EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
Esterline management continues to build upon a basic strategy of
balancing inherent swings in demand in markets for capital intensive
engineered products through the development of manufacturing businesses
that serve different industrial markets. This approach was affirmed in
1996 as reduced sales and operating earnings experienced by the
Automation and Instrumentation Groups were more than offset by a solid
recovery realized by the Aerospace / Defense Group.
Esterline presently consists of 13 separate operating units
grouped into three business segments. The six units that comprise the
core of the Company - Excellon, Whitney, Armtec, Auxitrol, Federal and
Korry - accounted for approximately 81% and 82% of net sales and 81% and
83% of operating earnings in 1996 and 1995, respectively.
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
COMPARED TO YEAR ENDED OCTOBER 31, 1995
Net sales remained consistent with the prior period at $352.8
million in 1996 compared with $351.9 million in 1995. Automation Group
sales declined 6% to $146.7 million compared with $156.1 million for the
prior year. Much of the revenue decline was attributed to uncertainty
among automated manufacturing equipment users, especially in the printed
circuit board industry, as they delayed capital purchase decisions. The
Instrumentation Group also experienced a slight decrease in sales of 3%
to $94.5 million compared with $97.8 million in 1995. However, on a
proforma basis when results are restated for Scientific Columbus which
was sold late in 1995, the group experienced an increase in net sales of
6%. The Aerospace / Defense Group compensated for the slight declines in
revenues experienced by the other two segments by posting a 14% increase
in net sales totalling $111.7 million compared to $98 million for the
prior year. A recovering aerospace market and the acquisition of Mason
Electric Co., which was completed at the beginning of the fourth quarter
of 1996, were primarily responsible for the improvement. Net sales to
foreign customers, including export sales by domestic operations, totaled
$122.6 million and $124.1 million in 1996 and 1995, respectively, and
accounted for 35% of the Company's net sales in both years.
Net sales for the year ended October 31, by group, were as
follows:
In thousands 96 95
- ------------- ------------------------
Automation $146,698 $156,116
Aerospace and Defense 111,691 98,027
Instrumentation 94,454 97,754
$352,843 $351,897
Total gross margin as a percentage of sales remained consistent with the
prior year at 39%. On a comparative basis, in 1996, the Automation and
Aerospace/Defense Groups' gross margins increased while the
Instrumentation Group's gross margin decreased. The gross margins by
group ranged from 38% to 39% in 1996, compared with 38% to 41% in the
prior year.
Selling, general and administrative expenses (which include corporate
expenses, and research, development and related engineering costs)
decreased to $103.4 million in 1996 when compared with $107.1 million in
the prior year. Reductions were realized in large measure due to the
absence of selling, general and administrative expenses at Scientific
Columbus in 1996. As a percentage of sales, these expenses improved to
29% in 1996 from 30% in 1995. Research, development, and related
engineering costs decreased to $15.4 million in 1996 from $16.6 million
in 1995.
In 1996, operating earnings (excluding corporate expenses) increased 15%
to $42.8 million from $37.3 million in the prior year. The primary areas
of improvement were in the Aerospace / Defense Group where operating
earnings more than doubled to $13.6 million in 1996 from $6.5 million in
the prior year. Recovery in aerospace markets as well as the operating
earnings generated by Mason contributed to this increase. The Automation
Group's operating earnings decreased 2% to $23.7 million in 1996 from
$24.2 million in 1995 reflecting a showdown in electronics industry
capital expenditures. The Instrumentation Group's operating earnings
decreased to $5.5 million in 1996 when compared with $6.6 million in the
prior year.
Interest income for the year increased to $2 million in 1996 compared
with $1.2 million in the prior year. Cash, generated from operations and
the proceeds of a public offering, was primarily invested in tax-exempt
securities.
Interest expense decreased $1.3 million in 1996 to $4.3 million compared
with $5.6 million in 1995. This reduction is primarily related to a
continuing decline in debt which included the initial principal payment
on the 8.75% Senior Notes.
The effective income tax rate for 1996 was 33% compared with 34% in the
prior year. The decrease in the effective rate is attributed primarily to
tax-exempt interest generated in the current year.
Net earnings were $21.4 million, or $2.61 per share, for 1996 compared
with net earnings of $17.4 million, or $2.53 per share, in the prior year
period. In 1995, earnings included $.20 per share and $.12 per share from
the restructuring credit and proceeds from a patent infringement
settlement, respectively. Without these items, 1995 earnings per share
from operations was $2.21.
Orders for 1996 increased 1% to $361.4 million from $358.3 million in the
prior year period. Backlog at October 31, 1996 was $127.3 million
compared with $103.2 million a year earlier. The increase in backlog
relates to the aerospace recovery and the Mason acquisition.
Approximately $24.6 million of backlog was scheduled to be delivered
after 1997. All orders in backlog are subject to cancellation until
delivery.
YEAR ENDED OCTOBER 31, 1995
COMPARED TO YEAR ENDED OCTOBER 31, 1994
Net sales in 1995 were $351.9 million compared with $294 million in 1994.
The net sales improvement was primarily attributable to the Automation
Group, where net sales increased $47.5 million, or 44%, to $156.1
million. The Automation Group benefited from a strong market for
automated manufacturing equipment, particularly at Excellon where the
growing capacity requirements of circuit board manufacturers and the
proliferation of increasingly smaller holes was helping to drive
replacement of older drilling machines. Net sales in the Company's two
other groups, Aerospace / Defense and Instrumentation, also improved in
1995. In the Aerospace / Defense Group, net sales for 1995 were $98
million, compared with $93.4 million in the prior year. This increase was
primarily due to a strengthening in the aerospace markets.
Instrumentation Group net sales for 1995 were $97.8 million, versus $92
million in 1994. This increase was primarily a result of new product
introductions and expanded sales efforts at Federal. Including export
sales by domestic operations, net sales to foreign buyers totaled $124.1
million and $91 million in 1995 and 1994, respectively and accounted for
35% and 31% of the Company's total net sales in each year, respectively.
Total gross margin as a percentage of sales remained consistent with the
prior year at 39%. Gross margin percentages by business segment decreased
in 1995 in both the Automation and Aerospace / Defense Groups, and
increased in the Instrumentation Group. By group, gross margins ranged
from 38% to 41% in 1995, compared with 39% to 42% in the prior year.
Selling, general and administrative expenses (which includes corporate
expenses, and research, development and related engineering costs but
excludes the restructuring credit) for 1995 increased to $107.1 million
compared with $100.8 million in 1994. As a percent of sales, however,
they decreased from 34% in 1994 to 30% in 1995 because of cost
containment and operating leverage the Company is experiencing due to
increased sales volumes. Research, development and related engineering
costs for 1995 increased to $16.6 million, versus $13.7 million in 1994,
reflecting the Company's continuing commitment to invest in strategic
product development programs. Operating earnings (excluding corporate
expenses and the restructuring credit) increased from $23.3 million in
1994 to $37.3 million in 1995. The improvement was primarily attributable
to the Automation Group where earnings more than doubled to $24.2 million
in 1995 from $11.9 million in 1994. The Automation Group's earnings
improvement is due to the operating leverage of increased sales. The
earnings of the Instrumentation Group also increased sharply from $1.5
million to $6.6 million due to favorable product mix of sales and receipt
of a patent infringement settlement of $1.3 million. The Aerospace /
Defense Group's earnings decreased to $6.5 million in 1995 from $9.8
million in the prior year. This decrease was primarily due to the above
referenced decline in gross margins.
Interest income for 1995 was $1.2 million compared with $0.1 million in
1994 due to increases in cash and equivalents which were generated
primarily from operations.
Interest expense for 1995 was $5.6 million compared with $6.1 million in
1994 due primarily to reduced debt levels.
The effective income tax rate for 1995 was 34% compared with 14% in 1994.
The low effective 1994 rate was primarily due to a $2 million benefit
recorded in 1994 from a settlement with the Internal Revenue Service of
audits of certain federal income tax returns.
Net earnings for 1995, were $17.4 million, or $2.53 per share, compared
with net earnings of $7.6 million, or $1.15 per share in the prior year
period. Earnings in the current year period include $.20 per share and
$.12 per share, respectively, from the restructuring credit and patent
infringement settlement discussed above.
Orders for 1995, were $358.3 million, compared with $319.4 million a year
earlier. The increase was primarily attributable to the Automation Group
and its improved markets as discussed above. Backlog at October 31, 1995
was $103.2 million, compared with $96.8 million a year earlier.
Approximately $11.9 million of Companywide backlog was scheduled to be
delivered after 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents at October 31, 1996 totaled $46.4 million, an
increase of $24.3 million from October 31, 1995. This increase was
generated through operations and a public offering of common stock, and
was reduced by acquisitions, debt paydown and an increase in other
working capital elements. Net working capital increased to $73.4 million
at October 31, 1996 from 35.7 million at October 31, 1995.
Total debt at October 31, 1996 was $40.9 million, a $9.4 million decrease
from a year earlier. The debt reduction is primarily due to a scheduled
principal payment of $5.7 million on the Company's 8.75% Senior Notes.
The scheduled repayments began on July 30, 1996 and will continue
annually until maturity on July 30, 2002. At October 31, 1996, total
outstanding debt included $34.3 million under the Company's 8.75% Senior
Notes, and $6.6 million under various foreign currency debt agreements.
Total credit facilities equaled $44 million of which $35.4 million was
available at October 31, 1996. The Company recently renegotiated its
primary bank financing arrangement, reducing the covenant restrictions
and lowering the interest rate.
Capital expenditures, consisting of buildings, machinery, equipment and
computers are anticipated to be approximately $27 million during fiscal
1997, compared with $17.2 million in 1996. The planned increase in
capital expenditures for fiscal 1997 primarily relates to the need for
new, expanded manufacturing facilities. Capital expenditures for 1996
(excluding acquisitions) were comprised of machinery, equipment and
computers.
Management believes cash on hand, funds generated from operations and
available bank credit lines will adequately service cash requirements
through fiscal 1997.
FORWARD-LOOKING STATEMENTS
Certain statements in the above commentary and throughout this annual
report contain forward-looking information that involves risk and
uncertainty, including industry trends, backlog, capital expenditures and
cash requirements. The Company's business is susceptible to economic
cycles and its results can vary widely based on a number of factors,
including domestic and foreign economic conditions and developments
affecting the specific industries and customers served. The products sold
by most of these businesses represent capital investment or support for
capital investment by either the initial customer or the ultimate
end-user. Also a significant portion of the sales and profitability of
some Company businesses is derived from the telecommunications, computer,
aerospace and defense markets. Changes in general economic conditions or
conditions in these and other specific industries, capital acquisition
cycles, and government policies, collectively or individually, can have a
significant effect on the Company's results of operations and financial
condition. Thus, these forward-looking statements may be materially
different from actual future outcomes. The Company does not undertake any
obligation to publicly release the results of any revisions that may be
made to these forward-looking statements to reflect any future events or
circumstances.
RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning
after December 15, 1995. This Statement defines and prescribes a fair
value based method of accounting for stock-based compensation plans in
which compensation cost is computed at the option grant date and expensed
over a service period. While full adoption of this statement is
encouraged, companies will be permitted to continue accounting for
stock-based compensation under the current guidance of Accounting
Principles Board (APB) Opinion No. 25; provided that certain pro forma
disclosures of the impact of full implementation are made. The Company
does not plan to adopt the accounting provisions of this standard and
accordingly will continue applying the provisions of APB Opinion No. 25.
SELECTED FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS,
FOR THE YEARS ENDED OCTOBER 31, 96 95 94 93 92
- -------------------------------------------------------------------------------------------------------
Operating Results
Net sales $352,843 $351,897 $294,044 $285,152 $304,827
Cost of sales 215,015 215,934 178,397 175,568 187,235
Selling, general and administrative 103,415 107,113 100,845 100,669 102,202
Restructuring provision (credit) -- (2,067) -- 40,626 --
Interest income (1,989) (1,156) (113) (122) (143)
Interest expense 4,328 5,598 6,098 6,446 7,389
Income tax expense (benefit) 10,720 9,094 1,254 (12,400) 3,050
Net earnings (loss) 21,354 17,381 7,563 (25,635) 5,094
Net earnings (loss) per share $ 2.61 $ 2.53 $ 1.15 $ (3.90) $ 0.76
Financial Structure
Total assets $276,646 $225,714 $217,524 $205,672 $232,024
Long-term debt, net 29,007 35,543 41,714 62,267 68,622
Shareholders' equity 142,304 83,706 65,491 55,323 82,622
Average number of shares outstanding 8,167 6,870 6,571 6,579 6,667
MARKET PRICE OF ESTERLINE COMMON STOCK
Principal Market - New York Stock Exchange
FOR THE YEARS ENDED OCTOBER 31, 96 95
- ------------------------------------------------------------------------------
Quarter High Low High Low
First $24.00 $19.13 $14.75 $11.13
Second 23.88 20.38 17.63 12.50
Third 26.00 18.75 24.75 16.63
Fourth 23.38 20.00 30.38 21.25
At October 31, 1996 there were approximately 1,032 holders of record of
the Company's common stock. Certain of the Company's financing
arrangements impose restrictions on the payment of dividends. (See Note 6
of Notes to Consolidated Financial Statements.)
CONSOLIDATED STATEMENT OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS,
FOR THE YEARS ENDED OCTOBER 31, 96 95 94
- -----------------------------------------------------------------------------
Net Sales $ 352,843 $ 351,897 $ 294,044
Costs and Expenses
Cost of sales 215,015 215,934 178,397
Selling, general and administrative 103,415 107,113 100,845
Restructuring credit -- (2,067) --
Interest income (1,989) (1,156) (113)
Interest expense 4,328 5,598 6,098
- -----------------------------------------------------------------------------
320,769 325,422 285,227
- -----------------------------------------------------------------------------
Earnings Before Income Taxes 32,074 26,475 8,817
Income Tax Expense 10,720 9,094 1,254
- -----------------------------------------------------------------------------
Net Earnings $ 21,354 $ 17,381 $ 7,563
=============================================================================
Net Earnings Per Share $ 2.61 $ 2.53 $1.15
=============================================================================
see notes to consolidated financial statements
CONSOLIDATED BALANCE SHEET
IN THOUSANDS, OCTOBER 31, 96 95
- ----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and equivalents $ 46,436 $ 22,097
Accounts receivable, net of
allowances of $4,084 and $4,117 69,120 63,825
Inventories 45,399 39,963
Deferred income taxes 15,321 14,122
Prepaid expenses 2,504 2,199
- ----------------------------------------------------------------------------
Total Current Assets 178,780 142,206
Property, Plant and Equipment
Land 3,619 3,913
Buildings 43,875 43,669
Machinery and equipment 112,809 99,076
- ----------------------------------------------------------------------------
160,303 146,658
Accumulated depreciation 106,813 97,426
- ----------------------------------------------------------------------------
53,490 49,232
Intangibles, net and Other Assets 44,376 34,276
- ----------------------------------------------------------------------------
$ 276,646 $ 225,714
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 20,836 $ 23,143
Accrued liabilities 68,492 66,363
Credit facilities 5,242 7,721
Current maturities of long-term debt 6,660 7,030
Federal and foreign income taxes 4,105 2,208
- ----------------------------------------------------------------------------
Total Current Liabilities 105,335 106,465
Long-Term Debt 29,007 35,543
Shareholders' Equity
Common stock, par value $.20 per
share, authorized 30,000,000
shares, issued and outstanding
8,501,668 and 6,645,780 shares 1,700 1,328
Capital in excess of par value 48,417 10,390
Retained earnings 93,686 72,332
Cumulative translation adjustment (1,499) (344)
- -----------------------------------------------------------------------------
Total Shareholders' Equity 142,304 83,706
- ----------------------------------------------------------------------------
$ 276,646 $ 225,714
===========================================================================
see notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
IN THOUSANDS, FOR THE YEARS ENDED OCTOBER 31, 96 95 94
- ------------------------------------------------------------------------------------------------
Cash Flows Provided (Used) by Operating Activities
Net earnings $21,354 $ 17,381 $ 7,563
Restructuring credit -- (2,067) --
Depreciation and amortization 16,269 16,599 16,414
Deferred income taxes (413) (2,969) (1,303)
Working capital changes, net of effect of acquisitions
Accounts receivable (4,319) 280 (15,625)
Inventories (2,694) (9,496) 7,590
Prepaid expenses (291) (176) 38
Accounts payable (2,399) 4,121 3,564
Accrued liabilities 605 7,196 6,910
Federal and foreign income taxes 1,886 897 144
Other, net 2,411 882 92
- ------------------------------------------------------------------------------------------------
32,409 32,648 25,387
- ------------------------------------------------------------------------------------------------
Cash Flows Provided (Used) by Investing Activities
Capital expenditures (17,203) (11,461) (11,288)
Capital dispositions 1,054 3,773 3,945
Acquisitions (20,485) -- --
- ------------------------------------------------------------------------------------------------
(36,634) (7,688) (7,343)
- ------------------------------------------------------------------------------------------------
Cash Flows Provided (Used) by Financing Activities
Net change in credit facilities (2,214) 7,483 (5,218)
Repayment of long-term debt (6,812) (19,837) (7,290)
Net proceeds provided by sale of common stock 38,365 -- --
- ------------------------------------------------------------------------------------------------
29,339 (12,354) (12,508)
- ------------------------------------------------------------------------------------------------
Effect of Exchange Rates (775) 415 322
Net Increase in Cash and Equivalents 24,339 13,021 5,858
Cash and Equivalents - Beginning of Year 22,097 9,076 3,218
- ------------------------------------------------------------------------------------------------
Cash and Equivalents - End of Year $46,436 $ 22,097 $ 9,076
================================================================================================
Supplemental Cash Flow Information
Cash paid during the year for
Interest expense $ 4,480 $ 4,577 $ 6,033
Income taxes 6,357 10,452 2,212
see notes to consolidated financial statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
IN THOUSANDS, FOR THE YEARS ENDED OCTOBER 31, 96 95 94
- ------------------------------------------------------------------------------------------------
Common Stock, par value $.20 per share
Beginning of year $ 1,328 $ 1,302 $ 1,302
1,800,000 shares issued 360 -- --
Shares issued under stock option plans 12 26 --
- ------------------------------------------------------------------------------------------------
End of year 1,700 1,328 1,302
- ------------------------------------------------------------------------------------------------
Capital in Excess of Par Value
Beginning of year 10,390 10,482 10,482
1,800,000 shares issued 38,005 -- --
Shares issued under stock option plans 22 (92) --
- ------------------------------------------------------------------------------------------------
End of year 48,417 10,390 10,482
- ------------------------------------------------------------------------------------------------
Retained Earnings
Beginning of year 72,332 54,951 47,388
Net earnings 21,354 17,381 7,563
- ------------------------------------------------------------------------------------------------
End of year 93,686 72,332 54,951
- ------------------------------------------------------------------------------------------------
Cumulative Foreign Currency Translation Adjustments
Beginning of year (344) (1,244) (3,849)
Change in foreign currency translation (1,155) 900 2,605
- ------------------------------------------------------------------------------------------------
End of year (1,499) (344) (1,244)
- ------------------------------------------------------------------------------------------------
Shareholders' Equity $142,304 $83,706 $65,491
================================================================================================
see notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING POLICIES
NATURE OF OPERATIONS Esterline Technologies Corporation (the Company) -
through its 13 separate operating units - designs, manufactures and
markets a broad array of capital intensive engineered products. The
company principally serves the aerospace and defense industry, electronic
equipment manufacturers, metal fabricators and general manufacturing
industries throughout the world.
BASIS OF PRESENTATION The consolidated financial statements include all
subsidiaries. All significant intercompany accounts and transactions have
been eliminated. Classifications have been changed for certain amounts in
the preceding period to conform with the current year's presentation.
MANAGEMENT ESTIMATES 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.
FOREIGN CURRENCY TRANSLATION Foreign currency assets and liabilities are
translated into their U.S. dollar equivalents based on year-end exchange
rates. Revenue and expense accounts are generally translated at average
exchange rates. Aggregate exchange gains and losses arising from the
translation of foreign assets and liabilities are included in
shareholders' equity. Transaction gains and losses are included in income
and have not been significant in amount.
INVENTORIES Most inventories are stated at the lower of cost (first in,
first out) or market. Three subsidiaries state their inventories at the
lower of cost (last in, first out) or market. Inventory cost includes
material, labor and factory overhead.
RESEARCH, DEVELOPMENT AND RELATED ENGINEERING COSTS Research, development
and related engineering costs approximated $15,373,000, $16,638,000 and
$13,711,000 in 1996, 1995 and 1994, respectively, and are generally
expensed as incurred.
PROPERTY, PLANT AND EQUIPMENT, AND DEPRECIATION Property, plant and
equipment is carried at cost and includes expenditures for major
improvements which increase useful lives. Depreciation is provided
generally on the straight-line method. For income tax purposes,
depreciation is also computed using various accelerated methods.
INTANGIBLES Intangible assets arise primarily from business acquisitions
and include the cost of purchased businesses in excess of amounts
assigned to identifiable assets. Intangible assets are being amortized
over estimated lives of up to 30 years.
ASSET VALUATION The carrying amount of long-life assets is reviewed
periodically. If the asset carrying amount is not recoverable, the asset
is considered to be impaired and the carrying amount is adjusted.
ENVIRONMENTAL Environmental exposures are provided for in total at the
time they are known to exist or are considered reasonably probable.
EARNINGS PER SHARE Earnings per share is computed using the average number
of common and common equivalent shares outstanding during each year. The
average number of shares were 8,167,000, 6,870,000, and 6,571,000 in
1996, 1995 and 1994, respectively.
CASH EQUIVALENTS Cash equivalents consist of highly liquid investments
with maturities of three months or less. Fair value of cash equivalents
approximates carrying value.
NOTE 2 INVENTORIES
Inventories at October 31 consisted of the following:
IN THOUSANDS 96 95
- ----------------------------------------------------------------------
Raw materials and purchased parts $15,880 $11,422
Work in process 23,195 22,052
Finished goods 6,324 6,489
- ----------------------------------------------------------------------
$45,399 $39,963
======================================================================
Inventories stated under the last in, first out method totaled $9,653,000
and $9,989,000 at October 31, 1996 and 1995, respectively. Had the first
in, first out method been used, these inventories would have been
$4,450,000 and $3,896,000 higher than reported at October 31, 1996 and
1995, respectively.
NOTE 3 ACCRUED LIABILITIES
Accrued liabilities at October 31 consisted of the following:
IN THOUSANDS 96 95
- ----------------------------------------------------------------------
Payroll and other compensation $19,670 $19,971
Self-insurance provisions 8,649 7,151
Interest 2,321 2,453
Warranties 9,065 10,202
State and other tax accruals 8,554 6,912
Other 20,233 19,674
- ----------------------------------------------------------------------
$68,492 $66,363
======================================================================
NOTE 4 RETIREMENT BENEFITS
Pension benefits are provided for substantially all U.S. employees under
contributory and non-contributory pension and other plans, and are based
on years of service and five-year average compensation. The Company makes
actuarially computed contributions as necessary to adequately fund
benefits. The actuarial computations assumed discount rates on benefit
obligations and expected long-term rates of return on plan assets of 7.5%
and annual compensation increases of 5%. Plan assets primarily consist of
publicly traded common stocks, bonds and government securities.
Total pension expense for all benefit plans, including defined benefit
plans, was $2,329,000, $2,016,000 and $1,232,000 for the years ended
October 31, 1996, 1995 and 1994, respectively. Net periodic pension
expense for the Company's defined benefit plans for the years ended
October 31 consisted of the following:
IN THOUSANDS 96 95 94
- -----------------------------------------------------------------------------
Service cost - benefits earned during the year $ 2,871 $ 2,316 $ 2,322
Interest cost on projected benefit obligation 5,154 4,698 4,457
Actual return on plan assets - investment gains (8,074) (13,496) (2,827)
Net amortization and deferral 1,319 7,599 (3,515)
- -----------------------------------------------------------------------------
Net pension expense $ 1,270 $ 1,117 $ 437
=============================================================================
The funded status of the defined benefit pension plan at October 31 was
as follows:
IN THOUSANDS 96 95
- ---------------------------------------------------------------------------
Plan assets at fair value $91,509 $84,598
Projected benefit obligation for service
rendered to date 71,066 62,223
- ---------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 20,443 22,375
Unrecognized net gain (7,576) (8,297)
Unrecognized transition asset (1,925) (2,406)
- ----------------------------------------------------------------------------
Prepaid pension expense, included in other assets $10,942 $11,672
===========================================================================
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$62,012 and $51,716 $62,329 $51,978
===========================================================================
The Company also has an unfunded supplemental retirement plan for key
executives providing for periodic payments upon retirement. The related
accrued pension liability was $2,630,000 and $2,046,000 as of October 31,
1996 and 1995, respectively.
NOTE 5 INCOME TAXES
Income tax expense (benefit) for the years ended October 31 consisted of
the following:
IN THOUSANDS 96 95 94
- --------------------------------------------------------------------------
Current $11,133 $12,063 $ 2,557
Deferred (413) (2,969) (1,303)
- --------------------------------------------------------------------------
$10,720 $ 9,094 $ 1,254
==========================================================================
Primary components of the Company's deferred tax assets and (liabilities)
for the years ended October 31 resulted from temporary tax differences
associated with the following:
IN THOUSANDS 96 95
- --------------------------------------------------------------------------
Reserves and liabilities $17,546 $15,797
Employee benefits 4,007 4,039
Foreign tax loss carryforward 1,430 1,627
- --------------------------------------------------------------------------
Total deferred tax assets 22,983 21,463
Depreciation and amortization (2,902) (1,412)
Retirement benefits (3,034) (3,417)
- -------------------------------------------------------------------------
Total deferred tax liabilities (5,936) (4,829)
- -------------------------------------------------------------------------
$17,047 $16,634
=========================================================================
A valuation allowance was not required due to the nature of and
circumstances associated with the temporary tax differences.
A reconciliation of the United States federal statutory income tax rate
to the effective income tax rate for the years ended October 31 was as
follows:
96 95 94
- -------------------------------------------------------------------------
U.S. statutory income tax rate 35.0% 35.0% 34.0%
State income taxes 2.8 3.5 6.6
Foreign tax rates (0.3) (1.5) 2.5
Foreign sales corporation (2.1) (1.7) (3.5)
Tax settlement -- -- (22.7)
Tax exempt interest (1.5) -- --
Other, net (0.5) (1.0) (2.7)
- -------------------------------------------------------------------------
Effective income tax rate 33.4% 34.3% 14.2%
=========================================================================
During 1994, the Internal Revenue Service completed an examination of
certain federal income tax returns and reached agreement with the Company
on various filing positions. As a result, the Company recorded a
$2,000,000 tax benefit in the fourth quarter of 1994.
No provision for federal income taxes has been made on accumulated
earnings of foreign subsidiaries, since such earnings have either been
permanently reinvested or would be substantially offset by foreign tax
credits.
NOTE 6 DEBT
Long-term debt at October 31 consisted of the following:
IN THOUSANDS 96 95
- ---------------------------------------------------------------------
8.75% Senior Notes, due 2002 $34,285 $40,000
Other 1,382 2,573
- ---------------------------------------------------------------------
35,667 42,573
Less current maturities 6,660 7,030
- ---------------------------------------------------------------------
$29,007 $35,543
=====================================================================
The 8.75% Senior Notes are unsecured and payable in equal annual
installments. Interest is payable semi-annually in January and July of
each year. The aggregate long-term debt maturing in the next five years
is as follows: 1997 - $6,660,000; 1998 -$6,023,000; 1999 - $5,780,000;
2000 - $5,775,000; 2001 - $5,714,000.
Short-term credit facilities at October 31 consisted of the following:
IN THOUSANDS 96 95
- --------------------------------------------------------------------------
Outstanding Interest Outstanding Interest
Borrowings Rate Borrowings Rate
U. S. dollar $ -- -- $ -- --
Foreign 5,242 7.8% 7,721 7.7%
- --------------------------------------------------------------------------
$5,242 $7,721
==========================================================================
During 1996, the Company renegotiated its primary U.S. dollar credit
facility of $35,000,000 with a group of banks. The new credit facility is
unsecured and interest is based on standard inter-bank offering rates.
The company's credit facilities total $44,000,000, including unsecured
foreign currency credit facilities of $9,000,000. The credit facilities
contain various covenant restrictions, including maintenance of net
worth, payment of dividends, interest coverage and limitations on
additional borrowings. Available credit under the above credit facilities
was $35,358,000 when reduced by outstanding borrowings and letters of
credit of $3,400,000.
The fair value of the Company's long-term debt and short-term credit
facilities was estimated at $41,900,000 and $51,500,000 at October 31,
1996 and 1995, respectively. These estimates were derived using interest
rates currently available to the Company for issuance of debt with
similar terms and remaining maturities.
NOTE 7 CONTINGENCIES
In October 1995, the Company identified irregularities in the allocation
of certain labor charges at its Armtec Defense Products subsidiary and is
participating in the Department of Defense Voluntary Disclosure Program.
Management believes that the eventual outcome of this issue will not have
a material adverse effect on the financial position or future operating
results of the Company.
In addition, the Company has various lawsuits and claims, both offensive
and defensive, and contingent liabilities arising from the conduct of
business, including those associated with Government contracting
activities, none of which, in the opinion of management, is expected to
have a material effect on the Company's financial position or results of
operations. Liabilities have been accrued for environmental remediation
costs expected to be incurred in the disposition of manufacturing
facilities. No provision has been recorded for environmental remediation
costs which could result from changes in laws or other circumstances
currently not contemplated by the Company.
NOTE 8 OPERATING LEASES
Net rental expense for operating leases amounted to $3,159,000,
$3,103,000 and $3,170,000 in 1996, 1995 and 1994, respectively.
The Company's rental commitments for noncancelable operating leases with
a duration in excess of one year are as follows:
IN THOUSANDS
1997 $ 3,090
1998 2,896
1999 2,605
2000 2,394
2001 2,474
2002 and thereafter 7,138
- ----------------------------------------------------------------------
$20,597
======================================================================
NOTE 9 STOCK OPTION PLANS
At October 31, 1996, the Company had 851,500 shares of common stock
reserved for issuance to officers and key employees under its 1987 Stock
Option Plan, of which 93,375 shares were available for future grant.
Authority to grant additional shares under the 1987 Plan expires on
October 28, 1997. The Board of Directors has approved a replacement plan
and intends to solicit shareholder approval for its plan including the
allocation of 400,000 additional shares to be issuable under the new plan
at the next shareholders' meeting on March 5, 1997.
The Board of Directors has authorized the Compensation and Stock Option
Committee to administer option grants, and their terms, under both plans.
Options granted under the plans become exercisable over a period of four
years following the date of grant and expire not later than the tenth
anniversary of the grant. Option exercise prices are equal to the fair
value of the Company's common stock on the date of grant.
The following summarizes the changes in outstanding options granted under
the Company's stock option plans:
Shares Option Prices Per Share
Balance - October 31, 1993 978,500 $ 7.63 - $11.25
Granted 119,000 7.38 - 9.88
Canceled (54,000) 7.38 - 11.25
Exercised (5,000) 9.00
- -------------------------------------------------------------------------
Balance - October 31, 1994 1,038,500 7.38 - 11.25
Granted 105,000 12.88 - 17.75
Canceled (7,500) 7.38 - 11.25
Exercised (381,375) 7.38 - 9.50
- -------------------------------------------------------------------------
Balance - October 31, 1995 754,625 7.38 - 17.75
Granted 129,000 21.00 - 23.38
Canceled (3,750) 7.63
Exercised (121,750) 7.38 - 11.25
- -------------------------------------------------------------------------
Balance - October 31, 1996 758,125 $ 7.38 - $23.38
=========================================================================
Exercisable at October 31, 1996 475,250 $ 7.38 - $17.75
=========================================================================
NOTE 10 CAPITAL STOCK
The authorized capital stock of the Company consists of 500,000 shares of
preferred stock, including 25,000 shares ($100 par value) and 475,000
shares ($1.00 par value) issuable in series, and 30,000,000 shares of
common stock ($.20 par value). At October 31, 1996, there were no shares
of preferred stock outstanding and 851,500 shares of common stock were
reserved for issuance under the Company's stock option plans.
On February 8, 1996 the Company completed the public offering of 1.8
million shares of common stock priced at $23 per share, generating net
proceeds of $38.4 million. These funds provide additional financial
resources for general corporate purposes, including the acquisition of
other companies.
The Company has a Shareholder Rights Plan providing for the distribution
of one Preferred Stock Purchase Right for each share of common stock held
on December 23, 1992. Each Right entitles the holder to purchase one-one
hundredth of a share of Series A Serial Preferred Stock at an exercise
price of $56. The Rights expire December 23, 2002.
The Rights will be exercisable and transferable apart from the common
stock only if a person or group acquires beneficial ownership of 10% or
more of the Company's common stock or commences a tender offer or
exchange offer which would result in a person or group beneficially
owning 10% or more of the Company's common stock. The Rights will be
redeemable by the Company for $.01 each at any time prior to the tenth
day after an announcement that a person or group beneficially owns 10% or
more of the common stock. Upon the occurrence of certain events, the
holder of a Right can purchase, for the then current exercise price of
the Right, shares of common stock of the Company (or under certain
circumstances, as determined by the Board of Directors, cash, other
securities or property) having a value of twice the Right's exercise
price. Upon the occurrence of certain other events, the holder of each
Right would be entitled to purchase, at the exercise price of the Right,
shares of common stock of a corporation or other entity acquiring the
Company or engaging in certain transactions involving the Company, that
has a market value of twice the Right's exercise price.
NOTE 11 ACQUISITIONS
On August 1, 1996, the Company acquired all of the operating assets of
Mason Electric Company. The purchase method of accounting was used, with
the results of operations included since the date of acquisition. The
allocation of purchase price to the assets and liabilities acquired was
based on preliminary estimates of fair value, and is subject to
finalization. The Company also acquired a noncontrolling equity interest
in a company, and executed an agreement to acquire a product line. The
total purchase price, including closing and other direct costs of these
purchase transactions was approximately $22 million, and includes excess
of cost over identifiable tangible and intangible assets of approximately
$12 million.
On a pro forma basis, prepared as though the business combination had
occurred at the beginning of fiscal 1995, consolidated revenues would be
$365,108,000 and $365,685,000, net earnings would be $21,910,000 and
$17,729,000, and net earnings per share would be $2.68 and $2.58, for the
years ended October 31, 1996 and 1995, respectively. These pro forma
results are unaudited, have been prepared for comparative purposes only,
and do not purport to be indicative of what would have occurred had the
acquisition been made at the beginning of 1995, or of results which may
occur in the future.
NOTE 12 RESTRUCTURING PROVISION
The Company recorded a restructuring charge in the fourth quarter of
1993. In the third quarter of fiscal year 1995 the Company recorded a
credit of $2.1 million ($1.4 million, or $.20 per share, net of income
tax) representing the substantial completion of the 1993 restructuring.
NOTE 13 BUSINESS SEGMENT INFORMATION
Details of the Company's operations by business segment for the years
ended October 31 were as follows:
Business Segment
IN THOUSANDS 96 95 94
- -----------------------------------------------------------------------------
Net Sales
Automation $146,698 $ 156,116 $108,642
Aerospace and Defense 111,691 98,027 93,370
Instrumentation 94,454 97,754 92,032
- -----------------------------------------------------------------------------
$352,843 $ 351,897 $294,044
=============================================================================
Earnings Before Income Taxes
Automation $ 23,684 $ 24,215 $ 11,913
Aerospace and Defense 13,649 6,493 9,809
Instrumentation 5,507 6,627 1,537
- -----------------------------------------------------------------------------
Operating Earnings 42,840 37,335 23,259
- -----------------------------------------------------------------------------
Corporate expense (8,427) (8,485) (8,457)
Restructuring credit -- 2,067 --
Interest income 1,989 1,156 113
Interest expense (4,328) (5,598) (6,098)
- -----------------------------------------------------------------------------
$ 32,074 $ 26,475 $ 8,817
=============================================================================
Identifiable Assets
Automation $ 67,360 $ 57,849 $ 49,540
Aerospace and Defense 86,303 68,785 76,681
Instrumentation 46,507 45,412 49,822
Corporate(1) 76,476 53,668 41,481
- -----------------------------------------------------------------------------
$276,646 $ 225,714 $217,524
=============================================================================
Capital Expenditures
Automation $ 7,379 $ 5,848 $ 4,214
Aerospace and Defense 3,414 2,750 3,158
Instrumentation 5,926 2,833 3,847
Corporate 484 30 69
- -----------------------------------------------------------------------------
$ 17,203 $ 11,461 $ 11,288
=============================================================================
Depreciation and Amortization
Automation $ 4,667 $ 4,388 $ 3,546
Aerospace and Defense 5,705 6,002 6,128
Instrumentation 5,618 5,754 6,257
Corporate 279 455 483
- -----------------------------------------------------------------------------
$ 16,269 $ 16,599 $ 16,414
=============================================================================
(1) Primarily cash, prepaid pension expense (see Note 4) and net
deferred tax assets (see Note 5).
NOTE 13 BUSINESS SEGMENT INFORMATION (CONTINUED)
The Company's operations by geographic area for the years ended October
31 were as follows:
Geographic Area
IN THOUSANDS 96 95 94
- -----------------------------------------------------------------------------
Sales
Domestic
Unaffiliated customers - U.S. $230,286 $227,810 $203,010
Unaffiliated customers - export 57,130 61,051 34,248
Intercompany 11,367 11,132 6,231
- -----------------------------------------------------------------------------
298,783 299,993 243,489
- -----------------------------------------------------------------------------
Foreign
Unaffiliated customers 65,427 63,036 56,786
Intercompany 1,900 1,073 628
- -----------------------------------------------------------------------------
67,327 64,109 57,414
- -----------------------------------------------------------------------------
Eliminations (13,267) (12,205) (6,859)
- -----------------------------------------------------------------------------
Net Sales $352,843 $351,897 $294,044
=============================================================================
Operating earnings (1)
Domestic $ 41,227 $ 38,238 $ 20,449
Foreign 1,195 (80) 2,994
Eliminations 418 (823) (184)
- -----------------------------------------------------------------------------
$42,840 $ 37,335 $ 23,259
=============================================================================
Identifiable assets (2)
Domestic $157,069 $134,897 $133,200
Foreign 43,101 37,149 42,843
- -----------------------------------------------------------------------------
$200,170 $ 172,046 $176,043
=============================================================================
1 Before restructuring credit and corporate expense, shown on page 44.
2 Excludes Corporate, shown on page 44.
The Company's principal foreign operations consist of manufacturing
facilities located in France, Spain, Mexico and Italy and include sales
and service operations located in England, Germany, Japan and France.
The above sales are based upon geographic origin of sale. Intercompany
sales are made at selling prices comparable with sales to unaffiliated
customers. Sales to any single customer or government entity did not
exceed 10% of consolidated sales.
Product lines contributing more than 10% of total sales in any of the
years ended October 31 were as follows:
96 95 94
- ----------------------------------------------------------------------
Printed circuit board drilling equipment 22% 26% 18%
Gauge products 12% 12% 13%
NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial information:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOURTH THIRD SECOND FIRST
- ---------------------------------------------------------------------------------
Year ended October 31, 1996
Net sales $98,142 $81,729 $88,975 $83,997
Gross margin 36,519 32,205 35,802 33,302
Net earnings 6,782 5,028 6,195 3,349
Net earnings per share1 $ .78 $ .58 $ .75 $ .48
Year ended October 31, 1995
Net sales $96,435 $87,318 $84,812 $83,332
Gross margin 36,642 34,334 30,993 33,994
Net earnings 5,543 6,589(2) 3,051 2,198
Net earnings per share $ .84 $ .93(2) $ .44 $ .32
1 The sum of quarterly per share amounts may not equal per share
amounts reported for year-to-date periods. This is due to changes in the
number of weighted average shares outstanding for each period.
2 Net earnings in the third quarter of 1995 reflect nonrecurring items
including a pre-tax restructuring credit of $2.1 million, or $.20 per
share on an after-tax basis, and a pre-tax patent infringement settlement
credit of $1.3 million, or $.12 per share on an after-tax basis. Without
these credits, net earnings would have been $4.2 million, or $.61 per
share.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors
Esterline Technologies Corporation
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Esterline
Technologies Corporation and its subsidiaries as of October 31, 1996 and
1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended October 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Esterline Technologies
Corporation and its subsidiaries as of October 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended October 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
December 11, 1996