- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(Thousands of dollars, except share data)
Years ended December 31
1997 1996 1995
---------------------------------------
Net sales ........................................... $588,616 $485,903 $409,814
Cost of goods sold .................................. 460,159 386,403 334,160
---------------------------------------
GROSS PROFIT .................................. 128,457 99,500 75,654
Selling, general and administrative expense ......... 70,379 61,322 49,644
---------------------------------------
OPERATING EARNINGS ............................ 58,078 38,178 26,010
Other income (expense):
Interest income .................................. 1,002 621 520
Interest expense ................................. (8,998) (7,989) (6,483)
Equity in earnings of affiliates ................. 230 853 1,701
Minority interest ................................ (224) (100)
Other, net ....................................... (788) (513) (473)
---------------------------------------
(8,778) (7,128) (4,735)
---------------------------------------
EARNINGS BEFORE INCOME TAXES .................. 49,300 31,050 21,275
Provision for income taxes .......................... 16,800 8,750 6,400
---------------------------------------
NET EARNINGS .................................. $32,500 $ 22,300 $ 14,875
=======================================
EARNINGS PER COMMON SHARE:
BASIC ....................................... $ 2.68 $ 1.87 $ 1.30
=======================================
DILUTED ..................................... $ 2.54 $ 1.77 $ 1.25
=======================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share data)
December 31
1997 1996
-------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................... $ 18,659 $ 33,310
Accounts and notes receivable, net ........................... 84,419 73,542
Inventories .................................................. 102,466 99,778
Deferred income taxes ........................................ 17,076 20,567
Prepaid expenses and other ................................... 4,268 4,579
-------------------------
TOTAL CURRENT ASSETS .................................... 226,888 231,776
-------------------------
Investments in affiliates ..................................... 5,988 4,760
Property, plant and equipment, net ............................ 172,599 148,616
Other assets .................................................. 66,573 42,848
-------------------------
TOTAL ASSETS .......................................... $472,048 $428,000
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt .......... $ 15,211 $ 16,454
Accounts payable ............................................. 45,006 34,952
Accrued expenses ............................................. 54,723 50,132
Income taxes payable ......................................... 5,563 3,919
-------------------------
TOTAL CURRENT LIABILITIES ............................... 120,503 105,457
-------------------------
Deferred income taxes ......................................... 14,799 14,505
Long-term debt ................................................ 95,507 98,838
Retirement obligations ........................................ 24,623 25,607
Minority interest ............................................. 1,826 5,997
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 13,576,846 shares
(13,292,500 shares in 1996) ................................ 6,788 6,646
Additional paid-in capital ................................... 92,597 82,561
Retained earnings ............................................ 133,391 100,891
Minimum pension liability .................................... (2,292) (2,257)
Common stock in treasury, at cost, 1,204,766 shares (1,290,762
shares in 1996) ............................................ (8,856) (7,920)
Cumulative translation adjustments ........................... (6,838) (2,325)
-------------------------
TOTAL SHAREHOLDERS' EQUITY .............................. 214,790 177,596
-------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................................ $472,048 $428,000
=========================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Thousands of dollars)
Years ended December 31
1997 1996 1995
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings .......................................................... $ 32,500 $ 22,300 $ 14,875
Reconciliation of net earnings to net cash provided by operating
activities:
Depreciation and amortization ...................................... 23,083 18,902 14,730
Equity in undistributed earnings of affiliates ..................... (230) (853) (1,701)
Net loss on sale of property, plant and equipment .................. 453 1,320 541
Deferred income taxes .............................................. 7,197 5,235 3,319
Cash used for restructuring activities ............................. (550)
Other operating items .............................................. (552) (283) 564
Changes in assets and liabilities, net of
acquisitions of businesses:
Receivables ...................................................... (6,533) (421) (1,738)
Inventories ...................................................... 1,796 1,031 (4,952)
Prepaid expenses and other ....................................... (281) 790 109
Accounts payable ................................................. 6,314 186 (811)
Accrued expenses ................................................. 3,045 4,006 (31)
Income taxes payable ............................................. 3,861 984 528
Other assets and liabilities, net ................................ (450) (2,890) 2,125
-------------------------------------------
Net cash provided by operating activities .......................... 70,203 50,307 27,008
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment ............................ (37,510) (28,220) (21,480)
Proceeds from sale of property, plant and equipment ................... 1,520 1,160 4,240
Acquisitions of businesses ............................................ (47,191) (35,580) (11,293)
Proceeds from divestitures of businesses .............................. 705
-------------------------------------------
Net cash used in investing activities .............................. (83,181) (62,640) (27,828)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings .............................................. 30,182 162,739 22,955
Reduction of borrowings ............................................... (32,862) (127,776) (25,359)
Proceeds from exercise of stock options ............................... 2,666 2,300 1,843
Purchases of treasury stock ........................................... (1,136)
-------------------------------------------
Net cash provided by (used in) financing activities ................ (1,150) 37,263 (561)
Effect of exchange rate changes on cash ............................... (523) 287 2
-------------------------------------------
Net increase (decrease) in cash and cash equivalents ............... (14,651) 25,217 (1,379)
Cash and cash equivalents at beginning of year ..................... 33,310 8,093 9,472
-------------------------------------------
Cash and cash equivalents at end of year ........................... $ 18,659 $ 33,310 $ 8,093
===========================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ...................................................... $ 10,627 $ 4,260 $ 6,134
Income taxes paid .................................................. 6,059 3,280 2,449
SIGNIFICANT NONCASH INVESTING AND FINANCING
ACTIVITIES
Issuance of treasury shares for businesses acquired ................ 4,915 5,666
Debt assumed with businesses acquired .............................. 3,179 14,976
Acquisition of treasury shares for stock options exercised ......... 774 3,253
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Thousands of dollars, except share data)
Additional Minimum Cumulative Total
Common Paid-In Retained Pension Treasury Translation Shareholders'
Stock Capital Earnings Liability Stock Adjustments Equity
----------------------------------------------------------------------------------------------
Balance, December 31, 1994 .... $6,378 $68,124 $ 63,716 $ (1,235) $ (5,990) $ (6,889) $124,104
Issuance of 147,306 shares
of common stock under
stock option plans ........... 73 2,039 2,112
Issuance of 283,278 shares
of treasury stock for
business acquired ............ 4,522 1,144 5,666
Net earnings .................. 14,875 14,875
Minimum pension liability
changes ...................... (1,391) (1,391)
Foreign currency translation
adjustment ................... 283 283
----------------------------------------------------------------------------------------------
Balance, December 31, 1995 .... 6,451 74,685 78,591 (2,626) (4,846) (6,606) 145,649
Issuance of 390,682 shares
of common stock under
stock option plans ........... 195 7,060 7,255
Acquisition of 121,846
shares of treasury stock
under stock option plans ..... (3,253) (3,253)
Net earnings .................. 22,300 22,300
Minimum pension liability
changes ...................... 369 369
Foreign currency translation
adjustment ................... 4,281 4,281
Issuance of 29,600 shares of
treasury stock for
contribution to pension
plan ......................... 816 179 995
----------------------------------------------------------------------------------------------
Balance, December 31, 1996 .... 6,646 82,561 100,891 (2,257) (7,920) (2,325) 177,596
Issuance of 284,346 shares
of common stock under
stock option plans ........... 142 6,095 6,237
Acquisitions of 47,424
shares of treasury stock ..... (1,910) (1,910)
Issuance of 133,420 shares
of treasury stock for
businesses acquired .......... 3,941 974 4,915
Net earnings .................. 32,500 32,500
Minimum pension liability
changes ...................... (35) (35)
Foreign currency translation
adjustment ................... (4,513) (4,513)
----------------------------------------------------------------------------------------------
Balance, December 31, 1997 .... $6,788 $92,597 $133,391 $ (2,292) $ (8,856) $ (6,838) $214,790
==============================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
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. Investments in affiliates, owned 20 percent or more
but not in excess of 50 percent, are recorded on the equity method. 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.
The Company provides reserves against its slow moving, obsolete and excess
inventories based upon factors which include current customer requirements,
quantity on hand, age of inventory and months supply of inventory. The
provisions for such reserves are recorded as a component of cost of goods sold.
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. Fully depreciated
items, other than buildings, generally are removed from the accounts.
Long-Lived Assets
Long-lived assets, including intangible assets, are reviewed when facts
and circumstances suggest that they may be impaired. If this review indicates
that 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. Intangible assets, included in other assets, were approximately
$49,000 and $23,600 at December 31, 1997 and 1996, respectively. Intangible
assets consist primarily of goodwill which arose from the excess of the cost of
purchased businesses over the value of the underlying net assets and is being
amortized by the straight-line method over periods not exceeding 40 years.
Accumulated amortization at December 31, 1997 and 1996, was $3,900 and $2,100,
respectively. Amortization of intangible assets was $2,273, $896 and $474 in
1997, 1996 and 1995, respectively.
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. 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.
Foreign Currency Translation
With the exception of an operation in Brazil, the financial statements of
the Company's non-United States 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. For the operation in Brazil, financial
statements are translated at either current or historical exchange rates, as
appropriate. These adjustments, along with gains and losses on currency
transactions (denominated in currencies other than local currency), are
reflected in the statements of consolidated operations.
Effective January 1998, Brazil will no longer be considered a highly
inflationary economy, because the three-year cumulative rate of inflation is
below 100%. The Company will measure the financial statements of its Brazilian
entity using the Brazilian real as its functional currency.
Forward Exchange Contracts
The Company enters into forward exchange contracts primarily as hedges
relating to identifiable currency positions. These financial instruments are
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
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 are classified in the same category
as the transaction hedged in the statements of consolidated cash flows.
Per Share Data
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per
Share." This Statement establishes standards for computing and presenting
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. The Company adopted SFAS No. 128 in the fourth quarter of 1997.
Prior periods have been restated in accordance with SFAS No. 128. This
restatement resulted in no material change from amounts previously reported.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles 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
conditions but does not generally require collateral. The Company invests
available cash in money market securities of various banks with high credit
ratings.
Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income."
This Statement establishes standards for reporting and disclosing comprehensive
income and its components. Comprehensive income includes all changes in equity
except those resulting from investments by owners and distribution to owners.
This Statement is effective for fiscal years beginning after December 15, 1997.
The Company will adopt SFAS No. 130 and begin reporting comprehensive income in
the first quarter of 1998.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131 "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
reporting segment results based on the way management organizes segments within
the enterprise for making operating decisions and assessing performance. This
Statement is effective for financial statements for periods beginning after
December 15, 1997. This Statement need not be applied to interim financial
statements in the initial year of its application. The Company will adopt SFAS
No. 131 in the fourth quarter of 1998, and is still evaluating its impact on
the Company's segment disclosures.
2. COMMON STOCK SPLIT
On July 29, 1997, the Company's Board of Directors approved a two-for-one
split of its common stock, effective August 20, 1997, distributed to
shareholders on August 29, 1997. In conjunction with the stock split, the Board
of Directors also approved a reduction in the par value of the common shares
from $1.00 to $0.50, and increased the number of authorized common shares from
30,000,000 to 60,000,000. All share and per share data for prior periods
presented have been restated to reflect the stock split.
3. 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.
In January 1997, the Company acquired all of the outstanding shares of
Postkey, Ltd. (Postkey), a manufacturer of cylindrical thread roll dies,
located in
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
Nuneaton, England for $1,200. The excess of purchase price over the fair values
of the net assets acquired was approximately $860 and has been recorded as
goodwill, which is being amortized on a straight-line basis over 20 years.
On February 24, 1997, the Company acquired all of the outstanding shares
of Greer Stop Nut, Inc. (Greer), a manufacturer of nylon insert nuts, located
in Nashville, Tennessee for $10,000. The excess of the purchase price over the
fair values of the net assets acquired was approximately $5,000 and has been
recorded as goodwill, which is being amortized on a straight-line basis over 40
years.
On March 7, 1997, the Company acquired the assets of RJF International
Corporation's (RJF) Bonded Magnet Business, a manufacturer of flexible ferrite
bonded magnets, located in Cincinnati and Marietta, Ohio for $9,200. The excess
of the purchase price over the fair values of the net assets acquired was
approximately $5,200 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 30 years.
On May 5, 1997, the Company acquired all of the outstanding shares of Lake
Erie Design Co., Inc. (LED), a manufacturer of high precision ceramic cores for
the investment casting industry, located in Wickliffe, Ohio for $8,100. The
excess of the purchase price over the fair values of the net assets acquired
was approximately $6,500 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 30 years.
On September 23, 1997, the Company acquired all of the outstanding shares
of Mohawk Europa Limited (Mohawk), a specialty cutting tool manufacturer,
located in Shannon, Ireland for $9,100. The purchase price approximated the fair
value of the net assets acquired.
On December 2, 1997, the Company acquired all of the outstanding shares of
Magnetic Technologies Corporation (MTC), a designer and manufacturer of
magnetic, electronic, and mechanical subassemblies of copiers and printers for
the electronic office equipment industry, located in Rochester, New York and
Rochester, England for $14,400. Approximately $9,600 was paid in cash and the
remainder in common stock of the Company. The excess of the purchase price over
the fair values of the net assets acquired was approximately $8,700 and has
been recorded as goodwill, which is being amortized on a straight-line basis
over 40 years.
In 1996, the Company completed two acquisitions of magnetic material
manufacturers. On June 14, 1996, the Company acquired all of the outstanding
shares of Flexmag Industries, Inc. (Flexmag) located in Marietta, Ohio, and the
assets of a related magnet business located in Seneca, South Carolina, for
$21,274. On July 3, 1996, the Company acquired all of the outstanding shares of
Swift Levick Magnets Ltd. (Swift Levick), located in Derbyshire, England for
$18,491. The excess of the purchase price over the fair value of the net assets
acquired for both acquisitions was approximately $13,300 and has been recorded
as goodwill, which is being amortized on a straight-line basis over 30 years.
On October 8, 1996, the Company acquired 85 percent of the capital stock
of Mecair Aerospace Industries, Inc. (Mecair), a manufacturer of aerospace
fasteners, located in Pointe Claire (Montreal), Quebec, Canada for $8,300. The
excess of the purchase price over the fair value of the net assets acquired was
approximately $3,500 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 40 years.
The following unaudited pro forma consolidated results of operations are
presented as if the Greer, RJF, LED, Mohawk, MTC, Flexmag, Swift Levick and
Mecair acquisitions had been made at the beginning of the periods presented.
The effects of the Postkey acquisition is not material and, accordingly, has
been excluded from the pro forma presentation.
Years Ended
December 31
1997 1996
--------------------------
Net sales .......................... $620,734 $570,978
Net earnings ....................... 33,291 23,585
Basic earnings per
common share .................... 2.74 1.98
Diluted earnings per
common share .................... 2.60 1.88
The pro forma consolidated results of operations include adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with 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.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
4. ACCOUNTS AND NOTES RECEIVABLE
1997 1996
----------------------
Trade ............................ $84,454 $ 72,273
Notes and other .................. 1,992 2,937
----------------------
86,446 75,210
Less allowance for
doubtful receivables .......... 2,027 1,668
----------------------
$84,419 $ 73,542
======================
5. INVENTORIES
1997 1996
----------------------
Finished goods ........... $ 38,222 $45,726
Work-in-process .......... 36,871 30,363
Raw materials and
supplies .............. 20,843 17,010
Tools .................... 6,530 6,679
----------------------
$102,466 $99,778
======================
6. INVESTMENTS IN AFFILIATES
At December 31, 1997, the Company's investments in affiliates consist of
22.05 percent interest in Precision Fasteners Limited (PFL), Bombay, India, and
a 55 percent interest in Shanghai SPS Biao Wu Fasteners Co. Ltd. (SSBW),
Shanghai, China. SSBW is accounted for as an affiliate under the equity method
because the Company is not able to exercise effective control over the
operations. In 1997, the Company acquired controlling interest in Unbrako
Products Pte. Ltd. (UPL), Singapore, and National-Arnold Magnetics Company
(NAM), Adelanto, California, United States. In 1995, the Company acquired
controlling interests in Metalac S.A. Industria e Comercio (Metalac), Sorocaba,
Brazil, and SPS/Unbrako K.K., Tokyo, Japan. Prior to the acquisition dates, the
Company had a 50 percent or less interest in these companies and, accordingly,
classified these investments as affiliates and accounted for them using the
equity method of accounting.
Dividends received from affiliates were $99, $339 and $387 in 1997, 1996
and 1995, respectively. Retained earnings in 1997, 1996 and 1995 included
undistributed earnings of affiliates, net of deferred taxes, of $3,161, $3,945
and $3,369 respectively. At December 31, 1997, the market value of PFL's common
stock was approximately $3,000.
The table below contains the summarized financial information of
affiliates. The operations of UPL, NAM,
Metalac and SPS/Unbrako K.K. are included in the table up to the date the
Company acquired a controlling interest.
1997 1996 1995
---------------------------------
Condensed Statements
of Earnings
Net sales .................. $51,725 $33,300 $48,256
Gross profit ............... 11,489 9,600 16,035
Operating earnings ......... 4,441 5,431 6,955
Net earnings ............... 1,915 3,244 5,428
Condensed Balance
Sheets
Current assets ............. $36,955 $28,233 $21,414
Noncurrent assets .......... 31,778 22,210 15,139
---------------------------------
$68,733 $50,443 $36,553
=================================
Current liabilities ........ $29,068 $22,583 $16,498
Noncurrent liabilities ..... 18,087 8,529 3,034
Shareholders' equity ....... 21,578 19,331 17,021
---------------------------------
$68,733 $50,443 $36,553
=================================
7. PROPERTY, PLANT AND EQUIPMENT
1997 1996
----------------------
Land .............................. $ 6,851 $ 6,565
Buildings ......................... 63,074 57,891
Machinery and
equipment ...................... 214,629 194,459
Construction in progress .......... 19,672 17,147
----------------------
304,226 276,062
Less accumulated
depreciation ................... 131,627 127,446
----------------------
$172,599 $148,616
======================
Depreciation expense was $20,810, $18,006 and $14,256 in 1997, 1996 and
1995, respectively.
8. NOTES PAYABLE
1997 1996
-------------------
Short-term bank
borrowings and notes
payable ........................ $ 9,178 $11,708
Current portion of
long-term debt ................. 6,033 4,746
-------------------
$15,211 $16,454
===================
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
The Company's weighted-average interest rate for short-term bank
borrowings and notes payable was 5.6% and 6.8% as of December 31, 1997 and
1996, 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 $15,010 as of December 31, 1997. The Company also has unused long
term credit facilities as discussed in Note 10.
9. ACCRUED EXPENSES
1997 1996
---------------------
Employee compensation
and related benefits ......... $27,114 $24,625
Other ........................... 27,609 25,507
---------------------
$54,723 $50,132
=====================
10. LONG-TERM DEBT
1997 1996
--------------------
Note Purchase Agreement,
fixed interest rates of
7.7% to 7.88% ........... $85,000 $85,000
Loan Agreement, variable
interest rate, 7.813% and
6.625% at December 31,
1997 and 1996 ........... 5,962 8,872
Industrial Development
Revenue Bond Series
1987, variable interest
rate, 4.4% and 4.25% at
December 31, 1997 and
1996, due 2012 .......... 5,300 5,300
Other ...................... 5,278 4,412
--------------------
101,540 103,584
Less current installments
(included in notes
payable) ................ 6,033 4,746
--------------------
$95,507 $98,838
====================
Installments due during the next five years are as follows: $6,033,
$2,688, $438, $5,493, $5,490 in 1998 through 2002, respectively.
The Company has 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.
Under the Bank Credit Agreement dated June 28, 1995, the Company may
borrow up to $55,000 in either United States dollars or certain Eurocurrencies.
The agreement also provides for a $10,000 sublimit, within the total $55,000
limit, which is available for letters of credit. 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) an
eurocurrency rate equal to the effective interbank rate, as defined, plus a
premium which ranges from .5 to 1.5 percentage points based on the consolidated
fixed charge coverage ratio, as defined, or c) at a rate and term negotiated
between each bank and the Company, as applicable. During 1997 and 1996, the
average interest rate on borrowings outstanding was 8.25 percent and 6.3
percent, respectively. The Company is required to pay a commitment fee of .3
percentage points on unborrowed amounts. The Bank Credit Agreement is a four
year agreement, extendible for one year on each of the first and second
anniversary dates. At December 31, 1997 and 1996, no amounts were outstanding
under this credit facility. Except as disclosed below, all of the Company's
loan agreements are unsecured.
As part of the 1996 acquisition of Swift Levick Magnets Ltd. (as described
in Note 3), the Company entered into a loan agreement with the seller ($5,962
at December 31, 1997). The loan is collateralized by a bank letter of credit,
bears interest at LIBOR plus .75 percent and is due in annual installments from
June 30, 1998 to June 30, 1999. In 1997 and 1996, the average interest rate was
7.6 percent and 6.7 percent, respectively.
The Series 1987 Bonds were issued to finance the acquisition and
improvement of a fastener manufacturing facility in Utah and are collateralized
by a first mortgage on the facility and a bank letter of credit. In 1997 and
1996, the average interest rate was 3.9 percent and 3.7 percent, respectively.
The Company is subject to a number of restrictive covenants under these
various debt agreements. Covenants associated with the Note Purchase Agreement
are generally more restrictive than those of the Bank Credit Agreement. The
Note Purchase Agreement contains the following significant financial covenants:
maintenance of a consolidated debt-to-total capitalization (tangible net worth
plus total debt) ratio of not
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
more than 50%; maintenance of a minimum consolidated tangible net worth of at
least $137,700 as of December 31, 1997; and maintenance of a fixed charge
coverage ratio of at least 1.75 to 1. Under these covenants, dividends paid by
the Company may not exceed $24,200 as of December 31, 1997 plus 50 percent of
consolidated net income (or minus 100 percent of consolidated net loss) from
January 1, 1998 to the date of the dividend. Certain of the Company's debt
agreements contain cross default and cross acceleration provisions. The Company
is currrently in compliance with all financial covenants. At year end 1997 the
Company (as restricted by loan covenants) would have been allowed to borrow an
additional $55,600.
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 13 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 $4,504, $3,872 and $2,507 in 1997, 1996 and 1995,
respectively.
At December 31, 1997, the future minimum annual rentals on non-cancelable
leases which have initial or remaining terms of more than one year aggregated
$32,595. The minimum payments over the next five years are as follows: $4,654,
$4,705, $3,819, $3,656 and $3,357 in 1998 through 2002, respectively.
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, 1997, the Company had an accrued
liability of $4,500 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. Management
believes the overall costs of environmental remediation will be incurred over an
extended period of time. 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. 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.
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 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 or
results of operations.
12. INCOME TAXES
The components of the provision for income taxes were as follows:
1997 1996 1995
-------------------------------
Currently payable:
United States
Federal ............. $ 7,592 $1,205 $ 400
State and local ..... 940 500 346
Non-United States 1,071 1,810 2,335
-------------------------------
9,603 3,515 3,081
-------------------------------
Deferred:
United States
Federal ............. 4,774 3,557 810
State and local ..... 196 150 (280)
Non-United States....... 2,227 1,528 2,789
-------------------------------
7,197 5,235 3,319
-------------------------------
$16,800 $8,750 $6,400
===============================
The tax expense that results from allocating certain tax benefits to
reduce goodwill of an acquired entity was $407 in 1997. The income tax benefits
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
of the employee stock option compensation expense for tax purposes in excess
of amounts recognized for financial reporting purposes credited to additional
paid-in capital was $2,356 in 1997, $1,534 in 1996 and $265 in 1995.
The components of earnings from operations before income taxes were as
follows:
1997 1996 1995
---------------------------------
United States .............. $41,783 $25,114 $10,948
Non-United States .......... 7,517 5,936 10,327
---------------------------------
$49,300 $31,050 $21,275
=================================
Temporary differences comprising the net deferred income tax asset
(liability) on the consolidated balance sheets were as follows:
1997 1996
-------------------------
Inventory ....................... $ 7,313 $ 7,720
Post-retirement benefits
other than pensions .......... 4,493 4,721
Other employee benefits
and compensation ............. 6,330 5,786
Alternative minimum tax
credits ...................... 1,072 1,758
Advance corporate tax ........... 148 508
Accrued expenses ................ 3,768 4,175
Net operating loss carry for-
wards ........................ 4,256 6,926
Valuation allowances ............ (7,291) (8,857)
----------------------
Deferred income tax
asset ..................... 20,089 22,737
---------------------
Depreciation .................... (11,882) (10,500)
Pension benefits ................ (4,161) (4,441)
Other, net ...................... (1,769) (1,734)
---------------------
Deferred income tax
liability ................. (17,812) (16,675)
----------------------
Net deferred income tax
asset ..................... $ 2,277 $ 6,062
=====================
The Company has recorded a net deferred tax asset of $2,277 million at
December 31, 1997. Realization of the net deferred tax asset is dependent on
generating sufficient taxable income prior to expiration of any net operating
loss carry forwards (NOLs). Although realization is not assured, management
believes it is more likely than not that the recorded net deferred tax asset
will be realized. At December 31, 1997, the Company had United States NOLs of
$2,300 which begin to expire in 2009, Brazilian NOLs of $7,300 with no
expiration dates and other non-United States NOLs of $2,000 which begin to
expire in 2003. The United States NOLs relate to the pre-owned operating losses
of a 1997 business acquisition. These losses must be used to offset future
taxable income of the acquired business and are not available to offset the
consolidated taxable income of all United States owned subsidiaries. The
valuation allowance at December 31, 1997 relates to certain state and
non-United States tax jurisdictions. The net change in the valuation allowance
for 1997 results primarily from the release of valuation allowances related to
1996 business acquisitions based on the reevaluation of the realization of
future benefits, net of increases for additional Brazilian NOLs and valuation
allowances acquired with the 1997 business acquisitions. Included in the
December 31, 1997 and 1996 valuation allowance is $255 and $847, respectively,
for deferred tax assets for which subsequently recognized tax benefits, if any,
will be allocated to reduce goodwill of an acquired entity.
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 for 1997 and 1996, and 34 percent for 1995 and that reported for
financial statement purposes:
1997 1996 1995
----------------------------------
Provision computed at
the United States
federal statutory
income tax rate ........ $17,255 $10,868 $7,234
Earnings of certain
subsidiaries taxed at
different rates ........ (1,504) (934) (664)
Permanent items ........... 345 973 1,346
State income tax, net
of federal benefit ..... 583 246 256
Valuation allowances ...... 150 (2,417) (1,824)
Other, net ................ (29) 14 52
--------------------------------
Provision for income
taxes .................. $16,800 $8,750 $6,400
================================
United States income taxes have not been provided on unremitted earnings
of certain subsidiaries located outside the continental United States of
approximately $49,400 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.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
13. 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 based upon the number of
years of employee service. The Company's contribution expense for the plans was
$629 in 1997, $245 in 1996 and $208 in 1995.
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, 1997 and 1996, the plans' assets included 440,664 shares of the
Company's common stock with fair values of $19,224 and $14,156, respectively.
There were no dividends received from Company stock for the years ended
December 31, 1997 and 1996.
--------------------------------
The following table sets forth the funded status of these plans at December 31,
1997 and 1996:
1997 1996
--------------------------------------------------------------------
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 ...................... $145,851 $13,435 $134,120 $11,283
Actuarial present value of benefit obligations:
Vested benefits ............................... (126,521) (19,480) (113,990) (17,123)
Nonvested benefits ............................ (926) (799) (588) (1,381)
------------------------------------------------------------------
Accumulated benefit obligation ................ (127,447) (20,279) (114,578) (18,504)
Projected future salary increases .............. (9,591) (105) (8,634) (60)
------------------------------------------------------------------
Projected benefit obligation ................... (137,038) (20,384) (123,212) (18,564)
------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation ............................ 8,813 (6,949) 10,908 (7,281)
Unrecognized net (asset) obligation at date of
initial application ........................... (3,716) 119 (4,670) 163
Unrecognized prior service (gain) cost ......... (9,482) 901 (10,535) 1,067
Unrecognized net loss .......................... 17,066 3,313 19,150 3,242
Recognized minimum liability ................... (4,285) (4,517)
------------------------------------------------------------------
Prepaid (accrued) pension cost at December 31 . $ 12,681 $(6,901) $ 14,853 $(7,326)
==================================================================
--------------------------------
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, 1997 and 1996. 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.
The assumptions used as of December 31, 1997, 1996 and 1995 in determining
the domestic net pension cost and net pension liability were as follows:
1997 1996 1995
--------------------------------
Discount rate ............... 7.00% 7.65% 7.25%
Rate of return on plan
assets ................... 9.00% 10.00% 10.00%
Rate of future compen-
sation increase .......... 5.00% 5.00% 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 range of assumptions used as of
December 31, 1997 was as follows: discount rate, 6 to 7 percent; rate of return
on plan assets, 9 to 9.5 percent; rate of future compensation increase, 4 to
4.5 percent.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
The net periodic pension cost incurred for 1997, 1996 and 1995,
respectively, for these plans, included the following components:
1997 1996 1995
--------------------------------------
Service cost ........... $ 6,077 $ 5,559 $ 4,665
Interest cost .......... 10,460 9,424 9,226
Actual return on plan
assets .............. (17,681) (13,901) (21,378)
Net amortization and
deferral ............ 3,776 1,205 11,337
-------------------------------------
Net periodic pension
cost ................ $ 2,632 $ 2,287 $ 3,850
=====================================
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.
An assumed discount rate of 7 percent and 7.65 percent was used to
determine the accumulated postretirement benefit obligation at December 31,
1997 and 1996, respectively.
The funded status of the plans and amounts recognized in the Company's
consolidated financial statements as of December 31 were as follows:
1997 1996
----------------------
Accumulated postre-
tirement benefit
obligation:
Current retirees ......... $ 4,372 $ 4,566
Fully eligible actives 1,745 1,430
Other actives ............ 2,823 3,378
---------------------
Total accumulated
postretirement ben-
efit obligation .......... 8,940 9,374
Unrecognized prior
service gain ............. 4,251 4,783
Unrecognized net loss . (414) (728)
---------------------
Postretirement benefit
obligation ............... $12,777 $13,429
=====================
Net periodic postretirement benefit cost included the following
components:
1997 1996 1995
---------------------------------
Service cost .................. $159 $178 $159
Interest cost ................. 629 686 846
Unrecognized prior
service gain ............... (531) (531) (531)
Net amortization and
deferral ................... (3) 26 77
-----------------------------
Net periodic postretire-
ment benefit cost .......... $254 $359 $551
=============================
A 7 percent annual rate of increase in the per capita
costs of covered health care benefits was assumed for 1997. 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,
1997 by $71 and increase the aggregate of the service and interest components
of net periodic postretirement benefit cost for 1997 by $9.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
14. 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
3,300,000 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 grant. The exercise price of outstanding
options is determined as follows: fixed price options are granted at market
value on date of grant; and discounted price options are granted at par value
of the common stock on date of grant. The options maximum term is 10 years and
fixed options granted vest over a five year period and discounted options
granted vest after one year.
The Company has adopted the disclosure-only provisions of 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 cost based on the fair value of
the options granted at grant date as prescribed by SFAS No. 123, net income and
earnings per share would have been reduced to the pro forma amounts as follows:
Years Ended December 31
1997 1996 1995
--------------------------------------
Net earnings ............ $ 31,775 $ 21,871 $ 14,729
Basic earnings per
common share ......... 2.62 1.84 1.29
Diluted earnings per
common share ......... 2.48 1.74 1.24
The weighted-average fair value of options granted per share were $14.51,
$10.25 and $6.31 in 1997, 1996 and 1995, 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 29 percent in 1997 and 32 percent in 1996
and 1995, expected option life of six years in 1997 and five years in 1996 and
1995, and no expected dividend payments over the life of the option. The
expected weighted-average risk-free interest rates of 6.2 percent, 5.3 percent
and 7.1 percent were used for 1997, 1996 and 1995, respectively.
At December 31, 1997, 62 individuals held options to purchase an aggregate
of 1,157,124 shares (fixed 1,134,252 discounted 22,872). There are 701,252
fixed price options outstanding with exercise prices ranging from $10.25 to
$14.22 per share (a weighted-average exercise price per share of $12.31) and
expiration dates ranging from November 28, 2000 to February 6, 2005 (a
weighted-average remaining contractual life of six years). Of these 701,252
fixed price options outstanding, 538,852 shares are currently exercisable with
a weighted-average exercise price of $12.00 per share. In addition, there are
260,000 fixed price options outstanding with exercise prices ranging from
$19.75 to $27.00 per share (a weighted-average exercise price per share of
$24.11) and expiration dates ranging from November 30, 1998 to January 31, 2006
(a weighted-average remaining contractual life of six years). Of these 260,000
fixed price options outstanding, 100,800 shares are currently exercisable with
a weighted-average exercise price of $23.57 per share. Also, there are 173,000
fixed price options outstanding with exercise prices ranging from $33.91 to
$45.59 per share (a weighted-average exercise price per share of $34.58) and
expiration dates ranging from February 9, 2007 to December 16, 2007 (a
weighted-average remaining contractual life of nine years). Of these 173,000
fixed price options outstanding, no shares are currently exercisable. The
discounted price options outstanding have an exercise price of $ .50 and
expiration dates ranging from May 31, 1999 to June 1, 2007 with a weighted-
average remaining contractual life of six years. Of the 22,872 discounted price
options outstanding, 21,016 shares are currently exercisable. No variable price
options were outstanding at December 31, 1997.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
Changes in shares under option were as follows:
1997 1996 1995
------------------------- ------------------------- ------------------------
Shares Weighted- Shares Weighted- Shares Weighted-
Average Average Average
Exercise Exercise Exercise
Price Price Price
Options outstanding at
beginning of year ................ 1,261,308 $ 14.92 1,461,900 $ 13.24 1,398,204 $ 12.99
Additions (deductions):
Options granted .................. 180,856 34.59 198,264 27.01 219,612 15.22
Options exercised ................ (271,240) 12.24 (385,656) 14.40 (138,516) 13.15
Options expired or terminated (13,800) 27.00 (13,200) 20.85 (17,400) 15.10
--------- --------- ---------
Options outstanding at end of
year ............................. 1,157,124 18.31 1,261,308 14.92 1,461,900 13.24
========= ========= =========
Options exercisable at end of
year ............................. 660,668 13.40 699,354 12.82 925,184 13.60
Shares available for future
option grants .................... 251,986 432,148 622,238
Total exercise of options
outstanding at end of year ....... $ 21,193 $ 18,818 $ 19,358
Under the nonqualified stock option plan, the Company has issued 26,922
restricted shares. Each year 20 percent of the restricted shares granted become
free of any restrictions. As of December 31, 1997, 22,401 shares issued are
restricted under the nonqualified stock option plan.
---------------
15. PER SHARE DATA
Earnings per share amounts have been restated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." This
restatement resulted in no material change from amounts previously reported.
Earnings per share are computed as follows:
Years Ended December 31
1997 1996 1995
-------------------------------------------------
Net earnings .................................. $ 32,500 $ 22,300 $ 14,875
================================================
Average shares of common stock outstanding
used to compute basic earnings per common
share ........................................ 12,128,173 11,918,938 11,441,332
Additional common shares to be issued assuming
exercise of stock options, net of shares
assumed reacquired ........................... 668,085 647,926 420,684
------------------------------------------------
Shares used to compute dilutive effect of stock
options ...................................... 12,796,258 12,566,864 11,862,016
================================================
Basic earnings per common share ............... $ 2.68 $ 1.87 $ 1.30
================================================
Diluted earnings per common share ............. $ 2.54 $ 1.77 $ 1.25
================================================
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
Options to purchase 92,200 shares of common stock at $22.69 per share were
outstanding during 1995 but were not included in the computation of diluted EPS
in 1995 because the options' exercise price was greater than the average market
price of the common shares. These options expire on December 7, 1999.
16. PREFERRED STOCK PURCHASE RIGHTS
As provided in the Rights Agreement dated November 11, 1988, the Board of
Directors declared a dividend distribution of one Right for each outstanding
share of common stock. The Rights Agreement was amended on January 22, 1991 and
on November 16, 1994. 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.
17. FINANCIAL INSTRUMENTS
Fair Value of Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash flows at
the rates currently available to the Company for debt of the same remaining
maturities. The fair value of the Company's variable rate debt approximates its
carrying value. The carrying amount and the estimated fair value of the
Company's long-term debt, including the current portion, are as follows:
1997 1996
----------------------
Carrying amount ............... $101,540 $103,584
Estimated fair value .......... 109,350 108,114
Forward Exchange Contracts
At December 31, 1997 and 1996, the Company had $6,314 and $2,326,
respectively, of forward foreign currency exchange contracts outstanding. These
contracts are primarily in British pounds and Irish punts, mature within 60
days and approximate fair values based on rates available to the Company at
December 31, 1997 and December 31, 1996, respectively. The counterparties of
these agreements are major financial institutions; therefore, management
believes the risk of incurring losses related to these contracts is remote.
18. RESEARCH AND DEVELOPMENT
Research and development costs incurred were $5,290, $5,649 and $5,247 for
1997, 1996 and 1995, respectively.
19. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in two industry segments: Fasteners (high-strength
precision mechanical fasteners and precision components); and Materials
(superalloys in ingot form, ceramic cores and magnetic materials). The Company
operates in the following geographic areas: United States, Europe (principally
England and Ireland) and other (principally Australia, Brazil, Canada, China,
Japan, Mexico and Singapore). 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. Principal markets include aerospace, transportation,
industrial machinery and equipment, electrical and medical equipment. Interest
income and expense, equity in earnings of affiliates and other income and
expenses are excluded from the determination of segment operating earnings. In
1996, the Company recorded a pre-tax charge for the cost of employee
separations of $3,600 which has been included in selling, general and
administrative expense. For segment reporting purposes, $2,700 reduced the
fastener segment operating earnings and $900 increased unallocated corporate
costs.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of dollars, except share data)
Industry Segments
1997 1996 1995
-------------------------------------
Net sales:
Fasteners ........................... $394,868 $334,677 $273,556
Materials ........................... 193,748 151,226 136,258
------------------------------------
Net sales ........................... $588,616 $485,903 $409,814
====================================
Operating earnings:
Fasteners ........................... $ 42,398 $ 26,997 $ 16,657
Materials ........................... 25,380 19,581 17,103
Unallocated corporate costs ......... (9,700) (8,400) (7,750)
------------------------------------
Operating earnings .................. $ 58,078 $ 38,178 $ 26,010
====================================
Identifiable assets:
Fasteners ........................... $301,720 $298,548 $248,802
Materials ........................... 170,328 129,452 77,285
------------------------------------
Total assets ........................ $472,048 $428,000 $326,087
====================================
Depreciation and Amortization and Capital Additions:
Depreciation and Amortization Capital Additions
------------------------------------ ----------------------------------
1997 1996 1995 1997 1996 1995
-------------------------------------------------------------------------
Fasteners ......... $15,582 $13,620 $10,875 $25,320 $20,936 $16,258
Materials ......... 7,501 5,282 3,855 12,190 7,284 5,222
------------------------------------------------------------------------
Total .......... $23,083 $18,902 $14,730 $37,510 $28,220 $21,480
========================================================================
Geographic Areas
1997 1996 1995
----------------------------------------
Net sales:
United States ............... $ 427,034 $ 345,591 $ 313,810
Europe ...................... 121,594 99,430 89,106
Other ....................... 64,531 60,668 26,158
Inter-area .................. (24,543) (19,786) (19,260)
---------------------------------------
Net sales ................... $ 588,616 $ 485,903 $ 409,814
=======================================
Operating earnings:
United States ............... $ 48,273 $ 31,052 $ 18,037
Europe ...................... 8,589 5,872 5,207
Other ....................... 1,290 1,267 1,704
Eliminations ................ (74) (13) 1,062
---------------------------------------
Operating earnings .......... $ 58,078 $ 38,178 $ 26,010
=======================================
Identifiable assets:
United States ............... $ 302,089 $ 253,718 $ 211,978
Europe ...................... 113,600 107,557 68,196
Other ....................... 56,586 67,224 46,332
Eliminations ................ (227) (499) (419)
---------------------------------------
Total assets ................ $ 472,048 $ 428,000 $ 326,087
=======================================
Included in United States sales are export sales of $55,000 in 1997, $39,400 in
1996 and $35,700 in 1995.
- --------------------------------------------------------------------------------
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
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, 1997 and 1996 and the
related statements of consolidated operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
February 2, 1998