<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-4416
--------------------------------------------------------------------------
SPS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
PENNSYLVANIA 23-1116110
(State of incorporation) (I.R.S. Employer Identification No.)
101 Greenwood Avenue, Suite 470 19046
Jenkintown, Pennsylvania (Zip Code)
(Address of principal executive offices)
(215) 517-2000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Title of Each Class Name of Each Exchange
Common Stock, Par Value $1.00 on Which Registered
Per Share New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 11, 1997 was approximately $370,428,919.
The number of shares of Registrant's Common Stock outstanding on March 11,
1997 was 6,022,771.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 13, which contains portions of the 1996 Annual Report to
Shareholders of the Registrant is incorporated by reference in Parts I, II
and IV of this Report. Portions of the Definitive Proxy Statement of
Registrant, if filed with the Securities and Exchange Commission within 120
days after December 31, 1996, are incorporated by reference in Part III of
this report. To the extent not so filed, such information will be provided on
a Form 10-K/A filed with the Securities and Exchange Commission.
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SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS (THOUSANDS OF DOLLARS)
SPS Technologies, Inc. and subsidiaries (the "Company") was incorporated
in Pennsylvania in 1903. The Company is engaged in the design, manufacture
and marketing of high-strength precision mechanical fasteners and precision
components (fasteners); and superalloys in ingot form and magnetic materials
(materials).
In 1996, the Company continued its plant and equipment modernization
program intended to increase capacity and reduce cost. Capital expenditures
were $28.2 million in 1996 and are budgeted for $35 million in 1997. The
Company is benefiting from the improving economic conditions in the aerospace
market and plans to further increase aerospace capacity to take advantage of
this upturn in the market. In 1996, the Company acquired 85% of a
manufacturer of aerospace fasteners in Canada to augment the efforts to
increase aerospace fastener capacity. The Company also increased its
investment in the magnetic materials business of its materials segment by
acquiring certain businesses to be combined with the Company's subsidiary,
the Arnold Engineering Company, a leading manufacturer of magnetic materials
and components. In 1996, the Company also consolidated certain manufacturing
operations to reduce cost and negotiated new long term debt to take advantage
of favorable financing. Additional information regarding 1996 operations is
provided in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The Company is multinational in operation. In addition to 10 manufacturing
plants in the United States, it operates 10 manufacturing facilities in six
different countries: England, Ireland, China, Canada, Brazil and Australia.
The Company also has a 50% interest in a manufacturing operation in Adelanto,
California, and has a minority interest in a manufacturing operation in
India. Marketing operations are carried on by subsidiaries and an affiliate
in five other countries.
The Company sells directly to original equipment manufacturers and
industrial, commercial and governmental users, and also sells through
independent stocking distributors and dealers. There were no changes in these
methods of distribution during 1996.
Principal fastener markets include aerospace, machine tool and industrial
machinery, automotive, and off-highway equipment. Principal markets for
materials include the precision investment casting, powdered metal,
aerospace, medical equipment, automotive, computer and communications
industries.
Principal fastener products are SPS(R) aerospace fasteners, MULTIPHASE(R)
alloy fasteners, and other aerospace fasteners; UNBRAKO(R) brand socket
screws, hex keys, dowel pins, shaft collars, spring pins and pressure plugs;
engineered fasteners for gasoline and diesel engines, other critical
automotive applications, and off-highway equipment and HI-LIFE(R) thread roll
dies and other metal-working tools.
Principal materials products are air and vacuum-melted iron, cobalt, and
nickel-based superalloys, including CMSX(R) single-crystal alloys; and
metallic and ceramic permanent magnets, wound and pressed powder magnetic
components, and magnetic ultra-thin foil and strip products.
The Company's business is highly competitive. Competition is based
primarily on technology, price, service, product quality and performance. The
Company believes that its favorable competitive position is based upon its
high-quality product performance and service to its customers, supported by
its commitment to research and development.
No material part of the Company's business is dependent upon a single
customer. In 1996, the five largest customers accounted for 16% of the
Company's reported consolidated sales.
The backlog of orders at December 31 was as follows:
1996 1995
--------- ----------
Fastener segment ............ $144,703 $111,289
Materials segment ........... 36,247 25,172
--------- ----------
Total ..................... $180,950 $136,461
========= ==========
No material portion of the Company's business in either segment is
seasonal.
2
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The principal sources of raw materials for the fastener and materials
segments include major and specialty steel producers, and non-ferrous metal
producers, converters and distributors. The Company anticipates it will have
no significant problem with respect to sources or availability of the raw
materials essential to the conduct of its business.
The Company owns certain trademarks and patents that it considers to be of
importance to its two industry segments. The principal trademarks of the
Company include SPS(R), ARNOLD(R), FLEXLOC(R), MULTIPHASE(R), MP35N(R),
MP159(R), UNBRAKO(R), U130(R), CMSX(R) and HI-LIFE(R). The trademarks have
been registered in the United States and certain foreign countries.
Generally, trademark registrations are valid so long as the trademarks
registered are used and renewal of the registration is timely made. United
States patents of the Company expire at various times over the next 17 years.
Patents covering the CMSX-4, CMSX-10 and CM247LC superalloys are of
particular importance in protecting the proprietary superalloy technology of
the Company's subsidiary, Cannon-Muskegon Corporation. However, the Company
does not believe that its business as a whole is dependent on any one or more
patents or trademarks or on patent or trademark protection generally.
Total expenditures during 1996, 1995 and 1994 for Company-sponsored
research and development were $5,649, $5,247, and $4,727, respectively. In
1996, approximately 67% of the expenditures were for the Company's fastener
segment.
Capital expenditures for property, plant and equipment are planned at $35
million in 1997, exclusive of any business acquisition.
There were approximately 3,467 and 848 persons employed by the Company at
December 31, 1996 in the fastener and materials segments, respectively.
Financial information concerning industry segments and the foreign and
domestic operations is included in Note 19 to the Company's Consolidated
Financial Statements on pages 31 through 33 in the 1996 Annual Report to
Shareholders. Exhibit 13.1 contains the information and is incorporated
herein by reference.
ITEM 2. PROPERTIES
The Company owns or leases the manufacturing properties described below.
All properties are in good condition.
LOCATION
Owned Square Feet
------------------------- --------------
Jenkintown, Pennsylvania 664,000 (a)
Cleveland, Ohio ......... 365,000 (a)
Santa Ana, California ... 305,000 (a)(k)
Salt Lake City, Utah .... 86,000 (a)
Marengo, Illinois ....... 356,000 (b)
Muskegon, Michigan ...... 110,000 (b)
Norfolk, Nebraska ....... 82,000 (b)
Sevierville, Tennessee .. 65,000 (b)
Marietta, Ohio .......... 30,000 (b)
Ogallala, Nebraska ...... 22,000 (b)
Anasco, Puerto Rico ..... 129,000 (a)(l)
Sorocaba, Brazil ........ 339,000 (a)
Coventry, England ....... 224,000 (a)
Smethwick, England ...... 137,000 (a)
Leicester, England ...... 92,000 (a)
Shanghai, China ......... 73,000 (a)
Melbourne, Australia .... 44,000 (a)
Derbyshire, England ..... 44,000 (b)
Leased Lease Expires Square Feet
------------------ --------------- -------------
Montreal, Canada (c) 35,000 (a)
Leicester, England (d) 38,000 (a)
Shannon, Ireland (e) (f) 179,000 (a)
Shanghai, China (g) (h) (i) (j) 275,000 (a)
3
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(a) Fastener segment.
(b) Materials segment.
(c) Lease for 35,000 square feet expires October 31, 2002.
(d) Lease for 38,000 square feet expires January 12, 2002.
(e) Lease for 75,000 square feet expires November 15, 2010.
(f) Lease for 104,000 square feet expires November 13, 2010.
(g) Lease for 94,000 square feet expires December 31, 2045.
(h) Lease for 43,000 square feet expires December 31, 2015.
(i) Lease for 122,000 square feet expires December 31, 1997.
(j) Lease for 16,000 square feet has no term established.
(k) Approximately 70,000 square feet used for manufacturing purposes, with the
remaining 235,000 square feet leased.
(l) Closed and held for sale.
Industrial Development Revenue Bonds were issued to finance the
acquisition and improvement of the Salt Lake City, Utah manufacturing
facility. These bonds are collateralized by a first mortgage on the facility
and a bank letter of credit.
ITEM 3. LEGAL PROCEEDINGS
A discussion of legal proceedings is included in Note 11 to the Company's
Consolidated Financial Statements on page 25 in the 1996 Annual Report to
Shareholders. Exhibit 13.1 contains the information and is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1996, through the solicitations of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
All executive officers of the Company are named below and are appointed by
the Board of Directors. The date that each officer was first appointed to his
present position is indicated. No officer listed was appointed as a result of
any arrangement between him and any other person as that phrase is understood
under the Securities Exchange Act regulations. No family relationship exists
among the executive officers of the Company.
<TABLE>
<CAPTION>
Name Experience and Position Held Age
----------------- ------------------------------------------------------------------------------ ---
<S> <C> <C>
Charles W. Grigg Chairman, Chief Executive Officer and President since March 1997. Previously,
Chairman and Chief Executive Officer since December 1993. Previously, President
and Chief Operating Officer, Watts Industries, Inc. since 1986. 57
James D. Dee Vice President, Environmental and Legal Affairs since February 1996. Previously,
Assistant Counsel and Patent Counsel since 1988. 39
Aaron Nerenberg Vice President, Corporate Counsel and Secretary since August 1988. Previously,
Corporate Counsel and Secretary since July 1986. 56
John M. Morrash Vice President, Treasurer and Assistant Secretary since July 1995. Previously,
Treasurer since February 1988. 42
William M. Shockley Vice President, Chief Financial Officer and Controller since July 1995.
Previously, Corporate Controller since September 1992. Previously, Assistant
Controller since November 1991. 35
</TABLE>
4
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
Information regarding the principal markets on which SPS Technologies
common stock is traded, the high and low sales price for the stock on the New
York Stock Exchange for each quarterly period during the past 2 years, and
the approximate number of holders of common stock at March 3, 1997 is
included under the caption entitled "Common Stock Information" on page 34 in
the 1996 Annual Report to Shareholders. Exhibit 13.4 contains this
information and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data for SPS Technologies for the years
and year ends specified is included under the caption entitled "Selected
Financial Data" on page 39 in the 1996 Annual Report to Shareholders. Exhibit
13.3 contains this information and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information regarding SPS Technologies financial condition, changes in
financial condition and results of operations is included under the caption
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 35 through 38 in the 1996 Annual Report to
Shareholders. Exhibit 13.5 contains this information and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements for SPS Technologies and the
required supplementary data "Summary of Quarterly Results" are included on
pages 16 through 33 and page 34, respectively, in the 1996 Annual Report to
Shareholders. Exhibits 13.1 and 13.2 contain this information and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of directors:
Information regarding directors is incorporated by reference to the
Definitive Proxy Statement, Election of Directors, if filed with the
Securities and Exchange Commission (SEC) within 120 days after December
31, 1996. To the extent not so filed, such information will be provided on
a Form 10-K/A filed with the SEC.
(b) Identification of executive officers:
Information regarding executive officers is contained in Part I of this
report (page 4).
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the Definitive Proxy Statement, Executive Compensation and Board Meetings,
Committees and Compensation of Directors, if filed with the SEC within 120
days after December 31, 1996. To the extent not so filed, such information
will be provided on a Form 10-K/A filed with the SEC.
5
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the Definitive Proxy Statement,
Ownership of Voting Securities, if filed with the SEC within 120 days after
December 31, 1996. To the extent not so filed, such information will be
provided on a Form 10-K/A filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. The Consolidated Financial Statements and related notes to consolidated
financial statements are set forth on pages 16 through 33 of the 1996
Annual Report to Shareholders. Exhibit 13.1 contains this information and
is incorporated by reference. The Report of Independent Accountants, which
covers both the Consolidated Financial Statements and the financial
statement schedule, appears on page 9 of this report.
2. Financial Statement Schedules:
The following supplemental schedule is located in this Report on the page
indicated.
Page
----
II Valuation and Qualifying Accounts 10
Schedules other than those listed above are omitted for the reason that
they are either not applicable or not required or because the information
required is contained in the financial statements or notes thereto.
3. Exhibits:
<TABLE>
<CAPTION>
<S> <C>
3a Amended and Restated Articles of Incorporation. Exhibit 3a to the Annual Report on Form 10-K for the
year ended December 31, 1990, is hereby incorporated by reference.
3b By-Laws as amended, effective April 29, 1993. Exhibit 3 to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993, is hereby incorporated by reference.
4a Rights Agreement dated November 11, 1988, is incorporated by reference to Form 8-K filed November 17,
1988. Amendment No. 1 to Rights Agreement dated January 22, 1991, is incorporated by reference to Form
8-K filed January 25, 1991. Form of Amendment No. 2 to Rights Agreement dated November 16, 1994, is
incorporated by reference to Exhibit 4.8 of Form S-3 filed August 26, 1994.
4b Form of Registration Rights Agreement between the Company, the Purchasers and the Investors dated November
16, 1994. Exhibit 4.5 to the Form S-3 filed August 26, 1994, is hereby incorporated by reference.
10a SPS 1988 Long Term Incentive Stock Plan as amended, effective February 2, 1989. Exhibit 10a to the Annual
Report on Form 10-K for the year ended December 31, 1988, is hereby incorporated by reference.
10b SPS Exempt Employees Savings and Investment Plan as Amended and Restated, effective November, 1991.
Exhibit 10b to the Annual Report on Form 10-K for the year ended December 31, 1991, is hereby incorporated
by reference.
10c SPS Technologies, Inc. Non-Exempt Employees Savings and Investment Plan as Amended and Restated, effective
November, 1991. Exhibit 10c to the Annual Report on Form 10-K for the year ended December 31, 1991,
is hereby incorporated by reference.
10d SPS Technologies, Inc. Management Incentive Plan as Amended and Restated, effective April 26, 1994.
Exhibit 10d to the Annual Report on Form 10-K for the year ended December 31, 1995, is hereby incorporated
by reference.
10e Form of standby Purchase Agreement dated November 16, 1994. Exhibit 10.1 to the Form S-3/A filed November
17, 1994, is hereby incorporated by reference.
6
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10f Retirement Benefit Agreement, dated February 28, 1979. Exhibit 10f to the Annual Report on Form 10-K
for the year ended December 31, 1991, is hereby incorporated by reference.
10g Fee Arrangement with Former Directors, effective November 29, 1984. Exhibit 10g to the Annual Report
on Form 10-K for the year ended December 31, 1990, is hereby incorporated by reference.
10h Form of Employment Agreements between SPS Technologies, Inc. and certain employees, as amended and restated
effective December 14, 1992. Exhibit 10h to the Annual Report on Form 10-K for the year ended December
31, 1992, is hereby incorporated by reference.
10i SPS Technologies, Inc. Executive Deferred Compensation Plan, as amended and restated, effective December
14, 1992. Exhibit 10i to the Annual Report on Form 10-K for the year ended December 31, 1992, is hereby
incorporated by reference.
10j SPS Technologies, Inc. Executive Deferred Compensation Plan II, as amended and restated effective December
1, 1993. Exhibit 10j to the Annual Report on Form 10-K for the year ended December 31, 1993, is hereby
incorporated by reference.
10k SPS Technologies, Inc. Supplemental Executive Retirement Plan, as amended and restated effective December
14, 1992. Exhibit 10k to the Annual Report on Form 10-K for the year ended December 31, 1992, is hereby
incorporated by reference.
10l Employment Agreement between SPS Technologies, Inc. and Charles W. Grigg, Chairman and Chief Executive
Officer, effective December 1, 1993. Exhibit 10l to the Annual Report on Form 10-K for the period ended
December 31, 1993, is hereby incorporated by reference.
10m Form of Indemnification Agreements between SPS Technologies, Inc. and officers and directors dated February
2, 1987. Exhibit 10m to the Annual Report on Form 10-K for the period ended December 31, 1992, is hereby
incorporated by reference.
10n Split Dollar Insurance Agreements regarding certain officers and directors effective April 2, 1990,
and November 27, 1991. Exhibit 10n to the Annual Report on Form 10-K for the year ended December 31,
1991, is hereby incorporated by reference.
10o SPS Technologies, Inc. Senior Executive Severance Plan, effective December 14, 1992. Exhibit 10o to
the Annual Report on Form 10-K for the year ended December 31, 1992, is hereby incorporated by reference.
10p Agreement with Retiring Executive, approved December 14, 1992. Exhibit 10p to the Annual Report on Form
10-K for the year ended December 31, 1992, is hereby incorporated by reference.
10q SPS Technologies, Inc. Benefit Equalization Plan, as amended and restated effective December 14, 1992.
Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, is hereby incorporated
by reference.
10r SPS Technologies, Inc. Long Range Incentive Plan, effective January 1, 1995. Exhibit 10r to the Annual
Report on Form 10-K for the year ended December 31, 1995, is hereby incorporated by reference.
11 Computation of dilution (anti-dilution) of earnings per share resulting from common stock equivalents.
13.1 1996 Consolidated Financial Statements, Notes to Consolidated Financial Statements and Report of Independent
Accountants.
13.2 Summary of Quarterly Results for 1996 and 1995.
13.3 Selected Financial Data for 1992 through 1996.
13.4 Common Stock Information for 1996 and 1995.
13.5 1996 Management's Discussion and Analysis of Financial Condition and Results of Operations.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended December
31, 1996.
7
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SIGNATURE
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.
SPS TECHNOLOGIES, INC.
----------------------------
(Registrant)
/s/ William M. Shockley
----------------------------
William M. Shockley
Vice President, Chief
Financial Officer
and Controller
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
------------------------------- ------------------------------------- ------------------
<S> <C> <C>
/s/ CHARLES W. GRIGG Chairman, Chief Executive March 24, 1997
------------------------------ Officer, President and Director
Charles W. Grigg (Principal Executive Officer)
/s/ HARRY J. WILKINSON Director March 24, 1997
------------------------------
Harry J. Wilkinson
/s/ WILLIAM M. SHOCKLEY Vice President, Chief March 24, 1997
------------------------------ Financial Officer and Controller
William M. Shockley (Principal Financial Officer)
/s/ ERIC M. RUTTENBERG Director March 24, 1997
------------------------------
Eric M. Ruttenberg
/s/ HOWARD T. HALLOWELL III Director March 24, 1997
------------------------------
Howard T. Hallowell III
/s/ JOHN F. LUBIN Director March 24, 1997
------------------------------
John F. Lubin
</TABLE>
8
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REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
SPS Technologies, Inc.:
We have audited the consolidated financial statements of SPS Technologies,
Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996, which financial statements
are included on pages 16 through 33 of the 1996 Annual Report to Shareholders
of SPS Technologies, Inc. and subsidiaries and incorporated by reference
herein. We have also audited the financial statement schedule as listed in
Item 14(a)2 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 SPS
Technologies, Inc. and subsidiaries as of 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. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
February 4, 1997
9
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SCHEDULE II
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1996, 1995 and 1994
(Thousands of dollars)
<TABLE>
<CAPTION>
Additions Additions
charged charged
(deductions (deductions
Balance at credited) credited) Balance
beginning of to costs and to other Deductions at end of
Description year expenses accounts (a) year
-------------------------------- -------------- -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
$ 26(b)
Allowance for doubtful
accounts .................. $ 1,292 $ 189 186(c) $ (25) $ 1,668
======= ======== ========= ======== =======
Deferred income tax valuation
allowance ................. $10,349 $(2,417) $ 925(c) $ $ 8,857
======= ======== ========= ======== =======
Year ended December 31, 1995:
Allowance for doubtful
accounts .................. $ 1,299 $ 124 $ (12)(b) $ (119) $ 1,292
======= ======== ========= ======== =======
Deferred income tax valuation
allowance ................. $11,462 $(1,824) $ 711(c) $ $10,349
======= ======== ========= ======== =======
Year ended December 31, 1994:
Allowance for doubtful
accounts .................. $ 1,185 $ 348 $ 18(b) $ (252) $ 1,299
======= ======== ========= ======== =======
Deferred income tax valuation
allowance ................. $13,717 $(2,255) $ $ $11,462
======= ======== ========= ======== =======
</TABLE>
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(a) Write off of uncollectible receivables, net of recoveries.
(b) Translation adjustments.
(c) Balance acquired in connection with acquisitions.
10
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EXHIBIT INDEX
3a Amended and Restated Articles of Incorporation. Exhibit
3a to the Annual Report on Form 10-K for the year ended
December 31, 1990, is hereby incorporated by reference.
3b By-Laws as amended, effective April 29, 1993. Exhibit 3
to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993, is hereby incorporated by
reference.
4a Rights Agreement dated November 11, 1988, is incorporated
by reference to Form 8-K filed November 17, 1988.
Amendment No. 1 to Rights Agreement dated January 22,
1991, is incorporated by reference to Form 8-K filed
January 25, 1991. Form of Amendment No. 2 to Rights
Agreement dated November 16, 1994, is incorporated by
reference to Exhibit 4.8 of Form S-3 filed August 26,
1994.
4b Form of Registration Rights Agreement between the
Company, the Purchasers and the Investors dated November 16,
1994. Exhibit 4.5 to the Form S-3 filed August 26,
1994, is hereby incorporated by reference.
10a SPS 1988 Long Term Incentive Stock Plan as amended,
effective February 2, 1989. Exhibit 10a to the Annual
Report on Form 10-K for the year ended December 31, 1988,
is hereby incorporated by reference.
10b SPS Exempt Employees Savings and Investment Plan as
Amended and Restated, effective November, 1991. Exhibit
10b to the Annual Report on Form 10-K for the year ended
December 31, 1991, is hereby incorporated by reference.
10c SPS Technologies, Inc. Non-Exempt Employees Savings and
Investment Plan as Amended and Restated, effective
November, 1991. Exhibit 10c to the Annual Report on Form
10-K for the year ended December 31, 1991, is hereby
incorporated by reference.
10d SPS Technologies, Inc. Management Incentive Plan as
Amended and Restated, effective April 26, 1994. Exhibit
10d to the Annual Report on Form 10-K for the year ended
December 31, 1995, is hereby incorporated by reference.
10e Form of standby Purchase Agreement dated November 16,
1994. Exhibit 10.1 to the Form S-3/A file November 17,
1994, is hereby incorporated by reference.
10f Retirement Benefit Agreement, dated February 28, 1979.
Exhibit 10f to the Annual Report on Form 10-K for the
year ended December 31, 1991, is hereby incorporated by
reference.
<PAGE>
10g Fee Arrangement with Former Directors, effective November
29, 1984. Exhibit 10g to the Annual Report on Form 10-K
for the year ended December 31, 1990, is hereby
incorporated by reference.
10h Form of Employment Agreements between SPS Technologies,
Inc. and certain employees, as amended and restated
effective December 14, 1992. Exhibit 10h to the Annual
Report on Form 10-K for the year ended December 31, 1992,
is hereby incorporated by reference.
10i SPS Technologies, Inc. Executive Deferred Compensation
Plan, as amended and restated effective December 14,
1992. Exhibit 10i to the Annual Report on Form 10-K for
the year ended December 31, 1992, is hereby incorporated
by reference.
10j SPS Technologies, Inc. Executive Deferred Compensation
Plan II, as amended and restated effective December 1,
1993. Exhibit 10j to the Annual Report on Form 10-K for
the year ended December 31, 1993, is hereby incorporated
by reference.
10k SPS Technologies, Inc. Supplemental Executive Retirement
Plan, as amended and restated effective December 14,
1992. Exhibit 10k to the Annual Report on Form 10-K for
the year ended December 31, 1992, is hereby incorporated
by reference.
10l Employment Agreement between SPS Technologies, Inc. and
Charles W. Grigg, Chairman and Chief Executive Officer,
effective December 1, 1993. Exhibit 10l to the Annual
Report on Form 10-K for the period ended December 31,
1993, is hereby incorporated by reference.
10m Form of Indemnification Agreement between SPS
Technologies, Inc. and officers and directors dated
February 2, 1987. Exhibit 10m to the Annual Report on
Form 10-K for the year ended December 31, 1992, is hereby
incorporated by reference.
10n Split Dollar Insurance Agreements regarding certain
officers and directors effective April 2, 1990, and
November 27, 1991. Exhibit 10n to the Annual Report on
Form 10-K for the year ended December 31, 1991, is hereby
incorporated by reference.
10o SPS Technologies, Inc. Senior Executive Severance Plan,
effective December 14, 1992. Exhibit 10o to the Annual
Report on Form 10-K for the year ended December 31, 1992,
is hereby incorporated by reference.
10p Agreement with Retiring Executive, approved December 14,
1992. Exhibit 10p to the Annual Report on Form 10-K for
the year ended December 31, 1992, is hereby incorporated
by reference.
10q SPS Technologies, Inc. Benefit Equalization Plan, as
amended and restated effective December 14, 1992. Exhibit
10 to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993, is hereby incorporated by
reference.
<PAGE>
10r SPS Technologies, Inc. Long Range Incentive Plan,
effective January 1, 1995. Exhibit 10r to the Annual
Report on Form 10-K for the year ended December 31, 1995,
is hereby incorporated by reference.
11 Computation of dilution (anti-dilution) of earnings per
share resulting from common stock equivalents.
13.1 1996 Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Report of
Independent Accountants.
13.2 Summary of Quarterly Results for 1996 and 1995.
13.3 Selected Financial Data for 1992 through 1996.
13.4 Common Stock Information for 1996 and 1995.
13.5 1996 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 11
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
Computation of Dilution (Anti-dilution) of Earnings Per Share
Resulting from Common Stock Equivalents
Years ended December 31, 1996, 1995, 1994, 1993 and 1992
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net earnings (loss) $22,300 $ 14,875 $ 3,200 $ (30,995) $ (20,409)
======= ========= ========= ========= =========
Weighted average number of common shares
outstanding during year 5,959,469 5,720,666 5,131,900 5,105,706 5,097,994
Weighted average number of maximum shares subject to
exercise under outstanding stock options at December 31 653,660 675,349 399,955 271,679 190,533
------- --------- --------- --------- ---------
6,613,129 6,396,015 5,531,855 5,377,385 5,288,527
Less treasury shares assumed purchased
with proceeds from assumed exercise of
outstanding options (a) 315,502 437,575 360,811 239,832 169,065
------- ------- --------- --------- ---------
Weighted average number of common shares and
equivalent common shares outstanding after assumed
exercise of options 6,297,627 5,958,440 5,171,044 5,137,553 5,119,462
========= ========= ========= ========= =========
Earnings (loss) per share based on above assumptions $ 3.54 $ 2.50 $ .62 $ (6.03) $ (3.99)
========= ========= ========= ========= =========
Earnings (loss) per share as reported $3.54(b) $ 2.50(b) $ .62 $ (6.07) $ (4.00)
========= ========= ========= ========= =========
</TABLE>
(a) All options are exercisable under a nonqualified plan. The proceeds
from assumed exercise of options, aggregate $19,882 in 1996, $16,967 in
1995, $8,896 in 1994, $6,199 in 1993 and $4,467 in 1992; the proceeds
and number of treasury shares assumed purchased were determined on the
most likely exercise assumptions.
(b) Earnings per share assuming full dilution are presented in the
statement of consolidated operations as the above calculation results
in dilution in excess of 3 percent.
<PAGE>
SPS Technologies, Inc. and Subsidiaries
Statements of Consolidated Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Net sales .......................................... $485,903 $409,814 $348,905
Cost of goods sold ................................. 386,403 334,160 292,580
-------- -------- --------
GROSS PROFIT .................................... 99,500 75,654 56,325
Selling, general and administrative expense ...... 61,322 49,644 44,847
Restructuring charge, net ........................ 3,500
-------- -------- --------
OPERATING EARNINGS .............................. 38,178 26,010 7,978
Other income (expense):
Interest income ................................. 621 520 440
Interest expense ................................. (7,989) (6,483) (6,924)
Equity in earnings of affiliates ............... 853 1,701 1,726
Minority interest .............................. (100)
Other, net ....................................... (513) (473) 2,900
-------- -------- --------
(7,128) (4,735) (1,858)
-------- -------- --------
EARNINGS BEFORE INCOME TAXES ..................... 31,050 21,275 6,120
Provision for income taxes ........................ 8,750 6,400 2,920
-------- -------- --------
NET EARNINGS .................................... $ 22,300 $ 14,875 $ 3,200
======== ======== ========
EARNINGS PER COMMON SHARE
AND COMMON SHARE
EQUIVALENT ..................................... $ 3.54 $ 2.50 $ .62
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
SPS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
December 31
1996 1995
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................... $ 33,310 $ 8,093
Accounts and notes receivable, net .......................................... 73,542 61,294
Inventories .................................................................. 99,778 88,090
Deferred income taxes ......................................................... 20,567 20,396
Prepaid expenses ............................................................ 2,979 3,103
Net assets held for sale ...................................................... 1,600 2,362
-------- -------
Total current assets ....................................................... 231,776 183,338
-------- -------
Investments in affiliates ...................................................... 4,760 4,516
Property, plant and equipment, net ............................................. 148,616 112,738
Other assets .................................................................. 42,848 25,495
-------- -------
Total assets .............................................................. $428,000 $326,087
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt ........................... $ 16,454 $ 6,578
Accounts payable ............................................................ 34,952 28,041
Accrued expenses ............................................................ 50,132 42,445
Income taxes payable ......................................................... 3,919 3,267
-------- -------
Total current liabilities .................................................... 105,457 80,331
-------- -------
Deferred income taxes ......................................................... 14,505 13,061
Long-term debt ............................................................... 98,838 58,119
Retirement obligations ......................................................... 25,607 27,827
Minority interest ............................................................ 5,997 1,100
SHAREHOLDERS' EQUITY
Preferred stock, par value $1 per share, authorized 400,000 shares, issued none
Common stock, par value $1 per share, authorized 30,000,000 shares, issued
6,646,250 shares (6,450,909 shares in 1995) .................................. 6,646 6,451
Additional paid-in capital ................................................... 82,561 74,685
Retained earnings ............................................................ 100,891 78,591
Minimum pension liability ................................................... (2,257) (2,626)
Common stock in treasury, at cost, 645,381 shares (599,258 shares in 1995) ... (7,920) (4,846)
Cumulative translation adjustments .......................................... (2,325) (6,606)
-------- -------
Total shareholders' equity ................................................. 177,596 145,649
-------- -------
Total liabilities and shareholders' equity ................................ $428,000 $326,087
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
SPS Technologies, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(Thousands of dollars)
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ......................................................... $ 22,300 $ 14,875 $ 3,200
Reconciliation of net earnings to net cash provided by operating
activities:
Depreciation and amortization ...................................... 18,902 14,730 13,063
Equity in undistributed earnings of affiliates .................... (853) (1,701) (1,726)
Net (gain) loss on sale of property, plant and equipment ........... 1,320 541 (3,374)
Deferred income taxes ............................................ 5,235 3,319 420
Restructuring charge, net ......................................... 3,500
Cash used for restructuring activities ............................. (550) (6,700)
Other operating items ............................................ (283) 564 199
Changes in assets and liabilities, net of acquisitions of businesses:
Receivables ....................................................... (421) (1,738) (6,311)
Inventories ....................................................... 1,031 (4,952) 1,984
Prepaid expenses ................................................. 790 109 (179)
Accounts payable ................................................. 186 (811) 8,123
Accrued expenses ................................................. 4,006 (31) 2,782
Income taxes payable .............................................. 984 528 523
Other assets and liabilities, net ............................... (2,890) 2,125 (825)
--------- -------- --------
Net cash provided by operating activities .......................... 50,307 27,008 14,679
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment ........................... (28,220) (21,480) (17,615)
Proceeds from sale of property, plant and equipment .................. 1,160 4,240 13,333
Acquisitions of businesses .......................................... (35,580) (11,293)
Proceeds from divestitures of businesses ........................... 705 2,128
Other, net ......................................................... 708
--------- -------- --------
Net cash used in investing activities ............................. (62,640) (27,828) (1,446)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ............................................. 162,739 22,955 14,560
Reduction of borrowings ............................................. (127,776) (25,359) (38,291)
Proceeds from rights offering ....................................... 12,185
Proceeds from exercise of stock options .............................. 2,300 1,843 405
--------- -------- --------
Net cash provided by (used in) financing activities .............. 37,263 (561) (11,141)
Effect of exchange rate changes on cash .............................. 287 2 528
--------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. 25,217 (1,379) 2,620
Cash and cash equivalents at beginning of year ..................... 8,093 9,472 6,852
--------- -------- --------
Cash and cash equivalents at end of year ........................... $ 33,310 $ 8,093 $ 9,472
========= ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ...................................................... $ 4,260 $ 6,134 $ 6,911
Income taxes paid ................................................... 3,280 2,449 1,700
SIGNIFICANT NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of treasury shares for business acquired .................. 5,667
Debt assumed with businesses acquired .............................. 14,976
Acquisition of treasury shares for stock options exercised ......... 3,253
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
SPS Technologies, Inc. and Subsidiaries
Statements of
Consolidated Shareholders' Equity
(Thousands of dollars)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
--------- ------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993 ...... $6,362 $59,704 $60,516
Issuance of common shares
under stock option plans ...... 16 355
Issuance of treasury shares
under stock option plans ...... 22
Issuance of treasury shares
under rights offering ......... 8,043
Net earnings .................. 3,200
Minimum pension liability
changes ........................
Foreign currency translation
adjustment including $677
write-off related to the sale
of subsidiary ..................
------- ------- --------
Balance, December 31, 1994 ...... 6,378 68,124 63,716
Issuance of common shares
under stock option plans ...... 69 2,039
Issuance of treasury shares for
business acquired ............ 4,522
Net earnings .................. 14,875
Minimum pension liability
changes ........................
Foreign currency translation
adjustment .....................
Other ........................... 4
------- ------- --------
Balance, December 31, 1995 ...... 6,451 74,685 78,591
Issuance of common shares
under stock option plans ...... 195 7,060
Acquisition of treasury shares
under stock option plans ......
Net earnings .................. 22,300
Minimum pension liability
changes ........................
Foreign currency translation
adjustment .....................
Stock contribution to pension
plan ........................... 816
------- ------- --------
Balance, December 31, 1996 ...... $6,646 $82,561 $100,891
======= ======= ========
<CAPTION>
Minimum Cumulative Total
Pension Treasury Translation Shareholders'
Liability Stock Adjustments Equity
------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 ...... $ (1,780) $ (10,144) $ (11,831) $102,827
Issuance of common shares
under stock option plans ...... 371
Issuance of treasury shares
under stock option plans ...... 12 34
Issuance of treasury shares
under rights offering ......... 4,142 12,185
Net earnings .................. 3,200
Minimum pension liability
changes ........................ 545 545
Foreign currency translation
adjustment including $677
write-off related to the sale
of subsidiary .................. 4,942 4,942
------- ------- -------- --------
Balance, December 31, 1994 ...... (1,235) (5,990) (6,889) 124,104
Issuance of common shares
under stock option plans ...... 2,108
Issuance of treasury shares for
business acquired ............ 1,145 5,667
Net earnings .................. 14,875
Minimum pension liability
changes ........................ (1,391) (1,391)
Foreign currency translation
adjustment ..................... 283 283
Other ........................... (1) 3
------- ------- -------- --------
Balance, December 31, 1995 ...... (2,626) (4,846) (6,606) 145,649
Issuance of common shares
under stock option plans ...... 7,255
Acquisition of treasury shares
under stock option plans ...... (3,253) (3,253)
Net earnings .................. 22,300
Minimum pension liability
changes ........................ 369 369
Foreign currency translation
adjustment ..................... 4,281 4,281
Stock contribution to pension
plan ........................... 179 995
-------- --------- --------- --------
Balance, December 31, 1996 ...... $ (2,257) $ (7,920) $ (2,325) $177,596
======== ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
SPS Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and all its subsidiaries. Investments in affiliates, owned more than 20 percent
but not in excess of 50 percent, are recorded on the equity method. Certain
prior year amounts have been reclassified for comparative purposes.
Cash Equivalents
The Company considers cash equivalents to be all highly liquid investments
purchased with original maturities of three months or less. The carrying amount
approximates fair value because of the short maturity of these items.
Inventories
Inventories are valued at lower of cost or market. Inventories are stated
at average cost and include material, labor and manufacturing overhead costs.
The Company provides reserves against its slow moving, obsolete and excess
inventories based upon factors which include current customer requirements,
quantity on hand, age of inventory and months supply of inventory. The
provisions for such reserves are recorded as a component of cost of goods sold.
Property and Depreciation
Property, plant and equipment are stated at cost. Depreciation is provided
substantially on a straight-line basis over the estimated useful lives of the
respective assets generally as follows: buildings, 8 to 50 years, and machinery
and equipment, 3 to 20 years. Asset and accumulated depreciation accounts are
reduced for the sale or other disposition of property and the resulting gain or
loss is included in results of operations. Fully depreciated items, other than
buildings, generally are removed from the accounts.
Intangible Assets
Intangible assets, included in other assets, were approximately $23,600 and
$6,500 at December 31, 1996 and 1995, respectively. Intangible assets consist
primarily of goodwill which arose from the excess of the cost of purchased
businesses over the value of the underlying net assets and is being amortized by
the straight-line method over periods not exceeding 40 years. Intangible assets
are reviewed when facts and circumstances suggest that they may be impaired. If
this review indicates that the intangible asset will not be recoverable based on
the expected future undiscounted net cash flows of the related asset, the
Company's carrying value will be reduced. Accumulated amortization at December
31, 1996 and 1995, was $2,100 and $1,600, respectively. Amortization of
intangible assets was $896, $474 and $431 in 1996, 1995 and 1994, respectively.
Retirement Plans
Substantially all employees are covered by pension plans. Defined benefit
plans in the United States are noncontributory and non-United States plans are
primarily contributory. Generally, unrecognized gains and losses are
systematically amortized over the average remaining service period of the plans'
active participants. For United States plans, the Company funds the minimum
amount permitted by the Employee Retirement Income Security Act (ERISA) and for
non-United States plans, the Company generally funds current costs.
Foreign Currency Translation
With the exception of operations in countries with highly inflationary
economies, the financial statements of the Company's non-United States
subsidiaries are translated into United States dollars using current rates of
exchange, with gains or losses included in the cumulative translation adjustment
account in the shareholders' equity section of the consolidated balance sheets.
For operations in countries with highly inflationary economies, financial
statements are translated at either current or historical exchange rates, as
appropriate. These adjustments, along with gains and losses on currency
transactions (denominated in currencies other than local currency), are
reflected in the statements of consolidated operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
20
<PAGE>
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, cash equivalents and
trade receivables. The Company sells its principal products to a large number of
customers in different industries and geographies. To reduce credit risk, the
Company performs ongoing credit evaluations of its customers' financial
conditions but does not generally require collateral. The Company invests
available cash in money market securities of various banks with high credit
ratings.
Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." This
Statement establishes new standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997 (earlier application is not permitted).
This Statement requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact SFAS No. 128 will have on its
financial statements, if any.
2. BUSINESS ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition.
In the first quarter of 1996, the Company formed a joint venture in China
by acquiring a 55 percent interest in Shanghai SPS Biao Wu Fasteners Co. Ltd.
(SSBW). The Company contributed cash and equipment of $3,288 and manufacturing
technology.
In 1996, the Company completed two acquisitions of magnet materials
manufacturers. On June 14, 1996, the Company acquired all of the outstanding
shares of Flexmag Industries, Inc. (Flexmag) located in Marietta, Ohio, and the
assets of a related magnets business located in Seneca, South Carolina, for
$21,274. On July 3, 1996, the Company acquired all of the outstanding shares of
Swift Levick Magnets Ltd. (Swift Levick), located in Derbyshire, England for
$18,491. The excess of the purchase price over the fair value of the net assets
acquired for both acquisitions was approximately $12,900 and has been recorded
as goodwill, which is being amortized on a straight-line basis over 30 years.
On October 8, 1996, the Company acquired 85 percent of the capital stock of
Mecair Aerospace Industries, Inc. (Mecair), a manufacturer of aerospace
fasteners, located in Pointe Claire (Montreal), Quebec, Canada for $8,300. The
excess of the purchase price over the fair value of the net assets acquired was
approximately $3,500 and has been recorded as goodwill, which is being amortized
on a straight-line basis over 40 years.
In 1995, the Company paid $6,200 to acquire, relocate and prepare for their
intended use certain assets of Harvard Industries, Inc.'s Elastic Stop Nut
Division (ESNA). ESNA manufactured aerospace locknuts in Union, New Jersey. On
June 30, 1995, the Company also paid approximately $1,000 to increase its
ownership in Unbrako K.K. from 50 percent to 100 percent. Unbrako K.K. is a
distributor of the Company's Unbrako and aerospace products in the Japanese
market.
On August 16, 1995, the Company acquired approximately 48 percent of the
outstanding stock of Metalac S.A. Industria e Comercio (Metalac) located in
Sorocaba, Brazil. With this acquisition, the Company increased its ownership to
approximately 95 percent. Metalac is a leading manufacturer and distributor of
industrial and automotive fasteners in Brazil. The Company paid $4,000 in cash
and issued 141,666 shares of the Company's common stock (approximate market
value on August 16, 1995 of $5,667). The Stock Purchase Agreement also contains
additional payments contingent on the future earnings performance of Metalac.
Any additional payments made, when the contingency is resolved, will be
accounted for as additional costs of the acquired assets and amortized over the
remaining life of the assets. No additional payments have been accrued to date.
Prior to this acquisition, the Company accounted for its investment in Metalac
using the equity method.
The following unaudited pro forma consolidated results of operations are
presented as if the Flexmag, Swift Levick, Mecair and Metalac acquisitions had
been made
21
<PAGE>
at the beginning of the periods presented. The effects of the other acquisitions
(SSBW, Unbrako K.K. and ESNA) are not material and, accordingly, have been
excluded from the pro forma presentation.
Years Ended
December 31
1996 1995
------------ -----------
Net sales ............... $ 510,740 $ 476,351
Net earnings ............ 22,585 16,252
Earnings per common
share and common
share equivalent ...... 3.59 2.69
The pro forma consolidated results of operations include adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the periods presented or the future results of the combined operations.
3. RESTRUCTURE OF OPERATIONS
The 1994 statement of consolidated operations includes a restructuring
charge of $3,500 for the loss on disposal of the Company's Spanish subsidiary
net of a credit for a change in estimate on the remaining components of the
restructuring plan initiated in 1993. In 1994, the Company sold its investment
in its subsidiary, Ferre Plana, S.A., located in Barcelona, Spain. The loss on
disposal of $6,600 included the write-off of the related intangible assets and
cumulative translation adjustment account. The 1993 restructuring charge
included a provision for the liquidation of the Assembly Systems Division (ASD),
a fastener segment product line. In 1994, the Company sold this product line. As
a result of this modification of the restructuring plan and the related change
in estimate, and because actual restructuring costs were lower than estimated
costs, the Company recorded a $1,500 credit for the reversal of excess reserves
associated with the 1993 restructuring charge and a $1,600 gain on the sale of
ASD's net assets.
Net assets held for sale included in the December 31, 1996 and 1995
consolidated balance sheets include the land and building located in Puerto
Rico, related to the former site of an Unbrako manufacturing operation closed in
1992, and a small parcel of land located in Newtown, Pennsylvania. In January
1997, the Company sold the land and building in Puerto Rico for $1,100, which
approximated its net book value at December 31, 1996.
4. ACCOUNTS AND NOTES RECEIVABLE
1996 1995
------- -------
Trade ..................... $72,273 $59,836
Notes and other ............ 2,937 2,750
------- -------
75,210 62,586
Less allowance for doubtful
receivables ............ 1,668 1,292
------- -------
$73,542 $61,294
======= =======
5. INVENTORIES
1996 1995
-------- -------
Finished goods ........... $50,726 $45,933
Work-in-process ........... 25,363 20,095
Raw materials and
supplies ................. 17,010 14,330
Tools .................... 6,679 7,732
-------- --------
$ 99,778 $ 88,090
======== ========
6. INVESTMENTS IN AFFILIATES
At December 31, 1996, the Company's investments in affiliates consist of
22.05 percent interest in Precision Fasteners Limited, Bombay, India, a 50
percent interest in Unbrako Products Pte. Ltd., Singapore, and a 50 percent
interest in National-Arnold Magnetics Company, Adelanto, California, United
States. In 1995, the Company acquired controlling interests in Metalac and
Unbrako K.K. (See Note 2). Prior to the 1995 acquisition dates, the Company had
a 50 percent or less interest in these companies and, accordingly, classified
these investments as affiliates and accounted for them using the equity method
of accounting.
Dividends received from affiliates were $339, $387 and $196 in 1996, 1995
and 1994, respectively. Retained earnings in 1996, 1995 and 1994 included
undistributed earnings of affiliates, net of deferred taxes, of $3,945, $3,369
and $7,493 respectively. At December 31, 1996, the Company has guaranteed the
payment of $1,882 of the affiliates' indebtedness.
In 1994, Precision Fasteners Limited executed a public issue of its stock
whereby it issued 4,800,000 shares at
22
<PAGE>
$1.59 per share and generated proceeds of approximately $6,900, net of related
expenses. The Company elected not to subscribe to the affiliate's public issue
which reduced its percentage ownership from 36.75 percent to 22.05 percent. The
gain on this transaction was offset by a write down of the Company's
proportionate share of the affiliate's cumulative translation adjustment
account. At December 31, 1996, the market value of the affiliate's stock of
$4,800 approximated the carrying value of the Company's investment.
The table below contains the summarized financial information of
unconsolidated affiliates. The operations of Metalac and Unbrako K.K. are
included in the table up to the date the Company acquired a controlling
interest.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Condensed Statements
of Earnings
Net sales ............... $33,300 $48,256 $59,314
Gross profit ............ 9,600 16,035 21,651
Operating earnings ...... 5,431 6,955 7,863
Net earnings ............ 3,244 5,428 4,658
Condensed Balance
Sheets
Current assets ......... $28,233 $21,414 $33,744
Noncurrent assets ...... 22,210 15,139 23,931
-------- -------- -------
$50,443 $36,553 $57,675
======== ======== =======
Current liabilities ...... $22,583 $16,498 $17,660
Noncurrent liabilities 8,529 3,034 3,661
Shareholders' equity ... 19,331 17,021 36,354
-------- -------- -------
$50,443 $36,553 $57,675
======== ======== =======
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Land ........................... $ 6,565 $ 5,001
Buildings ..................... 57,891 48,181
Machinery and
equipment ..................... 194,459 164,708
Construction in progress ...... 17,147 12,968
------- --------
276,062 230,858
Less accumulated
depreciation .................. 127,446 118,120
------- --------
$148,616 $112,738
======== ========
</TABLE>
Depreciation expense was $18,006, $14,256 and $12,632 in 1996, 1995 and
1994, respectively.
<PAGE>
8. NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Short-term bank
borrowings and notes
payable ............... $11,708 $1,080
Current portion of
long-term debt ...... 4,746 5,498
------- -------
$16,454 $ 6,578
======== =======
</TABLE>
The Company's weighted-average interest rate for short-term bank borrowings
and notes payable was 6.8% and 48.0% as of December 31, 1996 and 1995,
respectively. All short-term bank borrowings at December 31, 1995 were related
to the Company's Brazilian operation and denominated in Brazilian Reis.
Short-term lines of credit are made available to the Company by commercial banks
under customary arrangements which require the maintenance of a satisfactory
financial condition by the Company. These lines may be withdrawn at the
discretion of the banks. Unused short-term lines of credit were $12,241 as of
December 31, 1996. The Company also has unused long term credit facilities as
discussed in Note 10.
9. ACCRUED EXPENSES
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Employee compensation
and related benefits ...... $24,625 $23,861
Other ..................... 25,507 18,584
------- -------
$50,132 $42,445
======= =======
</TABLE>
23
<PAGE>
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Note Purchase Agreement,
fixed interest rates of
7.7% to 7.88% ............ $85,000
Notes Payable to Insurance
Companies, fixed interest
of 9.45% ............... $35,000
Bank Credit Agreement,
variable interest rates,
composite interest rate of
6.74% at December 31,
1995 ..................... 21,700
Loan Agreement, variable
interest rate, 6.625% at
December 31, 1996 ...... 8,872
Industrial Development
Revenue Bond Series
1987, variable interest
rate, 4.25% and 5.5% at
December 31, 1996 and
1995, due 2012 ......... 5,300 5,300
Other ..................... 4,412 1,617
------- -------
103,584 63,617
Less current installments
(included in notes
payable) ................ 4,746 5,498
------- -------
$ 98,838 $ 58,119
======== ========
</TABLE>
Installments due during the next five years are as follows: $4,746, $5,145,
$2,966, $600, $5,496 in 1997 through 2001, respectively.
On June 17, 1996, the Company completed a new long-term Note Purchase
Agreement with three insurance companies. Under this new agreement, the Company
borrowed $85,000 at fixed interest rates of 7.70 percent to 7.88 percent due in
annual installments from July 1, 2001 to July 1, 2011. The proceeds from the new
agreement were used to pay off $30,000 of existing Notes Payable to Insurance
Companies, reduce debt borrowed under the current Bank Credit Agreement and to
fund recent acquisitions.
Under the Bank Credit Agreement dated June 28, 1995, the Company may borrow
up to $55,000 in either United States dollars or certain Eurocurrencies. The
agreement also provides for a $10,000 sublimit, within the total $55,000 limit,
which is available for letters of credit. Borrowings bear interest at either a)
an overnight base rate equal to the higher of the prime rate of the agent bank
or the federal funds rate plus .5 percentage points, b) an eurocurrency rate
equal to the effective interbank rate, as defined, plus a premium which ranges
from .5 to 1.5 percentage points based on the consolidated fixed charge coverage
ratio, as defined, or c) at a rate and term negotiated between each bank and the
Company, as applicable. During 1996 and 1995, the average interest rate on
borrowings outstanding was 6.3 percent and 7.4 percent, respectively. The
Company is required to pay a commitment fee of .3 percentage points on
unborrowed amounts. The Bank Credit Agreement is a four year agreement,
extendable for one year on each of the first and second anniversary dates.
As part of the 1996 acquisition of Swift Levick Magnets Ltd. (as described
in Note 2), the Company entered into a loan agreement with the seller for 5,250
English pounds ($8,872 at December 31, 1996). The loan is collateralized by a
bank letter of credit, bears interest at LIBOR plus .75 percent and is due in
annual installments from June 30, 1997 to June 30, 1999. In 1996, the average
interest rate was 6.7 percent.
The Series 1987 Bonds were issued to finance the acquisition and
improvement of a fastener manufacturing facility in Utah and are collateralized
by a first mortgage on the facility and a bank letter of credit. In 1996 and
1995, the average interest rate was 3.7 percent and 4.1 percent, respectively.
The Company is subject to a number of restrictive covenants under the
various debt agreements. These covenants, among other things, set forth
limitations on indebtedness, restrict the payment of cash dividends and require
the Company to maintain a minimum consolidated tangible net worth and a minimum
consolidated fixed charge coverage ratio. Certain of the Company's debt
agreements contain cross default and cross acceleration provisions. Under these
covenants, dividends paid by the Company may not exceed $7,500 plus 50 percent
of consolidated net income (or minus 100 percent of consolidated net loss) for
the period from January 1, 1996 to the date of the dividend.
24
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
Leases
Certain of the Company's operations are conducted from leased facilities,
all of which are under operating leases which expire over the next 14 years. The
Company also has operating leases covering certain machinery and equipment.
Substantially all leases provide for the Company to pay operating expenses.
Rental expense incurred was $3,872, $2,507 and $2,158 in 1996, 1995 and 1994,
respectively.
At December 31, 1996, the future minimum annual rentals on non-cancelable
leases which have initial or remaining terms of more than one year aggregated
$19,976. The minimum payments over the next five years are as follows: $3,023,
$2,885, $2,891, $2,116 and $1,913 in 1997 through 2001, respectively.
Environmental
The Company has been identified as a potentially responsible party by
various federal and state authorities for clean up or removal of waste from
various disposal sites. At December 31, 1996, the Company had an accrued
liability of $3,300 for environmental remediation which represents management's
best estimate of the costs related to environmental remediation which are
considered probable and can be reasonably estimated. The Company has not
included any insurance recovery in the accrued environmental liability. The
measurement of the liability is evaluated quarterly based on currently available
information. As the scope of the Company's environmental liability becomes more
clearly defined, it is possible that additional reserves may be necessary.
Accordingly, it is possible that the Company's results of operations in future
quarterly or annual periods could be materially affected. Management does not
anticipate that its consolidated financial condition will be materially affected
by environmental remediation costs in excess of amounts accrued.
The Company has established procedures for identifying environmental issues
at its manufacturing facilities. Environmental and safety coordinators, a
designated position at most of the operating facilities, are familiar with
environmental laws and regulations and serve as resources for the identification
and resolution of environmental issues. The Company also has an environmental
audit program, which is used to identify and resolve potential environmental
issues at the operating facilities. Through these programs, the Company monitors
applicable regulatory developments and manages environmental issues.
Litigation
The Company is involved in various legal matters incidental to its
business. Although the final outcome of these matters cannot be determined, it
is management's opinion that the final resolution of these matters will not have
a materially adverse effect on the Company's consolidated financial position or
results of operation.
12. INCOME TAXES
The components of the provision for income taxes from operations were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Currently payable:
United States
Federal ............ $1,205 $ 400 $ 200
State and local ...... 500 346 350
Non-United
States ............... 1,810 2,335 1,950
------- ------ ------
3,515 3,081 2,500
------- ------ ------
Deferred:
United States
Federal ............ 3,557 810 2,017
State and local ...... 150 (280) (861)
Non-United
States ............... 1,528 2,789 (736)
------- ------ ------
5,235 3,319 420
------- ------ ------
$8,750 $6,400 $2,920
======= ====== ======
</TABLE>
The income tax benefits of the employee stock option compensation expense
for tax purposes in excess of amounts recognized for financial reporting
purposes credited to additional paid-in capital was $1,534 in 1996, $265 in 1995
and $23 in 1994.
25
<PAGE>
The components of earnings from operations before income taxes were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
United States ......... $ 25,114 $ 10,948 $ 2,231
Non-United States ...... 5,936 10,327 3,889
-------- -------- -------
$ 31,050 $ 21,275 $ 6,120
======== ======== =======
</TABLE>
Temporary differences comprising the net deferred income tax asset
(liability) on the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Inventory reserves ......... $ 7,720 $ 7,905
Post-retirement benefits
other than pensions ...... 4,721 4,752
Other employee benefits
and compensation ......... 5,786 4,916
Alternative minimum tax
credits .................. 1,758 1,327
Advance corporate tax ...... 508 1,041
Accrued expenses ............ 4,175 2,065
Net operating loss carry
forwards .................. 6,926 10,909
Valuation allowances ...... (8,857) (10,349)
-------- --------
Deferred income tax
asset ..................... 22,737 22,566
-------- --------
Depreciation ............... (10,500) (8,648)
Pension benefits ............ (4,441) (4,826)
Other, net .................. (1,734) (1,757)
-------- --------
Deferred income tax
liability ................ (16,675) (15,231)
-------- --------
Net deferred income tax
asset .................... $ 6,062 $ 7,335
======== ========
</TABLE>
The Company has recorded a net deferred tax asset of $6.1 million at
December 31, 1996. Realization of the net deferred tax asset is dependent on
generating sufficient taxable income prior to expiration of any net operating
loss carryforwards (NOLs). Although realization is not assured, management
believes it is more likely than not that the recorded net deferred tax asset
will be realized. At December 31, 1996, the Company had United States NOLs of
$10,700 which begin to expire in 2008, Brazilian NOLs of $7,500 with no
expiration dates and other non-United States NOLs of $2,500 which begin to
expire in 2002. The valuation allowance at December 31, 1996 relates to certain
state and non-United States tax jurisdictions. The net change in the valuation
allowance for 1996 results primarily from the release of valuation allowances in
the United States based on the reevaluation of the realization of future
benefits net of increases for additional Brazilian NOLs and valuation allowances
acquired with the 1996 business acquisitions.
The following sets forth the differences between the provision for income
taxes from continuing operations computed at the United States federal statutory
income tax rate of 35 percent for 1996 and 34 percent for 1995 and 1994 and that
reported for financial statement purposes:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Provision computed at the
United States federal
statutory income tax
rate ..................... $10,868 $ 7,234 $ 2,081
Earnings of certain subsid-
iaries taxed at different
rates ..................... (934) (664) (1,923)
Permanent items ............ 973 1,346 2,168
State income tax, net of
federal benefit ......... 246 256 177
Unused net operating loss
of subsidiary sold ...... 2,176
Valuation allowances ...... (2,417) (1,824) (2,255)
Other, net ............... 14 52 496
------- ------- -------
Provision for income taxes $ 8,750 $ 6,400 $ 2,920
======= ======= =======
</TABLE>
In 1994, the Company sold its Spanish subsidiary that had NOLs. The tax
benefit of these NOLs of $2,176 was fully offset by a valuation allowance at
December 31, 1993. In 1994, the Company wrote-off the deferred tax benefit of
these NOLs and made a corresponding reduction to its valuation allowance.
United States income taxes have not been provided on unremitted earnings of
certain subsidiaries located outside the continental United States of
approximately $48,600 because, in management's opinion, such earnings are
required in these operations, will be remitted in a tax-free liquidation, or
will be remitted as dividends with taxes substantially offset by foreign tax
credits. It is not practical to determine the amount of unrecognized deferred
tax liabilities associated with such earnings.
26
<PAGE>
13. RETIREMENT PLANS AND OTHER BENEFITS
The Company sponsors two defined contribution plans. Participation in one
of these plans is available to substantially all domestic salaried and hourly
employees. Participants may make voluntary pre-tax or after-tax contributions to
the plans up to 16 percent of their compensation (as defined). The Company
contributes a percentage of employee contributions based upon the number of
years of employee service to the salaried plan. The Company's contribution
expense for the salaried plan was $245 in 1996, $208 in 1995 and $199 in 1994.
The Company sponsors a number of defined benefit pension plans covering
substantially all employees and a defined benefit plan covering non-employee
directors. The benefits of such plans are based primarily on years of service
and compensation. Plan assets consist principally of common stocks, pooled
equity funds, corporate bonds and United States Government obligations. At
December 31, 1996 and 1995, the plans' assets included Company stock with fair
values of $14,156 and $10,970, respectively. There were no dividends received
from Company stock for the years ended December 31, 1996 and 1995.
The following table sets forth the funded status of these plans at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- -----------------------------------
Plans whose Plans whose Plans whose Plans whose
assets exceed accumulated assets exceed accumulated
accumulated benefits accumulated benefits
benefits exceed assets benefits exceed assets
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Plan assets at fair value ........................... $ 134,120 $ 11,283 $ 116,266 $ 9,215
Actuarial present value of benefit obligations:
Vested benefits .................................... (113,990) (17,123) (94,061) (17,167)
Nonvested benefits ................................. (588) (1,381) (411) (873)
--------- -------- --------- --------
Accumulated benefit obligation ..................... (114,578) (18,504) (94,472) (18,040)
Projected future salary increases .................. (8,634) (60) (14,723) (272)
--------- -------- --------- --------
Projected benefit obligation ........................ (123,212) (18,564) (109,195) (18,312)
--------- -------- --------- --------
Plan assets in excess of (less than) projected
benefit obligation ................................. 10,908 (7,281) 7,071 (9,097)
Unrecognized net (asset) obligation at date of
initial application .............................. (4,670) 163 (5,165) 208
Unrecognized prior service (gain) cost ............ (10,535) 1,067 (11,761) 1,213
Unrecognized net loss .............................. 19,150 3,242 21,932 4,021
Recognized minimum liability ........................ (4,517) (5,276)
--------- -------- --------- --------
Prepaid (accrued) pension cost at December 31 ...... $ 14,853 $ (7,326) $ 12,077 $ (8,931)
========= ======== ========= ========
</TABLE>
Under the requirements of Statement of Financial Accounting Standards
(SFAS) No. 87, "Employers' Accounting for Pensions," an additional minimum
pension liability for certain plans, representing the excess of accumulated
benefits over plan assets and accrued pension costs, was recognized at December
31, 1996 and 1995. A corresponding amount was recognized as an intangible asset,
to the extent of unrecognized prior service cost and unrecognized transition
obligation, with the balance recorded as a separate reduction of shareholders'
equity.
The assumptions used as of December 31, 1996, 1995 and 1994 in determining
the domestic net pension cost and net pension liability were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate ......... 7.65% 7.25% 9.00%
Rate of return on plan
assets ............... 10.00% 10.00% 10.00%
Rate of future compensa-
tion increase ...... 5.00% 5.00% 5.00%
</TABLE>
The assumptions used in determining the net pension cost and pension
liability for non-United States pension plans were based on the economic
environment of each applicable country. The range of assumptions used as of
December 31, 1996 was as follows: discount rate, 6.5 to 8 percent; rate of
return on plan assets, 9.5 percent; rate of future compensation increase, 4.25
to 5.5 percent.
27
<PAGE>
The net periodic pension cost incurred for 1996, 1995 and 1994,
respectively, for these plans, included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Service cost ...... $ 5,559 $ 4,665 $ 3,881
Interest cost ...... 9,424 9,226 9,148
Actual return on plan
assets ............ (13,901) (21,378) (4,267)
Net amortization and
deferral ......... 1,205 11,337 (5,961)
-------- -------- -------
Net periodic pension
cost ............... $ 2,287 $ 3,850 $ 2,801
======== ======== =======
</TABLE>
Other Postretirement Benefits
In addition to providing pension benefits, the Company and certain of its
subsidiaries provide postretirement health care and life insurance benefits. All
full-time nonbargaining employees hired prior to January 1, 1990 are eligible
for medical benefits under a defined dollar benefit plan if they retire with at
least 10 years of service and meet certain age requirements. Generally, Company-
provided medical benefits terminate when covered individuals become eligible for
Medicare benefits. The medical plan is contributory, with retiree contributions
adjusted annually. The life insurance plan covers substantially all employees
who retire from full-time employment after age 55 with at least 10 years of
service. The life insurance plan is non-contributory. Both of the Company's
postretirement plans are unfunded.
Effective in 1994, the Company implemented certain programs, such as
required participation in managed care programs when available, intended to stem
rising costs. These amendments resulted in an unrecognized prior
service gain of $6,376, which is being amortized as a reduction in
postretirement benefit cost beginning in 1994. An assumed discount rate of 7.65
percent, 7.25 percent and 8.5 percent was used to determine the accumulated
postretirement benefit obligation at December 31, 1996, 1995 and 1994,
respectively.
The funded status of the plans and amounts recognized in the Company's
consolidated financial statements as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Accumulated postretire-
ment benefit obligation:
Current retirees ...... $ 4,566 $ 6,039 $ 6,891
Fully eligible actives . 1,430 662 1,634
Other actives ......... 3,378 3,529 2,136
-------- -------- --------
Total accumulated post-
retirement benefit
obligation ............ 9,374 10,230 10,661
Unrecognized prior ser-
vice gain ............ 4,783 5,314 5,845
Unrecognized net loss . (728) (1,567) (2,004)
-------- -------- --------
Postretirement benefit
obligation ............ $ 13,429 $ 13,977 $ 14,502
======== ======== ========
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Service cost ............ $ 178 $ 159 $ 205
Interest cost ......... 686 846 836
Unrecognized prior ser-
vice gain ............ (531) (531) (531)
Net amortization and
deferral ............... 26 77 150
----- ----- -----
Net periodic postretire-
ment benefit cost ...... $ 359 $ 551 $ 660
===== ===== =====
</TABLE>
A 5 percent annual rate of increase in the per capita costs of covered
health care benefits was assumed for 1996. Increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by $290
and increase the aggregate of the service and interest components of net
periodic postretirement benefit cost for 1996 by $57.
28
<PAGE>
14. STOCK OPTIONS
The Company has a nonqualified stock option plan which continues to the
year 2000. Under the plan, the Company may grant up to an aggregate of 1,650,000
shares in either stock options (fixed price or variable price) or restricted
shares to officers and key employees. Additionally, non-employee directors may
elect to receive discounted price options in lieu of all or a portion of their
annual retainer fee. The number of such options, if elected, is based upon
market value at date of grant. The exercise price of outstanding options is
determined as follows: fixed price options are granted at market value on date
of grant; and discounted price options are granted at par value of the common
stock on date of grant. The options maximum term is 10 years and options granted
vest over a five year period.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The Company will continue to apply the provisions of Accounting
Principles Board Opinion 25 in accounting for its stock option plans. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date as prescribed by SFAS No. 123, net income and
earnings per share would have been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years Ended
December 31
1996 1995
------- -------
<S> <C> <C>
Net earnings ............ $21,871 $14,729
Earnings per common share
and common share
equivalent ............ 3.47 2.47
</TABLE>
The weighted-average fair value of options granted per share was $20.49 and
$12.61 in 1996 and 1995, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model and
the weighted-average assumptions used for grants in both 1996 and 1995 as
follows: expected volatility of 32 percent, expected option life of five years
and no expected dividend payments over the life of the option. The expected
weighted-average risk-free interest rates of 5.3 percent and 7.1 percent were
used for 1996 and 1995, respectively.
At December 31, 1996, 58 individuals held options to purchase an aggregate
of 630,654 shares (fixed 617,240, discounted 13,414). There are 471,540 fixed
price options outstanding with exercise prices ranging from $20.50 to $28.44 per
share (a weighted-average exercise price per share of $24.34) and expiration
dates ranging from December 2, 1997 to February 6, 2005 (a weighted- average
remaining contractual life of six years). Of these 471,540 fixed price options
outstanding, 301,332 shares are currently exercisable with a weighted-average
exercise price of $24.02 per share. In addition, there are 145,700 fixed price
options outstanding with exercise prices ranging from $39.50 to $54.00 per share
(a weighted-average exercise price per share of $50.29) and expiration dates
ranging from November 30, 1998 to January 31, 2006 (a weighted-average remaining
contractual life of seven years). Of these 145,700 fixed price options
outstanding, 39,100 shares are currently exercisable with a weighted-average
exercise price of $43.88 per share. The discounted price options outstanding
have an exercise price of $1.00 and expiration dates ranging from May 31, 1999
to June 2, 2006 with a weighted-average remaining contractual life of six years.
No variable price options were outstanding at December 31, 1996.
29
<PAGE>
Changes in shares under option were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ------------------------- ------------------------
Shares Weighted- Shares Weighted- Shares Weighted-
Average Average Average
Exercise Exercise Exercise
Price Price Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year ... 730,950 $26.48 699,102 $25.97 661,097 $26.76
Additions (deductions):
Options granted ........................... 99,132 54.03 109,806 30.45 92,009 23.72
Options exercised ........................... (192,828) 28.79 (69,258) 26.30 (17,169) 22.25
Options expired or terminated ............... (6,600) 41.70 (8,700) 30.20 (36,835) 34.28
--------- -------- --------
Options outstanding at end of year ......... 630,654 29.84 730,950 26.48 699,102 25.97
========= ======== ========
Options exercisable at end of year ......... 349,677 25.63 462,592 27.19 450,806 28.25
Shares available for future option grants ... 216,074 311,119 116,620
Total exercise of options outstanding at end
of year .................................... $ 18,818 $ 19,358 $ 18,159
</TABLE>
Under the nonqualified stock option plan, the Company has issued 6,908
restricted shares. Each year 20 percent of the restricted shares granted become
free of any restrictions. As of December 31, 1996, 6,029 shares issued are
restricted.
15. PER SHARE DATA
Earnings or loss per share is computed by dividing net earnings or loss by
the weighted average number of common shares outstanding. When dilutive, stock
options are included as common share equivalents using the treasury stock
method. The number of shares used in computing the earnings or loss per share
was 6,297,627 in 1996, 5,958,440 in 1995 and 5,131,900 in 1994. Primary and
fully diluted earnings or loss per share are the same for each of these years.
16. PREFERRED STOCK PURCHASE RIGHTS
As provided in the Rights Agreement dated November 11, 1988, the Board of
Directors declared a dividend distribution of one Right for each outstanding
share of common stock. The Rights Agreement was amended on January 22, 1991 and
on November 16, 1994. Under the Rights Agreement as amended, each Right may be
exercised, under certain conditions, to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, par value $1 per share, for
$125. The Rights are not exercisable or transferable apart from the common stock
until 10 business days after a public announcement that a person or group has
acquired or intends to commence a tender offer for 10 percent or more of the
outstanding common stock. The Board of Directors may, at its option and under
certain conditions, exchange all of the Rights not owned by the 10 percent
holder for an equal number of shares of common stock. The Rights, which expire
on November 21, 1998, do not have voting or dividend rights and may be redeemed
by the Company at a price of $.01 per Right at any time until 10 business days
following the acquisition of 10 percent or more of the Company's common stock.
In the event that the Company is acquired in a merger or other business
combination transaction, or 50 percent or more of its assets or earning power is
sold, each Right will entitle the holder to receive from the surviving or
acquiring corporation, for the exercise price, common stock having a market
value equal to two times the exercise price of the Right. Alternatively, if a 10
percent holder were to acquire the Company in a business combination transaction
in which the Company and its stock survive, or were to engage in certain
"self-dealing" transactions, each Right not owned by the 10 percent holder would
have the right to receive common shares having a market value of two times the
exercise price of the Right.
17. FINANCIAL INSTRUMENTS
Fair Value of Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash flows at
the rates cur-
30
<PAGE>
rently available to the Company for debt of the same remaining maturities. The
fair value of the Company's variable rate debt approximates its carrying value.
The carrying amount and the estimated fair value of the Company's long-term
debt, including the current portion, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Carrying amount ............ $103,584 $ 63,617
Estimated fair value ...... 108,114 66,930
</TABLE>
Forward Exchange Contracts
The Company enters into forward exchange contracts primarily as hedges
relating to identifiable currency positions. These financial instruments are
designed to minimize exposure and reduce risk from exchange rate fluctuations in
the regular course of business. Gains and losses on forward exchange contracts
which hedge exposures on firm foreign currency commitments are deferred and
recognized as adjustments to the bases of those assets. Gains and losses on
forward exchange contracts which hedge foreign currency assets or liabilities
are recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged. The cash
flow from such contracts is classified in the same category as the transaction
hedged in the statements of consolidated cash flows.
At December 31, 1996, the Company has outstanding contracts maturing in
1997 that have, in the aggregate, a United States dollar contract value
equivalent of $2,326, which approximates fair value based on rates available to
the Company at December 31, 1996.
18. RESEARCH AND DEVELOPMENT
Research and development costs incurred were $5,649, $5,247 and $4,727 for
1996, 1995 and 1994, respectively.
19. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in two industry segments: Fasteners (high-strength
precision mechanical fasteners and precision components); and Materials
(superalloys in ingot form and magnetic materials). The Company operates in the
following geographic areas: United States, Europe (principally England and
Ireland) and other (principally Australia, Brazil, Canada, China, Japan and
Mexico). Inter-area sales consist of products similar to those offered to
unaffiliated customers and are accounted for on the basis of third party sales
price. Principal markets include aerospace, transportation, industrial machinery
and equipment, electrical and medical equipment. Interest income and expense,
equity in earnings of affiliates and other income and expenses are excluded from
the determination of segment operating earnings. In 1996, the Company recorded a
pre-tax charge for the cost of employee separations of $3,600 which has been
included in selling, general and administrative expense. For segment reporting
purposes, $2,700 reduced the fastener group operating earnings and $900
increased unallocated corporate costs.
31
<PAGE>
Industry Segments
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Fasteners ........................ $334,677 $273,556 $239,561
Materials ........................ 151,226 136,258 109,344
-------- -------- --------
Net sales ........................ $485,903 $409,814 $348,905
======== ======== ========
Operating earnings:
Fasteners ........................ $ 26,997 $ 16,657 $ 2,376
Materials ........................ 19,581 17,103 13,409
Unallocated corporate costs ...... (8,400) (7,750) (7,807)
-------- -------- --------
Operating earnings ............... $ 38,178 $ 26,010 $ 7,978
======== ======== ========
Identifiable assets:
Fasteners ........................ $296,948 $246,440 $211,309
Materials ........................ 129,452 77,285 75,570
Net assets held for sale ......... 1,600 2,362 2,367
-------- -------- --------
Total assets ..................... $428,000 $326,087 $289,246
======== ======== ========
</TABLE>
Depreciation and Amortization and Capital Additions:
<TABLE>
<CAPTION>
Depreciation and Amortization Capital Additions
---------------------------------- ----------------------------------
1996 1995 1994 1996 1995 1994
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fasteners ...... $13,620 $10,875 $9,936 $20,936 $16,258 $11,110
Materials ...... 5,282 3,855 3,127 7,284 5,222 6,505
-------- -------- ------- -------- -------- --------
Total ......... $18,902 $14,730 $13,063 $28,220 $21,480 $17,615
======== ======== ======= ======== ======== ========
</TABLE>
Geographic Areas
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales:
United States ............ $345,591 $313,810 $275,069
Europe .................. 99,430 89,106 79,253
Other .................. 60,668 26,158 14,980
Inter-area ............... (19,786) (19,260) (20,397)
-------- -------- --------
Net sales ............. $485,903 $409,814 $348,905
======== ======== ========
Operating earnings:
United States ............ $ 31,052 $ 18,037 $ 3,746
Europe .................. 5,872 5,207 2,108
Other .................. 1,267 1,704 1,597
Eliminations ............ (13) 1,062 527
-------- -------- --------
Operating earnings ...... $ 38,178 $ 26,010 $ 7,978
======== ======== ========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
United States .................. $252,118 $209,616 $197,252
Europe ........................ 107,557 68,196 66,336
Other ........................ 67,224 46,332 24,675
Net assets held for sale ...... 1,600 2,362 2,367
Eliminations .................. (499) (419) (1,384)
-------- -------- --------
Total assets ................ $428,000 $326,087 $289,246
======== ======== ========
</TABLE>
Included in United States sales are export sales of $39,400 in 1996, $35,700 in
1995 and $26,000 in 1994.
Report of Independent
Accountants
The Shareholders and Board of Directors
SPS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of SPS
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related statements of consolidated operations, shareholders' 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 SPS
Technologies, Inc. and subsidiaries as of 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.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
February 4, 1997
33
<PAGE>
Summary of Quarterly Results (unaudited)
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
March June September December
31 30 30 31
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
1996
- ----
Net sales .................. $113,975 $121,302 $125,435 $125,191
Gross profit ............... 22,825 24,950 25,701 26,024
Net earnings ............... 5,040 6,020 6,040 5,200
Net earnings per share ...... .81 .95 .96 .82
1995
- ----
Net sales .................. $102,432 $100,581 $100,500 $106,301
Gross profit ............... 17,295 18,723 20,200 19,436
Net earnings ............... 3,050 3,925 4,185 3,715
Net earnings per share ...... .54 .67 .70 .60
</TABLE>
1996
----
Third quarter results include a pre-tax charge of $2,100 for the cost of
employee separations. Also in the third quarter, the Company revised its
estimates related to the future realization of tax benefits related to its
deferred tax assets. As a result, the provision for income taxes was reduced by
$1,700 in the third quarter.
Fourth quarter results include a pre-tax charge of $1,500 due to certain
costs incurred to consolidate management responsibilities.
1995
----
Fourth quarter results include a change in the estimate of obsolescence
reserves on the Unbrako product line inventory. The effect of this change was to
reduce fourth quarter pre-tax operating earnings by $1,100.
<PAGE>
Selected Financial Data
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales .................................... $485,903 $409,814 $348,905
Operating earnings (loss) ..................... 38,178 26,010 7,978
Earnings (loss) before cumulative effect of
changes in accounting policies ............... 22,300 14,875 3,200
Cumulative effect of changes in accounting
policies ....................................
Net earnings (loss) ........................... 22,300 14,875 3,200
- ---------------------------------------------------------------------------------------
Working capital .............................. 126,319 103,007 87,491
Total assets ................................. 428,000 326,087 289,246
Long-term debt .............................. 98,838 58,119 56,426
Property, plant and equipment additions ...... 28,220 21,480 17,615
- ---------------------------------------------------------------------------------------
Per Share Data:
Earnings (loss) before cumulative effect of
changes in accounting policies ............... 3.54 2.50 .62
Cumulative effect of changes in accounting
policies ....................................
Net earnings (loss) ........................... 3.54 2.50 .62
Cash dividends ..............................
Shareholders' equity ........................ 28.20 24.44 24.18
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Net sales .................................... $ 319,094 $359,431
Operating earnings (loss) ..................... (29,087) (3,106)
Earnings (loss) before cumulative effect of
changes in accounting policies ............... (30,995) (7,009)
Cumulative effect of changes in accounting
policies .................................... (13,400)
Net earnings (loss) ........................... (30,995) (20,409)
- -------------------------------------------------------------------------------------------
Working capital .............................. 94,483 102,968
Total assets ................................. 285,979 295,608
Long-term debt .............................. 81,828 63,321
Property, plant and equipment additions ...... 12,248 11,555
- -------------------------------------------------------------------------------------------
Per Share Data:
Earnings (loss) before cumulative effect of
changes in accounting policies ............... (6.07) (1.37)
Cumulative effect of changes in accounting
policies .................................... (2.63)
Net earnings (loss) ........................... (6.07) (4.00)
Cash dividends .............................. .96 1.28
Shareholders' equity ........................ 20.14 27.98
</TABLE>
Results for 1994, 1993 and 1992 include net restructuring charges of $3,500,
$32,400 and $6,800, respectively.
On December 14, 1993, the Board of Directors elected to suspend payment of the
Company's quarterly dividend.
The Company changed its accounting policies, effective January 1, 1992, to
accrue for postretirement benefits other than pensions and account for income
taxes under the liability method.
39
<PAGE>
Common Stock Information
The price range at which the Company's common stock traded in its principal
market, the New York Stock Exchange, during the last eight quarters were as
follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
- --------------------------- ------------ ----------
<S> <C> <C>
December 31, 1996 ...... $65.38 $58.63
September 30, 1996 ...... 70.25 59.75
June 30, 1996 ............ 71.25 55.63
March 31, 1996 ......... 56.63 51.25
December 31, 1995 ...... $53.75 $38.63
September 30, 1995 ...... 41.00 36.00
June 30, 1995 ............ 37.88 29.50
March 31, 1995 ......... 31.13 25.38
</TABLE>
As of March 3, 1997, the approximate number of registered shareholders was
1,092.
34
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
Sales, net earnings and net cash provided by operating activities have
improved significantly over the past two years. Significant capital
expenditures, which reduced manufacturing costs and improved customer service
levels, coupled with improving economic conditions in certain markets
contributed to these increases. Increased sales of aerospace fasteners has
resulted in the most significant improvement to operating results compared to
last year. In 1996, the Company completed acquisitions which strengthened its
existing businesses, consolidated certain manufacturing operations to reduce
cost, downsized and simplified its management structure and negotiated a new
long term debt agreement to take advantage of favorable financing.
1996 Compared to 1995
Net Sales
Fastener segment sales increased $61.1 million, or 22.3 percent, in 1996.
The segment's aerospace fasteners sales increased $35.6 million, or 27.7
percent, to $163.9 million due to the improving demand for new commercial
aircraft orders. Based on commercial aircraft production projections by the
major aircraft manufacturers, the Company expects this trend of improving demand
for aerospace fasteners to continue into 1997 and 1998. The Company has invested
and will continue to invest in infrastructure to increase capacity and support
this projected expansion.
Sales by Metalac S.A. Industria e Comercio (Metalac) in Brazil (acquired on
August 16, 1995) Unbrako K.K. in Japan (acquired on June 30, 1995) and Shanghai
SPS Biao Wu Fasteners Co. Ltd. (SSBW) in China (a joint venture formed on
January 1, 1996) increased fastener segment sales and sales sourced from other
areas, as presented in the geographic area information in Note 19 to the
financial statements, by $32.5 million in 1996. Excluding the sales from these
businesses, the Company's industrial fastener sales increased $1.1 million, or
1.6 percent, while the Unbrako fastener sales decreased $8.6 million, or 14.6
percent. The decline in Unbrako sales is due to a number of factors, including
inventory reduction programs by distributors; competitive pricing conditions;
and weak demand in European markets.
Excluding the $17.9 million of sales from the two magnetic materials
businesses acquired in 1996 (Flexmag Industries, Inc. and Swift Levick Magnets,
Ltd.), materials segment sales decreased by $3.0 million, or 2.2 percent. Sales
of magnetic materials which decreased by $7.2 million, or 9.8 percent, were
adversely affected by a significant decline in orders from personal computer,
telecommunications and electronics equipment customers. Sales of superalloys
increased $4.2 million, or 6.9 percent, as demand increased from the aerospace,
land-based turbine and medical markets. Capital expenditures planned for 1997
are intended to increase superalloy vacuum melt production capacity to further
participate in the expanding aerospace and land-based turbine markets. Excluding
the sales of Swift Levick Magnets, Ltd., all materials segment sales are sourced
from the United States and are classified as such in the geographic area
information presented in Note 19 to the financial statements.
Operating Earnings
Operating earnings of the fasteners segment improved from $16.7 million, or
6.1 percent of sales, in 1995, to $27.0 million, or 8.1 percent of sales in
1996. The improvement in earnings is primarily the result of increased sales of
aerospace fasteners and cost reductions attributed to the Company's investment
in new state-of-the-art computer controlled machine tools. By reducing costs and
better servicing customers, the Company's Cleveland, Ohio plant increased its
operating profit despite a $5.2 million net decrease in sales of its industrial
and Unbrako fasteners.
In response to the decline in industrial and Unbrako fastener sales in the
European and Brazilian markets, the Company consolidated its manufacturing
operations in Shannon, Ireland; Coventry, England and Sorocaba,
Brazil in 1996. The Company also consolidated management responsibilities in
Jenkintown, Pennsylvania. As a result, the Company recorded a pre-tax charge for
the cost of employee separations of $3.6 million which has been included in
selling, general and administrative expense. For segment reporting, $2.7 million
reduced the Fastener Group operating earnings and $900 thousand increased
unallocated corporate costs. These actions, which reduced total employment by 70
employees are expected to lower future operating and administrative costs by
approximately $3.6 million per year.
Excluding the operating earnings of the two magnetic material businesses
acquired in 1996, the operating earn-
35
<PAGE>
ings of the Materials Group increased from $17.1 million, or 12.6 percent of
sales, in 1995 to $17.3 million, or 12.9 percent of sales, in 1996. This
increase in earnings is attributed to a higher volume of superalloy sales,
partially offset by the decrease in magnetic material sales as described above.
United States operating earnings improved from $18.0 million in 1995 to
$31.1 million in 1996. This increase is attributed to higher sales volume of
domestic aerospace fasteners, improved operating performance by the Cleveland,
Ohio plant and the acquisition of Flexmag Industries, Inc. European operating
earnings increased from $5.2 million in 1995 to $5.9 million in 1996. This
increase is attributed to higher sales volume of European aerospace fasteners
and the acquisition of Swift Levick Magnets, Ltd. Partially offsetting this
increase was the cost of employee separations at the Shannon, Ireland and
Coventry, England manufacturing plants discussed earlier.
Other Expenses
Interest expense increased from $6.5 million in 1995 to $8.0 million in
1996. Higher levels of debt increased interest expense by approximately $1.9
million, while lower interest rates reduced interest expense by $400 thousand.
Income from the equity in earnings of affiliates decreased from $1.7 million in
1995 to $853 thousand in 1996. As discussed in Note 2 to the financial
statements, the Company increased its ownership interest in Metalac and Unbrako
K.K. in August and June of 1995, respectively. Prior to these acquisitions, the
Company accounted for its investment in these companies using the equity method.
Orders and Backlog
Incoming orders in 1996 were $508.6 million compared to $446.6 million in
1995, a 13.9 percent increase. Increased orders by the Aerospace Products
Division ($33.2 million) and incoming orders from acquisitions, including
Metalac, Flexmag and Swift Levick ($37.5 million) accounted for the majority of
the increase. Partially offsetting these increases was a decrease in orders
received for Unbrako Products manufactured in North America and Europe ($13.1
million) and lower orders for magnetic materials manufactured by the Arnold
Engineering Company ($13.8 million). The backlog in orders at December 31, 1996
was $181.0 million, compared to $136.5 million at the end of 1995 and $98.5
million at December 31, 1994.
Environmental
The Company has been identified as a potentially responsible party by
various federal and state authorities for clean up or removal of waste from
various disposal sites. The cost of remediation will depend upon numerous
factors, including the number of parties found liable at each environmental site
and their ability to pay, the outcome of negotiations with regulatory
authorities, and the years of remedial activity required.
At December 31, 1996, the accrued liability for environmental remediation
represents management's best estimate of the probable and reasonably estimable
costs related to environmental remediation. The measurement of the liability is
evaluated quarterly based on currently available information.
Acquisitions
In 1996, the Company increased its investment in the magnetic materials
business of its materials segment by acquiring certain businesses combined with
the Company's subsidiary, The Arnold Engineering Co. (Arnold), a leading
manufacturer of magnetic materials and components. As discussed in Note 2 to the
financial statements, the Company acquired all of the outstanding shares of
Flexmag Industries, Inc. (Flexmag), a manufacturer of flexible bonded magnets,
located in Marietta, Ohio and the assets of a related injection molded magnetics
business located in Seneca, South Carolina, for $21.3 million on June 14, 1996.
In 1996, these businesses had sales of approximately $19.5 million. This
acquisition will further expand Arnold's product lines into markets that the
Company believes have attractive growth potential. The injection molded
magnetics business has been consolidated with Arnold's existing manufacturing
operation in Norfolk, Nebraska. As discussed in Note 2 to the financial
statements, the Company acquired all of the outstanding shares of Swift Levick
Magnets Ltd. (Swift Levick), located in Derbyshire, England for $18.5 million on
July 3, 1996. Swift Levick is a European manufacturer of permanent magnets with
1996 sales of approximately $19.1 million. This acquisition has enabled Arnold
to merge certain manufacturing operations, expand its permanent magnet technical
base and provide it with an opportunity to expand sales into European markets.
As discussed in Note 2 to the financial statements, on October 8, 1996 the
Company acquired 85 percent of the
36
<PAGE>
capital stock of Mecair Aerospace Industries, Inc. (Mecair), a manufacturer of
aerospace fasteners, located in Pointe-Claire (Montreal), Quebec, Canada. Mecair
is a manufacturer of high strength fasteners and precision components for
commercial and military aircraft and for land-based power generation systems
with 1996 sales of approximately $6.4 million. The acquisition of Mecair is part
of the Company's efforts to increase aerospace fastener capacity.
1995 Compared to 1994
Net Sales
Fastener segment sales increased by $34.0 million, or 14.2 percent, as
sales increased in all served markets. The Company's aerospace fastener sales
were up $15.9 million, or 14.2 percent, to $128.3 million in 1995 due to
increased sales of fasteners to the maintenance and retrofit markets. Industrial
and Unbrako fastener sales increased $18.1 million, or 14.2 percent in 1995,
included in this increase is $9.8 million of sales by Metalac and Unbrako K.K.
which are included in the 1995 results of operations from their dates of
acquisition. The remaining increase is due primarily to increased sales of
automotive and Unbrako fasteners in the European market. Sales of automotive and
Unbrako products in the North American market were level with 1994.
Materials segment sales increased by $26.9 million, or 24.6 percent, as
sales of magnetic materials and superalloys increased from the prior year.
Demand was very strong for magnetic materials such as bonded magnets, rare earth
magnets and molybdenum permalloy powder cores sold to the automotive,
telecommunications and personal computer markets. Demand for these products
softened at the end of 1995. Stainless steel alloy sales to the air melt
investment casting market increased significantly from 1994. Sales of vacuum
melt alloy products manufactured for aerospace applications improved in the
second half of 1995.
Operating Earnings
The operating earnings of the fastener segment improved significantly from
$2.4 million, or 1 percent of sales, in 1994, to $16.7 million, or 6 percent of
sales in 1995. Excluding the net unusual charge in 1994, operating earnings
increased by $10.8 million or 183 percent. The improvement in earnings is
attributed to increased sales of fastener products and cost reductions
attributed to the Company's investment in new state-of-the-art computer
controlled machine tools. New manufacturing equipment and expanded employee
training programs at the Company's Cleveland, Ohio plant resulted in a
significant improvement in its operating earnings compared to its poor
performance in 1994. Despite an increase in European automotive fastener sales,
the Company's facility in Coventry, England, incurred an operating loss in 1995
due to inefficiencies in manufacturing and the need to replace older equipment.
The Company restructured the management organization at the Coventry facility
and started a multi-year equipment modernization program.
In the materials segment, operating earnings increased from $13.4 million
or 12.3 percent of sales in 1994, to $17.1 million or 12.6 percent of sales in
1995. The increase in earnings is attributed to higher sales volume and improved
manufacturing efficiencies. Advances made in magnetic and superalloy technology
and investments in new state-of-the-art equipment reduced manufacturing cost and
improved delivery time in the materials segment.
Excluding the $3.1 million restructuring credit in 1994, United States
operating earnings improved from $646 thousand in 1994 to $18.0 million in 1995.
The increase in earnings is attributed to higher sales volume of domestic
aerospace fasteners, significant improvement in the operating performance of the
Cleveland, Ohio plant and improved results of the materials segment. Excluding
the $6.6 million loss on disposal of the Spanish subsidiary in 1994, European
operating earnings decreased from $8.7 million in 1994 to $5.2 million in 1995.
The decrease in earnings is attributed to the 1995 operating loss of the
Coventry facility and lower margins on incremental sales into certain markets
intended to improve market share.
Other Expenses
Interest expense decreased from $6.9 million in 1994 to $6.5 million in
1995. Lower levels of debt decreased interest expense by approximately $1.2
million, but higher interest rates caused interest expense to increase by $800
thousand. The unfavorable change in other income of $3.4 million is attributed
primarily to the loss on the disposal of fixed assets of $541 thousand in 1995,
compared to the gain of $3.4 million in 1994. Certain machinery
37
<PAGE>
and equipment that was replaced with more modern equipment was sold or written
off in 1995. In 1994, the Company sold its former corporate headquarters in
Newtown, Pennsylvania and the Company's aircraft. The sale of these assets
resulted in gains totaling $3.3 million.
Net Earnings
The Company recorded net earnings for 1995 of $14.9 million, or $2.50 per
share, compared to $3.2 million, or $.62 per share, in 1994. Excluding the 1994
net restructuring charge, net earnings for 1994 were $6.7 million, or $1.31 per
share.
Liquidity and Capital Resources
Management considers liquidity to be the ability to generate adequate
amounts of cash to meet its needs and capital resources to be the resources from
which such cash can be obtained, principally from operating and external
sources. The Company believes that capital resources available to it will be
sufficient to meet the needs of its business, both on a short-term and long-term
basis.
Cash flow provided by or used in operating activities, investing activities
and financing activities is summarized in the statements of consolidated cash
flows. Net cash provided by operating activities increased by $23.3 million in
1996 compared to 1995 due primarily to the $7.4 million improvement in net
earnings and the $13.4 million improvement in changes in working capital.
Partially offsetting these increases was the $4.8 million received in 1995 from
the surrender of corporate-owned life insurance policies. The 1996 acquisitions
of SSBW, Flexmag, Swift Levick and Mecair contributed to higher levels of
working capital as of December 31, 1996.
The increase in cash used in investing activities is attributed to 1996
payments for Flexmag ($21.3 million), Swift Levick ($10.4 million) and Mecair
($5.6 million) compared to 1995 payments for the Elastic Stop Nut Division of
Harvard Industries, Inc. ($6.2 million) and the Company's increase in ownership
interest in Unbrako K.K. ($1 million) and Metalac ($4 million). 1994 investing
activities include proceeds from the sale of the Newtown facility ($10 million),
sale of the Company's aircraft ($1.1 million) and the sale of the Assembly
Systems Division ($2.1 million). The Company spent $28.2 million for capital
expenditures in 1996 and is budgeting $35 million for 1997. This level of
capital expenditures is required to increase manufacturing capacity for
aerospace fasteners and superalloy and magnetic materials and to replace old and
outdated equipment in the Industrial and Unbrako manufacturing operations.
In December 1994, the Company sold 512,561 shares of common stock
previously held in the Company's treasury at a price of $24.50 per share through
a rights offering to its existing shareholders. Proceeds, net of related
expenses, from this rights offering of $12.2 million were used to reduce debt
under the Bank Credit Agreement and for other general corporate purposes.
The Company's total debt to equity ratio was 65 percent at December 31,
1996, 44 percent at December 31, 1995 and 52 percent at December 31, 1994. Total
debt was $115.3 million at December 31, 1996 compared to $64.7 million at the
end of 1995 and 1994. As of December 31, 1996, under the terms of the existing
credit agreements, the Company is permitted to incur an additional $33 million
in debt. In 1996, the Company completed a new long term Note Purchase Agreement
in the amount of $85 million at an average fixed rate of 7.83 percent and an
average maturity of 11 years. Proceeds were used to reduce certain bank
borrowings and existing long term debt and to fund recent acquisitions.
Additional details of the new long term Note Purchase Agreement, the credit
agreements with commercial banks and the industrial bonds are provided in Note
10 to the financial statements.
As discussed in Note 19 to the financial statements, the Company is a
multinational corporation with operations in many countries. The largest portion
of the Company's foreign operations are in countries with stable currencies
namely, England and Ireland. However, the Company acquired a controlling
interest in a Brazilian subsidiary in 1995 and commenced a Chinese joint venture
in 1996. As the Company expands into Brazil, China and other foreign countries,
it is increasing its exposure to foreign currency fluctuations. Fluctuations in
foreign currency exchange rates affect the Company's financial position and
results of operations. As discussed in Note 17 to the financial statements, the
Company uses forward exchange contracts to minimize exposure and reduce risk
from exchange rate fluctuations affecting the results of operations. There are
presently no significant restrictions on the remittance of funds generated by
the Company's non-United States operations.
38
<PAGE>
EXHIBIT 21
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1996, the Company or one of its wholly-owned subsidiaries had,
among others, the following subsidiaries:
The Arnold Engineering Co
(an Illinois corporation) ..........................100% stock interest
Cannon-Muskegon Corporation
(a Michigan corporation)............................100% stock interest
Flexmag Industries, Inc.
(an Ohio corporation)...............................100% stock interest
Mecair Aerospace Industries, Inc.
(a Canadian corporation).............................85% stock interest
Metalac S.A. Industria e Comercio
(a Brazilian corporation)............................95% stock interest
(99.6 % voting, 91.4% non-voting)
National-Arnold Magnetics Company
(a California partnership).....................50% partnership interest
Precision Fasteners Limited
(an Indian corporation)...........................22.05% stock interest
SPS International Investment Company
(a Delaware corporation)............................100% stock interest
S.P.S. International Limited
(an Irish corporation)..............................100% stock interest
SPS Technologies Limited
(a United Kingdom corporation)......................100% stock interest
Standco Canada, Ltd.
(a Canadian corporation)............................100% stock interest
Swift Levick Magnets, Ltd.
(a United Kingdom corporation)......................100% stock interest
Unbrako K.K.
(a Japanese corporation)............................100% stock interest
Unbrako Mexicana, S.A. de C.V.
(a Mexican corporation).............................100% stock interest
Unbrako Pty. Limited
(an Australian corporation).........................100% stock interest
<PAGE>
The Company files consolidated financial statements which include the above
subsidiaries, except for Precision Fasteners Limited and National-Arnold
Magnetics Company, as well as subsidiaries which have been omitted from the
above list; all such omitted subsidiaries considered in the aggregate as a
single subsidiary do not constitute a "significant subsidiary" as defined in
Rule 1-02(w) of Regulation S-X under the Securities Exchange Act, as amended.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
SPS Technologies, Inc. and Subsidiaries on Form S-8 (Registration No. 33-23778)
and Post Effective Amendments to the Registration on Form S-8 (Registration Nos.
2-64082, 2-90908) of our report dated February 4, 1997, on our audits of the
consolidated financial statements and financial statement schedule of SPS
Technologies, Inc. and Subsidiaries as of December 31, 1996 and 1995, and for
the years ended December 31, 1996, 1995 and 1994, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,310
<SECURITIES> 0
<RECEIVABLES> 75,210
<ALLOWANCES> 1,668
<INVENTORY> 99,778
<CURRENT-ASSETS> 231,776
<PP&E> 276,062
<DEPRECIATION> 127,446
<TOTAL-ASSETS> 428,000
<CURRENT-LIABILITIES> 105,457
<BONDS> 98,838
0
0
<COMMON> 6,646
<OTHER-SE> 170,950
<TOTAL-LIABILITY-AND-EQUITY> 428,000
<SALES> 485,903
<TOTAL-REVENUES> 485,903
<CGS> 386,403
<TOTAL-COSTS> 386,403
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,989
<INCOME-PRETAX> 31,050
<INCOME-TAX> 8,750
<INCOME-CONTINUING> 22,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,300
<EPS-PRIMARY> 3.54
<EPS-DILUTED> 3.54
</TABLE>