<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, 1998 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
Jenkintown, Pennsylvania 19046
(Address of principal executive offices) (Zip Code)
(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 $0.50 on Which Registered
Per Share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 9, 1999, was approximately $489,057,000.
The number of shares of registrant's common stock outstanding on March 9,
1999 was 12,687,070.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 13, which contains portions of the 1998 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, 1998, 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.
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I
Item 1. BUSINESS
SPS Technologies, Inc. and subsidiaries (the "Company") was incorporated
in Pennsylvania in 1903. The Company is engaged in the design, manufacture and
marketing of fasteners, specialty materials, magnetic materials, aerospace
structures and precision tools. The Company is multinational in operation. In
addition to 18 manufacturing plants in the United States, it operates 15
manufacturing facilities in five different countries: England, Ireland, Canada,
Brazil and Australia. The Company also has a 55% interest in a manufacturing
operation in China and a minority interest in a manufacturing operation in
India. Marketing operations are carried on by subsidiaries in five other
countries.
In 1998, the Company's sales and net earnings continued to increase. The
improvement in operating results was primarily the result of increased sales of
aerospace fasteners and specialty materials and the inclusion of the operating
results of the businesses acquired during the past three years. The Company's
businesses continued to develop and expand through its capital expenditure and
"bolt on" acquisition programs. In 1998, the Company acquired the Chevron
Aerospace Group, which marks the Company's expansion into the production of
aerospace structural components. The Company also initiated further downsizing
of its automotive fastener manufacturing operation in Coventry, England.
Additional information regarding the general development of business operations
in 1998 is provided in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Company is organized as seven business groups that have been
aggregated into four reportable segments for financial reporting purposes. The
four reportable segments are: Fasteners, Specialty Materials and Alloys,
Magnetic Materials and Other. The Fasteners segment consists of three business
groups which produce fasteners for the aerospace, automotive and industrial
machinery markets. 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, FLEXLOC(R) all-metal locknuts, Greer Stop
Nuts(TM), SPS micro screws and SPS Non-Ferrous nuts and bolts, and engineered
fasteners and precision components for gasoline and diesel engines, other
critical and non-critical automotive applications, and off-highway equipment.
The Specialty Materials and Alloys (SMA) segment produces specialty metals,
melting services, superalloys and ceramic cores for the manufacture of
components for aerospace, industrial gas turbine, medical and general
engineering applications. Principal SMA products are air and vacuum-melted iron,
cobalt, and nickel-based superalloys, including CMSX(R) single-crystal alloys.
The Magnetic Materials segment produces magnetic materials and products for the
automotive, aerospace, reprographic, computer security and advertising specialty
markets. Principal magnetic materials products are metallic and ceramic
permanent magnets, wound and pressed powder magnetic components, bonded
magnetics, magnetic components and assemblies and magnetic ultra-thin foil and
strip products. The Other segment consists of two business groups which produce
structural assemblies for the aerospace market and precision consumable tools
used for metal forming and cutting. Principal products of the Other segment are
precision machined components, sheetmetal fabrications, avionic assemblies and
HI-LIFE(R) thread roll dies and other metalworking tools.
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 the
methods of distribution during 1998.
The principal sources of raw materials 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 four 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), PLASTIFORM(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 CM 247
2
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LC 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.
No material portion of the Company's business in any segment is seasonal.
No material part of the Company's business is dependent upon a single
customer. In 1998, the five largest customers accounted for 16% of the Company's
reported consolidated sales.
The backlog of orders at December 31, which represents firm orders with
scheduled delivery within the next twelve months was as follows (in thousands of
dollars):
1998 1997
-------- --------
Fasteners segment $186,771 $192,703
Specialty Materials and Alloys segment 28,444 20,773
Magnetic Materials segment 29,259 33,795
Other 51,643 3,866
-------- --------
Total $296,117 $251,137
======== ========
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.
Total expenditures during 1998, 1997 and 1996 for Company-sponsored
research and development were $5.3 million, $5.3 million and $5.6 million,
respectively. In 1998, approximately 61% of the expenditures were for the
Company's Fasteners segment.
Capital expenditures for property, plant and equipment are planned at
$38.0 million in 1999, excluding capital spending for businesses acquired in
1999.
There were approximately 3,683 persons employed in the Fasteners segment,
440 persons employed in the Specialty Materials and Alloys segment, 916 persons
employed in the Magnetic Materials segment and 944 persons employed in the Other
segment at December 31, 1998.
Additional narrative information and the financial information concerning
industry segments and the foreign and domestic operations are included in Note
18 to the Company's Consolidated Financial Statements on pages 45 and 46 in the
1998 Annual Report to Shareholders. Exhibit 13.1 contains the information and is
incorporated herein by reference.
3
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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 663,000(a)
Cleveland, Ohio 365,000(a)
Sorocaba, Brazil 339,000(a)
Santa Ana, California 305,000(a)(e)
Coventry, England 224,000(a)(f)
Smethwick, England 137,000(a)
Leicester, England 109,000(a)
Salt Lake City, Utah 86,000(a)
Waterford, Michigan 75,000(a)
Melbourne, Australia 44,000(a)
Transfer, Pennsylvania 245,000(b)
Muskegon, Michigan 130,000(b)
Marengo, Illinois 356,000(c)
Norfolk, Nebraska 112,000(c)
Marietta, Ohio 78,000(c)
Sevierville, Tennessee 65,000(c)
Derbyshire, England 44,000(c)
Ogallala, Nebraska 22,000(c)
Mansfield, England 26,000(d)
Nuneaton, England 9,400(d)
Leased Lease Expires Square Feet
------ ------------- -----------
Shannon, Ireland (g)(h) 157,000(a)
Nashville, Tennessee (i) 99,000(a)
Las Vegas, Nevada (j) 60,000(a)
Leicester, England (k) 38,000(a)
Pointe-Claire, Quebec, Canada (l) 35,000(a)
Wickliffe, Ohio (m)(n) 76,000(b)
Rochester, New York (o) 70,000(c)
Adelanto, California (p) 45,000(c)
Rochester, England (q) 12,000(c)
Shannon, Ireland (r)(s) 123,000(d)
Essex, England (t) 80,000(d)
Howell, Michigan (u) 44,000(d)
Nottingham, England (v) 42,000(d)
4
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- --------------------
(a) Fasteners segment.
(b) Specialty Materials and Alloys segment.
(c) Magnetic Materials segment.
(d) Other segment.
(e) Approximately 70,000 square feet used for manufacturing purposes, with
remaining 235,000 square feet sub-leased.
(f) Approximately 211,000 square feet used for manufacturing purposes, with
remaining 13,000 square feet sub-leased.
(g) Lease for 100,000 square feet expires November 13, 2010.
(h) Lease for 57,000 square feet expires April 1, 2004.
(i) Lease for 99,000 square feet expires August 14, 2002.
(j) Lease for 60,000 square feet expires February 28, 1999.
(k) Lease for 38,000 square feet expires January 12, 2002.
(l) Lease for 35,000 square feet expires October 31, 2002.
(m) Lease for 38,000 square feet expires May 1, 2009.
(n) Lease for 38,000 square feet expires July 1, 2010.
(o) Lease for 70,000 square feet expires October 31, 2006.
(p) Lease for 45,000 square feet expires January 1, 2005.
(q) Lease for 12,000 square feet expires June 24, 2007.
(r) Lease for 75,000 square feet expires November 15, 2010.
(s) Lease for 48,000 square feet expires January 1, 2112.
(t) Lease for 80,000 square feet expires July 8, 2012.
(u) Lease for 44,000 square feet expires June 30, 2003.
(v) Leases for 42,000 square feet with various expirations. Primary lease
expires December 24, 2001.
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 10 to the Company's
Consolidated Financial Statements on page 36 and 37 in the 1998 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 1998, through the solicitations of proxies or otherwise.
5
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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
their present position is indicated. No officer listed was appointed as a result
of any arrangement between them 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.
Name Experience and Position Held Age
- ---- ---------------------------- ---
Charles W. Grigg Chairman, Chief Executive Officer 59
and President since April 1997.
Previously, Chairman and
Chief Executive Officer since
December 1993. Previously,
President and Chief Operating Officer,
Watts Industries, Inc. since 1986.
James D. Dee Vice President, General Counsel 41
and Secretary since April 1997.
Previously, Vice President, Environmental
and Legal Affairs since February 1996.
Previously, Assistant Counsel and
Patent Counsel since 1988.
John M. Morrash Vice President, Treasurer and Assistant 44
Secretary since July 1995. Previously,
Treasurer since February 1988.
William M. Shockley Vice President, Chief Financial Officer 37
since October 1998. Previously, Vice
President, Chief Financial Officer and
Controller since July 1995. Previously,
Corporate Controller since September 1992.
Margaret B. Zminda Controller since October 1998. Previously, 40
Aerospace Fasteners Group Controller since
September 1993.
6
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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, 1999 is included under
the caption entitled "Common Stock Information" on page 48 in the 1998 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 48 in the 1998 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 49 through 55 in the 1998 Annual Report to
Shareholders. Exhibit 13.5 contains this information and is incorporated herein
by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's quantitative and qualitative information about market risk
is included in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 49 through 55 in the
1998 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
27 through 46 and page 48, respectively, in the 1998 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, 1998. 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 6).
7
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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, 1998. To the extent not so filed, such information will be
provided on a Form 10-K/A filed with the SEC.
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, 1998. 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 27
through 46 of the 1998 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 12 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 12
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:
3a Articles of Incorporation as amended. Exhibit 3a to the Annual
Report on Form 10-K for the year ended December 31, 1997, is
hereby incorporated by reference.
3b By-Laws as amended, effective April 29, 1998. Exhibit 3 to the
Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, is hereby incorporated by reference.
4a Rights Agreement, effective November 21, 1998. Exhibit 1 to
the Form 8-A filed November 18, 1998, is hereby incorporated
by reference.
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.
8
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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.
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.
10s SPS Technologies, Inc. Executive Deferred Compensation Plan
III, effective January 1, 1998.
9
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13.1 1998 Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Report of Independent Accountants.
13.2 Summary of Quarterly Results for 1998 and 1997.
13.3 Selected Financial Data for 1994 through 1998.
13.4 Common Stock Information for 1998 and 1997.
13.5 1998 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.
(b) Reports on Form 8-K filed during the last quarter of 1998:
None.
10
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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
Date: March 22, 1999
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 22, 1999
- ------------------------------ Officer, President and Director
Charles W. Grigg (Principal Executive Officer)
/s/WILLIAM M. SHOCKLEY Vice President, March 22, 1999
- ------------------------------- Chief Financial Officer
William M. Shockley (Principal Financial Officer)
/s/HOWARD T. HALLOWELL III Director March 22, 1999
- -------------------------------
Howard T. Hallowell, III
/s/JAMES F. O'CONNOR Director March 22, 1999
- -------------------------------
James F.O'Connor
/s/ERIC M. RUTTENBERG Director March 22, 1999
- -------------------------------
Eric M. Ruttenberg
/s/HARRY J. WILKINSON Director March 22, 1999
- -------------------------------
Harry J. Wilkinson
</TABLE>
11
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REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
SPS Technologies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 8, present fairly, in all material
respects, the financial position of SPS Technologies, Inc. and subsidiaries at
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 8, presents fairly, in all material respects, the
information set forth therein, when read in conjunction with the related
consolidated financial statements. 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, based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 2, 1999
SCHEDULE II
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
(Thousands of dollars)
<TABLE>
<CAPTION>
Additions Additions
charged charged
(deductions (deductions
Balance at credited) credited) Balance at
beginning to costs and to other end of
Description of year expenses accounts Deductions year
- ----------- ---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
$ (9) (b)
Allowance for doubtful accounts .... $ 2,027 $ 990 324 (c) $(372) (a) $2,960
======= ======= ======= ===== ======
Deferred income tax valuation
allowance ........................ $ 7,291 $ 752 $ $ $8,043
======= ======= ======= ===== ======
Year ended December 31, 1997:
$ (28) (b)
Allowance for doubtful accounts .... $ 1,668 $ 407 263 (c) $(283) (a) $2,027
======= ======= ======= ===== ======
Deferred income tax valuation
allowance ........................ $ 8,857 $ 150 $(1,716) (d) $7,291
======= ======= ======= ===== ======
Year ended December 31, 1996:
$ 26 (b)
Allowance for doubtful accounts .... $ 1,292 $ 189 186 (c) $ (25) (a) $1,668
======= ======= ======= ===== ======
Deferred income tax valuation
allowance ........................ $10,349 $(2,417) $ 925 (c) $ $8,857
======= ======= ======= ===== ======
</TABLE>
(a) Write off of uncollectible receivables, net of recoveries
(b) Translation adjustments
(c) Balance acquired in connection with acquisitions
(d) Release of valuation allowances related to prior year business acquisitions
and credited to goodwill, net of balances acquired with 1997 business
acquisitions.
12
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EXHIBIT INDEX
3a Articles of Incorporation as amended. Exhibit 3a to the Annual Report on
Form 10-K for the year ended December 31, 1997, 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 September 30, 1998, is hereby
incorporated by reference.
4a Rights Agreement, effective November 21, 1998. Exhibit 1 to the Form 8-A
filed November 18, 1998, is hereby incorporated by reference.
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.
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.
<PAGE>
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.
10s SPS Technologies, Inc. Executive Deferred Compensation Plan III, effective
January 1, 1998.
13.1 1998 Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Report of Independent Accountants.
13.2 Summary of Quarterly Results for 1998 and 1997.
13.3 Selected Financial Data for 1994 through 1998.
13.4 Common Stock Information for 1998 and 1997.
13.5 1998 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>
SPS TECHNOLOGIES, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
EFFECTIVE DATE JANUARY 1, 1998
<PAGE>
SPS TECHNOLOGIES, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
EFFECTIVE DATE JANUARY 1, 1998
PAGE
ARTICLE I - PURPOSE.................................. 1
ARTICLE II - DEFINITIONS
2.1 "Account".................................... 2
2.2 "Annual Deferral Amount"..................... 2
2.3 "Beneficiary"................................ 2
2.4 "Board"...................................... 2
2.5 "Change of Control"........................... 2
2.6 "Committee".................................. 4
2.7 "Company".................................... 4
2.8 "Compensation"............................... 4
2.9 "Deferral Periods"........................... 4
2.10 "Determination Date"......................... 5
2.11 "Employee"................................... 5
2.12 "Employer"................................... 5
2.13 "Exchange Act"............................... 5
2.14 "Interest"................................... 5
2.15 "Participant"................................ 5
2.16 "Participation Agreement".................... 5
2.17 "Participating Subsidiary"................... 5
2.18 "Plan"....................................... 5
2.19 "Plan Benefit"............................... 5
2.20 "Plan Year".................................. 5
2.21 "Severance of Employment".................... 5
2.22 "SPS"........................................ 5
2.23 "Unforeseeable Emergency".................... 5
ARTICLE III - PARTICIPATION AND DEFERRAL COMMITMENTS
3.1 Eligibility and Participation.............. 7
3.2 Form of Deferral; Maximum Deferral.......... 7
3.3 Modification of Annual Deferral Amounts..... 7
ARTICLE IV - DEFERRED COMPENSATION ACCOUNTS
4.1 Deferral of Compensation..................... 8
4.2 Determination of Accounts.................... 8
4.3 Statement of Accounts........................ 8
<PAGE>
ARTICLE V - PLAN BENEFITS
5.1 Form of Benefit Payment...................... 9
5.2 Death Benefit................................ 9
5.3 Pre-2008 Withdrawals..................... 9
5.4 Withholding; Payroll Taxes................... 10
5.5 Commencement of Payments..................... 10
5.6 Full Payment of Benefits..................... 10
5.7 Payment to Guardian.......................... 10
5.8 Responsibilities for Payment................. 10
5.9 Acceleration of Plan Benefits................. 11
ARTICLE VI - BENEFICIARY DESIGNATION
6.1 Beneficiary Designation...................... 12
6.2 Amendments................................... 12
6.3 No Beneficiary Designation................... 12
6.4 Death of Beneficiary......................... 12
ARTICLE VII - ADMINISTRATION
7.1 Designation of Committee..................... 13
7.2 Duties of Committee.......................... 13
7.3 Agents....................................... 13
7.4 Binding Effect of Decisions.................. 13
7.5 Indemnity of Committee....................... 13
ARTICLE VIII - CLAIMS PROCEDURE
8.1 Claim........................................ 14
8.2 Denial of Claim.............................. 14
8.3 Review of Claim.............................. 14
8.4 Final Decision............................... 14
8.5 Enforcement; No Set-off...................... 14
ARTICLE IX - AMENDMENT AND TERMINATION
9.1 Amendment................................... 16
9.2 Right to Terminate.......................... 16
9.3 Change of Control........................... 16
<PAGE>
ARTICLE X - MISCELLANEOUS
10.1 No Funding.................................. 17
10.2 Insurance................................... 17
10.3 Conflicting Provisions...................... 17
10.4 Nonassignability............................ 17
10.5 Not a Contract of Employment................ 18
10.6 Protective Provisions....................... 18
10.7 Terms....................................... 18
10.8 Captions.................................... 18
10.9 Governing Law............................... 18
10.10 Validity.................................... 18
10.11 Notice...................................... 18
10.12 Successors.................................. 18
<PAGE>
SPS TECHNOLOGIES, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
ARTICLE I
PURPOSE
-------
The purpose of this Executive Deferred Compensation Plan is to provide current
tax planning opportunities as well as supplemental funds upon retirement or
death for key management employees (and their beneficiaries) of SPS
Technologies, Inc. and certain of its subsidiaries which elect to participate in
the Plan. It is intended that the Plan will aid in attracting and retaining
employees of exceptional ability by providing such individuals with these
benefits.
<PAGE>
ARTICLE II
DEFINITIONS
-----------
For the purposes of this Plan, the following words and phrases shall have the
meanings indicated, unless the context clearly indicates otherwise.
2.1 "Account" means the recordkeeping account maintained by the Employer
pursuant to Article IV which represents the aggregate Annual Deferral Amounts
and Interest credited thereon with respect to a Participant.
2.2 "Annual Deferral Amount" means, with respect to any Participant, the total
dollar amount to be deferred by a Participant during any one of the Deferral
Periods pursuant to the Participant's Participation Agreement.
2.3 "Beneficiary" means the person, persons or entity designated by the
Participant, or as provided in Article VI, to receive any Plan Benefit payable
after a Participant's death.
2.4 "Board" means the Board of Directors of SPS.
2.5 A "Change of Control" shall be deemed to have taken place if (i) any Person
(except the Company, any Subsidiary of the Company, any employee benefit plan of
the Company or of any Subsidiary of the Company, any person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
employee benefit plan, or an Exempted Person), together with all Affiliates and
Associates of such Person, shall become the Beneficial Owner in the aggregate of
twenty percent (20%) or more of the Common Stock of the Company then
outstanding, (ii) an Exempted Person, together with all Affiliates and
Associates of such Person, shall become the Beneficial Owner in the aggregate of
thirty percent (30%) or more of the Common Stock of the Company, or (iii) during
any thirty-six (36) month period, (A) individuals who were directors at the
beginning such period (the "Initial Directors") cease for any reason to
constitute a majority of the Board, unless (B) the Initial Directors, plus other
directors who became directors subsequent to the beginning of the thirty-six
(36) month period and whose election and nominations for election by the
Company's shareholders was on each such occasion during the thirty-six (36)
month period approved by a vote of at least two-thirds (2/3) of the Initial
Directors then in office, constitute a majority of the Board. If a Person as
described in either of subsections (i) or aggregating the amounts described in
either of subsections (i) or (ii) above, as soon as practicable divests (without
exercising or retaining any power, including voting, with respect to such
shares) a sufficient amount of such shares so as to hold less than the amounts
described therein, after notice by the Company that such Person or Exempted
Person, as appropriate, will be deemed by the Company to have caused a Change of
Control unless such divestiture is made, then, despite the provisions of
subsections (i) and (ii) as applicable, a Change of Control shall not be deemed
to have taken place.
<PAGE>
For the purposes of this Section 2.5:
(a) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule l2b-2 of the General Rules and Regulations under the
Exchange Act.
(b) A Person shall be deemed the "Beneficial Owner" of any securities:
(i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of warrants, options, conversion rights, exchange rights or otherwise;
provided, however, that a Person shall not be deemed the "Beneficial Owners" of
securities tendered pursuant to a tender or exchange offer made by such Person
or any of such Person's Affiliates or Associates until such tendered securities
are accepted for payment, purchase or exchange;
(ii) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule l3d-3 of the General
Rules and Regulations under the Exchange Act), including without limitation
pursuant to any agreement, arrangement provided, however , that a Person shall
not be deemed the "Beneficial Owner" of any security under this subsection (ii)
as a result of an oral or written agreement, arrangement or understanding to
vote such security if such agreement, arrangement or understanding (A) arises
solely from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable provisions
of the General Rules and Regulations under the Exchange Act and (b) is not then
reportable by such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
<PAGE>
(iii) that are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person (or
any of such Person's Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy as described in the proviso to
subsection (ii) above) or disposing of any voting securities of the Company;
provided, however, that nothing in this Subsection (b) shall cause a Person
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of any securities acquired through such Person's participation in good faith in
a firm commitment underwriting until the expiration of forty (40) days after the
date of such acquisition.
(c) "Exempted Person" shall mean the group known as GAMCO Investors/Gabelli
Funds, Inc. as identified in the most recent Schedule 13D filed by such group
prior to the date hereof, unless and until such group or any Person in such
group, together with all affiliates and Associates of such group of any Person
in such group, becomes the Beneficial Owner of thirty percent (30%) or more of
the Common Shares of the Company then outstanding. The purchaser,assignee or
transferee of Common Shares of the Company of an Exempted Person shall not be an
Exempted Person.
(d) "Person" shall mean any individual, firm, corporation,partnership, or
other entity.
(e) "Subsidiary" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act.
2.6 "Committee" means the Executive Compensation and Stock Option
Committee of the Board.
2.7 "Company" shall mean SPS Technologies, Inc., a Pennsylvania
corporation.
2.8 "Compensation" means the base earnings of a Participant for
employment with an Employer, calculated according to the regular
monthly rates paid to the Participant. Compensation does not include
bonuses, expense reimbursements, or any form of non-cash remuneration
and benefits.
<PAGE>
2.9 "Deferral Periods" means the five one (1) year periods commencing
subsequent to the December 31, 1997, as follows: January 1, 1998
through December 31, 1998, January 1, 1999 through December 31, 1999,
January 1, 2000 through December 31, 2000, January 1, 2001 through
December 31, 2001 and January 1, 2002 through December 31, 2002.
2.10 "Determination Date" means the last day of each calendar month.
2.11 "Employee" means a person who is employed by an Employer and
designated by the Committee in accordance with 3. 1 (a).
2.12 "Employer" means SPS or any Participating Subsidiary or any
successors to the businesses thereof. For the purposes of this Plan,
SPS and each Participating Subsidiary shall be considered separate
Employers and shall be treated as the Employer only with respect to its
own employees.
2.13 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.14 "Interest" means the interest rate as set forth in Schedule B
attached hereto (as it may be amended from time to time).
2.15 "Participant" means any individual whose name is set forth in
Schedule A attached hereto (as it may be amended from time to time).
2.16 "Participation Agreement" means the agreement filed by a
Participant with respect to his participation in the Plan for a
Deferral Period.
2.17 "Participating Subsidiary" means an affiliated or subsidiary
corporation of SPS which elects to participate in the Plan and which
has been approved for participation in the Plan by the Board.
2.18 "Plan" means the SPS Technologies, Inc. Executive Deferred
Compensation Plan, effective January 1, 1998.
<PAGE>
2.19 "Plan Benefit" means the Participant's Account balance distributed
in accordance with Article V.
2.20 "Plan Year" means the calendar year, and the first Plan Year shall
begin January 1, 1998.
2.21 "Severance of Employment" means the termination of the employment
relationship (voluntarily or involuntarily) between an Employee and the
Employer and all subsidiaries.
2.22 "SPS" means SPS Technologies, Inc.
2.23 "Unforeseeable Emergency" means a severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident
of the Participant or a dependent of the Participant, loss of the
Participant's property due to casualty, or other similar extraordinary
and unforeseeable circumstances arising as a result of events beyond
the control of the Participant. The circumstances that will constitute
an "Unforeseeable Emergency" will depend on the facts of each case,
but, in any case, payment may not be made in the event that such
hardship would or may be relieved: (1) through reimbursement or
compensation or by insurance or otherwise, (2) by liquidation of the
Participant's assets, to the extent that liquidation of the
Participant's assets would not itself cause severe financial hardship,
or (3) by cessation of Annual Deferral Amounts under the Plan.
<PAGE>
ARTICLE III
PARTICIPATION AND DEFERRAL COMMITMENTS
3.1 Eligibility and Participation
(a) Eligibility. Eligibility to participate in the Plan is limited to those
Employees set forth in Schedule A. The Committee has the authority to designate
which Employees will be listed in Schedule A.
(b) Participation. An eligible individual may annually elect to participate
in the Plan by filing with the Committee a Participation Agreement no later than
the day before the commencement of one of the Deferral Periods, or upon becoming
an eligible employee. (Such Participation Agreement shall be effective only with
regard to Compensation earned in the Deferral Period for which it has been filed
and only with respect to Compensation earned after the Participation Agreement
has been filed with the Committee.)
3.2 Form of Deferral, Maximum Deferral. A Participant who wishes to defer
Compensation must elect to defer a percentage of his Compensation, which
percentage shall not exceed twenty percent (20%) of the Compensation earned in
the Deferral Period; provided, however, that in the event that the total Annual
Deferral Amounts by all Participants for a given Deferral Period would exceed
$500,000, the Annual Deferral Amounts of all Participants shall be reduced
pro-rata until the total Annual Deferral Amounts for all Participants for such
Deferral Period equals $500,000. Deferrals shall be withheld from the Employee's
Compensation in equal monthly installments during the Deferral Period.
3.3 Modification of Annual Deferral Amounts. The Annual Deferral Amounts shall
be irrevocable except that the Committee, in its sole discretion may permit a
Participant to reduce the amount to be deferred, or waive the remainder of the
deferrals for the Deferral Period, if the Committee determines that the
Participant has suffered an Unforeseeable Emergency.
<PAGE>
ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS
------------------------------
4.1 Deferral of Compensation. The amount of Compensation that a Participant
elects to defer shall be withheld and credited to the Participant's Account as
the non-deferred portion of Compensation becomes payable. Any withholding of
taxes or other amounts with respect to deferred Compensation which is required
by state, federal or local law shall be withheld from the Participant's
non-deferred Compensation.
4.2 Determination of Accounts. Each Participant's Account as of each
Determination Date shall consist of the balance of the Participant's Account as
of the immediately preceding Determination Date, reduced by any intervening
distributions therefrom and increased by any additional portion of the deferrals
credited thereto and Interest earned thereon since the immediately preceding
Determination Date. Interest earned shall be calculated as of each Determination
Date based upon the balance of the Account at the preceding Determination Date,
using the monthly equivalent of the appropriate effective annual interest rate.
4.3 Statement of Accounts. The Committee shall submit to each Participant,
within sixty (60) days after the close of each Plan Year, a statement setting
forth the balance as of the end of the Plan Year to the credit of each Account
maintained for the Participant. The Committee may at such time(s) as it
determines, provide to such Participant(s) as it selects a statement setting
forth the balance as of any date to the credit of such Account maintained for
the Participant(s).
<PAGE>
ARTICLE V
PLAN BENEFITS
-------------
5.1 Form of Benefit Payment . Except as otherwise provided under the Plan, the
Plan Benefit shall be paid in equal monthly installments of the applicable
Account amortized over a period of one hundred and twenty (120) months. The
installments paid during the first Plan Year that the Plan Benefit is payable
shall be amortized as of the date the first installment is paid over the
installment period on the basis of the Interest that would have been earned on
an Account for such Plan Year. The installments paid during each subsequent Plan
Year of the period of the Plan Benefit is payable shall be amortized as of the
first day of such Plan Year over the then remaining installment period on the
basis of the Interest that would have been earned on an Account for each such
subsequent Plan Year. The applicable Account of the Participant shall continue
to be credited with Interest during the period Plan Benefits are payable.
5.2 Death Benefit. Upon the death of a Participant (whether before or after
Severance of Employment), the Participant's Beneficiary shall be entitled to the
remaining unpaid balance of the Participant's Account in the same form as the
Participant was entitled to receive under Section 5.1, except that the
Committee, in its absolute discretion, may pay the amount due in a single sum,
but only if requested by the deceased Participant's personal representative or,
if there is no personal representative appointed, by the deceased Participant's
eneficiary.
5.3 Pre-2008 Withdrawals.
(a) Hardship Distributions. Upon finding that a Participant has
suffered an Unforeseeable Emergency, the Committee may, in its sole discretion,
allow distributions from the Participant's Account prior to the time otherwise
specified for payment of Plan Benefits. The amount of such distribution shall be
limited to the amount reasonably necessary to meet the Participant's
requirements during the financial hardship and shall not exceed the Account
balance at the time of the distribution or, for a Participant with a Disability
at the time of distribution, the Account balance.
<PAGE>
(b) Other Financial Hardship. Upon finding that a Participant has an
immediate and heavy financial need, such as the purchase of a Participant's
principal residence or tuition expenses and related educational fees for the
next twelve months of post-secondary education for the Participant, his spouse,
children or dependents, or such immediate and heavy financial need as may be
determined by the Committee on the basis of the relevant facts and
circumstances, the Committee may, in its sole discretion, allow distributions
from the Participant's Account prior to the time otherwise specified for payment
of Plan Benefits. The amount of such distribution shall be limited to the amount
reasonably necessary to meet the Participant's requirements during the financial
need and shall not exceed the Account balance at the time of the distribution.
Such withdrawals shall be subject to a ten percent (1O%) penalty (forfeiture) on
the amount distributed. In the event that the benefits payable under this Plan
become secured by a trust, any penalty (forfeiture) on a distribution under this
Section shall be allocated on a pro rata basis to the Accounts of the other
Participants.
5.4 Withholding; Payroll Taxes. The Employer shall withhold from distributions
made hereunder any taxes required to be withheld from a Participant's wages for
the federal or any state or local government.
5.5 Commencement of Payments. Payment of a Plan Benefit shall commence to a
Participant or his Beneficiary on January 1, 2008, notwithstanding the
provisions of Section 5.2 and Section 5.3 of this Plan. All payments shall be
made as of the first day of the month.
5.6 Full Payment of Benefits. Notwithstanding any other provision of this Plan,
all benefits not paid by the time the Participant attains or would have attained
age seventy-five (75) shall be paid in a single sum at that time.
5.7 Payment to Guardian. If a Plan Benefit is payable to a minor or a person
declared incompetent or to a person incapable of handling the disposition of
property, the Committee may direct payment of such benefit to the guardian,
legal representative or person having the care and custody of such minor or
incompetent person. The Committee may require proof of incompetency, minority,
incapacity or guardianship as it may deem appropriate prior to distribution of
the Plan Benefit. Such distribution shall completely discharge the Committee and
the Employer from all liability with respect to such Plan Benefit.
<PAGE>
5.8 Responsibilities for Payment. The Plan Benefit shall be paid by the
Employer(s) employing the Participant during one of the respective Deferral
Periods on account of which such Plan Benefit is payable. Plan Benefits payable
by Participating Subsidiary or from Participating Subsidiary shall be guaranteed
by SPS. No other Employer or employee, officer, director or agent of any
Employer shall have any liability for payments hereunder.
5.9 Acceleration of Plan Benefits. In the event that benefits payable under this
Plan are secured pursuant to the terms of a trust, then, if after a Change of
Control (as such term may be defined in the trust instrument) the trust is
terminated, the benefits so secured shall become immediately payable under this
Plan in a lump sum and shall be the Participants Account balance plus Interest
accrued to the date of the payment.
<PAGE>
ARTICLE VI
BENEFICIARY DESIGNATION
-----------------------
6.1 Beneficiary Designation. Each Participant shall have the right, at any time,
to designate any person or persons as his or her Beneficiary or Beneficiaries
(both primary and secondary) to whom the Plan Benefit shall be paid in the event
of his or her death prior to complete distribution to the Participant of the
Plan Benefit due him or her. Each beneficiary designation shall be in a written
form prescribed by the Committee and will be effective only when filed with the
Committee during the Participant's lifetime.
6.2 Amendments. Any Beneficiary designation form may be changed by a Participant
without the consent of any designated Beneficiary or other person by the filing
of a new beneficiary designation form with the Committee. The filing of a new
beneficiary designation form will cancel all beneficiary designation forms
previously filed.
6.3 No Beneficiary Designation. If any Participant fails to designate a
Beneficiary in the manner provided above or if the Beneficiary designated by a
deceased Participant predeceases the Participant, the Committee shall direct
such Participant's Plan Benefit (or the balance thereof) to be distributed as
follows:
(a) to the Participant's surviving spouse, if any; or
(b) if the Participant shall have no surviving spouse, then to
the Participant's estate.
6.4 Death of Beneficiary. If the Beneficiary designated by a deceased
Participant dies before receiving complete distribution of the Plan Benefit and
no other effective beneficiary designation is in effect, the Committee shall
direct that the balance of such Plan Benefit be distributed to such beneficiary
as the Beneficiary shall designate, or if no such designation is in effect, then
to the Beneficiary's estate.
<PAGE>
ARTICLE VII
ADMINISTRATION
--------------
7.1 Designation of Committee. This Plan shall be administered by the Committee.
Members of the Committee may be Participants under this Plan, but shall not
participate in any decision of the Committee made with respect to such
Participant's receipt of benefits hereunder.
7.2 Duties of Committee. The Committee shall be responsible for interpretation
of Plan provisions and approval of benefit payments to the extent such
responsibility has not been allocated under the Plan to another entity, and
subject to and in accordance with provisions hereof shall determine all
questions arising under the Plan. The Committee may also make such rules and
regulations and prescribe such forms and procedures for the conduct of its
meetings and administrative duties as it deems appropriate. The Committee shall
endeavor to act by general rules so as not to discriminate in favor of any
person.
7.3 Agents. The Committee shall appoint an individual to be the Committee's
agent with respect to the day-to-day administration of the Plan. In addition,
the Committee may, from time to time, employ other agents and delegate to them
such administrative duties as it sees fit, and may from time to time consult
with counsel who may be counsel to the Employer.
7.4 Binding Effect of Decisions. The decision or action of the Committee in
respect of any question arising out of or in connection with the administration,
interpretation and application of the Plan and the rules and regulations
promulgated hereunder shall be final and conclusive and binding upon all persons
having any interest in the Plan, except to the extent that a court of competent
jurisdiction shall decide to the contrary.
7.5 Indemnity of Committee. SPS shall indemnify and hold harmless the members of
the Committee against any and all claims, loss, damage, expense or liability
arising from any action or failure to act with respect to this Plan, except in
the case of willful misconduct.
<PAGE>
ARTICLE VIII
CLAIMS PROCEDURE
----------------
8.1 Claim. Any person claiming a Plan Benefit, requesting an interpretation or
ruling under the Plan, or requesting information under the Plan shall present
the request in writing to the Committee which shall respond in writing as soon
as practicable.
8.2 Denial of Claim. If the claim or request is denied, the written notice of
denial shall state:
(a) the reason(s) for denial, with specific referent to the Plan
provision(s) on which the denial is based;
(b) a description of any additional material or information required
and an explanation of why it is necessary; and
(c) an explanation of the Plan's claim review procedure.
8.3 Review of Claim. Any person whose claim or request is denied or who has not
received a response within thirty (30) days of the filing of such claim or
request may request review by notice given in writing to the Committee within
sixty (60) days. The claim or request shall be reviewed by the Committee which
may, but shall not be required to, grant the claimant a hearing. On review, the
claimant may have representation, examine pertinent documents, and submit issues
and comments in writing.
8.4 Final Decision. The decision on review shall normally be made within thirty
(30) days of the filing of such request, except that if special circumstances
exist, the claimant shall be notified and the decision shall be made within
sixty (60) days. The decision shall be in writing and shall state the reason(s)
therefor and shall reference the relevant Plan provision(s).
8.5 Enforcement; No Set-off
(a) In the event that SPS shall fail or refuse to make payments of any
amounts due the Participant under the Plan, SPS shall pay to the Participant, in
addition to the payment of any other sum provided in the Plan, interest,
compounded daily, on any amount remaining unpaid from the date payment is
required until paid to the Participant, at the rate from time to time announced
by CoreStates Bank, N.A. (or its successor) as its "prime rate" plus four
percent (4%), each change in such rate to take effect on the effective date of
the change in such prime rate.
<PAGE>
(b) It is the intent of the parties that the Participant not be
required to incur any expenses associated with the enforcement of his rights
under the Plan by arbitration, litigation or other legal action because the cost
and expense thereof would substantially detract from the benefits intended to be
extended to the Participant under the Plan. Accordingly, SPS shall pay the
Participant on demand the amount necessary to reimburse the Participant in full
for all expenses (including all attorneys' fees and legal expenses) incurred by
the Participant in enforcing any of the obligations of SPS under this Plan.
(c) SPS's obligation to make payments provided for in this Plan
and otherwise to perform its obligations hereunder shall not be affected by any
circumstances, including, without limitation, any set off, counterclaim,
recoupment, defense or other right which SPS may have against the Participant or
others.
<PAGE>
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
---------------------------------
9.1 Amendment. Except as provided in Section 9.3, the Board may at any time
amend the Plan in whole or in part, provided, however, that no amendment shall
be effective to decrease or restrict any Account maintained pursuant to any
existing Participation Agreement(s) under the Plan.
9.2 Right to Terminate. The Board may at any time terminate the Plan as to any
or all Employers if, in its judgment, the tax, accounting, or other effects of
the continuance of the Plan, or potential payments thereunder would not be in
the best interests of any or all Employers. In such event, the Employers (or any
Employer as to whom the Plan has been terminated) shall have no further
liability or obligation under the Plan or the Participant's Participation
Agreement, provided that the Participant is paid in full the amount of the
Participant's Account in a single sum as of the date of termination of the Plan,
or in equal installments over a period of not more than five (5) years, as the
Board may determine.
9.3 Change of Control. Upon a Change of Control the Board shall be precluded
from amending the Plan and, for a period of three (3) years, commencing on the
effective date of the Change of Control, from terminating the Plan.
<PAGE>
ARTICLE X
MISCELLANEOUS
-------------
10.1 No Funding. The Employer's obligation under the Plan shall be merely that
of an unfunded and unsecured promise of the Employer to pay money in the future,
and Participants and their Beneficiaries, heirs, successors and assigns shall
have no further legal or equitable rights, interest or claims in any property or
assets of the Employer. Notwithstanding any provision in this Section 10.1 to
the contrary, the Employer shall have right, but not the obligation, to secure
this Plan through a trust; provided, however, that upon a Change of Control, the
Employer shall be obligated to secure the value of Participant's Accounts,
determined as of the most recent Determination Date, by contributing cash or
property equal to such value to the SPS Technologies, Inc., Benefits Protection
Trust.
10.2 Insurance. The Employer shall have the right, but not the obligation, to
purchase one or more policies of life insurance upon the life of a Participant.
In the event such policies are purchased, they shall be owned by the Employer
and no Participant, their Beneficiaries, heirs, successors and assigns shall
have any right or interest therein. Each Participant shall, however, cooperate
in the application for, and in the maintenance of, such insurance in any
reasonable way in which requested to do so by the Employer.
10.3 Conflicting Provisions. To the extent that any provision of this Plan
conflicts with any provision of the Executive Severance Agreement or the Senior
Executive Severance Plan, the provision of the Executive Severance Agreement or
the Senior Executive Severance Plan, as the case may be, shall prevail, and this
Plan shall be deemed to have been amended to the extent thus required.
10.4 Nonassignability. Neither a Participant nor any other person shall have any
right to commute, sell, assign, transfer, pledge, anticipate, mortgage or
otherwise encumber, transfer, hypothecate, or convey in advance of actual
receipt of the amounts, if any, payable hereunder, or any part thereof, which
are, and all rights to which are, expressly declared to be unassignable and
nontransferable. No part of the amounts payable shall, prior to actual payment,
be subject to seizure or sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by a Participant or any other person, nor
be transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
<PAGE>
10.5 Not a Contract of Employment. The terms and conditions of this Plan shall
not be deemed to constitute a contract of employment between the Employer and
the Participant and the Participant (or his Beneficiary) shall have no rights
against the Employer except as may otherwise be specifically provided herein.
Moreover, nothing in this Plan shall be deemed to give a Participant the right
to be retained in the service of the Employer or to interfere with the right of
the Employer to discipline or discharge him or her at any time.
10.6 Protective Provisions. A Participant will cooperate with the Employer by
furnishing any and all information requested by the Employer in order to
facilitate the payment of benefits hereunder, by taking such physical
examinations as the Employer may deem necessary and taking such other action as
may be requested by the Employer.
10.7 Terms. Wherever any words are used herein in the singular or in the plural,
they shall be construed as though they were used in the plural or the singular,
as the case may be, in all cases where they would so apply.
10.8 Captions. The captions of the articles, sections and paragraphs of this
Plan are for convenience only and shall not control or affect the meaning or
construction of any of its provisions.
10.9 Governing Law. The provision of this Plan shall be construed and
interpreted according to the laws of the Commonwealth of Pennsylvania, except to
the extent preempted by the Employee Retirement Income Security Act (ERISA) of
1974 as amended.
1O.1O Validity. In case any provision of this Plan shall be held illegal or
invalid for any reason, said illegality or invalidity shall not affect the
remaining parts hereof, but this Plan shall be construed and enforced as if such
illegal and invalid provision had never been inserted herein.
10.11 Notice. Any notice or filing required or permitted to be given to the
Committee under the Plan shall be sufficient if in writing and hand delivered,
or sent by registered or certified mail, at the principal address of SPS. Such
notice shall be deemed given as of the date of delivery or, if delivery is made
by mail, as of the date shown on the postmark on the receipt for registration or
certification.
<PAGE>
10.12 Successors. The provisions of this Plan shall bind and inure to the
benefit of the Employer and its successors and assigns. The term successors as
used herein shall include any corporate or other business entity which shall,
whether by merger, consolidation, purchase or otherwise acquire all or
substantially all of the business and assets of the Employer, and successors of
any such corporation or other business entity.
Pursuant to resolution of the Board, this instrument is to be effective as of
January 1, 1998.
<PAGE>
1998 ANNUAL REPORT
Statements of Consolidated Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Years ended December 31
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ........................................... $ 716,605 $588,616 $485,903
Cost of goods sold .................................. 553,770 460,159 386,403
--------- -------- --------
Gross Profit .................................. 162,835 128,457 99,500
Selling, general and administrative expense ......... 83,501 70,379 61,322
--------- -------- --------
Operating Earnings ............................ 79,334 58,078 38,178
Other income (expense):
Interest income .................................. 947 1,002 621
Interest expense ................................. (10,860) (8,998) (7,989)
Equity in earnings (loss) of affiliates .......... (2,442) 230 853
Minority interest ................................ (523) (224) (100)
Other, net ....................................... 114 (788) (513)
--------- -------- --------
(12,764) (8,778) (7,128)
--------- -------- --------
Earnings Before Income Taxes .................. 66,570 49,300 31,050
Provision for income taxes .......................... 22,000 16,800 8,750
--------- -------- --------
Net Earnings .................................. $ 44,570 $ 32,500 $ 22,300
========= ======== ========
Earnings Per Common Share:
Basic ..................................... $ 3.55 $ 2.68 $ 1.87
========= ======== ========
Diluted ................................... $ 3.42 $ 2.54 $ 1.77
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Consolidated Balance Sheets
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
December 31
1998 1997
------------ -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents ................................... $ 8,414 $ 18,659
Accounts and notes receivable, net .......................... 109,300 84,419
Inventories ................................................. 127,366 102,466
Deferred income taxes ....................................... 20,494 17,076
Prepaid expenses and other .................................. 6,366 4,268
--------- --------
Total Current Assets ................................... 271,940 226,888
--------- --------
Investments in affiliates .................................... 2,033 5,988
Property, plant and equipment, net ........................... 207,800 172,599
Other assets ................................................. 125,462 66,573
--------- --------
Total Assets ........................................ $ 607,235 $472,048
========= ========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable and current portion of long-term debt ......... $ 18,185 $ 15,211
Accounts payable ............................................ 51,777 45,006
Accrued expenses ............................................ 62,062 54,723
Income taxes payable ........................................ 5,889 5,563
--------- --------
Total Current Liabilities .............................. 137,913 120,503
--------- --------
Deferred income taxes ........................................ 21,176 14,799
Long-term debt ............................................... 154,010 95,507
Retirement obligations ....................................... 25,605 24,623
Minority interest ............................................ 1,731 1,826
Shareholders' Equity
Preferred stock, par value $1 per share, authorized 400,000
shares, issued none
Common stock, par value $.50 per share, authorized
60,000,000 shares, issued 13,812,138 shares in 1998 and
13,576,846 shares in 1997 ................................. 6,906 6,788
Additional paid-in capital .................................. 106,093 92,597
Common stock in treasury, at cost, 1,119,008 shares in 1998
and 1,204,766 shares in 1997 .............................. (12,943) (8,856)
Retained earnings ........................................... 177,961 133,391
Accumulated other comprehensive income:
Minimum pension liability ................................. (2,025) (2,292)
Cumulative translation adjustments ........................ (9,192) (6,838)
--------- --------
Total Shareholders' Equity ............................. 266,800 214,790
--------- --------
Total Liabilities and
Shareholders' Equity ............................... $ 607,235 $472,048
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
1998 ANNUAL REPORT
Statements of Consolidated Cash Flows
(Thousands of dollars)
<TABLE>
<CAPTION>
Years ended December 31
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings .......................................................... $ 44,570 $ 32,500 $ 22,300
Reconciliation of net earnings to net cash provided by operating
activities:
Depreciation and amortization ...................................... 29,329 23,083 18,902
Equity in loss (earnings) of affiliates ............................ 2,442 (230) (853)
Net loss on sale of property, plant and equipment .................. 157 453 1,320
Deferred income taxes .............................................. 3,674 7,197 5,235
Other operating items .............................................. (371) (552) (283)
Changes in assets and liabilities, net of acquisitions of
businesses:
Receivables ..................................................... (6,283) (6,533) (421)
Inventories ..................................................... (654) 1,796 1,031
Prepaid expenses and other ...................................... (1,371) (281) 790
Accounts payable ................................................ (5,696) 6,314 186
Accrued expenses ................................................ 308 3,045 4,006
Income taxes payable ............................................ 3,141 3,861 984
Other assets and liabilities, net ............................... 915 (450) (2,890)
--------- --------- ----------
Net cash provided by operating activities .......................... 70,161 70,203 50,307
--------- --------- ----------
Cash Flows from Investing Activities
Additions to property, plant and equipment ............................ (32,084) (37,510) (28,220)
Proceeds from sale of property, plant and equipment ................... 408 1,520 1,160
Acquisitions of businesses ............................................ (58,684) (47,191) (35,580)
--------- --------- ----------
Net cash used in investing activities .............................. (90,360) (83,181) (62,640)
--------- --------- ----------
Cash Flows from Financing Activities
Proceeds from borrowings .............................................. 65,239 30,182 162,739
Reduction of borrowings ............................................... (53,277) (32,862) (127,776)
Proceeds from exercise of stock options ............................... 1,597 2,666 2,300
Purchases of treasury stock ........................................... (3,579) (1,136)
--------- --------- ----------
Net cash provided by (used in) financing activities ................ 9,980 (1,150) 37,263
--------- --------- ----------
Effect of exchange rate changes on cash ............................... (26) (523) 287
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents ............... (10,245) (14,651) 25,217
Cash and cash equivalents at beginning of year ..................... 18,659 33,310 8,093
--------- --------- ----------
Cash and cash equivalents at end of year ........................... $ 8,414 $ 18,659 $ 33,310
========= ========= ==========
Supplemental Cash Flow Disclosures
Interest paid ...................................................... $ 10,148 $ 10,627 $ 4,260
Income taxes paid .................................................. 15,249 6,059 3,280
Significant Noncash Investing and Financing Activities
Issuance of treasury shares for businesses acquired ................ 8,795 4,915
Debt assumed with businesses acquired .............................. 50,278 3,179 14,976
Acquisition of treasury shares for stock options exercised ......... 2,294 774 3,253
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Statements of Consolidated Shareholders' Equity
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
--------------------------
Additional Minimum Cumulative Total
Common Paid-In Treasury Retained Pension Translation Comprehensive
Stock Capital Stock Earnings Liability Adjustments Income
-------- ------------ ------------ ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $6,451 $ 74,685 $ (4,846) $ 78,591 $ (2,626) $ (6,606)
Issuance of 390,682 shares
of common stock under
stock option plans ........... 195 7,060
Acquisition of 121,846
shares of treasury stock ..... (3,253)
Net earnings .................. 22,300 $ 22,300
Other comprehensive
income ....................... 369 4,281 4,650
Issuance of 29,600 shares of
treasury stock for
contribution to pension
plan ......................... 816 179
------- -------- --------- -------- -------- -------- --------
Balance, December 31, 1996 6,646 82,561 (7,920) 100,891 (2,257) (2,325) $ 26,950
========
Issuance of 284,346 shares
of common stock under
stock option plans ........... 142 6,095
Acquisitions of 47,424
shares of treasury stock ..... (1,910)
Issuance of 133,420 shares
of treasury stock for
businesses acquired .......... 3,941 974
Net earnings .................. 32,500 $ 32,500
Other comprehensive
income ....................... (35) (4,513) (4,548)
------- -------- --------- -------- -------- -------- --------
Balance, December 31, 1997 6,788 92,597 (8,856) 133,391 (2,292) (6,838) $ 27,952
========
Issuance of 235,292 shares
of common stock under
stock option plans ........... 118 6,487
Acquisitions of 118,177
shares of treasury stock ..... (5,873)
Issuance of 203,935 shares
of treasury stock for
businesses acquired .......... 7,009 1,786
Net earnings .................. 44,570 $ 44,570
Other comprehensive
income ....................... 267 (2,354) (2,087)
------- -------- --------- -------- -------- -------- --------
Balance, December 31, 1998 $6,906 $106,093 $ (12,943) $177,961 $ (2,025) $ (9,192) $ 42,483
====== ======== ========= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
1998 ANNUAL REPORT
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 are recorded on the equity
method, either due to ownership interest of 20 percent or more but less than 50
percent or due to the Company's inability to exercise effective control.
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.
Long-Lived Assets
The carrying value of long-lived assets, including intangible assets, is
reviewed when facts and circumstances suggest that they may be impaired. If
this review indicates that the carrying value of the asset will not be
recoverable based on the expected future undiscounted net cash flows of the
related asset, the asset's carrying value is reduced. Intangible assets,
included in other assets, were approximately $105,200 and $49,000 at December
31, 1998 and 1997, 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. Accumulated
amortization at December 31, 1998 and 1997, was $6,400 and $3,900,
respectively. Amortization of intangible assets was $2,939, $2,273, and $896 in
1998, 1997 and 1996, 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
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. Gains and
losses on currency transactions (denominated in currencies other than local
currency), are reflected in the statements of consolidated operations.
Forward Exchange Contracts
The Company enters into forward exchange contracts primarily as hedges relating
to identifiable currency positions. These financial
31
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
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.
Interest Rate and Currency Swap Agreements
The Company is using an interest rate swap agreement and a currency swap
agreement for purposes other than trading that are treated as off-balance sheet
items. The interest rate swap agreement is used by the Company to modify a
portion of its variable rate obligations to fixed rate obligations, thereby
reducing the exposure to market rate fluctuations. This agreement involves the
exchange of amounts based on fixed interest rates for amounts based on variable
interest rates over the life of the agreement without an exchange of the
notional amount upon which payments are based. The differential to be paid or
received is charged to expense as interest rates change. The currency swap
agreement is used to manage exposure related to an intercompany debt
denominated in one currency that will be repaid in another currency. The
currency swap agreement is designated as a hedge of the firm commitment to pay
interest and principal on debt, which would otherwise expose the Company to
foreign currency risk.
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 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 June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on the use of the derivative
and whether it qualifies for hedge accounting. This Statement is effective for
all financial statements for fiscal years beginning after June 15, 1999. The
Company will adopt SFAS No. 133 in the first quarter of 2000. The impact of
adopting this standard cannot be determined at this time.
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.
On October 28, 1998 the Company acquired all of the outstanding shares of
Chevron Aerospace Group Limited (Chevron) based in Wilford,
32
<PAGE>
1998 ANNUAL REPORT
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Nottingham, England for approximately $54,900. Chevron is a manufacturer of
aircraft structural assemblies, precision machined components, avionic panels,
wiring harnesses and turbine lockplates. The excess of the purchase price over
the fair values of the net assets acquired was approximately $34,700 and has
been recorded as goodwill, which is being amortized on a straight-line basis
over 40 years.
On July 31, 1998, the Company acquired all of the outstanding shares of Nevada
Bolt & Mfg. Co. doing business as Non-Ferrous Bolt & Mfg. Co. (Non-Ferrous), a
manufacturer of non-standard, hot-forged bolts and nuts from stainless steel
and specialty alloy materials, located in Las Vegas, Nevada for $11,900.
Approximately $8,800 was paid with 203,935 shares of common stock from treasury
and the remainder in debt assumed by the Company. The excess of the purchase
price over the fair values of the net assets acquired was approximately $5,800
and has been recorded as goodwill, which is being amortized on a straight-line
basis over 40 years.
On June 30, 1998, the Company acquired the operating assets of Howell
Penncraft, Inc. (Penncraft), a manufacturer of high-speed tool steel and
carbide products used in metal forming, located in Howell, Michigan, for
$3,500. The purchase price approximated the fair value of the net assets
acquired.
On June 30, 1998, the Company acquired all of the outstanding shares of Terry
Machine Company (Terry), a manufacturer of specialty cold headed fasteners for
the automotive industry, located in Waterford, Michigan, for $22,100. The
excess of the purchase price over the fair values of the net assets acquired
was approximately $8,500 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 40 years.
On March 23, 1998, the Company acquired all of the outstanding shares of
Greenville Metals, Inc. (Greenville), a manufacturer of specialty metals and
alloys, located in Transfer, Pennsylvania, for $15,900. The excess of the
purchase price over the fair values of the net assets acquired was
approximately $7,800 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 40 years.
On December 2, 1997, the Company acquired all of the outstanding shares of
Magnetic Technologies Corporation (MTC), a designer and manufacturer of
magnetic, electronic, and mechanical subassemblies of copiers and printers for
the electronic office equipment industry, located in Rochester, New York and
Rochester, England for $14,400. Approximately $9,600 was paid in cash and the
remainder in common stock of the Company. The excess of the purchase price over
the fair values of the net assets acquired was approximately $8,500 and has
been recorded as goodwill, which is being amortized on a straight-line basis
over 40 years.
On September 23, 1997, the Company acquired all of the outstanding shares of
Mohawk Europa Limited (Mohawk), a specialty cutting tool manufacturer, located
in Shannon, Ireland for $9,100. The purchase price approximated the fair value
of the net assets acquired.
On May 5, 1997, the Company acquired all of the outstanding shares of Lake Erie
Design Co., Inc. (LED), a manufacturer of high precision ceramic cores for the
investment casting industry, located in Wickliffe, Ohio for $8,100. The excess
of the purchase price over the fair values of the net assets acquired was
approximately $6,600 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 30 years.
On March 7, 1997, the Company acquired the assets of RJF International
Corporation's (RJF) Bonded Magnet Business, a manufacturer of flexible ferrite
bonded magnets, located in Cincinnati and Marietta, Ohio for $9,200. The excess
of the purchase price over the fair values of the net assets acquired was
approximately $5,300 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 30 years.
On February 24, 1997, the Company acquired all of the outstanding shares of
Greer Stop Nut, Inc. (Greer), a manufacturer of nylon insert nuts, located in
Nashville, Tennessee for $10,000. The excess of the purchase price over the
fair values of the net assets acquired was approximately $5,000 and has been
recorded as goodwill, which is being amortized on a straight-line basis over 40
years.
The following unaudited pro forma consolidated results of operations are
presented as if the
33
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
acquisitions noted above had been made at the beginning of the periods
presented.
Years Ended
December 31
1998 1997
------------- -------------
Net sales ............... $789,958 $729,944
Net earnings ............ 45,231 32,004
Basic earnings per
common share ......... 3.61 2.57
Diluted earnings per
common share ......... 3.47 2.44
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. ACCOUNTS AND NOTES RECEIVABLE
1998 1997
----------- ----------
Trade ....................... $108,510 $84,454
Notes and other ............. 3,750 1,992
-------- -------
112,260 86,446
Less allowance for doubt-
ful receivables .......... 2,960 2,027
-------- -------
$109,300 $84,419
======== =======
4. INVENTORIES
1998 1997
----------- -----------
Finished goods ........... $ 53,748 $ 38,222
Work-in-process .......... 39,192 36,871
Raw materials and supplies 28,412 20,843
Tools .................... 6,014 6,530
-------- --------
$127,366 $102,466
======== ========
5. INVESTMENTS IN AFFILIATES
At December 31, 1998, the Company's investments in affiliates consist of a
22.05 percent interest in Precision Fasteners Limited (PFL), Bombay, India, and
a 55 percent interest in Shanghai SPS Biao Wu Fasteners Co. Ltd. (SSBW),
Shanghai, China. SSBW is accounted for as an affiliate under the equity method
because the Company is not able to exercise effective control over the
operations. Dividends received from affiliates were $99 and $339 in 1997 and
1996, respectively. No dividends were received in 1998. Retained earnings in
1998, 1997 and 1996 included undistributed earnings of affiliates, net of
deferred taxes, of $1,081, $3,161 and $3,945 respectively.
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT
1998 1997
---------- ----------
Land .............................. $ 8,231 $ 6,851
Buildings ......................... 75,182 63,074
Machinery and equipment 260,950 214,629
Construction in progress .......... 14,094 19,672
-------- --------
358,457 304,226
Less accumulated
depreciation ................... 150,657 131,627
-------- --------
$207,800 $172,599
======== ========
Depreciation expense was $26,390, $20,810, $18,006 in 1998, 1997 and 1996,
respectively.
7. NOTES PAYABLE
1998 1997
---------- ----------
Short-term bank borrow-
ings and notes payable ..... $ 6,237 $ 9,178
Current portion of long-
term debt .................. 11,948 6,033
------- -------
$18,185 $15,211
======= =======
The Company's weighted-average interest rate for short-term bank borrowings and
notes payable was 6.3% and 5.6% as of December 31, 1998 and 1997, respectively.
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 $22,229
as of December 31, 1998. The Company also has unused long-term credit
facilities as discussed in Note 9.
34
<PAGE>
1998 ANNUAL REPORT
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
8. ACCRUED EXPENSES
1998 1997
---------- ----------
Employee compensation
and related benefits ......... $35,684 $27,114
Other ........................... 26,378 27,609
------- -------
$62,062 $54,723
======= =======
9. LONG-TERM DEBT
1998 1997
----------- -----------
Note Purchase Agreement,
fixed interest rates of
7.7% to 7.88% ............... $ 85,000 $ 85,000
Bank Credit Agreement,
variable interest rate,
5.77% at December 31,
1998 ........................ 23,327
Guaranteed "A" and "B"
Unsecured Loan Notes,
fixed interest rate of 4% 22,236
Industrial Development
Revenue Bond Series
1987, variable interest
rate, 4.2% and 4.4% at
December 31, 1998 and
1997 ........................ 5,300 5,300
Promissory Notes, fixed
interest rate of 7% ......... 4,624
Note Payable, fixed interest
rate of 8.38% ............... 3,996
Deferred payments, fixed
interest rate of 6% ......... 3,471
Loan Agreement, variable
interest rate, 8.652% and
7.813% at December 31,
1998 and 1997 ............... 2,662 5,962
Other .......................... 15,342 5,278
-------- --------
165,958 101,540
Less current installments
(included in notes pay-
able) ....................... 11,948 6,033
-------- --------
$154,010 $ 95,507
======== ========
Installments due during the next five years are as follows: $11,948, $13,583,
$30,932, $29,890 and $6,798 in 1999 through 2003, respectively.
The Company has a long-term Note Purchase Agreement with three insurance
companies for $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.
Effective October 28, 1998, the Company renegotiated its Bank Credit Agreement.
Under the Third Amended and Restated Bank Credit Agreement, the Company may
borrow up to $75,000 in either United States Dollars or certain Eurocurrencies,
which consists of a revolving commitment of $55,000 and a supplemental
commitment of $20,000. 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) a eurocurrency rate equal to the
effective interbank rate plus a margin ranging from .225 to .475 percentage
points based on the consolidated Leverage Ratio, as defined, or c) at a rate
and term negotiated between each bank and the Company, as applicable. During
1998 and 1997, the average interest rate on borrowings outstanding was 5.57
percent and 8.25 percent, respectively. There were no borrowings outstanding
under the Second Amended and Restated Bank Credit Agreement at December 31,
1997. The revolving commitment under this agreement expires June 30, 2002,
extendible for one year at each annual anniversary date. The supplemental
commitment under this agreement expires on October 28, 1999, extendible for one
year at the first anniversary date. The Company is required to pay a fee on the
aggregate facility available ranging from .1 to .175 percentage points based on
the consolidated Leverage Ratio.
<PAGE>
In connection with the acquisition of Chevron Aerospace Group Limited (as
described in Note 2), the Company issued Guaranteed "A" and "B" Unsecured Loan
Notes. These notes bear interest at a fixed rate of 4.0 percent and are due on
October 31, 2001. Under this agreement, noteholders may present these notes for
redemption at par value, with not less than 30 days prior written notice on
each of April 30, 1999, April 30, 2000 and April 30, 2001. The Company may
elect to redeem any outstanding notes, with 30 days prior written notice, at
anytime after April 30, 2001.
The Series 1987 Bonds were issued to finance the acquisition and improvement of
a fastener manufacturing facility in Utah and are due in 2012. The Bonds are
collateralized by a first
35
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
mortgage on the facility and a bank letter of credit. In 1998 and 1997, the
average interest rate was 3.7 percent and 3.9 percent, respectively.
In connection with the acquisition of Greenville Metals, Inc. (as described in
Note 2), the former stockholders accepted promissory notes for a portion of the
purchase price aggregating approximately $5,800. The notes bear interest at a
fixed rate of 7.0% and are payable in quarterly installments of $290 plus
interest until March 31, 2003.
As part of the acquisition of Terry Machine Company (Terry) (as described in
Note 2), the Company assumed a note payable to a commercial bank in the amount
of approximately $4,300. This note bears interest at a fixed rate of 8.375% and
is payable in monthly installments of $73 (including interest) until September,
2002. A final installment of $1,700 is due on September 11, 2002. In addition,
the former stockholders of Terry agreed to accept deferred payments for a
portion of the purchase price aggregating $4,000. The Company has discounted
this liability using a 6.0% rate. These amounts are payable in annual
installments of $800 until June 30, 2003.
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 ($2,662 at
December 31, 1998). The loan is collateralized by a bank letter of credit and
bears interest at LIBOR plus 0.75 percent. The balance of the loan is due on
June 30, 1999. In 1998 and 1997, the average interest rate was 8.6 percent and
7.6 percent, respectively.
Other debt includes capital leases and other financing collateralized by fixed
assets, along with local borrowings to finance working capital and operating
requirements.
The Company is subject to a number of restrictive covenants under these various
debt agreements. Covenants associated with the Note Purchase Agreement are
generally more restrictive than those of the Bank Credit Agreement. Effective
April 1, 1998, the Note Purchase Agreement was amended and some modifications
were made to the restrictive covenants. The following significant covenants are
currently in place under the Note Purchase Agreement: maintenance of a
consolidated debt-to-total capitalization (net worth plus total debt) ratio of
not more than 50%; maintenance of a minimum consolidated net worth of at least
$183,385 as of December 31, 1998; and maintenance of a current ratio of at least
1.75 to 1. Under these covenants, dividends paid by the Company may not exceed
$31,447 as of December 31, 1998 plus 50% of consolidated net income (or minus
100% of the consolidated net loss) from January 1, 1999 to the date of the
dividend. Certain of the Company's debt agreements contain cross default and
cross acceleration provisions. The Company is currently in compliance with all
financial covenants. At year end 1998, the Company (as restricted by loan
covenants) would have been allowed to borrow an additional $94,607.
10. 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 12 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 $5,230, $4,504 and $3,872 in 1998, 1997 and 1996,
respectively.
At December 31, 1998, the future minimum annual rentals on non-cancelable
leases which have initial or remaining terms of more than one year aggregated
$32,125. The minimum payments over the next five years are as follows: $5,532,
$4,530, $4,270, $3,640 and $2,478 in 1999 through 2003, 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, 1998, the Company had an accrued liability of
$5,500 for environmental remediation which represents
36
<PAGE>
1998 ANNUAL REPORT
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
management's best estimate of the undiscounted costs related to environmental
remediation which are considered probable and can be reasonably estimated.
Management believes the overall costs of environmental remediation will be
incurred over an extended period of time. 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 operations.
11. INCOME TAXES
The components of the provision for income taxes were as follows:
1998 1997 1996
---------- ---------- ---------
Currently payable:
United States
Federal ............. $13,203 $ 7,592 $1,205
State and local ..... 1,947 940 500
Non-United States....... 3,176 1,071 1,810
------- ------- ------
18,326 9,603 3,515
------- ------- ------
Deferred:
United States
Federal ............. 4,646 4,774 3,557
State and local ..... 313 196 150
Non-United States....... (1,285) 2,227 1,528
------- ------- ------
3,674 7,197 5,235
------- ------- ------
$22,000 $16,800 $8,750
======= ======= ======
The tax expense that results from allocating certain tax benefits to reduce
goodwill of an acquired entity was $407 in 1997. 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 $2,340 in 1998, $2,356 in 1997 and $1,534 in 1996.
The components of earnings from operations before income taxes were as follows:
1998 1997 1996
---------- ---------- -----------
United States ........ $58,652 $41,783 $ 25,114
Non-United States..... 7,918 7,517 5,936
------- ------- --------
$66,570 $49,300 $ 31,050
======= ======= ========
37
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Temporary differences comprising the net deferred income tax asset (liability)
on the consolidated balance sheets were as follows:
1998 1997
------------ ------------
Inventory ....................... $ 9,063 $ 7,313
Post-retirement benefits
other than pensions .......... 4,321 4,493
Other employee benefits
and compensation ............. 7,570 6,330
Alternative minimum
tax credits .................. 6 1,072
Advance corporate tax ........... 913 148
Accrued expenses ................ 3,305 3,768
Net operating loss carry
forwards ..................... 7,432 4,256
Valuation allowances ............ (8,043) (7,291)
------- -------
Deferred income tax
asset ..................... 24,567 20,089
------- -------
Depreciation .................... (17,325) (11,882)
Pension benefits ................ (4,526) (4,161)
Other, net ...................... (3,398) (1,769)
------- -------
Deferred income tax
liability ................. (25,249) (17,812)
------- -------
Net deferred income
tax asset (liability) $ (682) $ 2,277
======= =======
Realization of the deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of any net operating loss carryforwards
(NOL's). Although realization is not assured, management believes it is more
likely than not that the recorded deferred tax asset, net of valuation
allowance provided, will be realized. At December 31, 1998, the Company had the
following NOL's available in the indicated geographic areas with the following
expiration dates:
Brazil $12,600 No expiration date
England 6,700 No expiration date
United States 1,300 Begin to expire in 2009
Australia 1,200 No expiration date
The NOL's available in England and the United States relate to operating losses
of businesses acquired in 1998 and 1997. These losses must be used to offset
future taxable income of the acquired businesses and are not available to
offset taxable income of other subsidiaries located in these countries. The
valuation allowance at December 31, 1998 relates to certain state and
non-United States tax jurisdictions. The net change in the valuation allowance
for 1998 results primarily from an increase in valuation allowances for
additional NOL's generated by the Company's Brazilian subsidiary, net of the
release of valuation allowance related to a 1996 business acquisition based on
the re-evaluation of the likelihood of the realization of future benefits.
Included in the valuation allowance at December 31, 1998 and 1997 is $255 for
deferred tax assets for which subsequently recognized tax benefits, if any,
will be allocated to reduce goodwill of an acquired entity.
<PAGE>
The following sets forth the differences between the provision for income taxes
computed at the United States federal statutory income tax rate of 35 percent
and that reported for financial statement purposes:
1998 1997 1996
---------- ---------- ----------
Provision computed at
the United States
federal statutory
income tax rate ........ $23,300 $17,255 $10,868
Earnings of certain
subsidiaries taxed at
different rates ........ (2,213) (1,504) (934)
Benefit of cash repa-
triation from non-
United States sub-
sidiaries .............. (494)
Permanent items ........... (227) 345 973
State income tax, net
of federal benefit ..... 1,374 583 246
Valuation allowances ...... 752 150 (2,417)
Other, net ................ (492) (29) 14
------- ------- -------
Provision for income
taxes .................. $22,000 $16,800 $ 8,750
======= ======= =======
United States income taxes have not been provided on unremitted earnings of
certain subsidiaries located outside the United States of approximately $33,800
because, in management's opinion, such earnings have been indefinitely
reinvested 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 for temporary differences related to investments in these
non-United States subsidiaries.
38
<PAGE>
1998 ANNUAL REPORT
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
12. RETIREMENT PLANS AND OTHER BENEFITS
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in 1998, which changes the way the Company
reports information about its retirement plans and other benefits. Financial
data for prior periods has been restated to conform to the 1998 presentation.
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. The Company's contribution expense for the plans was
$907 in 1998, $629 in 1997 and $245 in 1996.
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, 1998 and 1997, the plans' assets included 418,264 shares and
440,664 shares of the Company's common stock with fair values of $23,684 and
$19,224, respectively. There were no dividends received from Company stock for
the years ended December 31, 1998 and 1997.
The following provides a reconciliation of benefit obligations, plan assets and
funded status of these plans at December 31, 1998 and 1997:
1998 1997
------------ -----------
Change in benefit
obligation:
Benefit obligation at
January 1 .............. $157,529 $141,711
Service cost .............. 7,393 6,316
Interest cost ............. 10,886 10,460
Plan participants' contri-
butions ................ 951 882
Amendments ................ 3,381
Actuarial loss ............ 8,178 9,842
Acquisitions .............. 810
Foreign currency
exchange rate changes (266) (2,452)
Benefit payments .......... (13,210) (9,230)
--------- --------
Benefit obligation at
December 31 ............ $175,652 $157,529
========= ========
Change in plan assets:
Fair value of plan assets
at January 1 ........... $159,513 $144,927
Actual return on plan
assets ................. 18,432 23,720
Employer contributions..... 4,019 1,504
Plan participants contri-
butions ................ 951 882
Acquisitions .............. 922
Foreign currency
exchange rate changes (448) (2,290)
Benefits paid ............. (13,210) (9,230)
--------- --------
Fair value of plan assets
at end of year ......... $170,179 $159,513
========= ========
Reconciliation of funded
status:
Funded status [over
(under)] ............... $ (5,472) $ 1,985
Unrecognized net actu-
arial loss ............. 23,591 20,261
Unrecognized prior ser-
vice cost .............. (5,117) (8,601)
Unrecognized transition
asset .................. (2,775) (3,575)
--------- --------
Prepaid benefit cost ...... $ 10,227 $ 10,070
========= ========
Additional benefit liabil-
ity .................... $ (5,795) $ (4,285)
Intangible asset .......... 2,728 942
--------- --------
Accumulated other com-
prehensive income ...... $ (3,067) $ (3,343)
========= ========
39
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
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, 1998 and 1997. A corresponding amount was recognized
as an intangible asset, to the extent of unrecognized prior service cost and
unrecognized transition obligation, with the income tax effected balance
recorded as a separate reduction of shareholders' equity.
The plans which have accumulated obligations in excess of plan assets have an
obligation of $84,544 and assets of $73,884 and are therefore underfunded by
$10,660.
The assumptions used as of December 31, 1998, 1997, and 1996 in determining the
net pension cost and net pension liability for United States plans were as
follows:
1998 1997 1996
---------- ---------- -----------
Discount rate ........... 6.75% 7.00% 7.65%
Rate of return on
plan assets .......... 9.00% 9.00% 10.00%
Rate of future
compensation
increase ............. 5.00% 5.00% 5.00%
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, 1998
was as follows: discount rate: 6 to 7 percent; rate of return on plan assets: 8
to 9 percent; rate of future compensation increase: 4 to 4.5 percent.
The components of the net periodic pension cost incurred for these plans were
as follows:
1998 1997 1996
------------ ------------ --------------
Net periodic benefit
costs (income):
Service cost ................. $ 7,393 $ 6,316 $ 6,333
Interest cost ................ 10,886 10,460 9,424
Expected return on plan
assets .................... (14,161) (12,898) (13,901)
Amortization of prior
service costs ............. (637) (844) 268
Amortization of transi-
tion obligation (asset) (821) (817) 940
Amortization of net
actuarial (gain) loss ..... 345 654 (3)
------- ------- -------
Net periodic benefit cost 3,005 2,871 3,061
Settlement expense ........... 996 287
------- ------- -------
Total expense ................ $ 4,001 $ 3,158 $ 3,061
======= ======= =======
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 non-bargaining unit 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.
An assumed discount rate of 6.75 percent and 7.0 percent was used to determine
the accumulated postretirement benefit obligation at December 31, 1998 and
1997, respectively.
40
<PAGE>
1998 ANNUAL REPORT
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
The following provides a reconciliation of benefit obligations and funded
status of these plans at December 31, 1998 and 1997:
1998 1997
------------- -------------
Change in benefit obli-
gation:
Benefit obligation at
January 1 ............ $ 8,940 $ 9,374
Service cost ............ 187 159
Interest cost ........... 571 629
Plan participants
contributions ........ 112 130
Actuarial gain .......... (202) (316)
Benefit payments ........ (816) (1,036)
-------- --------
Benefit obligation at
December 31 .......... $ 8,792 $ 8,940
======== ========
Reconciliation of
funded status:
Funded status [over
(under)] ............. $ (8,792) $ (8,940)
Unrecognized net
actuarial loss ....... 227 414
Unrecognized prior
service cost ......... (3,720) (4,251)
-------- --------
Accrued benefit cost..... $(12,285) $(12,777)
======== ========
The components of the net periodic postretirement benefit cost incurred were as
follows:
1998 1997 1996
--------- ----------- ---------
Net periodic benefit costs
(income):
Service cost ..................... $187 $159 $178
Interest cost .................... 571 629 686
Amortization of prior
service costs ................. (531) (531) (531)
Amortization of net
actuarial (gain) loss ......... (15) (3) 26
---- ---- ----
Net periodic benefit cost $212 $254 $359
==== ==== ====
A 7.0 percent annual rate of increase in the per capita costs of covered health
care benefits was assumed for 1998. Increasing or decreasing the assumed health
care cost trend rates by one percentage point in each year would change the
accumulated postretirement benefit obligation as of December 31, 1998 by $59
and change the aggregate of the service and interest components of net periodic
postretirement benefit cost for 1998 by $6.
13. STOCK OPTIONS
The Company has a non-qualified stock option plan which continues to the year
2000. Under the plan, the Company may grant up to an aggregate of 3,300,000
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. Fixed options
granted vest over a five-year period and discounted options granted vest after
one year.
<PAGE>
The Company has adopted the disclosure-only provisions of the 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 earnings
and earnings per share would have been reduced to the pro forma amounts as
follows:
Years Ended December 31
1998 1997 1996
------------ ------------ ------------
Net earnings ............ $43,558 $31,775 $21,871
Basic earnings per
common share ......... 3.47 2.62 1.84
Diluted earnings per
common share ......... 3.35 2.48 1.74
41
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
The weighted-average fair value of options granted per share were $17.50,
$14.51 and $10.25 in 1998, 1997 and 1996, 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 were
as follows: expected volatility of 31 percent in 1998, 29 percent in 1997, and
32 percent in 1996, expected option life of six years in 1998 and 1997 and five
years in 1996, and no expected dividend payments over the life of the option.
The expected weighted-average risk-free interest rate of 5.5 percent, 6.2
percent and 5.3 percent were used for 1998, 1997 and 1996, respectively.
At December 31, 1998, 91 individuals held options to purchase an aggregate of
1,067,074 shares (fixed 1,046,035, discounted 21,039). There are 584,192 fixed
price options outstanding with exercise prices ranging from $10.81 to $19.75
per share (a weighted-average exercise price per share of $12.46) and
expiration dates ranging from November 28, 2000 to July 24, 2005 (a
weighted-average remaining contractual life of five years). Of these 584,192
fixed price options outstanding, 490,392 shares are currently exercisable with
a weighted-average exercise price of $12.14 per share.
In addition, there are 314,343 fixed price options outstanding with exercise
prices ranging from $22.69 to $33.91 per share (a weighted-average exercise
price per share of $30.12) and expiration dates ranging from December 6, 1999
to February 9, 2007 (a weighted-average remaining contractual life of seven
years). Of these 314,343 fixed price options outstanding, 82,942 are currently
exercisable with a weighted-average exercise price of $28.14 per share. Also,
there are 147,500 fixed price options outstanding with exercise prices ranging
from $41.09 to $54.81 per share (weighted-average exercise price per share of
$42.49) and expiration dates ranging from December 16, 2007 to December 14,
2008 (a weighted-average remaining contractual life of nine years). Of these
147,500 fixed price options outstanding, 2,000 are currently exercisable with a
weighted-average exercise price of $45.59 per share. The discounted price
options outstanding have an exercise price of $.50 and expiration dates ranging
from May 31, 1999 to May 31, 2008 with a weighted-average remaining contractual
life of five years. Of the 21,039 discounted price options outstanding, 19,574
shares are currently exercisable. No variable price options were outstanding at
December 31, 1998.
42
<PAGE>
1998 ANNUAL REPORT
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Changes in shares under option were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- --------------------------
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 ........... 1,157,124 $ 18.31 1,261,308 $ 14.92 1,461,900 $ 13.24
Additions (deductions):
Options granted ............. 138,965 42.43 180,856 34.59 198,264 27.01
Options exercised ........... (226,215) 17.20 (271,240) 12.24 (385,656) 14.40
Options expired or terminated (2,800) 30.95 (13,800) 27.00 (13,200) 20.85
--------- --------- ---------
Options outstanding at end of
year ........................ 1,067,074 21.58 1,157,124 18.31 1,261,308 14.92
========= ========= =========
Options exercisable at end of
year ........................ 594,908 14.10 660,668 13.40 699,354 12.82
Shares available for future
option grants ............... 106,744 251,986 432,148
</TABLE>
Under the nonqualified stock option plan, the Company has issued 35,999
restricted shares. Each year 20 percent of the restricted shares granted become
free of any restrictions. As of December 31, 1998, 26,093 shares issued are
restricted under the nonqualified stock option plan.
---------------------------------
14. EARNINGS PER SHARE
Basic earnings per common share is calculated using the average shares of
common stock outstanding, while diluted earnings per common share reflects the
potential dilution that could occur if stock options were exercised. Earnings
per share are computed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net earnings .................................. $ 44,570 $ 32,500 $ 22,300
========== ========== ==========
Average shares of common stock outstanding
used to compute basic earnings per common
share ........................................ 12,541,619 12,128,173 11,918,938
Additional common shares to be issued assuming
exercise of stock options, net of shares
assumed reacquired ........................... 477,082 668,085 647,926
---------- ---------- ----------
Shares used to compute dilutive effect of stock
options ...................................... 13,018,701 12,796,258 12,566,864
========== ========== ==========
Basic earnings per common share ............... $ 3.55 $ 2.68 $ 1.87
========== ========== ==========
Diluted earnings per common share ............. $ 3.42 $ 2.54 $ 1.77
========== ========== ==========
</TABLE>
Options to purchase 11,465 shares of common stock at a weighted-average
price of $53.74 per share were outstanding during 1998 but were not included in
the computation of diluted EPS in 1998 because the options' exercise price was
greater than the average market price of the common shares. These options
expire in 2008.
43
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
15. PREFERRED STOCK PURCHASE RIGHTS
As provided in the Rights Agreement dated November 21, 1998, the Board of
Directors declared a dividend distribution of one Right for each outstanding
share of common stock. Under the 1998 Rights Agreement, each Right may be
exercised, under certain conditions, to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Shares, par value $1.00 per share,
for $250, subject to adjustment. 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, 2008, unless extended by the Company's
Board of Directors, 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.
16. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
1998
-----------------------------
Estimated
Carrying Fair
Amount Value
------------- -------------
Cash and cash
equivalents ............ $ 8,414 $ 8,414
Long-term debt,
including current
portion ................ (165,958) (176,865)
Interest rate and
currency swaps ......... (1,355)
1997
-----------------------------
Estimated
Carrying Fair
Amount Value
------------- -------------
Cash and cash
equivalents ......... $ 18,659 $ 18,659
Long-term debt,
including current
portion ............. (101,540) (109,350)
The methods and assumptions used to estimate the fair value of each class
of financial instruments and additional information related to these financial
instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt
The fair value of fixed rate long-term debt was estimated at the discounted
amount of future cash flow using the Company's year-end incremental rate of
borrowing for similar debt. The fair value of variable rate debt approximates
its carrying value.
Interest Rate and Currency Swaps
The fair value of the interest rate swap agreement and the currency swap
agreement is the estimated amount that the banks would receive or pay to
terminate the swap agreements at December 31, 1998. The interest rate swap
agreement is used by the Company to modify $20,000 of its variable rate
obligation under the Bank Credit Agreement
44
<PAGE>
1998 ANNUAL REPORT
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
to a fixed rate obligation of 5.51 percent. This swap agreement expires in
November 2003. The Company entered into a currency swap agreement to exchange
pounds sterling (18,100) for United States dollars (30,046). The Company is
required to make pounds sterling payments on a quarterly basis at a fixed rate
of 8 percent in exchange for United States dollar receipts at a fixed rate of
6.785 percent until the swap agreement matures on October 27, 2003. The Company
is exposed to credit loss in the event of nonperformance by the counterparties
to the swap agreements. The Company does not anticipate nonperformance by the
counterparties who are major financial institutions.
Forward Exchange Contracts
At December 31, 1998 and 1997, the Company had $13,848 and $6,314,
respectively, of forward foreign currency exchange contracts outstanding. These
contracts are primarily in British pounds, Irish punts and Canadian dollars and
mature within 60 days. The fair value of these contracts is not significant.
The counterparties of these agreements are major financial institutions,
therefore, management believes the risk of incurring losses related to these
contracts is remote.
17. RESEARCH AND DEVELOPMENT
Research and development costs incurred were $5,349, $5,290 and $5,649 for
1998, 1997 and 1996, respectively.
18. SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in 1998, which changes the way the Company reports
information about its operating segments. Financial data for prior periods has
been restated to conform to the 1998 presentation.
The Company's seven business groups have separate management teams that report
operating results regularly which are reviewed by the chief operating decision
makers of the Company. Certain business groups have been aggregated into the
same reportable segment because they have similar products and services,
production processes, types of customers and distribution methods and their
long-term financial performance is affected by similar economic conditions.
The Company has four reportable segments: Fasteners, Specialty Materials and
Alloys, Magnetic Materials and Other. The Fasteners segment consists of three
business groups which produce fasteners for the aerospace, automotive and
industrial machinery markets. The Specialty Materials and Alloys segment
produces specialty metals, superalloys and ceramic cores for aerospace,
industrial gas turbine and medical applications. The Magnetic Materials segment
produces magnetic materials and products used in automotive, aerospace,
reprographic, computer and advertising specialty markets. The Other segment
consists of two business groups which produce structural assemblies for the
aerospace market and precision consumable tools used for metal forming and
cutting.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales are precision
tools from the Other segment sold to the Fasteners segment at market based
sales prices. The Company evaluates performance based on operating earnings of
the respective segments. No single customer or group under common control
represented 10% or more of the Company's net sales during 1998, 1997 and 1996.
45
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES / FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Segments Information
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net sales:
Fasteners ............................ $ 425,530 $382,505 $327,245
Specialty Materials & Alloys ......... 112,782 82,777 66,724
Magnetic Materials ................... 140,409 110,971 84,502
Other ................................ 45,729 20,521 14,737
Intersegment ......................... (7,845) (8,158) (7,305)
--------- -------- --------
Net sales ............................ $ 716,605 $588,616 $485,903
========= ======== ========
Operating earnings:
Fasteners ............................ $ 52,238 $ 41,104 $ 26,645
Specialty Materials & Alloys ......... 15,132 10,986 8,603
Magnetic Materials ................... 17,834 14,394 10,978
Other ................................ 4,530 1,294 352
Unallocated Corporate Costs . (10,400) (9,700) (8,400)
--------- -------- --------
Operating earnings ................... $ 79,334 $ 58,078 $ 38,178
========= ======== ========
Total assets:
Fasteners ............................ $ 317,366 $280,958 $285,672
Specialty Materials & Alloys ......... 70,838 45,578 32,448
Magnetic Materials ................... 118,097 124,762 99,985
Other ................................ 100,934 20,750 9,895
--------- -------- --------
Total assets ......................... $ 607,235 $472,048 $428,000
========= ======== ========
</TABLE>
Depreciation and Amortization and Capital Additions:
<TABLE>
<CAPTION>
Depreciation and Amortization Capital Additions
------------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fasteners ............................ $17,389 $14,515 $12,724 $19,445 $24,445 $20,829
Specialty Materials & Alloys ......... 2,243 1,418 953 6,082 4,966 2,339
Magnetic Materials ................... 7,321 5,950 4,216 3,482 7,224 3,972
Other ................................ 2,376 1,200 1,009 3,075 875 1,080
------- ------- ------- ------- ------- -------
Total ................................ $29,329 $23,083 $18,902 $32,084 $37,510 $28,220
======= ======= ======= ======= ======= =======
</TABLE>
Geographic Areas
1998 1997 1996
----------- ----------- -----------
Net sales:
United States ................... $517,693 $413,206 $335,489
England and Ireland ............. 145,560 111,105 89,935
Brazil .......................... 22,627 27,399 24,955
Other ........................... 30,725 36,906 35,524
-------- -------- --------
Net sales ....................... $716,605 $588,616 $485,903
======== ======== ========
Long-lived assets:
United States ................... $200,305 $155,331 $113,208
England and Ireland ............. 109,827 59,624 49,700
Brazil .......................... 12,660 14,570 14,356
Other ........................... 12,503 15,635 18,960
-------- -------- --------
Total long-lived assets ......... $335,295 $245,160 $196,224
======== ======== ========
The Other geographic areas consist principally of Australia, Canada, China,
Japan, Mexico and Singapore. For geographic area disclosure purposes, the
Company considers investments in affiliates, property, plant and equipment and
other assets, as disclosed in the Consolidated Balance Sheets, to be long-lived
assets.
46
<PAGE>
1998 ANNUAL REPORT
Report of Independent Accountants
The Shareholders and Board of Directors
SPS Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the consolidated financial position
of SPS Technologies, Inc. and subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
February 2, 1999
47
<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>
1998
- ----
Net sales $179,865 $175,149 $184,440 $177,151
Gross profit 40,187 41,773 41,008 39,867
Net earnings 10,920 11,720 11,025 10,905
Basic earnings per common share .88 .94 .87 .86
Diluted earnings per common share .85 .90 .84 .83
1997
- ----
Net sales $137,975 $153,108 $142,280 $155,253
Gross profit 29,330 33,417 31,367 34,343
Net earnings 7,120 8,390 8,450 8,540
Basic earnings per common share .59 .69 .70 .70
Diluted earnings per common share .56 .66 .66 .66
</TABLE>
<PAGE>
Selected Financial Data
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Net sales ...................... $ 716,605 $ 588,616 $ 485,903 $ 409,814 $348,905
Operating earnings ............. 79,334 58,078 38,178 26,010 7,978
Net earnings ................... 44,570 32,500 22,300 14,875 3,200
--------- --------- --------- --------- --------
Working capital ................ 134,027 106,385 126,319 103,007 87,491
Total assets ................... 607,235 472,048 428,000 326,087 289,246
Long-term debt ................. 154,010 95,507 98,838 58,119 56,426
Property, plant and equipment
additions ..................... 32,084 37,510 28,220 21,480 17,615
--------- --------- --------- --------- --------
Per Common Share Data:
Basic net earnings ............ 3.55 2.68 1.87 1.30 .31
Diluted net earnings .......... 3.42 2.54 1.77 1.25 .31
--------- --------- --------- --------- --------
</TABLE>
Results for 1994 include net restructuring charges of $3,500.
<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:
Quarter Ended High Low
- ----------------------------- ----------- -----------
December 31, 1998 ........... $ 57.38 $ 38.13
September 30, 1998 .......... 63.63 37.00
June 30, 1998 ............... 65.00 54.06
March 31, 1998 .............. 54.13 39.25
December 31, 1997 ........... $ 50.56 $ 41.38
September 30, 1997 .......... 47.00 35.13
June 30, 1997 ............... 37.88 32.38
March 31, 1997 .............. 34.75 29.19
The approximate number of holders of record of common stock as of March 3, 1999
was 985.
48
<PAGE>
1998 ANNUAL REPORT
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
Sales and net earnings have continued to improve over the last three years. The
improvement in operating results is primarily the result of increased sales of
aerospace fasteners and superalloys and the inclusion of the operating results
of the businesses acquired in the past three years. The Company's capital
expenditure program over the last five years has increased capacity and reduced
manufacturing costs. During the past three years, net cash provided by
operating activities has funded 59 percent of the $321.4 million cost incurred
by the aggressive capital expenditure and "bolt on" acquisition programs that
are driving the Company's growth.
1998 Compared to 1997
Net Sales
Fasteners segment sales increased $43.0 million, or 11.2 percent, in 1998. The
increase in fastener sales is due principally to two factors: an increase in
aerospace fastener sales and the acquisition of fastener companies in 1998. The
segment's aerospace fasteners sales increased $29.7 million, or 14.0 percent,
to $241.1 million as sales increased in North America and Europe. Although
sales in North America increased in 1998, the Company experienced a decline in
aerospace fastener orders in North America in 1998. This decline is attributed
to a forecasted drop in Boeing aircraft deliveries in the year 2000 and current
reductions in Boeing inventories. The Company's North American aerospace
facilities did secure important long-term contracts with Boeing, Pratt &
Whitney and General Electric which are expected to increase market share with
these customers. The recent success of Airbus in winning new aircraft orders
has increased the overall demand for aerospace products in Europe. To further
participate in the expanding European aerospace market, the Company has
committed to a $4.3 million expansion project for its European aerospace
fastener manufacturing facility. This expansion will be completed in 1999 and
is expected to increase manufacturing capacity by 25 percent. For 1999, the
Company believes that the overall aerospace fastener production volume should
remain at a level that will continue to generate reasonable profits and
significant free cash flow.
Sales of automotive and industrial fasteners by Terry Machine Company (acquired
on June 30, 1998) and Non-Ferrous Bolt & Mfg. Co. (acquired on July 31, 1998)
increased Fasteners segment sales by $23.7 million. Excluding the sales from
these acquired businesses, the Company's automotive and industrial fastener
sales decreased $6.1 million, or 3.8 percent. The decrease in sales of
fasteners manufactured in Brazil and Australia exceeded the modest growth in
sales of fasteners manufactured in North America and Europe. The overall
weakness of the Brazilian economy and increased fastener industry capacity has
adversely affected the Company's Brazilian operation. The Company's Australian
operation was adversely affected by weak demand from the automotive industry as
a result of the Asian economic slowdown.
Specialty Materials and Alloys segment sales increased $30.0 million, or 36.2
percent. This increase is due primarily to the 1998 acquisition of Greenville
Metals, Inc. ($14.0 million) and to an increase in superalloy sales ($13.4
million) by the Cannon-Muskegon Corporation (Cannon). Superalloy sales
benefited from strong demand from the aerospace and industrial gas turbine
markets. In December 1998, the Company signed a five year supply agreement to
deliver in excess of three million pounds annually of superalloy material to
Precision Castparts for use in industrial gas turbines and airplane jet
engines. The Company has committed to a $6.75 million investment at Cannon for
a building addition, a new five ton vacuum furnace and other equipment in order
to increase capacity to meet the requirements of this new contract.
Excluding the $32.1 million of sales by two companies acquired at the end of
1997 (Magnetic Technologies Corporation and National-Arnold Magnetics Company),
Magnetic Materials segment sales decreased by $2.6 million, or 2.4 percent. The
decrease is attributed to a decline in demand from ad-specialty customers and
the General Motors strike.
49
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
As described in Note 18 to the financial statements, the Company's Other
segment consists of the Precision Tool Group and the Chevron Aerospace Group.
The Precision Tool Group was formed to build a full service, global tool
business focusing on precision consumable tools used for metal forming and
cutting. Due primarily to the acquisition of Mohawk Europa Limited (Mohawk) on
September 23, 1997 and Howell Penncraft, Inc. on June 30, 1998, the Precision
Tool Group increased sales by $15.4 million, or 125 percent. The acquisition of
the Chevron Aerospace Group on October 28, 1998 marked the Company's expansion
into the production of aerospace structural components. While contributing
$10.1 million of sales in 1998, this acquisition is expected to have a more
material impact on sales in 1999.
Sales originating in the United States, as presented in the geographic area
information in Note 18 to the financial statements, increased $104.5 million,
or 25.3 percent, in 1998. This increase is primarily due to increased domestic
aerospace sales ($15.1 million) and sales from acquisitions made in the last
two years located in the United States ($79.2 million). Sales originating in
England and Ireland increased $34.5 million, or 31.0 percent, due to higher
sales of aerospace fasteners manufactured in England ($7.5 million), increased
sales from Mohawk, which was acquired in September of 1997 ($9.1 million) and
sales from Chevron noted above. The decrease in sales originating in Other
areas is attributed to the decrease in sales of fasteners manufactured in
Australia described above.
Operating Earnings
Operating earnings of the Fasteners segment improved from $41.1 million, or
10.7 percent of sales, in 1997, to $52.2 million, or 12.3 percent of sales. The
improvement in earnings is attributed to increased sales of aerospace fasteners
and further improvements in manufacturing efficiencies of all fastener
businesses. New production equipment, new plant layouts and process
simplification have resulted in improved margins in the Fasteners segment.
In 1998, the Company announced further downsizing of its manufacturing
operation in Coventry, England. This facility lost $3.4 million in 1998 which
included operating losses of $860 thousand, cost of employee separations of
$1.7 million, inventory write-offs of $600 thousand and other costs of $240
thousand. The headcount at this facility is expected to be approximately 50
employees by March, 1999 compared to 154 employees at January 1, 1998 and 82
employees at December 31, 1998. Certain equipment at Coventry will be relocated
to other facilities owned by the Company or sold to third parties. In 1998, the
Fasteners segment incurred the cost of other employee separations (primarily
related to automotive and industrial manufacturing operations) of $3.0 million.
Operating earnings of the Specialty Materials and Alloys segment improved from
$11.0 million, or 13.3 percent of sales, to $15.1 million, or 13.4 percent of
sales. The increase in earnings is attributed to increased sales of superalloys
and earnings contributed by the 1998 acquisition of Greenville Metals, Inc.
Partially offsetting these increases were operating losses incurred by Lake
Erie Design where technical problems were experienced in ramping up production
of very complex cores in the new 38,000 square foot industrial gas turbine core
facility. The Company expects to resolve these problems and return this
facility to profitability in 1999.
The magnetic material acquisitions completed at the end of 1997 discussed above
contributed $3.2 million of the $3.4 million increase in operating earnings in
the Magnetic Materials segment. Acquisitions in the Other segment (Chevron
Aerospace Group and the Precision Tool Group companies discussed above)
contributed $2.9 million of the $3.2 million increase in operating earnings
from the Other segment.
Other Income (Expenses)
Interest expense increased from $9.0 million in 1997 to $10.9 million in 1998
due primarily to a higher level of average debt during 1998. The 1998 loss from
equity in affiliates was $2.7 million worse than the 1997 income amount. The
Company's affiliates in India and China incurred significant losses in 1998.
The Company's
50
<PAGE>
1998 ANNUAL REPORT
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
share of these losses was $1.4 million for the Indian affiliate and $1.0
million for the China joint venture. Decreasing export sales, manufacturing
inefficiencies and weak economic conditions in Asia were the major factors in
these losses.
Orders and Backlog
Incoming orders in 1998 were $704.2 million compared to $648.6 million in 1997,
an 8.6 percent increase. The acquisitions made in the last two years increased
orders by $95.8 million. In addition to the acquisition impact, the Company's
orders increased for aerospace fasteners manufactured in England ($9.1 million)
and superalloys manufactured by Cannon ($16.7 million). Partially offsetting
these increases were decreases for aerospace fasteners manufactured in North
America ($49.0 million) and magnetic materials manufactured in North America
($13.9 million). The backlog of orders, which represent firm orders with
delivery scheduled within 12 months, at December 31, 1998 was $296.1 million,
compared to $251.1 million at the end of 1997 and $181.0 million at December
31, 1996.
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, 1998, 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
As discussed in Note 2 to the financial statements, the Company acquired five
businesses in 1998. On March 23, 1998, the Company acquired all of the
outstanding shares of Greenville Metals, Inc. (Greenville) located in Transfer,
Pennsylvania, for $15.9 million. Greenville manufactures master alloy ingot and
shot, foundry additive products, miscellaneous induction alloys and refines and
converts scrap for a wide variety of customers. In 1998, Greenville had sales
of approximately $19.2 million. Greenville's capabilities complement and expand
those of Cannon and the Company expects to realize future benefits from the
operational synergies that can be achieved between Cannon and Greenville. On
June 30, 1998, the Company acquired all of the outstanding shares of Terry
Machine Company (Terry) located in Waterford, Michigan, for $22.1 million.
Terry manufactures specialty cold headed fasteners for the automotive industry
and had 1998 sales of approximately $36.1 million. This acquisition expands the
Company's automotive product offering which complements auto makers' on-going
vendor reduction strategy. On June 30, 1998, the Company purchased the
operating assets of Howell Penncraft, Inc. (Penncraft) located in Howell,
Michigan, for $3.5 million. Penncraft is a manufacturer of high-speed tool
steel and carbide products used in metal forming. Penncraft had 1998 sales of
approximately $8.6 million. This acquisition expands the product range and
geographic sales coverage of the Company's Precision Tool Group. On July 31,
1998, the Company acquired all of the outstanding shares of Nevada Bolt & Mfg.
Co. doing business as Non-Ferrous Bolt & Mfg. Co. (Non-Ferrous) located in Las
Vegas, Nevada for $11.9 million. Non-Ferrous manufactures non-standard,
hot-forged bolts and nuts from stainless steel and specialty alloy materials.
Non-Ferrous had 1998 sales of approximately $16.0 million. This acquisition
expands the product range of the Company's industrial fastener products and
extends their penetration into the industrial market. On October 28, 1998 the
Company acquired all of the outstanding shares of Chevron Aerospace Group
Limited (Chevron) based in Nottingham, England for $54.9 million. Chevron is a
manufacturer of aircraft structural assemblies, precision machined components,
avionic panels, wiring harnesses and turbine lockplates. In 1998, Chevron had
sales of approximately $44.4 million.
51
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The acquisition of Chevron expands SPS' product offering to the European
aerospace market, which is growing rapidly due to the continued success of
Airbus in securing new aircraft orders.
The Company also acquired three smaller sized businesses, at a cost of $2.9
million, intended to add specific product line capabilities and enhance the
competitive position of the Company's current businesses. The company acquired
the assets of Premier Microwave Corporation's solenoid business, certain assets
of Robertson Tooling Limited (a manufacturer of planetary thread roll dies) and
the assets of KSS Socket Screw, Inc. (a manufacturer of small diameter headed
socket screws). The combined annual sales of these three businesses is
approximately $3.5 million and all assets were or will be relocated to
facilities owned by the Company.
1997 Compared to 1996
Net Sales
Fasteners segment sales increased $55.3 million, or 16.9 percent, in 1997. The
increase in fastener sales is attributed to an increase in aerospace fastener
sales and the 1997 acquisition of Greer Stop Nut, Inc. (Greer). The segment's
aerospace fastener sales increased $51.0 million, or 31.8 percent, to $211.4
million due to the buoyant aerospace market. The strong demand for aerospace
fasteners was attributed to the build rates for new aircraft and the ongoing
need for maintenance and repair parts for the aging fleet of commercial and
military aircraft. The Company spent approximately $23.9 million on capital
equipment over the past three years (1995 to 1997) to increase aerospace
capacity and lower costs to enhance its competitive position. Sales of
industrial fasteners by Greer (acquired in February, 1997) increased Fasteners
segment sales by $10.5 million. Excluding the sales from this business, the
Company's automotive and industrial fastener sales increased $2.1 million, or
1.4 percent, due primarily to increased sales by the Company's Brazilian
operation. Increased sales of UNBRAKO fasteners in the North American market
(approximately $2.0 million) were offset by lower sales of UNBRAKO fasteners in
Europe.
Specialty Materials and Alloy segment sales increased $16.1 million, or 24.1
percent, due to an increase in superalloy sales by the Cannon-Muskegon
Corporation ($10.5 million) and to the 1997 acquisition of Lake Erie Design
($5.6 million). The capital expenditures made over the past four years (1994 to
1997) have increased superalloy production capacity and allowed Cannon-Muskegon
to further participate in the expanding aerospace and land-based industrial gas
turbine markets. The acquisitions made in 1997 and 1996 in the Magnetic
Materials segment contributed $25.5 million of the $26.5 million increase in
this segment's sales.
Sales originating in the United States, as presented in the geographic area
information in Note 18 to the financial statements, increased $77.7 million, or
23.2 percent, in 1997. This increase is primarily due to increased domestic
aerospace fastener sales ($34.5 million) and sales from acquisitions made in
the last two years ($32.1 million) located in the United States. Sales
originating in England and Ireland increased $21.2 million, or 23.5 percent,
due to higher sales of aerospace fasteners manufactured in England ($9.0
million) and increased sales from the magnetic material company located in
England that was acquired in June, 1996 ($9.6 million). Sales originating in
Other areas include sales into the troubled Asia market; however, these sales
are not a significant part of our business and our net exposure in the affected
economies is not material to the Company's consolidated financial position or
results of operations.
Operating Earnings
Operating earnings of the Fasteners segment improved from $26.6 million, or 8.1
percent of sales, in 1996, to $41.1 million, or 10.7 percent of sales, in 1997.
The improvement in earnings is primarily the result of increased sales of
aerospace fasteners, aggressive capital expenditure programs and incorporating
design changes on certain programs to manufacture products on a more cost
effective basis. The fastener acquisitions made in 1997 and 1996 contributed
$2.9 million of the $14.5 million increase in operating earnings from the
Fasteners segment. Partially offsetting this
52
<PAGE>
1998 ANNUAL REPORT
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
increase was the operating loss incurred by the Company's manufacturing
facility in Coventry, England. In 1997, the Coventry facility lost $3.2 million
which included operating losses of $2.4 million and cost of employee
separations of $800 thousand.
Operating earnings of the Specialty Materials and Alloys segment improved from
$8.6 million, or 12.9 percent of sales, in 1996 to $11.0 million, or 13.3
percent of sales, in 1997. The improvement in earnings is the result of the
1997 acquisition of Lake Erie Design and an increase in superalloy sales by the
Cannon-Muskegon Corporation as described above. The acquisitions made in 1997
and 1996 in the Magnetic Materials segment contributed $3.1 million of the $3.4
million increase in operating earnings in this segment.
Other Income (Expenses)
Interest expense increased from $8.0 million in 1996 to $9.0 million in 1997
due primarily to a higher level of average debt during 1997. Income from the
equity in earnings of affiliates decreased from $853 thousand in 1996 to $230
thousand in 1997 due primarily to the loss incurred by the Company's joint
venture in China. The loss by the China joint venture is primarily due to a
significant decrease in sales (28 percent or $3.5 million) as a result of
competitive pricing conditions and decreased demand from European markets. The
Company's share of the joint venture loss in 1997 was approximately $800
thousand.
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 was $70.2 million in 1998 and
1997. The improvement in net earnings ($12.1 million) and higher non-cash
charges of depreciation, amortization, loss from equity in affiliates and
deferred income taxes ($5.4 million) were offset by an increase in cash used to
fund working capital ($18.8 million).
The increase in cash used in investing activities is attributed to 1998
payments for Greenville ($10.1 million), Terry ($8.4 million), Penncraft ($3.5
million) and Chevron ($32.6 million) compared to 1997 payments for Greer ($10.0
million), RJF's Bonded Magnet Business ($9.2 million), LED ($7.8 million),
Mohawk ($8.9 million) and MTC ($9.6 million) compared to 1996 payments for
Flexmag ($21.3 million), Swift Levick ($10.4 million) and Mecair ($5.6
million). Capital expenditures in 1998 ($32.1 million) and in 1997 ($37.5
million) were spent primarily to increase capacity in the Company's aerospace
fastener, superalloy, ceramic core and bonded magnet businesses and to upgrade
equipment in the automotive and industrial fastener manufacturing operations.
Capital spending of $38.0 million is budgeted for 1999, excluding capital
spending for companies acquired in 1999.
The Company's total debt to equity ratio was 65 percent at December 31, 1998,
52 percent at December 31, 1997 and 65 percent at December 31, 1996. Total debt
was $172.2 million at December 31, 1998 compared to $110.7 million at December
31, 1997 and $115.3 million at December 31, 1996. As of December 31, 1998,
under the terms of the existing credit agreements, the Company is permitted to
incur an additional $94.6 million in debt. Additional details of the long-term
Note Purchase Agreement, the credit agreements with commercial banks and other
debt are provided in Note 9 to the financial statements.
Market Risk
The Company's primary market risk exposures are foreign currency exchange rate
and interest rate risk. Fluctuations in foreign currency exchange rates affect
the Company's results of operations and financial position. As discussed in
Note 1 to
53
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
the financial statements, the Company uses forward exchange contracts and one
currency swap agreement to minimize exposure and reduce risk from exchange rate
fluctuations affecting the results of operations. Because the largest portion
of the Company's foreign operations are in countries with relatively stable
currencies, namely, England, Ireland and Canada, the foreign currency exchange
rate risk to the Company's financial position is not material. However, the
Company has expanded into Brazil, China and other foreign countries which
increases its exposure to foreign currency fluctuations. Fluctuations in
interest rates primarily affect the Company's results of operations. Because a
majority of the Company's debt is in fixed rate obligations (as disclosed in
Note 9 to the financial statements), the Company has effectively limited its
interest expense exposure to fluctuations in interest rates.
The status of the Company's financial instruments as of December 31, 1998 and
1997 is provided in Note 16 to the financial statements. Assuming an
instantaneous 10 percent strengthening of the United States dollar versus
foreign currencies for which forward exchange contracts and currency rate swap
agreements existed and a 10 percent change in interest rate on the Company's
debt had all occurred on December 31, 1998, the Company's results of
operations, cash flow and financial position would not have been materially
affected.
Year 2000 Readiness Disclosures
The following statements include "Year 2000 Readiness Disclosure" within the
meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. The
Company is identifying, evaluating and implementing changes to computer systems
and applications necessary to achieve a year 2000 (Y2K) date conversion with no
material effect on customers or disruption to business operations. These
actions are necessary to ensure that information technology (IT) and non-IT
systems and applications will recognize and process the year 2000 and beyond.
Major areas of potential business impact have been identified and conversion
efforts are underway. All mainframe based IT systems have been assessed, plans
have been put into place and required Y2K conversion of mainframe computer
programs is 90 percent completed. Converted programs have been tested and
placed into operation. Conversion is expected to be complete by April, 1999.
The process of assessing the various PC and LAN based IT systems and non-IT
systems is substantially complete. The Company has converted and tested many of
these systems and expects that the balance of testing and any necessary
remediation will be completed by September 30, 1999. The Company is
communicating with suppliers, customers, financial institutions and others it
does business with to coordinate Y2K conversion. The Company has not completed
its assessment and evaluation of the state of readiness of its customers and
vendors, although major customers have requested from the Company information
regarding its Y2K readiness and certain key suppliers have confirmed their own
internal Y2K readiness.
The cost specifically associated with addressing Y2K issues incurred in 1998
were capitalizable costs of $500 thousand and costs expensed as incurred of
$1.0 million. The Company's cost to complete its Y2K readiness actions is
estimated to be additional capitalizable costs of $1.2 million and costs
expensed as incurred of $600 thousand. Costs expensed as incurred include the
cost of resources within the Company and external resources which have been
directed toward Y2K activities. Total Y2K readiness costs are estimated to be
$3.4 million.
The most reasonably likely worst case Y2K scenario would be the failure of
either the Company or a third party to correct a material Y2K problem that
would cause an interruption in, or failure of, normal business activities or
operations. In the event that the worst case scenario occurs, the impact on the
Company's financial position or results of operations cannot be estimated.
While the Company believes that all internal IT and non-IT systems will be
converted prior to January 1, 2000, the Company is in the process of generating
contingency plans and
54
<PAGE>
1998 ANNUAL REPORT
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
identifying additional actions which would be implemented in the event of a Y2K
failure, including but not limited to: utilization of outside (third-party)
mainframe processing resources, identifying backup capacity within the
operating groups, development of manual procedures to process critical
transactions and other appropriate measures. To the extent that the Company
experiences a Y2K failure related to a third party's lack of readiness,
alternate sources of supply are being identified, however, certain resources
are not easily replaceable and there are limited contingency planning options
for such resources. At this time, the Company has not identified a Y2K problem
that it believes cannot be remediated prior to it having a material impact on
operations. The Company will continue to assess the readiness of its own
systems and, if a problem is identified that cannot be remediated in the
appropriate time period, a specific plan to address that issue will be
developed.
Forward-Looking Statements
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward-looking" information,
within the meaning of the Private Securities Litigation Reform Act of 1995,
that involve risk and uncertainty. The Company's expectations of demand for
aerospace fasteners and its effect on the Company's aerospace operations, the
market share gains as a result of the aerospace and superalloy long-term
contracts, resolution of manufacturing problems at Lake Erie Design, future
benefits from operational synergies with newly acquired companies, the relative
stability of certain foreign currencies and completing the Year 2000 date
conversion with no material adverse effect on operations and at no material
cost to the Company's results of operations are "forward looking" statements
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations. Actual future results may differ materially depending on
a variety of factors, such as: the effects of competition on products and
pricing, customer satisfaction and qualification issues, labor disputes,
worldwide political and economic stability and changes in fiscal policies, laws
and regulations on a national and international basis. The Company undertakes
no obligation to publicly release any forward-looking information to reflect
anticipated or unanticipated events or circumstances after the date of this
document.
55
<PAGE>
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1998, 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
Chevron Aerospace Group Limited
(a United Kingdom corporation) 100% stock interest
Flexmag Industries, Inc.
(an Ohio corporation) 100% stock interest
Greenville Metals, Inc.
(a Pennsylvania corporation) 100% stock interest
Greer Stop Nut, Inc.
(a Tennessee corporation) 100% stock interest
Howell Penncraft, Inc.
(a Michigan corporation) 100% stock interest
Lake Erie Design, Inc.
(an Ohio corporation) 100% stock interest
Magnetic Technologies Corporation
(a Delaware corporation) 100% stock interest
Mecair Aerospace Industries, Inc.
(a Canadian corporation) 85% stock interest
Metalac S.A. Industria e Comercio 95% stock interest
(a Brazilian corporation) (99.6 % voting, 91.4% non-voting)
Mohawk Europa, Ltd.
(an Irish corporation) 100% stock interest
National-Arnold Magnetics Company
(a California partnership) 50% partnership interest
<PAGE>
Nevada Bolt & Mfg. Co.
(a Nevada corporation) 100% stock interest
Postkey Limited
(a United Kingdom corporation) 100% stock interest
Precision Fasteners Limited
(an Indian corporation) 22.05% stock interest
SPS Biao Wu High Tensile Fasteners Company, Ltd.
(a Chinese foreign equity joint venture) 55% 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
SPS/Unbrako K.K.
(a Japanese corporation) 100% stock interest
Standco Canada, Ltd.
(a Canadian corporation) 100% stock interest
Swift Levick Magnets, Ltd.
(a United Kingdom Corporation) 100% stock interest
Terry Machine Company
(a Michigan 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
The Company files consolidated financial statements which include the above
subsidiaries, except for Precision Fasteners Limited and SPS Biao Wu High
Tensile Fasteners Company, Ltd., 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>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
SPS Technologies, Inc. and subsidiaries on Form S-3 (Registration No.
333-61517), 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 2, 1999 on our audits of the consolidated financial
statements and financial statement schedule of SPS Technologies, Inc. and
subsidiaries as of December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997, and 1996, which report is included in this Annual Report on Form
10-K.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 22, 1999
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