Carolina Tool
and Mold. In 1994, the Company ceased operations at the last
remaining Components Group business, Alliance Metal Stamping and
Fabricating, and sold the machinery and equipment located at this
division's facility. Further information regarding discontinued
operations is presented in Note 3 of the Notes to the Consolidated
Financial Statements in the Company's Annual Report to Stockholders
for the year ended December 31, 1996, which is incorporated herein
by reference.
<PAGE>
Description of Business
The Company operates in one business segment engaged in the
design, manufacture and sale of gear production machinery and
equipment. The Company has manufacturing operations in Rochester,
New York, Munich, Germany, and Plymouth, England. In 1996, the
Company began the establishment of a manufacturing facility at its
operation in Bangalore, India. The Company sold its former Belgian
manufacturing operation to a new company owned by former employees of
the Company in the fourth quarter of 1993. The successor company
serves as a contract manufacturer for some of the Company's products.
Foreign and domestic operations, export sales and major
customer financial information is presented in Note 14 of the Notes
to the Consolidated Financial Statements in the Company's Annual Report
to Stockholders for the year ended December 31, 1996, which is incorporated
herein by reference.
Products
Bevel Gear Products
The Company believes it is the world leader in the technology,
design, application and methods of production of hypoid and other
bevel gears, and in the manufacture of machines for the production of
these gears.
Hypoid and other bevel gears are used to transmit mechanical
power at an angle, such as from the drive shaft to the rear-driven
axle of an automobile. The gears produced by Gleason machines are
used in drive trains of automobiles, sport utility vehicles, trucks,
buses, aircraft, marine, agricultural and construction machinery, and
must meet a wide range of complex specifications which are determined
by the function required of a particular gear set.
The Company sells over 30 models of machines for the production
and testing of hypoid and other bevel gears. Some of these machines
can produce gears as small as 1/4 of an inch in diameter, weighing
only 1/2 ounce, while others can produce gears as large as 36 inches
in diameter, weighing more than 1,000 pounds. The latest design of
<PAGE>
these machines incorporates full computer numerical controls (CNC)
which contribute to improved quality and productivity.
In December 1989, the Company sold its first PHOENIX (Registered
Trademark) gear production machine. This line of machines incorporates
state-of-the-art, full CNC design for the production of spiral bevel and
hypoid gears. CNC machine features include the elimination of manual set-
ups, permitting a significant reduction in the overall cost of
manufacturing spiral bevel and hypoid gears. PHOENIX products now
account for the vast majority of bevel gear machine sales.
The Company designs and produces tooling, including cutting
tools and workholding equipment, principally for use on its bevel
gear production machines. Other products include spare parts,
service, and gear design software.
Cylindrical Gear Products
The Company also manufactures machines for the production of
spur and helical gears up to 20 inches in diameter. Spur and helical
or cylindrical gears are used for the straight-line or parallel
transmission of mechanical power. This type of gearing has a broad
range of applications, such as the main drive axles of passenger cars
with front-wheel-drive and transverse mounted engines, automotive
transmissions, speed reducers, pumps and gear motors.
In 1993, the Company began making shipments of its first
PHOENIX machine for cylindrical gear production. This machine, the
125GH gear hobber has significantly increased the Company's sales in
this market.
The acquisition of Hurth in 1995 added complementary product
lines which strengthen the Company's position in the cylindrical gear
equipment market. Hurth has been a leader in the technology and
production processes for shaving and fine finishing of cylindrical
gears. Similar to the Company's other gear equipment, the Company
offers tooling, spare parts and field service for its cylindrical
gear machines.
<PAGE>
Marketing
The Company's sales and service functions in North America and
Europe are performed directly by employees of the Company. Sales in
other territories are generally handled by independent foreign
machinery dealers.
In 1994, the Company acquired a 20 percent interest in OGA
Corporation, its exclusive sales and service representative in Japan
and Taiwan, in order to strengthen its presence and enhance growth in
that region.
Overseas markets are important to the Company. The percentage
of sales outside the United States was 73 percent and 65 percent in
1996 and 1995, respectively. The majority of overseas sales were to
European and Asian customers. Sales to overseas markets in 1996 were
higher as a percentage of total sales primarily due to higher
shipments to the Asia-Pacific region and the full year addition of
Hurth sales which were more heavily concentrated outside the U.S.
The domestic and foreign automotive and truck industries
accounted for approximately 76 percent and 74 percent of sales in
1996 and 1995, respectively.
The Company has no contracts or subcontracts with U.S.
government agencies that are significant.
Competition
The Company believes that it produces the largest number and
greatest variety of machines for the manufacture of bevel and hypoid
gears. However, it does have competition from other producers of
such machinery, particularly foreign producers, as well as from
producers of equipment for the production of bevel and hypoid gears
by processes other than machining, such as forging and sintered
powder metal processes.
The Company faces greater competition from manufacturers of
spur and helical gear equipment. Competition is primarily from
Japanese and German companies.
<PAGE>
Backlog
Backlog (unshipped orders), is an important measure of short-
term business activity. Because of the nature of the industry,
backlog is subject to fluctuation. As of December 31, 1996 backlog
totaled $122.8 million compared to $124.5 million as of December
31, 1995. The Company expects substantially all of the December 31,
1996 backlog to be shipped by the end of 1997.
Research and Development
Amounts expended for research and development are presented in
the Consolidated Statements of Operations in the Company's Annual Report
to Stockholders for the year ended December 31, 1996, which is
incorporated herein by reference.
Patents
The Company owns a substantial number of United States and
foreign patents and patent applications. The Company is not
significantly dependent upon any one patent or group of patents for
its business.
Employees
At December 31, 1996, the Company had 1,543 employees. Many
employees possess a high degree of engineering, technical and
mechanical skills. Employee relations are considered good. With the
exception of government-mandated Workers Council representation in
Germany, the Company's employees are not represented by any
collective bargaining agent.
<PAGE>
Other Information
The Company is not significantly dependent on any one source
for raw materials essential to its business.
The Company is not aware of any federal, state or local
provisions which have been enacted or adopted regarding discharge of
material into the environment, compliance with which might have a
material effect on the consolidated capital expenditures, earnings or
competitive position of the Company. The Company makes expenditures
for environmental control equipment on an ongoing basis in its
efforts to comply with applicable environmental regulations.
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate office is located in Rochester, New
York and its manufacturing operations are conducted at plants in
Rochester, Munich, Germany and Plymouth, England. In 1996, the
Company began the establishment of a manufacturing facility at its
operation in Bangalore, India. The activity at this location was not
material to overall operations in 1996.
A table of the major facilities and products manufactured is
displayed below:
Plant Principal
Location Square Footage Products
Owned Facilities
Rochester, New York 721,400 Gear production machines,
workholding equipment and
cutting tools
Plymouth, England 106,000 Cutting tools
Leased Facilities
Munich, Germany 248,000 Cylindrical gear production
machines and tooling
The Munich facility is being leased for a term ending in 2001.
The Company owns approximately 250 acres of undeveloped land in
Monroe County, New York and leases office space in various locations
around the world. The Company retained ownership of the land and
buildings of Alliance Precision Plastics and Alliance Carolina Tool
and Mold, which were sold in 1992, and leased these properties to
the new owners of these businesses. In March of 1997, the Company sold
the Alliance Carolina Tool and Mold property to the lessee. In 1995,
the Company sold the land and building of its former Alliance Metal
Stamping and Fabricating division.
The Company's plants consist of well-lighted, well-maintained
buildings and provide good working conditions. Production machinery
and equipment are generally owned by the Company and suited to its
manufacturing requirements.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to
any material pending legal proceedings required to be disclosed under
this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Information regarding the market for the Company's Common Stock
and related stockholder matters presented in the Company's Annual Report
to Stockholders for the year ended December 31, 1996 is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented in the Five Year Review in the
Company's Annual Report to Stockholders for the year ended December
31, 1996 is incorporated herein by reference.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion of Financial Condition and Results of
Operations is presented in the Company's Annual Report to Stockholders
for the year ended December 31, 1996 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and
supplementary data of the Company and its subsidiaries presented
in the Company's Annual Report to Stockholders for the year ended
December 31, 1996 are incorporated herein by reference:
Consolidated Statements of Operations - Years ended December 31,
1996, 1995 and 1994.
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements - December 31, 1996.
Quarterly Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required to be furnished by Items 401 and
405 of Regulation S-K are described in a definitive proxy statement
which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14-A within 120 days after the close of the
fiscal year ended December 31, 1996, which information is
incorporated herein by reference. Additional information required to
be furnished by Item 401 of Regulation S-K is as follows:
List of Executive Officers of the Registrant
EXECUTIVE
OFFICER POSITIONS AND
NAME AGE SINCE OFFICES HELD
James S. 62 1966 Chairman and President since
Gleason January 1985.
David J. 42 1992 Executive Vice President since
Burns August 1995; Vice President - Machine
Products Group from November 1992 to
July 1995; General Manager - Standard
Products Group from February 1991 to
October 1992.
John B. 55 1986 Vice President - Administration
Kodweis and Human Resources since 1992.
Ralph E. 63 1989 Vice President, Secretary
Harper & Treasurer since August 1993; Vice
President, Secretary & Corporate
Counsel since 1992.
<PAGE>
EXECUTIVE
OFFICER POSITIONS AND
NAME AGE SINCE OFFICES HELD
John J. 36 1993 Vice President - Finance since
Perrotti August 1995; Vice President -
Controller from August 1993 to July
1995; Controller from 1992 to
July 1993.
John W. 34 1995 Controller since August 1995;
Pysnack Director of Accounting and Reporting
from January 1995 to July 1995;
Finance Manager from October 1991
to December 1994.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished by Item 402 of
Regulation S-K is included in a definitive proxy statement which will
be filed with the Securities and Exchange Commission pursuant to
Regulation 14-A within 120 days after the end of the fiscal year
ended December 31, 1996, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Certain information regarding security ownership of certain
beneficial owners and management required to be furnished by Item 403
of Regulation S-K is included in a definitive proxy statement which
will be filed with the Securities and Exchange Commission pursuant to
Regulation 14-A within 120 days after the end of the fiscal year
ended December 31, 1996, which information is incorporated herein by
reference.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Information regarding relationships is included in a definitive
proxy statement which will be filed with the Securities and Exchange
Commission pursuant to Regulation 14-A within 120 days after the end
of the fiscal year ended December 31, 1996, which information is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) (1) The following is a list of the consolidated financial
statements of the Company and its subsidiaries and Report of
Independent Auditors presented in its Annual Report to Stockholders
for the year ended December 31, 1996 which are incorporated herein by
reference:
Consolidated Statements of Operations - Years ended
December 31, 1996, 1995 and 1994.
Consolidated Balance Sheets - December 31, 1996 and
1995.
Consolidated Statements of Cash Flows - Years
ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements -
December 31, 1996.
Report of Independent Auditors.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits required to be listed including exhibits
incorporated by reference under this Item and filed as exhibits under
(c) of this Item 14 pursuant to Item 601 Table I of Regulation S-K
are as follows:
(3) Articles of Incorporation and By-Laws.
(a) The Restated Certificate of Incorporation of Gleason
Corporation, as filed with the Delaware Secretary of
State on May 5, 1987, is incorporated by reference to
Exhibit A of the Registrant's Form 10-Q for the quarter
ended March 31, 1987.
<PAGE>
(b) The Certificate of Amendment of the Certificate of
Incorporation of Gleason Corporation as filed with the
Delaware Secretary of State on May 8, 1996 is
incorporated by reference to Exhibit 3 of the
Registrants Form 10-Q for the quarter ended
March 31, 1996.
(c) By-laws, as amended, are incorporated by reference
to Exhibit 3(b) of Gleason Corporation Form 10-K,
file number 1-8782, for the year ended December 31,
1991.
(4) Instruments defining the rights of security holders,
including indentures.
(a) See 3(a), 3(b) and 3(c) above.
(b) Gleason Corporation Preferred Stock Purchase Rights
Agreement, dated as of June 8, 1989, as amended, is
incorporated by reference to the Registrant's Form 8-A
Registration Statement dated June 8, 1989, Form 8
Amendment No. 1, dated March 2, 1990, and Form 8
Amendment No. 2, dated February 6, 1992.
(10) Material contracts.
(a) The Company's 1992 Stock Plan, as amended, is incorporated
by reference to Exhibit 10 of Gleason Corporation Form
10-K file number 1-8782, for the year ended December 31,
1996.
(b) Loan Agreement between Gleason Corporation and Chase
Manhattan Bank, N.A. and NBD Bank, dated September 29,
1995 is incorporated by reference to Exhibit 6(a) of
Gleason Form 10-Q, file number 1-8782, for the quarter
ended September 30, 1995.
(c) Gleason Corporation Annual Management Incentive
Compensation Plan is incorporated by reference to
Exhibit 10(a) of Gleason Corporation Form 10-K, file
number 1-8782, for the year ended December 31, 1994.
(d) Gleason Corporation Supplemental Retirement Plan, as
restated, is incorporated by reference to Exhibit 10(c)
of Gleason Corporation Form 10-K, file number 1-8782,
for the year ended December 31, 1993.
(e) Executive Agreement between the Company and its
executive officers (for which there are identical
agreements for those officers listed in Part III, Item
10 of this Form 10-K/A) is incorporated by reference to
Exhibit 10(c) of Gleason Corporation Form 10-K, file
number 1-8782, for the year ended December 31, 1991.
<PAGE>
(f) The Company's 1981 Stock Plan, as amended January 23,
1990, is incorporated by reference to Exhibit I of
Gleason Corporation Form 10-K, file number 1-8782, for
the year ended December 31, 1989.
(g) Trust Agreement for Gleason Corporation executive
agreements and Supplemental Retirement Plan is
incorporated by reference to Exhibit L of Gleason
Corporation Form 10-K, file number 1-8782, for the
year ended December 31,1989.
(h) Gleason Corporation Plan for Deferral of Directors Fees
is incorporated by reference to Exhibit J of Gleason
Corporation Form 10-K, file number 1-8782, for the year
ended December 31, 1988.
(i) Gleason Corporation Executive Life Insurance Program is
incorporated by reference to Exhibit L of Gleason
Corporation Form 10-K, file number 1-8782, for the year
ended December 31, 1987.
(j) Gleason Corporation Long Term Disability Plan is
incorporated by reference to Exhibit I of Gleason
Corporation Form 10-K, file number 1-8782, for the year
ended December 31, 1986.
(k) Gleason Corporation 1986 Deferred Compensation Plan is
incorporated by reference to Exhibit J of Gleason
Corporation Form 10-K, file number 1-8782, for the year
ended December 31, 1986.
(11) Computation of Per Share Earnings. Refer to the Index to
Exhibits.
(13) Annual Report to Stockholders of the registrant for the year
ended December 31, 1996 expressly incorporated by
reference into this Report. Refer to the Index to Exhibits.
(21) Subsidiaries of the registrant is incorporated by reference to
the Gleason Corporation Form 10-K, file number 1-8782, for the
year ended December 31, 1996.
(23) Consent of Independent Auditors. Refer to the Index to
Exhibits.
(24) Power of Attorney is incorporated by reference to Exhibit 24
to the Gleason Corporation Form 10-K, file number 1-8782, for
the year ended December 31, 1996.
(27) Financial Data Schedules. Refer to the Index to Exhibits.
<PAGE>
(b) Reports on Form 8-K filed in the fourth quarter of 1996:
None.
(c) and (d) Exhibits required by Item 601 of Regulation S-K and
required by Article 5 of Regulation S-X under Item 8 are filed
as exhibits to this Report on Form 10-K/A.
<PAGE>
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.
Gleason Corporation
Registrant
/s/James S. Gleason
James S. Gleason
Chairman and President
/s/John J. Perrotti
John J. Perrotti
Vice President - Finance
/s/John W. Pysnack
John W. Pysnack
Controller
Date: October 1, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
each of the following named directors has personally authorized the
signing of this report on their behalf by the Attorney in Fact named
below.
Martin L. Anderson )
Julian W. Atwater )
Robert W. Bjork )
J. David Cartwright ) Directors
James S. Gleason )
John W. Guffey, Jr. )
Donald D. Lennox )
Robert A. Sherman )
By: /s/ Ralph E. Harper
Ralph E. Harper
Attorney in Fact
Date: October 1, 1997
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Certain exhibits to this report on Form 10-K/A have been
incorporated by reference. For a list of these exhibits, see Item 14
hereof.
The following exhibits are being filed herewith:
Exhibit
No.
(11) Computation of Per Share Earnings
(13) Portions of the Annual Report to Stockholders
of the Registrant for the year ended December 31,
1996 expressly incorporated by reference into the
Form 10-K/A.
(23) Consents of Experts and Counsel
(a) Consent of Ernst & Young LLP,
Independent Auditors
(27) Financial Data Schedules
EXHIBIT (11)
<TABLE>
GLEASON CORPORATION
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
(In thousands, except per share amounts. Share and per share amounts have
been restated to reflect the two-for-one stock split effective September 26,
1977)
1996 1995 1994
<S> <C> <C> <C>
Primary
Average shares outstanding 10,334 10,342 10,326
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price 302 220 --
Hypothetical shares for the
deferral of directors' fees 46 38 --
Total 10,682 10,600 10,326
Net income $19,660 $30,827 $ 7,228
Per share amount $ 1.84 $ 2.91 $ .71
Fully Diluted
Average shares outstanding 10,334 10,342 10,326
Net effect of dilutive stock
options - based on the treasury
stock method using the higher of
the average or ending market price 302 300 --
Hypothetical shares for the
deferral of directors' fees
46 38 --
Total 10,682 10,680 10,326
Net income $19,660 $30,827 $ 7,228
Per share amount $ 1.84 $ 2.89 $ .71
</TABLE>
<TABLE>
Five Year Review
GLEASON CORPORATION AND SUBSIDIARIES
<CAPTION>
Dollars in thousands,
except per share amounts 1996 1995 1994 1993 1992
Summary of Operations
<S> <C> <C> <C> <C> <C>
Net sales $248,089 $197,046 $128,462 $103,870 $147,274
Income (loss) from continuing operations 19,660 30,382<Fa> 4,332 (2,873) (23,764)<Fb>
Gain on disposal of discontinued operations -- 445 2,956 -- --
Cumulative effect of change in accounting
for postretirement benefits other than
pensions -- -- -- -- (37,472)<Fc>
Net income (loss) 19,660 30,827 7,288 (2,873) (61,236)
Primary earnings (loss) per common share<Fd>:
Continuing operations 1.84 2.87<Fa> .42 (.28) (2.18)<Fb>
Disposal of discontinued operations -- .04 .29 -- --
Cumulative effect of change in accounting
for postretirement benefits other than
pensions -- -- -- -- (3.43)<Fc>
Net income (loss) 1.84 2.91 .71 (.28) (5.61)
Cash dividends declared per common share<Fd> .25 .25 .20 .20 .20
Financial Position at Year-End
Cash and equivalents 7,199 9,926 3,173 4,155 7,105
Net property, plant and equipment 61,391 60,948 53,604 60,286 67,479
Total assets 190,674 197,198 122,016 121,849 140,089
Long-term debt 4,506 25,315 2,600 14,575 6,172
Total debt 4,841 26,810 3,283 15,115 7,388
Stockholders' equity 84,864 73,291 42,199 35,009 41,458
Other Data
Capital expenditures 10,281 8,309 3,527 5,587 24,526
Depreciation and amortization 10,707 9,992 9,293 9,221 9,641
New orders 246,352 226,107 156,962 94,970 108,274
Backlog 122,800 124,500 54,700 26,200 35,100
Number of employees (continuing operations) 1,543 1,455 1,079 1,049 1,420
<FN>
Notes:
<Fa> Income from continuing operations for 1995 included positive adjustments
to record deferred tax assets not previously recognized. Income from
continuing operations for 1995 using normalized tax rates would have been
approximately $12.9 million, or $1.22 per share.
<Fb> (Loss) from continuing operations for 1992 included restructuring costs
of $26.0 million, or $2.38 per share, and environmental costs of $2.9
million, or $.26 per share.
<Fc> No tax benefit was recorded on the cumulative effect of accounting
change in 1992.
<Fd> Per share data has been adjusted to reflect the two-for-one stock split
effective September 26, 1997.
</FN>
</TABLE>
<PAGE>
Management's Discussion and Analysis
of Results of Operations and Financial Condition
About the Company
The Company operates within one business segment. The principal
activity is the design, manufacture and sale of machinery and equipment for
the production of bevel and cylindrical gears. The Company manufactures a
complete line of machines and tooling for bevel gears. Bevel gears transmit
power at an angle, such as from the drive shaft to the rear-driven axle of a
vehicle. The Company also manufactures machines and tooling for producing
cylindrical gears. Cylindrical gears transmit power in a parallel path and
have a variety of applications, including transmissions of vehicles. On
July 1, 1995, the Company acquired the technology and certain assets of Hurth
Maschinen und Werkzeuge GmbH ("Hurth") in Munich, Germany adding complemen-
tary product lines which strengthen its position in the cylindrical gear
equipment market.
The Company's major customers are in the automotive and truck industries,
which normally account for three-fourths of its total sales each year. Other
industries served include aerospace, construction, farm and marine.
The Company's markets are worldwide; historically two-thirds of total
sales each year have been to customers located outside of the United States.
In 1996, over 73 percent of total sales were to customers outside the U.S.,
compared to 65 percent in 1995. Because of the Company's dependence on these
global markets, economic conditions and trends in the world's major industrial
markets can significantly influence overall sales and operating results.
Results of Operations
1996 Compared to 1995
Earnings
Operating income (earnings before interest and taxes) increased 45
percent in 1996 to $31.3 million, or 12.6 percent of sales, compared to $21.5
million, or 10.9 percent of sales, in 1995. This improvement in operating
income was primarily attributable to benefits from higher operating volumes,
improved margins and incremental earnings from the Hurth operation.
Net income for 1996 was $19.7 million, or $1.84 per share, compared to
$30.8 million, or $2.91 per share, in 1995. Net income for 1995 was increased
<PAGE>
by significant tax benefits related to the recognition of deferred tax assets
associated with charges recorded in prior years. Management estimates that
net income for 1995 using normalized tax rates would have been approximately
$13.3 million, or $1.26 per share. Net income for 1995 also included a gain
on the disposal of discontinued operations of $0.4 million, or $.04 per share.
Orders and Backlog
Order levels in 1996 were $246.4 million, an increase of 9 percent from
1995. New orders, excluding the Company's Gleason-Hurth subsidiary which was
acquired in mid-1995, increased 5 percent compared to 1995. Order volumes were
higher primarily due to a 25 percent increase in orders for bevel gear
production machinery, partially offset by lower incoming orders for cylind-
rical gear production equipment and tooling products. Bevel gear machinery
orders increased with the continued strong demand for rear-wheel and all-
wheel drive vehicles, which use bevel gears, and the advantages for these
vehicle producers to replace their older installed base of bevel gear
production equipment with the Company's newer PHOENIX line of products.
Order levels for cylindrical gear machinery were lower than in 1995 primarily
due to a reduction in orders from Europe. Orders in 1995 included multiple
machine orders from European vehicle producers related to transmission
production expansion programs. The order rate for cylindrical gear produc-
tion machines increased during 1996, with orders in the second half more than
double the first half level. Tooling orders, excluding Hurth, were down 7
percent in 1996 due to lower orders for bevel gear cutting tools.
Backlog was $122.8 million at December 31, 1996 compared to $124.5
million at December 31, 1995. Bevel gear production machinery accounted for
about 60 percent of total machine backlog at December 31, 1996 compared to
42 percent at 1995 year-end.
Net Sales
Net sales were $248.1 million in 1996, a 26 percent increase from 1995.
Sales, excluding Hurth, increased 8 percent compared to the prior year. This
increase in sales was primarily a result of higher shipments of gear produc-
tion machines.
Machine product sales, excluding Hurth machines, increased 15 percent
compared to 1995. Higher shipments of bevel gear machinery more than offset
lower shipments of cylindrical gear production machines. Bevel gear produc-
<PAGE>
tion machine sales were higher largely due to increased sales to the Asian
market. The majority of this increase was attributable to capital spending
programs associated with new or expanding capacity requirements for vehicle
producers in that region. The reduction in cylindrical gear production
machine sales, excluding Hurth, was primarily due to lower shipments of the
Company's G-TECH (Registered Trademark) gear hobbing machines. Sales of
these products were negatively impacted by the introduction, in 1996, of a
new PHOENIX medium sized gear hobbing machine, for which shipments began in
early 1997. Shipments of the Company's PHOENIX cylindrical gear cutting
machines increased 13 percent in 1996 compared to 1995.
Sales of the Company's tooling products, excluding Hurth, were
comparable to those in 1995. Workholding equipment sales, which increased 10
percent, were offset by a decrease in shipments of bevel gear cutting tools to
customers in the U.S. Sales of other products including spare parts, field
service and software were down slightly from 1995.
Costs and Expenses
Cost of goods sold as a percentage of sales was 67.7 percent compared to
69.8 percent in 1995. The lower cost of sales percentage for 1996 was
primarily due to increased margins across all major machine product lines and a
more favorable sales mix of higher margin machine products including bevel
gear and Hurth gear shaving machines. Margins on machine products, in general,
were positively impacted by the higher production volumes which increased the
coverage of fixed operating costs. This was partially offset by a higher
percentage of machines in the overall sales mix. Generally, machine products
have lower margins than tooling or other products.
Selling, general and administrative expenses were $42.6 million, or
17.2 percent of sales, compared to $33.8 million, or 17.1 percent of sales,
in 1995. Spending as a percentage of sales was basically flat year over year,
however commission expense as a percentage of sales increased compared to
1995. Commissions paid to dealers increased due to higher shipments into the
Asia-Pacific and South American regions where the Company is represented by
independent machine dealers.
<PAGE>
Research and development spending in 1996 was $7.2 million, or 2.9
percent of sales, compared to $5.6 million, or 2.9 percent of sales, in 1995.
Development spending in 1996 exceeded 1995 levels because of increased
spending for new product development for both bevel and cylindrical gear
production equipment and manufacturing technology initiatives for the
Company's tooling operations.
Other income decreased to $1.0 million in 1996 from $1.3 million in
1995 primarily due to lower outside commission income.
Income Taxes
In 1996, the Company recorded a tax provision of $11.1 million on
pre-tax income of $30.7 million, or an effective rate of 36 percent. In
1995, the Company recorded a net tax benefit of $9.4 million for continuing
operations on pre-tax income of $21.0 million. 1995 income taxes were
lowered by significant deferred tax benefits resulting from a reduction in
the valuation allowance recorded for deferred tax assets. This reduction in
the valuation allowance resulted in an increase in the net deferred tax
asset recorded on the Company's Consolidated Balance Sheet at December 31,
1995 to $18.2 million from $2.8 million at December 31, 1994. The Company
had previously been limited, under the provisions of FASB Statement No. 109,
in the amount of the deferred tax asset it had been able to record.
Outlook
The Company's prospects for further growth in 1997 remain positive.
While sales of cylindrical gear equipment are not forecasted to increase from
1996, shipments of bevel gear machinery, which serve the popular light truck
and sport utility vehicle markets, should increase from 1996 given the higher
starting backlog for these products. In the second quarter of 1996, the
Company received two large orders totaling $24 million for bevel gear
production equipment from U.S. vehicle and axle manufacturers. These orders
provide a good example of the large market potential for replacement of the
older installed base of bevel gear production equipment with the Company's
more advanced line of PHOENIX products. These orders are expected to ship
in 1997.
These forward-looking statements are subject to a number of factors
that could cause actual results to differ materially from those expected.
These risk factors include, but are not limited to, failure to receive
customer orders to support the sales projections, possible delays in the
development of new products that are planned for shipment in 1997, and
economic conditions in the major industrial markets which the Company serves.
<PAGE>
1995 Compared to 1994
Earnings
Operating income (earnings before interest and taxes) in 1995 improved
to $21.5 million, or 10.9 percent of sales, from $5.2 million, or 4.0 percent
of sales, in 1994. The improvement in operating income from 1994 resulted
from higher sales, improved margins and incremental earnings from the Hurth
operation.
The Company had income from continuing operations of $30.4 million, or
$2.87 per share, in 1995, compared to $4.3 million, or $.42 per share, in
1994. Income from continuing operations for 1995 was increased by positive
adjustments related to the recognition of deferred tax assets associated with
charges recorded in prior years. Management estimates that income from
continuing operations for 1995 using normalized tax rates would have been
approximately $12.9 million, or $1.22 per share. Net income for the year was
$30.8 million, or $2.91 per share, including an after-tax gain from
discontinued operations of $0.4 million, or $.04 per share. Net income for
1994 was $7.3 million, or $.71 per share, which included an after-tax gain
from discontinued operations of $3.0 million, or $.29 per share.
Orders and Backlog
Order levels in 1995 increased 44 percent over 1994 to $226.1 million.
Orders for the Hurth operation totaled $41.2 million for the six-month period
from the acquisition to December 31, 1995. New orders, excluding Hurth,
increased 18 percent compared to 1994. This increase primarily resulted from
higher order levels for PHOENIX bevel gear machinery and bevel gear cutting
tools. The higher order rate was attributable to improved demand from the
Company's overseas markets.
Backlog was $124.5 million at December 31, 1995, compared to $54.7
million at December 31, 1994. This increase in backlog of $69.8 million
included $49.3 million for the Hurth operation. The remaining increase of
$20.5 million in backlog was principally for bevel gear machinery.
Net Sales
Net sales were $197.0 million in 1995, a 53 percent increase from 1994.
Sales for the Hurth operation totaled $32.8 million, accounting for
approximately 48 percent of the total increase. The remaining increase in
sales of $35.8 million, represented a 28 percent improvement from 1994
shipment levels. Sales of all product lines increased compared to 1994 with
higher machine sales accounting for the largest portion of the improvement.
<PAGE>
Machine product sales, excluding Hurth machines, increased $26.8 million
compared to 1994. This increase was divided relatively equally between bevel
and cylindrical gear machinery. Higher shipments of the Company's PHOENIX
gear hobbing machines accounted for the majority of the increase in cylind-
rical gear machine sales. Shipments to customers in the United States
accounted for approximately 60 percent of the 1995 full year total cylindri-
cal gear machine sales and the largest portion of the year over year increase.
Bevel gear machine sales were higher largely due to increased sales to the
Asian market, primarily China and India.
Sales of the Company's tooling products also showed strong improvement.
Tooling sales were $8.1 million higher, excluding the Hurth operation, with
the greatest increase coming from overseas markets which accounted for
approximately 70 percent of the increase.
Costs and Expenses
Cost of goods sold as a percentage of sales was 69.8 percent compared
to 73.9 percent in 1994. The lower percentage was primarily attributable to
improved margins on machine products. Margin improvement on these products
resulted from lower direct product costs on most machine product lines and
the effect of higher production volumes, which increased capacity utilization
and coverage of fixed operating costs. Margins on tooling products also
increased compared to 1994. The Hurth operation contributed favorably to
the overall gross margin percentage from its acquisition through December
31, 1995.
Selling, general and administrative expenses were $33.8 million, or
17.1 percent of sales, compared to $24.5 million, or 19.1 percent of sales,
in 1994. Spending decreased as a percentage of sales due to the higher sales
volumes. Total spending increased in 1995 with the inclusion of the Hurth
operation in the second half of 1995 and increased variable selling expenses,
including warranty and commissions. Variable selling expenses as a percentage
of sales were similar to 1994.
Research and development spending in 1995 was $5.6 million, or 2.9
percent of sales, compared to $4.7 million, or 3.7 percent of sales, in 1994.
Major development programs in 1995 included a new CNC gear testing machine,
shipments of which began in the 1995 fourth quarter. In addition, spending
for development programs associated with new product design and manufacturing
technology initiatives for the Company's tooling operations increased in 1995
compared to 1994.
<PAGE>
Income Taxes
In 1995, the Company recorded a net tax benefit of $9.4 million for
continuing operations on pre-tax income of $21.0 million. In 1994, the
Company recorded a tax provision of $0.8 million for continuing operations on
pre-tax income of $5.2 million. The 1995 tax benefit included a net deferred
benefit of $14.8 million primarily resulting from a reduction in the valuation
allowance recorded for deferred tax assets. This reduction in the valuation
allowance resulted in an increase in the net deferred tax asset recorded on
the Company's Consolidated Balance Sheet at December 31, 1995 to $18.2 million
from $2.8 million at December 31, 1994. Under the provisions of FASB
Statement No. 109, the Company had been limited, primarily due to its prior
domestic operating losses, in the amount of the deferred tax asset it had
been able to record. Significant improvements in domestic operating perfor-
mance and available tax planning strategies provided the necessary positive
evidence that it was more likely than not that future income would be
sufficient to fully realize the deferred tax asset recorded at December 31,
1995. A valuation allowance for deferred tax assets of $7.0 million remained
at December 31, 1995 for certain tax credits and net foreign operating loss
carryforwards for which realization could not be anticipated at that time.
Liquidity and Capital Resources
Borrowings under the Company's revolving credit facilities decreased to
$3.9 million at December 31, 1996 from $24.7 million at 1995 year-end.
Available unused short and long-term credit lines with banks, including
revolving credit facilities, totaled approximately $35 million at December
31, 1996. Cash and equivalents decreased to $7.2 million at December 31, 1996
from $9.9 million at December 31, 1995.
Operating activities provided $37.6 million of net cash in 1996,
compared to $4.7 million in 1995. Operating cash flows were higher in 1996
primarily due to higher operating earnings and significantly lower increases
in working capital, primarily accounts receivable and inventories.
Investing activities used $10.0 million of net cash in 1996 compared to
$18.6 million of net cash used in 1995. The purchase of Hurth accounted for
$10.6 million of the cash used in investing activities in 1995. Capital
expenditures in 1996 increased to $10.3 million, compared to $8.3 million in
1995 and $3.5 million in 1994. This increase in capital spending included the
purchase of equipment for the Company's tooling operations associated with the
<PAGE>
modernization program underway. Capital expenditures for 1997 are expected to
exceed depreciation expense with the majority of this spending planned for
further investments to upgrade existing production capabilities.
In July 1996, the Company's Board of Directors authorized the repurchase
of up to 10 percent of the Company's currently outstanding common stock in
open market or privately negotiated transactions. In 1996, the Company used
$6.2 million in cash to repurchase shares.
In the third quarter of 1996, the Company announced its intention to
acquire the operations of The Hermann Pfauter Group for cash, with an
option for the seller to receive up to 25 percent of the consideration in
shares of the Company's Common Stock. Pfauter is a leading manufacturer
of cylindrical gear production equipment headquartered in Ludwigsburg,
Germany with major operating locations in Germany, the United States and
Italy. As of March 7, 1997, the Company had not entered into a definitive
agreement for the acquisition.
The Company is in the process of restructuring its credit facilities to
finance the acquisition of Pfauter and its other investment and working
capital requirements. Management expects these credit facilities to be in
place at the time of closing on the acquisition.
Dividends
In January 1995, the Board of Directors approved a 25 percent increase
in the Company's quarterly dividend from $.05 per share to $.0625 per share.
Total dividend payments were $2,585,000 for 1996 and 1995 and $2,065,000 for
1994.
<PAGE>
<TABLE>
Consolidated Statements of Operations
GLEASON CORPORATION AND SUBSIDIARIES
<CAPTION>
__________________________________________________________________________
Dollars in thousands, except per share amounts
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Net sales $248,089 $197,046 $128,462
Costs and expenses
Cost of products sold 167,958 137,461 94,935
Selling, general and
administrative expenses 42,614 33,789 24,539
Research and development expenses 7,243 5,617 4,729
Interest expense--net 513 527 11
Other (income)--net (982) (1,328) (909)
217,346 176,066 123,305
Income from continuing operations
before income taxes 30,743 20,980 5,157
Provision (benefit) for income taxes 11,083 (9,402) 825
Income from continuing operations 19,660 30,382 4,332
Gain on disposal of discontinued
operations -- 445 2,956
Net income $ 19,660 $ 30,827 $ 7,288
Primary earnings per common share:
Income from continuing operations $ 1.84 $ 2.87 $ .42
Gain on disposal of discontinued
operations -- .04 .29
Net income $ 1.84 $ 2.91 $ .71
Fully diluted earnings per common share:
Income from continuing operations $ 1.84 $ 2.85 $ .42
Gain on disposal of discontinued
operations -- .04 .29
Net income $ 1.84 $ 2.89 $ .71
Weighted average number of common shares
outstanding:
Primary 10,681,644 10,600,234 10,325,754
Fully diluted 10,681,644 10,679,742 10,325,754
Cash dividends declared per common share $ .25 $ .25 $ .20
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
GLEASON CORPORATION AND SUBSIDIARIES
<CAPTION>
Dollars in thousands
December 31 1996 1995
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 7,199 $ 9,926
Trade accounts receivable 65,583 65,288
Inventories 27,986 29,565
Deferred tax asset 6,894 4,113
Other current assets 4,038 5,468
Total current assets 111,700 114,360
Property, plant and equipment - net 61,391 60,948
Deferred tax asset 10,013 14,755
Other assets 7,570 7,135
Total assets $190,674 $197,198
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 329 $ 1,489
Current portion of long-term debt 6 6
Trade accounts payable 16,972 16,153
Income taxes 10,224 2,335
Other current liabilities 30,335 33,968
Total current liabilities 57,866 53,951
Long-term debt 4,506 25,315
Pension plans and other retiree benefits 38,220 38,876
Other liabilities 5,218 5,765
Total liabilities 105,810 123,907
Stockholders' equity
Preferred Stock, par value $1 per share;
authorized 500,000 shares; issued: none
Common Stock, par value $1 per share;
authorized 20,000,000 shares; issued:
11,594,140 shares in 1996 and 11,592,892
shares in 1995 11,594 11,593
Additional paid-in capital 5,731 5,952
Retained earnings 86,187 69,112
Cumulative foreign currency translation
adjustment (2,149) (2,156)
Minimum pension liability adjustment (461) (1,093)
100,902 83,408
Less treasury stock of 1,603,594 shares
in 1996 and 1,229,182 shares in 1995, at cost 16,038 10,117
Total stockholders' equity 84,864 73,291
Total liabilities and stockholders' equity $190,674 $197,198
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
GLEASON CORPORATION AND SUBSIDIARIES
<CAPTION>
Dollars in thousands
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 19,660 $ 30,827 $ 7,288
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 10,707 9,992 9,293
(Gain) loss on disposals of property,
plant and equipment 113 (23) (36)
Provision (benefit) for deferred
income taxes 2,286 (14,836) (1,426)
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (954) (23,134) (13,774)
(Increase) decrease in inventories 374 (10,170) 3,288
(Increase) decrease in other
current assets 1,321 (2,979) 901
Increase in accounts payable 786 5,821 3,355
Increase in all other current
operating liabilities 4,318 8,114 3,261
Other, net (1,037) 1,102 (1,366)
Net cash provided by operating activities 37,574 4,714 10,784
Cash flows from investing activities:
Capital expenditures (10,281) (8,309) (3,527)
Investment in unconsolidated affiliate -- -- (1,489)
Investment in subsidiary -- (10,582) --
Proceeds from sales of businesses and
asset disposals 206 100 3,787
Proceeds from collection of notes
receivable 54 199 3,281
Net cash provided by (used in)
investing activities (10,021) (18,592) 2,052
Cash flows from financing activities:
Net proceeds from (repayments of)
short-term borrowings (1,185) 876 183
Net proceeds (repayments) under
revolving credit agreements (20,646) 22,490 (12,148)
Proceeds from long-term debt 130 145 83
Repayment of long-term debt (131) (68) (139)
Dividends paid (2,585) (2,585) (2,065)
Purchase of treasury stock (6,219) (59) (7)
Net stock issued 78 232 --
Net cash provided by (used in) financing
activities (30,558) 21,031 (14,093)
Effect of exchange rate changes on cash
and equivalents 278 (400) 275
Increase (decrease) in cash and equivalents (2,727) 6,753 (982)
Cash and equivalents, beginning of year 9,926 3,173 4,155
Cash and equivalents, end of year $ 7,199 $ 9,926 $ 3,173
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
GLEASON CORPORATION AND SUBSIDIARIES
<CAPTION>
Dollars in thousands Years Ended December 31, 1996, 1995 and 1994
Cumulative
Foreign Minimum Total
Additional Currency Pension Stock-
Common Paid-in Retained Translation Liability Treasury holders'
Stock Capital Earnings Adjustment Adjustment Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993, $ 5,796 $11,909 $35,647 $(1,315) $(6,585) $(10,443) $35,009
as previously reported
Effect of stock split 5,797 (5,797) --
Balance at December 31, 1993,
as restated 11,593 6,112 35,647 1,315 (6,585) (10,443) 35,009
Net income 7,288 7,288
Dividends declared (2,065) (2,065)
Foreign currency translation
adjustments 398 398
Change in minimum pension
liability adjustment 1,576 1,576
Purchase of treasury stock (7) (7)
_________________________________________________________________________________________________________________
Balance at December 31, 1994 11,593 6,112 40,870 (917) (5,009) (10,450) 42,199
Net income 30,827 30,827
Dividends declared (2,585) (2,585)
Shares issued under Stock Plans (147) 320 173
Foreign currency translation
adjustments (1,239) (1,239)
Change in minimum pension
liability adjustment 3,916 3,916
Purchase of treasury stock (59) (59)
Other shares issued to employees (13) 72 59
_________________________________________________________________________________________________________________
Balance at December 31, 1995 11,593 5,952 69,112 (2,156) (1,093) (10,117) 73,291
Net income 19,660 19,660
Dividends declared (2,585) (2,585)
Shares issued under Stock Plans 1 (221) 298 78
Foreign currency translation
adjustments 7 7
Change in minimum pension
liability adjustment 632 632
Purchase of treasury stock (6,219) (6,219)
_________________________________________________________________________________________________________________
Balance at December 31, 1996 $11,594 $ 5,731 $86,187 $(2,149) $ (461) $(16,038) $84,864
<FN>
See Notes to Consolidated Fnancial Statements.
</FN>
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
GLEASON CORPORATION AND SUBSIDIARIES
December 31, 1996
Note 1 -- Summary of Significant Accounting Policies
Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly-
owned. All significant intercompany transactions are eliminated in
consolidation.
Revenue Recognition: Sales generally are recognized by the Company
when products are shipped or services have been provided. Sales are
reported net of returns and allowances.
Foreign Currency Translation: All asset and liability accounts of
foreign operations are translated at the current exchange rate, income
statement items are translated at average exchange rates, and the
resulting translation adjustments are made directly to a separate
component of stockholders' equity designated as "cumulative foreign
currency translation adjustment." Gains and losses from foreign
currency transactions are reported in operations and had a minimal
impact on the Company in 1996, 1995 and 1994.
Cash and Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market.
Inventories valued using the last-in, first-out (LIFO) method
comprised 59% and 61% of consolidated inventories at December 31, 1996
and 1995, respectively. Inventories not valued using the LIFO method
are determined on the first-in, first-out (FIFO) method.
Property and Depreciation: Property, plant and equipment are recorded
at cost. Depreciation is computed on the straight-line method over
estimated useful lives of 10 to 32 years for buildings and
improvements and 4 to 12 years for machinery and equipment. Upon
retirement or disposal of an asset, the asset and related accumulated
depreciation are eliminated with any gain or loss reported in
earnings.
Earnings Per Share: The computation of primary earnings per common
share is determined by dividing the weighted average number of common
shares and (in periods in which they have a dilutive effect) common
share equivalents outstanding during the year into net earnings.
Common share equivalents include stock options and hypothetical shares
associated with the Company Plan for Deferral of Directors' Fees.
Fully diluted earnings per share in 1995 reflected the additional
dilution related to stock options due to the use of the market price
of the Company's Common Stock at the end of the period, which was
<PAGE>
higher than the average price for the period, in the calculation of
the number of common share equivalents.
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.
Estimates are based on currently available information. Actual results
could differ from the estimates.
Reclassification: Certain reclassifications have been made to prior
years' financial statements to conform to the 1996 presentation.
Additional accounting policies are described in the applicable notes.
Note 2 -- Hurth Acquisition
Effective July 1, 1995, the Company acquired, for $10,582,000 in
cash, certain assets of Hurth Maschinen und Werkzeuge GmbH ("Hurth"), a
Munich, Germany-based leader in the design and production of
cylindrical gear machinery and tooling. The Company purchased the
assets from the receiver in bankruptcy proceedings. Hurth, which
entered bankruptcy on May 31, 1995, had experienced financial losses
during 1994 and 1993 due to the economic recession in Europe. The
Company acquired patents, trademarks, rights to technology and know-
how, machinery and equipment, and inventories, and retained
approximately 280 employees at the Munich location. Under the
agreement, the Company assumed existing obligations for installation
and warranty of machines previously sold and completion of customer
orders in backlog.
The Company accounted for the acquisition under the purchase
accounting method. The purchase included, stated at fair value,
inventories ($8,350,000), machinery and equipment ($9,310,000),
technology ($1,450,000), current liabilities ($6,428,000), long-term
pension and other employee benefits ($2,100,000). The acquisition was
funded from the Company's revolving credit facility.
Results of operations after the acquisition date are included in
the Consolidated Statements of Operations. The following unaudited
pro forma information has been prepared assuming that this acquisition
had taken place at the beginning of 1995 and 1994. The pro forma
<
PAGE>
information includes adjustments for lower personnel costs associated
with the reduction in headcount and lower fixed costs associated with
rental of the Munich facility, additional depreciation and
amortization based on the fair market value of machinery, equipment
and technology acquired, elimination of a Hurth investment in
subsidiary loss for 1994, lower outside dealer commission expense due
to contract terminations and higher interest expense that would have
been incurred to finance the acquisition. The pro forma financial
information is not necessarily indicative of the results of operations
as they would have been had the transaction been effected on the
assumed dates.
<TABLE>
<CAPTION>
(Unaudited)
(In thousands, except per share amounts)
Year ended December 31 1995 1994
<S> <C> <C>
Net sales $212,823 $166,724
Income from continuing operations 28,535 1,989
Net income 28,980 4,945
Income from continuing operations
per common share $ 2.69 $ .20
Net income per common share 2.73 .48
</TABLE>
Note 3 -- Discontinued Operations
In the fourth quarter of 1995, the Company sold the land and
building of its former Alliance Metal Stamping and Fabricating
division and recognized a gain on this disposal of $445,000 (net of
applicable income taxes of $229,000). Proceeds from the sale included
an interest bearing note receivable of $2,100,000 due five years from
the date of sale.
During 1994, the Company ceased operations at the Alliance Metal
Stamping and Fabricating division and sold the machinery and equipment
located at this division's facility for $3,550,000. The Company
recognized a gain from discontinued operations of $2,956,000 (net of
applicable income taxes of $400,000), as the loss for the disposition
of this division was lower than the amount previously estimated. Net
sales for this discontinued operation were $7,508,000 for the year
ended December 31, 1994.
Accrued costs related to discontinued operations at December 31,
1996 are presented in the Consolidated Balance Sheets as follows:
$200,000 ($1,179,000 in 1995) in other current liabilities, and
$2,077,000 ($1,500,000 in 1995) in other liabilities. These
<PAGE>
liabilities principally consisted of estimated expenses for
environmental matters related to the properties of the Company's
former Components Group businesses. Refer to Note 15 - Environmental
Matters for further discussion.
Note 4 -- Inventories
The components of inventories were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Raw materials and purchased parts $ 5,269 $ 5,373
Work in process 18,063 18,889
Finished products 4,654 5,303
$27,986 $29,565
</TABLE>
If the valuation of all inventories had been determined on the FIFO
accounting method, inventories would have been $24,929,000 and
$24,209,000 higher at December 31, 1996 and 1995, respectively.
Note 5 -- Property, Plant and Equipment
The components of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Land $ 848 $ 838
Buildings and improvements 49,620 48,821
Machinery and equipment 119,616 112,040
170,084 161,699
Less accumulated depreciation 108,693 100,751
$ 61,391 $ 60,948
</TABLE>
Note 6 -- Other Current Liabilities
The components of other current liabilities were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Salaries, wages and related costs $11,095 $ 8,109
Advance payments from customers 6,177 8,286
Pension and other retiree
benefit plan contributions 4,614 6,673
Warranty, installation and related costs 4,603 5,184
Other current liabilities 3,846 5,716
$30,335 $33,968
</TABLE>
<PAGE>
Note 7 -- Employee Retirement Plans
The Company has a defined contribution retirement plan and a defined
benefit retirement plan which cover most domestic employees. The employees
of certain foreign operations participate in various postemployment benefit
arrangements, some of which are considered to be defined benefit plans for
financial reporting purposes.
Effective December 31, 1990, the Company amended its domestic defined
benefit plan to provide for the freezing of all active employee accrued
defined benefits and full vesting of all active employees in the plan. In
addition, the plan amendment provides that upon settlement of the plan, if
the fair value of plan assets exceeds the accrued defined benefit
obligation, any surplus will be distributed on a pro rata basis as
additional benefits to active employees. If the plan assets are not
sufficient to fund the accrued defined benefit obligation, the Company will
make any required additional contributions. All active employees in the
defined benefit plan were enrolled in the defined contribution plan
effective January 1, 1991.
The Company's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as the Company may determine to be appropriate from time to time.
A summary of the components of net periodic pension costs relating to
the domestic defined benefit plan is presented below:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
Interest cost on projected
benefit obligation $ 6,292 $ 6,625 $ 6,387
(Positive) negative return
on plan assets (9,288) (25,171) 2,012
Net amortization and
deferral 2,517 19,117 (8,249)
Net periodic pension
(income) expense $ (479) $ 571 $ 150
</TABLE>
The expected long-term rate of return on plan assets used in determining
net periodic pension costs was 9.0% for 1996 and 1995, and 8.25% for 1994.
The following table sets forth the domestic defined benefit plan's
<PAGE>
funded status and amounts recognized in the Company's consolidated
financial statements at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation
including vested benefits of
$88,279 in 1996 and $88,690
in 1995 $92,707 $92,900
Projected benefit obligation $92,707 $92,900
Plan assets at market value 94,680 90,430
Projected benefit obligation
(lower than) in excess of plan
assets (1,973) 2,470
Unrecognized prior service cost (760) (868)
Unrecognized net gain (loss) 702 (1,163)
Adjustment to recognize minimum
pension liability -- 2,031
(Prepaid pension asset) pension
liability recognized in the
consolidated balance sheets $(2,031) $ 2,470
</TABLE>
The discount rate used in determining the projected benefit obligation
was 7.0% for December 31, 1996 and 1995. The nonvested portion of the
accumulated benefit obligation primarily represents certain early
retirement benefits for individuals not currently eligible. The
accumulated benefit obligation is calculated using the 1983 Group Annuity
Mortality Table.
In accordance with FASB Statement No. 87, "Employers' Accounting for
Pensions," the Company must recognize a pension liability at least equal to
the minimum pension liability. The minimum pension liability is the excess
of the accumulated benefit obligation over plan assets. A corresponding
amount is recognized as either an intangible asset or a reduction of
equity. At December 31, 1996 the Company recognized a prepaid pension
asset of $2,031,000. In 1995 the Company recorded an additional liability
of $2,031,000, an intangible asset of $868,000 and an equity reduction of
$768,000. The current portion of the pension liability recognized in the
Consolidated Balance Sheets was $1,972,000 at December 31, 1995. The
decrease in the minimum pension liability adjustment and resulting prepaid
pension asset in 1996 was primarily due to an increase in the market value
of plan assets.
The plan's assets at December 31, 1996 were primarily invested in a
tactical asset allocation fund, cash equivalents and 770,104 shares of the
Company's Common Stock which had a market value of $12,707,000 and
$12,514,000 at December 31, 1996 and 1995, respectively. Dividends paid on
the Company's Common Stock were $192,500 in 1996 and 1995.
<PAGE>
All domestic employees participate in the defined contribution
retirement plan. Amounts contributed under this plan are based upon 4% of
compensation for eligible employees. The amounts expensed under this plan
for continuing operations were $1,616,000, $1,490,000 and $1,267,000 in
1996, 1995 and 1994, respectively.
The Company also has an unfunded supplemental defined benefit retirement
plan to provide certain executives a minimum level of retirement pay, up to
a maximum of 55% of final average earnings. In accordance with the
provisions of FASB Statement No. 87, the Company recognized pension expense
of $297,000, $272,000 and $210,000 in 1996, 1995 and 1994, respectively.
At December 31, 1996, the Company recorded a minimum pension liability of
$2,119,000 ($1,779,000 in 1995), an intangible asset of $409,000 ($490,000
in 1995) and an equity reduction of $461,000 ($325,000 in 1995).
The Company has a funded defined benefit pension plan which covers
employees at its U.K. subsidiary. The accumulated benefit obligation for
this plan calculated under the provisions of FASB Statement No. 87 at
December 31, 1996 was $9,608,000 ($8,615,000 in 1995). The discount rate
used in determining the accumulated benefit obligation was 8.25% in 1996
and 1995. The fair market value of plan assets at December 31, 1996
totaled $10,782,000 ($8,522,000 in 1995). The Company had a liability for
this plan on its Consolidated Balance Sheets at December 31, 1996 of
$455,000 ($326,000 in 1995). The expense associated with this plan totaled
$430,000, $463,000 and $457,000 in 1996, 1995 and 1994, respectively.
The Company also has unfunded retirement benefit plans for employees at
certain other foreign operations, including its Gleason-Hurth subsidiary.
The costs of these foreign benefit plans were $218,000, $231,000 and
$177,000 for 1996, 1995 and 1994, respectively. The liabilities included
in the Consolidated Balance Sheets for these plans were $3,175,000 and
$3,200,000 at December 31, 1996 and 1995, respectively.
Note 8 -- Postretirement Health and Life Insurance Benefits
The Company provides certain health and life insurance benefits for
retired domestic employees. Employees hired prior to January 1, 1993
generally become eligible for these benefits if they retire while working
for the Company at age 62 with a minimum of 15 years of service with the
<PAGE>
Company. Employees hired after this date are not eligible to receive
benefits. Health benefits are provided through supplemental insurance
policies whose premiums are based on group rates. Life insurance benefits
are paid directly by the Company.
The components of periodic expense for postretirement benefits were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
Service cost for benefits
earned during the year $ 111 $ 87 $ 141
Interest cost on the
accumulated postretirement
benefit obligation 2,105 2,563 2,599
Net amortization of prior
(gains) (141) (289) --
Total expense $2,075 $2,361 $2,740
</TABLE>
The recorded liabilities for this unfunded postretirement benefit plan
were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $25,264 $26,714
Fully eligible active plan participants 2,587 2,440
Other active plan participants 2,803 2,542
Total accumulated postretirement
benefit obligation 30,654 31,696
Unrecognized net gain 4,777 4,578
Total liability for postretirement health
and life insurance benefits 35,431 36,274
Less current portion 2,960 3,200
Noncurrent liability for postretirement
health and life insurance benefits $32,471 $33,074
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.0% at December 31, 1996 and 1995. The decrease in
the total accumulated postretirement benefit obligation was primarily
attributable to a decrease in the number of retiree participants.
The cost of health insurance premiums of this plan are shared between
the Company and the retiree. There are no future increases in the
Company's share of health insurance premiums.
<PAGE>
Note 9 -- Debt
Long-term debt at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Notes payable to banks under revolving
loan agreements $3,900 $24,709
Other obligations 612 612
4,512 25,321
Less current maturities 6 6
$4,506 $25,315
</TABLE>
At December 31, 1996, the Company had unsecured borrowing facilities
that provided for borrowings up to a combined $40 million on a revolving
loan basis through September 29, 1998. Approximately $11 million of the
total was allocated for borrowings outside the U.S. Available borrowings
under these facilities were reduced by approximately $8.8 million at
December 31, 1996 for bank guarantees and standby letters of credit issued
in the normal course of business. These revolving credit facilities
provide the Company the option to borrow at rates no higher than the
prevailing prime rate (weighted average borrowing rate was 6.53% at
December 31, 1996 and 5.77% at December 31, 1995). The agreements contain
covenants with respect to maintenance of working capital, interest
coverage, the level of indebtedness, tangible net worth and cash flow as a
percentage of indebtedness.
Lines of credit of the consolidated subsidiaries are generally in
connection with bank overdraft and note facilities for which there are
neither material commitment fees nor compensating balance requirements.
Unused short and long-term credit lines with banks, including the revolving
credit facilities, totaled approximately $34,981,000 at December 31, 1996.
The weighted average borrowing rates under short-term credit facilities
were 10.70% and 6.50% at December 31, 1996 and 1995, respectively.
Scheduled maturities of long-term debt in each of the next five years
are $6,000, $3,930,000, $4,000, $4,000 and $4,000 in 1997 through 2001,
respectively.
Interest expense for each of the three years in the period ended
December 31, 1996 was $877,000, $950,000 and $415,000, respectively.
<PAGE>
Note 10 -- Income Taxes
For financial reporting purposes, income from continuing operations
before income taxes included the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
United States $14,619 $12,144 $ 815
Foreign 16,124 8,836 4,342
Total $30,743 $20,980 $5,157
</TABLE>
Provisions (benefits) for income taxes included the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
Current:
Continuing operations:
Federal $1,703 $ 1,781 $ 1,000
State 556 600 148
Foreign 6,538 3,053 1,103
8,797 5,434 2,251
Discontinued operations -- 229 400
Total current $8,797 $ 5,663 $ 2,651
Deferred:
Continuing operations:
Federal $3,045 $(13,038) $(1,447)
State -- (2,311) --
Foreign (759) 513 21
Total deferred $2,286 $(14,836) $(1,426)
</TABLE>
The differences between the provision (benefit) for income taxes
attributable to continuing operations at the United States
federal statutory income tax rate and the tax provision (benefit) were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
U.S. federal statutory rate 34% 34% 34%
Taxes at statutory rate $10,453 $ 7,133 $1,753
Provision (benefit) resulting from:
Change in valuation allowance (1,000) (15,400) (880)
Effect of consolidating foreign
subsidiaries 1,297 (695) (352)
Foreign Sales Corporation (396) (304) --
Other 729 (136) 304
Tax provision (benefit) $11,083 $ (9,402) $ 825
</TABLE>
<PAGE>
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Deferred tax assets:
Accrued retiree and other
employee benefits $15,737 $15,497
Foreign tax loss carryforwards 1,000 2,000
Federal and state tax credits 7,365 10,701
Discontinued operations 819 1,000
Other 5,287 4,441
Total deferred tax assets 30,208 33,639
Less valuation allowance 6,000 7,000
Deferred tax asset 24,208 26,639
Deferred tax liabilities:
Depreciation 7,940 7,526
Other 757 912
Total deferred tax liabilities 8,697 8,438
Net deferred tax asset $15,511 $18,201
</TABLE>
The 1995 provision for income taxes was lowered by significant
deferred tax benefits resulting from a reduction in the valuation allowance
recorded against deferred tax assets. The Company determined that it was
more likely than not that there would be sufficient future domestic taxable
income to recognize deferred temporary differences which had previously
been offset by a valuation allowance. Accordingly, the Company reduced the
valuation allowance and increased the net deferred tax asset to $18,201,000
at December 31, 1995. A valuation allowance of $7,000,000 was still
required at December 31, 1995 for domestic tax credits which could expire
before they are utilized and a German loss carryforward that could not be
recognized due to a history of recent losses and certain limitations on its
usage. The valuation allowance of $6,000,000 at December 31, 1996 is still
required for these same issues. The decrease in the allowance during 1996
was a result of the utilization of certain German tax loss carryforwards in
the current period. The net deferred tax asset was $15,511,000 at December
31, 1996. Management believes that sufficient income will be earned in the
future to fully realize the net deferred tax asset.
The net deferred tax asset of $15,511,000 at December 31, 1996
($18,201,000 in 1995) is presented in the Consolidated Balance Sheets as
follows: $6,894,000 ($4,113,000 in 1995) in current assets; $10,013,000
($14,755,000 in 1995) in non-current assets and $1,396,000 ($667,000 in
1995) in other liabilities.
<PAGE>
Foreign loss carryforwards totaling $2.2 million, which may be carried
forward indefinitely, are available to reduce future taxable income. Domestic
tax credits of $7.4 million are also available to reduce future federal and
state income taxes and expire at various dates through 2004, with the
exception of the federal alternative minimum tax credits which can be carried
forward indefinitely.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $13.1 million at December 31, 1996. Those earnings are
considered to be indefinitely reinvested and accordingly no provisions for
U.S. federal or state income taxes have been provided thereon. Upon
distribution of these earnings, the Company would be subject to both U.S.
income tax (potentially offset by foreign tax credits) and withholding
taxes payable to the foreign country. It is not practicable to estimate
the amount of additional tax that might be payable on the foreign earnings.
Note 11 -- Stock Plan
The Company's 1992 Stock Plan, which became effective May 5, 1992, is a
successor to the Company's 1981 Stock Plan. No additional grants of
options could be made under the 1981 Stock Plan after December 16, 1991.
Under the Company's 1992 Stock Plan, 1,000,000 common shares have been
reserved for granting of options, stock appreciation rights (SARs) and
restricted stock to key employees. Options are granted at prices equal to
100% of the market value of the common stock at the date of grant and may
be exercisable beginning six months and ending ten years from the date of
grant. The Executive Compensation Committee of the Company's Board of
Directors at its discretion may at the time of grant of an option provide
further limitations on periods during which options may be exercised. SARs
allow the optionee to surrender the option and receive a number of shares
of common stock, cash, or cash and shares of common stock, as the Executive
Compensation Committee determines, with an aggregate value equal to the
amount by which the fair market value of the shares covered by the
surrendered option exceeds the option price. Increases in the value of
SARs resulting from changes in the market value of common stock will be
charged to expense as they occur. Options automatically carry with them
conditional SARs which are exercisable in the event of a tender offer
meeting certain specified conditions. No SARs have been granted under the
Plan.
Under the Plan an option, which is exercisable beginning six months from
the date of grant, to purchase 2,000 shares at the market value per share on
the date of grant, is granted each year to each director of the Company who
<PAGE>
is not, and has not been an employee of the Company since the beginning of
the preceding year.
Grants of restricted stock entitle the grantee to vote and receive cash
dividends on the shares, but not to transfer or otherwise dispose of such
shares while they are subject to restrictions. The restriction period
cannot be less than one year or more than ten years from the date of grant.
As restrictions lapse, the difference between the market value on the date
of grant and the grant price, if any, is charged to expense. Any dividends
paid to the grantee during the restriction period are also charged to
expense. Grants of 800 shares of restricted stock were made during 1995
and restrictions lapsed on 4,000 shares during 1995. At December 31, 1996
and 1995, 800 restricted shares were outstanding.
The following is a summary of option transactions under both Plans:
<TABLE>
<CAPTION>
Shares Price Range
<S> <C> <C>
Outstanding December 31, 1993 520,406 $ 6.25 - $ 9.69
Granted 140,000 $ 5.66 - $ 7.56
Forfeited (32,000) $ 6.56 - $ 9.31
Outstanding December 31, 1994 628,406 $ 5.66 - $ 9.69
Granted 81,000 $10.59 - $17.41
Forfeited (20,000) $ 6.81
Exercised (54,908) $ 6.25 - $ 7.94
Outstanding December 31, 1995 634,498 $ 5.66 - $17.41
Granted 103,000 $14.85 - $20.38
Exercised (53,822) $ 7.00 - $ 9.38
Outstanding December 31, 1996 683,676 $ 5.66 - $20.38
Exercisable at December 31:
1996 594,676 $ 5.66 - $20.38
1995 567,498 $ 5.66 - $10.59
1994 498,406 $ 5.66 - $ 9.69
Available for additional grants
at December 31:
1996 464,200
1995 567,200
1994 649,000
1993 785,000
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation" requires
use of option valuation models. Under APB 25, because the exercise price
<PAGE>
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the
information be determined as if the Company had accounted for its stock
options granted subsequent to December 31,1994 under the fair value method
of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk free interest rates of 6.80% and 6.34%
for 1996 and 6.12% and 5.65% for 1995; a dividend yield of 1.38%;
volatility factors of the expected market price of the Company's Common
Stock of .313 and .358 in 1996 and .345 and .335 in 1995; and a weighted
average expected life of the options of 7 years. The weighted average
exercise price and remaining contractual life of these options were $9.73
and 7 years, respectively as of December 31, 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
(In thousands, except 1996 1995
per share amounts)
<S> <C> <C>
Pro forma net income $19,079 $30,765
Pro forma earnings per share:
Primary $ 1.79 $ 2.90
Fully diluted $ 1.79 $ 2.88
</TABLE>
Note 12 -- Preferred Stock Purchase Rights
Pursuant to the Company's Shareholder Rights Plan, each outstanding share
of the Company's common stock carries one Preferred Stock purchase right.
Each right, when exercisable, entitles the holder to purchase from the
<PAGE>
Company for $22.50, one two-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $1 per share, of the Company. The
Rights become exercisable, subject to certain exceptions, upon announcement
that a person or group has acquired 15% or more of the Company's
outstanding common stock, or 10 days, or such other period as the Board may
determine, following commencement of, or announcement of an intention to
commence, a tender or exchange offer consummation of which would result in
a person or group owning 15% or more of the Company's outstanding common
stock, whichever occurs first. If any person or group becomes the
beneficial owner of 15% of the outstanding common stock, other than
pursuant to a Permitted Offer, as defined in the Plan, holders, other than
an Acquiring Person as defined in the Plan, will have the right to purchase
from the Company common stock (or, in certain circumstances, cash, property
or other securities of the Company or to a reduction in the purchase price)
having a value equal to two times the exercise price of $22.50, or the Board
may elect to issue without any payment common stock and/or equivalents of
the Company with a value equal to the exercise price. If a person or group
becomes beneficial owner of 15% or more of the Company's outstanding common
stock and the Company is thereafter acquired by another entity, by merger,
consolidation, or transfer of 50% or more of the Company's assets, in one
or more transactions, holders of Rights, other than an Acquiring Person,
will have the right to receive, upon exercise common shares of the
acquiring company (including the Company if it is the surviving company)
having a value two times the exercise price ($22.50) of the Right. The Rights
will expire on June 15, 1999, unless exercised by the holder or redeemed by
the Company prior to that date. The Company may, subject to certain
conditions, redeem the Rights at a price of $.005 per Right.
Note 13 -- Supplemental Cash Flow Information
Cash payments (net refunds) for income taxes were $3,188,000, $4,378,000
and ($1,188,000) for 1996, 1995 and 1994, respectively. Interest payments
were $963,000, $837,000 and $444,000 in 1996, 1995 and 1994, respectively.
Non-cash investing activities in 1995 included notes receivable of
$2,100,000 from the sale of the land and building of Alliance Metal
Stamping and Fabricating. Refer to Note 3 - Discontinued Operations.
<PAGE>
Note 14 -- Business Segment and Foreign Operations
The Company's operations are conducted within one business segment.
The principal activity is the design, manufacture and sale of machinery and
equipment for the production of gears.
The Company's sales in North America and Europe are in general made
directly by employees of the Company. Sales in other territories are
handled by independent foreign machine dealers.
The Company's major foreign operations are located in Western Europe.
Information about the Company's operations in the United States and Western
Europe for 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
Net sales to unaffiliated customers
United States $162,305 $146,344 $113,304
Western Europe 85,784 50,702 15,158
$248,089 $197,046 $128,462
Interarea sales and transfers
United States $ 399 $ 468 $ 431
Western Europe 8,777 7,774 6,844
$ 9,176 $ 8,242 $ 7,275
Total sales
United States $162,704 $146,812 $113,735
Western Europe 94,561 58,476 22,002
257,265 205,288 135,737
Less interarea sales 9,176 8,242 7,275
$248,089 $197,046 $128,462
_______________________________________________________________________
Operating income
United States $ 17,642 $ 14,296 $ 3,250
Western Europe 16,749 9,622 4,011
34,391 23,918 7,261
Less:
Interest expense -- net 513 527 11
Corporate and other non-allocable
expenses 3,135 2,411 2,093
Income from continuing
operations before income taxes $ 30,743 $ 20,980 $ 5,157
_______________________________________________________________________
Identifiable assets
United States $136,349 $137,683 $103,871
Western Europe 47,115 49,578 13,416
183,464 187,261 117,287
Corporate assets 7,210 9,937 3,199
Assets of discontinued operations -- -- 1,530
Total assets $190,674 $197,198 $122,016
</TABLE>
<PAGE>
Interarea sales and transfers are generally accounted for at prices to
yield normal returns to the selling company in relation to the costs of
production. Identifiable assets represent assets directly identified with
each geographic region. Corporate assets consist primarily of cash and
equivalents.
United States continuing operations for 1996, 1995 and 1994 included
export sales (exclusive of intercompany sales) to the following geographic
areas:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
Europe / Africa $33,892 $37,536 $27,938
Asia / Pacific 49,105 29,197 19,114
Americas 14,025 10,829 5,660
$97,022 $77,562 $52,712
</TABLE>
During 1996, one single customer accounted for 14% of consolidated sales.
Note 15 -- Environmental Matters
Environmental expenditures that relate to continuing operations are
expensed or capitalized in accordance with generally accepted accounting
principles. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the costs can be reasonably estimated.
The Company has made provisions for environmental matters at certain
discontinued operations for which the Company retains responsibility.
These provisions were recorded in discontinued operations in 1991 and are
believed to be adequate based upon information known at this time.
The Company is subject to federal, state and local laws and regulations
concerning the environment, and is currently participating in
administrative proceedings involving different sites under these laws, as a
participant in a group of potentially responsible parties. These
proceedings are at various stages, and it is impossible to estimate with
any certainty the ultimate cost, timing and extent of remedial actions
which may be required by governmental authorities, or the amount of the
liability, if any, of the Company alone or in relation to that of the other
responsible parties. Based on the facts presently known, the Company does
not believe that the outcome of any of these proceedings will have a
material adverse effect on its results of operations or financial position.
Note 16 -- Concentrations of Risk
The Company's major customers are predominately in the automotive and
truck industries. Other markets utilizing the Company's products include
aerospace, manufacturers of power tools, marine, farm and construction
<PAGE>
equipment. The Company's markets are worldwide. Approximately 73% and 65%
of total sales in 1996 and 1995, respectively, were to customers outside of
the U.S. This geographical sales distribution offsets, to a degree, the
cyclical fluctuations of regional economies. As such, the Company is not
significantly at risk to the economic cycle of a single region.
Note 17 -- Commitments and Contingencies
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liability, if any,
resulting from such actions will not have a material impact on the
Company's future results of operations or financial position.
The Company was contingently liable under standby letters of credit
issued in the normal course of business for $8.9 million at December 31,
1996.
Note 18 -- Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long and short-term debt: The carrying amounts of the Company's short-
term borrowings and variable rate long-term debt approximate their fair
value.
Foreign currency exchange contracts: The Company enters into foreign
currency forward contracts to hedge transactions involving foreign
currencies primarily for firm commitments to buy or sell goods. The
aggregate contract value of agreements to sell foreign currencies in
exchange for U.S. dollars was $2.7 million and $12.5 million at December
31, 1996 and 1995, respectively. The aggregate value of contracts for the
sale of U.S. dollars in exchange for foreign currencies was $7.1 million
and $1.3 million at December 31, 1996 and 1995, respectively. The
aggregate value of contracts for the exchange of other foreign currencies
was $1.4 million at December 31, 1996. The fair values of these contracts,
representing the difference between the contract values and the estimated
settlement values based on the quoted market prices of comparable contracts
at December 31, 1996 and 1995, were not material.
<PAGE>
Note 19 - Subsequent Event
On August 28, 1997, the Board of Directors declared a two-for-one (2-for-1)
stock split on the Company's common stock, including shares held in its
treasury, effected in the form of a 100% common stock distribution payable on
September 26, 1997 to holders of record on September 12, 1997. The distribution
on September 26, 1997 increased the number of shares issued from 5,797,070 to
11,594,140 which includes an increse in treasury stock from 820,614 to
1,641,228. Common stock and additional paid-in capital as of December 31,
1996, 1995 and 1994 and have been restated to reflect this split.
In addition, all share and per share data, including stock option and
stock plan information have been stated to reflect the split.
Note 20 - Subsequent Event (unaudited)
On July 31, 1997 the Company purchased all of the general and limited
partnerhsip interests of Hermann Pfauter GmbH & Co. ("Pfauter") from its 21
limited partners (its general partner was owned by the limited partnership)
pursuant to an agreement between the Sellers and Purchasers dated July 23,
1997.
Pfauter, headquartered in Ludwigsburg, Germany, is a leading designer
and manufacturer of machinery for the manufacture of cylindrical gears,
with subsidiary companies for the assembly of such machines in the U.S. and
Italy. Tooling used in the production of cylindrical gears is produced by
Pfauter-Maag Cutting Tools Limited Partnerhsip ("PMCT"), located in Loves
Park, Illinois, 76.12% of which (including 100% of its managing general
partner) was owned by Pfauter, and was acquired in the purchase of Pfauter.
The remaining 23.88% of partnership interests of PMCT was also purchased on
July 31, 1997, simultaneously with the purchase of Pfauter, by a wholly
owned subsidiary of the Company from PMCT management personnel, who held
limited partnership interest, and a limited liability company owned by such
personnel, which held the other general partnership interest.
The purchase price pursuant to both agreements was paid in cash, with
$25,074,575 being paid pursuant to the Pfauter agreement, and $9,700,000
being paid pursuant to the PMCT agreement.
As a result of the purchases, the Company acquired all of the assets and
liabilities of Pfauter, its machinery assembly subsidiary companies, and PMCT,
including the assumption of approximately $56 million of bank debt.
The purchases were financed through a new multi-currency credit agreement
dated as of July 31, 1997 between the Company and its significant
subsidiaries, including Pfauter, its machinery assembly subsidiary companies,
and PMCT, and The Chase Manhattan Bank and nine other banks, providing for
term loans, revolving credit and standby letters of credit totaling up to
$170 million.
The Company will account for the acquisition under the purchase
accounting method.
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
of Gleason Corporation
We have audited the accompanying consolidated balance sheets of Gleason
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Gleason Corporation and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Syracuse, New York
January 30, 1997, except for Note 19, Ernst & Young LLP
as to which the date is October 1, 1997
<PAGE>
Quarterly Information (Unaudited)
Selected quarterly information for the years 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
Dollars in thousands, 1996
except per share amounts First Second Third Fourth
<S> <C> <C> <C> <C>
Net sales $59,510 $65,157 $53,467 $69,955
Cost of products sold 40,371 44,488 35,722 47,377
Income from continuing
operations 4,600 4,738 3,765 6,557
Net income 4,600 4,738 3,765 6,557
Primary earnings per common share:
Income from continuing
operations .43 .44 .35 .62
Net income .43 .44 .35 .62
Fully diluted earnings per common
share:
Income from continuing
operations .43 .44 .35 .62
Net income .43 .44 .35 .62
Cash dividends declared per
common share .0625 .0625 .0625 .0625
Stock prices
High 21 1/2 21 3/8 20 1/2 19 7/8
Low 13 5/8 18 15 1/2 14 1/8
</TABLE>
<TABLE>
<CAPTION>
Dollars in thousands, 1995
except per share amounts First Second Third Fourth
<S> <C> <C> <C> <C>
Net sales $31,901 $40,604 $54,550 $69,991
Cost of products sold 21,394 28,429 38,472 49,166
Income from continuing
operations 2,913 3,643 3,772 20,054
Net income 2,913 3,643 3,772 20,499
Primary earnings per common share:
Income from continuing operations .28 .35 .37 1.88
Net income .28 .35 .37 1.92
Fully diluted earnings per common
share:
Income from continuing
operations .28 .35 .37 1.88
Net income .28 .35 .37 1.92
Cash dividends declared per
common share .0625 .0625 .0625 .0625
Stock prices
High 9 1/2 12 3/4 18 5/8 18
Low 7 3/8 8 7/8 11 13 3/4
</TABLE>
Notes: Income from continuing operations for the 1995 fourth quarter
included a $13.7 million, or $1.30 per share, positive adjustment to record
deferred tax assets not previously recognized. Income from continuing
operations for the 1995 full year using normalized tax rates would have
been approximately $12.9 million, or $1.22 per share.
Net income in 1995 included a gain on the disposal of discontinued
operations of $445,000, or $.04 per share, in the fourth quarter.
Per share amounts have been adjusted to reflect the two-for-one stock split
effective September 26, 1997.
The Company's Common Stock (symbol GLE) is traded on the New York Stock
Exchange. The high and low sales price in each quarter of 1996 and 1995
are shown above. As of December 31, 1996 there were 3,203 holders of
record of the Company's Common Stock.
Ernst & Young LLP
1800 One MONY Plaza Phone: 315 425-8011
Syracuse, New York 13202 Fax: 315 422-5226
Consent of Independent Auditors
We consent to the use of our report dated January 10, 1997 (except for Note 19,
as to which the date is October 1, 1997) included in the Annual Report on
Form 10-K of Gleason Corporation for the year ended December 31, 1996, with
respect to the consolidated financial statements, as amended, included in this
Form 10-K/A.
We also consent to the use in the Registration Statements (Form S-8 No.
2-91656 and Form S-8 No. 33-62447) and Registration Statement (Form S-3 No.
2-84220) of Gleason Corporation of our report dated January 30, 1997 (except
for Note 19, as to which the date is October 1, 1997) included in the Annual
Report on Form 10-K of Gleason Corporation for the year ended December 31,
1996, with respect to the consolidated financial statements, as amended,
included in this Form 10-K/A.
Syracuse, New York
October 1, 1997
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000743239
<NAME> GLEASON CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7199
<SECURITIES> 0
<RECEIVABLES> 65583
<ALLOWANCES> 0
<INVENTORY> 27986
<CURRENT-ASSETS> 111700
<PP&E> 170084
<DEPRECIATION> 108693
<TOTAL-ASSETS> 190674
<CURRENT-LIABILITIES> 57866
<BONDS> 0
<COMMON> 11594
0
0
<OTHER-SE> 73270
<TOTAL-LIABILITY-AND-EQUITY> 190674
<SALES> 248089
<TOTAL-REVENUES> 248089
<CGS> 167958
<TOTAL-COSTS> 167958
<OTHER-EXPENSES> 48875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 513
<INCOME-PRETAX> 30743
<INCOME-TAX> 11083
<INCOME-CONTINUING> 19660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19660
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
</TABLE>
