[Page 13 of Annual Report]
Five-Year Summary
At and for the years ended December 31
1995 (c)(d) 1994 (e) 1993 (e)(f) 1992 1991 (g)
(In thousands, except share and per share data)
OPERATIONS DATA (a)
Net sales $730,552 $619,471 $517,462 $622,934 $326,609
Net income 6,455 47,880 43,706 35,532 22,002
Net income available to common
shareholders 6,455 47,880 43,706 32,896 21,044
Net income per common share .19 1.40 1.31 1.16 .95
Cash dividends per common
share .12 .12 .12 .11 .08
Average number of common
shares outstanding 34,398,025 34,284,095 33,415,429 28,343,827 22,175,462
BALANCE SHEET DATA
Total assets $817,591 $687,226 $614,016 $627,485 $560,167
Long-term debt 100,000 - - 68,215 50,583
Shareholders' equity 492,541 485,298 436,010 325,924 272,195
Ratio of long-term debt to
long-term capital (b) 16.9% 0% 0% 17.3% 15.7%
<FN>
(a) See Note 1, "Summary of Significant Accounting Policies," in the
Notes to Consolidated Financial Statements.
(b) Long-term capital consists of long-term debt and common shareholders'
equity.
(c) On April 24, 1995, the Company acquired Fadal Engineering Company,
Inc. (Fadal). The operations of Fadal have been included in the
Company's financial statements since the acquisition date. See
Management's Discussion and Analysis and Note 3 in the Notes to
Consolidated Financial Statements.
(d) Reflects a charge to pretax income of $30.3 million from the adoption
of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," (SFAS No. 121) and from a severance charge relating
to the Company's German subsidiary. See Note 2 in the Notes to
Consolidated Financial Statements.
(e) Reflects cash received on certain fully-reserved Russian contracts
and other credits. See Note 2 in the Notes to Consolidated Financial
Statements.
(f) Reflects the prospective adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
(g) On October 31, 1991, the Company acquired Cross & Trecker Corporation
(Cross & Trecker). The operations of Cross & Trecker have been
included in the Company's financial statements since the acquisition
date.
[Pages 14-18 of the Annual Report]
Management's Discussion and Analysis
Introduction
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto included elsewhere
in this Annual Report. In reviewing the Company's financial statements and
management's discussion and analysis, the following matters should be
considered:
- The Company is organized into four major operating groups: Automation
Technology, Integrated Automation, Automation Measurement and Control
and European Operations. The Automation Technology group is
responsible for the manufacture of cellular and smart manufacturing
systems, automated standalone machine tools and machining centers,
tooling and fixtures and remanufacturing. The Integrated Automation
group produces assembly automation products and systems and flexible
transfer lines. Programmable industrial computers, servo systems,
controls and measurement products are produced by the Automation
Measurement and Control group. The European Operations group offers
most of the Company's product lines through its sales, engineering,
manufacturing and service facilities in England and Germany.
- A majority of the Company's products are sold pursuant to long-term
contracts. Profits on long-term contracts are recognized using the
percentage-of-completion method. The percentage-of-completion is
measured principally by the percentage of costs incurred to date
versus the estimated total costs for each contract. Significant
adjustments are sometimes required to reflect experience and other
factors. Such adjustments are recorded as changes in estimates as
part of the percentage-of-completion accounting in the period of
change. Revenues recognized on the percentage-of-completion method,
but not yet billed to customers, are reflected in accounts
receivable. The Company does not normally receive the bulk of
payments for products sold under long-term contracts until the
product is shipped.
- The Company acquired Fadal Engineering Co., Inc. (Fadal), a designer
and manufacturer of computer numerically controlled vertical
machining centers on April 24, 1995. The operations of the acquired
company have been included in the Company's financial statements
since the acquisition date. The Fadal operations are a component of
the Automation Technology group.
Results of Operations
1995 Compared to 1994
The following tables set forth the Company's bookings by operating group
for the period indicated and consolidated backlog at period-end on a
quarterly basis for 1995 and 1994.
April 2 July 2 Oct. 1 Dec. 31
(In thousands)
1995:
Operating group:
Automation Technology $41,523 $76,765 $83,534 $75,782
Integrated Automation 91,420 64,884 39,091 (17,956)
European Operations 8,680 27,459 24,470 79,699
Automation Measurement
and Control 17,741 19,364 14,698 16,436
------- ------- ------- -------
Consolidated bookings $159,364 $188,472 $161,793 $153,961
======= ======= ======= =======
Consolidated backlog $430,121 $478,324 $442,507 $388,156
======== ======== ======== ========
April 3 July 3 Oct. 2 Dec. 31
(In thousands)
1994:
Operating group:
Automation Technology $32,034 $31,724 $28,973 $40,116
Integrated Automation 117,610 113,870 94,705 91,226
European Operations 6,138 5,771 12,141 8,759
Automation Measurement
and Control 13,647 17,831 16,964 17,948
------ ------ ------- -------
Consolidated bookings $169,429 $169,196 $152,783 $158,049
======= ======= ======= =======
Consolidated backlog $431,448 $460,370 $449,969 $422,172
======= ======= ======= =======
Bookings for 1995 of $663.6 million represented a 2.2% increase from 1994
bookings of $649.5 million. Automation Technology bookings of $277.6
million for 1995 increased 109.0% from 1994 bookings of $132.9 million
primarily as a result of the acquisition of Fadal in April 1995 and the
demand for the new RAM machining centers, which were introduced in the
second half of 1994. Integrated Automation bookings for 1995 totaled
$177.4 million, a 57.5% decrease from unusually large 1994 bookings of
$417.4 million. Customer revision to the scope of two orders received
earlier in 1995 resulted in contract reductions which exceeded new
bookings by $18 million in the fourth quarter of 1995. For the Integrated
Automation group, the Company believes that orders will approach their
historic average in 1996. However, because automotive orders are driven
by multi-year capital investment programs with purchases in large lump sum
increments, quarterly order patterns have been and will continue to be
subject to volatility. European Operations' bookings increased 327.7% to
$140.3 million in 1995, from $32.8 million in 1994. The increase in 1995
was due to significant orders received from European automotive companies
primarily in the United Kingdom. The Company continues to monitor the
unfavorable economic conditions (especially in the automotive sector) and
increased competitive pressures relative to the Company's German
operation. In late 1995, the Company took steps to improve the competitive
position of its German operation by initiating a reduction in work force
as discussed below. Automation Measurement and Control bookings of $68.3
million for 1995 increased 2.8% over 1994 bookings of $66.4 million.
Company backlog at December 31, 1995, was $388.2 million, a decrease of
$34.0 million or 8.1% from $422.2 million at 1994 year-end. The decrease
in backlog resulted from decreased booking activity in the domestic
automotive sector.
Consolidated sales of $730.6 million for 1995 compared to $619.5 million
in the prior year. The increase in year-to-year net sales was primarily
attributable to the addition of Fadal in April 1995. Automation Technology
net sales of $293.9 million in 1995 represented an increase of 80.4% from
$162.9 million in net sales in 1994. Integrated Automation net sales of
$277.6 million in 1995 increased 3.7% from $267.8 million in the prior
year. The significantly lower orders received at Integrated Automation in
1995 will result in lower sales for this group in 1996. European
Operations net sales of $87.9 million in 1995 decreased 30.6% from $126.6
million in 1994. The decrease in net sales related mainly to significantly
lower orders received by the European Operations group in 1994. Given the
level of 1995 bookings, European sales are expected to increase during
1996. The net sales of Automation Measurement and Control increased 14.4%
from $62.2 million in 1994 to $71.2 million in 1995.
Net income for 1995 of $6.5 million decreased 86.5% from 1994 net income
of $47.9 million. Pre-tax income in 1995 was $28.1 million, a 63.8%
decrease from 1994 pre-tax income of $77.6 million. As described in
further detail in Note 2 in the Notes to Consolidated Financial
Statements, 1994 and 1995 pre-tax earnings were impacted by the following
other charges or credits:
1995
The Company recorded a pre-tax charge of $6.3 million related to a
formal plan to improve the operations of its German subsidiary, which
includes planned terminations. In connection with the formal plan,
the Company evaluated the fair value of its long-term assets at its
German facility in accordance with SFAS No. 121 and recorded a
write-down of $20.5 million. In addition, in accordance with the
adoption of SFAS No. 121, the Company determined that the long-term
assets associated with a plant in its Automation Measurement and
Control group were impaired (as indicated by the relatively poor
performance of that entity since its 1991 acquisition) and wrote
those assets down by $3.5 million. In both cases, the write-down of
the assets (which included allocated goodwill) was based on those
assets' estimated fair values, which were determined using forecasted
cash flow estimates discounted at rates commensurate with the
Company's cost of capital. The separate $30.3 million operating
expense item in the Company's 1995 statement of income consists of
the above-described charges.
1994
During the fourth quarter of 1994, certain conditions were satisfied
which allowed for a credit guarantee with respect to a contract with
a customer in the former Soviet Union to be activated. This contract
along with another contract (the "Russian Contracts") were entered
into by Cross & Trecker before its acquisition by the Company in
1991. As a result of the satisfaction of certain conditions, the
Company received a net payment of $32.3 million, which represented
the remaining balance owed under the contract and covered by the
guarantee. The receipt of this payment resulted in a $22.1 million
increase to pre-tax income recorded in the fourth quarter of 1994.
The income recorded was net of various costs expected to be incurred
in connection with shipment and installation of the equipment covered
under the contract. For the second Russian contract, no payments have
been received and no credit guarantee has been issued. Cost incurred
or committed to be incurred with respect to this contract were fully
reserved.
Other items of note concerning the comparison of 1995 compared to 1994
results of operations are highlighted below:
The consolidated gross margin percentage (before depreciation and
amortization) increased from 20.7% in 1994 to 21.3% in 1995. Gross
margins for both 1994 and 1995 were adversely impacted by competitive
pricing pressures, excess program costs on certain contracts, and
increased product development spending related to the introduction of RAM
machining centers. These factors largely offset an improvement in the
gross profit percentage resulting from the inclusion of Fadal. The
Company currently expects that the consolidated gross margin percentage
will improve in 1996 but will continue to be impacted by competitive and
economic factors.
Selling, general and administrative expenses (before depreciation and
amortization) decreased as a percentage of net sales from 9.5% in 1994 to
9.2% in 1995. The percentage decrease is primarily attributable to the
favorable settlement associated with the successful defense of a patent
infringement case and the effect of a significant increase in sales volume
as a result of the acquisition of Fadal.
Net interest expense increased from $1.0 million of net interest income in
1994 to net interest expense of $9.5 million in 1995. The increase in the
net interest expense is attributable to the borrowings used to finance the
purchase of Fadal.
The provision for income taxes of $21.6 million for 1995 decreased from
$29.7 million in 1994. The Company's effective tax rate for 1995 was 77.0%
as compared to 38.3% for the prior year. The increase in the 1995
effective tax rate is principally due to the write-off of $11.3 million of
non-deductible costs in excess of net acquired assets and $17.8 million
of foreign net operating losses for which no tax benefits were recorded.
See Note 8 in the Notes to Consolidated Financial Statements.
1994 Compared to 1993
The following table sets forth the Company's bookings by operating group
in the period and consolidated backlog at period-end on a quarterly basis
for 1994 and 1993.
April 3 July 3 Oct. 2 Dec. 31
(In thousands)
1994:
Operating group:
Automation Technology $ 32,034 $31,724 $28,973 $40,116
Integrated Automation 117,610 113,870 94,705 91,226
European Operations 6,138 5,771 12,141 8,759
Automation Measurement
and Control 13,647 17,831 16,964 17,948
------- ------ ------- -------
Consolidated bookings $169,429 $169,196 $152,783 $158,049
======= ======= ======= =======
Consolidated backlog $431,448 $460,370 $449,969 $422,172
======= ======= ======= =======
April 4 July 4 Oct. 3 Dec. 31
(In thousands)
1993:
Operating group:
Automation Technology $36,987 $31,716 $36,561 $39,857
Integrated Automation 26,612 59,723 39,837 79,270
European Operations 52,367 28,543 55,404 8,433
Automation Measurement
and Control 13,328 11,954 13,818 14,511
------- ------- ------ ------
Consolidated bookings $129,294 $131,936 $145,620 $142,071
======= ======= ======= =======
Consolidated backlog $349,070 $342,605 $367,857 $382,694
======= ======= ======= =======
Bookings for 1994 of $649.5 million represented an 18.3% increase from
1993 bookings of $548.9 million. Automation Technology bookings of $132.8
million for 1994 declined 8.5% from 1993 bookings of $145.1 million. This
decline mainly reflected continued weakness in the demand for large
machine tools and flexible manufacturing systems by industries other than
those related to the automotive sector. Integrated Automation bookings for
1994 totaled $417.4 million, a 103.2% increase from 1993 bookings of
$205.4 million. The increase in bookings was attributable to significant
order placement by the domestic automotive industry. European Operations'
bookings decreased 77.3% to $32.8 million in 1994, from $144.7 million in
1993. The decrease in 1994 was due to unfavorable economic conditions
(especially in the automotive sector) and increased competitive pressures
in the Company's European market. In addition, bookings in 1993 were
favorably impacted by significant orders received from European automotive
companies and a Korean automotive company. Automation Measurement and
Control bookings of $66.4 million for 1994 increased 23.8% over 1993
bookings of $53.6 million due mainly to large orders received from the
automotive and mining industries.
Company backlog at December 31, 1994, was $422.2 million, an increase of
$39.5 million or 10.3% from $382.7 million at 1993 year-end. The increase
in backlog resulted from increased booking activity noted above, which was
concentrated mainly in the domestic automotive sector.
Consolidated net sales of $619.5 million for 1994 compared to $517.5
million in the prior year. The increase in year-to-year net sales was
primarily attributable to the Integrated Automation and European
Operations groups. Automation Technology net sales of $162.9 million in
1994 represented a decrease of 3.4% from $168.7 million in net sales in
1993. Integrated Automation net sales of $267.8 million in 1994 increased
37.3% from $195.0 million in the prior year. The increase in Integrated
Automation sales is the result of improvements in domestic automotive
bookings which started in the fourth quarter of 1993 and continued into
1994. European Operations net sales of $126.6 million in 1994 increased
29.9% from $97.4 million in 1993. The increase in net sales related mainly
to significant orders received by the European Operations group in the
third quarter of 1993. Automation Measurement and Control net sales
increased 10.4% from $56.3 million in 1993 to $62.2 million in 1994.
Net income for 1994 of $47.9 million increased 9.6% from 1993 net income
available to common shareholders of $43.7 million. Pre-tax income in 1994
was $77.6 million, a 10.5% increase from 1993 pre-tax income of $70.0
million. As described in further detail in Note 2 in the Notes to
Consolidated Financial Statements, 1993 and 1994 pre-tax earnings were
impacted by certain nonrecurring items. These items resulted in a net
decrease in 1993 cost of sales and selling, general and administrative
expenses of $6.0 million and $8.7 million, respectively. The effect of
actions related to the Russian Contracts on 1994 net income is described
above.
The consolidated gross margin percentage (before depreciation and
amortization) decreased from 29.2% in 1993 to 20.7% in 1994. The
consolidated gross margin percentage for 1993 before the impact of the
nonrecurring items noted above was 28.0%. Gross margins for 1994 were
adversely impacted by competitive pricing pressures, cost overruns on
contracts booked in prior periods, and increased product development
spending.
Selling, general and administrative expenses (before depreciation and
amortization) decreased as a percentage of sales to 9.5% in 1994 from
11.9% in 1993. Selling, general and administrative expenses as a
percentage of sales for 1993 before the impact of the nonrecurring items
mentioned above was 13.6%. The percentage decrease was primarily
attributable to improved engineering efficiencies, continued cost
reduction measures and the effect of a significant increase in sales
volume.
Net interest income of $1.0 million in 1994 consisted mainly of income on
short-term investments offset in part by the amortization of capitalized
loan fees. Significant factors contributing to the decrease in net
interest expense from $2.9 million in 1993 to net interest income of $1.0
million in 1994 included: (1) the conversion into common stock in March
1993 of substantially all of the Company's 10% convertible subordinated
debentures (see Note 5 in the Notes to Consolidated Financial Statements
for details); and (2) the repayment of all then remaining outstanding debt
in the second quarter of 1993.
Other income of $.8 million for 1994 was primarily made up of royalty
income and gains on sale of fixed assets, offset by a net loss on foreign
currency transactions.
The provision for income taxes of $29.7 million for 1994 increased from
$26.3 million in 1993. Included as a component of income tax expense for
1993 was the benefit arising from the increase in the net deferred income
tax asset of approximately $1.0 million resulting from the 1% increase in
the top U.S. corporate tax rate enacted in August 1993. The Company's
effective tax rate for 1994 amounted to 38.3% as compared to 39.1% for the
prior year (excluding the rate change benefit). The decrease in the
effective tax rate from 1993 to 1994 was primarily due to a change in the
mix of income between various tax jurisdictions.
Liquidity and Capital Resources at December 31, 1995
On December 31, 1995, the Company had $14.2 million of cash and cash
equivalents on hand, which was a decrease of $9.9 million from the balance
on hand at the beginning of the year. For the year ended December 31,
1995, operating activities provided $52.3 million of cash. Operating
assets and liabilities provided net cash flow of $1.1 million, due
primarily to lower accounts receivable offset by a net decrease in
accounts payable and accrued expenses (excluding the effects of the Fadal
acquisition). The $30.8 million in cash provided from the reduction in
accounts receivable balances was due primarily to a decrease in unbilled
receivables on the Company's long-term contracts offset by a decrease in
related customer deposits. It should be noted that the acquisition of
Fadal resulted in the total accounts receivable balance increasing in
1995 versus 1994. The $6.5 million net cash used relating to the higher
inventory balance was largely attributable to the increase in RAM
production. The acquisition of Fadal accounted for the remainder of the
increase in inventory in 1995 versus 1994. There was a $31.9 million
decrease in accounts payable and accrued expenses at December 31, 1995 as
compared with December 31, 1994.
Increased material purchases in late 1994 resulted in an unusually high
accounts payable balance at December 31, 1994.
Investing activities in 1995 used $194.3 million, which included $179.6
million for the acquisition of Fadal and $16.1 million in capital
expenditures. The Fadal acquisition resulted in an increase to intangible
assets of approximately $123 million. Net proceeds from the sale of fixed
assets and assets held for sale generated $1.5 million of cash in 1995.
Financing activities in 1995 provided cash of $131.5 million consisting
mainly of the issuance of debt securities of $100 million and draws on
lines of credit, net of repayments, of $36.8 million, offset in part by
dividend payments of $4.1 million.
The Company's available borrowing capacity at December 31, 1995, amounted
to $124.4 million under a domestic credit agreement and $30.2 million
under foreign lines of credit. The Company had debt outstanding of $136.8
million at December 31, 1995.
Capital expenditures were $16.1 million, $16.7 million and $18.8 million
in 1995, 1994 and 1993, respectively. The Company expects commitments for
capital projects carried over from 1995, along with new projects proposed
for 1996, to result in capital expenditures of approximately $21 million
in 1996. The main focus of 1996 capital expenditures will be productivity
enhancement.
In addition, the Company expended $60.4 million, $67.4 million and $57.4
million in 1995, 1994 and 1993, respectively, on research, product
development and customer-sponsored engineering programs. Spending for such
activities is expected to remain steady at approximately $65 million in
1996 as a result of consistent sales volume and comparable product
development activities.
The Company believes its cash flows from operations and funds available
under domestic and foreign credit agreements will be adequate to finance
capital expenditures and working capital requirements for the foreseeable
future.
The Company is involved in environmental matters concerning facilities and
sites owned or formerly owned by the Company, its subsidiaries or alleged
predecessors. As described in Note 6 in the Notes to Consolidated
Financial Statements, those matters include an environmental remediation
at the Company's former West Allis, Wisconsin, property and a criminal
complaint and civil lawsuits concerning its Menominee, Michigan facility.
In connection with these sites, the Company has incurred various
expenditures to date on both investigative activities and remediation
efforts. Estimated future clean-up and other costs associated with these
environmental contingencies have been accrued on the Company's balance
sheet in instances where losses have been determined to be probable and
reasonably estimable. Management believes that future costs in excess of
the amounts accrued on all presently known and quantifiable environmental
contingencies will not be material to the Company's financial position or
results of operations. As referenced in Note 6 in the Notes to
Consolidated Financial Statements, information currently available to the
Company does not allow it to reasonably estimate the damages, penalties
and/or remediation costs, if any, that may be incurred with respect to the
Menominee, Michigan facility. Recurring costs incurred by the Company and
associated with managing hazardous substances and pollution at on-going
operations generally are not significant.
The Company is also involved in other litigation and proceedings,
including product liability claims. As discussed in Note 6 in the Notes to
Consolidated Financial Statements, management believes that future costs
in excess of the amounts accrued for all existing litigation will not be
material to the Company's financial position or results of operations.
Market Prices and Dividends
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol GIDL. The following table sets forth information as to the high and
low last sales prices per share of common stock as quoted on Nasdaq and
the cash dividends declared per share for the periods indicated.
Sales Price
Low High Dividends
1995:
First quarter $ 14-5/8 $ 17-1/4 $.03
Second quarter 15-1/8 18-7/8 .03
Third quarter 16 18-1/2 .03
Fourth quarter 14-7/8 17-3/8 .03
1994:
First quarter $ 25 $ 28 $.03
Second quarter 14-7/8 27-1/4 .03
Third quarter 15-5/8 20-3/8 .03
Fourth quarter 13-7/8 17-5/8 .03
As of February 15, 1996, there were approximately 2,352 record holders of
the Company's common stock.
The Board of Directors of the Company intends to consider the payment of
cash dividends on the common stock on a quarterly basis, but the
declaration of future dividends will necessarily be dependent upon
business conditions, the earnings and financial position of the Company
and such other matters as the Board of Directors deems relevant. For
information on restrictions on the payment of cash dividends on the common
stock, see Note 5 in the Notes to Consolidated Financial Statements.
[Pages 19-34 of the Annual Report]
Consolidated Statements of Income
Years Ended December 31,
1995 1994 1993
(In thousands, except share and
per share data)
Net sales $730,552 $619,471 $517,462
Costs and expenses:
Cost of sales (Note 2) 575,234 49 1,397 366,444
Selling, general and
administrative
expenses (Note 2) 67,556 58,977 61,474
Depreciation and amortization 19,308 15,399 14,768
Other charges (credits) (Note 2) 30,280 (22,128) -
------- ------- -------
Total operating expenses 692,378 543,645 442,686
------- ------- -------
Operating income 38,174 75,826 74, 776
Interest expense (income), net 9,501 (1,025) 2,898
Other expense (income) 610 (755) 1,851
------ ------ -------
Income before provision for income
taxes 28,063 77,606 70,027
Provision for income taxes (Note
8) 21,608 29,726 26,321
------- ------- -------
Net income $ 6,455 $ 47,880 $ 43,706
======== ======== =======
Net income per common share $0.19 $1.40 $1.31
===== ===== ====
Cash dividends per common share $0.12 $0.12 $0.12
==== ==== ====
Average number of common shares
outstanding 34,398,025 34,284,095 33,415,429
=========== ========== ==========
See accompanying notes.
Consolidated Statements of Cash Flows
Years Ended December 31,
1995 1994 1993
(In thousands)
Operating activities
Net income $6,455 $47,880 $43,706
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 19,308 15,399 14,768
Impairment and severance charge 30,280 - -
Deferred income taxes 3,948 20,996 14,608
Long-term employee benefits and
other long-term liabilities (4,105) (4,696) 462
Changes in operating assets and
liabilities:
Accounts receivable 30,816 (91,621) 74,148
Inventories (6,546) (16,719) (3,340)
Other current assets 8,780 (6,928) 1,707
Accounts payable and accrued
liabilities (31,920) 20,267 (67,275)
Foreign currency transaction
(gains) losses 179 669 2, 270
Other (4,922) 291 3,077
------ ------- ------
Net cash provided by (used in)
operating activities 52,273 (14,462) 84,131
Investing activities
Acquisition of business (Note 3) (179,579) - -
Additions to property, plant and
equipment (16,097) (16,747) (18,849)
Proceeds from sale of assets 1,546 5,875 10,015
Other (140) (1,759) 229
-------- ------- -------
Net cash used in investing
activities (194,270) (12,631) (8,605)
Financing activities
Proceeds from draws on lines of
credit 382,931 49,000 9,462
Repayments under lines of credit
and notes payable (346,168) (49,000) (27,813)
Proceeds from sale of debt
securities 100,000 - -
Payments for debt issue costs (1,182) - -
Repayments of long-term
borrowings - - (11,000)
Proceeds from additional stock
issuance - 487 3,354
Payments on debenture redemptions
and expenses on conversions - - (224)
Cash dividends (4,129) (4,115) (4,072)
------- ------- -------
Net cash provided by (used in)
financing activities 131,452 (3,628) (30,293)
Effect of exchange rate changes
on cash 689 916 143
------- ------- -------
Net (decrease) increase in cash
and cash equivalents (9,856) (29,805) 45,376
Cash and cash equivalents at
beginning of year 24,072 53,877 8,501
------- ------- -------
Cash and cash equivalents at end
of year $14,216 $ 24,072 $53,877
====== ======= ======
Supplemental disclosure of cash
flow information -
Cash paid during the year for:
Interest $ 7,648 $ 848 $ 1,709
======= ======= =======
Income taxes, net of refunds
received $11,334 $12,073 $10,016
======= ======= =======
See accompanying notes.
Consolidated Balance Sheets
December 31,
1995 1994
(In thousands, except
share data)
Assets
Current assets:
Cash and cash equivalents $14,216 $ 24,072
Accounts receivable, net of allowance
for doubtful accounts (Notes 1 and 4) 350,593 343,881
Inventories (Notes 1 and 4) 102,281 74,823
Deferred income taxes (Note 8) 4,776 9,455
Other current assets 5,921 10,923
------- -------
Total current assets 477,787 463,154
Fixed assets, net (Notes 1 and 4) 111,382 107,164
Intangible assets (Notes 1 and 4) 192,522 84,997
Deferred income taxes (Note 8) 19,700 18,968
Other assets 16,200 12,943
------- -------
Total assets $817,591 $687,226
======= =======
Liabilities and shareholders' equity
Current liabilities:
Notes payable (Note 5) $36,763 $ -
Accounts payable 67,676 76,562
Accrued expenses and other
liabilities (Note 4) 77,888 78,912
------- --------
Total current liabilities 182,327 155,474
Long-term debt (Note 5) 100,000 -
Long-term employee benefits and other
long-term liabilities (Notes 4 and 7) 42,723 46,454
------- -------
Total liabilities 325,050 201,928
Commitments and contingencies (Note 6)
Shareholders' equity (Notes 5 and 9):
Class A preferred stock - -
Common stock, 34,422,043 and 34,294,404
shares issued and outstanding at December
31, 1995 and 1994, respectively 3,442 3,429
Capital in excess of par 326,608 325,063
Retained earnings 160,783 158,457
Cumulative translation adjustment 4,223 174
Unamortized compensation expense (2,515) (1,825)
------- -------
Total shareholders' equity 492,541 485,298
------- -------
Total liabilities and shareholders' equity $817,591 $687,226
======= ========
See accompanying notes.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1995, 1994 and 1993
Common Stock
Shares Amount
(In thousands, except share
amounts)
Balance, December 31, 1992 30,365,197 $3,037
Net issuance of shares under restricted
stock awards and stock option plans 352,780 35
Tax benefit related to exercise of stock
options - -
Conversion of convertible debentures to
common stock, net of expense (Note 5) 3,538,133 354
Effect of income tax accounting change
(Note 8) - -
Net income - -
Amortization of compensation expense - -
Cash dividends - -
Translation adjustment - -
Other (2,042) (1)
----------- -------
Balance, December 31, 1993 34,254,068 3,425
Net issuance of shares under restricted
stock awards and stock option plans 40,370 4
Tax benefit related to exercise of stock
options and vesting of restricted stock - -
Net income - -
Amortization of compensation expense - -
Cash dividends - -
Translation adjustment - -
Other (34) -
--------- --------
Balance, December 31, 1994 34,294,404 3,429
Net issuance of shares under restricted
stock awards and stock option plans 127,639 13
Tax benefit related to exercise of stock
options and vesting of restricted stock - -
Net income - -
Amortization of compensation expense - -
Cash dividends - -
Translation adjustment - -
------- -------
Balance, December 31, 1995 34,422,043 $3,442
========== =====
Cumulative Unamortized Total
Capital in Retained Translation Compensation Shareholders'
Excess of Par Earnings Adjustment Expense Equity
$251,601 $ 75,058 $(1,807) $(1,965) $325,924
4,427 - - (1,701) 2,761
1,775 - - - 1,775
58,258 - - - 58,612
7,626 - - - 7,626
- 43,706 - - 43,706
- - - 1,324 1,324
- (4,072) - - (4,072)
- - (1,637) - (1,637)
(8) - - - (9)
------- ------- ------- ------- -------
323,679 114,692 (3,444) (2,342) 436,010
530 - - (852) (318)
854 - - - 854
- 47,880 - - 47,880
- - - 1,369 1,369
- (4,115) - - (4,115)
- - 3,618 - 3,618
- - - - -
------- ------- ------- -------- -------
325,063 158,457 174 (1,825) 485,298
1,351 - - (2,098) (734)
194 - - - 1 94
- 6,455 - - 6,455
- - 1,408 1,408
- (4,129) - - (4,129)
- - 4,049 - 4,049
------- ------- -------- ------- --------
$326,608 $160,783 $4,223 $(2,515) $492,541
======== ======= ===== ====== =======
See accompanying notes.
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Giddings &
Lewis, Inc. and all of its wholly owned subsidiaries (collectively, the
Company). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Revenue Recognition and Receivables
Revenue is reported on the percentage-of-completion (POC) method of
accounting for all long-term contracts and the completed contract method
for other products. Progress on POC contracts is measured by costs
incurred to date compared with an estimate of total costs at the project's
completion. Provision is made for the entire amount of expected losses, if
any, in the period in which such losses are first determinable. Revenue on
completed contract sales is recognized upon shipment to the customer.
The Company's POC calculations are made using management's best estimates
based on existing information with respect to contracts in progress. The
nature of the Company's contracts, however, are such that significant
subsequent changes in estimates are possible. The effects of such changes
are recognized in the period that they occur.
Customers are billed according to the terms of the contract. Unbilled
receivables include amounts recognized as revenue under the POC basis but
not billed to the customer. Retainers are billed upon shipment and are due
upon customer acceptance. Substantially all receivables, including
retainers, are collectible within one year.
Included in accounts receivable are unbilled receivables of $202,672,000
and $249,357,000 at December 31, 1995 and 1994, respectively. At December
31, 1995 and 1994, there were $51,692,000 and $23,019,000, respectively,
of retainers included in accounts receivable.
The Company is subject to certain credit risks, including a concentration
of accounts receivable balances with its worldwide automotive and related
customers, which totaled approximately $237,000,000 and $271,000,000 at
December 31, 1995 and 1994, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost
is determined by the first-in, first-out (FIFO), last-in, first-out (LIFO)
or average methods. Approximately $9,116,000 and $10,156,000 of the
inventories at December 31, 1995 and 1994, respectively, are valued on the
LIFO basis. If the FIFO inventory method, which approximates replacement
cost, had been used for these inventories, they would have been $481,000
and $388,000 greater at December 31, 1995 and 1994, respectively. The FIFO
and average costing methods produce materially consistent results.
Fixed Assets
Property, plant and equipment are carried at cost. Depreciation of plant
and equipment is determined on the straight-line basis over the estimated
useful lives of the assets, which range from 3 to 20 years.
Intangible Assets
Intangible assets include trade name, distributor network, and other
intangible assets identified in connection with purchase business
combinations, along with the residual component of the excess purchase
price that is referred to as "costs in excess of net acquired assets."
Allocation of costs to identified intangible assets was made primarily
using outside valuations.
Costs in excess of net acquired assets represent the excess purchase price
recorded in (a) the 1995 acquisition of Fadal Engineering Co., Inc.
(Fadal) (see Note 3), and (b) the 1991 acquisition of Cross & Trecker
Corporation (Cross & Trecker). The Company is amortizing costs in excess
of net acquired assets using the straight-line method over periods from 25
to 40 years. Accumulated amortization was $14,704,000 and $8,869,000 at
December 31, 1995 and 1994, respectively. Costs in excess of net acquired
assets related to the Cross & Trecker acquisition are also reduced for
the initial recognition of acquired tax loss carryforwards and temporary
deductible differences (see Note 8).
Other intangible assets are amortized on the straight-line basis over
periods ranging from 13 to 30 years.
The Company assesses long-lived assets for impairment under FASB Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Under those rules, costs in excess of net acquired assets associated
with long-lived assets acquired in purchase business combinations are
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Research, Development and Custom Engineering
Research and development expense pertaining to new products or significant
improvement to existing products was $3,183,000, $3,857,000 and $4,064,000
for the years ended December 31, 1995, 1994 and 1993, respectively. The
total expenditure for research, development and custom engineering was
$60,395,000, $67,398,000 and $57,413,000, respectively, for the periods
noted above.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions
Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using current exchange rates, and statement
of income items are translated using average exchange rates for the year.
For the years ended December 31, 1995, 1994 and 1993, losses on foreign
currency transactions amounted to $1,217,000, $669,000 and $2,270,000,
respectively, and are included in other expense/income in the accompanying
consolidated statements of income.
The Company enters into forward foreign exchange contracts mainly to fix
the price of certain loans to, and receivables from, its foreign
subsidiaries denominated in European currencies. The Company also enters
into forward foreign exchange contracts to fix the price of certain
contracts of its foreign subsidiaries denominated in currencies other than
the subsidiaries' local currency. The primary purpose of the Company's
foreign currency activities is to protect the Company from the risk that
the eventual dollar cash flows resulting from the repayment of such loans
and the collection of the accounts receivable will be adversely affected
by changes in exchange rates. At December 31, 1995, the Company had
forward exchange contracts that require it to convert these foreign
currencies, at various rates and dates through April 1997 into
approximately $21.2 million, DM 5.0 million, and [L]20.3 million. At
December 31, 1994, the Company had forward exchange contracts that
required it to convert foreign currencies, at various rates and dates
through December 1995, into approximately $50.0 million, DM 3.0 million,
and [L]1.4 million.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts; however, the Company
does not anticipate nonperformance by any of these counterparties. The
amount of such exposure is generally any unrealized gains in such
contracts.
Net Income Per Common Share
Net income per common share in 1995, 1994 and 1993 was computed by
dividing net income by the weighted average number of common shares
outstanding during the respective periods. Stock options were not
materially dilutive for these years.
Stock Awards
The Company accounts for employee stock awards (e.g., restricted stock and
stock options) in accordance with APB Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees." Under APB 25, the total compensation
expense recognized is equal to the difference between the award's exercise
price and the underlying stock's market price (referred to as "intrinsic
value") at the measurement date, which is the first date that both the
exercise price and number of shares to be issued is known.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective
January 1, 1996. As is permitted under SFAS No. 123, the Company has
tentatively decided to continue accounting for employee stock compensation
under the APB 25 rules, but will disclose pro forma results using the new
standard's alternative accounting treatment, which calculates the total
compensation expense to be recognized as the fair value of the award at
the date of grant for effectively all awards.
Nature of Operations
The Company's operations are conducted in one business segment: the
design, production and integration of smart manufacturing systems,
flexible transfer lines, automated assembly systems, high-precision
automated machine tools, coordinate measuring machines, industrial control
systems and other related products and services. Organizationally, the
Company is comprised of four major operating groups: Automation
Technology, Integrated Automation, Automation Measurement and Control, and
European Operations. The Company's products are sold throughout the world
primarily to manufacturers in the automotive, construction, aerospace,
defense, appliance, energy and electronics industries. The Company's
subsidiaries in England, Canada and Germany account for a significant part
of the Company's sales outside of the U.S. (refer to Note 11 for
information about foreign operations and export sales).
A substantial amount of the Company's flexible transfer lines and
automated assembly systems are sold to large manufacturers in the
automotive industry. In that regard, approximately 23.2% and 6.3% of the
Company's 1995 sales were to two such automotive industry customers.
Approximately 15.9% and 14.2% of the Company's 1994 sales were to two
different automotive industry customers, respectively. In 1993,
approximately 29.7% of the Company's sales were derived from a single
automotive industry customer.
2. Other Charges (Credits)
1995
The separate $30.3 million operating expense item in the Company's 1995
statement of income consists of the charges listed below. While these
charges are based on available information and management's best estimate
at this time, it is impossible to predict the ultimate costs to be
incurred in this regard.
In the fourth quarter of 1995, the Company entered into a formal plan to
improve the operations of its German subsidiary, which includes the
planned termination of 145 employees at that location. As a result of its
decision, the Company recorded a pre-tax charge of $6.3 million relating
to the planned terminations. Through December 31, 1995, no termination
benefit payments have been made.
In conjunction with the above plan, the Company evaluated the ongoing
value of the property, plant and equipment, and related intangible assets,
associated with its German subsidiary in accordance with SFAS No. 121.
Based on this evaluation, the Company determined that assets were impaired
and wrote them down by $20.5 million to their estimated fair value. The
fair value estimate was based on estimated future cash flows of the
subsidiary discounted at an interest rate commensurate with the risk
involved.
Also during the fourth quarter of 1995, in connection with the adoption of
SFAS No. 121, the Company determined that the long-term and intangible
assets associated with a plant in its Automation Measurement and Control
group were impaired. That impairment evaluation was triggered by the
relatively poor operating performance of that entity since its 1991
acquisition. Such assets were written down $3.5 million to their
estimated fair value, which was determined using a discounted future cash
flow estimate.
1994
In connection with the 1991 Cross & Trecker acquisition, the Company wrote
off the uncollected receivables and reserved for the costs committed to be
incurred with respect to two Russian contracts entered into by Cross &
Trecker prior to the acquisition. The Russian contracts totaled
approximately $48.2 million.
During the fourth quarter of 1994, the necessary conditions were met such
that a credit guarantee was activated in connection with one of the
Russian contracts referred to above. As a result, the Company received a
net payment of $32.3 million, which represented the remaining balance owed
under the contract and covered by the guarantee. The receipt resulted in a
$22.1 million increase to pre-tax income recorded in the fourth quarter of
1994. The income recorded was net of various costs expected to be incurred
in connection with shipment and installation. For the other Russian
contract, no payments have been received and no credit guarantee has been
issued through 1995.
1993
In connection with the allocation of the purchase price for the Cross &
Trecker acquisition, certain liabilities were established relating to
probable facility closings both in the U.S. and abroad. As a result of
changing economic conditions, changes in senior management, and other
factors, in 1993 the Company decided not to shut down two of the plants
scheduled for closing. Accordingly, the related accruals were no longer
deemed necessary. In addition, during 1993 there were favorable developments
pertaining to certain Russian contracts, including the receipt of certain
down payments, (see discussion under the 1994 section of this note) that
had been fully reserved. The net effect of these and other changes in
estimates with respect to certain liabilities established in connection
with the Cross & Trecker acquisition was a 1993 fourth quarter increase
to pre-tax income of approximately $23 million as shown below.
The Company also recognized a pre-tax restructuring charge in the fourth
quarter of 1993 of approximately $8.3 million related to the closing of
two facilities. The restructuring charge consists primarily of inventory
and fixed asset write-downs to net realizable value, termination benefits
and estimated future facility carrying costs through the expected dates of
disposal. The facilities were subsequently sold in October 1994 and March
1995. As of December 31, 1995, there were no significant remaining
expenditures relating to these formerly-owned facilities.
The impact of these items on 1993's results of operations is summarized
below:
Purchase Price
Accounting Restructuring Net
Reserves Charges Benefit
(In thousands)
Cost of sales $11,593 $(5,625) $ 5,968
Selling, general and
administrative expenses 11,410 (2,643) 8,767
------ ------ -------
Total $23,003 $(8,268) $14,735
====== ====== =======
3. Acquisition of Fadal
On April 24, 1995, the Company acquired for cash all of the issued and
outstanding shares of capital stock of Fadal, and the land and building
used by Fadal in the operation of its business. Fadal is principally
involved in the design, manufacture and sale of computer numerically
controlled vertical machining centers. The acquisition was financed with
amounts borrowed under existing and new credit facilities.
The Fadal acquisition was accounted for using the purchase method of
accounting and, accordingly, the operations of Fadal are included in the
Company's consolidated statement of income since the April 24, 1995
acquisition date. The total purchase price was approximately $180 million
and included $123 million allocated to intangible assets, which includes
the residual component of costs in excess of net acquired assets that is
being amortized over 25 years.
Pro forma unaudited results of operations for the years ended December 31,
1995 and 1994, assuming consummation of the Fadal purchase as of January
1, 1994, are as follows:
1995 1994
(In thousands)
Net sales $783,546 $757,299
Net income 9,784 55,920
Net income per common share 0.28 1.63
4. Additional Balance Sheet and Cash Flow Information
1995 1994
(In thousands)
Receivables -
Allowance for doubtful accounts $ 1,836 $ 922
========= =======
Inventories:
Raw materials $ 52,694 $ 37,166
Work-in-process 38,038 27,568
Finished goods 11,549 10,089
-------- --------
$ 102,281 $ 74,823
======= ========
Fixed assets:
Land $ 9,504 $ 7,826
Buildings 64,557 66,462
Machinery and equipment 141,973 137,681
------- --------
216,034 211,969
Less accumulated depreciation (104,652) (104,805)
------- -------
$ 111,382 $ 107,164
======== ========
Intangible assets:
Trade name $19,544 $ -
Distributor network 22,214 -
Costs in excess of net acquired
assets 149,180 84,997
Other 1,584 -
------- -------
$192,522 $84,997
======= =======
Accrued expenses and other
liabilities:
Payroll and related expenses $16,163 $13,640
Installation and warranty accruals 17,218 19,165
Restructuring costs 6,313 2,936
Self-insurance reserves 4,156 6,067
Other current liabilities 34,038 37,104
------- -------
$77,888 $78,912
======= ======
Long-term employee benefits and other
long-term liabilities:
Postretirement health care
obligations $13,224 $13,764
Pension and retirement plan
obligations 18,765 18,917
Environmental liabilities 9,993 13,773
Other 741 -
------- --------
$42,723 $46,454
====== ======
A significant non-cash transaction during 1995 was as follows:
- In the purchase of Fadal, the purchase price was allocated as follows
(in thousands):
Purchase price $179,579
Estimated fair value of tangible
assets acquired (68,536)
Estimated fair value of liabilities assumed 12,370
------
Excess purchase price allocated to intangible
assets $123,413
========
A significant non-cash transaction during 1994 was as follows:
- Decrease in intangible assets of $4 million, due to the recognition of
certain acquired foreign net operating loss carryforwards.
Significant non-cash transactions during 1993 were as follows:
- Conversion of 10% Convertible Subordinated Debentures due 2015
(Debentures), $58.6 million of principal and accrued interest (net of
tax), to common stock.
- Effect of adopting Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS No. 109) (see Note 8).
- Net decrease in intangible assets of $16.6 million due to the utili-
zation or initial benefit recognition of acquired tax loss
carryforwards (see Note 8).
5. Financing Arrangements and Long-Term Debt
Notes payable under revolving credit facilities and long-term debt
consisted of the following at December 31:
1995 1994
(In thousands)
Borrowings under 1992 Credit
Facility $ 36,763 $ -
7.5% unsecured notes maturing in
2005 100,000 -
------ ------
Total debt 136,763 -
Less current maturities 36,763 -
------- -------
Long-term debt $ 100,000 $ -
======== =======
The Company has a multicurrency credit agreement with a syndicate of
financial institutions for an unsecured $175 million revolving credit
facility (1992 Credit Agreement). The 1992 Credit Agreement matures in
December 1997. At December 31, 1995, outstanding borrowings and letters of
credit under the 1992 Credit Agreement totaled $36.8 million and $13.8
million, respectively. Letters of credit reduce the amount available for
additional borrowings under the agreement. At December 31, 1994, there
were no borrowings under the Credit Agreement; however, outstanding
letters of credit totaled $21.8 million. The 1992 Credit Agreement
carries an interest rate equal to a Base Rate, as defined, or LIBOR plus a
spread. At December 31, 1995, the weighted average interest rate on
outstanding borrowings under the 1992 Credit Agreement was 6.82%. The
Company is required to pay certain fees and expenses from time to time,
including agent fees and commitment fees of .125% of the unused portion
available under the Credit Agreement.
The 1992 Credit Agreement contains various covenants and restrictions,
including customary financial covenants, additional debt limitations and
restrictions on payment of dividends. The dividend restrictions prohibit
the Company from paying cash dividends on its common stock in excess of
40% of the Company's consolidated net earnings after tax in any fiscal
quarter, less amounts paid to redeem capital stock in such quarter. This
limitation is subject to certain carryforward provisions.
At December 31, 1995, the Company had foreign lines of credit that
approximated $72 million, with no borrowings outstanding. Borrowings under
the foreign lines of credit bear interest at an average rate of 4.5%.
Outstanding foreign letters of credit at December 31, 1995 and 1994,
approximated $41.8 million and $38.0 million, respectively, and reduce the
amounts available under the foreign lines of credit.
In connection with the April 1995 Fadal acquisition, the Company entered
into an additional $100 million one-year revolving credit facility with a
bank (1995 Credit Agreement). Amounts borrowed under the 1995 Credit
Agreement to finance the acquisition were subsequently repaid or
refinanced in 1995.
During 1995, the Company filed a shelf registration with the Securities
and Exchange Commission enabling the Company to issue to the public up to
$250 million in unsecured debt securities. On October 2, 1995, $100
million of such securities were issued in a public offering at an interest
rate of 7.5%. The proceeds from the offering were used to repay amounts
borrowed under the 1992 and 1995 Credit Agreements in connection with the
Fadal acquisition. The notes issued in 1995 mature in the year 2005.
In 1993, the Company called for the redemption of $57 million of its
convertible debentures. In connection therewith, substantially all holders
of the debentures elected conversion into common stock instead of
redemption. The $58.6 million of principal and accrued interest (net of
tax) relating to debentures converted into shares of common stock during
the first quarter of 1993 is reflected as an increase in shareholders'
equity.
Interest expense for the years ended December 31, 1995, 1994 and 1993, was
$10,548,000, $1,970,000 and $4,147,000, respectively.
6. Commitments and Contingencies
The Company has operating leases and service contracts covering primarily
office space and data processing equipment. Future minimum lease payments
under these commitments at December 31, 1995, were as follows (in
thousands):
1996 $2,513
1997 1,647
1998 477
1999 151
2000 73
Thereafter 82
------
$4,943
======
Total expense for all operating leases for the years ended December 31,
1995, 1994 and 1993, was $3,431,000, $3,645,000 and $3,983,000,
respectively.
The Company is involved in various environmental matters, including
matters in which the Company and certain of its subsidiaries or alleged
predecessors have been named as potentially responsible parties under the
Comprehensive Environmental Response Compensation and Liability Act
(CERCLA). These matters include a soil and water contamination matter at
its former West Allis, Wisconsin, facility. In 1992, the Company was
notified by the Wisconsin Department of Natural Resources (WDNR) of
contamination at the West Allis site. In 1994, the Company sold most of
the site, including the manufacturing facility. The Company has made
substantial progress on the implementation of a WDNR approved clean-up
plan on the portion of the site that was not sold.
The Company has established accruals ($10.0 million and $13.8 million at
December 31, 1995 and 1994, respectively) for all environmental
contingencies of which management is currently aware in accordance with
generally accepted accounting principles. In establishing these accruals,
management considered: (a) reports of environmental consultants retained
by the Company; (b) the costs incurred to date by the Company at sites
where clean-up is presently ongoing and the estimated costs to complete
the necessary remediation work remaining at such sites; (c) the financial
solvency, where appropriate, of other parties that have been responsible
for effecting remediation at specified sites; and (d) the experience of
other parties who have been involved in the remediation of comparable
sites. The accruals recorded by the Company with respect to environmental
matters have not been reduced by potential insurance or other recoveries
and are not discounted. Although the Company has and will continue to
pursue such claims against insurance carriers or other responsible
parties, future potential recoveries remain uncertain and, therefore, were
not recorded as a reduction to the estimated gross environmental
liabilities. Based on the foregoing and given current information,
management believes that future costs in excess of the amounts accrued on
all presently known and quantifiable environmental contingencies will not
be material to the Company's financial position or results of operations.
In another matter, a Michigan Department of Natural Resources' (now known
as the "Department of Environmental Quality"-MDEQ) investigation into
alleged environmental violations at the Company's Menominee, Michigan,
facility has resulted in the issuance of a criminal complaint against the
Company and two of its employees. The complaint generally is focused on
alleged releases of hazardous substances and the alleged illegal treatment
and disposal of hazardous wastes. Two civil lawsuits are also pending
which allege improper disposal and emissions at this facility. The Company
is vigorously defending itself against all charges and allegations.
Information presently available to the Company does not enable it to
reasonably estimate potential civil or criminal penalties, or remediation
costs, if any, related to this matter.
The Company is also involved in other litigation and proceedings,
including product liability claims. In the case of product liability, the
Company is partially self-insured and has accrued for all claim exposure
for which a loss is probable and reasonably estimable. Based on current
information, management believes that future costs in excess of the
amounts accrued for all existing litigation will not be material to the
Company's financial position or results of operations.
7. Employee Benefit Plans
Domestic Defined Benefit Plans
The Company has defined benefit plans that cover substantially all U.S.
employees. Benefits for salaried employees generally are based on earnings
and years of service while hourly employee benefits generally are a fixed
amount for each year of service. The Company annually contributes to the
defined benefit plans amounts which are actuarially determined to provide
the plans with sufficient assets to meet future benefit payment
requirements. Plan assets are invested primarily in listed stocks, money
market instruments, fixed income securities and U.S. corporate bonds.
Net periodic pension expense for the Company's domestic defined benefit
retirement plans includes the following components:
1995 1994 1993
(In thousands)
Service cost $ 3,411 $ 3,436 $ 2,907
Interest cost 7,988 7,047 6,900
Actual (return)/loss on assets (16,615) 744 (8,115)
Net amortization and deferral 10,174 (7,097) 2,030
------ ----- ------
Net periodic pension expense $ 4,958 $ 4,130 $ 3,722
====== ====== ======
The following table presents a reconciliation of the funded status of the
Company's domestic defined benefit plans at December 31:
1995 1994
(In thousands)
Actuarial present value of benefit
obligations:
Vested benefits $ 98,419 $ 76,463
Nonvested benefits 6,963 5,843
------- -------
Accumulated benefit obligation 105,382 82,306
Effect of assumed increases in
compensation levels 16,152 15,541
------- -------
Projected benefit obligation 121,534 97,847
Plan assets at fair value 94,983 78,090
------- -------
Projected benefit obligation in
excess of plan assets (26,551) (19,757)
Unrecognized net loss 7,504 1,318
Unreco gnized prior service cost 1,230 1,099
-------- -------
Accrued pension cost $(17,817) $(17,340)
======== ========
The assumptions used in determining pension expense (for the following
year) and funded status information shown above were as follows:
1995 1994 1993
Discount rate 7.5% 8.25% 7.5%
Rate of salary progression 4.5% 5.0% 5.0%
Long-term rate of return on assets 8.5% 8.0% 8.0%
The change in the discount rate and rate of salary progression assumptions
at December 31, 1995 increased the projected benefit obligation by
$13,054,000. The change in the discount rate assumption at December 31,
1994, decreased the projected benefit obligation by $10,377,000.
Foreign Defined Benefit Plans
Benefits of the defined benefit plans for the Company's foreign employees
are based on years of service and the employees' compensation during
employment. Substantially all of the plan assets are held in commingled
trust accounts. The Company's foreign funding policy is to contribute
annually the minimum amount required to comply with local statutory
requirements.
Net periodic pension income for the Company's foreign defined benefit
plans includes the following components:
1995 1994 1993
(In thousands)
Service cost $ 884 $ 729 $ 1,036
Interest cost 2,026 1,595 1,720
Actual (return)/loss on assets (4,800) 1,650 (6,710)
Net amortization and deferral 1,253 (5,333) 3,453
------ ------- ------
Net periodic pension income $(637) $(1,359) $ (501)
===== ======= ======
During 1995 and 1994, settlements relating to the Company's foreign plans
resulted in gains of approximately $400,000 and $500,000, respectively.
The following table presents a reconciliation of the funded status of the
Company's foreign defined benefit plans at December 31:
1995 1994
(In thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation--all
vested $24,686 $19,514
Effect of assumed increases in
compensation levels 3,727 2,817
------- -------
Projected benefit obligation 28,413 22,331
Plan assets at fair value 36,020 30,782
------ ------
Plan assets in excess of projected
benefit obligation 7,607 8,451
Unrecognized net loss 1,362 440
Unrecognized net transition asset (5,198) (5,805)
Unrecognized prior service cost 1,078 1,169
------ -------
Prepaid pension cost $ 4,849 $ 4,255
====== =======
The assumptions used in determining foreign pension expense (for the
following year) and funded status information shown above were as follows:
1995 1994 1993
Discount rate 8.0% 9.0% 8.0%
Rate of salary progression 5.0% 5.0% 5.0%
Long-term rate of return on assets 9.5% 9.0% 9.0%
The change in the above assumptions increased the projected benefit
obligation by approximately $3,415,000 at December 31, 1995 and decreased
the projected benefit obligation by approximately $3,287,000 at December
31,1994.
Defined Contribution Plans
The Company also has certain defined contribution plans that cover
substantially all full-time employees. Contributions to the plans are
based on a percentage of employee earnings. Costs of these plans charged
to operations were $2,108,000, $2,024,000 and $1,745,000 in 1995, 1994 and
1993, respectively.
Other Postretirement Benefit Plans
The Company provides health care benefits, and certain life insurance
benefits, to certain retired employees who retired prior to June 1, 1992.
The types of benefits, retiree contributions, and eligibility for benefits
varied among the various divisions and are unfunded. The Company's
contribution level is frozen such that all health care cost increases are
borne by retirees. Benefits for plan participants age 65 and older are
integrated with Medicare under all plans. The Company funds costs as
incurred under the plans.
The following sets forth the plans' status reconciled with the amounts
recognized in the Company's balance sheet as of December 31:
1995 1994
(In thousands)
Accumulated postretirement benefit
obligation:
Current retirees $(11,857) $(11,985)
Unrecognized net gain (1,367) (1,779)
------- -------
Accrued long-term employee benefit $(13,224) $(13,764)
======= =======
The periodic postretirement benefit cost included in the statement of
income is as follows:
1995 1994 1993
(In thousands)
Service cost $ - $ - $ 3
Interest 924 934 1,220
Amortization (74) (68) -
----- ----- ------
Total $850 $866 $1,223
==== ==== ======
Due to the nature of the plans, a one percent change in the healthcare
trend rate assumption does not have any material impact on the Company's
obligation. Similarly, the healthcare cost trend rate is not a factor in
computing the benefit obligation. A discount rate of 7.5% and 8.25% was
used to present value all future health care and life insurance
liabilities at December 31, 1995 and 1994, respectively.
8. Income Taxes
Effective January 1, 1993, the Company prospectively adopted SFAS No. 109,
"Accounting for Income Taxes." The effect of adopting SFAS No. 109 was a
$7.6 million credit recorded directly to Capital in Excess of Par. Under
SFAS No. 109's liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities, and are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
At December 31, 1995, the Company had U.S. federal net operating loss
carryforwards totaling approximately $26 million and various state net
operating loss carryforwards. The federal carryforwards expire in 2003
through 2005, while the state carryforwards expire in 1996 through 2011.
The Company also had foreign tax loss carryforwards totaling approximately
$42 million at December 31, 1995, that can be carried forward
indefinitely. The U.S. federal amount and $21.5 million of the foreign
amount represent acquired net operating loss carryforwards resulting from
the Cross & Trecker acquisition. The tax benefit of these loss
carryforwards has been, or will be in the case of certain foreign loss
carryforwards, recorded as a reduction to goodwill (i.e., reduce
intangible assets) when initially recognized.
At December 31, 1993, the valuation allowance relating to the U.S. federal
loss carryforward was eliminated. The benefit relating to those remaining
carryforwards (approximately $13 million), the benefit of the loss
carryforward used in 1993 (approximately $3.6 million-U.S.; $1.7 million-
foreign), and other adjustments were recognized as reductions to goodwill.
These items constitute the $18 million decrease in the deferred tax asset
valuation allowance from January 1, 1993 to December 31, 1993.
The decrease in the valuation allowance during 1994 primarily reflects the
recognition of approximately $4 million in certain acquired foreign net
operating loss carryforwards as a reduction to goodwill. The increase in
the valuation allowance during 1995 relates to newly generated foreign
deferred tax assets, the benefit of which can not be recognized under SFAS
No. 109's "more likely than not" provisions.
Gross deferred tax assets for all remaining net operating loss
carryforwards, together with various deductible temporary differences
related to certain of the Company's foreign subsidiaries, continue to be
fully offset by a valuation allowance based on management's judgment with
respect to the realizability of those items.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1995 and 1994, are as follows:
1995 1994
(In thousands)
Deferred tax liabilities:
Tax over book depreciation $ 8,005 $14,618
LIFO book/tax difference relating to
acquisition 2,193 2,225
Percentage of completion accounting 2,436 2,654
Other, net 9,039 5,598
------ ------
Total deferred tax liabilities 21,673 25,095
Gross deferred tax assets:
Environmental accruals 3,874 5,226
Pension, other postretirement, and other
longer term employee benefit obligations 7,885 10,526
Other accrued expenses not currently
deductible and other 19,579 21,445
Net operating loss carryforwards 31,298 24,418
------ ------
Total gross deferred tax assets 62,636 61,615
Valuation allowance for deferred tax assets (16,487) (8,097)
------- ------
Deferred tax assets, net of valuation
allowance 46,149 53,518
------- ------
Net deferred tax asset $ 24,476 $28,423
======= =======
The net current and noncurrent components of deferred taxes recognized in
the December 31, 1995 and 1994, balance sheets are as follows:
1995 1994
(In thousands)
Net current asset $ 4,776 $ 9,455
Net noncurrent asset 19,700 18,968
------ ------
$24,476 28,423
====== =======
Details of income before provision for income taxes are as follows:
1995 1994 1993
(In thousands)
Domestic $ 57,446 $77,525 $58,280
Foreign (29,383) 81 11,747
------- ------- -------
$ 28,063 $77,606 $70,027
======= ====== ======
Details of the provision for income taxes for the years ended December 31,
1995, 1994 and 1993, are as follows:
1995 1994 1993
(In thousands)
Current:
Federal $ 13,963 $ 4,650 $ 3,129
State 1,460 1,627 830
Foreign 702 1,599 286
------ ------ -----
16,125 7,876 4,245
Deferred:
Federal 6,606 19,90 8 9,643
State 867 2,655 1,815
Foreign (3,525) (1,567) 3,150
------ ------ ------
3,948 20,996 14,608
Effect of using acquired
loss carryforwards (1) 887 - 5 ,343
Tax benefit related to
exercise of options and
other items charged to
equity 648 854 2,125
------- ------ ------
$21,608 $29,726 $26,321
====== ====== ======
(1) Reduction in current provision (not previously recognized) and
credited to goodwill.
The differences between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate (35%) for the years ended
December 31, 1995, 1994 and 1993, are as follows:
1995 1994 1993
(In thousands)
Provision at statutory rates $ 9,822 $27,162 $24,509
State taxes, net of federal benefit 1,513 2,783 1,719
Foreign loss for which no tax
benefit recorded 6,215 - -
Write-off of costs in excess of net
acquired assets 3,957 - -
Amortization of costs in excess of
net acquired assets 631 668 823
Effect of different foreign tax
rates (946) (513) 1,029
Effect on deferred taxes of change
in U.S. federal tax rate - - (1,366)
Addition (reduction) to tax
reserves 114 (520) (820)
Other 302 146 427
------ ------ ------
Actual provision for income taxes $21,608 $29,726 $26,321
======= ======= ======
Undistributed earnings of the Company's foreign subsidiaries, which are
not significant at December 31, 1995, are considered to be permanently
invested. Therefore, no deferred taxes (including withholding taxes
payable) have been provided for the remittance of those earnings.
9. Capital Stock
The Company's capital structure consists of the following at December 31:
1995 1994
(In thousands, except share
amounts)
Class A preferred stock, $.10 par value,
authorized 3,000,000 shares; 350,000 shares
designated as Series A and 700,000 shares
designated as Series B; none issued and
outstanding $ - $ -
Common stock, $.10 par value, authorized
70,000,000 shares; 34,422,043 and 34,294,404
shares issued and outstanding at December 31,
1995 and 1994, respectively 3,442 3,429
On August 23, 1995, the Board of Directors of the Company declared a
rights dividend of one preferred share purchase right (Right) for each
share of common stock outstanding on September 8, 1995, and provided that
one Right would be issued with each share of common stock thereafter
issued. Each Right entitles the registered holder to purchase from the
Company, upon the occurrence of certain events, one one-hundredth of a
share of Class A preferred stock, Series B at an initial exercise price of
$60 per one one-hundredth of a share or, upon the occurrence of certain
events, common stock or other property having a value of twice the
exercise price. The redemption price for the Rights is $.01 per Right.
Simultaneous with this rights dividend, the Company redeemed outstanding
rights from a 1990 rights dividend for $172,000.
1989 Restricted Stock Plan
Under the Company's 1989 restricted stock plan, the Company may grant to
key employees the right to purchase up to an aggregate of 500,000 shares
of common stock (the restricted shares) at $.10 per restricted share, with
such shares not vesting for a period, as determined by the Compensation
Committee of the Board of Directors, of up to ten years from the effective
date of the award (the restricted period). During the restricted period,
the restricted shares may not be sold, transferred or otherwise alienated
by the recipient. The restricted shares currently outstanding have a
restricted period from one to five years from the effective date of the
award.
1989 Stock Option Plan
The Company's 1989 stock option plan authorizes the granting of incentive
and nonqualified stock options to key employees for up to an aggregate of
1,500,000 shares of common stock. Stock options granted under the 1989
stock option plan will have an exercise price of not less than 90% of the
fair market value of the common stock on the date of grant. Options
granted will vest and become exercisable in accordance with the terms and
conditions established by the Compensation Committee of the Board of
Directors and set forth in the applicable option agreement, except that no
options may be exercised later than ten years after the date of its grant.
1991 Independent Director Stock-Based Incentive Plan
During 1991, the Company adopted a stock based incentive plan for members
of the Board of Directors who are not employees of the Company. Under the
1991 plan, on each date on which a non-employee director is elected or re-
elected to serve on the Board of Directors (as the case may be), such non-
employee director automatically receives options to purchase 1,000 shares
of the Company's common stock. The plan authorizes the granting of
nonqualified stock options to non-employee directors for up to an
aggregate of 50,000 shares of common stock. Stock options granted under
the 1991 plan have an exercise price equal to the closing price of a share
of common stock at the date of grant and become exercisable (subject to
immediate vesting in certain cases) upon expiration of the non-employee
director's term as a director.
1993 Stock and Incentive Plan
In 1993, the Company adopted the 1993 stock and incentive plan. The 1993
plan authorizes the granting to key employees of (a) stock options (either
incentive stock options or nonqualified options), (b) stock appreciation
rights, (c) restricted stock, and (d) performance shares and performance
units. In addition, under the 1993 plan, non-employee directors receive
annual restricted stock grants based on an established formula. In total,
the 1993 plan allows for the granting of awards relating to 2,000,000
shares of common stock.
Options granted under the 1993 plan shall have exercise prices no less
than 90% (100% in the case of incentive stock options) of the fair market
value of a share of common stock at the date of grant. The term of the
option is to be determined at the time of the grant but in no event can
exceed ten years. Restricted stock issued under the 1993 plan may contain
restrictions similar to those described above for the 1989 restricted
stock plan, as well as other terms, including vesting based on the
achievement of specified performance criteria. Subject to the terms of the
1993 plan, awards of stock appreciation rights and performance shares and
performance units may have such terms as are specified by the Compensation
Committee of the Board of Directors.
A summary of restricted stock activity, including shares issued to non-
employee directors, is as follows:
Number of Shares
1995 1994 1993
Restricted stock:
Outstanding at beginning of year 208,315 385,515 385,200
Granted 129,556 58,840 113,142
Canceled (15,000) (29,298) (112,827)
Vested (72,000) (206,742) -
------- -------- --------
Outstanding at end of year 250,871 208,315 385,515
======= ======== =======
A summary of option activity under the above-described stock option and
incentive plans is as follows:
Number of Shares
1995 1994 1993
Options:
Outstanding at beginning of year
at $7.00 to $28.00 697,676 584,370 1,162,778
Granted at $9.625 to $28.00 272,600 229,750 70,000
Canceled (88,264) (67,656) (295,943)
Exercised at $7.00 to $19.875 (42,000) (48,788) (352,465)
------- ------- -------
Outstanding at end of year at
$7.00 to $28.00 840,012 697,676 584,370
======= ======= =======
All options granted through December 31, 1995, are nonqualified stock
options. There were 315,381, 209,299 and 17,143 options exercisable at
December 31, 1995, 1994 and 1993, respectively.
A total of approximately 2,794,000 shares of the Company's authorized but
unissued common stock are reserved for potential future issuance under the
Company's various stock option and incentive plans.
10. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates fair value.
Notes Payable and Long-Term Debt
The carrying amounts of the Company's borrowings under the 1992 Credit
Agreement approximate fair value. The fair value of the Company's 7.5%
unsecured notes was estimated based on the quoted market price of those
securities.
Foreign Currency Exchange Contracts
The fair values of the Company's forward foreign currency exchange
contracts are estimated based on quoted market prices of comparable
contracts.
The carrying amounts and fair values (i.e., unrealized gains/(losses) in
the case of forward exchange contracts) of the Company's financial
instruments at December 31 are as follows:
1995 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands)
Cash and cash
equivalents $ 14,216 $ 14,216 $24,072 $24,072
Notes payable (36,763) (36,763) - -
Long -term debt (100,000) (104,400) - -
Foreign currency
exchange contracts - (73) - (759)
11. Foreign Operations
Information relating to the Company's foreign operations, consisting
principally of operations in the United Kingdom and continental Europe, at
December 31, 1995, 1994 and 1993, and for each of the three years then
ended is as follows:
Sales Operating
Assets Gross Intergeographic(1) Net Income
(In thousands)
1995 $139,813 $122,032 $16,803 $105,229 $(660)
======= ======= ======= ======= =======
1994 $185, 382 $148,625 $20,493 $128,132 $ 1,832
======== ======= ======= ======== =======
1993 $145,040 $104,471 $ 6,282 $98,189 $11,837
======== ======= ======= ======= =======
(1) Represents sales from the Company's foreign subsidiaries to the
Company in the United States, which are at prices approximating those
charged to unaffiliated customers.
In 1995, 1994 and 1993, the foreign subsidiaries had sales to unaffiliated
U.S. customers of $8,715,000, $1,640,000 and $107,000, respectively.
Export sales to unaffiliated customers were $59,775,000, $23,647,000 and
$17,519,000 in 1995, 1994 and 1993, respectively.
Quarterly Financial Data (Unaudited)
1995
Quarter Ended
April 2 July 2 October 1 December 31(1)
(In thousands, except per share amounts)
Net sales $154,576 $171,125 $195,921 $208,930
Gross profit (before
depreciation and
amortization) $31,714 $37,790 $42,258 $43,556
Net income (loss) $7,096 $9,319 $8,543 $(18,503)
Net income (loss) per
common share $.21 $.27 $.25 $(.54)
(1) Includes a $30.3 million impairment and severance pre-tax charge--see
Note 2
1994
Quarter Ended
April 3 July 3 October 2 December 31(2)
(In thousands, except per share amounts)
Net sales $123,030 $144,805 $166,100 $185,536
Gross profit (before
depreciation and
amortization) $28,191 $30,937 $34,624 $34,322
Net income $6,870 $7,230 $9,809 $23,971
Net income per common
share: $.20 $.21 $.29 $.70
(2) Includes $22.1 million of pre-tax income related to receipt on Russian
contract (see Note 2).
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Giddings & Lewis, Inc.
We have audited the accompanying consolidated balance sheets of Giddings &
Lewis, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Giddings
& Lewis, Inc. at December 31, 1995 and 1994, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2 in the notes to the consolidated financial
statements, effective December 31, 1995, the Company changed its method of
accounting for the impairment of long-lived assets and related goodwill.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 26, 1996