69
LOGO
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CORPORATE OFFICES
101 Greenwood Avenue, Suite 470
Jenkintown, Pennsylvania 19046
(215) 517-2000
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U.S.
MANUFACTURING
PLANTS
Santa Ana, California Norfolk, Nebraska Jenkintown, Pennsylvania
Marengo, Illinois Ogallala, Nebraska Sevierville, Tennessee
Muskegon, Michigan Cleveland, Ohio Salt Lake City, Utah
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SUBSIDIARIES AND
*AFFILIATES
The Arnold *National-Arnold Standco Canada, Ltd.
Engineering Co. Magnetics Company Toronto, Canada
Marengo, Illinois Adelanto, California
Norfolk, Nebraska Unbrako Mexicana, S.A.
Ogallala, Nebraska *Pacific Products de C.V.
Sevierville, Tennessee Limited Mexico City, Mexico
Singapore
Cannon-Muskegon Tokyo, Japan Unbrako Pty. Limited
Corporation Melbourne, Australia
Muskegon, Michigan *Precision Fasteners
Limited Unbrako Schrauben
Ferre Plana, S.A. Bombay, India GmbH
Barcelona, Spain Koblenz, Germany
S.P.S. International
*Metalac S.A. Indstria Limited
e Commercio Shannon, Ireland
Sao Paulo, Brazil
SPS Technologies
Limited
Birmingham, England
Coventry, England
Leicester, England
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70
(PHOTO)
Building on the strength of its technology and product quality, SPS
Technologies has been a leading supplier of industrial and aerospace
fasteners for more than 90 years. The Company was among the first producers
of fasteners for commercial and military aircraft, and through its Aerospace
Products Division continues to provide the industry high-strength bolts,
nuts, screws and precision components. Its Industrial Products Division
supplies engineered fasteners to makers of automobiles, trucks, diesel
engines and farm and construction equipment. The Unbrako Products Division
provides socket screws and other fasteners for industrial machinery and
equipment. Through its Cannon-Muskegon subsidiary, SPS also provides
superalloys for medical applications, aerospace and industrial gas turbine
engine components and other parts produced by investment casting. The Arnold
Engineering Co. specializes in magnetic materials and precision foil and
strip products for automobiles, aircraft, power supplies, electrical
equipment and electronic security systems. Its joint-venture National-Arnold
Magnetics Company supplies soft magnetic tape-wound core products for
electrical and electronic equipment. SPS has production facilities and a
network of manufacturing and marketing affiliates in 12 countries. The
Company is respected throughout the world for its innovative solutions to
engineering problems and the quality and reliability of its products.
71
TO OUR SHAREHOLDERS 1993 was a bad year for SPS Technologies.
Sales fell by 11% to $319.1 million, and SPS
had a net loss of $31.0 million or $6.07 per
share compared to a net loss of $7.0 million
or $1.37 per share in 1992 before the effect
of cumulative accounting changes. Total debt
increased by $18.7 million to $89.2 million,
and Shareholders' Equity decreased to $102.8
million from $142.6 million in 1992. Because
(PHOTO) of these losses and deteriorating financial
conditions, the Board of Directors on
December 14, 1993 suspended dividend
payments to shareholders.
The SPS Board of Directors elected me
Chairman of the Board and Chief Executive
Officer on December 1, 1993. Prior to that,
I had been President and Chief Operating
Officer of Watts Industries, Inc., a
manufacturer of valve products.
With the losses SPS has suffered over the past several years, it is
evident that SPS has had and continues to have significant problems. One
of the principal problems was excess corporate staff and too many layers
of management, which consumed a disproportionate share of the Company's
profits and kept top management distant from operations.
Another problem was the diversion of investment and management focus
from the Company's core fastener business. SPS entered the fastener market
in 1906, and the Company was built principally on the success of its
aerospace, industrial and OEM fasteners. Yet, investments needed in SPS'
fastener business to maintain its manufacturing and technical superiority
were channeled elsewhere. Furthermore, several fastener businesses were
put up for sale, which hurt their reputation with key customers and put
these businesses at a competitive disadvantage. With these fundamental
problems adversely impacting our core fastener business, the significant
decline in the aerospace fastener market resulted in factories being
closed, operations consolidated, large reductions in the number of people
employed and significant operating losses.
The first step in reorganizing SPS was to recognize the strength of
our core fastener business and retain those operations which previously
had been put up for sale. The next step was to downsize the corporate
staff located in Newtown, Pennsylvania, from 167 to 26. Some of this
reduction has been accomplished by reassigning people to operating
divisions when requested, and the remainder has been accomplished by
termination of employment. The Newtown office building is up for sale, and
the Company's jet airplane has been sold. The remaining downsized
corporate staff has been relocated to part of a leased floor in an office
building near the Jenkintown, Pennsylvania plant. The benefits from these
actions are not all financial. A positive cultural change has occurred
whereby attention is focused on operating issues instead of corporate
issues. This has resulted in an empowerment of our operating people, which
will enable them to make operating decisions that will benefit our
businesses and our shareholders.
72
Unfortunately, SPS' excess overhead expenses were not limited to the
corporate staff. There were too many people whose jobs were not directly
related to manufacturing, selling products and satisfying our customers.
On January 5, 1994, we announced a reduction of over 200 non-direct
employees (or approximately 10% of SPS' total non-direct work force),
which now has been accomplished. The cost benefits of this action will
have a favorable effect on our future financial results beginning in the
second quarter of 1994.
Part of the investment resources that were diverted from our core
fastener business went to the Assembly Systems Division, which
manufactures computer-controlled fastener tightening equipment and
competes with large machine tool equipment manufacturers. After many years
in this business, SPS has attained only a small market position and has
accumulated 5 year operating losses totaling $11.6 million. We have made
the decision to either sell the Assembly Systems Division or liquidate the
tightening systems part of this business and continue to operate the
profitable hand wrench, spare parts and service portions. We have signed a
Letter of Intent to sell the entire Assembly Systems Division business and
expect this transaction to be completed by the end of April.
Another big drain on SPS' resources has been Ferre Plana S.A., our
fastener company located in Barcelona, Spain acquired in 1990. While Ferre
Plana is in the fastener business, it does not have the technical skills
or equipment to manufacture critical service automotive fasteners, which
is the core business of SPS' Industrial Products Division. Since 1990, the
Spanish automotive market has declined significantly. The combination of a
product line built around commodity, low-end automotive fasteners and a
declining market has resulted in Ferre Plana incurring cumulative
operating losses of $9.4 million since it was acquired. Currently, we are
reviewing all options available in order to determine the best course of
action. We will not permit Ferre Plana to remain a long-term drain on SPS.
We will either make reasonably quick progress in improving operating
results or terminate our involvement.
Besides the profit improvement actions discussed above, we have, for
the most part, completed our plant consolidation program. The transfer of
aerospace plant operations from Santa Ana, California to Salt Lake City,
Utah and Jenkintown, Pennsylvania was near completion by the end of 1993.
During the year, we also moved Jenkintown's Unbrako specialty socket screw
manufacturing operations to Cleveland, Ohio for consolidation with the
Unbrako manufacturing operations that were previously transferred to
Cleveland from Puerto Rico. The Puerto Rico manufacturing plant was closed
in 1992 and currently is up for sale. While these consolidations have
caused significant manufacturing disruptions in 1993, they will permit
more effective plant utilization in the future. The overall impact of
these and other consolidations and downsizing can be appreciated when one
realizes that since the end of 1990, the total workforce employed in
continuing businesses has been reduced by 1,974 employees.
The outlook in 1994 for our various businesses is mixed. The aerospace
industry is projected to continue to be depressed but should be no worse
than last year and could be somewhat better. The domestic automotive
market is strong, and we expect to have significant growth in our
automotive products. We also see some growth in industrial demand for our
products in the United States and the United Kingdom. However, this is
offset by a weaker European market.
73
During the past year, SPS has focused much of its capital expenditures
program on Arnold Engineering and Cannon-Muskegon. Arnold Engineering will
soon complete a $5 million project to modernize its molybdenum-permalloy
magnet manufacturing plant. When finished, Arnold will be the clear
technical, quality and cost leader of molybdenum-permalloy magnet
products. Cannon-Muskegon will complete in April a $1.5 million addition
to its continuous cast air melt line, which will reduce costs and increase
capacity.
Cash flow will be a critical issue in 1994. We currently are operating
SPS within $10 million of our newly negotiated domestic credit limit with
our banks. We still have significant severance payments ahead of us; we
have a $5 million insurance company debt principal payment to make in May;
and we have budgeted $13 million of badly needed capital expenditures in
1994 compared to depreciation expense of $13.4 million. We have real
estate for sale which should generate significant cash, but the timing is
uncertain. We have on-going capital expenditure needs over the next few
years which are in excess of depreciation, and we would like to be in a
position to consider certain relatively modest but strategic acquisitions.
In view of this situation, we are reviewing all options to generate
additional capital.
I believe we have taken the necessary steps to turn SPS around and
begin the journey back to earning a fair return on Shareholders' Equity.
We are cultivating a new operations oriented culture and have
significantly reduced our costs. We are focusing on rebuilding our core
businesses and divesting or restructuring those businesses that have been
a long-term drain on our resources. We have many talented, motivated and
skilled long-service employees in SPS who are absolutely committed to the
Company's long-term success. In spite of our recent problems, we continue
to be market leaders in all our major business segments. We are still the
recognized leader in aerospace fasteners. Our Unbrako trade name is still
the world standard for excellence in industrial fasteners. We are a
leading supplier of critical service automotive fasteners in North
America, Europe and Australia. Cannon-Muskegon is recognized around the
world for its technical excellence and quality in superalloys and
proprietary alloys. Arnold Engineering is a leader in most of its magnetic
materials market segments and has the broadest product line of magnetic
materials in the industry. Our challenge is to take advantage of these
strengths and build SPS into a company that will finally reward our
shareholders for their patient investment.
/s/ Charles W. Grigg
-----------------------------------
Charles W. Grigg
Chairman and Chief Executive Officer
74
STATEMENTS OF CONSOLIDATED OPERATIONS
(Thousands of dollars, except per share data)
Years ended December 31
1993 1992 1991
--------------------------------
Net sales .................................................. $319,094 $359,431 $408,499
Cost of goods sold ......................................... 269,207 306,425 341,446
--------------------------------
GROSS PROFIT ........................................... 49,887 53,006 67,053
Selling, general and administrative expense ................ 46,574 49,312 51,364
Restructuring charge (credit) .............................. 32,400 6,800 (4,400)
--------------------------------
OPERATING EARNINGS (LOSS) .............................. (29,087) (3,106) 20,089
Other income (expense):
Interest income .......................................... 472 765 1,050
Interest expense ......................................... (5,906) (5,805) (8,194)
Equity in earnings (loss) of affiliates .................. 563 588 (2,196)
Other, net ............................................... 363 (751) (37)
--------------------------------
(4,508) (5,203) (9,377)
--------------------------------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..................... (33,595) (8,309) 10,712
Provision (benefit) for income taxes ....................... (2,600) (1,300) 5,100
--------------------------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS .......... (30,995) (7,009) 5,612
Discontinued operations
Adjustment of estimated loss on disposal ................. 990
Cumulative effect of changes in accounting policies ........
Income taxes ............................................. (2,400)
Postretirement benefits .................................. (11,000)
--------------------------------
NET EARNINGS (LOSS) ................................ $(30,995) $(20,409) $ 6,602
================================
Per share data:
Earnings (loss) from continuing operations ............... $ (6.07) $ (1.37) $ 1.10
Discontinued operations .................................. .20
Cumulative effect of changes in accounting policies ...... (2.63)
--------------------------------
NET EARNINGS (LOSS) ................................ $ (6.07) $ (4.00) $ 1.30
================================
The 1992 and 1991 amounts have been reclassified (see Note 3).
See accompanying notes to consolidated financial statements.
75
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
December 31
ASSETS 1993 1992
--------------------
CURRENT ASSETS
Cash and cash equivalents ........................................ $ 6,852 $ 2,879
Accounts and notes receivable, net ............................... 48,968 52,704
Inventories ...................................................... 80,604 84,502
Deferred income taxes ............................................ 13,667 10,772
Prepaid expenses ................................................. 2,300 2,557
Net assets held for sale ......................................... 8,619 4,356
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Total current assets ........................................... 161,010 157,770
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Investments in affiliates ............................................ 12,475 10,509
Property, plant and equipment, net ................................... 86,958 91,578
Net assets held for sale ............................................. 8,787
Other assets ......................................................... 25,536 26,964
--------------------
Total assets ............................................... $285,979 $295,608
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable .................................................... $ 7,339 $ 7,120
Accounts payable ................................................. 19,657 20,907
Accrued expenses ................................................. 38,885 25,841
Income taxes payable ............................................. 646 934
--------------------
Total current liabilities ...................................... 66,527 54,802
--------------------
DEFERRED INCOME TAXES ................................................ 9,445 8,935
Long-term debt........................................................ 81,828 63,321
Retirement obligations................................................ 25,352 25,932
SHAREHOLDERS' EQUITY
Preferred stock, par value $1 per share
authorized 400,000 shares, issued none
Common stock, par value $1 per share
authorized 30,000,000 shares, issued 6,361,606 shares .......... 6,362 6,362
Additional paid-in capital ....................................... 59,704 59,685
Retained earnings ................................................ 60,516 96,412
Minimum pension liability ........................................ (1,780) (723)
Common stock in treasury, at cost
1,254,977 shares in 1993 (1,256,177 shares in 1992) ............ (10,144) (10,154)
Cumulative translation adjustments ............................... (11,831) (8,964)
--------------------
Total shareholders' equity ..................................... 102,827 142,618
--------------------
Total liabilities and shareholders' equity ................. $285,979 $295,608
====================
The 1992 amounts have been reclassified (see Note 3).
See accompanying notes to consolidated financial statements.
76
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Thousands of dollars)
Years ended December 31
1993 1992 1991
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) .................................................... $(30,995) $(20,409) $ 6,602
Reconciliation of net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization ...................................... 14,484 15,343 15,213
Deferred income taxes .............................................. (1,812) (1,447) (3,483)
Restructuring charge (credit) ...................................... 32,400 6,800 (4,400)
Cash used for restructuring activities ............................. (14,892) (3,221) 899
Cumulative effect of changes in accounting policies ................ 13,400
Other operating items .............................................. (480) (810) 2,783
Changes in:
Receivables....................................................... 2,204 841 15,160
Inventories ...................................................... 558 8,704 18,945
Prepaid expenses ................................................. 871 1,034 (300)
Accounts payable ................................................. (851) 1,598 1,239
Accrued expenses ................................................. (2,618) 901 (5,531)
Income taxes payable ............................................. (282) (5,951) (1,624)
Other assets and liabilities, net ................................ 2,344 (1,299) 1,343
--------------------------------
Net cash provided by operating activities ............................ 931 15,484 46,846
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment ............................. (12,248) (11,555) (11,118)
Acquisition/Investments ................................................ (3,900) (500)
Proceeds from divestitures ............................................. 2,500 4,419
Other, net ............................................................. 302 519 1,192
--------------------------------
Net cash used by investing activities ................................ (9,446) (14,936) (6,007)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ............................................... 38,200 25,679 12,220
Reduction of borrowings ................................................ (18,987) (20,632) (47,931)
Payments of cash dividends ............................................. (6,535) (6,521) (6,503)
Other, net ............................................................. 28 505 138
--------------------------------
Net cash provided (used) by financing activities ...................... 12,706 (969) (42,076)
Effect of exchange rate changes on cash ................................ (218) (479) (153)
--------------------------------
Net increase (decrease) in cash and cash equivalents ................. 3,973 (900) (1,390)
Cash and cash equivalents at beginning of year ....................... 2,879 3,779 5,169
--------------------------------
Cash and cash equivalents at end of year ............................. $ 6,852 $ 2,879 $ 3,779
================================
The 1992 and 1991 amounts have been reclassified (see Note 3).
See accompanying notes to consolidated financial statements.
77
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Thousands of dollars)
Years ended December 31
1993 1992 1991
--------------------------------
COMMON STOCK
Beginning and end of year ................................................ $ 6,362 $ 6,362 $ 6,362
================================
ADDITIONAL PAID-IN CAPITAL
Beginning of year ........................................................ $ 59,685 $ 59,349 $ 58,446
Exercise of stock options ............................................ 19 336 100
Stock contribution to pension plan ................................... 803
--------------------------------
End of year .............................................................. $ 59,704 $ 59,685 $ 59,349
================================
RETAINED EARNINGS
Beginning of year ........................................................ $ 96,412 $123,349 $123,250
Net earnings (loss) .................................................. (30,995) (20,409) 6,602
Cash dividends, ($.96 per share in 1993,
$1.28 per share in 1992 and 1991) ................................. (4,901) (6,528) (6,503)
--------------------------------
End of year .............................................................. $ 60,516 $ 96,412 $123,349
================================
MINIMUM PENSION LIABILITY
Beginning of year ........................................................ $ (723) $ (448) $ (841)
Changes during the year .............................................. (1,057) (275) 393
--------------------------------
End of year .............................................................. $ (1,780) $ (723) $ (448)
================================
COMMON STOCK IN TREASURY
Beginning of year ........................................................ $(10,154) $(10,333) $(10,620)
Exercise of stock options ............................................ 10 179 45
Stock contribution to pension plan ................................... 242
--------------------------------
End of year .............................................................. $(10,144) $(10,154) $(10,333)
================================
CUMULATIVE TRANSLATION ADJUSTMENTS
Beginning of year ........................................................ $ (8,964) $ 1,009 $ 3,226
Changes during the year:
Working capital .................................................. (1,458) (5,659) (1,831)
Property, plant and equipment, net ............................... (2,250) (4,196) (325)
Other, net ....................................................... 841 (118) (61)
--------------------------------
End of year .............................................................. $(11,831) $ (8,964) $ 1,009
================================
TOTAL SHAREHOLDERS' EQUITY ............................................... $102,827 $142,618 $179,288
================================
See accompanying notes to consolidated financial statements.
78
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 subsidiaries. Investments in affiliates, owned more than
20 percent but not in excess of 50 percent, are recorded on the equity
method.
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. Cost is determined
by the average cost method and includes material, labor and manufacturing
overhead costs.
PROPERTY AND DEPRECIATION
Land, buildings and machinery and equipment are stated at cost.
Depreciation is provided substantially on a straight-line basis over the
estimated useful lives of the respective assets. 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. Fully depreciated items, other than buildings, generally are
removed from the accounts.
INTANGIBLE ASSETS
Intangible assets, included in other assets, were approximately $8,700
and $9,300 at December 31, 1993 and 1992, respectively. Intangible assets
consist primarily of goodwill which arose from the excess of the cost of
purchased businesses over the value of the net underlying assets and is
being amortized by the straight-line method over periods not exceeding 40
years.
RETIREMENT PLANS
Substantially all employees are covered by pension plans. Plans in the
United States are noncontributory and non-United States plans are
primarily contributory. Generally, unrecognized gains and losses are
systematically amortized over the average remaining service period of the
plans' active participants. For United States plans, the Company funds the
minimum amount permitted by the Employee Retirement Income Security Act
(ERISA) and for non-United States plans, the Company generally funds
current costs.
79
ENVIRONMENTAL REMEDIATION
Expenditures for environmental remediation are expensed or capitalized
in accordance with generally accepted accounting principles. Liabilities
for these expenditures are recorded when it is probable that obligations
have been incurred and the amounts can be reasonably estimated.
FOREIGN CURRENCY TRANSLATION
The asset and liability accounts of the Company's non-United States
subsidiaries are translated into United States dollars at year-end
exchange rates. Revenue and expense accounts are translated at average
exchange rates for each year. Net translation gains and losses are
adjusted directly to a separate component of shareholders' equity. Foreign
currency gains and losses resulting from transactions are included in the
statement of consolidated operations.
2. CHANGES IN ACCOUNTING POLICIES
Effective January 1, 1992, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." SFAS No. 109 requires the
liability method of accounting for income taxes rather than the deferred
method previously used. The liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax basis of assets and liabilities. The cumulative effect of this
accounting change was to increase the 1992 net loss by $2,400 or $.47 per
share (see Note 18). SFAS No. 106 requires the accrual method of
accounting for postretirement benefits other than pensions. In prior
years, the Company recognized the cost of providing postretirement
benefits other than pensions by expensing the benefits as incurred. In
1991, benefit costs of $1,098 were recognized as incurred. For 1992
benefit costs were $1,625 under the accrual method which was $238 higher
than benefit costs incurred. The cumulative effect of this accounting
change was to increase the 1992 net loss by $11,000 (net of income taxes
of $4,700) or $2.16 per share (see Note 21).
3. RESTRUCTURE OF OPERATIONS
During 1993, the Company initiated additional restructuring actions
which included the following: a 10 percent decrease in its non-direct
workforce including significant reductions in corporate and executive
staff, the decision to sell the Company's aircraft, relocation of the
corporate headquarters, the exit of certain historically unprofitable and
non-strategic product lines and the writeoff of costs previously deferred
in contemplation of gains on the sale of the related operating assets held
for sale, required as a result of the protracted period of disposal. The
1993 statement of consolidated operations includes a restructuring charge
of $32,400 to reflect the costs of these actions and higher than expected
costs of completing the previously announced plant consolidations. This
restructuring charge consists of the cost of employee separations of
$10,000, plant consolidation costs of $7,500, operating losses of
businesses or plants that were held for sale, sold or closed of $7,600,
80
product line disposal costs of $3,800 and other non-recurring
restructuring costs of $3,500.
In order to maintain the Company's presence in certain key business
markets, the Company decided in the fourth quarter of 1993 to retain the
European industrial fastener businesses in Coventry and Smethwick,
England, and Barcelona, Spain; the Unbrako fastener distribution business
in Koblenz, Germany; and the hard ferrite magnetic materials business in
Sevierville, Tennessee. The 1992 and 1991 financial statements and notes
have been reclassified for comparative purposes to reflect these
modifications. The financial data for each of the years that the retained
businesses were previously reported as held for sale is as follows:
1992 1991
--------------------
Net sales .................... $38,189 $24,624
Operating loss ............... 2,540 1,817
Total assets ................. 26,221 31,250
Total liabilities ............ 5,201 5,920
Net assets held for sale on the December 31, 1993 consolidated balance
sheet includes certain real estate assets. Net assets held for sale on the
December 31, 1992 consolidated balance sheet includes certain real estate
assets and the industrial fastener operations sold in 1993.
The 1992 statement of consolidated operations includes a restructuring
charge of $6,800. This restructuring charge resulted from the modification
of the 1991 restructuring plan to retain the fastener manufacturing plant
in Shannon, Ireland, and the Unbrako fastener distribution business in
West Bromwich (Birmingham), England, and to accelerate the closing of an
aerospace fastener manufacturing facility in the United States.
The 1991 statement of consolidated operations includes a restructuring
credit of $4,400. This restructuring credit includes $1,300 related to the
reversal of reserves associated with a 1990 restructuring charge and
$3,100 for the effect of reclassifying the operating results of the
businesses held for sale but ultimately retained.
4. DISCONTINUED OPERATIONS
During 1991, the Company revised its estimated loss on disposal of the
materials handling segment which was discontinued in 1988. An excess
reserve of $990 (net of income tax expense of $510) was credited to income
as a result of favorable experience during the wind-down period.
81
5. NON-UNITED STATES SUBSIDIARIES
Selective comparative financial data of consolidated non-United States
subsidiaries are as follows:
1993 1992 1991
---------------------------
Net earnings ..................... $ 95 $ 3,177 $ 8,540
Net current assets ............... 39,288 34,292 37,506
Net assets ....................... 63,120 62,247 71,612
Net assets held for sale ......... 4,057 5,588
6. ACCOUNTS AND NOTES RECEIVABLE
1993 1992
-----------------
Trade .................................... $43,357 $49,287
Notes and other .......................... 6,796 4,746
-----------------
50,153 54,033
Less allowance for doubtful receivables .. 1,185 1,329
-----------------
$48,968 $52,704
=================
7. INVENTORIES
1993 1992
-------------------
Finished goods ................... $37,323 $36,914
Work-in-progress ................. 17,115 18,666
Raw materials and supplies ....... 26,166 28,922
-------------------
$80,604 $84,502
===================
8. INVESTMENTS IN AFFILIATES
The Company's investments in affiliates consist of a 36.75 percent
interest in Precision Fasteners Ltd., Bombay, India, a 46.49 percent
interest (represented by 43.0 percent voting and 49.96 percent non-voting
shares) in Metalac S.A. Industria e Comercio, Sao Paulo, Brazil, a 50.0
percent percent interest in Pacific Products Limited, Guernsey, Channel
Islands, United Kingdom, and a 50.0 percent interest in National-Arnold
Magnetics Company, Adelanto, California, United States. National-Arnold
Magnetics Company was formed on January 1, 1993 as a joint venture to
produce soft magnetic tape-wound core products. Dividends received from
affiliates were $42, $44 and $66 in 1993, 1992 and 1991, respectively.
Retained earnings in 1993, 1992 and 1991 included undistributed earnings
of affiliates, net of deferred taxes, of $6,253, $5,953 and $5,506,
respectively. At December 31, 1993, the Company has guaranteed $2,638 of
affiliates' indebtedness.
82
Summarized financial information of the unconsolidated companies is as
follows:
CONDENSED STATEMENTS OF EARNINGS 1993 1992 1991
--------------------------------
Net sales .......................... $52,608 $44,382 $34,543
Operating earnings (loss) .......... 454 2,548 (1,281)
Net earnings (loss) ................ 669 1,333 (4,655)
CONDENSED BALANCE SHEETS
Current assets ..................... $25,539 $18,998 $25,197
Noncurrent assets .................. 23,642 23,553 27,027
--------------------------------
$49,181 $42,551 $52,224
================================
Current liabilities ................ $18,793 $14,179 $17,724
Noncurrent liabilities ............. 4,230 4,932 10,169
Shareholders' equity ............... 26,158 23,440 24,331
--------------------------------
$49,181 $42,551 $52,224
================================
9. PROPERTY, PLANT AND EQUIPMENT
1993 1992
-------------------
Land ............................. $ 4,487 $ 4,787
Buildings ........................ 40,841 39,722
Machinery and equipment .......... 127,318 136,360
Construction in progress ......... 7,526 9,046
-------------------
180,172 189,915
Less accumulated depreciation .... 93,214 98,337
-------------------
$ 86,958 $ 91,578
===================
Depreciation expense incurred was $13,644, $13,930 and $14,784 in
1993, 1992 and 1991, respectively.
10. NOTES PAYABLE
1993 1992
------------------
Short-term bank borrowings and notes
payable .............................. $2,262 $2,110
Current portion of long-term debt ...... 5,077 5,010
------------------
$7,339 $7,120
==================
83
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 and
withdrawal of the lines at the discretion of the banks. Unused short-term
lines of credit were $10,000 as of December 31, 1993.
11. ACCRUED EXPENSES
1993 1992
---------------------
Employee compensation and related
benefits ......................... $17,228 $13,059
Restructuring accrual .............. 9,882
Other .............................. 11,775 12,782
---------------------
$38,885 $25,841
=====================
12. LONG-TERM DEBT
1993 1992
------------------
Notes Payable to Insurance Companies, 8.7%,
due in equal installments 1994 through 2002 ............................ $45,000 $50,000
Bank Credit Agreement, variable interest rate,
1993 average interest rate 3.7% ........................................ 36,100 12,200
Industrial Development Revenue Bond Series 1987,
variable rate demand, 1993 average interest rate 2.7%, due 2012 ......... 5,300 5,300
Other .................................................................... 505 831
------------------
86,905 68,331
Less current installments (included in notes payable) .................... 5,077 5,010
------------------
$81,828 $63,321
==================
Installments due during the next five years are: $5,077, $11,016,
$17,034, $17,034, $11,016 in 1994 through 1998, respectively. The carrying
amount of long-term debt approximates fair value. The fair value is
estimated based on current rates available to the Company for debt of
similar remaining maturities.
In connection with the Company's restructuring, the Company amended
certain debt agreements on March 21, 1994, primarily to modify certain
financial covenants, effective December 31, 1993. In addition, effective
84
January 1, 1994 the Company's borrowing rate was increased to 9.45% on the
Notes Payable to the Insurance Companies.
Under the Amended and Restated Bank Credit Agreement, the Company may
borrow up to $50,000 at any time prior to June 30, 1995. This agreement
also provides for a $5,000 sublimit, within the total $50,000 limit, which
is available for letters of credit. Borrowings under the Bank Credit
Agreement bear interest at either a Base Rate or a Eurocurrency Rate. The
Base Rate is equal to the higher of the prime rate of the agent bank or
the federal funds rate plus .5 percentage points. The Eurocurrency Rate is
equal to the effective interbank rate plus a premium which ranges from
1.25 to 1.75 percentage points based on the senior funded indebtedness
ratio and fixed charge coverage ratio. No later than June 30, 1995, the
Company may, at its option, convert the amount of indebtedness outstanding
to term notes, payable in 12 equal quarterly installments commencing on
September 30, 1995. The term notes will bear interest at the rates
described above plus .5 percentage points. The Company is required to pay
a commitment fee of .4 percentage points on unborrowed amounts.
The Series 1987 Bonds were issued to finance the acquisition and
improvement of a fastener manufacturing facility and are collateralized by
a first mortgage on the facility and a bank letter of credit.
The Company is subject to a number of restrictive covenants under the
various debt agreements. These covenants, among other things, set forth
limitations on indebtedness, restrict the payment of cash dividends and
require the Company to maintain a minimum consolidated tangible net worth,
a minimum fixed charge coverage ratio and a minimum current ratio. In
addition, the Amended and Restated Bank Credit Agreement prohibits the
Company from paying cash dividends unless waived by the banks or the
agreement is amended. Certain of the Company's debt agreements contain
cross default and cross acceleration provisions.
Cash payments for interest on all debt were $5,918, $6,153 and $7,984
in 1993, 1992 and 1991, respectively.
13. LEASE COMMITMENTS
Certain of the Company's operations are conducted from leased
facilities, all of which are under operating leases which expire over the
next 17 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 $2,094, $2,635 and
$2,922 in 1993, 1992 and 1991, respectively.
At December 31, 1993, the future minimum annual rentals on
non-cancelable leases which have initial or remaining terms of more than
one year aggregated $15,506. The minimum payments over the next five years
are $1,829 in 1994, $1,436 in 1995, $1,250 in 1996, $1,038 in 1997 and
$935 in 1998.
85
14. CONTINGENCIES
LITIGATION:
The Company is involved in various legal matters incidental to its
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 materially adverse effect on the Company's
consolidated financial position.
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, 1993, the accrued liability
for environmental remediation represents management's best estimate of the
probable and reasonably estimable costs related to environmental
remediation. The measurement of the liability is evaluated quarterly based
on currently available information. 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 possible that the
Company's results of operations in future quarterly or annual periods
could be materially affected. However, management believes that the
overall costs of environmental remediation will be incurred over an
extended period of time and, as a result, are not expected to have a
material impact on the consolidated financial position of the Company.
15. STOCK OPTIONS
The Company has a nonqualified stock option plan which continues to
the year 2000. Under the plan, the Company may grant up to an aggregate of
1,350,000 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 on date of grant. The
exercise price of outstanding options is determined as follows: 1) fixed
price options are granted at market value on date of grant; and 2)
discounted price options are granted to directors at par value ($1.00 per
share).
At December 31, 1993, 41 individuals held options to purchase an
aggregate of 661,097 shares (fixed 650,445, discounted 10,652). The fixed
price options outstanding under the plan have exercise prices and
expiration dates of $21.4375 (December 2, 1997), $42.00 (November 30,
1998), $45.375 (December 6, 1999), $25.00 (November 28, 2000), $27.00
(September 4, 2001), $19.9375 (October 4, 2002), $20.50 (December 2, 2002)
and $21.625 (November 30, 2003). The discounted price options outstanding
have exercise prices of $1.00 and expiration dates of May 31, 1999, May
31, 2000, June 2, 2001, May 31, 2002 and May 31, 2003. No variable price
options or restricted shares were outstanding at December 31, 1993.
86
Changes in shares under option were:
1993 1992 1991
-----------------------------------------------
Shares under option at beginning of year ......... 509,435 521,452 391,606
Additions (deductions):
Options granted ................................ 152,862 20,637 135,476
Options exercised .............................. (1,200) (22,154) (5,630)
Options expired or terminated .................. (10,500)
-----------------------------------------------
Shares under option at end of year ............... 661,097 509,435 521,452
===============================================
Option price per share of options exercised
during the year ................................ $ 21.44 $ 21.44 $ 21.44
Options exercisable at end of year ............... 497,917 424,660 329,742
Exercise price of options outstanding:
Total .......................................... $ 17,694 $ 14,473 $ 14,975
Per share (fixed) .............................. $19.94-$45.38 $19.94-$45.38 $21.44-$45.38
Per share (discounted) ......................... $ 1.00 $ 1.00 $ 1.00
Shares available for future option grants ...... 171,794 74,656 84,793
16. PER SHARE DATA
The weighted average number of shares used to compute per share data
was 5,105,706 in 1993, 5,097,994 in 1992 and 5,073,798 in 1991.
Common share equivalents in the form of stock options are excluded
from the calculation of per share data as their dilutive effect is not
material, or their effect is anti-dilutive.
17. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in two industry segments: high strength precision
mechanical fasteners, precision components, fastening systems and assembly
systems (fasteners); and superalloys in ingot form and magnetic materials
(materials). Principal markets include aerospace, transportation,
industrial machinery and equipment, and medical equipment. Inter-area
sales consist of products similar to those offered to unaffiliated
customers and are accounted for on the basis of third party sales price.
Other expense, excluded from the determination of segment operating
earnings, includes interest income and expense, equity in earnings (loss)
of affiliates and other income and expenses.
87
INDUSTRY SEGMENTS:
1993 1992 1991
--------------------------------
Net sales:
Fasteners .............................................................. $226,791 $262,523 $321,909
Materials .............................................................. 92,303 96,908 86,590
--------------------------------
Net sales ............................................................. $319,094 $359,431 $408,499
================================
Operating earnings (loss):
Fasteners .............................................................. $(34,118) $ (9,214) $ 16,450
Materials .............................................................. 5,031 6,108 3,639
--------------------------------
Operating earnings (loss).............................................. (29,087) (3,106) 20,089
Other expense ............................................................ 4,508 5,203 9,377
--------------------------------
Earnings (loss) from continuing operations before income taxes and
cumulative effect of changes in accounting policies..................... $(33,595) $ (8,309) $ 10,712
================================
Identifiable assets:
Fasteners .............................................................. $211,097 $220,510 $244,140
Materials .............................................................. 66,263 61,955 57,024
Net assets held for sale ............................................... 8,619 13,143 17,159
--------------------------------
Total assets ......................................................... $285,979 $295,608 $318,323
================================
Depreciation and Amortization and Capital Additions:
Depreciation and Amortization Capital Additions
-----------------------------------------------------------------
1993 1992 1991 1993 1992 1991
-----------------------------------------------------------------
Fasteners .................... $11,569 $12,691 $12,485 $ 6,540 $ 8,270 $ 9,395
MATERIALS .................... 2,915 2,652 2,728 5,708 3,285 1,723
-----------------------------------------------------------------
TOTAL ...................... $14,484 $15,343 $15,213 $ 12,248 $ 11,555 $ 11,118
=================================================================
88
GEOGRAPHIC AREAS:
1993 1992 1991
--------------------------------
Net sales:
United States .......................................................... $247,380 $267,971 $303,223
Europe ................................................................. 83,437 99,037 110,983
Other .................................................................. 13,309 12,911 17,415
Eliminations............................................................ (25,032) (20,488) (23,122)
--------------------------------
Net sales ............................................................. $319,094 $359,431 $408,499
================================
Operating earnings (loss):
United States .......................................................... $(29,986) $ (7,369) $ 5,908
Europe ................................................................. (168) 4,038 9,113
Other .................................................................. 1,531 902 4,045
Eliminations ........................................................... (464) (677) 1,023
--------------------------------
Operating earnings (loss) ............................................. (29,087) (3,106) 20,089
Other expense ............................................................ 4,508 5,203 9,377
--------------------------------
Earnings (loss) from continuing operations before income taxes and
cumulative effect of changes in accounting policies..................... $(33,595) $ (8,309) $ 10,712
================================
Identifiable assets:
United States .......................................................... $189,940 $195,698 $194,590
Europe ................................................................. 66,416 67,177 86,290
Other .................................................................. 21,004 19,590 20,284
Net assets held for sale ............................................... 8,619 13,143 17,159
--------------------------------
Total assets .......................................................... $285,979 $295,608 $318,323
================================
89
Depreciation and Amortization and Capital Additions:
Depreciation and Amortization Capital Additions
--------------------------------------------------------------
1993 1992 1991 1993 1992 1991
--------------------------------------------------------------
United States ................ $10,265 $10,830 $10,582 $10,052 $ 9,930 $ 7,565
EUROPE ....................... 3,985 4,290 4,371 1,962 1,321 3,347
OTHER ........................ 234 223 260 234 304 206
--------------------------------------------------------------
TOTAL ...................... $14,484 $15,343 $15,213 $12,248 $11,555 $11,118
==============================================================
18. INCOME TAXES
As of January 1, 1992, the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", were
adopted (see Note 2).
The components of the provision (benefit) for income taxes from
continuing operations were as follows:
1993 1992 1991
-----------------------------
Currently payable (receivable):
United States
Federal .................... $ 100 $ 171 $ 3,445
State and local ............ 300 465 737
Non-United States ............ (604) 3,086 3,443
-----------------------------
(204) 3,722 7,625
-----------------------------
Deferred:
United States
Federal .................... (1,897) (2,633) (3,502)
State and local ............ (897) (792) (97)
Non-United States ............ 398 (1,597) 1,074
-----------------------------
(2,396) (5,022) (2,525)
-----------------------------
$(2,600) $(1,300) $ 5,100
=============================
Net cash payments (refunds) for income taxes were $(326), $5,358 and
$7,015 in 1993, 1992 and 1991, respectively.
90
The components of earnings (loss) from continuing operations before
income taxes and cumulative effect of changes in accounting policies were
as follows:
1993 1992 1991
---------------------------------
United States .................. $(33,484) $(12,975) $(2,321)
Non-United States .............. (111) 4,666 13,033
---------------------------------
$(33,595) $ (8,309) $10,712
=================================
The significant components of the deferred income tax provision
(benefit) were as follows:
1993 1992 1991
------------------------------
Depreciation ......................................... $ (533) $ (85) $ (464)
Inventory reserves ................................... (2,741) (1,663) (2,667)
Postretirement benefits other than pensions .......... 116
Other employee benefits and compensation ............. (90) (265) (370)
Alternative minimum tax credits ...................... 1,099 (931) (345)
Advance corporate tax ................................ 216 (1,583) (600)
Accrued expenses ..................................... (2,691) (1,423) 1,410
Net operating loss carryforwards...................... (10,176)
Valuation allowances ................................. 12,966 549
Other, net ........................................... (562) 379 511
------------------------------
$ (2,396) $(5,022) $(2,525)
==============================
91
Temporary differences comprising the net deferred income tax asset
(liability) on the consolidated balance sheet are:
1993 1992
--------------------
Inventory reserves ................................... $ 5,870 $ 3,129
Postretirement benefits other than pensions .......... 5,220 5,336
Other employee benefits and compensation ............. 1,856 1,766
Alternative minimum tax credits ...................... 1,155 2,254
Advance corporate tax ................................ 1,908 2,124
Accrued expenses ..................................... 5,374 2,683
Net operating loss carryforwards...................... 10,176
Valuation allowances ................................. (17,717) (4,751)
--------------------
Deferred income tax asset ........................... 13,842 12,541
--------------------
Depreciation ......................................... (8,608) (9,141)
Other, net ........................................... (1,012) (1,563)
--------------------
Deferred income tax liability ....................... (9,620) (10,704)
--------------------
Net deferred income tax asset ....................... $ 4,222 $ 1,837
====================
The following sets forth the differences between the provision
(benefit) for income taxes from continuing operations computed at the
United States federal statutory income tax rate of 34% and that reported
for financial statement purposes:
1993 1992 1991
-----------------------------
Provision (benefit) computed at the United States
federal statutory income tax rate .................. $(11,422) $(2,825) $3,642
Earnings of certain subsidiaries taxed at different
rates .............................................. (2,278) 49 197
Certain losses not tax effected ...................... 304 305
Permanent items ...................................... (1,612) 354 258
State income tax, net of federal benefit ............. 132 238 825
Valuation allowances ................................. 12,966 549
Other, net ........................................... (386) 31 (127)
-----------------------------
Provision (benefit) for income taxes ................. $ (2,600) $(1,300) $5,100
=============================
92
United States income taxes have not been provided on the unremitted
earnings of certain subsidiaries located outside the continental United
States of approximately $37,600 because, in management's opinion, such
earnings are required 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.
At December 31, 1993, the Company had $29,310 of net operating loss
carryforwards available to reduce future taxable income. The net operating
loss carryforwards expire as follows: $650 in 1995, $1,470 in 1996, $1,900
in 1997, $2,290 in 1998 and $23,000 in 2008.
19. PREFERRED STOCK PURCHASE RIGHTS
The Board of Directors declared a dividend distribution of one Right
for each outstanding share of common stock, as provided in the Rights
Agreement dated November 11, 1988. The Rights Agreement was amended on
January 22, 1991. Under the Rights Agreement, as amended, each Right may
be exercised, under certain conditions, to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock, par value $1 per
share, for $125. 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, 1998, 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.
20. RESEARCH AND DEVELOPMENT
Research and development costs incurred were $5,050, $6,604 and $6,930
for 1993, 1992 and 1991, respectively.
21. RETIREMENT PLANS AND OTHER BENEFITS
The Company sponsors two defined contribution plans. Participation in
one of these plans is available to substantially all domestic salaried and
hourly employees. Participants may make voluntary pre-tax or after-tax
contributions to the plans up to 16 percent of their compensation (as
defined). The Company contributes a percentage of employee contributions
93
based upon the number of years of employee service to the salaried plan.
The Company's contribution expense for the salaried plan was $228 in 1993,
$225 in 1992 and $233 in 1991.
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, 1993 and 1992, the Plans' assets
included Company stock with fair values of $3,938 and $4,213,
respectively. In 1991, the Company contributed 30,000 shares of its common
stock to its United States pension plan to satisfy a portion of its
funding requirement. The market value of the stock on the date of
contribution was $1,045.
The net periodic pension cost incurred for 1993, 1992 and 1991,
respectively for these plans, includes the following components:
1993 1992 1991
-------------------------------
Service cost ................................... $ 3,322 $ 3,644 $ 3,008
Interest cost .................................. 9,764 9,777 9,553
Actual return on plan assets ................... (9,891) (10,987) (21,289)
Net amortization and deferral .................. (1,760) (981) 10,042
-------------------------------
Net periodic pension cost ...................... $ 1,435 $ 1,453 $ 1,314
===============================
In addition to the 1993 pension cost noted above, the early retirement
program offered to eligible employees at the Company's Jenkintown
manufacturing facility resulted in a one-time charge of $1,748 for
enhanced benefits and lump sum distributions. This charge is reflected in
the Statement of Consolidated Operations as a component of the
restructuring charge.
94
The following table sets forth the funded status of these plans at
December 31, 1993 and 1992:
1993 1992
-----------------------------------------------------------------
Plans whose Plans whose Plans whose Plans whose
assets exceed accumulated assets exceed accumulated
accumulated benefits accumulated benefits
benefits exceed assets benefits exceed assets
-----------------------------------------------------------------
Plan assets at fair value .................. $ 103,792 $ 7,849 $102,783 $ 13,791
Actuarial present value of benefit
obligations:
Vested benefits ........................ (77,005) (13,729) (69,460) (16,178)
Nonvested benefits ..................... (1,975) (1,788) (2,064) (2,020)
---------------------------------------------------------------
Accumulated benefit obligation ............. (78,980) (15,517) (71,524) (18,198)
Projected future salary increases .......... (24,889) (366) (20,011) (3,777)
---------------------------------------------------------------
Projected benefit obligation ............... (103,869) (15,883) (91,535) (21,975)
---------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation ............. (77) (8,034) 11,248 (8,184)
Unrecognized net (asset) obligation at
date of initial application .............. (6,596) 425 (7,326) 231
Unrecognized prior service cost ............ 2,690 1,047 3,011 1,346
Unrecognized net loss ...................... 15,273 3,002 4,719 3,933
Recognized minimum liability ............... (3,910) (2,636)
---------------------------------------------------------------
Prepaid (accrued) pension cost at
December 31 .............................. $ 11,290 $ (7,470) $ 11,652 $ (5,310)
===============================================================
Under the requirements of Statement of Financial Accounting Standards
(SFAS) No. 87, "Employers' Accounting for Pensions", an additional
minimum pension liability for certain plans, representing the excess of
accumulated benefits over plan assets and accrued pension costs, was
recognized at December 31, 1993 and 1992. A corresponding amount was
recognized as an intangible asset, to the extent of unrecognized prior
service cost and unrecognized transition obligation, with the balance
recorded as a separate reduction of shareholders' equity.
95
The increase in the projected benefit obligation is primarily
attributable to the decrease in the discount rate, offset partially by the
reduction in the workforce. The following weighted average assumptions
were used to determine the return on plan assets and the projected benefit
obligation:
1993 1992 1991
---------------------------
Discount rate .......................... 7.3% 8.8% 8.9%
Rate of return on plan assets .......... 9.5% 10.1% 10.3%
Rate of future compensation increase ... 4.7% 6.1% 6.2%
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 nonbargaining 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.
As of January 1, 1992, the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions", were adopted
(see Note 2).
The funded status of the plans and amounts recognized in the Company's
consolidated financial statements as of December 31 were as follows:
1993 1992
------------------
Accumulated postretirement benefit obligation
Current retirees ......................................... $ 9,739 $ 7,660
Fully eligible actives ................................... 3,117 3,404
Other actives ............................................ 4,075 4,450
------------------
Total accumulated postretirement benefit obligation ........ 16,931 15,514
Unrecognized net loss from changes in assumptions .......... (1,676)
Unrecognized net gain ...................................... 97 418
------------------
Long-term postretirement benefit obligation................ $15,352 $15,932
==================
96
Net periodic postretirement benefit cost
included the following components:
1993 1992
---------------------
Service cost ........................... $ 288 $ 329
Interest cost .......................... 1,324 1,296
---------------------
Net periodic postretirement benefit cost $1,612 $1,625
=====================
An 11 percent annual rate of increase in the per capita costs of
covered health care benefits was assumed for 1994, gradually decreasing to
6 percent by the year 2003. Increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $193 and
increase the interest cost component of net periodic postretirement
benefit cost for 1993 by $14. A 5 percent and 6 percent increase in
salaries and a discount rate of 7.25 percent and 8.5 percent were used to
determine the accumulated postretirement benefit obligation at December
31, 1993 and 1992, respectively.
As a result of the Company's decision to close its Santa Ana,
California, and Puerto Rico manufacturing facilities, an $800 gain related
to the curtailment of its postretirement benefit plans was recognized in
1993. This curtailment gain is reflected in the Statement of Consolidated
Operations as a component of the restructuring charge.
POSTEMPLOYMENT BENEFITS
The Financial Accounting Standards Board issued SFAS No. 112,
"Employers' Accounting for Postemployment Benefits", in November 1992.
This Standard changes the current practice of expensing postemployment
benefits as incurred by requiring the estimated cost of these benefits to
be recorded on an accrual basis. Adoption of SFAS No. 112 is required in
1994. Adoption of this standard is not expected to have a material effect
on the Company's consolidated financial position or results of operations.
22. FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign exchange contracts each month to hedge
certain foreign currency transactions. Market value gains and losses are
recognized, and the result offsets foreign exchange gains or losses on
those transactions. The cash flow from such contracts is classified in the
same category as the transaction hedged in the Statements of Consolidated
Cash Flows.
At December 31, 1993, the Company has outstanding contracts maturing
in early 1994 that have, in the aggregate, a United States dollar contract
value equivalent of $11,258, which approximates fair value based on rates
available to the Company at December 31, 1993.
97
23. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
Quarter Ended
--------------------------------------------
March June September December
31 30 30 31
--------------------------------------------
1993
----
Net sales................................................... $ 87,283 $85,459 $74,394 $ 71,958
Gross profit................................................ 14,121 14,824 11,954 8,988
Net earnings (loss)......................................... 1,630 1,378 (6,840) (27,163)
Net earnings (loss) per share............................... .32 .27 (1.34) (5.32)
1992
----
Net sales................................................... $ 94,234 $96,115 $85,713 $ 83,369
Gross profit................................................ 15,852 15,523 11,533 10,098
Earnings (loss) before cumulative effect of changes in
accounting policies....................................... 1,572 1,343 (479) (9,445)
Cumulative effect of changes in accounting policies
Income taxes ........................................... (2,400)
Postretirement benefits................................. (11,000)
Net earnings (loss)......................................... (11,828) 1,343 (479) (9,445)
Earnings (loss) per share:
Continuing operations....................................... .31 .26 (.09) (1.85)
Cumulative effect of changes in accounting policies......... (2.63)
Net earnings (loss)......................................... (2.32) .26 (.09) (1.85)
98
1993
----
Fourth quarter results include a restructuring charge of $24,500 due
to modifications and reassessments to the Company's restructuring plan
(see Note 3). Sales and gross profit for the first three quarters of 1993
and all four quarters of 1992 have been reclassified to reflect the
modifications. These modifications also resulted in restructuring credits
of $500, $400 and $400 to the first, second and third quarters of 1993,
respectively.
Third quarter results include a net restructuring charge of $8,800 as
a result of additional manufacturing consolidation costs, workforce
reductions and the revaluation of certain assets held for sale.
1992
----
The Company adopted SFAS 109 and SFAS 106 in the fourth quarter of
1992 and retroactively applied a $13,400 charge or $2.63 per share, for
changes in accounting policies to the first quarter of 1992 (see Note 2).
Fourth quarter results include a restructuring charge of $6,800 due to
modifications and reassessments to the Company's restructuring plan (see
Note 3).
Fourth quarter results include charges of $1,550 related to employee
severance and increases in estimated expenses for environmental and other
contingent liabilities.
99
COMMON STOCK INFORMATION
The price range at which the Company's common stock traded in its
principal market, the New York Stock Exchange, and the quarterly dividends
paid per share during the last eight quarters are as follows:
DIVIDEND
QUARTER ENDED HIGH LOW DECLARED
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December 31, 1993............. $30.13 $15.75 -$
September 30, 1993............ 29.75 26.38 .32
June 30, 1993................. 28.00 24.00 .32
March 31, 1993................ 24.75 20.00 .32
December 31, 1992............. $22.13 $19.00 $.32
September 30, 1992............ 26.50 19.75 .32
June 30, 1992................. 29.13 23.25 .32
March 31, 1992................ 29.50 24.75 .32
On December 14, 1993, the Board of Directors elected to suspend payment of
the Company's quarterly dividend. As of March 7, 1994, the approximate
number of registered shareholders was 1,427.
100
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
SPS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of SPS
Technologies, Inc. and subsidiaries as of December 31, 1993 and 1992 and
the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SPS Technologies, Inc. and subsidiaries as of December 31, 1993 and 1992,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and
postretirement benefits other than pensions in 1992.
/s/ COOPERS & LYBRAND
---------------------------
COOPERS & LYBRAND
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
March 2, 1994, except as to Note 12
for which the date is March 21, 1994
101
Selected Financial Data
(Thousands of dollars, except per share data)
1993 1992 1991 1990 1989
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Net sales................................... $319,094 $359,431 $408,499 $440,996 $423,190
Earnings (loss) from continuing operations.. (30,995) (7,009) 5,612 (9,961) 14,209
Discontinued operations - Estimated gain
(loss) on disposal........................ 990 (1,500)
Cumulative effect of changes in accounting
policies.................................. (13,400)
Net earnings (loss)......................... (30,995) (20,409) 6,602 (11,461) 14,209
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Total assets................................ 285,979 295,608 318,323 368,896 333,972
Long-term obligations....................... 81,828 63,321 61,110 91,325 74,912
Property, plant and equipment additions..... 12,248 11,555 11,118 19,440 18,863
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Per Share Data:
Earnings (loss) from continuing operations (6.07) (1.37) 1.10 (1.98) 2.84
Discontinued operations - Estimated gain
(loss) on disposal...................... .20 (.30)
Cumulative effect of changes in accounting
policies................................ (2.63)
Net earnings (loss)....................... (6.07) (4.00) 1.30 (2.28) 2.84
Cash dividends............................ .96 1.28 1.28 1.28 1.22
Shareholders' equity...................... 20.14 27.98 35.34 35.78 36.78
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The 1992 and 1991 amounts have been reclassified to reflect the fourth
quarter 1993 decision to retain the European industrial fastener
businesses in Coventry and Smethwick, England, and Barcelona, Spain; the
Unbrako fastener distribution business in Koblenz, Germany; and the hard
ferrite magnetic materials business in Sevierville, Tennessee.
Results for 1993 and 1992 include restructuring charges of $32,400 and
$6,800, respectively. Results for 1991 include a restructuring credit of
$4,400. See Note 3 to consolidated financial statements.
The Company changed its accounting policies, effective January 1,
1992, to accrue for postretirement benefits other than pensions and
account for income taxes under the liability method. See Note 2 to
consolidated financial statements.
102
Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
In December 1993, under the direction of the Company's newly appointed
Chairman and Chief Executive Officer, the Company initiated programs to
reduce the Company's cost structure and improve its future operating
performance. The Company has substantially completed a 10 percent
reduction in its non-direct workforce, which included significant
reductions in corporate and executive staff. In addition, the Company has
relocated its corporate offices to a smaller leased facility and listed
its corporate headquarters facility in Newtown, Pennsylvania and aircraft
for sale. The Company also committed to exit certain historically
unprofitable product lines of its fastener segment. In addition, the
Company's plant consolidations, which were both expensive and disruptive
to the business, are now substantially complete.
1993 COMPARED TO 1992
Net Sales
Sales in 1993 of $319.1 million declined by $40.3 million, or 11.2
percent, from 1992 amounts. Fastener segment sales declined $35.7 million,
or 13.6 percent, primarily due to the effect of exchange rate changes
which affected sales by $12 million and also due to reduced shipments to
the aerospace market. Aerospace fastener sales declined by $27.8 million,
or 21.7 percent, due to continued decreases in commercial and military
aircraft production and production disruptions from the start-up of
aerospace fastener operations transferred from another facility.
Transportation and industrial fastener sales declined by $7.9 million, or
5.9 percent, due to the continuing recession in the European markets. In
the United States, sales were adversely affected by the floods in the
Midwest; however, shipments to the automobile industry were still higher
compared to 1992 reflecting the strengthening domestic automotive
business.
Materials segment sales decreased by $4.6 million, or 4.8 percent, as
the increased sales of magnetic materials were offset by a greater decline
in the sales of superalloys. Sales of magnetic materials increased due to
the acquisition of a bonded magnet business in December 1992 and increased
demand from automotive and computer markets. Sales of proprietary
superalloys increased from the same periods in 1992, but lower sales of
stainless steel alloys and continued weakness in the aerospace market
produced an overall decrease in superalloy sales.
Operating Earnings
The operating loss for the fastener segment of $34.1 million in 1993
is attributed largely to the 1993 restructuring charge. Other factors
contributing to the fastener segment operating loss were decreases in
sales volume, continued pressure to reduce prices and manufacturing
inefficiencies resulting from the start-up of fastener operations
transferred from other facilities. The Company's operating earnings before
restructuring charges was essentially unchanged on sharply lower sales
103
volume, reflecting cost reduction actions taken in 1993. The primary
source of cost reduction in 1993 was a reduction in the workforce of 447
employees since the end of 1992.
In the materials segment, operating earnings decreased from $6.1
million, or 6.3 percent of sales in 1992, to $5 million, or 5.5 percent of
sales in 1993. The decrease in the sales volume of superalloy sales
resulted in lower gross profit amounts which were partially offset by a
decrease in selling, general and administrative expenses.
Other Expense
Higher levels of corporate debt offset by a decrease in interest rates
resulted in level amounts of interest expense compared to 1992.
Income Taxes
The income tax benefit of the Company's 1993 loss from continuing
operations was lower than the benefit computed at the United States
federal statutory tax rate primarily due to operating losses in the United
States and Spain for which a benefit is not currently recognizable.
Earnings
The Company recorded a net loss for 1993 of $31 million, or $6.07 per
share, compared to a net loss of $20.4 million, or $4.00 per share, in
1992. The loss in 1993 is attributed to the pre-tax restructuring charge
of $32.4 million. The 1992 loss results from pre-tax restructuring charge
of $6.8 million and changes in accounting policies of $13.4 million.
Orders and Backlog
Incoming orders in 1993 were $333.7 million, compared to $345.1
million in 1992. Orders improved in the United States transportation
market, but overall orders were down due to decreases in the aerospace and
materials markets. The backlog in orders at December 31, 1993, was $89
million, compared to $84.5 million at the end of 1992 and $102.5 million
at December 31, 1991.
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. The cost of remediation will depend upon
numerous factors, including the number of parties found liable at each
environmental site and their ability to pay, the outcome of negotiations
with regulatory authorities, and the years of remedial activity required.
At December 31, 1993, the accrued liability for environmental
remediation represents management's best estimate of the probable and
reasonably estimable costs related to environmental remediation. The
measurement of the liability is evaluated quarterly based on currently
available information.
104
Consolidation of Operations
By the end of 1993, the transfer of the aerospace manufacturing plant
operations from the Santa Ana, California, fastener plant to the Company's
facilities in Salt Lake City, Utah, and Jenkintown, Pennsylvania was
complete. While some operations were retained at the Santa Ana facility,
the majority of the plant will be leased to a third party in 1994. The
Company moved all of Jenkintown's UNBRAKO(Reg) socket screw manufacturing
operations to Cleveland, Ohio, for consolidation with the UNBRAKO
production transferred to Cleveland from Puerto Rico. The Company's Puerto
Rico manufacturing facility was closed in 1992 and is currently held for
sale. The related consolidation costs are included in the 1992 and 1993
restructuring charges. While these consolidations have caused
manufacturing disruptions in 1993, they will permit more effective
utilization of the remaining plants in the future. In addition, the
Company has decided to either sell the Assembly Systems Division, which is
a fastener segment product line, or liquidate the computer-controlled
fastener tightening systems part of this division and only operate the
hand wrenches, spare parts and service portion.
Consistent with the lower levels of business activity, the Company has
reduced employment in all operations. Since the end of 1990, the work
force employed in continuing businesses has been reduced by 1,974
employees, or 35 percent. Since the end of 1992, the work force employed
in continuing businesses has been reduced by 447 employees, or 10.8
percent. A portion of the reduction in employment was achieved through the
implementation of an early retirement program. The cost of this program
and other severance costs are included in the 1993 restructuring charge.
As part of the restructuring plan, Unbrako S.r.l., a distribution and
marketing subsidiary in Milan, Italy, was sold in the second quarter of
1993. SPS-Unbrako S.A., the Company's distribution and marketing
subsidiary located in Paris, France was closed and distribution activities
in France were transferred to independent distributors.
1992 COMPARED TO 1991
Net Sales
Sales in 1992 of $359.4 million declined by $49.1 million, or 12
percent, from 1991 amounts. Fastener segment sales declined $59.4 million,
or 18.4 percent, as sales declined in all served markets of the fastener
segment. Continued economic difficulties in the worldwide airline industry
have led to significant reductions in new aircraft orders as well as to
cancellations and deferrals of existing orders. The continued economic
difficulties of the transportation and industrial fastener markets also
contributed to the decline in sales.
Materials segment sales increased $10.3 million, or 11.9 percent, in
1992 due to strong demand for cobalt-based medical alloys and high-value,
proprietary single-crystal superalloys, and to higher cobalt metal prices.
105
Operating Earnings
In the fastener segment, operating losses of $9.2 million in 1992
compares unfavorably to the operating earnings of $16.4 million in 1991.
The 1992 restructuring charge, significant decreases in fastener sales and
costs associated with work force reductions contributed to the decrease in
1992 operating earnings.
In the materials segment, operating earnings increased from $3.6
million, or 4.2 percent of sales in 1991, to $6.1 million, or 6.3 percent
of sales in 1992. The increase is attributed to a higher volume of
superalloy sales, higher prices for cobalt-based products and productivity
improvements in the manufacture of magnetic materials.
Other Expense
Interest expense decreased from $8.2 million in 1991 to $5.8 million
in 1992, as a result of lower levels of corporate debt coupled with
reduced interest rates. The Company's Brazilian affiliate reported net
earnings in 1992 compared to a net loss in 1991. As a result, the
Company's equity in earnings (loss) of affiliates improved by $2.8
million.
Income Taxes
The income tax benefit of the Company's 1992 loss from continuing
operations was lower than the benefit computed at the United States
federal statutory tax rate due to certain losses for which no tax benefits
were available, an increase in the valuation allowance on deferred income
tax assets and state income taxes.
Earnings
The Company recorded a net loss for 1992 of $20.4 million, or $4.00
per share, compared to earnings of $6.6 million, or $1.30 per share, in
1991. The loss in 1992 is attributed to the pre-tax restructuring charge
of $6.8 million and the charge related to the changes in accounting
policies of $13.4 million on an after-tax basis. The additional decrease
in net earnings from 1991 is attributed to declines in the operating
earnings of the fastener segment partially offset by improved results in
the materials segment, lower interest expense and improved results from
the Company's Brazilian affiliate. Included in net earnings for 1991 was a
restructuring credit of $4.4 million and a $1 million favorable adjustment
to discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Management considers liquidity to be the ability to generate adequate
amounts of cash to meet its needs and capital resources to be the
resources from which such cash can be obtained, principally from operating
and external sources. The Company believes that capital resources
available to it will be sufficient to meet the needs of its business, both
on a short-term and long-term basis.
106
Cash flow provided by or used for operating activities, investing
activities and financial activities is summarized in the statements of
consolidated cash flow. The 1993 cash flow provided from operating
activities decreased from 1992 due to the 1993 cash expenditures to fund
plant consolidations, severance payments and other restructuring
activities.
The changes in cash used by investing activities is attributed to 1993
proceeds from the sale and liquidation of two distribution businesses in
Europe, 1992 acquisition cost of a new bonded magnet business for the
material segment and 1991 proceeds from the sale of the Unbrako fastener
manufacturing facility in Mexico and the Hydraulic Tensioning Division in
the United Kingdom. The Company spent $12.2 million for capital
expenditures in 1993 and is budgeting $13 million for 1994, which
approximates depreciation expense. Additionally, cash flow is expected to
be generated from the sale of the corporate headquarters facility and the
manufacturing facility in Puerto Rico.
The Company's total debt to equity ratio was 87 percent at December
31, 1993, 49 percent at December 31, 1992 and 37 percent at December 31,
1991. Total debt was $89.2 million, $70.4 million and $65.6 million at the
end of 1993, 1992 and 1991, respectively. As of December 31, 1993, under
the terms of the existing credit agreements, the Company is permitted to
incur an additional $18 million in debt.
In connection with the 1993 restructuring charge, the Company reached
agreement with its lenders to amend certain loan agreement covenants.
Under the Amended and Restated Bank Credit Agreement with the lending
banks, the Company is prohibited from paying cash dividends unless waived
by the banks or the agreement is amended.
107
LOGO
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BOARD OF DIRECTORS
Charles W. Grigg Paul F. Miller F. James Skinner
Chairman and Chief Former Senior Partner Former President and
Executive Officer Miller, Anderson & Chief Executive
SPS Technologies, Inc. Sherrerd, an Officer
investment management SKF Industries, Inc.,
Howard T. Hallowell III
firm a manufacturer of ball
Financial Analyst
and roller bearings
Eastman Kodak Company Eric M. Ruttenberg
and automotive
Executive Vice
John Francis Lubin components
President
Professor Emeritus of
Tinicum Investors, Harry J. Wilkinson
Management
L.P., President and Chief
The Wharton School
an investment Operating Officer
University of Pennsylvania
management company SPS Technologies, Inc.
Allen C. Menke
Former Chairman
of the Board and
Chief Executive Officer
Artesian Industries, an air
conditioning and plumbing
products manufacturer
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OFFICERS
Charles W. Grigg John P. McGrath John M. Morrash
Chairman and Chief Vice President Treasurer
Executive Officer Corporate Services
Harry J. Wilkinson Aaron Nerenberg William M. Shockley
President and Chief Vice President Controller
Operating Officer Corporate Counsel
and Secretary
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AUDITORS TRANSFER AGENT NEW YORK STOCK
REGISTRAR EXCHANGE TICKER
Coopers & Lybrand
DIVIDEND SYMBOL: ST
2400 Eleven Penn Center
DISBURSING AGENT
Philadelphia, Pennsylvania
19103 Mellon Bank, N.A. SHAREHOLDERS WITH
c/o Mellon Securities INQUIRIES ABOUT THEIR
Transfer Services SHARE OWNERSHIP SHOULD
85 Challenger Road CONTACT MELLON BANK AT
Overpeck Centre (412) 236-8000
Ridgefield Park,
New Jersey 07660
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The Annual Meeting of shareholders will be held on Monday, May 23, 1994 at
10 a.m. at 17 Mellon Bank Center, Forum Room (8th floor), 1735 Market
Street, Philadelphia, PA.
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