FINANCIAL HIGHLIGHTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
PERCENT
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 CHANGE
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Net sales $2,522,008 $2,230,351 13.1
Special charges(1) $ - $ 108,487 (100.0)
Net earnings (after special charges) $ 148,307 $ 87,501 69.5
Net earnings per common share
Basic $ 2.57 $ 1.54 66.9
Diluted $ 2.56 $ 1.54 66.2
Average shares outstanding
Basic 57,690 56,677 1.8
Diluted 57,912 56,990 1.6
Cash dividends declared per common share $ 1.12 $ 1.12 0.0
Shareholders' equity $1,094,132 $1,015,105 7.8
Capital expenditures $ 133,083 $ 126,733 5.0
Employees 21,489 19,330 11.2
Shareholders of record 4,050 4,374 (7.4)
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(1) Special charges of $108.5 million pretax in 1998 consisted of
restructuring costs and other charges. Excluding those charges, earnings per
share would have been $2.90 basic and $2.89 diluted in 1998.
Our single-minded focus is to rapidly restore our operations to that standard.
Do we regret the short-term impacts of theses system conversions?
Certainly, and we have taken aggressive steps to ensure that they do not
recur. But the price of industry leadership - of being first to adopt new
technology and new methods - is to recognize that enormous change is rarely
easy to hazard-free. With that in mind, we remain intensely committed to
fulfilling the promise of these operational improvements that will lead to
increasing value for shareholders in the years to come.
AN AGENDA OF POSITIVE CHANGE
Now, for the positive changes we undertook. In 1999 we tightened the
strategic focus on our product lines; executed important acquisitions that
brought valuable diversity to our electrical segment; and invested in the
operational and technological resources to fortify our position ast he
industry leader in the ongoing e-commerce revolution. New acquisitions and
divestitures of several existing product lines were completed with a view
toward expanding on what we do best, and removing ourselves from business
segments where we could not be a market leader. In addition, we saw growing
market acceptance of our MPI and ETI electronic technologies.
BROADENING A STRONG FOUNDATION
For several years Thomas & Betts has pursued a prudently aggressive acquisition
strategy, guided by the belief that a broad and diverse product portfolio is
essential to sustained growth. As you will read in the roundtable discussion
that follows, we expect the B2B e-commerce revolution to make product breadth
and scope even more critical in the years ahead.
In 1999 we successfully integrated and leveraged the assets of Kaurel
Group, a late-1998 acquisition that more than doubled the size of our
commercial and industrial lighting offerings and provided an important
operational foothold in Europe. In January we closed our purchase of Ocal,
whose line of PVC-coated conduit and components for corrosive environments
enhances our ability to serve the needs of heavy industry.
The third quarter brought the addition of L.E. Mason and Shamrock Conduit
Products. Mason is the market leader in weatherproof electrical boxes and
covers that enjoys a significant presence in the residential and
do-it-yourself (DIY) markets. The Shamrock acquisition broadened our
leadership in the manufacture of conduit fittings, particularly specialized
large-radius elbows used in commercial and industrial construction. All four
of these acquisitions have, to date, performed well above our initial
expectations.
3
FINANCIAL CONTENTS
Six-Year Summary of Selected Financial Data 18
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Management's Discussion and Analysis 19
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Consolidated Statements of Earnings 28
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Consolidated Balance Sheets 29
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Consolidated Statements of Cash Flows 30
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Consolidated Statements of Shareholders' Equity 31
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Notes to Consolidated Financial Statements 32
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Company Report on Financial Statements 54
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Independent Auditors' Report 54
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Quarterly Review 55
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17
SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
DOLLARS AND SHARES IN THOUSANDS
(EXCEPT PER SHARE DATA) 1999 1998(a) 1997 1996(b) 1995(c) 1994(d)
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OPERATIONAL DATA
Net sales $ 2,522,008 $ 2,230,351 $ 2,259,508 $ 2,134,387 $ 1,876,403 $ 1,677,249
Costs and expenses
Cost of sales 1,847,262 1,581,215 1,567,286 1,525,121 1,339,305 1,202,930
Marketing, general and administrative 427,192 366,463 353,029 344,941 289,474 259,627
Research and development 47,959 48,690 52,977 47,482 44,083 40,543
Amortization of intangibles 19,643 17,364 17,355 15,323 11,314 12,345
Merger expense - - - 30,558 - -
Provision (recovery) - restructured
operations (11,632) 62,096 - 24,501 18,700 79,011
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2,330,424 2,075,828 1,990,647 1,987,926 1,702,876 1,594,456
Earnings from operations 191,584 154,523 268,861 146,461 173,527 82,793
Other expense - net 31,848 29,615 35,354 40,066 25,162 28,218
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Earnings from continuing
operations
before income taxes 159,736 124,908 233,507 106,395 148,365 54,575
Income taxes 11,429 37,407 71,229 32,940 41,917 12,484
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Earnings from continuing operations 148,307 87,501 162,278 73,455 106,448 42,091
Net earnings $ 148,307 $ 87,501 $ 162,278 $ 73,455 $ 106,448 $ 108,024
Net return on sales 5.9% 3.9% 7.2% 3.4% 5.7% 6.4%
Return on average
shareholders' equity 14.1% 8.7% 17.2% 8.4% 12.7% 14.4%
FINANCIAL POSITION
(at year-end)
Current assets $ 1,163,935 $ 1,058,402 $ 846,472 $ 997,863 $ 786,828 $ 759,452
Current liabilities $ 513,445 $ 587,549 $ 473,234 $ 515,740 $ 422,170 $ 364,711
Working capital $ 650,490 $ 470,853 $ 373,238 $ 482,123 $ 364,658 $ 394,741
Current ratio 2.27 to 1 1.80 to 1 1.79 to 1 1.93 to 1 1.86 to 1 2.08 to 1
Property, plant and
equipment-net $ 666,528 $ 631,022 $ 574,052 $ 543,237 $ 475,536 $ 398,507
Long-term debt $ 935,731 $ 790,963 $ 503,077 $ 645,096 $ 353,666 $ 354,552
Shareholders' equity $ 1,094,132 $ 1,015,105 $ 999,304 $ 888,647 $ 870,096 $ 808,982
Total assets $ 2,652,686 $ 2,499,587 $ 2,094,288 $ 2,175,342 $ 1,706,003 $ 1,595,312
COMMON STOCK DATA
Average shares outstanding
Basic 57,690 56,677 56,178 54,520 53,955 52,323
Diluted 57,912 56,990 56,551 54,973 54,185 52,621
Cash dividends declared $ 65,127 $ 66,307 $ 66,752 $ 62,112 $ 63,880 $ 50,508
Percent of net earnings 44% 76% 41% 85% 60% 47%
Per share
Earnings from continuing operations
Basic $ 2.57 $ 1.54 $ 2.89 $ 1.35 $ 1.97 $ 0.80
Diluted $ 2.56 $ 1.54 $ 2.87 $ 1.34 $ 1.96 $ 0.80
Net earnings
Basic $ 2.57 $ 1.54 $ 2.89 $ 1.35 $ 1.97 $ 2.06
Diluted $ 2.56 $ 1.54 $ 2.87 $ 1.34 $ 1.96 $ 2.05
Cash dividends declared $ 1.12 $ 1.12 $ 1.12 $ 1.12 $ 1.12 $ 1.12
Shareholders' equity $ 18.89 $ 17.88 $ 17.71 $ 16.23 $ 16.08 $ 15.25
Market price range $ 28-53 7/16 $33 11/16-64 $41-58 11/16 $34 3/4-45 7/8 $31 3/4-37 5/8 $29 1/8-35 5/8
OTHER DATA
Capital expenditures $ 133,083 $ 126,733 $ 118,926 $ 109,108 $ 132,838 $ 99,515
Depreciation $ 78,404 $ 77,969 $ 79,183 $ 77,098 $ 65,970 $ 64,192
Employees at year-end 21,489 19,330 17,829 15,523 13,406 12,308
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Restated to include the results of Telecommunication Devices, Inc., acquired
July 2, 1998, and Augat Inc., acquired December 11, 1996, and accounted for as
poolings of interests, except cash dividends per share, which reflect the
Corporation's historical per share amount.
(a) Includes special charges of $108.5 million pretax ($1.36 basic and $1.35
diluted per share). Net sales exclude sales of businesses contributed to
the Exemplar/Thomas & Betts joint venture at the end of 1997.
(b) Includes special charges of $97.1 million pretax ($1.23 basic and $1.22
diluted per share).
(c) Includes special charges of $23.0 million pretax ($0.29 basic and diluted
per share).
(d) Net earnings for 1994 included after-tax earnings from discontinued
operations (Vitramon, Inc.) of $7.4 million, a pretax gain from the sale of
Vitramon of $99.1 million, a pretax restructuring charge of $79.0 million
and a pretax operating write-down of $10.6 million for previously vacated
facilities. Those items offset each other on an after-tax basis.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
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Thomas & Betts Corporation ("Thomas & Betts" or the
"Corporation") had net sales in 1999 of $2,522 million, 13.1%
higher than in 1998 and 11.6% above 1997. Results for all
three years include the 1998 acquisition of Telecommunications
Devices, Inc. (TDI) accounted for as a pooling of interests.
Excluding the impacts of acquisitions and divestitures from
all years, 1999 sales rose 2.3% over 1998 and 1998 sales rose
0.5% over 1997.
Three significant factors affect the comparability of
sales during the reporting period. In November 1998 the
Corporation acquired Kaufel Group Ltd. (Kaufel), a
manufacturer and marketer of emergency-lighting products. In
its first full year, Kaufel contributed $195.8 million to 1999
sales, an increase of $165.6 million over its 1998
contribution. In September 1999 the Corporation divested
itself of three cable-television amplifier businesses with
sales for nine months of 1999 totaling $64.5 million. Also,
sales for 1999 and 1998 do not include sales from businesses
contributed at year-end 1997 to the Exemplar/Thomas & Betts
(ET&B) joint venture that were included in 1997's results. In
addition, the Corporation completed several smaller
acquisitions over the three-year period.
Results for 1999 include the contributions of three
acquisitions. The Corporation acquired Ocal, Inc. (Ocal) in
January 1999 and Shamrock Conduit Products, Inc. (Shamrock) in
September 1999. Both of those acquisitions were accounted for
using the purchase-accounting method and their results are
included from the date that Thomas & Betts acquired each
company. Additionally, Thomas & Betts acquired L. E. Mason Co.
(Mason) in August 1999 and accounted for that transaction as
an immaterial pooling of interests. The three 1999
acquisitions accounted for $76.8 million of 1999 sales.
Additional details of those acquisitions follow in the
discussion of Liquidity and Financial Resources.
For 1999, sales realized outside the U.S. accounted for
32.5% of the Corporation's total sales compared with 28.3% and
23.5% in 1998 and 1997, respectively. Sales outside the U.S.
have increased due to acquisitions of companies with non-U.S.
sales and the Corporation's efforts to increase foreign sales.
Thomas & Betts views its business in three segments that
are divided along the lines of the end-user markets to which
it sells. The Electrical segment manufactures and sells a
broad package of electrical connectors, components and
accessories, primarily fasteners, fittings, connectors, boxes
and covers, metal framing, grounding materials and lighting
products for use in industrial, commercial, residential and
utility installation, construction and maintenance
applications. Sales of the Electrical segment grew 21.5% in
1999, to $1,358.6 million, following an increase of 9.6% in
1998 compared with 1997. Sales from Kaufel were the largest
driver of the segment's sales growth in 1999, increasing that
segment's sales in 1999 over 1998 by 14.8%. Acquisitions
contributed all of the segment's 1999 growth, more than
offsetting slight volume declines in sales to industrial
markets and commercial construction customers that were due,
in part, to sales losses or deferrals resulting from
installation of a new order management system. In 1998, volume
gains accounted for over one-half of the segment's growth with
several product-line acquisitions and favorable pricing also
adding to the year-over-year improvement.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
The Electronic Original Equipment Manufacturer (OEM) segment
manufactures and markets electronic cable assemblies,
connectors and various electronic components for use in
high-speed computer, mobile communications and automotive
applications, all involving miniaturization, surface-mounts,
electromagnetic interference and multiplexing. Sales of the
Electronic OEM segment grew 8.0%, to $686.7 million, in 1999
over 1998, but were 15.5% lower in 1998 than in 1997. At
year-end 1997, Thomas & Betts contributed certain businesses
to ET&B. Sales of those contributed businesses were included
in 1997 segment sales, but were excluded from 1998 and 1999
sales. In the absence of the impact of the joint-venture
deconsolidation, 1998's OEM sales were 4.6% lower than in
1997.
OEM demand for the Corporation's products improved over
the course of 1999 and volume increases offset moderate price
declines to fuel all of the segment's growth in 1999 over
1998. Price decreases were most pronounced in mobile
communications battery packs. While this segment realizes the
greatest percentage of its sales outside of the U.S. of the
Corporation's segments, foreign currency did not have a
meaningful impact on the rate of sales growth in 1999, but did
cause 1998 reported sales to be 1.0% lower than 1997's level.
Thomas & Betts continued to penetrate the market with its
innovative Metallized Particle InterconnectTM (MPITM)
technology. For 1999, sales of the MPI product line more than
doubled, contributing $44.2 million of sales, up from $20.3
million in 1998 and $1.6 million in 1997.
As previously discussed, at year-end 1997 Thomas & Betts
contributed assets, which generated 1997 sales of
approximately $86 million, to ET&B. Under terms of the
joint-venture agreement, Thomas & Betts has a 49% ownership
interest in ET&B, and retains 100% interest in the income
generated by the assets it contributed plus a 49% interest in
income generated by jointly developed business. The
Corporation accounts for its investment in ET&B under the
equity method. The establishment of the joint venture did not
change segment earnings or consolidated net earnings from what
they would have been if the business was fully consolidated,
but did reduce net sales, costs and expenses by the amounts
attributable to the contributed assets.
The Communications segment produces and sells a package of
drop-line hardware, connectors, fasteners, grounding materials
and various electronic components for use in cable television
(CATV), telecommunications and data communications
applications. In 1999's third quarter, the Corporation
completed sales of its three cable amplifier product lines to
sharpen its focus within the cable television business on its
core hardware product lines. The three product lines had 1999
sales of $64.5 million and generated a pretax loss of $11.9
million on those sales. Those same businesses had sales of
$44.7 million and $52.0 million in 1998 and 1997,
respectively.
Communications sales of $260.3 million were 0.1% lower in
1999 compared with 1998, and were 9.3% lower excluding 1999
and 1998 sales of the divested product lines. Sales in 1998
were also slightly below the prior-year level.
Sales from business activities that cannot be classified
in the aforementioned three segments totaled $216.4 million in
1999, 0.2% higher than in 1998. In 1998, those same sales
decreased 4.0% from 1997's level. In 1998, lower demand for
heating units brought on by unusually warm winter weather and
a shift in steel structure product mix resulted in lower
sales.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
Several complex factors, two of which were related to the
installation of new information technology systems, impacted
1999 expenses. Those systems' conversions involved the
Corporation's financial reporting and order management
functions. The Corporation undertook both conversions as part
of a global effort to align the Corporation's core information
technology systems with its strategic plans and its
organization structure. That effort was undertaken in order to
meet the information, analysis and decision-making needs of
the Corporation and to prepare the Corporation for Web-based
electronic commerce.
By the third quarter of 1999 the Corporation had virtually
completed implementation of its new financial systems.
Management believes the magnitude of the implementation and
the rapid timetable on which it was achieved were directly or
indirectly responsible for a number of accounting charges and
credits that are more fully described in Note 5 to the
financial statements. The Corporation recorded full-year
charges and credits in 1999 by general area and amount for:
(1) relocation of facilities, $16.6 million; (2) new systems'
impacts, $13.0 million; (3) promotional costs, $11.9 million;
and (4) accounting/estimating changes, $9.8 million.
The fourth-quarter 1999 North American roll-out of the
Thomas & Betts Order Processing System (TOPS) disrupted the
Corporation's North American order processing and shipping
capabilities in late 1999. Those disruptions were in addition
to European implementation issues that gave rise to $7.7
million of expense earlier in the year. The Corporation
estimated that the TOPS implementation delayed approximately
$20 million of shipments until 2000, caused an additional loss
of approximately $24 million of fourth-quarter sales and
increased freight, labor and other costs by approximately $18
million as the Corporation sought to minimize the new system's
impact on customer service. Management estimated the total
operating income impact of those lost and deferred sales and
additional costs was approximately $36 million.
Also in 1999, Thomas & Betts recorded charges of $9.5
million related to TDI, which the Corporation acquired in July
1998. The events giving rise to those charges are described in
Note 5 to the financial statements.
Expenses for 1998 included pretax special charges of
$108.5 million primarily related to a program to reduce costs
through manufacturing relocations. Those charges had a
negative after-tax impact of $77.0 million, or $1.35 per
diluted share, on 1998 net earnings, and are described in Note
4 to the financial statements. The charges were recorded as
$30.3 million of cost of sales, $16.1 million of marketing,
general and administrative expense and $62.1 million provision
for restructured operations. In many cases individual
factories involved in the cost-reduction effort manufactured
product lines for more than one of the Corporation's
reportable segments, and restructuring costs were therefore
excluded from the measurement of segment results.
Expected savings from the cost-reduction program are net
of (1) the associated operating cost increases expected to be
incurred at the destination facilities and (2) in 1998 and
1999, project expenses. Ongoing net savings upon full
implementation of the program are expected in the form of
reduced salaries and benefits ($17 million), manufacturing
labor and benefits ($47 million) and depreciation expense ($1
million) offset by higher freight and other overhead costs ($5
million). The Corporation estimates that actions implemented
under the plan resulted in savings of $27.3 million in 1999
net of project expenses of $13.3 million in that year and $1.0
million in 1998 net of project expenses of $6.2 million in
that year. Thomas & Betts anticipates an incremental net
pretax benefit in 2000 of $29.5 million.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
Project expenses were not accruable as part of the 1998
special charges, and included primarily equipment and
personnel relocation costs. The Corporation expects to spend
another $3.3 million as it completes its cost-reduction plans
in early 2000. In addition to project expenses, the
Corporation incurred $19.1 million in related capital projects
in 1999 and $5.4 million in 1998.
The 1999 consolidated gross margin percent was 26.8% of
sales compared with 29.1% and 30.6% in 1998 and 1997,
respectively. The lower gross margin percent in 1999 compared
with earlier years resulted from the loss of gross margin due
to charges, primarily to write-down inventory and recognize
promotional sales discounts, recorded following implementation
of the new financial systems described elsewhere and in Note 5
to the financial statements and to TOPS implementation issues.
The lower gross margin percent in 1998 compared with 1997 was
due to the impact of special charges on 1998's gross margin
percent.
Marketing, general and administrative (MG&A) expense was
16.9% of sales in 1999, versus 16.4% and 15.6% in 1998 and
1997, respectively. MG&A rose as a percent of 1999 sales
compared with earlier years due primarily to the charges
recorded following implementation of the new financial systems
and additional expense associated with the TOPS
implementation. The increase in MG&A expense as a percent of
sales in 1998 versus 1997 was due to the inclusion of $16.1
million of special charges in 1998's expense, primarily to
reserve for the cost of exiting the Corporation's vacant
headquarters building.
Thomas & Betts spent 1.9% of sales on research and
development (R&D) in 1999, compared with 2.2% and 2.3% in 1998
and 1997, respectively. Most R&D activity took place in the
Electronic OEM and Communications segments with efforts in
1999 focused on developing additional products based on MPI
and elastomeric technologies. Amortization expense rose in
both 1999 and 1998 compared with the respective prior year due
to additional amortization of goodwill related to
acquisitions.
Restructure and special-charge reserves established in
1998 and 1996 were reduced by $11.6 million and $1.6 million,
respectively, in 1999, primarily because of decisions not to
execute all of the originally planned phases of certain
projects for economic reasons.
Income from unconsolidated companies includes equity
income from the Corporation's joint ventures and other equity
investments. Those include ET&B, an investment in Leviton
Manufacturing Co. and the Elastimold offshore joint ventures.
Income from unconsolidated companies for 1999 decreased to
$23.8 million from 1998's level of $26.2 million, due
primarily to charges for pricing adjustments and increased
accounts receivable and inventory reserves at ET&B. These
changes were partially offset by improved equity income from
other joint ventures.
The large increase in income from unconsolidated companies
in 1998 over 1997 was due primarily to the start-up of ET&B.
Income from unconsolidated companies is attributed to the
Corporation's business segments as follows: income from
Leviton and the Elastimold joint ventures to the Electrical
segment and income from ET&B to the Electronic OEM segment.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
Interest expense rose in 1999 versus both 1998 and 1997
due primarily to higher outstanding debt and also due to a
general increase in the rate of interest charged on
floating-rate debt.
Other expense (income)-net includes losses on sales of
accounts receivable pursuant to a receivables securitization
program and foreign-currency losses or gains partially offset
by foreign-exchange contract gains and other income. The
Corporation recorded other income in 1999 as a result of a
termination fee related to a proposed acquisition that more
than offset related transaction costs and losses on sales of
accounts receivable. The increase in this expense from 1997 to
1998 was primarily due to a full year's losses on sales of
accounts receivable under the Corporation's
asset-securitization program, which was initiated in December
1997.
The effective income tax rate for 1999 includes a $30.7
million reduction in tax provision that resulted from approval
of tax refund claims and completion of prior-year audits
prompting adjustments of tax reserves. That reduction resulted
in an effective tax rate of 7.2% for 1999. The effective
income tax rate for 1998 of 29.9% was 0.6 percentage points
below the rate for 1997. Thomas & Betts has been able to
maintain a tax rate below the statutory rate because of tax
benefits derived from operations in Puerto Rico and other
proactive tax-saving initiatives.
The Corporation evaluates its business segments on the
basis of segment earnings, with segment earnings defined as
earnings before interest, taxes, restructure and special
charges and certain other expenses. The magnitude of charges
and credits recorded following the financial systems
conversion as well as the impact of the TOPS implementation
heavily impacted the 1999 operating results of all segments
and the comparability of those results to results of prior
years. Earnings of the Electrical segment decreased 9.0% in
1999, and rose 9.8% in 1998 from 1997's level. The increase
from 1997 to 1998 was due to sales growth, somewhat offset by
lower margins on the mix of products sold. Earnings of the
Electronic OEM segment were 56.0% lower in 1999 compared with
1998's performance, and were 12.5% lower in 1998 than in 1997.
Performance in 1998 was due to lower sales, but improved
margins within the segment. Communications segment earnings
declined 127.3% in 1999 from 1998 and 30.2% in 1998 from 1997,
with the majority of the decrease in both years attributable
to losses generated by amplifier product lines divested by the
Corporation in 1999. Earnings related to all other sales rose
6.9% in 1999 compared with 1998 and 30.6% in 1998 compared
with 1997, as a result of enhancements made in the
manufacturing processes for steel structures and heating
units.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
LIQUIDITY AND FINANCIAL RESOURCES
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Cash provided by operating activities decreased in 1999 versus
1998 and in 1998 versus 1997 due to increased working capital.
The 1999 increase in accounts receivable was primarily due to
sales volume increases, including sales of acquired companies;
processing lead times for billing adjustments; slower
collections related to the year-end TOPS implementation; and
targeted increases in payment terms. The late 1998 acquisition
of Kaufel, in addition to information and financial systems
conversions, accounted for the majority of 1998's increased
working capital. In December 1997, the Corporation initiated a
program to sell accounts receivable under an
asset-securitization program. The commencement of that program
provided an increase in cash of $145.2 million in 1997.
Receivables sold under the program were $177.1 million and
$172.5 million at year-end 1999 and 1998, respectively.
Shipping delays due to the TOPS implementation were
primarily responsible for the 1999 year-over-year increase in
inventory levels, while accounts payable increased primarily
as a result of successful efforts to extend payment terms.
Both inventory and accounts payable also increased due to
recent acquisitions.
Management has developed and is executing plans to deal
with those issues which gave rise to increased receivables and
inventory, and expects to reduce investment in those working
capital items in 2000.
Purchases of property, plant and equipment of $133.1
million in 1999 were 5.0% higher than 1998's level. Spending
in 1998 increased 6.6% from the year earlier. Projects in all
three years included restructuring-related spending to
consolidate the operations of recent acquisitions, expansion
of production capabilities, efficiency-related improvements
and new systems software.
During the years covered by this report, Thomas & Betts
made selective acquisitions to broaden its business worldwide.
While the Corporation will continue to evaluate acquisitions,
especially of companies serving the electrical component
market place, it expects to slow the pace of acquisitions in
2000 as compared with recent years. Also, following evaluation
of the performance of acquisitions in its various business
segments, the Corporation is unlikely to pursue acquisitions
of Electronic OEM product lines in the near future. Thomas &
Betts may finance any future acquisitions through the issuance
of private or public debt or equity, internally generated
funds or a combination of those sources.
Thomas & Betts completed three acquisitions during 1999
for approximately $17 million of cash, 869,722 shares of the
Corporation's common stock and $16.7 million of assumed debt.
Those acquisitions were: (1) in January, Ocal, a manufacturer
of PVC-coated conduit bodies; (2) in August, Mason, a
manufacturer of weatherproof electrical boxes and covers,
conduit bodies, fittings and residential outdoor lighting; and
(3) in September, Shamrock, a manufacturer of steel and
aluminum conduit elbows, couplings and conduit nipples used by
electrical contractors. The Ocal and Shamrock acquisitions
were accounted for using the purchase method of accounting,
and together gave rise to $12.5 million of goodwill. The Mason
acquisition was accounted for as an immaterial pooling of
interests, and consequently, current-year financial statements
have been restated to include the results of that operation.
Those three acquisitions accounted for $76.8 million of 1999
sales.
In January 1999, Thomas & Betts announced a proposed
stock-for-stock merger with AFC Cable Systems, Inc. (AFC).
That merger did not proceed, as AFC received a superior offer
in August and terminated its agreement with the Corporation.
As called for in the merger agreement, Thomas & Betts received
a termination fee of $16 million from AFC and that income,
less associated transaction expenses, was included in other
expense-net.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
Thomas & Betts completed nine acquisitions during 1998 for
approximately $168 million of cash, 1,461,000 shares of the
Corporation's common stock and $99 million of assumed debt.
Two of those acquisitions were of significant size: Kaufel, a
manufacturer of emergency lighting products, and TDI, a
manufacturer of mobile communications battery packs. All 1998
acquisitions, with the exception of TDI, were accounted for
using the purchase method, and in aggregate, gave rise to
$73.5 million of goodwill. Acquisitions accounted for as
purchases in 1998 represented $58.8 million of that year's
sales.
Thomas & Betts completed six acquisitions during 1997 for
approximately $19 million of cash, 793,560 shares of the
Corporation's common stock and $16 million of assumed debt.
The largest of those was the July acquisition of Diamond
Communications Products, Inc., a manufacturer of drop hardware
for the worldwide communications industry. The six
acquisitions completed in 1997 represented $57.6 million of
that year's sales and together gave rise to $14.6 million of
goodwill.
Total debt increased $82.8 million in 1999 compared with
1998, following a rise of $342.9 million in 1998 from 1997,
reflecting debt issued and assumed for acquisitions, in
particular the 1998 acquisition of Kaufel, and to fund
increases in working capital. Thomas & Betts maintains a
commercial paper program, which is backed by $560 million of
revolving-credit agreements. At year-end 1999, $148.8 million
of commercial paper was outstanding. Management believes that
its external financial resources and internally generated
funds are sufficient to meet the Corporation's capital needs
for the foreseeable future.
Cash and marketable securities decreased $21.7 million in
1999. Thomas & Betts maintains a portfolio of marketable
securities and cash equivalents in Puerto Rico, which at
year-end 1999 was valued at $36.9 million. Although those
investments represent currently available funds, they remain
invested until the Corporation can repatriate the investments
free of tollgate tax.
YEAR-2000 READINESS PROGRAM
- --------------------------------------------------------------------------------
Thomas & Betts has had no disruption to its operations to date
as a result of the Year-2000 (Y2K) issue. The Y2K issue is the
result of computer programs being written using two digits
rather than four to define the applicable year. As a result,
computer programs that have time-sensitive software are at
risk to recognize a date using "00" as the year 1900 rather
than the year 2000. The Corporation completed a corporate-wide
program to ensure its systems and products were Y2K compliant
during 1999.
The total cost to modify existing software for Y2K
compliance, expended over the period 1997-1999, was
approximately $2 million. In many instances, the Corporation
installed new software with greatly enhanced functionality
that also solved potential Y2K compliance issues and
capitalized the costs of those installations.
The Corporation has contingency plans to address
situations that may result if the Corporation encounters a Y2K
issue in a critical operating system. Those contingency plans
cover the critical order processing and distribution systems
as well as plant operating systems. If both the Corporation's
Y2K solutions and contingency plans fail for a critical system
for a prolonged period, the impact on the Corporation would be
material.
Despite assurances from outside parties of their timely
readiness, the Corporation cannot ensure that its suppliers,
vendors and customers have resolved all Y2K issues. Given the
responses from suppliers and the Corporation's experience thus
far in 2000, Thomas & Betts believes it is highly unlikely
that a large number of outside parties will experience any
significant problems due to unresolved Y2K issues. In the
event that a large number of customers suffer Y2K compliance
issues over a prolonged period, the impact on the Corporation
would be material.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
MARKET RISK AND FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Thomas & Betts is exposed to market risk from changes in
foreign-exchange rates, raw material commodity prices and
interest rates. The Corporation may enter into various hedging
transactions to reduce those risks and allow management to
focus on core business issues and challenges. The Corporation
does not enter into foreign-currency or interest-rate
transactions or commodity-price contracts for speculative
purposes.
Thomas & Betts primarily enters into forward
foreign-exchange contracts to reduce the impact on earnings
and cash flow from non-functional currency-denominated assets,
liabilities and transactions, predominately inter-company and
third-party receivables and payables. Gains and losses
resulting from hedging instruments offset the losses or gains
on the underlying assets, liabilities and transactions being
hedged. The Corporation's contracts generally have maturity
dates of less than 90 days, and the Corporation maintains a
high correlation between the hedges and the underlying assets,
liabilities or transactions to minimize currency risk. In most
cases, both the exposed transactions and the hedging contracts
are marked to market monthly with gains and losses included in
earnings as other income or expense.
Assuming a hypothetical 10% adverse change in all foreign
currencies, with the resulting functional currency gains and
losses translated into U.S. dollars at the spot rate, the loss
in fair value of exchange contracts held on January 2, 2000,
would have been $16.4 million. Those losses would be offset by
gains on the underlying assets, liabilities and transactions
being hedged.
Thomas & Betts will occasionally enter into interest-rate
swaps to reduce the impact of changes in interest rates on
portions of its floating-rate debt. During the period covered
by this report, there were no interest-rate swaps outstanding.
As of January 2, 2000, the fair value of the Corporation's
long-term debt, estimated using quoted market prices or
discounted future cash flows based on the Corporation's
current incremental borrowing rates for similar types of
borrowing arrangements, was $908.7 million. That fair value
was $30.8 million lower than the carrying value of debt at
January 2, 2000. The potential change in fair value resulting
from a hypothetical 10% decrease in interest rates amounted to
$24.5 million at January 2, 2000.
Thomas & Betts is exposed to risk from fluctuations in
prices for commodities used to manufacture its products,
primarily copper, zinc, aluminum, gold and silver. Some of
that risk is hedged through the use of futures and swap
contracts that fix the price the Corporation will pay for the
commodity. The use of such commodity contracts effectively
protects Thomas & Betts against changes in the price of the
commodity to the extent of the notional amount under the
contract. Since the maturities of those contracts are highly
correlated with the actual purchases of the commodities, the
reported cost-of-sales amounts reflect the commodities' costs,
including the effects of commodity hedges.
As of January 2, 2000, the net unrealized gain on all
commodity contracts held was $1.2 million. A hypothetical 10%
decrease in all commodity market prices would reduce that
unrealized gain to $0.4 million. The Corporation would
normally only record those gains at the time the commodity is
actually purchased, and the gain would be reported as a part
of cost of sales.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NEW ACCOUNTING STATEMENTS
- --------------------------------------------------------------------------------
In 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Statement No. 133 requires the
recognition at fair value of all derivatives as either assets
or liabilities in the Consolidated Balance Sheet. Under
certain conditions, a derivative can be designated as a hedge
allowing the deferral of fair value gains or losses until the
offsetting gains or losses on the hedged item are recognized.
At times Thomas & Betts enters into derivative instruments to
hedge risks associated with commodity fluctuations. Statement
No. 133, as amended, is effective for the first quarter of
2001. Thomas & Betts does not believe that adoption will have
a material effect on its future results of operations or
financial position.
ADDITIONAL DISCLOSURE
- --------------------------------------------------------------------------------
Thomas & Betts is committed to complying with all applicable
laws and to pursuing actions and practices that promote a
safer, healthier environment. The Corporation expended
approximately $2 million, $2 million and $3 million for
environmental remediation and corrective matters for the years
1999, 1998 and 1997, respectively, with payments related to
matters covered under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (the
"Superfund Act") being less than $0.7 million in any year.
On January 1, 1999, 11 of 15 member countries of the
European Union established fixed-conversion rates between
their existing sovereign currencies and the euro, and began an
effort to fully adopt the euro as their common legal currency
by January 1, 2002.
Thomas & Betts has successfully programmed its information
technology and other systems to accommodate euro-denominated
transactions. To date, the euro conversion has not materially
impacted those systems or the Corporation's competitive
position, currency-exchange risk, material contracts, tax
position or accounting policies.
27
CONSOLIDATED STATEMENTS OF EARNINGS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------
IN THOUSANDS (EXCEPT PER SHARE DATA) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Net Sales $2,522,008 $2,230,351 $2,259,508
Costs and Expenses
Cost of sales 1,847,262 1,581,215 1,567,286
Marketing, general and administrative 427,192 366,463 353,029
Research and development 47,959 48,690 52,977
Amortization of intangibles 19,643 17,364 17,355
Provision (recovery) - restructured operations (11,632) 62,096 -
- -----------------------------------------------------------------------------------------------------------------
2,330,424 2,075,828 1,990,647
Earnings from operations 191,584 154,523 268,861
Income from unconsolidated companies 23,776 26,172 13,909
Interest expense - net 60,995 45,756 44,795
Other expense (income) - net (5,371) 10,031 4,468
- -----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 159,736 124,908 233,507
Income taxes 11,429 37,407 71,229
- -----------------------------------------------------------------------------------------------------------------
Net Earnings $ 148,307 $ 87,501 $ 162,278
- -----------------------------------------------------------------------------------------------------------------
Net Earnings Per Common Share:
Basic $ 2.57 $ 1.54 $ 2.89
Diluted $ 2.56 $ 1.54 $ 2.87
Average shares outstanding:
Basic 57,690 56,677 56,178
Diluted 57,912 56,990 56,551
Cash dividends declared per share $ 1.12 $ 1.12 $ 1.12
See notes to consolidated financial statements.
28
CONSOLIDATED BALANCE SHEETS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
January 2, January 3,
IN THOUSANDS 2000 1999
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 70,553 $ 64,028
Marketable securities 14,217 42,478
Receivables - net 470,532 404,784
Inventories 537,401 469,641
Deferred income taxes 44,410 61,829
Prepaid expenses 26,822 15,642
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 1,163,935 1,058,402
Property, Plant and Equipment
Land 28,190 22,309
Buildings 256,538 232,380
Machinery and equipment 972,341 908,253
- ---------------------------------------------------------------------------------------------------------------
1,257,069 1,162,942
Less accumulated depreciation 590,541 531,920
- ---------------------------------------------------------------------------------------------------------------
666,528 631,022
Intangible assets - net 611,362 621,487
Investments in unconsolidated companies 154,919 142,251
Other assets 55,942 46,425
- ---------------------------------------------------------------------------------------------------------------
Total Assets $2,652,686 $2,499,587
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 31,921 $ 75,068
Current maturities of long-term debt 3,774 22,589
Accounts payable 300,242 262,483
Accrued liabilities 159,401 155,815
Income taxes 1,917 55,674
Dividends payable 16,190 15,920
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 513,445 587,549
Long-Term Liabilities
Long-term debt 935,731 790,963
Other long-term liabilities 88,828 93,788
Deferred income taxes 20,550 12,182
Shareholders' Equity
Common stock 5,782 5,677
Additional paid-in capital 332,480 322,019
Retained earnings 795,208 710,474
Unearned compensation-restricted stock (3,439) (4,534)
Accumulated other comprehensive income (35,899) (18,531)
- ---------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,094,132 1,015,105
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,652,686 $2,499,587
- ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
IN THOUSANDS 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $148,307 $ 87,501 $ 162,278
Adjustments:
Depreciation and amortization 98,047 95,333 96,538
Provision (recovery) - restructured operations (11,632) 62,096 -
Accrued merger and other special charges 28,003 46,393 -
Undistributed earnings from unconsolidated companies (15,215) (13,204) (11,278)
Deferred income taxes 26,634 (26,139) 19,771
Changes in operating assets and liabilities, net:
Receivables (86,078) (60,145) 77,817
Inventories (85,745) (50,477) (25,687)
Accounts payable 28,306 (11,677) 23,260
Accrued liabilities (25,456) (38,487) (60,198)
Income taxes payable (21,177) 6,694 9,144
Other (3,843) (9,459) 77
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 80,151 88,429 291,722
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of and investments in businesses (17,049) (169,349) (19,326)
Purchases of property, plant and equipment (133,083) (126,733) (118,926)
Proceeds from sale of property, plant and equipment 9,315 5,337 6,098
Proceeds from divestitures of businesses 16,390 - -
Marketable securities acquired (6,825) (38,781) (81,365)
Proceeds from matured marketable securities 34,658 48,816 64,807
Other - - (1,000)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (96,594) (280,710) (149,712)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in borrowings with
original maturities less than 90 days (37,162) 22,602 432
Proceeds from long-term debt and other borrowings 200,591 256,560 170,730
Repayment of long-term debt and other borrowings (79,819) (11,148) (354,394)
Stock options exercised 3,211 10,553 25,945
Cash dividends paid (64,857) (65,788) (62,648)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 21,964 212,779 (219,935)
Effect of exchange-rate changes on cash 1,004 (1,695) (4,030)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,525 18,803 (81,955)
Cash and cash equivalents - beginning of year 64,028 45,225 127,180
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 70,553 $ 64,028 $ 45,225
- -----------------------------------------------------------------------------------------------------------------
Cash payments for interest $ 66,103 $ 46,600 $ 55,088
Cash payments for income taxes $ 39,191 $ 46,050 $ 42,552
See notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
Accumulated
Other
Common Stock Paid-In Retained Restricted Comprehensive Comprehensive
IN THOUSANDS Shares Amount Capital Earnings Stock Income Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 54,764 $ 284,860 $ - $589,323 $(2,011) $ 16,475 $ - $ 888,647
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 162,278 - - 162,278 162,278
Other comprehensive income:
Unrealized gain adjustment on
securities net of taxes of $(30) - - - - - - (87) (87)
Cumulative translation
adjustment - - - - - - (18,586) (18,586)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income - - - - - (18,673) (18,673) -
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - - - - 143,605 -
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends declared - - - (66,752) - - - (66,752)
Business acquisitions and
investments 62 3,610 - - - - - 3,610
Stock options and incentive awards 910 25,945 - - - - - 25,945
Unearned compensation - - - - (2,910) - - (2,910)
Immaterial pooling of interests 731 2,728 - 4,431 - - - 7,159
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 56,467 317,143 - 689,280 (4,921) (2,198) - 999,304
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 87,501 - - 87,501 87,501
Other comprehensive income:
Unrealized gain adjustment on
securities net of taxes of $67 - - - - - 198 198
Cumulative translation
adjustment - - - - - - (16,531) (16,531)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income - - - - - (16,333) (16,333) -
Comprehensive income - - - - - - 71,168 -
Stock converted to $0.10 par
value - (311,497) 311,497 - - - - -
Dividend declared - - - (66,307) - - - (66,307)
Stock options and incentive
awards 307 31 10,522 - - - - 10,553
Unearned compensation - - - - 387 - - 387
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1999 56,774 5,677 322,019 710,474 (4,534) (18,531) - 1,015,105
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 148,307 - - 148,307 148,307
Other comprehensive income:
Unrealized gain adjustment
on securities net of taxes of
$(150) - - - - - - (278) (278)
Minimum pension liability (651) (651)
Cumulative translation adjustment - - - - - - (16,439) (16,439)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income - - - - - (17,368) (17,368) -
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - - - - 130,939 -
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends declared - - - (65,127) - - - (65,127)
Business acquisitions 86 9 3,541 - - - - 3,550
Stock options and incentive awards 177 18 6,418 - - - - 6,436
Unearned compensation - - - - 1,095 - - 1,095
Immaterial pooling of interests 784 78 502 1,554 - - - 2,134
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 2000 57,821 $ 5,782 $332,480 $795,208 $(3,439) $(35,899) $ - $1,094,132
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock: Authorized 1,000,000 shares, par value $0.10 per share. None
issued; 300,000 shares reserved for the Corporation's Shareholders' Rights Plan.
Common Stock: Authorized 250,000,000 shares, par value $0.10 per share.
See notes to consolidated financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
1. NATURE OF OPERATIONS
- --------------------------------------------------------------------------------
Thomas & Betts Corporation (Thomas & Betts or the Corporation)
is a leading manufacturer of connectors and components for
worldwide electrical and electronics markets. With
international headquarters in Memphis, Tennessee, Thomas &
Betts operates over 250 manufacturing, distribution and office
facilities around the globe in 25 countries. Thomas & Betts
designs, manufactures and sells components used in assembling,
maintaining or repairing electrical, electronic and
communications systems. The Corporation's products include:
(1) electrical components and accessories for industrial,
commercial, utility and residential construction, renovation
and maintenance applications and for applications within other
companies' products, primarily in North America, but also in
Europe and other areas of the world; (2) electromechanical
components, connectors and subsystems for use in high-speed
applications involving miniaturization, surface-mounts,
electromagnetic interference and multiplexing that are sold to
the information processing, mobile communications and
automotive industries in North America, Europe and Asia for
use within other manufacturers' products; (3)
electromechanical components, subsystems and accessories used
to maintain, construct and repair cable television,
telecommunications and data communications networks worldwide;
(4) transmission poles and towers primarily for North American
customers; and (5) heating units and accessories for North
American and European markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of the Corporation and its
domestic and foreign subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation. The Corporation uses the equity method of
accounting for its investments in 20-to-50-percent-owned
companies. Under generally accepted accounting principles
(GAAP), there is a presumption that the equity method should
be used to account for those investments. If the Corporation
were to determine that it no longer had the ability to
exercise significant influence over the operating and
financial policies of those companies, GAAP would require the
Corporation to use the cost method rather than the equity
method to account for those investments. The Corporation
regularly monitors its relationships with those companies.
USE OF ESTIMATES: The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FISCAL YEAR: The Corporation's fiscal year ends on the Sunday
closest to the end of the calendar year. Results for 1999 and
1997 are for 52-week periods, and results for 1998 are for a
53-week period.
REVENUE RECOGNITION: The Corporation records revenue at the
time of shipment of products to customers. Sales discounts,
quantity rebates, allowances and warranty costs are estimated
based on experience and recorded in the period in which the
sale is recorded. Certain customers have a right to return
goods under certain circumstances and those returns, which are
reasonably estimable, are accrued for at the time of shipment.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of
subsidiaries whose functional currencies are other than the
U.S. dollar are translated at exchange rates in effect at the
end of the year, and their income and expense items are
translated at average monthly exchange rates. Exchange gains
or losses resulting from foreign currency translations, except
those in highly inflationary economies, are accumulated as
part of a separate component of shareholders' equity titled
"Accumulated Other Comprehensive Income." The net change in
this amount due to foreign currency translation is identified
as a "cumulative translation adjustment" in determining
comprehensive income. Also included in the cumulative
translation adjustment are the effects of exchange rate
changes on intercompany transactions of a long-term investment
nature and those transactions designated as hedges of net
foreign investments.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK: When
deemed appropriate, the Corporation enters into
forward-foreign-exchange contracts to hedge
foreign-currency-transaction exposures for periods consistent
with those committed exposures. Those financial instruments
are with major financial institutions and expose the
Corporation to market and credit risks and may at times be
concentrated with certain counterparties. The creditworthiness
of counterparties is subject to continuing review and full
performance by those counterparties is anticipated.
Foreign-exchange contracts generally have maturities which do
not exceed one year. The Corporation maintains a high
correlation between the transactions and the hedges to
minimize currency risk. In most cases, both the exposed
transactions and the hedging contracts are marked to market
monthly with gains and losses included in earnings as other
income or expense. Gains and losses on certain contracts that
hedge specific foreign-currency-denominated commitments are
deferred and recognized in the period in which the transaction
is completed. Unrealized gains are reported as prepaid
expenses and unrealized losses are reported as accrued
liabilities.
As of January 2, 2000, and January 3, 1999, the
Corporation had outstanding forward contracts of $164.3
million and $60.5 million, respectively, for the sale or
purchase of principally Canadian, Japanese and European
currencies, all maturing within 160 days. Deferred contract
gains and losses at January 2, 2000, and January 3, 1999, were
not significant.
The Corporation is exposed to risk from fluctuating prices
for commodities used to manufacture its products: primarily
copper, zinc, aluminum, gold and silver. Some of that risk is
hedged through the use of futures and swap contracts that fix
the price the Corporation will pay for the commodity. Cost of
sales reflects the commodity cost including the effects of the
commodity hedge. As of January 2, 2000, the Corporation had
$6.6 million of those contracts outstanding maturing through
December 2000. The maturities of the contracts highly
correlate with the actual purchases of the commodity. The
amounts paid or received are calculated based on the notional
amounts under the contracts. The use of such commodity
contracts effectively protects the Corporation against changes
in the price of the commodity to the extent of the notional
amount under the contract. Recording the fair value of
commodity contracts as of January 2, 2000, would have resulted
in a $1.2 million gain. That value will change as commodity
prices change and will be recorded only at the time the
underlying commodity is actually purchased.
Credit risk with respect to trade receivables is limited
due to the large number of customers comprising the
Corporation's customer base and their dispersion across many
different industries and geographic areas.
The Corporation will, on occasion, enter into
interest-rate swaps to reduce the impact of changes in
interest rates on portions of its floating-rate debt. The rate
differential paid or received under those agreements is
accrued monthly, consistent with the terms of the agreements
and market interest rates. Those agreements are with financial
institutions having at least a single-A credit rating, which
minimizes non-performance risk. As of January 2, 2000, the
Corporation had no outstanding interest-rate swaps.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
RECEIVABLES: Receivables are stated net of allowances for
doubtful accounts and returns and allowances of $31.8 million
at January 2, 2000, and $23.6 million at January 3, 1999.
The Corporation has an asset securitization program which
permits the Corporation to continually sell accounts
receivable to a maximum purchaser's investment of $200.0
million. The investment varies, based on the level of eligible
accounts receivable and restrictions on concentrations of
receivables. Sales under that program are accounted for as
sales of assets under the provisions of Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." The sold accounts receivable are reflected as
reductions of the receivables balance in the accompanying
consolidated balance sheets. At January 2, 2000, and January
3, 1999, net receivables of $177.1 million and $172.5 million,
respectively, had been sold under that program. The discount
rate on the receivables sold in December 1999 was
approximately 6.2%.
INVENTORIES: Inventories are stated at the lower of cost or
market. Cost is determined using the last-in, first-out (LIFO)
method for approximately 71% and 79% of the Corporation's
inventories at January 2, 2000, and January 3, 1999,
respectively, and the first-in, first-out (FIFO) method for
the remainder of inventories. If the FIFO method had been used
to value all inventories, those values would have been lower
by $32.6 million and $21.2 million at January 2, 2000, and
January 3, 1999, respectively. The LIFO valuation method had
the effect of increasing net earnings by $7.1 million, $3.3
million and $1.0 million in 1999, 1998, and 1997,
respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment
are stated at cost. Expenditures for maintenance and repair
are charged to expense as incurred. Significant renewals and
betterments that extend the lives of assets are capitalized.
Depreciation is computed principally on the straight-line
method over the estimated useful lives of the assets, which
range principally from five to 45 years for buildings, three
to 10 years for machinery and equipment, and 10 years for land
improvements.
INTANGIBLE ASSETS: Intangible assets consist principally of
the excess of cost over the fair value of net assets
(goodwill) acquired in business combinations accounted for as
purchases. Those assets are being amortized on a straight-line
basis over various periods not exceeding 40 years. Goodwill is
re-evaluated when business events and circumstances indicate
that the carrying amount may not be recoverable. Re-evaluation
is based on projections of related undiscounted future cash
flows. As of January 2, 2000, and January 3, 1999, accumulated
amortization of intangible assets was $133.2 and $115.8
million, respectively.
INCOME TAXES: The Corporation uses the asset and liability
method of accounting for income taxes. That method recognizes
the expected future tax consequences of temporary differences
between the book and tax bases of assets and liabilities and
provides a valuation allowance based on a more-likely-than-not
standard.
Undistributed earnings of foreign subsidiaries amounted to
$112.7 million at January 2, 2000. Those earnings are
considered to be indefinitely reinvested, and, accordingly, no
provision for U.S. federal or state income taxes has been
provided thereon.
EARNINGS PER SHARE: Basic earnings per share are computed by
dividing net earnings by the weighted-average number of shares
of common stock outstanding during the year. Diluted earnings
per share are computed by dividing net earnings by the sum of
(1) the weighted-average number of shares of common stock
outstanding during the period and (2) the dilutive effect of
the assumed exercise of stock options using the treasury stock
method. Options for 866,000 and 393,000 shares of common stock
in 1999 and 1998, respectively, were excluded because their
effect was anti-dilutive.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations:
IN THOUSANDS (EXCEPT PER SHARE DATA) 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Net earnings $148,307 $87,501 $162,278
---------------------------------------------------------------------------------------------------------
Basic
Average shares outstanding 57,690 56,677 56,178
Basic earnings per share $ 2.57 $ 1.54 $ 2.89
Diluted
Average shares outstanding 57,690 56,677 56,178
Plus additional shares from the assumed exercise
of stock options 222 313 373
---------------------------------------------------------------------------------------------------------
57,912 56,990 56,551
---------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.56 $ 1.54 $ 2.87
---------------------------------------------------------------------------------------------------------
ENVIRONMENTAL COSTS: Environmental expenditures that relate to
current operations are expensed or capitalized, as
appropriate. Remediation costs that relate to an existing
condition caused by past operations are accrued when it is
probable that those costs will be incurred and can be
reasonably estimated based on evaluations of currently
available facts related to each site.
Under the requirements of The Comprehensive Environmental
Response Compensation and Liability Act of 1980 (the
"Superfund Act") and certain other laws, the Corporation is
potentially liable for the cost of clean-up at various
contaminated sites identified by the United States
Environmental Protection Agency and other agencies. The
Corporation has been notified that it is named a potentially
responsible party (PRP) at various sites for study and
clean-up costs. In some cases there are several named PRPs and
in others there are hundreds. The Corporation generally
participates in the investigation or clean-up of potentially
contaminated sites through cost-sharing agreements with terms
which vary from site to site. Costs are typically allocated
based upon the volume and nature of the materials sent to the
site. However, under the Superfund Act and certain other laws,
as a PRP, the Corporation can be held jointly and severally
liable for all environmental costs associated with the site.
When the Corporation becomes aware of a potential
liability at a particular site, it conducts studies to
estimate the amount of the liability. If determinable, the
Corporation accrues what it considers to be the most accurate
estimate of its liability at that site, taking into account
the other participants involved in the site and their ability
to pay. The Corporation has acquired facilities subject to
environmental liability where, in one case, the seller has
committed to indemnify the Corporation for those liabilities,
and, in another, subject to an asset purchase agreement, the
seller assumed responsibility for paying its proportionate
share of the environmental clean-up costs.
The Corporation has and is in the process of further
evaluating properties acquired with recent acquisitions, and
may have liability associated with contamination at those
properties. As of January 2, 2000, and January 3, 1999 the
Corporation's reserve for future environmental costs was $23
million and $29 million, respectively. In addition to payments
made, the Corporation's environmental reserve was reduced by
$5.5 million to reflect changes in estimates of technological
advances and increased experience with remediation at certain
treatment sites. The Corporation is not able to predict with
certainty the extent of its ultimate liability with respect to
any pending or future environmental matters. However, the
Corporation does not believe that any liability with respect
to the aforementioned environmental matters will be material
to its financial or competitive position or results of
operation.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
CASH FLOW INFORMATION: Cash equivalents consist of investments
with maturities at date of purchase of less than 90 days that
have a low risk of change in value due to interest-rate
changes. Foreign-currency cash flows have been converted to
U.S. dollars at appropriately weighted-average exchange rates
or the exchange rates in effect at the time of the cash flows,
where determinable.
RECLASSIFICATIONS: The 1998 and 1997 financial statements were
reclassified to conform to the 1999 presentation. Those
reclassifications had no effect on earnings in any year.
3. MERGERS, ACQUISITIONS AND DIVESTITURES
- --------------------------------------------------------------------------------
1999 - ACQUISITIONS AND DIVESTITURES: The Corporation
completed three acquisitions during 1999 for a total
consideration of $70.7 million, consisting of $17.0 million of
cash, $16.7 million of debt assumed, and 869,722 of shares of
the Corporation's common stock. Two of those acquisitions were
accounted for using the purchase method of accounting.
Accordingly, results of those operations have been included in
the consolidated statement of earnings since the date of the
acquisition. The aggregate purchase price was allocated to the
acquired assets based on their respective fair values with the
excess of $12.5 million allocated to goodwill to be amortized
over 40 years. Those two acquisitions added $28.9 million to
sales in 1999. The third acquisition was accounted for as an
immaterial pooling of interests with the results of that
acquisition included in the Corporation's results as of the
beginning of 1999 without restating prior-year results. This
acquisition contributed $47.9 million to sales in 1999.
The Corporation sold its Megaflex, Photon and broadband RF
amplifier product lines for a pretax loss of $2.2 million.
Those three lines produced 1999 sales of $64.5 million through
the third quarter of 1999 prior to divestiture.
1998 - ACQUISITIONS: In November 1998, the Corporation
purchased Kaufel Group Ltd., (Kaufel) an international company
headquartered in Montreal, Canada, specializing in the design,
manufacture and distribution of emergency and other lighting
products and systems for the industrial and commercial
markets, for a cash price of approximately $100 million, and
the assumption of approximately $60 million of outstanding
debt. The acquisition was accounted for using the purchase
method, with the aggregate purchase price allocated to the
acquired assets based on their respective fair values and the
excess of approximately $37 million allocated to goodwill. The
goodwill is being amortized on a straight-line basis over 40
years. The Kaufel acquisition added $30.2 million to the
Corporation's sales in 1998.
The Corporation completed eight other acquisitions in
addition to Kaufel, for a total consideration of $107 million,
consisting of $68.2 million of cash and $38.8 million of debt
assumed, plus 1,461,000 of shares of the Corporation's common
stock. Seven of those acquisitions were accounted for using
the purchase method of accounting, with the aggregate purchase
price allocated to the acquired assets based on their
respective fair values and the excess of $36.5 million
allocated to goodwill. The goodwill is being amortized on a
straight-line basis over 40 years. Those seven acquisitions
added $28.6 million to sales in 1998.
The acquisition of Telecommunication Devices, Inc. (TDI)
on July 2, 1998, was accounted for as a pooling of interests,
and the Corporation's financial statements were restated to
include the results of that acquisition for all periods
presented, except for dividends per share which reflect the
Corporation's historical per share amount. The Corporation
acquired all of the outstanding stock of TDI and affiliated
companies for 1,461,000 shares of the Corporation's common
stock.
1997 - ACQUISITIONS: The Corporation completed six
acquisitions during 1997 for a total consideration of $62
million, consisting of approximately $19 million of cash and
793,560 shares of the Corporation's common stock. Two of those
acquisitions were accounted for as immaterial
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
poolings of interests, and the results of those acquisitions
have been included in the Corporation's results as of the
beginning of 1997 without restating prior years' results. The
remaining four acquisitions were accounted for under the
purchase method of accounting. The six acquisitions
represented $57.6 million of sales reported by the Corporation
in 1997. The excess of the purchase price over the fair value
of the acquired assets in the purchase acquisitions was $14.6
million and was recorded as goodwill.
1997 - EXEMPLAR/THOMAS & BETTS JOINT VENTURE: In December
1997, the Corporation formed a joint venture with Exemplar
Manufacturing Company, a privately-owned business based in
Ypsilanti, Michigan, to manufacture and sell power
distribution, battery cable and wiring systems to the U.S.
automotive industry. In exchange for a 49% interest in the
ownership of the joint venture, the Corporation contributed
net assets with a carrying value of approximately $41 million;
no gain or loss was recognized as a result of that
transaction. The joint-venture agreement provides that each
party retains a 100% income interest in earnings generated by
its respective contributed business. Income from jointly
developed business will be allocated in accordance with the
ownership percentages. Sales generated in 1997 by the assets
contributed by the Corporation to this joint venture were
$85.9 million.
LEVITON MANUFACTURING CO.: In August 1994, the Corporation
completed the purchase of a minority interest (29.1% of the
outstanding common stock representing 23.55% of the voting
common stock) in Leviton Manufacturing Co., Inc., a leading
U.S. manufacturer of wiring devices, for approximately $51
million consisting of cash and common stock. Leviton's chief
executive officer opposed the Corporation's acquisition. The
chief executive officer, with his wife, owns approximately
50.5% of Leviton's outstanding common stock (76.45% of
Leviton's voting common stock) through a voting trust (a
majority sufficient for the approval of all corporate actions
that Leviton might undertake; however, the majority is not
sufficient to permit either federal income tax consolidation
or pooling of interests accounting treatment in a merger). The
remainder of the outstanding common stock, all of which is
non-voting, is owned by approximately 19 other Leviton family
members. The opposition of the chief executive officer to the
Corporation's investment has resulted in litigation between
Leviton and the Corporation, consisting of the Corporation's
proceeding in Delaware in February 1995 to compel Leviton to
make additional financial and other information available to
the Corporation, and of Leviton's subsequent action against
the Corporation and other parties in New York seeking damages
and other relief in connection with the transaction in which
the Corporation acquired its Leviton investment. The
Corporation does not have and has not sought representation on
Leviton's board of directors, which would be opposed by
Leviton's chief executive officer, and does not receive copies
of Leviton's board minutes.
Notwithstanding the existence of an adversarial
relationship with the controlling shareholder of Leviton, the
Corporation has developed relationships with certain key
members of Leviton management and believes that those
relationships and other factors support management's
conclusion that the Corporation has the ability to exercise
significant influence over Leviton's financial and operating
policies. The Corporation owns more than 20% of Leviton's
voting stock, and there are no restrictions to the
Corporation's ability to exercise the attributes of ownership
(situations have not arisen to date in which the Corporation
has had an opportunity to vote its Leviton shares in a matter
that would demonstrate significant influence over Leviton's
financial and operating policies). In addition, because the
Corporation is a non-family shareholder, the Corporation
believes that it has a greater ability than other shareholders
to challenge actions by Leviton management that the
Corporation considers adverse to shareholders' interests.
Senior management responsible for Leviton's day-to-day
operations and operating and financial policies has engaged in
an ongoing dialogue over the past three and one-half years
with the Corporation, and they have acknowledged that the
Corporation's presence as a Leviton shareholder has influenced
the manner
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
in which Leviton conducts business. Further, Leviton has taken
certain actions following discussions with the Corporation
that have been consistent with the Corporation's requests and
suggestions. The Corporation's equity in earnings of Leviton
have ranged between approximately 5-10% of consolidated pretax
earnings over the last three years. Should the Corporation
determine that it no longer has the ability to influence the
operating and financial policies of Leviton, the Corporation,
in compliance with GAAP, will adopt the cost method on a
prospective basis.
4. RESTRUCTURING AND SPECIAL CHARGES
- --------------------------------------------------------------------------------
During the third quarter of 1998, the Corporation recorded
pretax restructuring and special charges of $108.5 million
primarily related to a program to reduce costs through
manufacturing relocations. Those cost-reduction plans involved
consolidating several facilities and product-line operations,
terminating employees at affected locations, downsizing
administrative functions and writing down idle facilities. The
charges were comprised of a $62.1 million provision for
restructuring operations and $46.4 million of other special
charges, of which $30.3 million was charged to cost of sales
and $16.1 million to marketing, general and administrative
expense. The components of those charges were:
1999 1999
Original 1998 1998 Ending Charges & Remaining
IN MILLIONS Provision Charges Balance Adjustments Balance
---------------------------------------------------------------------------------------------------------
Severance and employee-related costs $ 26.6 $ (7.6) $19.0 $(15.4) $ 3.6
Property, plant and equipment write-offs 25.7 (7.0) 18.7 (18.1) 0.6
Other facility exit costs 9.8 (2.8) 7.0 (5.8) 1.2
---------------------------------------------------------------------------------------------------------
Provision for restructured operations 62.1 (17.4) 44.7 (39.3) 5.4
---------------------------------------------------------------------------------------------------------
Inventory write-offs related to restructuring 25.6(1) (14.4) 11.2 (10.6) 0.6
Costs related to previously idled facilities
Write-downs 4.7(1) (1.5) 3.2 (2.2) 1.0
Carrying costs 10.4(2) (0.7) 9.7 (0.2) 9.5
Other 5.7(2) - 5.7 (4.3) 1.4
---------------------------------------------------------------------------------------------------------
Special charges 46.4 (16.6) 29.8 (17.3) 12.5
---------------------------------------------------------------------------------------------------------
Total $108.5 $(34.0) $74.5 $(56.6) $17.9
---------------------------------------------------------------------------------------------------------
Charged to (1) cost of sales, and (2) marketing, general and
administrative expense.
Severance and other employee-related costs involve actions
that are expected to result in a net reduction of
approximately 325 jobs, including administrative positions at
plants and corporate headquarters. As of January 2, 2000, the
Corporation had realized a net reduction of approximately 296
jobs. The property, plant and equipment write-offs reduced to
fair value the carrying amount of fixed assets that were not
to be relocated in conjunction with their associated
manufacturing process. Assets written down as part of the
cost-reduction program remain classified as property, plant
and equipment until idled; the adjusted carrying value of the
assets still in use was $25.3 million. The effect of
suspending depreciation on facilities idled in 1999 and 1998
was $0.2 and $0.1 million of depreciation expense reduction,
respectively.
Inventory write-offs primarily relate to items that became
obsolete due to modifications of manufacturing processes for
product lines being relocated; items not cost-effective to
relocate; and, to a lesser degree, inventory associated with
discontinued products.
Charges related to previously idled and written down
facilities were based on management's current estimates of
costs necessary to ultimately dispose of, and satisfy
obligations related to, such facilities. The majority of those
are lease-related costs, which will generally be incurred
ratably over an eight-year period.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
Those previously idled facilities, which had carrying
values of $6.3 million at the end of 1999 and $7.1 million at
the end of 1998, are expected to be sold, although in a few
cases they may be donated or leased to third parties.
Restructure and special charge reserves established during
1998 were reduced by $6.3 million and $0.3 million
respectively during 1999 because of decisions not to execute
all originally planned phases of certain projects for economic
reasons.
The cost-reduction program commenced in 1998 was
approximately 90% complete by year-end 1999, with disposal of
remaining idle facilities anticipated by the end of 2000.
Certain other costs, primarily relating to the relocation of
inventory, equipment and personnel, were not accruable until
incurred. Such costs, which were not included in the $108.5
million provision, amounted to $13.3 million in 1999 and $6.2
million in 1998. Future revenues are not expected to be
significantly affected, since the cost-reduction program is
primarily intended to relocate operations rather than
discontinue operations.
During the fourth quarter of 1996, the Corporation
recorded a restructuring charge of $24.5 million related to
the integration of Augat and initiatives affecting Augat's and
other of the Corporation's operations. Restructuring
initiatives included the closure of Augat's corporate
headquarters facility in Mansfield, Massachusetts, and
redundant non-U.S. administrative facilities, as well as the
rationalization of the combined sales forces and manufacturing
operations. Those initiatives are now substantially complete.
The following table summarizes the original 1996
restructuring provision and subsequent activity:
1999 1999
Original 1997 1998 Charges & Ending
IN MILLIONS Provision Charges Charges Adjustments Balance
---------------------------------------------------------------------------------------------------------
Severance and employee-related costs $15.7 $(14.6) $(1.1) $ - $ -
Plant, property and equipment write-offs 6.6 (0.7) (0.9) (5.0) -
Other facility exit costs 2.2 (0.1) (0.5) (1.4) 0.2
---------------------------------------------------------------------------------------------------------
Total $24.5 $(15.4) $(2.5) $(6.4) $0.2
---------------------------------------------------------------------------------------------------------
Decisions were made not to execute all of the originally
planned phases of the 1996 restructure plan. This resulted in
a reduction in 1996 restructure reserves in the year 1999 of
$5.4 million and of special charge reserve reversals of $1.3
million. Amounts remaining at the end of 1999 noted in the
table above are expected to be used primarily for idle
facility carrying costs. Management believes those reserves
are adequate to cover the estimated remaining costs associated
with that restructure plan.
5. ONE-TIME ITEMS AND OTHER CHARGES AND CREDITS
- --------------------------------------------------------------------------------
In late 1997 the Corporation embarked on a global effort to
align core information technology systems with strategic plans
and organization structure in order to meet information,
analysis and decision-making needs and to prepare for
Web-based electronic commerce. As part of that overall plan,
in January 1998, the Corporation began converting its legacy
financial reporting software system to an Oracle-based
financial reporting system. The conversion was prompted to
ensure Year 2000 compliance, to accommodate the increased
size, complexity and organization structure of the Corporation
and to avoid potential control problems arising from
non-integrated financial systems. Management believes the
magnitude of the implementation and the rapid timetable on
which it was achieved were directly or indirectly responsible
for a number of charges and credits.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
By the third quarter of 1999 the Corporation had virtually
completed implementation of its Oracle-based system. With the
new system's improved capabilities, during the third quarter
management identified charges and credits which (a) arose from
the extensive systems conversion processes or (b) were then
detectable as a result of both more effective analytical
capabilities with the new system and decentralization of the
accounting control function. Those charges and credits, which
are more fully described below, resulted from (i) system
start-up problems and user errors, (ii) diversion of key
accounting personnel to the design, implementation and
trouble-shooting activities for the new system, (iii)
simultaneous changes in other information technology systems,
(iv) concurrent integration of acquisitions into the reporting
structure, and (v) initial problems encountered in
implementing organizational structure changes, including the
decentralization of the accounting control function into the
divisions within the Corporation's reporting segments. During
the third quarter, the Corporation recorded charges and
credits and made other adjustments identified by the new
financial reporting system.
In addition, several unusual events occurred in the third
quarter of 1999. The aggregate effects of those unusual events
and the adjustments described above are as follows:
IN THOUSANDS
-----------------------------------------------------------------------------------------
Pretax After Taxes
-----------------------------------------------------------------------------------------
Tax refunds and reduction in taxes payable(a) $ - $ 30,700
Acquisition and divestiture income(b) 8,615 5,021
TDI inventory adjustments(c) (9,542) (5,916)
Other adjustments(d) (51,619) (34,156)
-----------------------------------------------------------------------------------------
Total $(52,546) $ (4,351)
-----------------------------------------------------------------------------------------
These charges and credits arose as follows:
(a) $12.5 million of the reduction in tax provision
resulted from approval of tax refund claims filed for
previous years and $18.2 million resulted from
favorable completion of several tax audits during the
third quarter of 1999 and a favorable worldwide
reassessment of tax exposures.
(b) Acquisition and divestiture income and expense amounts
include the transaction income and expense associated
with two unconsummated acquisitions, a completed
acquisition and divestiture of three amplifier product
lines. During the third quarter of 1999 the planned
merger with AFC Cable Systems, Inc. (AFC) was
terminated by AFC to enable it to accept another
offer. As a result, the Corporation received a $16
million cash termination fee from AFC. Partially
offsetting that termination fee income were costs
associated with that terminated transaction and a
second unconsummated acquisition.
Income (Loss) Impacts for
IN THOUSANDS Aquisition/Divestiture Activity
---------------------------------------------------------------------------------------------------------
Pretax After Taxes
---------------------------------------------------------------------------------------------------------
Termination fee from AFC Cable, net of related costs and costs
associated with another unconsummated acquisition $12,483 $ 7,739
Transaction costs related to a pooling of interests
with L.E. Mason Co. (1,708) (1,058)
Net loss on disposition of three amplifier product lines (2,160) (1,660)
---------------------------------------------------------------------------------------------------------
Earnings impact from acquisition and divestiture activity $ 8,615 $ 5,021
---------------------------------------------------------------------------------------------------------
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
(c) These adjustments relate to Telecommunications
Devices, Inc. (TDI), which was acquired in July 1998.
In the second quarter of 1999, the Corporation
reported alleged wrongdoing of executives in TDI's
battery pack operations in Dundee, Scotland. Following
the discovery of alleged wrongdoing in Dundee and in
connection with a review of all TDI operations, the
Corporation conducted physical counts of battery pack
operations in its Romeoville, Illinois plant.
Unfavorable adjustments of $9.5 million resulted from
physical inventory counts taken in the third quarter
of 1999.
(d) These adjustments predominately relate directly or
indirectly to information technology systems'
conversions, and can be categorized as:
1. SYSTEMS' CONVERSION ISSUES RELATED TO OPERATIONS
IN EUROPE that gave rise to a charge of
$7.7 million for credits issued in 1999.
2. CONVERSION ISSUES RELATED TO THE ELECTRICAL SEGMENT
that gave rise to cumulative adjustments in the
third quarter of 1999 of $10.2 million.
3. OTHER CONVERSION ISSUES. As the Oracle system
matured, management deployed account analysis
capabilities and exception reports and reassigned
accounting personnel who had been working on the
Oracle system implementation to decentralized
accounting and control functions. The deployment
of those resources to the divisions resulted in
the identification of a number of decreases in
various balance sheet accounts totaling net
charges of $18.1 million. Restructuring and
special charge reserves were reduced by $7.9
million because of decisions not to execute all
the originally planned phases of certain projects
for economic reasons. In addition, reserve balance
adjustments and write-downs were made, totaling
$23.5 million.
The cumulative impact on the balance sheet during 1999
related to the aforementioned one-time items and other charges
and credits was as follows:
IN THOUSANDS Increase (Decrease)
--------------------------------------------------------------------------------
Accounts receivable $(27,891)
Inventory (19,563)
Notes payable (16,000)
Accounts payable 2,067
Accrued liabilities 19,025
Taxes payable (32,369)
Deferred tax liability (15,826)
Shareholders' equity (4,351)
--------------------------------------------------------------------------------
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
6. INCOME TAXES
- -------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
The components of earnings before income taxes were:
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Domestic $114,917 $ 99,949 $184,252
Foreign 44,819 24,959 49,255
---------------------------------------------------------------------------------------------------------
Total $159,736 $124,908 $233,507
---------------------------------------------------------------------------------------------------------
The components of income tax expense were:
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Current
Federal $(22,420) $ 44,149 $32,892
Foreign 12,946 19,942 17,695
State and local (6,393) 1,786 622
---------------------------------------------------------------------------------------------------------
Total current (15,867) 65,877 51,209
---------------------------------------------------------------------------------------------------------
Deferred
Domestic 17,589 (21,507) 19,408
Foreign 9,707 (6,963) 612
---------------------------------------------------------------------------------------------------------
Total deferred 27,296 (28,470) 20,020
---------------------------------------------------------------------------------------------------------
Income taxes $ 11,429 $ 37,407 $71,229
---------------------------------------------------------------------------------------------------------
The reconciliation between the federal statutory tax rate
and the Corporation's effective tax rate was:
1999 1998 1997
---------------------------------------------------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
State tax - net of federal tax benefit (2.5) 0.3 0.4
Partially tax-exempt income (6.5) (9.2) (6.3)
Goodwill 2.4 3.4 2.0
Non-taxable income of company acquired in pooling of interests (0.4) (0.6) (0.5)
Tax refund claims (7.8) - -
Tax exams and reassessment of tax exposure (11.4) - -
Change in valuation allowance - - (1.9)
Other (1.6) 1.0 1.8
---------------------------------------------------------------------------------------------------------
Effective tax rate 7.2% 29.9% 30.5%
---------------------------------------------------------------------------------------------------------
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
The components of the Corporation's net deferred tax assets
were:
January 2, January 3,
IN THOUSANDS 2000 1999
---------------------------------------------------------------------------------------------------------
Deferred tax assets
Special-charge-related reserves $ 14,355 $ 34,611
Accrued employee benefits 7,893 7,244
Other accruals 22,550 20,457
Asset reserves 8,855 11,429
Tax credit and loss carryforwards 35,295 21,214
Pension benefits 7,679 7,168
Other 10,983 20,557
Valuation allowance (5,250) (5,355)
---------------------------------------------------------------------------------------------------------
Net deferred tax assets 102,360 117,325
---------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment (47,761) (40,257)
Other (30,739) (27,421)
---------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (78,500) (67,678)
---------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 23,860 $ 49,647
---------------------------------------------------------------------------------------------------------
The valuation allowance for deferred tax assets decreased
by $0.1 million in 1999 due to the utilization of foreign net
operating loss carryforwards. The remaining valuation
allowance at January 2, 2000, related to net operating loss
carryforwards and foreign tax credit carryforwards. At January
2, 2000, the Corporation had approximately $6 million of tax
credits which, if unused, would expire by 2003, and
approximately $230 million of loss carryforwards, $45 million
of which, if unused, would expire by 2005, $16 million by 2010
and $169 million beyond 2010.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The Corporation's financial instruments include cash and cash
equivalents, marketable securities, short-term borrowings,
long-term debt, commodity swaps and foreign-currency
contracts. The carrying amounts of those financial instruments
generally approximated their fair values at January 2, 2000,
and January 3, 1999, except that, based on the borrowing rates
currently available to the Corporation under current market
conditions, the fair value of long-term debt was approximately
$908.7 million and $832.6 million at January 2, 2000, and
January 3, 1999, respectively.
The cost bases and fair market values of marketable
securities at January 2, 2000, and January 3, 1999, were:
Amortized Gross Gross Fair
Cost Unrealized Unrealized Market
IN THOUSANDS Basis Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
January 2, 2000
Mortgage-backed $13,242 $1,097 $(122) $14,217
- ---------------------------------------------------------------------------------------------------------------------------
January 3, 1999
Certificates of deposit $25,705 $ - $ - $25,705
Mortgage-backed 15,370 1,472 (69) 16,773
- ---------------------------------------------------------------------------------------------------------------------------
Total $41,075 $1,472 $ (69) $42,478
- ---------------------------------------------------------------------------------------------------------------------------
The mortgage-backed securities held at January 2, 2000,
had expected maturities ranging from four to 20 years.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
8. LONG-TERM DEBT
- --------------------------------------------------------------------------------
The Corporation's long-term debt at January 2, 2000, and
January 3, 1999, was:
January 2, January 3,
IN THOUSANDS 2000 1999
------------------------------------------------------------------------------------------------
Notes payable with a weighted-average interest rate
at January 2, 2000, of 6.84%, due through 2008 $598,654 $ 448,418
Commercial paper with a weighted-average interest rate
at January 2, 2000, of 6.36% 148,764 134,399
Other bank borrowings with a weighted-average interest rate
at January 2, 2000, of 6.25% 60,571 131,900
Non-U.S. borrowings with a weighted-average interest rate
at January 2, 2000, of 5.29%, due through 2008 106,276 71,858
Industrial revenue bonds with a weighted-average interest rate
at January 2, 2000, of 5.26%, due through 2010 19,055 19,455
Other 6,185 7,522
-------------------------------------------------------------------------------------------------
939,505 813,552
Less current portion 3,774 22,589
-------------------------------------------------------------------------------------------------
Long-term debt $935,731 $790,963
-------------------------------------------------------------------------------------------------
Principal payments on long-term debt including capital
leases in each of the five years subsequent to January 2,
2000, are $3.8, $19.6, $56.0, $270.5 and $128.3 million,
respectively.
The Corporation has committed borrowing facilities of
approximately $625 million. Those facilities include $560
million of revolving-credit commitments with two groups of
banks that make $300 million available through June 30, 2003,
and the remaining $260 million available through June 28,
2000. Under the $260 million facility, any committed
borrowings outstanding as of June 28, 2000, would mature on
June 28, 2001. There were no borrowings outstanding under
those facilities as of January 2, 2000, or January 3, 1999.
The Corporation has the option, at the time of drawing funds
under such facilities, of selecting an interest rate based on
a number of benchmarks including LIBOR, the certificate of
deposit rate or the prime rate of the agent bank. The credit
facilities include covenants, among which are limitations on
the amount of future indebtedness that are based on certain
financial ratios. The Corporation's commercial paper program
is backed by those credit facilities.
The Corporation also has a number of uncommitted credit
facilities to provide funding for both its domestic and
international operations. In the normal course of its business
activities, the Corporation is required under certain
contracts to provide letters of credit that may be drawn in
the event the Corporation fails to perform under the
contracts. Outstanding letters of credit or similar financial
instruments amounted to $57.8 million at January 2, 2000.
The Corporation completed the sale of $150.0 million of
10-year 6.39% medium-term notes in February 1999. The net
proceeds from that sale were used to repay commercial paper
issued by the Corporation within the past year and other
short-term borrowings. The Corporation has an effective
registration statement outstanding for the sale of an
additional $450 million of the Corporation's debt securities,
common stock and preferred stock. Future proceeds from the
sale of any securities registered under this filing will be
added to the general funds of the Corporation and used for
general corporate purposes.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
9. STOCK OPTION AND INCENTIVE PLANS
- ------------------------------------------------------------------------------
The Corporation has stock option plans that provide for the
purchase of the Corporation's common stock by its key
employees and directors. At January 2, 2000, a total of
4,078,766 shares were reserved for issuance under stock
options or restricted stock awards already granted or
available for future grants.
A summary of the options outstanding at January 2, 2000,
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------
$23.99 - $38.59 970,201 4.30 Years $33.38 966,201 $33.38
38.72 - 45.75 930,030 7.89 Years 44.01 330,314 45.53
49.66 - 59.56 387,741 8.07 Years 50.70 135,926 50.82
------------------------------------------------------------------------------------------------------
$23.99 - $59.56 2,287,972 6.39 Years $40.64 1,432,441 $37.83
------------------------------------------------------------------------------------------------------
The following is a summary of the option transactions for
the years 1999, 1998 and 1997:
Average
Per Share
Shares Option Price
------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 2,166,232 $30.71
Granted 545,237 45.70
Exercised (801,132) 27.11
Terminated (61,592) 35.87
------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 1,848,745 $36.53
Granted 471,661 50.16
Exercised (233,377) 31.83
Terminated (82,753) 44.14
------------------------------------------------------------------------------------------------------
Balance at January 3, 1999 2,004,276 $39.97
------------------------------------------------------------------------------------------------------
Granted 787,590 41.99
Exercised (102,986) 32.29
Terminated (400,908) 42.10
------------------------------------------------------------------------------------------------------
Balance at January 2, 2000 2,287,972 $40.64
------------------------------------------------------------------------------------------------------
Exercisable at December 28, 1997 1,074,759 $32.02
Exercisable at January 3, 1999 1,164,493 $34.74
Exercisable at January 2, 2000 1,432,441 $37.83
------------------------------------------------------------------------------------------------------
The 1993 Management Stock Ownership Plan provides that,
for each calendar year, up to 1.25% of the outstanding common
stock of the Corporation will be available for issuance as
grants or awards. That plan provides for granting stock
options at a price not less than the fair market value on the
date of grant with a term not to exceed 10 years. The plan
also provides for the issuance of restricted stock awards as
incentive compensation to key employees. The awards are
subject to certain restrictions, including full vesting if the
restricted stock recipient remains in the employ of the
Corporation three years after receiving the award. The value
of the awards is recorded as compensation expense over the
vesting period. Restricted shares awarded under that plan were
75,372 in 1999, 79,724 in 1998, and 127,641 in 1997.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
During 1999, the Corporation made a special stock option
grant to certain members of management for 261,511 shares of
common stock at a price not less than the fair market value on
the date of grant with a term not to exceed 10 years. The
special options were to vest upon the Company reaching
specific working capital objectives. Those objectives were not
met and the options were cancelled as of January 2, 2000.
The Corporation has a Restricted Stock Plan for
Nonemployee Directors under which each director receives 200
restricted shares of common stock annually for a full year of
service. Those shares remain restricted during the directors'
terms. Shares issued under that plan were 1,883 in 1999; 2,000
in 1998; and 2,000 in 1997.
The Corporation has a stock option plan under which each
nonemployee director receives a nonqualified stock option
grant for 800 shares of common stock. The exercise price is
the fair market value on the date of grant. Each option is
fully vested and exercisable on the date of grant with a term
of 10 years. The Corporation also has a deferred fee plan
under which each nonemployee director can defer all or a
portion of compensation for earned services as a director. Any
amount deferred is valued in accordance with the director's
election in a hypothetical investment in Common Stock (Stock
Credits) or in one or more of seven mutual funds. In addition,
nonemployee directors receive an annual grant of Stock Credits
having a value of $7,500. Stock Credits are distributed in
shares of Common Stock and mutual fund accounts are
distributed in cash upon a director's termination of service.
The Corporation continues to account for its stock-based
employee compensation plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation cost has been
recognized for fixed stock-option plans. In accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," a
valuation using the fair-value-based accounting method has
been made for stock options issued in 1999, 1998 and 1997.
That valuation was performed using the Black-Scholes
option-pricing model.
The Corporation's 10-year term options were valued
assuming risk-free interest rates of 5.0%, 5.5% and 6.25% on
their respective issuance dates in 1999, 1998 and 1997, a
dividend yield of 2.5%, an average expected-option life of
five years and volatility of 20%. The valuation determined a
per-share weighted-average fair value for 10-year options
granted during 1999, 1998 and 1997 of $8.49, $10.63 and
$10.36, respectively. Had those options been accounted for
using the fair-value method, they would have resulted in
additional compensation cost of $3.1 million, $3.1 million and
$2.4 million net of taxes for 1999, 1998 and 1997,
respectively.
Had the Corporation adopted the fair-value-based
accounting method for stock options, net earnings would have
been $145.2 million ($2.52 basic earnings per share [EPS];
$2.51 diluted EPS) in 1999; $84.4 million ($1.49 basic EPS;
$1.48 diluted EPS) in 1998; and $159.7 million ($2.84 basic
EPS; $2.82 diluted EPS) in 1997.
10. POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
PENSION PLANS: The Corporation and its subsidiaries have
several noncontributory pension plans covering substantially
all employees. Those plans generally provide pension benefits
that are based on compensation levels and years of service.
Annual contributions to the plans are made according to the
established laws and regulations of the applicable countries.
Plan assets are primarily invested in equity securities, fixed
income securities and cash equivalents.
The Corporation maintains non-qualified supplemental
pension plans covering certain key executives, which provide
for benefit payments that exceed the limit for deductibility
imposed by income tax regulations. The benefit obligation
related to those unfunded plans was $11.4 million at January
2, 2000, and $12.3 million at January 3, 1999. Net periodic
pension cost for 1999, 1998 and 1997 for the Corporation's
defined benefit pension plans included the following
components:
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 9,728 $ 10,542 $ 9,138
Interest cost on projected benefit obligation 17,931 17,077 15,431
Expected return on plan assets (21,314) (19,659) (17,001)
Net amortization of unrecognized:
Prior service costs/(gains) 590 607 746
Transition amount (1,557) (1,536) (1,539)
Plan net losses 395 392 57
Curtailment and settlement losses 84 816 -
---------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 5,857 $ 8,239 $ 6,832
---------------------------------------------------------------------------------------------------------
Assumed weighted-average rates used in developing the net
periodic pension cost were:
U.S. Plans Non-U.S. Plans
--------------------------------------------------------
1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Discount rate 7.0% 7.3% 7.8% 5.9% 6.1% 6.3%
Rate of increase in compensation level 4.5% 4.5% 4.5% 3.9% 3.8% 4.2%
Expected long-term rate of return on plan assets 9.8% 9.5% 9.0% 7.6% 7.7% 7.7%
The following is information regarding the Corporation's
1999 and 1998 pension benefit obligation:
IN THOUSANDS 1999 1998
---------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $267,216 $233,150
Service cost 9,728 10,542
Interest cost 17,931 17,077
Employee contributions 855 699
Plan amendments - (465)
Actuarial (gains)/losses (28,037) 17,806
Foreign-exchange impact 101 196
Acquisitions - 5,590
Curtailments (57) (123)
Settlements (601) (1,643)
Benefits paid from fund (14,740) (15,613)
Benefits paid directly (56) -
---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 252,340 267,216
---------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 229,678 210,875
Actual return on plan assets 29,546 19,143
Company contributions 2,224 8,908
Employee contributions 855 699
Foreign-exchange impact (86) (72)
Acquisitions - 7,381
Settlements (601) (1,643)
Benefits paid (14,740) (15,613)
---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 246,876 229,678
---------------------------------------------------------------------------------------------------------
Funded status:
Benefit obligation in excess of plan assets 5,467 37,538
Unrecognized:
Net transition asset 1,730 3,287
Plan net gains/(losses) 10,813 (25,940)
Prior service costs (1,834) (2,412)
---------------------------------------------------------------------------------------------------------
Accrued benefit costs $ 16,176 $ 12,473
---------------------------------------------------------------------------------------------------------
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
The present value of projected benefits for U.S. plans
recorded at January 2, 2000, and January 3, 1999, was
determined using discount rates of 8% and 7%, respectively,
and an assumed rate of increase in compensation of 4.5%.
The Corporation's recognized defined benefit pension
liability for 1999 and 1998 included the following components:
IN THOUSANDS 1999 1998
---------------------------------------------------------------------------------------------------------
Prepaid benefit costs $ (7,154) $ (7,022)
Accrued benefit liability 24,283 19,669
Accumulated other comprehensive income (651) -
Intangible asset (302) (174)
---------------------------------------------------------------------------------------------------------
Net liability recognized $ 16,176 $ 12,473
---------------------------------------------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFIT PLANS: The Corporation sponsors
defined contribution 401(k) savings plans for its U.S.
employees for which the Corporation's contributions are based
on a percentage of employee contributions. The cost of those
plans for continuing operations was $6.8, $6.1 and $5.0
million in 1999, 1998 and 1997, respectively.
The Corporation provides certain health-care and life
insurance benefits to certain retired employees and certain
active employees who meet age and length of service
requirements. The Corporation is recognizing the estimated
liability for those benefits over the estimated lives of the
individuals covered, and is not funding that liability. The
plan is closed to new entrants. Plan net gains and losses are
amortized over a five-year period.
The net periodic cost for postretirement health-care and
life insurance benefits in 1999, 1998 and 1997 included the
following components:
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the period $ - $ 22 $ 37
Interest cost on projected benefit obligation 1,893 1,970 1,888
Net amortization of unrecognized:
Prior service costs 41 41 41
Plan net gains (627) (1,051) (2,161)
Transition amount 1,009 1,009 1,009
---------------------------------------------------------------------------------------------------------
Net periodic cost $2,316 $ 1,991 $ 814
---------------------------------------------------------------------------------------------------------
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
The following is information regarding the Corporation's
1999 and 1998 postretirement benefit obligation:
IN THOUSANDS 1999 1998
---------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $28,342 $26,333
Service cost - 22
Interest cost 1,893 1,970
Actuarial (gains)/losses (2,280) 3,143
Benefits paid (2,265) (3,126)
---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $25,690 $28,342
---------------------------------------------------------------------------------------------------------
IN THOUSANDS 1999 1998
---------------------------------------------------------------------------------------------------------
Total postretirement benefit obligation $ 25,690 $ 28,342
Unrecognized:
Net transition liability (12,900) (13,909)
Plan net losses 4,936 3,283
Prior service gains (39) (80)
---------------------------------------------------------------------------------------------------------
Accrued benefits cost $ 17,687 $ 17,636
---------------------------------------------------------------------------------------------------------
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 8.0% in 1999
and 7.0% in 1998. An increase in the cost of covered
health-care benefits of 7.0% was assumed for 1999, and graded
down annually to 4.8% for 2005 and future years. A 1.0%
increase or 1.0% decrease in the health-care cost trend rate
would increase or decrease the accumulated postretirement
benefit obligation by $1.2 million at January 2, 2000, and
increase or decrease, respectively, the net periodic cost by
$0.1 million for the year then ended.
11. COMMITMENTS
- --------------------------------------------------------------------------------
The Corporation and its subsidiaries are parties to various
leases relating to plants, distribution facilities, office
facilities, automobiles and other equipment. Related real
estate taxes, insurance and maintenance expenses are normally
obligations of the Corporation. It is expected that in the
normal course of business the majority of the leases will be
renewed or replaced by other leases. Capitalized leases are
not significant.
Future minimum payments under noncancelable operating
leases consisted of the following at January 2, 2000:
IN THOUSANDS
---------------------------------------------------------------------------------------------------------
2000 $ 26,169
2001 19,868
2002 16,362
2003 13,492
2004 9,715
Thereafter 38,915
---------------------------------------------------------------------------------------------------------
Total minimum operating lease payments $124,521
---------------------------------------------------------------------------------------------------------
Rent expense for operating leases was $32.8, $32.5 and
$35.4 million in 1999, 1998 and 1997, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
12. OTHER FINANCIAL DATA
- --------------------------------------------------------------------------------
Other expense (income)-net consisted of the following:
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Acquisition termination fee received $(16,000) $ - $ -
Loss on sale of receivables 11,343 8,951 1,754
Foreign-currency losses (gains) (387) 707 3,759
Foreign-exchange contract gains (1,646) (2,395) (2,071)
Other 1,319 2,768 1,026
---------------------------------------------------------------------------------------------------------
Other expense (income) - net $ (5,371) $10,031 $ 4,468
---------------------------------------------------------------------------------------------------------
The Corporation expenses the cost of advertising as it is
incurred. Total advertising expense was $24.8 million in 1999,
$22.4 million in 1998 and $22.0 million in 1997.
Accrued liabilities included salaries, fringe benefits and
other compensation amounting to $38.0 and $36.7 million in
1999 and 1998, respectively.
Inventories consisted of the following:
January 2, January 3,
IN THOUSANDS 2000 1999
---------------------------------------------------------------------------------------------------------
Finished goods $266,463 $202,368
Work in process 91,765 95,436
Raw materials 179,173 171,837
---------------------------------------------------------------------------------------------------------
Total inventories $537,401 $469,641
---------------------------------------------------------------------------------------------------------
The Corporation conducts portions of its business through
investments in companies accounted for using the equity
method. Those companies are primarily engaged in the design,
manufacture and selling of components used in assembling,
maintaining or repairing electrical and electronic systems.
Summarized financial information for the Corporation's equity
investees on a combined basis was:
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Net sales $1,331,980 $1,230,392 $1,053,715
Gross margin 385,049 361,730 297,345
Net income 64,581 60,004 42,005
Current assets 535,780 512,907 434,892
Non-current assets 203,001 161,249 123,496
Current liabilities 150,984 133,594 118,579
Non-current liabilities $ 167,696 $ 165,791 $ 164,320
---------------------------------------------------------------------------------------------------------
13. SEGMENT AND OTHER RELATED DISCLOSURES
- --------------------------------------------------------------------------------
The Corporation has three reportable segments: Electrical,
Electronic Original Equipment Manufacturer (Electronic OEM)
and Communications. The Electrical segment manufactures and
sells a broad package of electrical connectors, components and
accessories consisting primarily of fasteners, connectors,
fittings, boxes and covers, metal framing, grounding materials
and lighting products for use in industrial, commercial,
residential and utility electrical installation construction
and maintenance applications. The Electronic OEM segment
manufactures and markets electronic cable assemblies,
connectors and various electronic components for use in
high-speed computer, mobile-communication and automotive
applications involving miniaturization, surface-mounts,
electromagnetic interference and multiplexing. The
Communications
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
segment produces and sells a package of drop-line hardware,
connectors, fasteners, grounding materials, various electronic
components for use in cable television, telecommunications and
data communications applications. Some business activities
cannot be classified in one of the aforementioned segments and
are shown under Other. Those businesses consist mainly of the
manufacture and sale of steel structures for electrical
transmission and distribution, power-generation and
telecommunications applications and mechanical products,
primarily heating units, for heating and ventilation
applications. The Corporation's reportable segments are based
on channels to market, and represent the primary mode used to
assess allocation of resources and performance. Management
evaluates each segment's profit or loss performance based on
earnings before interest, taxes, loss on sale of accounts
receivable, restructure, special charges and certain other
expenses and, beginning in 2000, on economic value added. The
significant accounting policies applied to the segments to
determine earnings are essentially those described in the
summary of significant accounting policies. The Corporation
has no material inter-segment sales. General corporate assets
not allocated to segments are principally cash, marketable
securities, deferred income taxes and other corporate assets.
SEGMENT INFORMATION
IN THOUSANDS 1999 1998(a) 1997(a)
---------------------------------------------------------------------------------------------------------
Net Sales
Electrical $1,358,626 $1,117,917 $1,020,102
Electronic OEM 686,716 635,946 752,482(b)
Communications 260,302 260,601 262,121
All other 216,364 215,887 224,803
---------------------------------------------------------------------------------------------------------
Total $2,522,008 $2,230,351 $2,259,508
---------------------------------------------------------------------------------------------------------
Segment Earnings
Electrical $ 171,900 $ 188,927 $ 172,062
Electronic OEM 26,771 60,845 69,573
Communications (4,463) 16,369 23,440
Related to all other sales 24,174 22,619 17,316
---------------------------------------------------------------------------------------------------------
Total $ 218,382 $ 288,760 $ 282,391
---------------------------------------------------------------------------------------------------------
Total Assets
Electrical $1,435,718 $1,307,834 $1,064,971
Electronic OEM 607,192 543,179 530,452
Communications 262,293 257,834 223,448
Related to all other sales 195,461 217,736 197,722
---------------------------------------------------------------------------------------------------------
Total $2,500,664 $2,326,583 $2,016,593
---------------------------------------------------------------------------------------------------------
Capital Expenditures
Electrical $ 71,566 $ 55,163 $ 50,752
Electronic OEM 46,976 39,486 36,288
Communications 8,350 21,069 19,431
Related to all other sales 6,191 11,015 10,042
---------------------------------------------------------------------------------------------------------
Total $ 133,083 $ 126,733 $ 116,513
---------------------------------------------------------------------------------------------------------
Depreciation and Amortization
Electrical $ 47,321 $ 47,765 $ 46,240
Electronic OEM 27,070 26,061 25,574
Communications 15,396 13,183 15,988
Related to all other sales 8,066 8,283 8,065
---------------------------------------------------------------------------------------------------------
Total $ 97,853 $ 95,292 $ 95,867
---------------------------------------------------------------------------------------------------------
(a) Certain prior-year amounts have been reclassified to
conform to the current-year presentation.
(b) Includes sales of businesses contributed to the
Exemplar/Thomas & Betts joint venture at the end of 1997,
amounting to $85.9 million. In 1999 and 1998, results of
operations from that investment were accounted for using
the equity method.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
The following are reconciliations of the total of reportable
segments to the consolidated company:
RECONCILIATION TO TOTAL COMPANY
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Net Sales
Total reportable segment net sales $2,305,644 $2,014,464 $2,034,705(a)
Other sales 216,364 215,887 224,803
---------------------------------------------------------------------------------------------------------
Total $2,522,008 $2,230,351 $2,259,508
---------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes
Total reportable segment earnings $ 194,208 $ 266,141 $ 265,075
Earnings on other sales 24,174 22,619 17,316
Restructure and special charges 11,632 (108,487) -
Interest expense (67,956) (51,135) (52,041)
Loss on sale of receivables (11,343) (8,951) (1,754)
Interest income 6,961 5,379 7,246
Other 2,060 (658) (2,335)
---------------------------------------------------------------------------------------------------------
Total $ 159,736 $ 124,908 $ 233,507
---------------------------------------------------------------------------------------------------------
Total Assets
Total from reportable segments $2,299,373 $2,108,847 $1,818,871
Related to all other sales 201,291 217,736 197,722
General corporate 152,022 173,004 77,695
---------------------------------------------------------------------------------------------------------
Total $2,652,686 $2,499,587 $2,094,288
---------------------------------------------------------------------------------------------------------
Capital Expenditures
Total from reportable segments $ 126,892 $ 115,718 $ 106,471
Related to all other sales 6,191 11,015 10,042
General corporate - - 2,413
---------------------------------------------------------------------------------------------------------
Total $ 133,083 $ 126,733 $ 118,926
---------------------------------------------------------------------------------------------------------
Depreciation and Amortization
Total from reportable segments $ 89,787 $ 87,009 $ 87,802
Related to all other sales 8,066 8,283 8,065
General corporate 194 41 671
---------------------------------------------------------------------------------------------------------
Total $ 98,047 $ 95,333 $ 96,538
---------------------------------------------------------------------------------------------------------
(a)Includes sales of businesses contributed to the
Exemplar/Thomas & Betts joint venture at the end of 1997.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
14. FINANCIAL INFORMATION RELATING TO OPERATIONS
IN DIFFERENT GEOGRAPHIC AREAS
- -------------------------------------------------------------------------------
The Corporation conducts business in five principal areas:
U.S., Europe, Canada, Asia Pacific and Latin America.
IN THOUSANDS 1999 1998 1997
---------------------------------------------------------------------------------------------------------
Net Sales (by external customer locations)
U.S. $1,701,534 $1,606,131 $1,728,135(a)
Europe 377,742 284,713 259,927
Canada 279,427 215,065 165,873
Asia Pacific 108,580 94,108 97,502
Latin America 44,820 21,573 8,071
Other countries 9,905 8,761 -
---------------------------------------------------------------------------------------------------------
Total $2,522,008 $2,230,351 $2,259,508
---------------------------------------------------------------------------------------------------------
Long-lived Assets
U.S. $1,029,847 $1,028,384 $1,041,436
Europe 209,680 200,476 58,918
Canada 129,244 110,832 81,599
Asia Pacific 80,589 71,903 35,110
Latin America 20,711 17,505 30,753
Other foreign countries 18,680 12,085 -
---------------------------------------------------------------------------------------------------------
Total $1,488,751 $1,441,185 $1,247,816
---------------------------------------------------------------------------------------------------------
(a)Includes sales of businesses contributed to the
Exemplar/Thomas & Betts joint venture at the end of 1997.
15. SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
On February 16, 2000, a shareholder filed a purported
class-action suit in the United States District Court for the
Western District of Tennessee against the Corporation, Clyde
R. Moore, as president and chief executive officer, and Fred
R. Jones, as vice president-chief financial officer. The
complaint alleges fraud and violations of Section 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5 thereunder. The plaintiffs allege that purchasers
of the Corporation's common stock between April 28, 1999, and
December 14, 1999, were damaged when the market value of the
stock dropped by nearly 29% on December 15, 1999. The
plaintiffs allege generally that the defendants artificially
inflated the market value of the Corporation's common stock by
a series of misleading statements or by failing to disclose
certain adverse information. An unspecified amount of damages
is sought. At this time, the Corporation is investigating the
allegations, and is unable to predict the outcome of this
litigation and its ultimate effect, if any, on the financial
condition of the Corporation. However, the Corporation
believes that meritorious defenses to the claims exist and
intends to vigorously defend against those claims. Mr. Moore
and Mr. Jones may be entitled to indemnification from the
Corporation.
53
COMPANY REPORT ON FINANCIAL STATEMENTS
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
To the Shareholders of
Thomas & Betts Corporation:
The accompanying financial statements, as well as all financial data in this
annual report, have been prepared by the Corporation in accordance with
generally accepted accounting principles consistently applied. As such, they
include certain amounts that are based on the Corporation's estimates and
judgments. The Corporation has systems of internal control that are designed to
provide reasonable assurance that the financial records are reliable for
preparing financial statements and maintaining accountability for assets, and
that assets are safeguarded against loss from unauthorized use or disposition.
Those systems are augmented by the positive attitude of management in
maintaining a sound control environment, communication of established written
policies and procedures, the maintenance of a qualified internal auditing group,
the selection and training of qualified personnel and an organizational
structure that provides appropriate delegation of authority, segregation of
duties and regular review of financial performance by management. In addition to
the systems of internal control, additional safeguards are provided by the
independent auditors and the Audit Committee of the Board of Directors. The
independent auditors, whose report is set forth below, perform an objective,
independent audit of the Corporation's financial statements taken as a whole.
The Audit Committee, composed entirely of outside directors, meets periodically
with the independent auditors, internal auditors and members of management to
review matters relating to the quality of financial reporting and internal
accounting control and to the nature, extent and results of audit efforts.
INDEPENDENT AUDITORS' REPORT
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
To the Shareholders and Board of Directors of
Thomas & Betts Corporation:
We have audited the accompanying consolidated balance sheets of Thomas & Betts
Corporation and subsidiaries as of January 2, 2000, and January 3, 1999, and the
related consolidated statements of earnings, cash flows, and shareholders'
equity for each of the years in the three-year period ended January 2, 2000.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thomas &
Betts Corporation and subsidiaries at January 2, 2000, and January 3, 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 2, 2000, in conformity with generally
accepted accounting principles.
KPMG LLP
Memphis, Tennessee
March 17, 2000
54
QUARTERLY REVIEW
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
IN THOUSANDS (EXCEPT PER SHARE DATA) 1999(a) 1998(b) 1997(c)
- ---------------------------------------------------------------------------------------------------------------------------
First Quarter
Net sales $ 612,011 $ 544,656 $ 549,287
Gross profit 176,461 163,342 161,932
Net earnings 34,493 37,303 31,696
Earnings per common share
Basic .60 .66 .57
Diluted .60 .65 .57
Cash dividends declared per share .28 .28 .28
Market price range $37 5/16 - 48 7/8 $ 44 5/8 - 64 $ 42 1/2 - 47 1/2
- -----------------------------------------------------------------------------------------------------------------------------
Second Quarter
Net sales $ 652,660 $ 553,318 $ 581,153
Gross profit 189,895 170,636 177,020
Net earnings 43,706 41,543 40,199
Earnings per common share
Basic .76 .73 .72
Diluted .75 .73 .71
Cash dividends declared per share .28 .28 .28
Market price range $ 37 5/8 - 48 1/8 $ 45 7/8 - 61 3/4 $ 41 - 55 3/8
- -----------------------------------------------------------------------------------------------------------------------------
Third Quarter
Net sales $ 635,641 $ 539,945 $ 553,956
Gross profit 137,527 132,343 169,113
Net earnings (loss) 46,930 (37,468) 42,232
Earnings (loss) per common share
Basic .81 (.66) .75
Diluted .81 (.66) .74
Cash dividends declared per share .28 .28 .28
Market price range $41 7/8 - 53 7/16 $33 11/16 - 49 15/16 $ 51 9/16 - 58 11/16
- ---------------------------------------------------------------------------------------------------------------------------
Fourth Quarter
Net sales $ 621,696 $ 592,432 $ 575,112
Gross profit 170,863 182,815 184,158
Net earnings 23,178 46,124 48,151
Earnings per common share
Basic .40 .81 .85
Diluted .40 .81 .85
Cash dividends declared per share .28 .28 .28
Market price range $ 28 - 51 9/16 $ 36 7/8 - 45 9/16 $43 15/16 - 55 13/16
- ---------------------------------------------------------------------------------------------------------------------------
Basic per share amounts are based on average shares outstanding in each quarter.
Diluted per share amounts also reflect potential dilution from stock options.
(a) 1999 includes restatements for one-time items and other charges and
credits. (See Note 5.)
(b) Includes special charges of $108.5 million pretax ($1.36 basic and $1.35
diluted per share) in the third quarter.
(c) Includes sales of businesses contributed to the Exemplar/Thomas & Betts
joint venture at the end of 1997, amounting to $85.9 million. In 1999 and
1998, such investment was accounted for using the equity method.
55
OFFICERS AND DIRECTORS
THOMAS & BETTS CORPORATION
OFFICERS
CLYDE R. MOORE
President and
Chief Executive Officer
T. ROY BURTON
President -
Electronics/OEM Group
GREGORY M. LANGSTON
Group President-International
W. NEIL PARKER
President -
Electrical Components Group
GARY R. STEVENSON
President -
Operations/Administration Group
JOHN P. MURPHY
Senior Vice President -
Chief Financial Officer
JOHN R. JANULIS
Vice President - Controller
JERRY KRONENBERG
Vice President -
General Counsel and Secretary
CONNIE MUSCARELLA
Vice President - Human Resources
THOMAS C. OVIATT
Treasurer
PENELOPE Y. TURNBOW
Assistant Secretary
DIRECTORS
T. KEVIN DUNNIGAN
Chairman of the Board
of the Corporation
DIRECTOR SINCE 1975(2)(3)
ERNEST H. DREW
Former Chief Executive Officer,
Industries and Technology Group
Westinghouse Electric Corporation
(power generation and process control systems)
DIRECTOR SINCE 1989(2)(3)
JEANANNE K. HAUSWALD
Managing Partner,
Solo Management Group, L.L.C.
(corporate finance and investment management consulting)
DIRECTOR SINCE 1993(1)
DEAN JERNIGAN
Chairman, President and Chief Executive Officer
Storage USA, Inc.
(self-storage real estate
investment trust)
DIRECTOR SINCE 1999
RONALD B. KALICH, SR.
President and
Chief Executive Officer,
National-Standard Company
(wire-related products for the
automotive industry)
DIRECTOR SINCE 1998(1)
ROBERT A. KENKEL
Former Chairman of the Board,
Chief Executive Officer and
Chief Operating Officer,
The Pullman Co.
(automotive, aerospace and industrial companies)
DIRECTOR SINCE 1994(3)(4)
KENNETH R. MASTERSON
Executive Vice President,
General Counsel and Secretary,
FedEx Corporation
(transportation services)
DIRECTOR SINCE 1995(2)
THOMAS C. MCDERMOTT
Chairman and Manager,
Forbes Products, L.L.C.
(custom vinyl business products)
DIRECTOR SINCE 1996(1)
CLYDE R. MOORE
President and Chief Executive Officer of the Corporation
DIRECTOR SINCE 1993(2)(3)
JEAN-PAUL RICHARD
Chairman and
Chief Executive Officer,
PRO MACH, Inc.
(industrial food processing and packaging equipment)
DIRECTOR SINCE 1996(1)
JERRE L. STEAD
Chairman,
Ingram Micro, Inc.
(distributor of technology products and services)
DIRECTOR SINCE 1998(4)
WILLIAM H. WALTRIP
Former Chairman of the Board,
Bausch & Lomb Incorporated
(optical products), and
Chairman of the Board,
Technology Solutions Company
(computer technology services)
DIRECTOR SINCE 1983(3)(4)
- -------------------------------------------------------------------------------
(1) Audit Committee
(2) Corporate Governance Committee
(3) Executive Committee
(4) Human Resources Committee
56
CORPORATE INFORMATION
THOMAS & BETTS CORPORATION
ANNUAL MEETING
The annual meeting of shareholders will be held on
Wednesday, May 3, 2000, at 10:00 a.m. at the
Winegardner Auditorium, The Dixon Gallery and
Gardens 4339 park Avenue, Memphis, Tennessee.
ANNUAL REPORT ON FORM 10-K
A copy of the Corporation's Annual Report on Form
10-K (excluding exhibits), filed with the Securities
and Exchange Commission, is available free of charge
by writing to the vice president-investor relations at
corporate headquarters.
The Form 10-K and other documents filed
electronically with the SEC may be accessed via the
Internet at www.sec.gov
TRANSFER AGENT, REGISTRAR AND
DIVIDEND DISBURSING AGENT
First Chicago Trust Company, a division of Equiserve
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Fax (201) 222-4679
Telephone Response Center (800) 446-2617
(8 a.m. to 7 p.m. Eastern time weekdays)
Fax (201) 222-4892, TDD Service (201) 222-4955
Correspondence concerning change of address
dividends, lost stock certificates and stock transfer
requirements should be directed to the address above.
Inquiries regarding the Dividend Reinvestment Plan
should be directed to the corporate secretary at
corporate headquarters.
DIVIDEND REINVESTMENT PLAN
First Chicago Trust Company, a division of Equiserve
Dividend Reinvestment Plan
P.O. Box 2598
Jersey City, New Jersey 07303-2598
Internet address: www.equiserve.com
LISTED NEW YORK STOCK EXCHANGE
Trading symbol: TNB
CORPORATE HEADQUARTERS
Thomas & Betts Corporation
8155 T&B Boulevard
Memphis, Tennessee 38125
(901) 252-8000
INVESTOR INQUIRIES
Inquiries should be directed to the investor relations
department at (901) 252-8300 or e-mailed to
investor-relations @tnb.com.
Visit us on the World Wide Web at www.tnb.com
for investor information, technical producer back-
ground or a general overview of Thomas & Betts.
SAFE HARBOR NOTICE
Forward-looking statements made throughout this
annual report are subject to many uncertainties in
the Corporation's operations and business environ-
ment. Such uncertainties, which are discussed in the
Corporation's Annual Report on Form 10-K filed
with the Securities and Exchange Commission, may
cause acrual results of the Corporation to be materi-
ally different from any future results expressed or
implied by such forward-looking statements.