[Page 14 of the Annual Report]
Five-Year Summary
At and for the Years Ended December 31,
(In thousands except per 1996 (c) 1995 (d)(e) 1994(f) 1993((f)(g) 1992
share data)
Operations Data (a)
Net sales $762,993 $730,552 $619,471 $517,462 $622,934
Net income (loss) (12,542) 6,455 47,880 43,706 35,532
Net income (loss) per share (0.37) 0.19 1.40 1.31 1.16
Cash dividends per share 0.12 0.12 0.12 0.12 0.11
Average number of
shares outstanding 34,025 34,398 34,284 33,415 28,344
Balance Sheet Data
Total assets $811,400 $817,591 $687,226 $614,016 $627,485
Long-term debt 100,000 100,000 - - 68,215
Shareholders' equity 460,823 492,541 485,298 436,010 352,924
Ratio of long-term debt
to long-term capital(b) 17.8% 16.9% 0% 0% 17.3%
(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) Reflects a charge to pre-tax income of $64.1 million to recognize the costs to achieve
customer satisfaction on certain complex agile transfer line contracts and other related
restructuring costs. Also reflects a pretax adjustment of $16.0 million included in cost
of sales for warranty and inventory valuation reserves established for various product
lines. See Note 2 in the Notes to Consolidated Financial Statements.
(d) 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.
(e) 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," and from a severance charge relating to the
Company's German subsidiary. See Note 2 in the Notes to Consolidated Financial Statements.
(f) Reflects cash received on certain fully-reserved Russian contracts and other credits. See
Note 2 in the Notes to Consolidated Financial Statements.
(g) Reflects the prospective adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
[Pages 15-19 of the Annual Report]
MANAGEMENTS DISCUSSION & 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 managements 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 flexible
manufacturing systems, automated stand-alone machine tools and
machining centers, tooling, fixtures, castings and remanufacturing.
The Integrated Automation group produces assembly automation products
and systems and flexible, modular and dedicated transfer lines.
Programmable industrial computers, servo systems, Computer Numerical
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.
- Approximately one-half 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 to previous estimates 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.
- Revenues related to the remaining portion of the company's products
and services are recognized when the products are shipped. The
majority of payments for these products and services are received
after shipment.
- 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
1996 Compared with 1995
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 1996 and 1995.
1996 (In thousands) March 31 June 30 Sept. 29 Dec. 31
Operating group:
Automation Technology $85,581 $66,088 $68,864 $68,047
Integrated Automation 35,365 49,040 24,237 24,466
European Operations 35,848 15,425 42,693 12,661
Automation Measurement
and Control 15,615 15,640 15,338 15,376
------- ------- ------- -------
Consolidated bookings $172,409 $146,193 $151,132 $120,550
======= ======= ======= =======
Consolidated backlog $365,953 $305,989 $272,379 $208,298
======= ======= ======= =======
1995 (In thousands) April 2 July 2 Oct. 1 Dec. 31
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
======= ======= ======= =======
Bookings for 1996 of $590.3 million represented an 11.0% decrease
from 1995 bookings of $663.6 million. Automation Technology bookings of
$288.6 million for 1996 increased 4.0% from 1995 bookings of $277.6
million with the benefit of a full year inclusion of Fadal being offset by
a decline in demand for large and medium sized stand-alone machine tools.
Integrated Automation bookings for 1996 totaled $133.1 million, a 25.0%
decrease from 1995 bookings of $177.4 million. The decline in orders at
Integrated Automation in 1996 was due to weakness in transfer line related
orders while the company resolved customer concerns. Customer revisions
to the scope of two orders received earlier in 1995 resulted in contract
reductions that exceeded new bookings by $18.0 million in the fourth
quarter of 1995. 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 decreased 24.0% to $106.6
million in 1996 from $140.3 million in 1995. The decrease in 1996 was due
to the significant orders received from European automotive companies,
primarily in the United Kingdom, in the fourth quarter of 1995, which were
not repeated in 1996. Automation Measurement and Control bookings of
$62.0 million for 1996 decreased 9.2% from 1995 bookings of $68.3 million,
primarily as a result of softness in demand for measurement products.
Company backlog at December 31, 1996, was $208.3 million, a decrease
of $179.9 million or 46.3% from $388.2 million at 1995 year-end. The
decrease in backlog resulted primarily from decreased booking activity
during 1996 from the domestic and foreign automotive sectors.
Consolidated sales of $763.0 million in 1996 compared to sales of
$730.6 million in the prior year. The increase in year-to-year net sales
was primarily attributable to the inclusion of Fadal for all of 1996 and a
46.9% increase in European sales, partially offset by a decline in sales
at the Integrated Automation Group. Automation Technology net sales of
$332.4 million in 1996 represented an increase of 13.1% from $293.9
million in net sales in 1995. Integrated Automation net sales of $238.5
million in 1996 decreased 14.1% from $277.6 million in the prior year.
The decline in sales at Integrated Automation was due to the decline in
bookings in the second half of 1995 and all of 1996, which were the result
of difficulties with certain agile transfer line contracts. European
Operations net sales of $129.1 million in 1996 increased 46.9% from $87.9
million in 1995. The increase in European sales was the result of the
significant automotive orders received in the fourth quarter of 1995. The
net sales of Automation Measurement and Control decreased 11.5% from $71.2
million in 1995 to $63.0 million in 1996 due to a general decline in
market demand for measurement products.
The company incurred a net loss for 1996 of $12.5 million, compared
with net income in 1995 of $6.5 million. The company had incurred a
pretax loss in 1996 of $33.0 million compared with pretax income of $28.1
million in 1995. As described in further detail in Note 2 in the Notes to
Consolidated Financial Statements, 1995 and 1996 pretax earnings were
impacted by the following factors:
1996
In the fourth quarter of 1996, the company recorded a pretax charge
of $64.1 million related to the company's Integrated Automation business.
The company took the charge in order to achieve customer satisfaction on
certain complex agile transfer line contracts and to recognize costs
associated with the formal adoption of a plan to improve the divisions
business operations, including workforce reductions and reengineering of
certain business processes.
In addition to the $64.1 million charge, adjustments of $16.0 million
were reflected in fourth quarter cost of sales. Of these adjustments,
product rationalization at the Automation Technology group, as well as
additional warranty expenses, resulted in costs of $10.3 million. The
remaining $5.7 million of costs relate primarily to the write-down of
inventory at the company's other business locations.
1995
The company recorded a pretax charge of $6.3 million related to a
formal plan to improve the operations of its German subsidiary, which
included planned employee 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 the 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 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.
Other items of note concerning the comparison of 1996 and 1995
results of operations are highlighted below:
The consolidated gross margin percentage (before depreciation and
amortization) decreased from 21.3% in 1995 to 18.4% in 1996. Gross
margins in 1996 were negatively impacted by the $16.0 million adjustment
to cost of sales discussed above. Gross margins for both 1995 and 1996
were adversely impacted by competitive pricing pressures, excess program
costs on certain agile contracts, and increased product development and
warranty spending related to the introduction of RAM machining centers.
These factors more than offset an improvement in the gross profit
percentage resulting from the inclusion of Fadal for a full year. The
company currently expects that the consolidated gross margin percentage
will improve in 1997, but will continue to be impacted by competitive and
economic factors.
Selling, general and administrative expenses increased as a
percentage of net sales from 9.2% in 1995 to 10.6% in 1996. The increase
was the result of costs associated with a change in distribution for a
major domestic territory, and consultant fees and related costs for
strategic external business development efforts. The year-to-year
difference was also affected by favorable settlements of certain
litigation in 1995.
Net interest expense in 1996 of $9.6 million compares with $9.5
million in 1995.
The company's effective tax rate for 1996 was 61.9% as compared to
77.0% for the prior year. The effective tax rate for 1996 was positively
impacted by the tax restructuring of the company's German operations and
the favorable settlement of a federal income tax audit. The effective tax
rate for 1995 was negatively impacted by 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.
1995 Compared with 1994
The following tables set forth the company's bookings by operating
group in the period and consolidated backlog at period-end on a quarterly
basis for 1995 and 1994.
1995 (In thousands) April 2 July 2 Oct. 1 Dec. 31
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
======= ======= ======= =======
1994 (In thousands) April 3 July 3 Oct. 2 Dec. 31
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. 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. 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 above. 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 net 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. 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. 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 available to common shareholders of $47.9 million, pretax income in
1995 was $28.1 million, a 63.8% decrease from 1994 pretax income of $77.6
million. As described in further detail in Note 2 in the Notes to
Consolidated Financial Statements, 1994 and 1995 pretax earnings were
impacted by certain nonrecurring items. These items in 1994 resulted in a
net increase in pretax income of $22.1 million. The effect of actions
related to the adoption of SFAS No. 121 on 1995 net income is described
above.
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.
Selling, general and administrative expenses decreased as a
percentage of sales from 9.5% in 1994 to 9.2% in 1995. The percentage
decrease was primarily attributable to the favorable settlement associated
with the successful defense of patent infringement litigation 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 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% compared with 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.
Liquidity and Capital Resources at December 31, 1996
On December 31, 1996, the company had $71.7 million of cash and cash
equivalents on hand, which was an increase of $57.5 million from the
balance on hand at the beginning of the year. For the year ended
December 31, 1996, operating activities provided $105.4 million of cash.
Operating assets and liabilities provided net cash flow of $60.6 million,
due primarily to lower accounts receivable and inventory levels offset by
a net decrease in accounts payable and accrued expenses. The $59.6
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 as well as an increase in related customer
deposits offset by an increase in trade receivables. The $13.8 million
net cash provided relating to the lower inventory balance was largely due
to the reduced backlog. There was a $14.3 million decrease in accounts
payable and accrued expenses at December 31, 1996, compared with
December 31, 1995.
Investing activities in 1996 used $20.0 million, which included $19.9
million in capital expenditures, while net proceeds from the sale of fixed
assets generated $1.1 million of cash in 1996.
Financing activities in 1996 used cash of $24.9 million, consisting
mainly of repurchase of stock of $18.6 million, net repayments on lines of
credit of $2.5 million and dividend payments of $4.1 million.
The company's available borrowing capacity at December 31, 1996,
amounted to $131.7 million under a domestic credit agreement and $54.9
million under foreign lines of credit. The company had debt outstanding
of $134.2 million at December 31, 1996.
Capital expenditures were $19.9 million, $16.1 million and $16.7
million in 1996, 1995 and 1994, respectively. The company expects
commitments for capital projects carried over from 1996, along with new
projects proposed for 1997, to result in capital expenditures of
approximately $20 million in 1997. The main focus of 1997 capital
expenditures will be productivity enhancement and process improvement.
In addition, the company expended $51.9 million, $60.4 million and
$67.4 million in 1996, 1995 and 1994, respectively, on research, product
development and customer-sponsored engineering programs. Spending for
such activities is expected to remain steady at approximately $50 million
in 1997 based on the timing of initiating the start-up of long lead-time
products 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, fund the estimated $33.3 million future cash
portion of the 1996 year-end adjustments and support 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 included at December
31,1996, 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 any 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. Except to the extent 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 ongoing 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 any 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
1996:
First quarter $ 14 3/4 $ 19 9/16 $ .03
Second quarter 16 1/8 19 1/8 .03
Third quarter 10 3/4 16 .03
Fourth quarter 11 3/8 14 .03
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
As of February 18, 1997, there were approximately 2,204 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 20-35 of the Annual Report]
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(In thousands, except per share data) 1996 1995 1994
Net sales $762,993 $730,552 $619,471
Costs and expenses:
Cost of sales (Note 2) 622,323 575,234 491,397
Selling, general and
administrative
expenses (Note 2) 80,592 67,556 58,977
Depreciation and amortization 20,293 19,308 15,399
Other charges (credits) (Note 2) 64,100 30,280 (22,128)
------- ------- -------
Total operating expenses 787,308 692,378 543,645
------- ------- -------
Operating income (loss) (24,315) 38,174 75,826
Interest expense (income), net 9,584 9,501 (1,025)
Other expense (income) (947) 610 (755)
------- ------- -------
Income (loss) before income taxes (32,952) 28,063 77,606
Provision (benefit) for income
taxes (Note 8) (20,410) 21,608 29,726
------- ------- -------
Net income (loss) $(12,542) $6,455 $47,880
======= ======= =======
Net income (loss) per share $(0.37) $0.19 $1.40
======= ======= =======
Cash dividends per share $0.12 $0.12 $0.12
======= ======= =======
Average number of shares outstanding 34,025 34,398 34,284
======= ======= =======
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands) 1996 1995 1994
Operating activities
Net income (loss) $(12,542) $6,455 $47,880
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 20,293 19,308 15,399
Other charges (Note 2) 64,100 30,280
Deferred income taxes (26,902) 3,948 20,996
Long-term employee benefits and
other long-term liabilities (5,451) (4,105) (4,696)
Changes in operating assets and
liabilities:
Accounts receivable 59,636 30,816 (91,621)
Inventories 13,815 (6,546) (16,719)
Other current assets 1,474 8,780 (6,928)
Accounts payable and accrued
liabilities (14,319) (31,920) 20,267
Foreign currency transaction losses 1,055 179 669
Other 4,225 (4,922) 291
------- ------- -------
Net cash provided by (used in) operating
activities 105,384 52,273 (14,462)
Investing activities
Acquisition of business (Note 3) - (179,579) -
Additions to property, plant and
equipment (19,893) (16,097) (16,747)
Proceeds from sale of assets 1,052 1,546 5,875
Other (1,203) (140) (1,759)
------- ------- -------
Net cash used in investing activities (20,044) (194,270) (12,631)
Financing activities
Proceeds from draws on lines of credit 146,463 382,931 49,000
Repayments under lines of credit and
notes payable (149,000) (346,168) (49,000)
Proceeds from sale of debt securities - 100,000 -
Payments for debt issue costs - (1,182) -
Payment for repurchase of stock (18,639) - -
Proceeds from additional stock
issuance - - 487
Proceeds from stock options
exercised 304 - -
Cash dividends (4,069) (4,129) (4,115)
------ ------- -------
Net cash provided by (used in)
financing activities (24,941) 131,452 (3,628)
Effect of exchange rate changes
on cash (2,957) 689 916
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 57,442 (9,856) (29,805)
Cash and cash equivalents at
beginning of year 14,216 24,072 53,877
------- ------- -------
Cash and cash equivalents at end
of year $71,658 $14,216 $24,072
======= ======= =======
Supplemental disclosure of cash flow
information -
Cash paid during the year for:
Interest $9,755 $7,648 $848
======= ======= =======
Income taxes, net of refunds
received $14,176 $11,334 $12,073
======= ======= =======
See accompanying notes.
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands) 1996 1995
Assets
Current assets:
Cash and cash equivalents $71,658 $14,216
Accounts receivable, net of allowance for
doubtful accounts (Notes 1 and 4) 280,985 350,593
Inventories (Notes 1 and 4) 88,969 102,281
Deferred income taxes (Note 8) 29,048 4,776
Other current assets 3,951 5,921
------- -------
Total current assets 474,611 477,787
Fixed assets, net (Notes 1 and 4) 118,484 111,382
Intangible assets (Notes 1 and 4) 185,276 192,522
Deferred income taxes (Note 8) 19,524 19,700
Other assets 13,505 16,200
------- -------
Total assets $811,400 $817,591
======= =======
Liabilities and shareholders' equity
Current liabilities:
Notes payable (Note 5) $34,226 $36,763
Accounts payable 30,141 67,676
Accrued expenses and other liabilities
(Note 4) 148,938 77,888
------- -------
Total current liabilities 213,305 182,327
Long-term debt (Note 5) 100,000 100,000
Long-term employee benefits and other
long-term liabilities (Notes 4 and 7) 37,272 42,723
------- -------
Total liabilities 350,577 325,050
Commitments and contingencies (Note 6)
Shareholders' equity (Notes 5 and 9):
Class A preferred stock - -
Common stock, 34,623 and 34,422 shares
issued and outstanding at December 31,
1996 and 1995, respectively 3,462 3,442
Capital in excess of par 328,668 326,608
Retained earnings 144,172 160,783
Cumulative translation adjustment 6,755 4,223
------- -------
483,057 495,056
Less: Treasury stock (1,495 shares)
at cost (Note 9) (18,639) -
Unamortized compensation expense (3,595) (2,515)
------- -------
Total shareholders' equity 460,823 492,541
------- -------
Total liabilities and shareholders' equity $811,400 $817,591
======= =======
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
(In thousands except share amounts)
Common Stock Capital in Cumulative Unamortized Total
Excess of Retained Translation Treasury Compensation Shareholders'
Shares Amount Par Earnings Adjustment Stock Expense Equity
Balance, December 31,
1993 34,254,068 $ 3,425 $ 323,679 $ 114,692 $ (3,444) - $ (2,342) $ 436,010
Net issuance of shares
under restricted
stock awards and
stock option plans 40,370 4 530 - - - (852) (318)
Tax benefit related to
exercise of stock
options and vesting
of restricted stock - - 854 - - - - 854
Net income - - - 47,880 - - - 47,880
Amortization of
compensation expense - - - - - - 1,369 1,369
Cash dividends - - - (4,115) - - - (4,115)
Translation adjustment - - - - 3,618 - - 3,618
Other (34) - - - - - - -
---------- ------- ------- ------- ------ ------- -------- -------
Balance, December 31,
1994 34,294,404 3,429 325,063 158,457 174 - (1,825) 485,298
Net issuance of shares
under restricted
stock awards and
stock option plans 127,639 13 1,351 - - - (2,098) (734)
Tax benefit related to
exercise of stock
options and vesting
of restricted stock - - 194 - - - - 194
Net income - - - 6,455 - - - 6,455
Amortization of
compensation expense - - - - - - 1,408 1,408
Cash dividends - - - (4,129) - - - (4,129)
Translation adjustment - - - - 4,049 - - 4,049
---------- ------- ------- ------- ------ ------- -------- -------
Balance, December 31,
1995 34,422,043 3,442 326,608 160,783 4,223 - (2,515) 492,541
Net issuance of shares
under restricted
stock awards and
stock option plans 200,812 20 1,943 - - - (1,902) 61
Tax benefit related to
exercise of stock
options and vesting
of restricted stock - - 117 - - - - 117
Net loss - - - (12,542) - - - (12,542)
Stock repurchase - - - - - (18,639) - (18,639)
Amortization of
compensation expense - - - - - - 822 822
Cash dividends - - - (4,069) - - - (4,069)
Translation adjustment - - - - 2,532 - - 2,532
---------- ------- ------- ------- ------ ------- -------- -------
Balance, December 31,
1996 34,622,855 $ 3,462 $ 328,668 $ 144,172 $ 6,755 $(18,639) $ (3,595) $ 460,823
========== ======= ======= ======= ====== ======= ======== =======
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 projects
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 managements 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 yet billed to the customer. Retainers are billed upon
shipment and are due upon customer acceptance. Substantially all
receivables, including retainers, are due within one year.
Included in accounts receivable are unbilled receivables of
$141,741,000 and $202,672,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, there were $57,359,000 and $51,692,000,
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 $197,000,000
and $237,000,000 at December 31, 1996 and 1995, 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 cost methods. Approximately $8,553,000 and $9,116,000
of the inventories at December 31, 1996 and 1995, 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 $432,000 and $481,000 greater at December 31, 1996 and 1995,
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 independent 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 $21,816,000 and $14,704,000 at
December 31, 1996 and 1995, 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 $9,367,000, $3,183,000,
and $3,857,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The total expenditure for research, development and custom
engineering was $51,895,000, $60,395,000, and $67,398,000, 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
The functional currencies of the company's foreign subsidiaries are
the local currencies. Accordingly, assets and liabilities of the
company's foreign subsidiaries are translated into U.S. dollars using
current exchange rates, and statement of operations items are translated
using average exchange rates for the year. For the years ended December
31, 1996, 1995 and 1994, gain/(losses) on foreign currency transactions
amounted to $273,000, ($1,217,000), and ($669,000), respectively, and are
included in other expense/income in the accompanying consolidated
statements of operations.
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, 1996, the company had
forward exchange contracts that require it to convert these foreign
currencies, at various rates and dates through February 1998 into
approximately $20.8 million, DM 5.0 million, and 29.8 million. At
December 31, 1995, the company had forward exchange contracts that
required it to convert foreign currencies, at various rates and dates
through April 1997, into approximately $21.2 million, DM 5.0 million, and
20.3 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 (Loss) Per Common Share
Net income (loss) per common share in 1996, 1995 and 1994 was
computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the respective periods. Stock options
were not materially dilutive for any of these years.
Environmental
In October 1996, the AICPA issued Statement of Position (SOP) No. 96-
1, Environmental Remediation Liabilities, which provides authoritative
guidance on the recognition, measurement, display and disclosure of
environmental remediation liabilities. SOP No. 96-1 is effective for the
company on January 1, 1997. The impact of adoption is not expected to be
material to the consolidated financial statements.
Nature of Operations
The company's operations are conducted in one business segment: the
design, production and integration of flexible 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 comprises 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 18.7% and 10.3% of the
company's 1996 sales were to two such automotive industry customers.
Approximately 23.2% and 6.3% of the company's 1995 sales were to the same
automotive industry customers, respectively. In 1994, approximately 15.9%
and 14.2% of the company's sales were derived from two such automotive
industry customers.
2. Other Charges (Credits)
1996
In the fourth quarter of 1996, the company recorded a pretax charge
of $64.1 million related to the company's Integrated Automation business.
The company took this charge to achieve customer satisfaction on certain
complex agile transfer line contracts and to recognize costs associated
with the formal adoption of a plan to improve operations including
workforce reductions and reengineering of certain business processes.
In addition to the $64.1 million charge, adjustments of $16.0 million
were reflected in cost of sales. Product rationalization at the
Automation Technology group, as well as additional warranty expenses,
resulted in costs of $10.3 million. The remaining $5.7 million of costs
relate primarily to the write-down of inventory at the company's other
business locations.
1995
The separate $30.3 million operating expense item in the company's
1995 statement of income consists of the charges listed below.
In the fourth quarter of 1995, the company entered into a formal plan
to improve the operations of its German subsidiary, which included the
planned termination of 145 employees at that location. As a result of its
decision, the company recorded a pretax charge of $6.3 million relating to
the planned employee terminations. The termination benefit payments were
made during 1996.
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 pretax 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.
Due to the economic conditions in Russia and the financial position
of the former customer associated with the other Russian contract,
management does not believe they will execute a credit guarantee or
collect any moneys relating to this contract. As the receivable was
previously written off, there was no significant impact on the
consolidated financial statements of the company.
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 statements of operations 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:
(In thousands) 1995 1994
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
(In thousands) 1996 1995
Receivables -
Allowance for doubtful accounts $2,196 $1,836
Inventories:
Raw materials $51,310 $52,694
Work-in-process 26,356 38,038
Finished goods 11,303 11,549
------- -------
$88,969 $102,281
======= =======
Fixed assets:
Land $9,258 $9,504
Buildings 69,054 64,557
Machinery and equipment 156,015 141,973
------- -------
234,327 216,034
Less accumulated depreciation (115,843) (104,652)
------- -------
$118,484 $111,382
======= =======
Intangible assets:
Trade name $18,878 $19,544
Distributor network 21,065 22,214
Costs in excess of net
acquired assets 143,860 149,180
Other 1,473 1,584
------- -------
$185,276 $192,522
======= =======
Accrued expenses and other
liabilities:
Payroll and related expenses $18,263 $16,163
Installation and warranty
accruals 49,303 17,218
Restructuring and contract
reserves 46,618 6,313
Self-insurance reserves 3,431 4,156
Other 31,323 34,038
------- -------
$148,938 $77,888
======= =======
Long-term employee benefits and other
long-term liabilities
Postretirement health-care
obligations $12,542 $13,224
Pension and retirement plan
obligations 14,911 18,765
Environmental liabilities 9,116 9,993
Other 703 741
------- -------
$37,272 $42,723
======= =======
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 $4.0 million, due to the recognition
of certain acquired foreign net operating loss carryforwards.
5. Financing Arrangements and Long-Term Debt
Notes payable under revolving credit facilities and long-term debt
consisted of the following at December 31:
(In thousands) 1996 1995
Borrowings under 1992 Credit Agreement $34,226 $36,763
7.5% unsecured notes maturing in 2005 100,000 100,000
------- -------
Total debt 134,226 136,763
Less current maturities 34,226 36,763
------- -------
Long-term debt $100,000 $100,000
======= =======
The company has a multicurrency credit agreement with a syndicate of
financial institutions for an unsecured $175.0 million revolving credit
facility (1992 Credit Agreement). The 1992 Credit Agreement matures in
December 1997. At December 31, 1996 and 1995, outstanding borrowings and
letters of credit under the 1992 Credit Agreement totaled $34.2 million
and $9.1 million and $36.8 million and $13.8 million, respectively.
Letters of credit reduce the amount available for additional borrowings
under the agreement. The 1992 Credit Agreement carries an interest rate
equal to a Base Rate, as defined, or LIBOR plus a spread. At December 31,
1996 and 1995, the weighted average interest rate on outstanding
borrowings under the 1992 Credit Agreement was 5.725% and 6.82%,
respectively. 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.
The company has obtained a waiver of covenant default for the period
ended December 31, 1996, and an amendment to the 1992 Credit Agreement
that excludes the impact of the December 1996 other charges and
adjustments, as disclosed in Note 2, from the financial covenant tests
through the remaining term of the agreement.
At December 31, 1996, the company had foreign lines of credit that
approximated $68.1 million, with no borrowings outstanding. Borrowings
under the foreign lines of credit bear interest at an average rate of
6.4%. Outstanding foreign letters of credit at December 31, 1996 and
1995, approximated $13.2 million and $41.8 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 $250.0 million in unsecured debt securities. On October 2,
1995, $100.0 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.
Interest expense for the years ended December 31, 1996, 1995 and
1994, was $11,059,000, $10,548,000, and $1,970,000, 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, 1996, were as
follows (in thousands):
1997 $2,120
1998 976
1999 450
2000 171
2001 73
Thereafter 65
-----
$3,855
=====
Total expense for all operating leases for the years ended December 31,
1996, 1995 and 1994, was $2,889,000, $3,431,000, and $3,645,000,
respectively.
The company is involved in various environmental matters, including
matters in which the company and certain of its subsidiaries have been
named as potentially responsible parties under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA).
One such matter is the company's implementation of a Wisconsin
Department of Natural Resources (WDNR) approved clean-up plan on a nine-
acre parcel of land adjacent to its former West Allis, Wisconsin
manufacturing facility. The company has completed the soil removal
portion of the plan and is currently engaged in limited groundwater
monitoring to support its application to the WDNR for site closure.
The company has established accruals ($9.1 million and $10.0 million
at December 31, 1996 and 1995, 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 Environmental Quality
(State) investigation into alleged environmental violations at the
company's Menominee, Michigan, facility resulted in the issuance of
criminal complaints against the company and two of its employees in
November 1994. The complaints, filed in Menominee County, Michigan,
district and circuit courts, generally focus on alleged releases of
hazardous substances and the alleged illegal treatment and disposal of
hazardous waste. In December 1996, the seven charges then pending against
the company in circuit court were dismissed on the grounds, among other
things, that the criminal provision under which the company was charged is
unconstitutional. In February 1997, the company and the State reached a
tentative agreement, subject to the negotiation of a final written
settlement and plea agreement and its entry by the court. The general
parameters of the tentative agreement are as follows: (i) the State will
dismiss with prejudice and release the company from all charges and
covenant not to sue on any matters, administrative, civil or criminal,
raised in the criminal complaint or investigation; (ii) the company will
reimburse the States investigation costs in an amount to be determined,
not to exceed $492,000; (iii) the company will plead no contest (not
admitting liability) to one misdemeanor charge and (iv) the circuit court
decision holding the statute unconstitutional will be vacated. Pending
this final resolution, cross appeals have been filed. The three
misdemeanor counts against the two employees of the company remain pending
in district court.
Also, two civil lawsuits are pending against the company in Menominee
County, Michigan, district court which seek unspecified damages based on
allegations of improper disposal and emissions at this facility. The
company remains committed to vigorously defending itself against all
suits, charges and allegations to the extent they are not resolved on
terms satisfactory to the company. Except to the extent described above,
information presently available to the company does not enable it to
reasonably quantify potential civil or criminal penalties, or remediation
costs, if any, related to any of these pending matters.
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, mutual
funds, 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:
(In thousands) 1996 1995 1994
Service cost $5,373 $3,411 $3,436
Interest cost 8,691 7,988 7,047
Actual (return)/loss on assets (10,272) (16,615) 744
Net amortization and deferral 3,199 10,174 (7,097)
------- ------- -------
Net periodic pension expense $6,991 $4,958 $4,130
======= ======= =======
The following table presents a reconciliation of the funded status of
the company's domestic defined benefit plans at December 31:
(In thousands) 1996 1995
Actuarial present value of benefit
obligations:
Vested benefits $105,146 $ 98,419
Nonvested benefits 5,938 6,963
------- -------
Accumulated benefit obligation 111,084 105,382
Effect of assumed increases in
compensation levels 14,766 16,152
------- -------
Projected benefit obligation 125,850 121,534
Plan assets at fair value 111,036 94,983
------- -------
Projected benefit obligation in excess
of plan assets (14,814) (26,551)
Unrecognized net (gain)/loss (591) 7,504
Unrecognized prior service cost 1,418 1,230
------- -------
Accrued pension cost $(13,987) $(17,817)
======= =======
The assumptions used in determining pension expense (for the
following year) and funded status information shown above were as follows:
1996 1995 1994
Discount rate 7.5% 7.5% 8.25%
Rate of salary progression 4.5 4.5 5.0
Long-term rate of return on assets 8.5 8.5 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.
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:
(In thousands) 1996 1995 1994
Service cost $ 890 $ 884 $ 729
Interest cost 2,286 2,026 1,595
Actual (return)/loss on assets (3,895) (4,800) 1,650
Net amortization and deferral (292) 1,253 (5,333)
------- ------ -------
Net periodic pension income $(1,011) $ (637) $(1,359)
======= ====== =======
During 1995, settlements relating to the company's foreign plans
resulted in gains of approximately $400,000.
The following table presents a reconciliation of the funded status of
the company's foreign defined benefit plans at December 31:
(In thousands) 1996 1995
Actuarial present value of benefit
obligations:
Accumulated benefit obligation-all
vested $25,707 $24,686
Effect of assumed increases
in compensation levels 3,277 3,727
------- -------
Projected benefit obligation 28,984 28,413
Plan assets at fair value 39,007 36,020
------- -------
Plan assets in excess of projected
benefit obligation 10,023 7,607
Unrecognized net loss 414 1,362
Unrecognized net transition asset (5,009) (5,198)
Unrecognized prior service cost 1,097 1,078
------- -------
Prepaid pension cost $6,525 $4,849
======= =======
The assumptions used in determining foreign pension expense (for the
following year) and funded status information shown above were as follows:
1996 1995 1994
Discount rate 8.5% 8.0% 9.0%
Rate of salary progression 5.5 5.0 5.0
Long-term rate of return
on assets 9.5 9.5 9.0
The change in the above assumptions decreased the projected benefit
obligation by approximately $1,406,000 at December 31, 1996 and increased
the projected benefit obligation by approximately $3,415,000 at
December 31,1995.
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 $2,570,000, $2,108,000 and $2,024,000 in 1996, 1995 and
1994, 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:
(In thousands) 1996 1995
Accumulated postretirement benefit
obligation:
Current retirees $(10,963) $(11,857)
Unrecognized net gain (1,541) (1,367)
------- -------
Accrued long-term employee benefit $(12,504) $(13,224)
======= =======
The periodic postretirement benefit cost included in the statements
of operation is as follows:
(In thousands) 1996 1995 1994
Interest $820 $924 $934
Amortization (61) (74) (68)
---- ---- ----
Total $759 $850 $866
==== ==== ====
Due to the nature of the plans, a one percent change in the health-
care trend rate assumption does not have any material impact on the
company's obligation. Similarly, the health-care cost trend rate is not a
factor in computing the benefit obligation. A discount rate of 7.5% was
used to present value all future health-care and life insurance
liabilities at December 31, 1996 and 1995.
8. Income Taxes
At December 31, 1996, the company had U.S. federal net operating loss
carryforwards totaling approximately $14.8 million and various state net
operating loss carryforwards. The federal carryforwards expire in 2003,
while the state carryforwards expire in 1997 through 2011. The company
also had foreign tax loss carryforwards totaling approximately $37.3
million at December 31, 1996, that can be carried forward indefinitely.
The U.S. federal amount and $16.8 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.
The decrease in the valuation allowance during 1994 primarily
reflects the recognition of approximately $4.0 million in certain acquired
foreign net operating loss carryforwards as a reduction to goodwill. The
increases in the valuation allowance during 1996 and 1995 relate to newly
generated foreign deferred tax assets, the benefit of which can not be
recognized under the provisions of generally accepted accounting
principles.
Net deferred tax assets for all foreign and state 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 managements judgment with
respect to the realizability of those items.
Significant components of the company's deferred tax assets and
liabilities as of December 31, 1996 and 1995, are as follows:
(In thousands) 1996 1995
Deferred tax liabilities:
Tax over book depreciation $9,332 $8,005
LIFO book/tax difference relating
to acquisition 2,180 2,193
Percentage of completion accounting 1,487 2,436
Other, net 3,277 9,039
------- -------
Total deferred tax liabilities $16,276 $21,673
======= =======
Deferred tax assets:
Environmental accruals $3,548 $3,874
Inventory reserves 10,996 1,837
Restructuring and contract reserves 15,444 -
Warranty accruals 8,935 2,956
Pension, other postretirement,
and other longer term
employee benefit obligations 10,443 7,885
Other accrued expenses
not currently deductible 8,373 14,786
Net operating loss carryforwards 25,521 31,298
------- -------
Total deferred tax assets 83,260 62,636
Valuation allowance for deferred tax assets (18,412) (16,487)
------- -------
Deferred tax assets, net of valuation
allowance 64,848 46,149
------- -------
Net deferred tax asset $48,572 $24,476
======= =======
The net current and noncurrent components of deferred taxes
recognized in the December 31, 1996 and 1995, balance sheets are as
follows:
(In thousands) 1996 1995
Net current asset $29,048 $4,776
Net noncurrent asset 19,524 19,700
------- -------
$48,572 $24,476
======= =======
Details of income (loss) before provision for income taxes are as
follows:
(In thousands) 1996 1995 1994
Domestic $(36,494) $57,446 $77,525
Foreign 3,542 (29,383) 81
------- ------- -------
$(32,952) $28,063 $77,606
======= ======= =======
Details of the provision for income taxes for the years ended
December 31, 1996, 1995 and 1994, are as follows:
(In thousands) 1996 1995 1994
Current:
Federal $3,424 $13,963 $4,650
State 825 1,460 1,627
Foreign 199 702 1,599
------ ------- ------
4,448 16,125 7,876
Deferred:
Federal (25,198) 6,606 19,908
State (1,658) 867 2,655
Foreign (46) (3,525) (1,567)
------- ------- -------
(26,902) 3,948 20,996
Effect of using acquired
loss carryforwards (1) 1,730 887 -
Tax benefit related to exercise
of options and other items
charged to equity 314 648 854
------- ------- -------
$(20,410) $21,608 $29,726
======= ======= =======
(1) Reduction in current taxes due (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, 1996, 1995 and 1994, are as follows:
(In thousands) 1996 1995 1994
Provision (benefit) at
statutory rates $(11,533) $9,822 $27,162
State taxes, net of federal benefit (541) 1,513 2,783
Foreign loss for which no tax
benefit recorded 1,006 6,215 -
Write-off of costs in excess of net
acquired assets - 3,957 -
Amortization of costs in excess of
net acquired assets 631 631 668
Effect of different foreign tax rates (104) (946) (513)
Benefit from tax restructuring of
foreign operations (5,530) - -
Addition to (reduction of)
tax reserves (3,000) 114 (520)
Other (1,339) 302 146
------- ------- -------
Actual provision (benefit) for
income taxes $(20,410) $21,608 $29,726
======= ======= =======
On March 20, 1996, the company adopted a tax planning strategy to
capture U.S. tax benefits for losses arising from its German subsidiary.
As such, income and losses from this date forward will be included in the
consolidated federal income tax return of the company. Upon adoption, a
benefit of $1.2 million was recorded as a decrease to income tax expense.
The flow-through of losses from the company's German subsidiary resulted
in the recording of an additional $4.3 million tax benefit for 1996.
Future tax benefits or expenses will be dependent on the profitability of
the German operations.
Undistributed earnings of the company's foreign subsidiaries, which
are not significant at December 31, 1996, 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:
(In thousands, except share amounts) 1996 1995
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; 34,622,855 and
34,422,043 shares issued and outstanding
at December 31, 1996 and 1995,
respectively 3,462 3,442
On July 18, 1996, the company announced that the Board of Directors
had authorized management to repurchase up to 10% of the company's
outstanding common stock (3.5 million shares). Such repurchases are
expected to be made principally through open market transactions from time
to time as the share price and market conditions warrant. The company
intends to fund any such repurchases with cash from operations and
additional short-term borrowings. At December 31, 1996, the company had
repurchased 1.5 million shares at an aggregate purchase price of $18.6
million.
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 Nonvested Stock Plan
Under the company's 1989 nonvested 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 nonvested shares) at $.10 per nonvested share,
with such shares not vesting for a period, as determined by the
Compensation Committee of the Board of Directors, of up to 10 years from
the effective date of the award (the restricted period). During the
restricted period, the nonvested shares may not be sold, transferred or
otherwise alienated by the recipient. The nonvested 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 10 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 an independent director is
elected or re-elected to serve on the Board of Directors (as the case may
be), such independent 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 independent 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 independent
directors term.
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) non-vested stock, and (d) performance shares and
performance units. In addition, under the 1993 plan, independent
directors receive annual nonvested 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. Nonvested stock issued under the 1993 plan may
contain restrictions similar to those described above for the 1989
nonvested 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 nonvested stock activity, including shares issued to
independent directors, is as follows:
Number of Shares
1996 1995 1994
Nonvested stock:
Outstanding at beginning of year 250,871 208,315 385,515
Granted 185,056 129,556 58,840
Canceled - (15,000) (29,298)
Vested (42,000) (72,000) (206,742)
Outstanding at end of year 393,927 250,871 208,315
======= ======= =======
Weighted-average fair value of
shares granted during the year $15.176
=======
A summary of option activity under the above-described stock option
and incentive plans is as follows:
1996
Weighted
average
1996 exercise 1995 1994
Options price Options Options
Options:
Outstanding at
beginning of year 840,012 $17.473 697,676 584,370
Granted 308,700 15.177 272,600 229,750
Canceled (12,000) 19.938 (88,264) (67,656)
Exercised (31,000) 9.807 (42,000) (48,788)
--------- ------- ------- -------
Outstanding at end
of year 1,105,712 $17.020 840,012 697,676
========= ======= ======= =======
Weighted-average
fair value of
shares granted
during the year $6.482
=========
All options granted through December 31, 1996, are nonqualified stock
options. There were 576,271; 315,381 and 209,299 options exercisable at
December 31, 1996, 1995 and 1994, respectively.
A summary of options outstanding at December 31, 1996, is as follows:
Weighted
Weighted Average Average Weighted Average
Option Exercise Price Exercise Price Remaining
Price Options of Options Options of Exercisable Contractual Life
(per share) Outstanding Outstanding Exercisable Options (years)
7.00-10.00 128,000 8.039 128,000 8.039 3.18
10.01-20.00 740,662 16.228 259,230 17.524 7.98
20.01-28.00 237,050 24.343 189,041 24.199 7.14
----------- --------- -------- -------- -------- -------
7.00-28.00 1,105,712 17.020 576,271 17.607 7.24
=========== ========= ======== ======== ======== =======
A total of approximately 2,577,000 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. (See summary
below.)
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, became effective January 1, 1996
for the company. As permitted under SFAS No. 123, the company elected to
continue to account for employee stock compensation (e.g., nonvested stock
and stock options) in accordance with AICPA Accounting Principles Board
(APB) No. 25, Accounting for Stock Issued to Employees. Under APB No. 25,
because the exercise price of the company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
SFAS No. 123 calculates the total compensation expense to be
recognized as the fair value at the date of grant for effectively all
awards. The company's net income would not have been materially different
had compensation expense for employee stock compensation been recognized
consistent with SFAS No. 123. In determining the effect of SFAS No. 123,
the Black-Scholes option pricing model was used with the following
weighted-average assumptions for 1996: risk-free interest rate of 6.0%;
dividend yield ranging from .67 to .80; volatility factor of the expected
market price of the company's common stock ranging from .34 to .40; and a
weighted-average expected life of the option of 3 to 9 years.
The pro forma calculations only included the effects of 1996 and 1995
grants. As such, the impact on pro forma net income (loss) of these
options during these years are not necessarily indicative of the effects
on the pro forma results of operations in future years.
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 sheets 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:
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands)
Cash and
cash equivalents $ 71,658 $ 71,658 $ 14,216 $ 14,216
Notes payable (34,226) (34,226) (36,763) (36,763)
Long-term debt (100,000) (98,910) (100,000) (104,400)
Foreign currency
exchange contracts - 4,828 - (73)
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, 1996, 1995 and 1994, and for each of the three years then
ended is as follows:
Sales
Operating
Assets Gross Intergeographic(1) Net Income (Loss)
(In thousands)
1996 $165,177 $143,810 $22,307 $121,503 $3,102
1995 $139,813 $122,032 $29,216 $ 92,816 $ (660)
1994 $185,382 $148,625 $20,493 $128,132 $1,832
(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 1996, 1995 and 1994, the foreign subsidiaries had sales to
unaffiliated U.S. customers of $9,513,000, $0 and $1,640,000,
respectively.
Export sales to unaffiliated customers were $45,854,000, $59,775,000
and $23,647,000 in 1996, 1995 and 1994, respectively.
(Quarterly Financial Data - Unaudited)
1996
Quarter Ended
March 31 June 30 Sept. 29 Dec. 31(1)
(In thousands, except per share amounts)
Net sales $192,420 $199,646 $185,794 $185,133
Gross profit (before
depreciation and
amortization) $ 42,695 $ 42,948 $ 35,024 $ 20,003
Net income (loss) $ 10,417 $ 9,278 $ 5,597 $(37,834)
Net income (loss) per
share $0.30 $0.27 $0.17 $(1.14)
(1) Includes a $40.1 million, or $1.18 per share, after-tax charge to
achieve customer satisfaction on certain agile transfer line
contracts and other related restructuring costs (see Note 2). Also
includes after-tax adjustment of $10.0 million, or $.29 per share,
included in cost of sales for warranty and inventory valuation
reserves established for various product lines (see Note 2).
1995
Quarter Ended
April 2 July 2 Oct. 1 Dec. 31(2)
(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
share $0.21 $0.27 $0.25 $(0.54)
(2) Includes a $29.0 million, or $.84 per share, impairment and severance
after-tax charge (see Note 2).
INDEPENDENT AUDITORS REPORT
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, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Giddings & Lewis, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, 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
February 10, 1997