SPS Technologies, Inc. and Subsidiaries
Statements of Consolidated Operations
(Thousands of dollars, except share data)
Years ended December 31
2001 2000 1999
-------------------------------
Net sales.................................................... $918,106 $872,752 $787,661
Cost of goods sold........................................... 738,977 693,204 615,952
-------------------------------
Gross Profit............................................. 179,129 179,548 171,709
Selling, general and administrative expense.................. 108,857 96,160 80,874
Restructurings and impairments............................... 19,100 - -
-------------------------------
Operating Earnings....................................... 51,172 83,388 90,835
Other income (expense):
Interest income............................................ 640 1,092 915
Interest expense........................................... (19,960) (20,905) (14,508)
Equity in loss of affiliates............................... - - (2,032)
Other, net................................................. (482) 504 (390)
-------------------------------
(19,802) (19,309) (16,015)
-------------------------------
Earnings Before Income Taxes 31,370 64,079 74,820
Provision for income taxes................................... 9,800 19,700 23,600
-------------------------------
Net Earnings............................................. $ 21,570 $ 44,379 $ 51,220
===============================
Earnings Per Common Share:
Basic................................................. $ 1.66 $ 3.50 $ 4.05
===============================
Diluted............................................... $ 1.63 $ 3.42 $ 3.95
===============================
See accompanying notes to consolidated financial statements.
6
SPS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Thousands of dollars, except share data)
December 31
2001 2000
-------------------
Assets
Current Assets
Cash and cash equivalents............................. $ 59,948 $ 31,933
Accounts and notes receivable, net.................... 129,663 130,017
Inventories........................................... 175,151 161,584
Deferred income taxes................................. 20,170 18,247
Prepaid expenses and other............................ 8,346 7,830
-------------------
Total Current Assets ................................ 393,278 349,611
-------------------
Property, plant and equipment, net.................... 226,060 228,632
Other assets, principally goodwill.................... 231,441 232,279
-------------------
Total Assets ....................................... $850,779 $810,522
===================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable and current portion of long-term debt... $ 20,096 $ 14,617
Accounts payable...................................... 77,735 77,093
Accrued expenses...................................... 71,526 65,679
Income taxes payable.................................. 605 5,265
-------------------
Total Current Liabilities ........................... 169,962 162,654
-------------------
Deferred income taxes ................................... 26,370 31,619
Long-term debt .......................................... 243,078 243,586
Pension and post retirement benefit obligations ......... 42,379 17,864
Other long-term liabilities ............................. 16,305 9,932
Commitments and contingencies (note 11)
Shareholders' Equity
Preferred stock, par value $1 per share, authorized
400,000 shares, issued none
Common stock, par value $.50 per share, authorized
60,000,000 shares, issued 14,396,924 shares in 2001
and 14,210,886 shares in 2000 ....................... 7,198 7,105
Additional paid-in capital............................ 125,949 117,665
Common stock in treasury, at cost, 1,286,374 shares in
2001 and 1,428,354 shares in 2000 ................... (25,433) (26,626)
Retained earnings..................................... 295,130 273,560
Accumulated other comprehensive income (loss)......... (50,159) (26,837)
-------------------
Total Shareholders' Equity .......................... 352,685 344,867
-------------------
Total Liabilities and Shareholders' Equity ......... $850,779 $810,522
===================
See accompanying notes to consolidated financial statements.
7
SPS Technologies, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(Thousands of dollars)
Years ended December 31
2001 2000 1999
-------------------------------
Cash Flows from Operating Activities
Net earnings.................................................................................... $ 21,570 $ 44,379 $51,220
Reconciliation of net earnings to net cash provided by operating activities:
Depreciation and amortization................................................................ 37,675 36,736 33,615
Equity in loss of affiliates................................................................. - - 2,032
Net loss (gain) on sale of property, plant and equipment..................................... 1,866 (2,167) (3,907)
Net loss on sale of a business............................................................... 6,500 - -
Deferred income taxes........................................................................ 2,878 6,619 5,503
Other operating items........................................................................ (426) (1,301) (1,136)
Changes in assets and liabilities, net of acquisitions of businesses:
Receivables............................................................................... 3,920 (3,994) (3,056)
Inventories............................................................................... (6,836) (6,150) (5,075)
Prepaid expenses and other................................................................ (836) (1,331) (920)
Accounts payable.......................................................................... (1,640) 7,266 2,015
Accrued expenses.......................................................................... 5,769 2,480 (5,657)
Income taxes payable...................................................................... (2,717) 245 2,671
Other assets and liabilities, net......................................................... (886) 5,359 (3,903)
-------------------------------
Net cash provided by operating activities.................................................... 66,837 88,141 73,402
-------------------------------
Cash Flows from Investing Activities
Additions to property, plant and equipment...................................................... (42,264) (31,985) (38,161)
Proceeds from sale of property, plant and equipment............................................. 20,167 4,690 11,260
Acquisitions of businesses...................................................................... (24,228) (118,129) (29,741)
Proceeds from sale of a business................................................................ 5,050 - -
-------------------------------
Net cash used in investing activities........................................................ (41,275) (145,424) (56,642)
-------------------------------
Cash Flows from Financing Activities
Proceeds from borrowings........................................................................ 65,935 113,938 133,022
Reduction of borrowings......................................................................... (63,866) (72,039) (101,418)
Proceeds from exercise of stock options......................................................... 677 1,380 1,158
Purchases of treasury stock..................................................................... - (4,240) (6,952)
-------------------------------
Net cash provided by financing activities.................................................... 2,746 39,039 25,810
-------------------------------
Effect of exchange rate changes on cash......................................................... (293) (302) (505)
-------------------------------
Net increase (decrease) in cash and cash equivalents......................................... 28,015 (18,546) 42,065
Cash and cash equivalents at beginning of year............................................... 31,933 50,479 8,414
-------------------------------
Cash and cash equivalents at end of year..................................................... $ 59,948 $ 31,933 $50,479
===============================
See accompanying notes to consolidated financial statements.
8
SPS Technologies, Inc. and Subsidiaries
Statements of Consolidated
Shareholders' Equity
(Thousands of dollars, except share data)
Accumulated
Additional Other Total
Common Paid-In Treasury Retained Comprehensive Comprehensive
Stock Capital Stock Earnings Income (Loss) Income (Loss)
----------------------------------------------------------- -------------
Balance, December 31, 1998 ......................... $6,906 $106,093 $(12,943) $177,961 $(11,217)
Issuance of 174,744 shares of common stock for
stock options and awards.......................... 87 4,168
Acquisitions of 247,399 shares of treasury stock ... (9,342)
Net earnings 51,220 $ 51,220
Cumulative translation adjustments ................. (9,187) (9,187)
Minimum pension liability changes .................. 1,293 1,293
----------------------------------------------------------- -------------
Balance, December 31, 1999 ......................... 6,993 110,261 (22,285) 229,181 (19,111) $ 43,326
=============
Issuance of 224,004 shares of common stock for
stock options and awards.......................... 112 5,668
Acquisitions of 172,599 shares of treasury stock ... (6,205)
Issuance of 110,652 shares of treasury stock for
businesses acquired............................... 1,736 1,864
Net earnings ....................................... 44,379 $ 44,379
Cumulative translation adjustments (7,740) (7,740)
Minimum pension liability changes .................. 14 14
----------------------------------------------------------- -------------
Balance, December 31, 2000 ......................... 7,105 117,665 (26,626) 273,560 (26,837) $ 36,653
=============
Issuance of 186,038 shares of common stock for
stock options and awards.......................... 93 5,043
Acquisitions of 50,507 shares of treasury stock .... (2,541)
Issuance of 192,487 shares of treasury stock for
businesses acquired............................... 3,241 3,734
Net earnings ....................................... 21,570 $ 21,570
Cumulative translation adjustments (5,651) (5,651)
Minimum pension liability changes .................. (15,494) (15,494)
Fair value of derivatives:
Adjustments ....................................... (2,427) (2,427)
Cumulative accounting changes ..................... 250 250
----------------------------------------------------------- -------------
Balance, December 31, 2001 ......................... $7,198 $125,949 $(25,433) $295,130 $(50,159) $(1,752)
=========================================================== =============
See accompanying notes to consolidated financial statements.
9
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and
all its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
for comparative purposes.
Cash Equivalents
The Company considers cash equivalents to be all highly liquid investments
purchased with original maturities of three months or less. The carrying
amount approximates fair value because of the short maturity of these items.
Inventories
Inventories are valued at lower of cost or market. Inventories are stated at
average cost and include material, labor and manufacturing overhead costs.
Factors considered in determining lower of cost or market are current customer
requirements, quantity on-hand, age of inventory and months' supply of
inventory.
Property and Depreciation
Property, plant and equipment are stated at cost. Depreciation is provided
substantially on a straight-line basis over the estimated useful lives of the
respective assets generally as follows: buildings, 8 to 50 years, and machinery
and equipment, 3 to 20 years. Asset and accumulated depreciation accounts are
reduced for the sale or other disposition of property and the resulting gain or
loss is included in results of operations.
Long-Lived Assets
The carrying value of long-lived assets, including intangible assets, is
reviewed when facts and circumstances suggest that they may be impaired. If
this review indicates that the carrying value of the asset will not be
recoverable based on the expected future undiscounted net cash flows
of the related asset, the asset's carrying value is reduced to it's fair value
and an impairment loss is recognized. Intangible assets, included in other
assets, were approximately $209,900 and $211,900 at December 31, 2001 and
2000, respectively. Intangible assets consist primarily of goodwill, which
arose from the excess of the cost of businesses acquired over the value of the
underlying net assets and was being amortized by the straight-line method over
periods not exceeding 40 years. See the "Recently Issued Accounting Standards"
section of Note 1 for a description of the change in accounting policy related
to goodwill and other intangible assets that the Company will adopt in the
first quarter of 2002. Accumulated amortization at December 31, 2001 and 2000,
was approximately $21,100 and $17,400, respectively. Amortization of
intangible assets was $6,682, $6,082 and $5,002 in 2001, 2000 and 1999,
respectively.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer in accordance with
the terms of the agreement, title and risk of loss have been transferred,
collectibility is probable, and pricing is fixed and determinable. In
instances where title does not pass to the customer upon shipment, the Company
recognizes revenue upon delivery or customer acceptance, depending on the
terms of the sale agreement. Accruals are made for sales returns and other
allowances based on the Company's experience.
Retirement Plans
Substantially all employees are covered by pension plans. Defined benefit
plans in the United States are noncontributory and non-United States plans are
primarily contributory. For United States plans,
10
Notes to Consolidated Financial Statements (continue)
(Thousands of dollars, except share data)
the Company funds the minimum amount required by the Employee Retirement
Income Security Act (ERISA) and for non-United States plans, the Company
generally funds current costs.
Foreign Currency Translation
The functional currency of the Company's non-United States subsidiaries is the
local currency. The financial statements of these subsidiaries are translated
into United States dollars using current rates of exchange, with gains or
losses included in the cumulative translation adjustment account in the
shareholders' equity section of the consolidated balance sheets. Gains and
losses on currency transactions (denominated in currencies other than local
currency), are reflected in the statements of consolidated operations. The
2001 statement of consolidated operations includes $1,211 of losses on
currency transactions.
Forward Exchange Contracts
The Company enters into forward exchange contracts primarily as hedges
relating to identifiable currency positions. These financial instruments are
designed to minimize exposure and reduce risk from exchange rate fluctuations
in the regular course of business. Gains and losses on forward exchange
contracts which hedge exposures on firm foreign currency commitments are
deferred and recognized as adjustments to the bases of those assets. Gains and
losses on forward exchange contracts which hedge foreign currency assets or
liabilities are recognized in income as incurred. Such amounts effectively
offset gains and losses on the foreign currency assets or liabilities that are
hedged. The cash flow from such contracts is classified in the same category
as the transaction hedged in the statements of consolidated cash flows.
Interest Rate Swap Agreements
The Company is using interest rate swap agreements for purposes other than
trading that are treated as off-balance sheet items. The interest rate swap
agreements are used by the Company to modify a portion of its variable rate
obligations to fixed rate obligations, thereby reducing the exposure to market
rate fluctuations. These agreements involve the exchange of amounts based on
fixed interest rates for amounts based on variable interest rates over the
life of the agreement without an exchange of the notional amount upon which
payments are based. The amounts to be paid or received are recognized as
increases or reductions in interest expense in the periods in which they
accrue.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash, cash equivalents and trade
receivables. The Company sells its principal products to a large number of
customers in different industries and geographies. To reduce credit risk, the
Company performs ongoing credit evaluations of its customers' financial
condition but does not generally require collateral. The Company
11
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
invests available cash in money market securities of various banks with high
credit ratings.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations."
This statement requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and establishes specific
criteria for the recognition of intangible assets separately from goodwill.
The Company will follow the requirements of this statement for all business
acquisitions made after June 30, 2001.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement requires that goodwill and intangible
assets deemed to have an indefinite life no longer be amortized but be tested
for impairment at least annually. The amortization period for intangible
assets with finite lives will no longer be limited to forty years. This
statement is effective for fiscal years beginning after December 15, 2001. The
Company will adopt SFAS No. 142 in the first quarter of 2002. Total
amortization expense for goodwill and intangible assets deemed to have an
indefinite life for full year 2001 was approximately $5,000 on an after-tax
basis, or $.38 per share. The Company does not expect the adoption of the
other provisions of the new standard, including provisions for determining
goodwill impairment and assessing the useful lives of other intangible assets,
to have a material impact.
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs be recognized when they are incurred and classified as
liabilities. This statement is effective for fiscal years beginning after June
15, 2002. The Company estimates that the impact of adopting this standard in
the first quarter of 2003 will not be material.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121 on
the same topic and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a
business. This statement also amends ARB No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This statement is effective for
fiscal years beginning after December 15, 2001. The impact of adopting this
standard in the first quarter of 2002 will not be material.
2. CHANGE IN ACCOUNTING POLICIES
Effective January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138. The new
standard requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on the use of the derivative and whether it qualifies for hedge
accounting treatment. Based on market valuations for derivatives held as of
January 1, 2001, the Company recorded net-of-tax, cumulative-effect-type
adjustments to other comprehensive income of $250 to recognize the fair value
of all derivatives. The Company made no
12
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
significant change to its risk management strategies due to the adoption of
SFAS No. 133.
The Company enters into derivative contracts to reduce the risk associated
with currency exchange rates and variable interest rates. The Company has
derivative instruments designated as cash flow hedging instruments. The
Company has entered into a series of foreign currency forward contracts to buy
certain foreign currencies each month over a future period of time at the
forward exchange rate at the time of the contract. The Company is using
interest rate swap agreements to modify a portion of its variable rate
obligations to fixed rate obligations, thereby reducing the exposure to market
rate fluctuations. The Company formally assesses (both at the hedge's
inception and on a quarterly basis) whether the derivatives that are used in
hedging transactions have been highly effective in offsetting changes in the
cash flows of hedged items and whether those derivatives may be expected to
remain highly effective in future periods.
As of December 31, 2001, all hedges outstanding were highly effective. The
maximum remaining length of time of the foreign currency forward contracts
currently in place as of December 31, 2001 is approximately 2.0 years. The
maximum remaining length of time of the interest rate swaps currently in place
as of December 31, 2001 is approximately 4.0 years. The Company is exposed to
credit loss in the event of nonperformance by the counterparties to the swap
agreements and the foreign currency forward contracts. The Company does not
anticipate nonperformance by the counterparties who are major financial
institutions.
The fair value of all derivatives was zero at the inception date and will be
zero at the maturity of the derivatives. Throughout the term of the
derivatives, the Company will adjust the derivatives to their fair value with
an offsetting adjustment to other comprehensive income and current period
earnings. Any change in fair value related to the derivative's hedge
ineffectiveness and any component of the derivative's gain or loss excluded
from the assessment of hedge effectiveness would be recognized in current
period earnings. For derivative instruments designated as cash flow hedging
instruments, the net gain or loss recognized in earnings during 2001 was $69
of losses. Of the amount reported in accumulated other comprehensive income at
December 31, 2001, the Company estimates that $120 of losses are expected to
be reclassified to current period earnings within the next twelve months. When
the losses are reclassified into current period earnings, they will be
reported on the same line as the underlying transaction. If it is determined
that any derivative is not highly effective as a hedge, the Company would
discontinue hedge accounting prospectively and the gain or loss on the
derivative remaining in accumulated other comprehensive income would be
reclassified into earnings. In any situation in which hedge accounting was
discontinued and the derivative remained outstanding, the Company would carry
the derivative at its fair value on the balance sheet and recognize changes in
the fair value in current period earnings.
3. RESTRUCTURINGS AND IMPAIRMENTS
In 2001, the Company announced plans to eliminate, consolidate and restructure
certain manufacturing operations. The elements of this plan include the
closure of five manufacturing plants (affecting 500 employees), reduction of
an additional 300 employees at remaining plants, relocation of certain product
lines to existing facilities, outsourcing the manufacture of certain product
lines to third parties, discontinuing production of certain product lines and
further integrating and consolidating the
13
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
operations of certain acquired companies. The Statement of Consolidated
Operations for 2001 includes charges for restructurings and impairments and
related inventory write downs that total $20,600 ($13,500 or $1.02 per share
on an after-tax basis). Charges of $19,100 are classified in the Statement of
Consolidated Operations as restructurings and impairments. Charges for the
write downs of inventory related to discontinued product lines of $1,500 are
classified in cost of goods sold in the Statement of Consolidated Operations.
As of December 31, 2001, employment has been reduced by approximately 460
people due to the restructuring actions. The following table summarizes the
expenses related to the Company's restructuring plan classified as
restructurings and impairments in the 2001 Statement of Consolidated
Operations:
Accrual
Total Balance at
Initial Adjust- Charge as December 31,
Charge ments Adjusted Incurred 2001
------- ------- --------- -------- ------------
Employee separations.................................................. $ 7,800 $ 700 $ 8,500 $ 5,200 $3,300
Loss on sale of the Lake Erie Design business......................... 6,500 -- 6,500 6,500 --
Write downs of machinery and equipment................................ 2,000 -- 2,000 2,000 --
Lease termination cost................................................ 900 (300) 600 -- 600
Other costs........................................................... 1,400 100 1,500 600 900
------- ----- ------- ------- ------
$18,600 $ 500 $19,100 $14,300 $4,800
======= ===== ======= ======= ======
In addition, the Company has estimated that it will incur approximately $5,500
($3,500 or $0.26 per share on an after-tax basis) for certain related costs
that will be charged to the Statement of Consolidated Operations as incurred.
These costs consist of the following: losses during the wind-down period of
$3,600, costs to relocate equipment of $1,300 and costs to start-up production
of $600. As of December 31, 2001, the Company has incurred $3,500 ($2,200 or
$0.17 per share on an after-tax basis) for costs related to the restructure
plan that were charged to the Statement of Consolidated Operations as
incurred. These costs included $1,900 for losses during the wind-down period,
$1,100 for costs to relocate equipment and $500 for costs to start up
production at plants where products have been transferred.
4. BUSINESS ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The results
of operations of the acquired businesses are included in the consolidated
financial statements from the dates of acquisition.
On April 5, 2001, the Company acquired all of the outstanding stock of M.
Argueso & Co., Inc. (Argueso) based in Mamaroneck, New York for $19,685.
Consideration consisted of $9,094 in cash, $3,616 in debt assumed and 192,487
shares of the Company's common stock valued at $6,975. Argueso is a
manufacturer and distributor of wax blends for use in the investment casting
industry. Argueso's products are used in a variety of investment casting
applications in industries such as aerospace, power generation and medical.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition:
14
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Current assets ....................................................... $ 8,439
Property, plant and equipment ........................................ 6,235
Intangible assets .................................................... 750
Goodwill ............................................................. 7,843
-------
Total assets acquired ............................................... 23,267
Current liabilities .................................................. 3,582
-------
Net assets acquired ................................................. $19,685
=======
The intangible assets acquired are patents valued at $750 with a 14 year
weighted-average useful life. The $7,843 of goodwill was assigned to the
Specialty Materials and Alloys segment and is not expected to be deductible
for tax purposes.
In 2001, the Company also completed two relatively smaller acquisitions. On
February 6, 2001, the Company and a group of investors acquired substantially
all of the assets and business of AAA Aircraft Supply Co., Inc. (AAA) located
in Windsor Locks, Connecticut for $7,000. The Company's ownership percentage
is 88.75 percent. In connection with the acquisition of AAA, members of AAA's
management and a director of the Company obtained ownership interests in AAA
of 6.25 percent and 5.0 percent, respectively, on the same terms as the
Company. AAA is a North American distributor of fasteners sold to the
aerospace markets. On October 3, 2001, the Company acquired substantially all
the assets and business of J. F. McCaughin Co. located in Rosemead, California
for approximately $2,500. McCaughin is a formulator, manufacturer and
distributor of waxes, supplies and equipment to the investment casting
industry.
On March 14, 2000, the Company acquired all of the outstanding shares of
Avibank Mfg., Inc. (Avibank) based in Burbank, California for $115,923.
Consideration consisted of $112,323 in cash and 110,652 shares of the
Company's common stock in treasury valued at $3,600. Avibank is a manufacturer
of latches, hold open rods, quick release pins, structural panel fasteners,
self-retaining bolts and expandable fasteners for aerospace markets. Avibank,
through its AVK Industrial Products Division, also manufactures threaded
inserts for automotive and industrial markets. The following table summarizes
the estimated fair values of the assets acquired and liabilities assumed at
the date of acquisition:
Current assets ...................................................... $ 25,930
Property, plant and equipment ....................................... 8,431
Intangible assets ................................................... 2,000
Goodwill ............................................................ 88,839
--------
Total assets acquired .............................................. 125,200
Current liabilities ................................................. 9,277
--------
Net assets acquired ................................................ $115,923
========
The intangible assets acquired of $2,000 consist of customer contracts valued
at $1,300 with a five year weighted-average useful life and patents valued at
$700 with a ten year weighted-average useful life. The $88,839 of goodwill was
assigned to the Aerospace Fasteners and Components segment and Engineered
Fasteners and Components segment in the amounts of $44,092 and $44,747,
respectively. The total amount of goodwill is expected to be deductible for
tax purposes.
In 2000, the Company also completed two relatively smaller acquisitions in
Europe. On January 10, 2000, the Company acquired certain operating assets of
ULMA S.p.A. (ULMA) based in Milan, Italy for approximately $2,300. ULMA is a
full range manufacturer of flat, planetary and cylindrical thread roll dies
used in metal forming. In December 2000, the Company acquired certain
operating assets of DACAR S.A. based in Auxerre, France for approximately
$1,600. DACAR is a manufacturer of precision machined components and
structural assemblies used by European aerospace suppliers.
The following unaudited pro forma consolidated results of operations are
presented as if the
15
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Argueso and Avibank acquisitions had been made at the beginning of the periods
presented. The effects of the AAA, McCaughin, ULMA and DACAR acquisitions are
not material and, accordingly, have been excluded from the pro forma
presentation.
Years Ended
December 31
-------------------
2001 2000
-------- --------
Net sales ............................................... $923,617 $910,716
Net earnings ............................................ 21,645 44,527
Basic earnings per common share ......................... 1.66 3.46
Diluted earnings per common share ....................... 1.64 3.38
The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, interest expense on acquisition debt,
shares of common stock issued and the related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the purchase been made at the
beginning of the periods presented or the future results of the combined
operations.
5. ACCOUNTS AND NOTES RECEIVABLE
2001 2000
-------- --------
Trade ................................................... $130,683 $131,619
Notes and other ......................................... 3,860 2,213
-------- --------
134,543 133,832
Less allowance for doubtful receivables ................. 4,880 3,815
-------- --------
$129,663 $130,017
======== ========
6. INVENTORIES
2001 2000
-------- --------
Finished goods .......................................... $ 75,667 $ 70,188
Work-in-process ......................................... 57,592 51,093
Raw materials and supplies .............................. 34,956 34,273
Tools ................................................... 6,936 6,030
-------- --------
$175,151 $161,584
======== ========
7. PROPERTY, PLANT AND EQUIPMENT
2001 2000
-------- --------
Land .................................................... $ 8,117 $ 7,462
Buildings ............................................... 76,504 74,052
Machinery and equipment ................................. 279,590 293,621
Construction in progress ................................ 29,825 18,659
-------- --------
394,036 393,794
Less accumulated depreciation ........................... 167,976 165,162
-------- --------
$226,060 $228,632
======== ========
Depreciation expense was $30,993, $30,654 and $28,613 in 2001, 2000 and 1999,
respectively.
8. NOTES PAYABLE AND CURRENT PORTION OF LONG-TERM DEBT
2001 2000
------- -------
Short-term bank borrowings and notes payable .............. $ 7,603 $ 4,565
Current portion of long-term debt ......................... 12,493 10,052
------- -------
$20,096 $14,617
======= =======
The Company's weighted-average interest rate for short-term bank borrowings
and notes payable was 4.61% and 7.03% as of December 31, 2001 and 2000,
respectively. Short-term lines of credit are made available to the Company by
commercial banks under customary arrangements which require the maintenance of
a satisfactory financial condition by the Company. These lines may be
withdrawn at the discretion of the banks. Unused short-term lines of credit
were $17,485 as of December 31, 2001. The Company also has unused long-term
credit facilities as discussed in Note 10.
16
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
9. ACCRUED EXPENSES
2001 2000
------- -------
Employee compensation and related benefits ................ $38,137 $33,372
Interest .................................................. 7,003 7,062
Environmental ............................................. 3,900 4,400
Other ..................................................... 22,486 20,845
------- -------
$71,526 $65,679
======= =======
10. LONG-TERM DEBT
2001 2000
-------- --------
1996 Note Purchase Agreement,
fixed interest rates of 7.70% to 7.88%................ $ 79,545 $ 85,000
1999 Note Purchase Agreement,
fixed interest rates of 7.75% to 7.85%............... 80,000 80,000
2000 Note Purchase Agreement,
fixed interest rate of 8.37%.......................... 15,000 15,000
1998 Bank Credit Agreement,
variable interest rate, 2.46%
and 7.14% at December 31,
2001 and 2000, respectively........................... 50,000 45,000
Michigan Revenue Bonds, Series
2000, variable interest rate,
1.75% and 4.95% at December
31, 2001 and 2000, respectively....................... 6,000 6,000
Utah Revenue Bonds, Series
1987, variable interest rate,
2.00% and 5.10% at December
31, 2001 and 2000, respectively....................... 5,300 5,300
Note Payable, fixed interest rate of 8.38% ............. 2,167 2,829
Deferred payments, fixed interest rate of 6.0% ......... 1,511 2,203
Term Note payable, variable
interest rate, 4.64% at December 31, 2001............. 2,000 --
Promissory Notes, fixed interest rate of 7.0% .......... 1,448 2,607
Other .................................................. 12,600 9,699
-------- --------
255,571 253,638
Less current installments (included in notes payable) .. 12,493 10,052
-------- --------
$243,078 $243,586
======== ========
Installments due during the next five years are as follows: $12,493, $9,188,
$14,766, $67,329 and $17,279 in 2002 through 2006, respectively.
In 1996, the Company entered into a long-term Note Purchase Agreement with
three insurance companies for $85,000 at fixed interest rates of 7.70 percent
to 7.88 percent due in annual installments from July 1, 2001 to July 1, 2011.
In 1999, the Company entered into a long-term Note Purchase Agreement with
five insurance companies for $80,000 at fixed interest rates of 7.75 percent
to 7.85 percent. Of the total proceeds, $50,000 is due in annual installments
from August 1, 2004 to August 1, 2014 and $30,000 is due on August 1, 2009.
In 2000, the Company entered into a long-term Note Purchase Agreement with one
insurance company for $15,000 at a fixed interest rate of 8.37 percent due in
annual installments from February 28, 2004 to February 29, 2010.
Under the 1998 Bank Credit Agreement, the Company may borrow up to $55,000 in
either United States Dollars or certain currencies in Europe. Borrowings bear
interest at either a) an overnight base rate equal to the higher of the prime
rate of the agent bank or the federal funds rate plus .5 percentage points, b)
a rate in the European currency equal to the effective interbank rate plus a
margin ranging from .225 to .45 percentage points based on the consolidated
Leverage Ratio, as defined, or c) at a rate and term negotiated between each
bank and the Company, as applicable. During 2001 and 2000, the average
interest rate on borrowings outstanding was 4.86 percent and 7.12 percent,
respectively. There were $50,000 in borrowings outstanding under the 1998 Bank
Credit Agreement at December 31, 2001. This agreement expires June 30, 2002.
The Company is required to pay a fee on the borrowed and
17
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
unborrowed amounts of the facility ranging from .1 to .175 percentage points
based on the consolidated Leverage Ratio. As more fully described in Note 19,
the Company utilizes interest rate swap agreements to convert borrowings under
the 1998 Bank Credit Agreement to fixed rate obligations.
On March 10, 2000, the Company entered into the 2000 Bank Credit Agreement to
borrow up to $75,000 in either United States Dollars or certain European
currencies. Borrowings bear interest at either a) an overnight base rate equal
to the higher of the prime rate of the agent bank or the federal funds rate
plus .5 percentage points, b) a rate equal to the effective interbank rate
plus a margin ranging from .75 to 1.30 percentage points based on the
consolidated Leverage Ratio, as defined, or c) at a rate and term negotiated
between the agent bank and the Company, as applicable. During 2001 and 2000,
the average interest rate on borrowings outstanding was 5.66 and 7.36 percent,
respectively. No borrowings were outstanding under the 2000 Bank Credit
Agreement at December 31, 2001 and 2000. This agreement expires March 9, 2005.
The Company is required to pay a fee on unborrowed amounts of the facility
ranging from .175 to .30 percentage points based on the consolidated Leverage
Ratio.
The Michigan Strategic Fund Variable Rate Demand Limited Obligation Revenue
Bonds, Series 2000, were issued to finance the acquisition and installation of
machinery and equipment at a engineered fastener and components segment
manufacturing facility in Canton, Michigan and are to be repaid on February 1,
2010. The Bonds are collateralized by a bank letter of credit. In 2001 and
2000, the average interest rate was 2.81 percent and 4.44 percent,
respectively.
The Utah Industrial Development Revenue Bonds, Series 1987, were issued to
finance the acquisition and improvement of an aerospace fastener and
components segment manufacturing facility in Salt Lake, Utah and are due in
2012. The Bonds are collateralized by a first mortgage on the facility and a
bank letter of credit. In 2001 and 2000, the average interest rate was 2.85
percent and 4.34 percent, respectively.
As part of the 1998 acquisition of SPS Technologies Waterford Company
(formerly, Terry Machine Company), the Company assumed a note payable to a
commercial bank in the amount of approximately $4,300. This note bears
interest at a fixed rate of 8.38 percent and is payable in monthly
installments of $73 (including interest) until September, 2002. A final
installment of $1,700 is due on September 11, 2002. In addition, the former
stockholders of SPS Technologies Waterford Company agreed to accept deferred
payments for a portion of the purchase price aggregating $4,000. The Company
has discounted this liability using a 6.0 percent rate. These amounts are
payable in annual installments of $800 until June 30, 2003.
In connection with the 2001 acquisition of AAA Aircraft Supply Co., Inc., the
Company and a group of investors entered into an agreement to borrow $3,000
from a commercial bank to partially finance the transaction. The note bears
interest at a variable rate plus a margin of 2.50 percentage points. The
average interest rate for 2001 was 6.42%. The note is payable in monthly
installments of $63 beginning on March 1, 2002. The note is collateralized by
the assets of AAA Aircraft Supply, LLC.
In connection with the 1998 acquisition of Greenville Metals, Inc., the former
stockholders accepted promissory notes for a portion of the purchase price
aggregating approximately $5,800.
18
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
The notes bear interest at a fixed rate of 7.0 percent and are payable in
quarterly installments of $290 plus interest until March 31, 2003.
Other debt includes capital leases and other financing collateralized by fixed
assets, along with other unsecured local borrowings.
The Company is subject to a number of restrictive covenants under its various
debt agreements. Covenants associated with the Note Purchase Agreements are
similar to those of the Bank Credit Agreements. The following significant
covenants are currently in place under the Note Purchase Agreements:
maintenance of a consolidated debt-to-total capitalization (shareholders'
equity plus total debt) ratio of not more than 55 percent and maintenance of a
consolidated net worth of at least $200,000 plus 50 percent of adjustable
consolidated net income for quarters ended after December 31, 1998. Under
these covenants, restricted payments, which include all dividends and
purchases or retirements of capital stock, made by the Company may not exceed
$40,000 plus 50 percent of consolidated net income (or minus 100 percent of
the consolidated net loss) from January 1, 1999 to the date of the restricted
payment. As of December 31, 2001, the amount of retained earnings available
for future restricted payments is $89,000. Certain of the Company's debt
agreements contain cross default and cross acceleration provisions. At
December 31, 2001, the Company was in compliance with all covenants. As of
December 31, 2001, under the terms of the existing credit agreements, the
Company is permitted to incur an additional $168,000 in debt.
11. COMMITMENTS AND CONTINGENCIES
Leases
Certain of the Company's operations are conducted from leased facilities, all
of which are under operating leases which expire over the next 11 years. The
Company also has operating leases covering certain machinery and equipment.
Substantially all leases provide for the Company to pay operating expenses.
Rental expense incurred was $11,882, $9,895 and $8,077 in 2001, 2000 and 1999,
respectively.
At December 31, 2001, the future minimum annual rentals on non-cancelable
leases which have initial or remaining terms of more than one year aggregated
$72,754. The minimum payments over the next five years are as follows:
$12,475, $11,146, $10,372, $9,629 and $8,263 in 2002 through 2006,
respectively. During 2001, the Company sold machinery and equipment with a
book value of $15,166 for $20,000 and leased the equipment back under a five
year operating lease. The gain on the transaction was deferred and will be
amortized over the lease term.
Environmental
The Company has been identified as a potentially responsible party by various
federal and state authorities for clean up or removal of waste from various
disposal sites. At December 31, 2001, the Company had an accrued liability of
$3,900 for environmental remediation which represents management's best
estimate of the undiscounted costs related to environmental remediation which
are considered probable and can be reasonably estimated. The Company has not
included any insurance recovery in the accrued environmental liability. The
measurement of the liability is evaluated quarterly based on currently
available information. Management believes the overall costs of environmental
remediation will be incurred over an extended period of time. As the scope of
the Company's environmental liability becomes more clearly defined, it is
possible that additional reserves may be necessary. Accordingly, it is
19
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
possible that the Company's results of operations in future quarterly or
annual periods could be materially affected. Management does not anticipate
that its consolidated financial condition will be materially affected by
environmental remediation costs in excess of amounts accrued.
The Company has established procedures for identifying environmental issues at
its manufacturing facilities. Environmental and safety coordinators, a
designated position at most of the operating facilities, are familiar with
environmental laws and regulations and serve as resources for the
identification and resolution of environmental issues. The Company also has an
environmental audit program, which is used to identify and resolve potential
environmental issues at the operating facilities. Through these programs, the
Company monitors applicable regulatory developments and manages environmental
issues.
Litigation
The Company is involved in lawsuits, claims, investigations and proceedings,
including commercial, environmental and employment matters, which arise in the
ordinary course of business. Although the final outcome of these matters
cannot be determined, it is management's opinion that the final resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
20
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
12. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000 1999
------- ------- -------
Cash paid for:
Interest.......................................................................................... $19,933 $21,843 $14,535
Income taxes...................................................................................... 9,891 12,819 15,273
Noncash Transactions:
Issuance (refund) of treasury shares for businesses acquired...................................... 6,975 3,600 (1,121)
Debt assumed with businesses acquired............................................................. 3,616 483 15,018
Acquisition of treasury shares for stock options exercised........................................ 2,541 1,965 1,269
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Company reports the components of comprehensive income (loss), total
comprehensive income (loss) and total accumulated other comprehensive income
(loss) in the Statements of Consolidated Shareholders' Equity. The income tax
effects and accumulated balances for each component of comprehensive income
(loss) are as follows:
Total
Cumulative Fair Minimum Other
Translation Value of Pension Comprehensive
Adjustment Derivatives Liability Income (Loss)
----------- ----------- --------- -------------
December 31, 1998 ....................................................... $ (9,192) $ -- $ (2,025) $(11,217)
Gross Changes ........................................................... (9,187) -- 1,958 (7,229)
Deferred Income Tax Effects ............................................. -- -- (665) (665)
-------- ------- -------- --------
December 31,1999 ........................................................ (18,379) -- (732) (19,111)
Gross Changes ........................................................... (7,740) -- 21 (7,719)
Deferred Income Tax Effects -- -- (7) (7)
-------- ------- -------- --------
December 31, 2000 ....................................................... (26,119) -- (718) (26,837)
Gross Changes ........................................................... (5,651) (3,410) (23,269) (32,330)
Deferred Income Tax Effects ............................................. -- 983 7,775 8,758
Cumulative Accounting Changes-Gross ..................................... -- 89 -- 89
Cumulative Accounting Changes-Deferred Income Tax Effects ............... -- 161 -- 161
-------- ------- -------- --------
December 31, 2001 ....................................................... $(31,770) $(2,177) $(16,212) $(50,159)
======== ======= ======== ========
21
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
14. INCOME TAXES
The components of the provision for income taxes were as follows:
2001 2000 1999
------ ------- -------
Currently payable:
United States
Federal................................ $5,050 $ 8,246 $12,461
State and local........................ 911 1,163 1,938
Non-United States........................ 961 3,672 3,698
------ ------- -------
6,922 13,081 18,097
------ ------- -------
Deferred:
United States
Federal................................ 1,660 4,726 5,249
State and local........................ 80 395 504
Non-United States........................ 1,138 1,498 (250)
------ ------- -------
2,878 6,619 5,503
------ ------- -------
$9,800 $19,700 $23,600
====== ======= =======
The income tax benefits of employee stock option compensation expense for tax
purposes in excess of amounts recognized for financial reporting purposes
which were credited to additional paid-in capital were $1,895 in 2001, $1,930
in 2000 and $1,358 in 1999. The tax expense that results from allocating
certain tax benefits to reduce goodwill of an acquired entity was $255 in
1999.
The components of earnings before income taxes were as follows:
2001 2000 1999
------- ------- -------
United States............................ $21,440 $44,174 $55,766
Non-United States........................ 9,930 19,905 19,054
------- ------- -------
$31,370 $64,079 $74,820
======= ======= =======
The components of the deferred income tax liability (asset) on the
consolidated balance sheets were as follows:
2001 2000
-------- --------
Depreciation .......................................... $ 24,333 $ 23,432
Intangibles ........................................... 3,465 4,042
Pension benefits ...................................... -- 5,905
Other, net ............................................ 1,618 1,504
-------- --------
Deferred income tax liability ........................ 29,416 34,883
-------- --------
Inventory ............................................. (6,852) (7,005)
Pension benefits ...................................... (1,418) --
Post-retirement benefits other than pensions .......... (3,657) (3,892)
Other employee benefits and compensation .............. (11,643) (7,903)
Accrued expenses ...................................... (2,010) (2,230)
Net operating loss carryforwards ...................... (4,682) (5,454)
Capital loss carryforwards ............................ (1,043) (3,434)
Valuation allowances .................................. 8,089 8,407
-------- --------
Deferred income tax asset ............................ (23,216) (21,511)
-------- --------
Net deferred income tax liability (asset)........... $ 6,200 $ 13,372
======== ========
At December 31, 2001 the Company had net operating loss (NOL) carryforwards
available in Brazil of $9,800, England of $1,900, Australia of $1,500 and
France of $300. The French NOL expires in 2006 while all other NOLs can be
carried forward indefinitely with no expiration dates. The NOL carryforward
available in England relates to operating losses of a business acquired in
1998. These losses must be used to offset future taxable income of the
acquired business and are not available to offset taxable income of other
subsidiaries located in England. The Company also has capital loss
carryforwards of $3,500 available in England with no expiration dates. These
capital losses must be used to offset future capital gains and are not
available to offset taxable operating income. The valuation allowances at
December 31, 2001 and 2000 relate to certain state and non-United States tax
jurisdictions. The net reduction in
22
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
the valuation allowance for 2001 was $318. The valuation allowance was reduced
by $250 due to changes in currency exchange rates and $357 due to decreases in
the net deferred income tax assets in certain state and Brazilian tax
jurisdictions and increased by $289 due to losses by certain Brazilian and
French subsidiaries.
The following sets forth the differences between the provision for income
taxes computed at the United States federal statutory income tax rate of 35
percent and that reported for financial statement purposes:
2001 2000 1999
------- ------- -------
Provision computed at the
United States federal statutory income
tax rate................................ $10,980 $22,428 $26,187
Earnings of certain
subsidiaries taxed at different rates... (2,390) (3,195) (3,526)
State income tax, net of federal benefit.. 644 1,136 1,588
Non-deductible goodwill amortization
expense................................. 1,003 916 812
Non-US net operating losses with no
benefit provided........................ 289 102 979
Change in valuation allowance............. (357) (243) (2,428)
General business credits.................. (40) (158) (180)
Other, net................................ (329) (1,286) 168
------- ------- -------
Provision for income taxes................ $ 9,800 $19,700 $23,600
======= ======= =======
United States income taxes have not been provided on unremitted earnings of
certain subsidiaries located outside the continental United States of
approximately $68,300 because, in management's opinion, such earnings have
been indefinitely reinvested in these operations, will be remitted in a tax-
free liquidation, or will be remitted as dividends with taxes substantially
offset by foreign tax credits. It is not practical to determine the amount of
unrecognized deferred tax liabilities for temporary differences related to
investments in these non-United States subsidiaries.
15. RETIREMENT PLANS AND OTHER BENEFITS
The Company sponsors a number of defined contribution plans. Participation in
the plans is available to substantially all United States salaried and hourly
employees. Participants may make voluntary pre-tax or after-tax contributions
to the plan up to 20 percent of their compensation. Primarily, the Company
contributes a percentage of the employees' contributions to the plans.
However, certain subsidiaries contribute a fixed percentage of the employees'
compensation. The Company's contribution expense for these plans was $2,815 in
2001, $1,264 in 2000 and $1,148 in 1999. The increase in the expense for 2001
compared to 2000 is attributed to certain recently acquired businesses
starting their participation in the Company's defined contribution plans on
January 1, 2001.
The Company sponsors a number of defined benefit pension plans covering
substantially all employees and a defined benefit plan covering non-employee
directors. The benefits of such plans are based primarily on years of service
and compensation. Plan assets consist principally of common stocks, pooled
equity funds, corporate bonds and United States Government obligations. At
December 31, 2001 and 2000, the plans' assets included 398,264 and 403,264
shares of the Company's common stock with fair values of $13,907 and $22,104,
respectively. There were no dividends received from Company stock for the
years ended December 31, 2001, 2000 and 1999.
The following provides a reconciliation of benefit obligations, plan assets,
funded status and the amounts recognized in the statement of financial
position of these plans at December 31, 2001 and 2000:
23
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
2001 2000
-------- --------
Change in benefit obligation:
Benefit obligation at January 1...................... $171,071 $168,708
Service cost......................................... 7,925 7,575
Interest cost........................................ 11,309 11,313
Plan participants' contributions..................... 853 878
Amendments........................................... 972 632
Actuarial loss (gain)................................ 4,935 2,309
Acquisitions......................................... -- 2,456
Special termination benefits......................... -- 583
Benefits paid........................................ (10,838) (16,917)
Foreign currency exchange rate
changes............................................. (1,304) (6,466)
-------- --------
Benefit obligation at
December 31......................................... $184,923 $171,071
======== ========
Change in plan assets:
Fair value of plan assets at January 1............... $168,400 $170,790
Actual return on plan assets......................... (16,558) 15,354
Employer contributions............................... 9,241 3,153
Plan participants' contributions..................... 853 878
Acquisitions......................................... -- 2,219
Benefits paid........................................ (10,838) (16,917)
Foreign currency exchange rate changes............... (2,566) (7,077)
-------- --------
Fair value of plan assets at end of year............. $148,532 $168,400
======== ========
Reconciliation of funded status:
Funded status........................................ $(36,391) $ (2,671)
Unrecognized net actuarial loss (gain)............... 50,782 15,856
Unrecognized prior service cost (gain)............... (1,719) (2,687)
Unrecognized transition obligation (asset)........... (1,064) (1,579)
-------- --------
Net pre-tax amount recognized........................ $ 11,608 $ 8,919
======== ========
Amounts recognized in the statement of financial
position consist of:
Prepaid benefit cost ................................ $ 15,643 $ 12,234
Accrued benefit long-term liability.................. (31,929) (6,745)
Intangible asset..................................... 3,537 2,342
Accumulated other comprehensive income............... 24,357 1,088
-------- --------
Net pre-tax amount recognized ........................ $ 11,608 $ 8,919
======== ========
The plans which have accumulated obligations in excess of plan assets have
obligations of $168,156 and assets of $129,841 and are therefore underfunded
by $38,315 at December 31, 2001.
The assumptions used as of December 31, 2001, 2000 and 1999, in determining
the net pension cost and net pension liability for United States plans were as
follows:
2001 2000 1999
----- ----- -----
Discount rate............................... 7.25% 7.60% 8.00%
Rate of return on plan assets............... 9.50% 9.50% 9.00%
Rate of future compensation increase........ 4.50% 4.50% 5.00%
The assumptions used in determining the net pension cost and pension liability
for non-United States pension plans were based on the economic environment of
each applicable country. The discount rate was assumed to be 6.0 percent. The
range of other assumptions used as of December 31, 2001 was as follows: rate
of return on plan assets: 7.0 to 7.5 percent; rate of future compensation
increase: 3.5 to 4.0 percent.
The components of the net periodic pension cost incurred were as follows:
2001 2000 1999
-------- -------- --------
Net periodic benefit cost
(income):
Service cost........................... $ 7,925 $ 7,575 $ 7,774
Interest cost.......................... 11,309 11,313 10,548
Expected return on
plan assets.......................... (13,856) (13,472) (14,165)
Amortization of prior
service cost (gain).................. (499) (575) (596)
Amortization of
transition obligation
(asset).............................. (468) (460) (485)
Amortization of net
actuarial loss (gain)................ 318 783 388
-------- -------- --------
Net periodic benefit
cost................................. 4,729 5,164 3,464
Curtailment and
settlement expense................... 1,553 1,852 --
-------- -------- --------
Total expense.......................... $ 6,282 $ 7,016 $ 3,464
======== ======== ========
24
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
In 2001, a curtailment expense of $1,553 was recognized due to termination of
employees' services earlier than expected at plants affected by the Company's
2001 restructuring plan. In 2000, a settlement expense of $1,852 was
recognized due to the level of participation in the Company's early retirement
window with special termination benefits offered to plan participants in 2000.
Other Postretirement Benefits
In addition to providing pension benefits, the Company and certain of its
subsidiaries provide postretirement health care and life insurance benefits.
All full-time, non-bargaining unit employees hired prior to January 1, 1990
are eligible for medical benefits under a defined dollar benefit plan if they
retire with at least 10 years of service and meet certain age requirements.
Generally, Company-provided medical benefits terminate when covered
individuals become eligible for Medicare benefits. The medical plan is
contributory, with retiree contributions adjusted annually. The life insurance
plan covers substantially all employees who retire from full-time employment
after age 55 with at least 10 years of service. The life insurance plan is
non-contributory. Both of the Company's postretirement plans are unfunded.
An assumed discount rate of 7.25 percent and 7.60 percent was used to
determine the accumulated postretirement benefit obligation at December 31,
2001 and 2000, respectively.
The following provides a reconciliation of benefit obligations and funded
status of these plans at December 31, 2001 and 2000:
2001 2000
-------- --------
Change in benefit obligation:
Benefit obligation at January 1 ..................... $ 9,236 $ 7,844
Service cost ........................................ 162 201
Interest cost ....................................... 587 669
Plan participants' contributions .................... 145 147
Plan amendments ..................................... (1,199) --
Actuarial loss (gain) ............................... (727) 1,472
Benefit payments .................................... (1,032) (1,097)
-------- --------
Benefit obligation at
December 31........................................ $ 7,172 $ 9,236
======== ========
Reconciliation of funded status:
Funded status ....................................... $ (7,172) $ (9,236)
Unrecognized net actuarial
loss (gain)........................................ 48 775
Unrecognized prior service
cost (gain)........................................ (3,326) (2,658)
-------- --------
Accrued benefit obligation .......................... $(10,450) $(11,119)
======== ========
The components of the net periodic postretirement benefit cost incurred were
as follows:
2001 2000 1999
----- ----- -----
Net periodic benefit cost
(income):
Service cost........................................ $ 162 $ 201 $ 205
Interest cost....................................... 587 669 569
Amortization of prior service
cost (gain)....................................... (531) (531) (531)
----- ----- -----
Net periodic benefit cost........................... $ 218 $ 339 $ 243
===== ===== =====
An 8.5 percent annual rate of increase in the per capita costs of covered
health care benefits was assumed for 2001. Increasing or decreasing the
assumed health care cost trend rates by one percentage point in each year
would change the accumulated postretirement benefit obligation as of December
31, 2001 by $24 and change the aggregate of the service and interest
components of net periodic postretirement benefit cost for 2001 by $4.
25
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
16. STOCK OPTIONS
The Company grants stock options under the 1988 Long Term Incentive Stock Plan
which continues to the year 2009. Under the plan, the Company may grant up to
an aggregate of 3,925,000 shares in either stock options (fixed price or
variable price) or restricted shares to officers and key employees.
Additionally, non-employee directors may elect to receive discounted price
options in lieu of all or a portion of their annual retainer fee. The number
of such options, if elected, is based upon market value at date of the grant.
Also, the Company granted 23,000 and 37,000 stock options in 2001 and 2000,
respectively, to certain employees pursuant to contractual agreements
negotiated at the time of initial hire. These options were not granted under
the 1988 Long Term Incentive Stock Plan. The exercise price of outstanding
options is determined as follows: fixed price options are granted at market
value on date of the grant and discounted price options are granted at par
value of the common stock on date of the grant. The options' maximum term is
10 years. Fixed price options granted vest over a five-year period and
discounted price options granted vest after one year.
The weighted-average fair value of options granted per share was $21.81,
$14.78 and $17.52 in 2001, 2000 and 1999, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model and the weighted-average assumptions used for grants were as
follows: expected volatility of 34 percent in 2001 and 33 percent in 2000 and
1999, expected option life of six years in 2001, 2000 and 1999, and no
expected dividend payments over the life of the option. The expected weighted-
average risk-free interest rates of 5.1 percent in 2001, 6.8 percent in 2000
and 5.5 percent in 1999 were used.
At December 31, 2001, 107 individuals held options to purchase an aggregate of
1,052,754 shares (fixed 1,034,204; discounted 18,550). No variable price
options were outstanding at December 31, 2001.
Additional information about options outstanding at December 31, 2001 is as
follows:
Options Outstanding Options Exercisable
----------------------------------------------------------------- -------------------------------------------
Weighted-
Weighted- Average Weighted-
Exercise Price Number of Average Contractual Number of Average
Range Shares Exercise Price Life (years) Shares Exercise Price
- --------------------- --------------------- --------------------- --------------------- --------------------- ---------------------
$.50 (Discounted) 18,550 $ .50 5.0 17,174 $ .50
$10.81-$14.22 149,442 12.50 2.5 149,442 12.50
$19.75-$27.00 84,332 26.20 4.0 84,332 26.20
$30.97-$45.59 619,530 37.42 6.9 300,830 37.72
$46.74-$54.81 180,900 50.85 9.0 9,000 51.78
--------------------- ---------------------
1,052,754 560,778
===================== =====================
26
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Changes in shares under option were as follows:
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
Options outstanding at beginning of year ............... 1,086,026 $29.30 1,149,108 $26.65 1,067,074 $21.58
Additions (deductions):
Options granted ....................................... 172,376 50.37 162,125 32.13 267,800 40.65
Options exercised ..................................... (185,548) 17.34 (208,507) 16.04 (163,066) 14.68
Options expired or terminated ......................... (20,100) 40.83 (16,700) 39.35 (22,700) 35.95
--------- --------- ---------
Options outstanding at end of year ..................... 1,052,754 34.64 1,086,026 29.30 1,149,108 26.65
========= ========= =========
Options exercisable at end of year ..................... 560,778 28.35 571,800 22.61 586,307 16.99
Shares available for future option grants and stock
awards................................................ 232,964 125,632 100,803
Under the 1988 Long Term Incentive Stock Plan, the Company has issued 52,913
restricted shares of which 490 restricted shares were granted in 2001. Shares
granted become free of any restrictions at a rate of 20 percent per year or in
full upon retirement. As of December 31, 2001, 14,314 shares issued remain
subject to restrictions under this plan.
Under the 2000 Restricted Stock Award Plan, the Company may grant up to an
aggregate of 100,000 restricted shares. Under this plan, the Company has
issued 10,751 restricted shares, all of which were granted in 2000. Shares
granted become free of any restrictions at a rate of 20 percent per year or in
full upon retirement. As of December 31, 2001, 7,751 shares issued remain
subject to restrictions under this plan.
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." The Company will continue to apply the provisions of Accounting
Principles Board Opinion 25 in accounting for its stock option plans. If the
Company had elected to recognize compensation expense based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123, net
earnings and earnings per share would have been reduced to the pro forma
amounts as follows:
Years Ended December 31
2001 2000 1999
------- ------- -------
Net earnings.................................. $19,669 $42,848 $49,791
Basic earnings per common share............... 1.51 3.38 3.93
Diluted earnings per common share............. 1.49 3.30 3.84
27
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
17. EARNINGS PER SHARE
Basic earnings per common share is calculated using the average shares of
common stock outstanding, while diluted earnings per common share reflects the
potential dilution that could occur if stock options were exercised. Earnings
per share are computed as follows:
2001 2000 1999
----------- ----------- -----------
Net earnings........................................................................... $ 21,570 $ 44,379 $ 51,220
=========== =========== ===========
Average shares of common stock outstanding used to compute basic earnings per common
share................................................................................ 13,015,748 12,691,781 12,659,920
Additional common shares to be issued assuming exercise of stock options, net of shares
assumed reacquired................................................................... 209,389 279,067 295,138
----------- ----------- -----------
Shares used to compute dilutive effect of stock options................................ 13,225,137 12,970,848 12,955,058
=========== =========== ===========
Basic earnings per common share........................................................ $ 1.66 $ 3.50 $ 4.05
----------- ----------- -----------
Diluted earnings per common share...................................................... $ 1.63 $ 3.42 $ 3.95
=========== =========== ===========
Options to purchase 180,900 shares of common stock at a weighted-average price
of $50.85 per share were outstanding during 2001 but were not included in the
computation of diluted EPS in 2001 because the options' exercise price was
greater than the average market price of the common shares. These options
expire on various dates between December 15, 2008 and July 31, 2011.
18. PREFERRED STOCK PURCHASE RIGHTS
As provided in the Rights Agreement dated November 21, 1998, the Board of
Directors declared a dividend distribution of one Right for each outstanding
share of common stock. Under the 1998 Rights Agreement, each Right may be
exercised, under certain conditions, to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Shares, par value $1.00 per share,
for $250, subject to adjustment. The Rights are not exercisable or
transferable apart from the common stock until 10 business days after a public
announcement that a person or group has acquired or intends to commence a
tender offer for 10 percent or more of the outstanding common stock. The Board
of Directors may, at its option and under certain conditions, exchange all of
the Rights not owned by the 10 percent holder for an equal number of shares of
common stock. The Rights, which expire on November 21, 2008, unless extended
by the Company's Board of Directors, do not have voting or dividend rights and
may be redeemed by the Company at a price of $.01 per Right at any time until
10 business days following the acquisition of 10 percent or more of the
Company's common stock.
In the event that the Company is acquired in a merger or other business
combination transaction, or 50 percent or more of its assets or earning power
is sold, each Right will entitle the holder to receive from the surviving or
acquiring corporation, for the exercise price, common stock having a market
value equal to two times the exercise price of the Right. Alternatively, if a
10 percent holder were to acquire the Company in a business combination
transaction in which the Company and its stock survive, or were to engage in
certain "self-dealing" transactions, each Right not owned by the 10 percent
holder would have the right to receive common shares having a market value of
two times the exercise price of the Right.
28
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
19. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
2001
---------------------
Carrying Fair
Amount Value
--------- ---------
Cash and cash
equivalents ........................................ $ 59,948 $ 59,948
Long-term debt, including
current portion .................................... (255,571) (275,687)
Interest rate and currency
swaps .............................................. (2,968) (2,968)
Forward exchange
contracts .......................................... (352) (352)
2000
---------------------
Carrying Fair
Amount Value
--------- ---------
Cash and cash
equivalents ........................................ $ 31,933 $ 31,933
Long-term debt, including
current portion .................................... (253,638) (275,740)
Interest rate and currency
swaps .............................................. -- 1,377
Forward exchange
contracts .......................................... -- (1,288)
The methods and assumptions used to estimate the fair value of each class of
financial instruments and additional information related to these financial
instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt
The fair value of fixed rate long-term debt was estimated at the discounted
amount of future cash flow using the Company's year-end incremental rate of
borrowing for similar debt. The fair value of variable rate debt approximates
its carrying value.
Interest Rate and Currency Swaps
The fair values of the interest rate and currency swap agreements are the
estimated amounts that the banks would receive or pay to terminate the swap
agreements at December 31, 2001 and 2000. The notional principal amounts of
interest rate swap agreements outstanding were $50,000 at December 31, 2001
and 2000. In November 2000, the Company entered into interest rate swap
agreements which effectively converted $30,000 of its variable rate
obligations to an average fixed rate of 7.10 percent. The 2000 agreements
expire in November 2005. In November 1998, the Company entered into interest
rate swap agreements which effectively converted $20,000 of its variable rate
obligations to an average fixed rate of 5.69 percent. The 1998 agreements
expire in November 2003. In 1998, the Company entered into a currency swap
agreement to exchange British pounds (18,100) for United States dollars
(30,046). The Company was required to make British pound payments on a
quarterly basis at a fixed rate of 8 percent in exchange for United States
dollar receipts at a fixed rate of 6.785 percent. The Company settled this
swap agreement on November 29, 2001. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the swap agreements. The
Company does not anticipate nonperformance by the counterparties who are major
financial institutions.
Forward Exchange Contracts
At December 31, 2001 and 2000, the Company had $44,967 and $46,688,
respectively, of forward foreign currency exchange contracts outstanding.
These contracts are primarily in British pounds, Euros and Canadian dollars
and mature within 30 days. The fair value of these contracts is not material.
At December 31, 2001, the Company had additional forward exchange contracts to
purchase $11,733 of foreign currencies (British pounds and Euros) with
29
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
maturities ranging from January 2, 2002 to December 31, 2003 with a weighted
average maturity of 318 days. At December 31, 2000, the Company had additional
forward exchange contracts to purchase $19,029 of foreign currencies (Canadian
Dollars and Euros) with maturities ranging from January 2, 2001 to December
27, 2001 with a weighted average maturity of 166 days. The fair value of these
additional foreign currency contracts have been estimated by valuing the net
position of the contracts using the applicable spot rates and forward rates as
of the reporting dates. The counterparties of all exchange contracts are major
financial institutions, therefore, management anticipates full performance.
Standby Letters of Credit
The Company is contingently liable under standby letters of credit totaling
$17,762 and $19,004 at December 31, 2001 and 2000, respectively. The fair
value of these standby letters of credit is not material. The Company's
management does not expect any material losses to result from these standby
letters of credit because performance is not expected to be required.
20. RESEARCH AND DEVELOPMENT
Research and development costs incurred were $8,401, $7,319 and $6,338 for
2001, 2000 and 1999, respectively.
21. SEGMENTS AND RELATED INFORMATION
The Company has six business groups which have separate management teams that
report operating results regularly that are reviewed by the chief operating
decision makers of the Company. Certain business groups have been aggregated
into the same reportable segment because they have similar products and
services, production processes, types of customers and distribution methods
and their long-term financial performance is affected by similar economic
conditions.
The Company has four reportable segments: Aerospace Fasteners and Components,
Engineered Fasteners and Components, Specialty Materials & Alloys and Magnetic
Products. The Aerospace Fasteners and Components segment consists of two
business groups which produce aerospace fasteners and components for critical
applications in the aerospace market.
The Engineered Fasteners and Components segment consists of two business
groups which produce precision fasteners and components for critical
applications in the automotive and industrial machinery markets. The Specialty
Materials & Alloys segment produces specialty metals, superalloys and wax
blends for aerospace, industrial gas turbine and medical applications. The
Magnetic Products segment produces magnetic materials and products used in
automotive, aerospace, reprographic, computer and advertising specialty
markets.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on operating earnings of the respective segments. No single customer or
group under common control represented 10% or more of the Company's net sales
during 2001, 2000 and 1999.
For geographic area disclosure purposes, the Company considers property, plant
and equipment and other assets, as disclosed in the Consolidated Balance
Sheets, to be long-lived assets. The other geographic areas consist
principally of Australia, Canada, China, France, Italy, Japan, Mexico and
Singapore.
30
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Segments Information
2001 2000 1999
-------- -------- --------
Net sales:
Aerospace Fasteners and Components............................................................. $352,859 $303,908 $309,576
Engineered Fasteners and Components............................................................ 278,948 303,037 232,783
Specialty Materials & Alloys................................................................... 166,709 127,424 107,192
Magnetic Products.............................................................................. 119,590 138,383 138,110
-------- -------- --------
Net sales...................................................................................... $918,106 $872,752 $787,661
======== ======== ========
Operating earnings:
Aerospace Fasteners and Components............................................................. $ 35,106 $ 36,830 $ 54,557
Engineered Fasteners and Components............................................................ 7,861 25,108 15,549
Specialty Materials & Alloys................................................................... 16,509 17,376 13,670
Magnetic Products.............................................................................. 4,196 15,434 17,559
Unallocated Corporate Costs.................................................................... (12,500) (11,360) (10,500)
-------- -------- --------
Operating earnings ............................................................................ $ 51,172 $ 83,388 $ 90,835
======== ======== ========
Total assets:
Aerospace Fasteners and Components............................................................. $322,396 $299,750 $244,159
Engineered Fasteners and Components............................................................ 307,162 319,659 258,760
Specialty Materials & Alloys................................................................... 108,369 78,958 77,278
Magnetic Products.............................................................................. 112,852 112,155 120,767
-------- -------- --------
Total assets................................................................................... $850,779 $810,522 $700,964
======== ======== ========
Depreciation and Amortization and Capital Additions
Depreciation and
Amortization Capital Additions
---------------------------- ----------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- -------
Aerospace Fasteners and Components ................................. $13,357 $12,976 $12,233 $15,599 $11,640 $12,889
Engineered Fasteners and Components ................................ 13,085 13,248 10,980 13,786 15,067 14,952
Specialty Materials & Alloys ....................................... 3,974 2,941 2,578 9,395 2,880 7,907
Magnetic Products .................................................. 7,259 7,571 7,824 3,484 2,398 2,413
------- ------- ------- ------- ------- -------
Total ............................................................. $37,675 $36,736 $33,615 $42,264 $31,985 $38,161
======= ======= ======= ======= ======= =======
31
Notes to Consolidated Financial Statements (continued)
(Thousands of dollars, except share data)
Geographic Areas
2001 2000 1999
-------- -------- --------
Net sales:
United States.................................................................................. $698,454 $654,832 $558,378
England and Ireland............................................................................ 145,342 159,533 182,457
Brazil......................................................................................... 21,936 22,675 15,157
Other.......................................................................................... 52,374 35,712 31,669
-------- -------- --------
Net sales...................................................................................... $918,106 $872,752 $787,661
======== ======== ========
Long-lived assets:
United States.................................................................................. $351,249 $347,475 $250,715
England and Ireland............................................................................ 90,998 97,538 98,987
Brazil......................................................................................... 7,159 7,257 7,848
Other.......................................................................................... 8,095 8,641 10,265
-------- -------- --------
Total long-lived assets........................................................................ $457,501 $460,911 $367,815
======== ======== ========
32
Report of Independent Accountants
The Shareholders and Board of Directors
SPS Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of SPS
Technologies, Inc. and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 13, 2002
33