Exhibit 13
Management's discussion and analysis of financial condition and results of operations
OVERVIEW
Our strategic growth plan revolves around the development of three key technologies—sensors and controls, specialized high-performance materials and illuminated displays. We are concentrating our efforts to selectively expand our capabilities in these markets. Our goal is to meet the evolving needs of our customers by providing a broad array of products and services through a single point of contact. We plan to accomplish this through internal development and strategic acquisitions. Internally, we are increasing our market presence by uniting sales forces, combining marketing opportunities and blending manufacturing knowledge and technological expertise.
Over the past several years we have focused on a selective acquisition and divestiture program supporting our long-term strategy to be a leading supplier to aerospace and defense customers throughout the world. Late in fiscal 1999, as a strategic addition to our European aerospace operation, we purchased the aerospace group of Muirhead Vactric and Norcroft Dynamics, Muirhead, a manufacturer of micro motors and motion control components located in the United Kingdom. Also, late in fiscal 1999, we divested Federal Products, an operation not aligned with our long-term direction. In December 1999, we acquired a manufacturer of custom keyboards and other multifunction data input subsystems, Advanced Input Devices Co., A.I.D. This acquisition expanded our high-end illuminated displays and custom panels operations.
We view and operate our business in three different segments: Aerospace, Advanced Materials and Automation. We primarily serve aerospace and defense customers with manufactured products such as high-end components for avionics, propulsion and guidance systems, high-performance elastomers and other complex materials in the Aerospace and Advanced Materials segments. The Automation segment serves electronic equipment customers with PCB drilling equipment and heavy equipment customers with automated machine tools for cutting and punching plate metal for heavy equipment applications.
RESULTS OF OPERATIONS
Fiscal 2000 compared with fiscal 1999
Sales for fiscal 2000 grew 6.5% when compared with the prior year. Sales by segment, were as follows:
| | 1999
| | 2000
| | Increase
(decrease)
from prior year
| |
|---|
| | (dollars in thousands)
| |
| |
|---|
| |
|---|
| Aerospace | | $ | 183,783 | | $ | 236,269 | | 28.6% | |
| Advanced Materials | | | 127,920 | | | 129,386 | | 1.1% | |
| Automation | | | 149,266 | | | 125,311 | | (16.0% | ) |
| | |
| |
| | | |
| Total | | $ | 460,969 | | $ | 490,966 | | | |
| | |
| |
| | | |
Aerospace provided our key area of growth in fiscal 2000. Substantially all of this growth was attributable to the acquisitions of Muirhead and A.I.D. Muirhead was included for a full year in fiscal 2000 and only three months in the prior year. In addition, the timing of the A.I.D. acquisition resulted in the inclusion of approximately three quarters of its sales in fiscal 2000. Sales growth in Advanced Materials was affected by customer programs designed to rebalance inventory levels. We believe those inventory levels have been normalized. Order placement activity improved over the last two quarters of fiscal 2000.
1
The decrease in Automation sales was primarily a result of our October 1999 divestiture of Federal Products. Excluding Federal Products on a comparative basis, Automation sales increased 15.6% due to improved PCB manufacturing equipment business, driven largely by strong performance in the second half of the year. Performance in this area has been difficult to predict and current trends indicate that the improvement may not continue through fiscal 2001. In addition, equipment sales to the heavy equipment markets remained weak throughout fiscal 2000 and are not expected to improve during fiscal 2001.
Sales to foreign customers, including export sales by domestic operations, totaled $156.2 million and $137.3 million, and accounted for 31.8% and 29.8% of our sales for fiscal 2000 and 1999, respectively.
Overall, gross margin as a percentage of sales was 36.6% and 37.9% for fiscal 2000 and 1999, respectively. Gross margin by segment ranged from 35.0% to 37.6% in fiscal 2000, compared with 33.7% to 40.4% in the prior year. Gross margin ranges for fiscal 2000 were lower when compared to fiscal 1999 due to a combination of factors, including lower margins on some recent acquisitions in the Aerospace segment; customer-related inventory rebalancing during the first part of fiscal 2000 in Advanced Materials; and a non-recurring inventory charge in Advanced Materials.
Automation gross margin improved when compared with the prior year primarily due to the PCB equipment revenue increases and cost cutting measures that have been implemented in the operations serving the heavy equipment markets.
Selling, general and administrative expenses (which include corporate expenses) decreased to $105.5 million in fiscal 2000 compared with $106.2 million in the prior year. As a percentage of sales, selling, general and administrative expenses were 21.5% and 23.0% in fiscal 2000 and 1999, respectively. Overall sales volume was weak throughout fiscal 1999 into the first quarter of fiscal 2000 and we focused on tightening selling, general and administrative expenses. In the second quarter of fiscal 2000, sales nearly matched the highest quarter in the prior year and continued to improve throughout the rest of the year. We believe our efficiency improvements have facilitated the absorption of business without significant increases in expenses. However, as an upward trend in sales continues, selling, general and administrative expenses will gradually increase. Long-term selling, general and administrative expense as a percentage of sales is unlikely to remain as low as the 21.5% in fiscal 2000.
Research, development and related engineering spending was $20.8 million, or 4.2% of sales, in fiscal 2000 compared with $24.0 million, or 5.2% of sales, in the prior year. During the year, several projects transitioned from prototype to production and accounted for the lower level of spending in the current fiscal year.
Segment earnings (excluding corporate expenses) increased 14.8% during fiscal year 2000 to $65.4 million compared with $56.9 million in the prior year. By segment, Aerospace earnings increased 31.6% to $32.7 million for fiscal 2000 compared with $24.8 million in the prior year, primarily due to acquisitions. Advanced Materials earnings were $24.8 million for fiscal 2000 compared with $29.2 million for the prior year. The decrease in earnings for Advanced Materials was attributable to the customer-related inventory rebalancing and the write-down of inventory. Automation earnings improved to $7.9 million for fiscal 2000 compared with $2.9 million for the prior year. For fiscal 1999, Automation earnings were attributable to Federal Products—sold at the end of that fiscal year. Excluding Federal Products in a year-over-year comparison, the increase in Automation earnings was primarily related to improvements in business related to PCB markets.
2
The $2.6 million gain on sale of business relates to the curtailment of retirement benefits for certain Federal Products employees resulting from the October 28, 1999 sale of that operation. This gain was reported during the third quarter when it was first estimable. For purposes of the benefit calculations, credited service under the plan was frozen as of the date of sale. We do not anticipate any further adjustments related to the curtailment.
Interest income decreased to $2.2 million during fiscal 2000 compared with $2.9 million in the prior year. Interest expense decreased to $8.1 million during fiscal 2000 compared with $9.0 million in the prior year.
The effective income tax rate for fiscal 2000 was 34.9% compared with fiscal 1999 at 35.2%. Both years benefited from certain tax credits.
Net earnings in fiscal 2000 were $32.6 million, or $1.85 per share on a diluted basis, compared with $29.9 million, or $1.69 per share, in the prior year.
Orders received in fiscal 2000 increased 12.7% to $536.1 million from $475.7 million in the prior year. The increase is primarily attributable to Aerospace and Advanced Materials. Backlog at the end of fiscal 2000 was $228.3 million compared with $183.2 million at the end of the prior year. Approximately $46.1 million of backlog is scheduled to be delivered after fiscal 2001. Backlog is subject to cancellation until delivery.
Fiscal 1999 compared with fiscal 1998
Sales for fiscal 1999 grew 1.6% when compared with the prior year. Sales by segment were as follows:
| | 1998
| | 1999
| | Increase
(decrease)
from prior year
| |
|---|
| | (dollars in thousands)
| |
| |
|---|
| |
|---|
| Aerospace | | $ | 171,028 | | $ | 183,783 | | 7.5% | |
| Advanced Materials | | | 91,498 | | | 127,920 | | 39.8% | |
| Automation | | | 191,376 | | | 149,266 | | (22.0% | ) |
| | |
| |
| | | |
| Total | | $ | 453,902 | | $ | 460,969 | | | |
| | |
| |
| | | |
Sales in Advanced Materials grew substantially in fiscal 1999. This growth was primarily attributable to Kirkhill Rubber Co., Kirkhill, acquired in August 1998. Kirkhill was included in Advanced Materials for a full year during fiscal 1999 and three months in fiscal 1998. Aerospace continued to see improvements although at a slower rate than in the previous year. Sales in Aerospace were positively impacted by the acquisition of Muirhead. Revenues for this entity were included for the last quarter of the year.
Sales in Automation declined due to a variety of unfavorable market conditions during the year. These included continuing poor worldwide demand for PCB manufacturing equipment as well as soft agriculture and automotive markets. The sale of Tulon Co., Tulon, in late fiscal 1998 also impacted Automation in the year-over-year comparison.
Sales to foreign customers, including export sales by domestic operations, totaled $137.3 million and $120.2 million, and accounted for 29.8% and 26.5% of our sales for fiscal 1999 and 1998, respectively.
Gross margin as a percentage of sales was 37.9% and 38.0% for fiscal 1999 and 1998, respectively. Gross margins by segment ranged from 33.7% to 40.4% in fiscal 1999, compared with 33.2% to 42.4% in the prior year. Gross margin in Aerospace decreased slightly due to volumes that were lower
3
than expected. Gross margin for Advanced Materials decreased during the year due to volume decreases and new business included for a full year, primarily Kirkhill. An increase in Automation margin was related primarily to improvements at Federal Products relative to the prior year, and the divestiture of Tulon late in fiscal 1998.
Selling, general and administrative expenses (which include corporate expenses) increased to $106.2 million in fiscal 1999 compared with $102.4 million in the prior year. As a percentage of sales, selling, general and administrative expenses were 23.0% and 22.6% in fiscal 1999 and 1998, respectively.
Research, development and related engineering spending increased to $24.0 million in fiscal 1999 from $20.8 million in fiscal 1998, and as a percentage of sales was 5.2% compared with 4.6% in the prior year. Developments continued in laser technology for Automation; sensors and controls for Aerospace; and fireproofing elastomer for Advanced Materials during fiscal 1999.
Segment earnings (excluding corporate expenses) decreased 5.3% during fiscal 1999 to $56.9 million compared with $60.1 million in the prior year. Aerospace earnings were essentially flat with the prior year. Advanced Materials posted earnings of $29.2 million in fiscal 1999 compared with $24.7 million in fiscal 1998. The improvement was primarily due to Kirkhill's full year of earnings. Automation earnings decreased to $2.9 million in fiscal 1999 compared with $10.7 million in the prior year. This reduction was primarily due to the continued effects of a depressed worldwide PCB equipment market and was compounded in the second half of the year by a significant decline in the agriculture and heavy equipment sector.
Prior to the close of fiscal 1999, we completed the sale of Federal Products to Mahr GmbH. Federal Products was our only measurement business and accounted for less than 10.0% of our sales during fiscal 1999. We recognized an $8.0 million gain on the sale for fiscal 1999.
Interest income increased to $2.9 million during fiscal 1999 compared with $1.6 million in the prior year. Interest expense increased to $9.0 million during fiscal 1999 compared with $3.8 million in the prior year. In November 1998, we completed a $100.0 million private placement of senior notes (1999 Senior Notes). The proceeds of this placement were used to retire an outstanding bridge facility arising from the Kirkhill acquisition. The remainder was invested and utilized to fund other internal expansion and acquisition activities.
The effective income tax rate decreased to 35.2% in fiscal 1999 from 35.9% in fiscal 1998, primarily due to a one-time benefit related to state tax refunds.
Net earnings in fiscal 1999 were $29.9 million, or $1.69 per share on a diluted basis, compared with $30.1 million, or $1.70 per share, in the prior year.
Orders received in fiscal 1999 increased 6.1% to $475.7 million from $448.5 million in the prior year. Backlog at October 31, 1999 was $183.2 million compared with $168.4 million at the end of the prior year.
4
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at the end of fiscal 2000 totaled $50.9 million, a decrease of $4.2 million from the prior year. No short-term investments were held at the end of fiscal 2000 compared with $25.9 million at the end of fiscal 1999. Net working capital decreased to $121.6 million at the end of fiscal 2000 from $140.9 million at the end of the prior year. These decreases were primarily attributable to the acquisitions completed during late 1999.
Net accounts receivable were $83.3 million at the end of fiscal 2000 compared with $69.6 million at the end of the prior year. Sales increased $15.1 million when compared with the prior year fourth quarter, resulting in a significant increase in net accounts receivable. Accounts payable were $25.0 million at the end of fiscal 2000 compared with $16.9 million at the end of the prior year. The increase was primarily due to the timing of payments in Automation. Net accounts receivable and accounts payable were also higher due to the inclusion of A.I.D. for the current year. Federal and foreign income taxes payable were $5.5 million at the end of fiscal 2000 compared with $6.3 million at the end of fiscal 1999.
Net property, plant and equipment was $87.4 million at the end of fiscal 2000 compared with $89.3 million at the end of the prior year. Goodwill increased to $138.0 million at the end of fiscal 2000 compared with $105.4 million at the end of the prior year, due to acquisitions completed during the year.
Capital expenditures for fiscal 2000 were $15.5 million (excluding acquisitions) and included machinery and equipment and enhancements to information technology systems. Capital expenditures are anticipated to approximate $21.0 million for fiscal 2001. We will continue to support expansion through investments in infrastructure including machinery, equipment, buildings and information systems.
Total debt decreased $12.0 million from the prior year to $117.4 million at the end of fiscal 2000, principally due to a reduction in outstanding short-term credit facilities and repayment of debt. Total debt outstanding at the end of fiscal 2000 consisted of $100.0 million under our 1999 Senior Notes, $11.4 million under our 8.75% Senior Notes, and $6.0 million under various foreign currency debt agreements, including capital lease obligations. The 8.75% Senior Notes have a scheduled annual payment of $5.7 million, which will continue until maturity on July 30, 2002. The 1999 Senior Notes have maturities ranging from 5 to 10 years and interest rates from 6.00% to 6.77%. Management believes cash on hand, funds generated from operations and other available debt facilities are sufficient to fund operating cash requirements and capital expenditures through fiscal 2001.
SEASONALITY
The timing of our revenues is impacted by the purchasing patterns of our customers and as a result we do not generate revenues evenly throughout the year. Moreover, our first fiscal quarter, November through January, includes significant holiday and vacation periods in both Europe and North America. This leads to decreased order and shipment activity, consequently first quarter results are typically weaker than other quarters and not necessarily indicative of our performance in subsequent quarters.
5
MARKET RISK EXPOSURE
We have financial instruments that are subject to interest rate risk, principally debt obligations issued at a fixed rate. To the extent that sales are transacted in a foreign currency, we are also subject to foreign currency fluctuation risk. Furthermore, we have assets denominated in foreign currencies that are not offset by liabilities in such foreign currencies. Historically, we have not experienced material gains or losses due to interest rate or foreign exchange fluctuations. We own a significant operation in France. During the year, the foreign exchange rate for this country decreased significantly relative to the US dollar, which resulted in an increase in accumulated other comprehensive loss, as a result of the foreign currency translation adjustment.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, FASB, issued Statement of Financial Accounting Standards, FAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 133 establishes standards for derivative instruments and requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. In June 1999, the FASB issued FAS No. 137 which deferred the effective date of FAS No. 133. This standard will be effective for us beginning in fiscal 2001. We utilize foreign currency forward contracts primarily to reduce our exposure to fluctuations between the US dollar and the French Franc. At the end of fiscal 2000, we held foreign currency contracts totaling a notional amount of $8.5 million. If FAS No 133 was in effect at the end of fiscal 2000, this would have resulted in a gain of approximately $600,000. We anticipate that future similar foreign currency transactions will qualify for hedge accounting treatment under FAS No. 133.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, SAB No. 101, "Revenue Recognition in Financial Statements." In SAB No. 101, the Commission's staff expressed its views regarding the appropriate recognition of revenue with regard to a variety of circumstances. We will be required to adopt SAB No. 101 for the fourth quarter of fiscal 2001. We are currently evaluating SAB No. 101, however, we believe it will not have a material impact on our consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of Accounting Principles Board Opinion 25, "Stock Issued to Employees." We adopted the Interpretation effective July 1, 2000, and it did not have a material impact on the consolidated financial statements.
6
SELECTED FINANCIAL DATA
in thousands, except per share amounts
for fiscal years
| | 2000
| | 1999
| | 1998
| | 1997
| | 1996
| |
|---|
| |
|---|
| Operating Results | | | | | | | | | | | | | | | | |
| Sales | | $ | 490,966 | | $ | 460,969 | | $ | 453,902 | | $ | 390,958 | | $ | 352,843 | |
| Cost of sales | | | 311,242 | | | 286,410 | | | 281,539 | | | 243,197 | | | 215,015 | |
| Selling, general and administrative | | | 105,532 | | | 106,239 | | | 102,361 | | | 90,918 | | | 88,042 | |
| Research, development and engineering | | | 20,839 | | | 24,022 | | | 20,846 | | | 17,556 | | | 15,373 | |
| Gain on sale of business | | | (2,591 | ) | | (7,956 | ) | | — | | | — | | | — | |
| Interest income | | | (2,205 | ) | | (2,859 | ) | | (1,594 | ) | | (2,397 | ) | | (1,989 | ) |
| Interest expense | | | 8,124 | | | 9,011 | | | 3,803 | | | 3,603 | | | 4,328 | |
| Income tax expense | | | 17,438 | | | 16,240 | | | 16,863 | | | 12,760 | | | 10,720 | |
| Net earnings | | | 32,587 | | | 29,862 | | | 30,084 | | | 25,321 | | | 21,354 | |
| Net earnings per share—diluted | | $ | 1.85 | | $ | 1.69 | | $ | 1.70 | | $ | 1.44 | | $ | 1.31 | |
| | |
| |
| |
| |
| |
| |
| Financial Structure | | | | | | | | | | | | | | | | |
| Total assets | | $ | 474,339 | | $ | 453,082 | | $ | 387,179 | | $ | 289,847 | | $ | 276,646 | |
| Long-term debt, net | | | 108,172 | | | 116,966 | | | 74,043 | | | 27,218 | | | 29,007 | |
| Shareholders' equity | | | 249,695 | | | 224,620 | | | 196,376 | | | 165,718 | | | 142,304 | |
| Weighted average shares outstanding—diluted | | | 17,654 | | | 17,658 | | | 17,718 | | | 17,608 | | | 16,334 | |
| | |
| |
| |
| |
| |
| |
7
MARKET PRICE OF ESTERLINE COMMON STOCK
in dollars
| | 2000
| | 1999
|
|---|
for fiscal years
| | High
| | Low
| | High
| | Low
|
|---|
|
|---|
| Quarter | | | | | | | | | | | | |
| First | | $ | 14.00 | | $ | 10.25 | | $ | 24.13 | | $ | 18.25 |
| Second | | | 13.19 | | | 9.25 | | | 19.63 | | | 12.13 |
| Third | | | 16.13 | | | 12.06 | | | 16.75 | | | 12.38 |
| Fourth | | | 22.50 | | | 14.75 | | | 16.63 | | | 13.25 |
| | |
| |
| |
| |
|
Principal Market—New York Stock Exchange
At the end of fiscal 2000, there were approximately 797 holders of record of the Company's common stock.
8
Esterline Technologies Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
in thousands, except per share amounts
for each of the three fiscal years in the period ended October 27, 2000
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Sales | | $ | 490,966 | | $ | 460,969 | | $ | 453,902 | |
| Cost of Sales | | | 311,242 | | | 286,410 | | | 281,539 | |
| | |
| |
| |
| |
| | | | 179,724 | | | 174,559 | | | 172,363 | |
| Expenses | | | | | | | | | | |
| Selling, general and administrative | | | 105,532 | | | 106,239 | | | 102,361 | |
| Research, development and engineering | | | 20,839 | | | 24,022 | | | 20,846 | |
| | |
| |
| |
| |
| Total Expenses | | | 126,371 | | | 130,261 | | | 123,207 | |
| | |
| |
| |
| |
| Operating Earnings | | | 53,353 | | | 44,298 | | | 49,156 | |
| | |
| |
| |
| |
| Gain on sale of business | | | (2,591 | ) | | (7,956 | ) | | — | |
| Interest income | | | (2,205 | ) | | (2,859 | ) | | (1,594 | ) |
| Interest expense | | | 8,124 | | | 9,011 | | | 3,803 | |
| | |
| |
| |
| |
| Net Other (Income) Expense | | | 3,328 | | | (1,804 | ) | | 2,209 | |
| | |
| |
| |
| |
| Earnings Before Income Taxes | | | 50,025 | | | 46,102 | | | 46,947 | |
| Income Tax Expense | | | 17,438 | | | 16,240 | | | 16,863 | |
| | |
| |
| |
| |
| Net Earnings | | $ | 32,587 | | $ | 29,862 | | $ | 30,084 | |
| | |
| |
| |
| |
| Net Earnings Per Share—Basic | | $ | 1.88 | | $ | 1.72 | | $ | 1.74 | |
| | |
| |
| |
| |
| Net Earnings Per Share—Diluted | | $ | 1.85 | | $ | 1.69 | | $ | 1.70 | |
| | |
| |
| |
| |
See notes to consolidated financial statements.
9
Esterline Technologies Corporation
CONSOLIDATED BALANCE SHEET
in thousands, except share and per share amounts
as of October 27, 2000 and October 31, 1999
| | 2000
| | 1999
| |
|---|
| |
|---|
| Assets | | | | | | | |
| Current Assets | | | | | | | |
| Cash and cash equivalents | | $ | 50,888 | | $ | 55,047 | |
| Short-term investments | | | — | | | 25,933 | |
| Accounts receivable, net of allowances of $2,423 and $2,233 | | | 83,336 | | | 69,613 | |
| Inventories | | | 73,984 | | | 71,430 | |
| Deferred income tax benefits | | | 16,053 | | | 16,212 | |
| Prepaid expenses | | | 4,282 | | | 4,251 | |
| | |
| |
| |
| Total Current Assets | | | 228,543 | | | 242,486 | |
| Property, Plant and Equipment | | | | | | | |
| Land | | | 12,950 | | | 13,159 | |
| Buildings | | | 64,007 | | | 62,561 | |
| Machinery and equipment | | | 123,611 | | | 117,555 | |
| | |
| |
| |
| | | | 200,568 | | | 193,275 | |
| Accumulated depreciation | | | 113,158 | | | 103,936 | |
| | |
| |
| |
| | | | 87,410 | | | 89,339 | |
| Other Non-Current Assets | | | | | | | |
| Goodwill, net | | | 137,952 | | | 105,383 | |
| Intangibles, net and other assets | | | 20,434 | | | 15,874 | |
| | |
| |
| |
| Total Assets | | $ | 474,339 | | $ | 453,082 | |
| | |
| |
| |
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
| Current Liabilities | | | | | | | |
| Accounts payable | | $ | 25,014 | | $ | 16,918 | |
| Accrued liabilities | | | 67,211 | | | 65,974 | |
| Credit facilities | | | 2,654 | | | 5,138 | |
| Current maturities of long-term debt | | | 6,525 | | | 7,249 | |
| Federal and foreign income taxes | | | 5,518 | | | 6,299 | |
| | |
| |
| |
| Total current liabilities | | | 106,922 | | | 101,578 | |
| Long-Term Liabilities | | | | | | | |
| Long-term debt, net of current maturities | | | 108,172 | | | 116,966 | |
| Deferred income taxes | | | 9,550 | | | 9,918 | |
| Commitments and contingencies | | | — | | | — | |
| Shareholders' Equity | | | | | | | |
| Common stock, par value $.20 per share, authorized 60,000,000 shares, issued and outstanding 17,424,853 and 17,342,374 shares | | | 3,485 | | | 3,468 | |
| Additional paid in capital | | | 46,952 | | | 46,824 | |
| Retained earnings | | | 211,540 | | | 178,953 | |
| Accumulated other comprehensive loss | | | (12,282 | ) | | (4,625 | ) |
| | |
| |
| |
| Total Shareholders' Equity | | | 249,695 | | | 224,620 | |
| | |
| |
| |
| Total Liabilities and Shareholders' Equity | | $ | 474,339 | | $ | 453,082 | |
| | |
| |
| |
See notes to consolidated financial statements.
10
Esterline Technologies Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
in thousands
for each of the three fiscal years in the period ended October 27, 2000
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Cash Flows Provided (Used) by Operating Activities | | | | | | | | | | |
| Net earnings | | $ | 32,587 | | $ | 29,862 | | $ | 30,084 | |
| Gain on sale of business | | | (2,591 | ) | | (7,956 | ) | | — | |
| Depreciation and amortization | | | 21,709 | | | 20,796 | | | 18,316 | |
| Deferred income taxes | | | 112 | | | 497 | | | (447 | ) |
| Working capital changes, net of effect of acquisitions | | | | | | | | | | |
| Accounts receivable | | | (12,377 | ) | | 4,778 | | | (2,344 | ) |
| Inventories | | | (1,394 | ) | | (2,640 | ) | | (4,920 | ) |
| Prepaid expenses | | | (472 | ) | | 98 | | | (222 | ) |
| Accounts payable | | | 6,773 | | | (7,805 | ) | | 167 | |
| Accrued liabilities | | | 275 | | | (5,795 | ) | | (1,557 | ) |
| Federal and foreign income taxes | | | (701 | ) | | 5,643 | | | (1,542 | ) |
| Other, net | | | (3,114 | ) | | 1,684 | | | (2,420 | ) |
| | |
| |
| |
| |
| | | | 40,807 | | | 39,162 | | | 35,115 | |
| | |
| |
| |
| |
| Cash Flows Provided (Used) by Investing Activities | | | | | | | | | | |
| Purchases of capital assets | | | (15,489 | ) | | (15,641 | ) | | (29,773 | ) |
| Capital dispositions | | | 1,618 | | | 28,995 | | | 9,421 | |
| Sales (Purchases) of short-term investments | | | 25,933 | | | (25,933 | ) | | — | |
| Acquisitions of businesses, net of cash acquired | | | (45,998 | ) | | (20,860 | ) | | (113,304 | ) |
| | |
| |
| |
| |
| | | | (33,936 | ) | | (33,439 | ) | | (133,656 | ) |
| | |
| |
| |
| |
| Cash Flows Provided (Used) by Financing Activities | | | | | | | | | | |
| Net change in credit facilities | | | (1,922 | ) | | (3,649 | ) | | 6,579 | |
| Repayment of long-term obligations | | | (8,655 | ) | | (6,287 | ) | | (5,079 | ) |
| Proceeds from sale of senior notes | | | — | | | 100,000 | | | — | |
| Proceeds (Repayment) of bridge facility | | | — | | | (50,000 | ) | | 50,000 | |
| | |
| |
| |
| |
| | | | (10,577 | ) | | 40,064 | | | 51,500 | |
| | |
| |
| |
| |
Effect of foreign exchange rates on cash |
|
|
(453 |
) |
|
363 |
|
|
(107 |
) |
| | |
| |
| |
| |
| Net increase (decrease) in cash and cash equivalents | | | (4,159 | ) | | 46,150 | | | (47,148 | ) |
| Cash and cash equivalents—beginning of year | | | 55,047 | | | 8,897 | | | 56,045 | |
| | |
| |
| |
| |
| Cash and cash equivalents—end of year | | $ | 50,888 | | $ | 55,047 | | $ | 8,897 | |
| | |
| |
| |
| |
| Supplemental Cash Flow Information | | | | | | | | | | |
| Cash paid during the fiscal year for | | | | | | | | | | |
| Interest | | $ | 8,366 | | $ | 6,805 | | $ | 3,244 | |
| Income taxes | | | 17,521 | | | 8,779 | | | 17,517 | |
See notes to consolidated financial statements.
11
Esterline Technologies Corporation
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
in thousands, except per share amounts
for each of the three fiscal years in the period ended October 27, 2000
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Common Stock, Par Value $.20 Per Share | | | | | | | | | | |
| Beginning of year | | $ | 3,468 | | $ | 3,463 | | $ | 3,457 | |
| Shares issued under stock option plans | | | 17 | | | 5 | | | 6 | |
| | |
| |
| |
| |
| End of year | | | 3,485 | | | 3,468 | | | 3,463 | |
| | |
| |
| |
| |
| Additional Paid-in Capital | | | | | | | | | | |
| Beginning of year | | | 46,824 | | | 46,793 | | | 46,831 | |
| Shares issued under stock option plans | | | 128 | | | 31 | | | (38 | ) |
| | |
| |
| |
| |
| End of year | | | 46,952 | | | 46,824 | | | 46,793 | |
| | |
| |
| |
| |
| Retained Earnings | | | | | | | | | | |
| Beginning of year | | | 178,953 | | | 149,091 | | | 119,007 | |
| Net earnings | | | 32,587 | | | 29,862 | | | 30,084 | |
| | |
| |
| |
| |
| End of year | | | 211,540 | | | 178,953 | | | 149,091 | |
| | |
| |
| |
| |
| Accumulated Other Comprehensive Loss | | | | | | | | | | |
| Beginning of year | | | (4,625 | ) | | (2,971 | ) | | (3,577 | ) |
| Foreign currency translation adjustment | | | (7,657 | ) | | (1,654 | ) | | 606 | |
| | |
| |
| |
| |
| End of year | | | (12,282 | ) | | (4,625 | ) | | (2,971 | ) |
| | |
| |
| |
| |
| Total shareholders' equity | | $ | 249,695 | | $ | 224,620 | | $ | 196,376 | |
| | |
| |
| |
| |
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
| Net earnings | | $ | 32,587 | | $ | 29,862 | | $ | 30,084 | |
| Foreign currency translation adjustment | | | (7,657 | ) | | (1,654 | ) | | 606 | |
| | |
| |
| |
| |
| Comprehensive Income | | $ | 24,930 | | $ | 28,208 | | $ | 30,690 | |
| | |
| |
| |
| |
See notes to consolidated financial statements.
12
Esterline Technologies Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies
Nature of Operations
Esterline Technologies (the "Company") designs, manufactures and markets highly engineered products. The Company principally serves the aerospace and defense industry and electronic equipment manufacturers throughout the world, primarily in the United States and Europe.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany accounts and transactions have been eliminated. Classifications have been changed for certain amounts in prior periods to conform with the current year's presentation.
The Company closes its books for reporting purposes on the last Friday of October and has changed its fiscal year in 2000 to coincide with that date.
Management Estimates
To prepare financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.
Foreign Currency Translation
Foreign currency assets and liabilities are translated into their U.S. dollar equivalents based on year-end exchange rates. Revenue and expense accounts are generally translated at average exchange rates. Aggregate exchange gains and losses arising from the translation of foreign assets and liabilities are included in shareholders' equity as a component of comprehensive loss. Foreign currency transaction gains and losses are included in income and have not been significant in amount.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. Fair value of cash equivalents approximates carrying value.
Short-Term Investments
Short-term investments, consisting principally of local government obligations, are classified as available-for-sale. These investments are carried at amortized cost which approximates the fair market value.
Inventories
Inventories are stated at the lower of cost or market. One subsidiary determines the cost of its inventories under the last-in, first-out (LIFO) method while the remainder use the first-in, first-out (FIFO) method. Inventory cost includes material, labor and factory overhead.
Property, Plant and Equipment, and Depreciation
Property, plant and equipment is carried at cost and includes expenditures for major improvements. Depreciation is generally provided on the straight-line method based upon estimated useful lives ranging from 3 to 30 years. Depreciation expense was $15,763,000, $16,297,000, and $15,126,000 for fiscal 2000, 1999, and 1998, respectively.
13
Asset Valuation
The carrying amount of long-lived assets, including goodwill attributable to those assets, is reviewed periodically for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is generally determined based upon discounted future cash flow.
Goodwill and Intangibles
Intangible assets and the excess purchase price paid over the fair value of net assets of businesses acquired are amortized on a straight-line basis over the period of expected benefit which ranges from 5 to 40 years. Accumulated amortization of goodwill and intangibles was $38,173,000 and $33,355,000, respectively, at the end of fiscal years 2000 and 1999.
Environmental
Environmental exposures are provided for at the time they are known to exist or are considered reasonably probable and estimable. No provision has been recorded for environmental remediation costs which could result from changes in laws or other circumstances currently not contemplated by the Company. Costs provided for future expenditures on environmental remediation are not discounted to present value.
Revenue Recognition
Sales are generally recorded at the time of shipment of products or performance of services and are presented net of sales returns and allowances.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding during the year. Diluted earnings per share also includes the dilutive effect of stock options. The weighted average number of shares outstanding used to compute basic earnings per share were 17,375,000, 17,337,000, and 17,290,000 for the fiscal years ending 2000, 1999, and 1998, respectively. The weighted average number of shares outstanding used to compute diluted earnings per share were 17,654,000, 17,658,000, and 17,718,000 for the fiscal years ending 2000, 1999, and 1998, respectively.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 133 establishes standards for derivative instruments and requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. In June 1999, the FASB issued FAS No. 137 which deferred the effective date of FAS No. 133. This standard will be effective for the Company beginning in fiscal 2001. The Company utilizes foreign currency forward contracts primarily to reduce its exposure to fluctuations between the U.S. dollar and the French Franc. At the end of fiscal 2000, the Company held foreign currency forward contracts totaling a notional amount of $8.5 million. If FAS No. 133 was in effect at the end of fiscal 2000, this would have resulted in a gain of approximately $600,000. The Company anticipates that future similar foreign currency transactions will qualify for hedge accounting treatment under FAS No. 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." In SAB No. 101, the SEC staff expressed its views regarding the appropriate recognition of revenue with regard to a variety of
14
circumstances. The Company will be required to adopt SAB No. 101 for the fourth quarter of fiscal 2001. The Company is currently evaluating SAB No. 101, however, the Company believes that it will not have a material impact on the consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of Accounting Principles Board ("APB") Opinion No. 25, "Stock Issued to Employees." The Interpretation was adopted by the Company effective July 1, 2000 and did not have a material impact on the consolidated financial statements.
(2) Inventory
Inventories at the end of the fiscal year consisted of the following:
in thousands
| 2000
| | 1999
|
|---|
|
|---|
| Raw materials and purchased parts | $ | 31,693 | | $ | 30,014 |
| Work in process | | 27,264 | | | 27,803 |
| Finished goods | | 15,027 | | | 13,613 |
| |
| |
|
| | $ | 73,984 | | $ | 71,430 |
| |
| |
|
Inventories stated under the last-in, first-out method totaled $6,666,000 and $6,118,000 at the end of fiscal 2000 and 1999, respectively. Had the first-in, first-out method been used, these inventories would have been $421,000 and $524,000 higher than reported at the end of fiscal 2000 and 1999, respectively.
(3) Accrued Liabilities
Accrued liabilities at the end of the fiscal year consisted of the following:
in thousands
| 2000
| | 1999
|
|---|
|
|---|
| Payroll and other compensation | $ | 24,614 | | $ | 21,135 |
| Casualty and medical | | 6,988 | | | 5,642 |
| Interest | | 3,204 | | | 3,446 |
| Warranties | | 7,946 | | | 7,440 |
| State and other tax accruals | | 9,785 | | | 9,396 |
| Other | | 14,674 | | | 18,915 |
| |
| |
|
| | $ | 67,211 | | $ | 65,974 |
| |
| |
|
15
(4) Retirement Benefits
Pension benefits are provided for substantially all U.S. employees under a noncontributory pension plan and are based on years of service and five-year average compensation. The Company makes actuarially computed contributions as necessary to adequately fund benefits. The actuarial computations assumed discount rates for benefit obligations on plan assets of 7.5%, 7.25%, and 6.5% for fiscal 2000, 1999, and 1998, respectively, and annual compensation increases of 5%. The expected long-term rate of return on plan assets was assumed at 8.5% for fiscal 2000, 1999, and 1998. Plan assets primarily consist of publicly traded common stocks, bonds and government securities. The Company also has an unfunded supplemental retirement plan for key executives providing for periodic payments upon retirement.
Total pension expense (benefit) for all benefit plans, including defined benefit plans, was ($3,334,000), $902,000, and ($971,000) for the fiscal years ending 2000, 1999, and 1998, respectively. The Company recorded a curtailment gain resulting from the October 1999 sale of Federal Products Co. This amount is reported as a gain on sale of business in fiscal 2000. Net periodic pension benefit for the Company's defined benefit plans at the end of the fiscal year consisted of the following:
in thousands
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Components of Net Periodic Benefit Cost | | | | | | | | | | |
| Service cost | | $ | 2,268 | | $ | 3,351 | | $ | 2,639 | |
| Interest cost | | | 6,463 | | | 5,726 | | | 5,645 | |
| Expected return on plan assets | | | (10,069 | ) | | (9,122 | ) | | (8,895 | ) |
| Amortization of transition asset | | | (401 | ) | | (400 | ) | | (405 | ) |
| Amortization of prior service cost | | | 92 | | | 105 | | | 105 | |
| Amortization of actuarial loss (gain) | | | (116 | ) | | 4 | | | (1,157 | ) |
| Recognition of gain due to curtailment | | | (2,591 | ) | | — | | | — | |
| | |
| |
| |
| |
| Net periodic benefit | | $ | (4,354 | ) | $ | (336 | ) | $ | (2,068 | ) |
| | |
| |
| |
| |
16
The funded status of the defined benefit pension plan at the end of each fiscal year was as follows:
in thousands
| 2000
| | 1999
| |
|---|
| |
|---|
| Benefit Obligation | | | | |
| Beginning balance | $ 84,161 | | $ 92,509 | |
| Service cost | 2,268 | | 3,351 | |
| Interest cost | 6,463 | | 5,726 | |
| Curtailment gain | (2,692 | ) | — | |
| Actuarial loss (gain) | 7,713 | | (8,717 | ) |
| Benefits paid | (5,552 | ) | (8,708 | ) |
| |
| |
| |
| Ending balance | $ 92,361 | | $ 84,161 | |
| |
| |
| |
| Plan Assets—Fair Value | | | | |
| Beginning balance | $121,012 | | $109,663 | |
| Actual return on plan assets | 10,704 | | 16,299 | |
| Company contributions | 981 | | 3,758 | |
| Benefits paid | (5,552 | ) | (8,708 | ) |
| |
| |
| |
| Ending balance | $127,145 | | $121,012 | |
| |
| |
| |
| Reconciliation of Funded Status to Net Amount Recognized | | | | |
| Funded status—plan assets in excess of benefit obligation | $ 34,784 | | $ 36,851 | |
| Unrecognized net actuarial gain | (16,635 | ) | (23,830 | ) |
| Unrecognized prior service costs | 680 | | 874 | |
| Unrecognized net transition obligations (assets) | 239 | | (162 | ) |
| |
| |
| |
| Net amount recognized | $ 19,068 | | $ 13,733 | |
| |
| |
| |
| Amount Recognized in the Consolidated Balance Sheet | | | | |
| Prepaid benefit cost | 19,231 | | 14,279 | |
| Accrued benefit liability | (163 | ) | (546 | ) |
| |
| |
| |
| Net amount recognized | $ 19,068 | | $ 13,733 | |
| |
| |
| |
(5) Income Taxes
Income tax expense for each of the fiscal years consisted of:
in thousands
| 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Current | | | | | | | | | |
| U.S. federal | $ | 14,011 | | $ | 13,530 | | $ | 14,799 | |
| State | | 650 | | | 160 | | | 1,295 | |
| Foreign | | 2,665 | | | 2,053 | | | 1,216 | |
| |
| |
| |
| |
| | | 17,326 | | | 15,743 | | | 17,310 | |
Deferred |
|
|
|
|
|
|
|
|
|
| U.S. federal | | (564 | ) | | 684 | | | (429 | ) |
| State | | (48 | ) | | 20 | | | (18 | ) |
| Foreign | | 724 | | | (207 | ) | | — | |
| |
| |
| |
| |
| | | 112 | | | 497 | | | (447 | ) |
| |
| |
| |
| |
| Income tax expense | $ | 17,438 | | $ | 16,240 | | $ | 16,863 | |
| |
| |
| |
| |
17
U.S. and foreign components of earnings before income taxes for each of the fiscal years were:
in thousands
| 2000
| | 1999
| | 1998
|
|---|
|
|---|
| U.S. | $ | 42,794 | | $ | 42,518 | | $ | 45,608 |
| Foreign | | 7,231 | | | 3,584 | | | 1,339 |
| |
| |
| |
|
| Earnings before income taxes | $ | 50,025 | | $ | 46,102 | | $ | 46,947 |
| |
| |
| |
|
Primary components of the Company's deferred tax assets (liabilities) at the end of the fiscal year resulted from temporary tax differences associated with the following:
in thousands
| 2000
| | 1999
| |
|---|
| |
|---|
| Reserves and liabilities | $ 17,054 | | $ 17,339 | |
| Employee benefits | 5,494 | | 4,425 | |
| |
| |
| |
| Total deferred tax assets | 22,548 | | 21,764 | |
Depreciation and amortization |
(8,378 |
) |
(9,720 |
) |
| Retirement benefits | (6,960 | ) | (5,013 | ) |
| Other | (706 | ) | (737 | ) |
| |
| |
| |
| Total deferred tax liabilities | (16,044 | ) | (15,470 | ) |
| |
| |
| |
| | $ 6,504 | | $ 6,294 | |
| |
| |
| |
No valuation allowance was considered necessary on deferred tax assets.
A reconciliation of the U.S. federal statutory income tax rate to the effective income tax rate for each of the fiscal years was as follows:
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| U.S. statutory income tax rate | | 35.0 | % | 35.0 | % | 35.0 | % |
| State income taxes | | 0.8 | | 0.2 | | 1.8 | |
| Foreign taxes | | 1.2 | | 1.2 | | 1.3 | |
| Foreign sales corporation | | (1.0 | ) | (1.1 | ) | (1.5 | ) |
| Tax exempt interest | | (0.6 | ) | (0.8 | ) | (0.3 | ) |
| Non-deductible goodwill | | 2.5 | | 1.7 | | 0.9 | |
| Research & development credits | | (3.9 | ) | — | | — | |
| Other, net | | 0.9 | | (1.0 | ) | (1.3 | ) |
| | |
| |
| |
| |
| Effective income tax rate | | 34.9 | % | 35.2 | % | 35.9 | % |
| | |
| |
| |
| |
No provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries, since such earnings were considered permanently reinvested or would be substantially offset by foreign tax credits, if repatriated.
18
(6) Debt
Long-term debt at the end of the fiscal year consisted of the following:
in thousands
| 2000
| | 1999
|
|---|
|
|---|
| 6.77% Senior notes, due 2008 | $ 40,000 | | $ 40,000 |
| 6.40% Senior notes, due 2005 | 30,000 | | 30,000 |
| 6.00% Senior notes, due 2003 | 30,000 | | 30,000 |
| 8.75% Senior notes, due 2002 | 11,428 | | 17,143 |
| Other | 3,269 | | 7,072 |
| |
| |
|
| | 114,697 | | 124,215 |
| Less current maturities | 6,525 | | 7,249 |
| |
| |
|
| | $108,172 | | $116,966 |
| |
| |
|
The 1999 Senior Notes are payable in full in 2003, 2005 and 2008 and require semi-annual interest payments in November and May of each year. The 8.75% Senior Notes are due in 2002, are payable in equal annual installments and interest is payable semi-annually in January and July. All Senior Notes are unsecured.
Maturities of long-term debt at the end of the fiscal year were as follows:
|
|
|---|
in thousands
|
|---|
| 2001 | $ | 6,525 |
| 2002 | | 6,236 |
| 2003 | | 30,302 |
| 2004 | | 285 |
| 2005 | | 30,274 |
| 2006 and thereafter | | 41,075 |
| |
|
| | | $114,697 |
| |
|
Short-term credit facilities at the end of the fiscal year consisted of the following:
in thousands
| | 2000
| |
| | 1999
| |
| |
|---|
| |
|---|
| | Outstanding
Borrowings
| | Interest Rate
| | Outstanding
Borrowings
| | Interest Rate
| |
|---|
| U.S. dollar | | $ — | | — | | $ — | | — | |
| Foreign | | 2,654 | | 5.70 | % | 5,138 | | 5.60 | % |
| | |
| |
| |
| |
| |
| | | $2,654 | | | | $5,138 | | | |
| | |
| | | |
| | | |
During the fourth quarter of fiscal 2000, the Company's primary U.S. dollar credit facility was renewed and increased from $35,000,000 to $50,000,000. This credit facility is offered through a group of banks, is unsecured with interest based on standard inter-bank offering rates and will be up for renewal during fiscal 2005. An additional $8,600,000 of unsecured foreign currency credit facilities has been extended by foreign banks for a total of $58,600,000 available companywide.
A number of underlying agreements contain various covenant restrictions which include maintenance of net worth, payment of dividends, interest coverage and limitations on additional borrowings. The Company was in compliance with these covenants at the end of the fiscal year. Available credit under the above credit facilities was $53,577,000 at fiscal 2000 year-end, when reduced by outstanding borrowings of $2,654,000 and letters of credit of $2,369,000.
19
The fair market value of the Company's long-term debt and short-term borrowings was estimated at $110,000,000 and $121,000,000 at fiscal year-end 2000 and 1999, respectively. These estimates were derived using discounted cash flow with interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities.
(7) Commitments and Contingencies
Rental expense for operating leases totaled $5,871,000, $4,647,000, and $4,628,000 in fiscal 2000, 1999, and 1998, respectively.
At the end of the fiscal year, the Company's rental commitments for noncancelable operating leases with a duration in excess of one year were as follows:
in thousands
| |
|
|---|
| 2001 | | $ | 5,696 |
| 2002 | | | 5,414 |
| 2003 | | | 5,337 |
| 2004 | | | 4,535 |
| 2005 | | | 3,873 |
| 2006 and thereafter | | | 14,486 |
| | |
|
| | | $ | 39,341 |
| | |
|
The Company is a party to various lawsuits and claims, both as plaintiff and defendant, and has contingent liabilities arising from the conduct of business, none of which, in the opinion of management, is expected to have a material effect on the Company's financial position or results of operations. The Company believes that it has made appropriate and adequate provisions for contingent liabilities.
(8) Stock Option Plans
The Company provides a nonqualified stock option plan for officers and key employees. At the end of fiscal 2000, the Company had 1,574,750 shares reserved for issuance to officers and key employees, of which 93,500 shares were available to be granted in the future. The Board of Directors has approved a proposal to solicit shareholder approval to amend the Stock Option Plan at the March 7, 2001 shareholders' meeting. The proposed amendment will authorize an additional 500,000 shares to be available for grant.
The Board of Directors authorized the Compensation and Stock Option Committee to administer option grants and their terms. Awards under the plan may be granted to eligible employees of the Company over the 10-year period ending March 4, 2007. Options granted become exercisable over a period of four years following the date of grant and expire on the tenth anniversary of the grant. Option exercise prices are equal to the fair market value of the Company's common stock on the date of grant.
20
The following table summarizes the changes in outstanding options granted under the Company's stock option plans:
| | 2000
| |
| | 1999
| |
| | 1998
| |
|
|---|
| | Shares Subject to
Option
| | Weighted Average
Exercise Price
| | Shares Subject to
Option
| | Weighted Average
Exercise Price
| | Shares Subject to
Option
| | Weighted Average
Exercise Price
|
|---|
|
|---|
| Outstanding, beginning of year | | 1,355,250 | | $ | 11.046 | | 1,313,250 | | $ | 10.125 | | 1,190,000 | | $ | 8.472 |
| Granted | | 316,500 | | | 13.216 | | 202,000 | | | 18.973 | | 187,000 | | | 18.644 |
| Exercised | | (185,500 | ) | | 6.286 | | (47,500 | ) | | 5.016 | | (63,750 | ) | | 4.261 |
| Cancelled | | (5,000 | ) | | 19.625 | | (112,500 | ) | | 17.070 | | — | | | — |
| | |
| |
| |
| |
| |
| |
|
| Outstanding, end of year | | 1,481,250 | | $ | 12.077 | | 1,355,250 | | $ | 11.046 | | 1,313,250 | | $ | 10.125 |
| | |
| |
| |
| |
| |
| |
|
| Exercisable, end of year | | 921,500 | | $ | 10.199 | | 925,500 | | $ | 8.413 | | 741,500 | | $ | 6.893 |
| | |
| |
| |
| |
| |
| |
|
The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Additional disclosures as required under FAS No. 123, "Accounting for Stock-Based Compensation," are included below. The Black-Scholes option-pricing model was used to calculate the estimated compensation expense that would have been recognized under these guidelines.
If only options granted after fiscal 1995 were included, as prescribed by FAS No. 123, pro forma net income would have been $31,573,000, $28,920,000, and $28,971,000 for fiscal 2000, 1999, and 1998, respectively. Basic earnings per share for fiscal 2000, 1999, and 1998 would have been $1.82, $1.67, and $1.68, respectively. Diluted earnings per share for fiscal 2000, 1999, and 1998 would have been $1.79, $1.64, and $1.64, respectively.
The pro forma disclosures presented below include the fair value compensation expense for all options that would have been amortized during fiscal 2000, 1999, and 1998:
in thousands, except per share amounts
| | 2000
| | 1999
| | 1998
|
|---|
|
|---|
| Net earnings as reported | | $ | 32,587 | | $ | 29,862 | | $ | 30,084 |
| Pro forma net earnings | | $ | 31,573 | | $ | 28,915 | | $ | 28,928 |
| Basic earnings per share as reported | | $ | 1.88 | | $ | 1.72 | | $ | 1.74 |
| Pro forma basic earnings per share | | $ | 1.82 | | $ | 1.67 | | $ | 1.67 |
| Diluted earnings per share as reported | | $ | 1.85 | | $ | 1.69 | | $ | 1.70 |
| Pro forma diluted earnings per share | | $ | 1.79 | | $ | 1.63 | | $ | 1.63 |
The weighted average Black-Scholes value of options granted during fiscal 2000, 1999, and 1998 was $8.516, $12.109, and $10.870, respectively. The assumptions used in the Black-Scholes option-pricing model for fiscal 2000, 1999, and 1998 were as follows:
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Volatility | | 62.3 | % | 60.5 | % | 55.3 | % |
| Risk-free interest rate | | 5.75 - 5.83 | % | 5.99 - 6.23 | % | 4.10 - 4.57 | % |
| Expected life (years) | | 5 - 8 | | 5 - 8 | | 5 - 8 | |
| Dividends | | — | | — | | — | |
21
The following table summarizes information for stock options outstanding at the end of the fiscal year:
Range of Exercise Prices
| | Shares
| | Average Remaining Life (years)
| | Weighted Average Price
| | Shares
| | Weighted Average Price
|
|---|
|
|---|
| $ 3.6875 - 4.1875 | | 218,000 | | 2.89 | | $ | 4.0453 | | 218,000 | | $ | 4.0453 |
| 4.3750 - 11.1250 | | 293,000 | | 4.37 | | | 8.1113 | | 283,000 | | | 8.0446 |
| 11.3750 - 11.6875 | | 285,750 | | 7.49 | | | 11.5021 | | 116,250 | | | 11.6875 |
| 13.2500 - 14.7500 | | 330,250 | | 7.51 | | | 13.7920 | | 159,000 | | | 13.3502 |
| 16.7500 - 20.6875 | | 354,250 | | 7.79 | | | 19.1647 | | 145,250 | | | 18.9883 |
(9) Capital Stock
The authorized capital stock of the Company consists of 500,000 shares of preferred stock, including 25,000 shares ($100 par value) and 475,000 shares ($1.00 par value) issuable in series, and 60,000,000 shares of common stock ($.20 par value). At the end of fiscal 2000, there were no shares of preferred stock outstanding.
The Company has a Shareholder Rights Plan providing for the distribution of one Preferred Stock Purchase Right ("Right") for each share of common stock held. Each Right entitles the holder to purchase one one-hundredth of a share of Series A Serial Preferred Stock at an exercise price of $56. The Rights expire December 23, 2002.
The Rights will be exercisable and transferable apart from the common stock only if a person or group acquires beneficial ownership of 10% or more of the Company's common stock or commences a tender offer or exchange offer which would result in a person or group beneficially owning 10% or more of the Company's common stock. The Rights will be redeemable by the Company for $.01 each at any time prior to the tenth day after an announcement that a person or group beneficially owns 10% or more of the common stock. Upon the occurrence of certain events, the holder of a Right can purchase, for the then current exercise price of the Right, shares of common stock of the Company (or under certain circumstances, as determined by the Board of Directors, cash, other securities or property) having a value of twice the Right's exercise price. Upon the occurrence of certain other events, the holder of each Right would be entitled to purchase, at the exercise price of the Right, shares of common stock of a corporation or other entity acquiring the Company or engaging in certain transactions involving the Company, that has a market value of twice the Right's exercise price.
22
(10) Acquisitions
In December 1999, the Company purchased Advanced Input Devices Co. ("A.I.D."). A.I.D. is a strategic purchase for the Company's growth platform around high-end illuminated displays and custom panels. The total purchase price, including closing and other direct costs of the acquisition, was approximately $43,100,000. The acquisition resulted in an excess of cost over identifiable tangible assets of approximately $37,100,000. This goodwill is being amortized over a 30-year period.
The Company also purchased Surftech Finishes Co., a small metal-finishing operation, in April 2000. This acquisition resulted in an excess of cost over identifiable tangible assets of approximately $2,100,000.
Both transactions were accounted for under the purchase method of accounting and funded with available cash. The results of operations were included from the effective date of each acquisition.
(11) Business Segment Information
The Company's businesses are organized and managed in three operating segments: Aerospace, Advanced Materials and Automation. Aerospace operations produce high-precision components for avionics, propulsion and guidance systems. Advanced Materials operations formulate specialized materials such as high-temperature elastomers, molded-fiber compounds and certain finishings and coatings. Both segments principally serve aerospace and defense markets. Automation operations manufacture products that enhance the fabrication efficiency of manufactured goods. Sales in all segments are worldwide, and include military, defense and commercial customers.
Geographic sales information is based on product origin. The Company evaluates these segments based on segment profits prior to net interest, other income/expense, corporate expenses and federal/foreign income taxes.
23
Details of the Company's operations by business segment for the last three fiscal years were as follows:
in thousands
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Sales | | | | | | | | | | |
| Aerospace | | $ | 236,269 | | $ | 183,783 | | $ | 171,028 | |
| Advanced materials | | | 129,386 | | | 127,920 | | | 91,498 | |
| Automation | | | 125,311 | | | 149,266 | | | 191,376 | |
| | |
| |
| |
| |
| | | $ | 490,966 | | $ | 460,969 | | $ | 453,902 | |
| | |
| |
| |
| |
| Earnings Before Income Taxes | | | | | | | | | | |
| Aerospace | | $ | 32,661 | | $ | 24,822 | | $ | 24,766 | |
| Advanced materials | | | 24,819 | | | 29,186 | | | 24,683 | |
| Automation | | | 7,894 | | | 2,924 | | | 10,694 | |
| | |
| |
| |
| |
| Segment earnings | | | 65,374 | | | 56,932 | | | 60,143 | |
| Corporate expense | | | (12,021 | ) | | (12,634 | ) | | (10,987 | ) |
| Gain on sale of business | | | 2,591 | | | 7,956 | | | — | |
| Interest of income | | | 2,205 | | | 2,859 | | | 1,594 | |
| Interest expense | | | (8,124 | ) | | (9,011 | ) | | (3,803 | ) |
| | |
| |
| |
| |
| | | $ | 50,025 | | $ | 46,102 | | $ | 46,947 | |
| | |
| |
| |
| |
| Identifiable Assets | | | | | | | | | | |
| Aerospace | | $ | 192,496 | | $ | 144,836 | | $ | 123,346 | |
| Advanced materials | | | 140,028 | | | 135,907 | | | 142,902 | |
| Automation | | | 62,611 | | | 62,868 | | | 87,227 | |
| Corporate(1) | | | 79,204 | | | 109,471 | | | 33,704 | |
| | |
| |
| |
| |
| | | $ | 474,339 | | $ | 453,082 | | $ | 387,179 | |
| | |
| |
| |
| |
| Capital Expenditures | | | | | | | | | | |
| Aerospace | | $ | 8,368 | | $ | 6,029 | | $ | 9,103 | |
| Advanced materials | | | 3,822 | | | 3,866 | | | 11,997 | |
| Automation | | | 2,758 | | | 5,518 | | | 7,748 | |
| Corporate | | | 541 | | | 228 | | | 925 | |
| | |
| |
| |
| |
| | | $ | 15,489 | | $ | 15,641 | | $ | 29,773 | |
| | |
| |
| |
| |
| Depreciation and Amortization | | | | | | | | | | |
| Aerospace | | $ | 10,305 | | $ | 6,961 | | $ | 6,065 | |
| Advanced materials | | | 6,938 | | | 6,814 | | | 4,579 | |
| Automation | | | 3,686 | | | 6,270 | | | 7,084 | |
| Corporate | | | 780 | | | 751 | | | 588 | |
| | |
| |
| |
| |
| | | $ | 21,709 | | $ | 20,796 | | $ | 18,316 | |
| | |
| |
| |
| |
- (1)
- Primarily cash, prepaid pension expense (see Note 4) and deferred tax assets (see Note 5).
24
The Company's operations by geographic area for the last three fiscal years were as follows:
in thousands
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Sales | | | | | | | | | | |
| Domestic: | | | | | | | | | | |
| Unaffiliated customers—U.S. | | $ | 334,768 | | $ | 323,702 | | $ | 333,678 | |
| Unaffiliated customers—export | | | 66,205 | | | 57,776 | | | 58,926 | |
| Intercompany | | | 5,591 | | | 8,670 | | | 11,042 | |
| | |
| |
| |
| |
| | | | 406,564 | | | 390,148 | | | 403,646 | |
| | |
| |
| |
| |
| France: | | | | | | | | | | |
| Unaffiliated customers | | | 44,368 | | | 58,871 | | | 47,056 | |
| Intercompany | | | 6,494 | | | 10,694 | | | 9,552 | |
| | |
| |
| |
| |
| | | | 50,862 | | | 69,565 | | | 56,608 | |
| | |
| |
| |
| |
| All other foreign: | | | | | | | | | | |
| Unaffiliated customers | | | 45,625 | | | 20,620 | | | 14,242 | |
| Intercompany | | | 194 | | | 843 | | | 1,761 | |
| | |
| |
| |
| |
| | | | 45,819 | | | 21,463 | | | 16,003 | |
| | |
| |
| |
| |
| Eliminations | | | (12,279 | ) | | (20,207 | ) | | (22,355 | ) |
| | |
| |
| |
| |
| | | $ | 490,966 | | $ | 460,969 | | $ | 453,902 | |
| | |
| |
| |
| |
| Segment Earnings(1) | | | | | | | | | | |
| Domestic | | $ | 57,119 | | $ | 52,585 | | $ | 58,579 | |
| France | | | 6,701 | | | 5,233 | | | 2,485 | |
| All other foreign | | | 1,263 | | | (625 | ) | | (1,025 | ) |
| Eliminations | | | 291 | | | (261 | ) | | 104 | |
| | |
| |
| |
| |
| | | $ | 65,374 | | $ | 56,932 | | $ | 60,143 | |
| | |
| |
| |
| |
| Identifiable Assets(2) | | | | | | | | | | |
| Domestic | | $ | 328,006 | | $ | 269,860 | | $ | 302,977 | |
| France | | | 32,165 | | | 35,758 | | | 39,343 | |
| All other foreign | | | 34,964 | | | 37,993 | | | 11,155 | |
| | |
| |
| |
| |
| | | $ | 395,135 | | $ | 343,611 | | $ | 353,475 | |
| | |
| |
| |
| |
- (1)
- Before corporate expense, shown on page F-18.
- (2)
- Excludes corporate, shown on page F-18.
The Company's principal foreign operations consist of manufacturing facilities located in France, the United Kingdom and Spain, and include sales and service operations located in Germany, Italy, Hong Kong and France. Intercompany sales are at prices comparable with sales to unaffiliated customers. Sales to any single customer or government entity did not exceed 10% of consolidated sales.
Product lines contributing sales of 10% or more of total sales in any of the last three fiscal years were as follows:
| | 2000
| | 1999
| | 1998
| |
|---|
| |
|---|
| Elastomeric products | | 13 | % | 14 | % | 5 | % |
| Printed circuit board drilling equipment | | 16 | % | 12 | % | 16 | % |
| Aerospace switches and indicators | | 9 | % | 10 | % | 13 | % |
| Gauge products | | — | | 9 | % | 10 | % |
25
(12) Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly financial information:
in thousands, except per share amounts
| | Fourth
| | Third
| | Second
| | First
|
|---|
|
|---|
| Fiscal year 2000 | | | | | | | | | | | | |
| Sales | | $ | 138,539 | | $ | 126,033 | | $ | 122,146 | | $ | 104,248 |
| Gross margin | | | 50,963 | | | 45,791 | | | 44,962 | | | 38,008 |
| Net earnings | | | 11,130 | | | 9,694 | (1) | | 6,937 | | | 4,826 |
| Net earnings per share—basic | | $ | .64 | | $ | .56 | | $ | .40 | | $ | .28 |
| Net earnings per share—diluted | | $ | .63 | | $ | .55 | | $ | .40 | | $ | .27 |
| Fiscal year 1999 | | | | | | | | | | | | |
| Sales | | $ | 123,402 | | $ | 112,748 | | $ | 116,121 | | $ | 108,698 |
| Gross margin | | | 46,053 | | | 43,425 | | | 44,957 | | | 40,124 |
| Net earnings | | | 11,711 | (2) | | 5,952 | | | 7,142 | | | 5,057 |
| Net earnings per share—basic | | $ | .68 | | $ | .34 | | $ | .41 | | $ | .29 |
| Net earnings per share—diluted | | $ | .66 | | $ | .34 | | $ | .40 | | $ | .29 |
- (1)
- Included a $2.6 million gain on sale of business related to the curtailment of retirement benefits for certain Federal Products employees resulting from the October 28, 1999 sale of that operation.
- (2)
- Included an $8.0 million gain on sale of Federal Products.
26
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors
Esterline Technologies Corporation
Bellevue, Washington
We have audited the accompanying consolidated balance sheet of Esterline Technologies Corporation and subsidiaries as of October 27, 2000, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for the fiscal year then ended. 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 audit. The financial statements of the Company for the two fiscal years ended October 31, 1999, were audited by other auditors whose report dated December 9, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the fiscal 2000 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Esterline Technologies Corporation and subsidiaries at October 27, 2000 and the consolidated results of their operations and their cash flows for the fiscal year then ended in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Seattle, Washington
December 6, 2000
27
