-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PYhQA/+I/W3GCjSseL93QYnU4yrmY+jcY/bfgILCQlAxpYHesoW2KwYMSG5N78rh UgjIGOqf+wEHDbZtVKeUiQ== 0000910647-99-000012.txt : 19990118 0000910647-99-000012.hdr.sgml : 19990118 ACCESSION NUMBER: 0000910647-99-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESTERLINE TECHNOLOGIES CORP CENTRAL INDEX KEY: 0000033619 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 132595091 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06357 FILM NUMBER: 99506951 BUSINESS ADDRESS: STREET 1: 10800 NE 8TH ST STREET 2: STE 600 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 2064539400 MAIL ADDRESS: STREET 1: 10800 N E 8TH STREET CITY: BELLEVUE STATE: WA ZIP: 98004 FORMER COMPANY: FORMER CONFORMED NAME: ESTERLINE CORP DATE OF NAME CHANGE: 19910317 FORMER COMPANY: FORMER CONFORMED NAME: BOYAR SCHULTZ INC DATE OF NAME CHANGE: 19671101 10-K 1 BODY OF 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended October 31, 1998 ---------------- OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission file number 1-6357 ESTERLINE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-2595091 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 10800 NE 8th Street Bellevue, Washington 98004 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 425/453-9400 ------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock ($.20 par value) New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 1A As of January 5, 1999, 17,334,388 shares of the Registrant's common stock were outstanding. The aggregate market value of such common stock held by non-affiliates at such date was $388,940,331 (based upon the closing sales price of $22.4375 per share). DOCUMENTS INCORPORATED BY REFERENCE Portions of Annual Report to Shareholders for Fiscal Year ended October 31, 1998-Parts I, II and IV. Portions of Definitive Proxy Statement relating to the 1999 Annual Meeting of Shareholders, to be held on March 3, 1999-Part III. 1B PART I This Report includes a number of forward-looking statements that reflect the Company's current views with respect to future events and financial performance. Please refer to the section addressing forward- looking information on page 8 for further discussion. Item 1. Business (a) General Development of Business. Esterline Technologies Corporation, a Delaware corporation formed in 1967 (the "Company"), is a diversified manufacturing company that has strong market positions within, or in support of, a variety of manufacturing industries, including electronic equipment, metal fabrication, commercial aerospace and defense. The Company conducts its operations through three business segments-Automation, Aerospace/Defense and Instrumentation. The Company focused its efforts on growth through acquisitions, product development and manufacturing facility expansion during fiscal 1998, completing seven acquisitions throughout the year, completing construction of two new facilities and expanding two other facilities. The products manufactured and markets served by the new acquisitions complement the Company's existing products. In addition, the acquisitions and investment in manufacturing facilities provide opportunities for new products, production efficiency improvements, and future growth. The Automation Group expanded by completing an acquisition of a small printed circuit board ("PCB") routing equipment company, Advanced Technologies, Inc. Assets from this purchase are being integrated with an existing router line. In addition, an exclusive licensing agreement was completed with Exitech Ltd., a U.K.-based company, for the manufacture and sale rights on advanced laser PCB drilling equipment. The Company expects this agreement to lead the way to new, innovative processes and products for electronic equipment manufacturers. Late in the year, the Company divested Tulon Co., a small drill bit manufacturer that no longer met the criteria used to evaluate the Company's ongoing businesses. The Aerospace and Defense Group expanded with the acquisition of Fluid Regulators Corporation, a manufacturer of aerospace-related hydraulic valves and controls; an aerospace sensor product line; and a manufacturer of high- performance seals for the aerospace industry. The largest addition of the year was Kirkhill Rubber Co., announced in August. Kirkhill manufactures specialized elastomers for aerospace markets as well as a broad array of products for other markets including automotive and recreation. In addition, two operations moved to new facilities during the year. The Instrumentation Group expanded as well. The Company acquired the Boeing 777 cockpit switch product line and purchased Memtron Technologies Co., a manufacturer of membrane switches and panels for medical, industrial computer and other commercial markets. Memtron's technology and markets create diversity and a broader business base for the Instrumentation Group. (b) Financial Information about Industry Segments. A summary of net sales to unaffiliated customers, operating earnings and identifiable assets attributable to the Company's business segments for the years ended October 31, 1998, 1997 and 1996 is incorporated herein by 2 reference to Note 11 to the Company's Consolidated Financial Statements (pages 58-60) of the Annual Report to Shareholders for the year ended October 31, 1998. (c) Narrative Description of Business. The Company is organized into three business groups-Automation, Aerospace/Defense and Instrumentation-that focus on developing products strategically positioned into distinct niche markets for aerospace, defense, electronic equipment, automotive, metal fabricating and general manufacturing industries. Specific comments covering all of the Company's business groups and operations are set forth below. Automation Group The Automation Group consists of three operations-Excellon, Equipment Sales Co. and Whitney. These operations manufacture and/or market automated equipment for use by printed circuit board, construction, agricultural, mining and transportation equipment manufacturers. The Automation Group accounted for 32% and 39% of the Company's net sales in 1998 and 1997, respectively. Excellon manufactures highly efficient automated drilling systems for the PCB manufacturing industry and is a leader in this niche. During the past few years, Excellon has focused on expanding its product lines to include material handling equipment and routers used in the fabrication of both bare and populated circuit boards. More recently, laser technology has been developed which the Company expects will pave the way for improved drilling systems in the near future. In addition, another operation acts as a sales representative for various manufacturers' products sold to the PCB assembly industry, including high-speed "pick and place" equipment. Printed circuit board drilling equipment accounted for 16%, 22% and 22% of the Company's consolidated net sales in 1998, 1997 and 1996, respectively. Whitney designs and builds highly productive automated machine tools for cutting and punching plate and structural steel for construction, transportation, agricultural and mining equipment manufacturers and independent steel fabrication centers. Whitney produces equipment specifically designed for mid- to heavy-plate metal that enables manufacturers to meet rigid cut quality and accuracy standards. The Company believes that the computer-controlled heavy punching and cutting machines significantly reduce setup, work-in-process and material handling time and enable customers to utilize just-in-time production, and reduce inventory and production costs. In its niche, Whitney is the leading supplier in the U.S. and has market positions in both Europe and Asia. Whitney recently introduced laser technology into its line of products. The Company expects this advancement will allow customers opportunities to further reduce the time it takes to produce a final product since finish work will be essentially eliminated. Backlog At October 31, 1998 the backlog of the Automation Group was $20 million (all of which is expected to be shipped during fiscal 1999) compared with $28.1 million at October 31, 1997. 3 Aerospace and Defense Group The Aerospace and Defense Group consists of seven operations-Armtec, Auxitrol, Hytek, Kirkhill, Mason, Midcon and TA Mfg. which accounted for 42% and 36% of the Company's net sales in 1998 and 1997, respectively. Armtec manufactures molded fiber cartridge cases, mortar increments, igniter tubes and other combustible ammunition components for the U.S. Armed Forces and licenses such technology to foreign defense contractors and governments. Armtec currently is the only U.S. supplier of combustible casings utilized by the U.S. Army. These products include the 120mm combustible case used as the main armament system on the U.S. Army's M-1A1 and M-1A2 tanks, the 60mm, 81mm and 120mm combustible mortar increments and the 155mm combustible case for artillery ammunition. Auxitrol is a French manufacturer of high precision temperature and pressure sensing devices, and hydraulic controls used primarily in aerospace applications. Other product applications include liquid level measurement devices for ships and storage tanks; and industrial alarms. Auxitrol's principal customers are jet and rocket engine manufacturers. The acquisitions completed during the year will also expand their product offerings and provide for additional penetration into U. S. markets. Auxitrol also manufactures electrical penetration devices, under license, for sale to nuclear power plants in most of Europe and certain other foreign countries. These penetration devices permit electrical signals to pass safely through the reactor containment dome while maintaining pressure integrity and signal continuity. Two operations, Kirkhill and TA Mfg., manufacture elastomer products primarily for the aerospace markets. The products include specialty clamps, seals, tubing and coverings; all designed in custom molded shapes principally for airframe and jet engine manufacturers as well as military and commercial airline aftermarkets. Some of the products include proprietary elastomers that are specifically formulated for various extreme applications, including high-temperature environments on or near a jet engine. Other operations in the Aerospace/Defense Group provide a variety of products including specialized metal finishing and inspection services primarily for aerospace applications (plating, anodizing, polishing, nondestructive testing and organic coatings); control sticks, grips and wheels as well as specialized switching systems for commercial and military aerospace applications; electronic and electrical cable assemblies and cable harnesses for the military, government contractors and the commercial electronics markets. In addition, a variety of products are manufactured for land-based military vehicles such as tanks and missile launchers. Backlog At October 31, 1998 the backlog of the Aerospace and Defense Group was $106.5 million (of which $10.1 million is expected to be shipped after fiscal 1999) compared with $81.5 million at October 31, 1997. 4 Instrumentation Group The Instrumentation Group consists of two operations-Federal and Korry-serving aerospace, automotive, ordnance, farm implement, construction and medical equipment manufacturers. The Instrumentation Group accounted for 26% and 25% of the Company's net sales for 1998 and 1997, respectively. Federal manufactures a broad line of high-precision analog and digital dimensional and surface measurement and inspection instruments as well as systems for a wide range of industrial quality control and scientific applications. Manufacturers use the equipment for direct shop-floor inspections to reduce costly rework at more advanced production stages. Products include dial indicators, air gauges, electronic gauges and other gauges where high-precision measurement is required; and custom-built and dedicated semi-automatic and automatic gauging systems. Distributed products manufactured by others include laser interferometer systems used primarily to check machine tool calibrations. Federal's equipment is used extensively in precision metal working. In 1998, 1997 and 1996, gauge products accounted for 10%, 11% and 12%, respectively, of the Company's consolidated net sales. Korry is a market and technology leader in the manufacture of high- reliability electro-optical instrumentation components and systems, illuminated push button switches, indicators, panels and keyboards. These products act as human interfaces in a broad variety of control and display applications. Products have been designed into many existing aircraft systems, and as a result, Korry has significant spares and retrofit business. Primary markets served include commercial aviation, and airborne and ground-based military equipment manufacturers. Proprietary products provide customers with significant technological advantage in such areas as night vision-a critical operational requirement-and backlighting for active matrix liquid-crystal displays. Switches and indicators, including certain sales from the Aerospace/Defense Group, accounted for 13%, 12% and 9% of the Company's consolidated net sales in 1998, 1997 and 1996, respectively. Backlog At October 31, 1998, the backlog of the Instrumentation Group was $41.9 million (of which $7.6 million is expected to be shipped after fiscal 1999) compared with $44.5 million at October 31, 1997. Marketing and Distribution The Company believes that one of the keys to its continued success in any market is the ability to provide solutions that simplify, integrate and improve the processes and procedures currently being applied by customers. Preserving worldwide service capability with this focus is an integral part of the marketing function for most of the Company's businesses. Each of the Company's operations maintains its own separate and distinct sales force, outside representatives or distributor relationships. The marketing and distribution approach varies by operation depending on the market and geographic area. 5 Research and Development Currently, the Company's product development and design programs utilize an extensive base of professional engineers, technicians and support personnel, supplemented by outside engineering and consulting firms when needed. In 1998, approximately $20.3 million was expended for research, development and engineering, compared with $17.6 million in 1997 and $15.4 million in 1996. Foreign Operations The Company's principal foreign operations consist of manufacturing facilities located in France and Spain. Other locations include sales and service operations located in England, France, Germany and Japan, sales offices in England and France, and a small distribution facility in Italy. During fiscal 1998, the Company opened an office in Hong Kong to facilitate purchasing and sales in the area. For further information regarding foreign operations, reference is made to Note 1 to the Consolidated Financial Statements (pages 46-47) and Note 11 to the Consolidated Financial Statements (pages 58-60) of the Company's Annual Report to Shareholders for the year ended October 31, 1998, which is incorporated herein by reference. Employees The Company and its operations had over 4,200 employees at October 31, 1998. Less than 10% of these employees were members of an organized labor union. In addition, the European operations are subject to specific local regulations governing employment. Government Contracts and Subcontracts As a contractor and subcontractor to the U.S. Government, the Company is subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. The Company sells both directly and indirectly to the United States Government. Combined, approximately 13% of the Company's sales are controlled by government contracting regulations. As a consequence, such contracts may be subject to protest or challenge by unsuccessful bidders or to termination, reduction or modification in the event of changes in government requirements, reductions in federal spending, and other factors. The accuracy and appropriateness of certain costs and expenses used to substantiate direct and indirect costs of the Company for the U.S. Government under both cost-plus and fixed-price contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an arm of the U.S. Department of Defense. Competition, Patents and Leases The Company's products and services are affected by varying degrees of competition. The Company competes with other companies in most markets it serves, many of which have far greater sales volume and financial resources. The principal competitive factors in the commercial markets in which the Company participates are product performance and service. Part of product performance requires expenditures in research and development that lead to product improvement on a rapid basis. The market for many of the Company's products may be affected by rapid and significant technological changes and new product introduction. Current competitors or new entrants could introduce new products with features that render the Company's products obsolete or less marketable. Principal competitors by Group include 6 Hitachi, Ltd., Schmoll, Pluritec, Cincinnati, Inc., Trumpf, Mazak and U.S. Amada for the Automation Group; Ametek and Rosemount for the Aerospace/Defense Group; and Mitutoyo, Brown & Sharpe, Starrett, Eaton-MSC and Ducommun Jay-El for the Instrumentation Group. The Company holds a number of patents and licenses including a long- term license agreement under which Auxitrol manufactures and sells electrical penetration assemblies. In general, the Company relies on technical superiority, continual product improvement, exclusive equipment features, service to customers and marketing to maintain competitive advantage. Sources and Availability of Raw Materials and Components Due to the Company's diversification, the sources and availability of raw materials and components are not nearly as important as they would be for a company that manufactures a single product. However, certain components and supplies such as air bearing spindles and ceramic beams for Excellon, and certain other raw materials and components for other operations are purchased from single sources. In such instances, the Company strives to develop alternative sources and design modifications to minimize the effect of business interruptions. Environmental Matters The Company is subject to federal, state, local and foreign laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances (together, "Environmental Laws"). The Company's various operations use certain substances and generate certain wastes that are regulated as, or may be deemed, hazardous under applicable Environmental Laws, or for which the Company has incurred cleanup obligations. While the Company endeavors at each of its facilities to assure compliance with Environmental Laws, from time to time operations of the Company have resulted or may result in certain noncompliance with applicable requirements under Environmental Laws for which the Company has incurred cleanup and related costs. The Company believes, however, that any such noncompliance or cleanup liability under current Environmental Laws would not have a material adverse effect on the Company's results of operations and financial condition. The Company has been identified as a potentially responsible party ("PRP"), pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), and analogous state Environmental Laws, for the cleanup of contamination resulting from past disposals of hazardous wastes at certain sites to which the Company, among others, sent wastes in the past. CERCLA requires PRPs to pay for cleanup of sites from which there has been a release or threatened release of hazardous substances. Courts have interpreted CERCLA to impose strict, joint and several liability upon all persons liable for cleanup costs. As a practical matter, however, at sites where there are multiple PRPs, the costs of cleanup typically are allocated among the parties according to a volumetric or other standard. Although there can be no assurance, the Company believes, based on, among other things, a review of the data available to 7 the Company regarding each such site, including the minor volumes of waste which the Company is alleged to have contributed, and a comparison of the Company's liability at each such site to settlements previously reached by the Company in similar cases, that it has adequately accrued for the estimated costs associated with such matters. Nonetheless, until the Company's proportionate share is finally determined at each such site, there can be no assurance that such matters, or any similar liabilities that arise in the future, will not have a material adverse effect on the Company's results of operations or financial condition. 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 that could result from changes in laws or other circumstances currently not contemplated by the Company. (d) Financial Information About Foreign and Domestic Operations and Export Sales. See "Foreign Operations" above. Forward-Looking Statements and Risk Factors Except for the historical information contained in this Report and the documents incorporated herein by reference, the matters discussed in this Report, particularly those identified with the words "expects," "believes," "anticipates," "intends" and similar expressions, are forward-looking statements. These statements reflect management's best judgment based on factors known to them at the time of such statements. Such forward-looking statements are subject to certain risks and uncertainties, including, without limitation, those set forth below, many of which are beyond the Company's control, that could cause actual results to differ materially from those anticipated. The factors set forth below should be carefully considered when evaluating the Company's business and prospects. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Year 2000 Compliance. The Company is aware of the issues associated with programming codes in existing computer systems as the year 2000 ("Y2K") approaches and is utilizing both internal and external resources to address Y2K compliance. The Company continues to assess the Y2K risk from failure of its internal systems as low. It is the Company's belief that the impact of a Y2K failure at any one location would not have a material impact due to its diversified and decentralized nature. Although risk is assessed as low, the Company recognizes that not all of its internal computer systems are compliant and steps are being taken to resolve these issues. Currently, it is expected that the systems will be materially compliant by March 1999, even though efforts on ancillary and supporting modules will continue throughout the year. Cyclicality of Business. The Company's business is susceptible to economic cycles and actual results can vary widely based on a number of 8 factors, including domestic and foreign economic conditions and developments affecting the specific industries and customers served. Certain products sold 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, defense and automotive markets as well as government contracts. 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 impact on the Company's results of operations and financial condition. Dependence on Major Customers; Backlog. Certain of the Company's operations are dependent on a relatively small number of customers and defense programs, which change from time to time. Significant customers in 1998 included the U.S. Army, Snecma and Boeing. There can be no assurance that the Company's current customers will continue to buy the Company's products at their current levels. Moreover, orders included in backlog are generally subject to cancellation by the Company's customers. The inability to replace sales due to the loss of any major customer or defense program could have a material adverse effect on the Company's results of operations and financial condition. Dependence on Proprietary Technology. The Company takes precautionary steps to protect technological advantages and intellectual property and relies in part on patent, trademark, trade secret and copyright laws. There can be no assurances that the precautionary steps taken by the Company will prevent misappropriation of its technology. Litigation may be necessary in the future to enforce the Company's patents and other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of proprietary rights of others or to defend against claims of infringement or invalidity by others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's operating results and financial condition. Risk of Foreign Operations. Foreign sales represented approximately 26% of the Company's total sales in 1998. Foreign sales are subject to numerous risks, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, economic conditions in local markets, inconsistent product regulation by foreign agencies or governments, the imposition of product tariffs and the burdens of complying with a wide variety of international and U.S. export laws and differing regulatory requirements. To the extent that foreign sales are transacted in a foreign currency, the Company would be subject to the risk of losses due to foreign currency fluctuations. In addition, the Company has substantial assets denominated in foreign currencies that are not offset by liabilities denominated in such foreign currencies. These net foreign currency investments are subject to material changes in the event of fluctuations in foreign currencies against the U.S. dollar. Product Liability. The Company is subject to the risk of claims arising from injuries to persons or property due to the use of its products. Although the Company maintains general liability and product liability insurance, there can be no assurance that such insurance will be sufficient to cover all claims that may arise. Volatility of Stock Price. The trading price of the Company's Common Stock may be subject to fluctuations in response to quarter-to-quarter 9 variations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, announcements of marketing and distribution arrangements by the Company, general conditions in the industries in which the Company competes and other events or factors. In addition, in recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations also may adversely affect the future trading price of the Common Stock. Risks Associated With Acquisitions. A key operating strategy of the Company is the pursuit of selective acquisitions. Although the Company reviews many possible acquisitions, including some outside of its current markets and acquisition criteria, the Company currently has no material commitments or agreements to acquire any specific businesses or other material assets. There can be no assurance that any acquisition will be consummated, or if consummated, that any such acquisition will be successfully integrated or will not have a material adverse effect upon the Company's financial condition or results of operations. Certain Anti-Takeover Provisions. The Company's Restated Certificate of Incorporation, as amended, and Bylaws contain provisions for a classified Board of Directors and restricting the ability of shareholders to call special meetings. These provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving the Company, even if such events might be favorable to the Company's stockholders. In addition, certain agreements to which the Company is a party, including loan and employment agreements, contain provisions that impose increased costs upon the Company in the event of a change of control. The Company's Shareholder Rights Plan is designed to cause substantial dilution to any "Acquiring Person" that attempts to merge or consolidate with, or that takes certain other actions affecting the Company on terms that are not approved by the Board of Directors of the Company. The Company is also subject to the "business combination" statute of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging various "business combination" transactions with any "interested shareholder" for a period of three years after the date of the transaction in which such person became an "interested shareholder," unless the business combination is approved in a prescribed manner. These provisions could discourage or make more difficult a merger, tender offer or other similar transaction, even if favorable to the Company's shareholders. Item 2. Properties The following table summarizes the principal properties (in excess of 50,000 square feet) owned or leased by the Company and its operations as of October 31, 1998: 10
Approximate Type of Number of Owned Location Facility Square Feet or Leased -------- -------- ----------- --------- Brea, CA Office and Plant (D) 329,000 Owned Rockford, IL Office and Plant (A) 257,000 Owned Providence, RI Office and Plant (I) 166,000 Owned Torrance, CA Office and Plant (A) 150,000 Leased Seattle, WA Office and Plant (I) 138,000 Leased Coachella, CA Office and Plant (D) 111,000 Owned Bourges, France Plant (D) 100,700 Leased Brea, CA Warehouse (D) 100,000 Owned Kent, WA Office and Plant (D) 93,000 Owned Joplin, MO Office and Plant (D) 92,000 Owned Valencia, CA Office and Plant (D) 88,000 Owned San Fernando, CA Office and Plant (D) 50,000 Leased
- ------------------------ The Group operating each facility described above is indicated by the letter following the description of the facility, as follows: (A) - Automation (D) - Aerospace and Defense (I) - Instrumentation Item 3. Legal Proceedings The Company is party to various lawsuits and claims, both offensive and defensive, and contingent liabilities arising from the conduct of its business, none of which, is expected by management to have a material effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of the year ended October 31, 1998. PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters The following information that appears in the Company's Annual Report to Shareholders for the year ended October 31, 1998 is hereby incorporated by reference: (a) The high and low market sales prices of the Company's Common Stock for each quarterly period during the years ended October 31, 1998 and 1997, respectively, (page 41 of the Annual Report to Shareholders). 11 (b) Restrictions on the ability to pay future cash dividends (Note 6 to the Consolidated Financial Statements, pages 52-53 of the Annual Report to Shareholders). No cash dividends were paid during the years ended October 31, 1998 and 1997. The Company expects to continue its policy of retaining all internally generated funds to support the long-term growth of the Company and to retire debt obligations. On January 5, 1999, there were approximately 853 record holders of the Company's common stock. The principal market for the Company's Common Stock is the New York Stock Exchange. Item 6. Selected Financial Data The Company hereby incorporates by reference the Selected Financial Data of the Company that appears on page 40 of the Company's Annual Report to Shareholders for the year ended October 31, 1998. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company hereby incorporates by reference Management's Discussion and Analysis of Results of Operations and Financial Condition which is set forth on pages 34-39 of the Company's Annual Report to Shareholders for the year ended October 31, 1998. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company hereby incorporates by reference the narrative discussion regarding market risk appearing on page 38 of the Company's Annual Report to Shareholders for the year ended October 31, 1998. Item 8. Financial Statements and Supplementary Data The Company hereby incorporates by reference the Consolidated Financial Statements and the report thereon of Deloitte & Touche LLP, dated December 9, 1998, which appear on pages 42-61 of the Company's Annual Report to Shareholders for the year ended October 31, 1998. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant (a) Directors. The Company hereby incorporates by reference the information set forth under "Election of Directors" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 3, 1999, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 15, 1999. 12 (b) Executive Officers. The names and ages of all executive officers of the Company and the positions and offices held by such persons as of January 15, 1999 are as follows:
Name Position with the Company Age ---- ------------------------- --- Wendell P. Hurlbut Chairman and Chief Executive Officer 67 Robert W. Cremin President and Chief Operating Officer 58 Robert W. Stevenson Executive Vice President, Chief Financial Officer and Secretary 59 James J. Cich, Jr. Group Vice President 37 Larry A. Kring Group Vice President 58 Stephen R. Larson Group Vice President 54 Marcia J. M. Greenberg Vice President, Human Relations 46 Robert D. George Treasurer and Controller 42
Mr. Hurlbut has served as Chairman and Chief Executive Officer of the Company since September 1997. Previously, he served as Chairman, President and Chief Executive Officer from January 1993 through September 1997. From February 1989 through December 1992, he was President and Chief Executive Officer. Mr. Hurlbut is also a member of the Board of Directors of the National Association of Manufacturers. Mr. Cremin has been President since September 1997 and Chief Operating Officer since October 1996. In addition, he served as Executive Vice President from October 1996 to September 1997. From January 1991 to October 1996, he was Senior Vice President and Group Executive. Mr. Cremin has a M.B.A. from the Harvard Business School and a B.S. degree in Metallurgical Engineering from Polytechnic Institute of Brooklyn. Mr. Stevenson has been Executive Vice President, Chief Financial Officer and Secretary since October 1987. From October 1987 to June 1997, he also served as Treasurer. Mr. Stevenson has a M.B.A. from the Wharton School of Business at the University of Pennsylvania and a B.A. degree from Stanford University. Mr. Cich has been Group Vice President since March 1998. Previously, he was Group Executive from February 1997 to February 1998. From June 1995 to February 1997, he was President, Chief Executive Officer and Director for WFI Industries, Ltd. From June 1988 to May 1995, he was President of Patton Electric Company, Inc. Mr. Cich has a M.B.A. from Harvard Business School and a B.S. degree in Industrial Engineering from the University of Washington. Mr. Kring has been Group Vice President since August 1993. From November 1978 to July 1993, he was President and Chief Executive Officer of Heath Tecna Aerospace Co., a unit of Ciba Composites Division, Anaheim, California. Mr. Kring has a M.B.A. from California State University at Northridge and a B.S. degree in Aeronautical Engineering from Purdue University. He is a director of Active Apparel Group, Inc. 13 Mr. Larson has been Group Vice President since April 1991. From February 1978 to March 1991, he held various executive positions with Korry Electronics, a subsidiary of the Company, including President and Executive Vice President, Marketing. Mr. Larson has a M.B.A. degree from the University of Chicago and a B.S. degree in Electrical Engineering from Northwestern University. Ms. Greenberg has been Vice President, Human Resources since March 1993. From January 1992 to February 1993, she was a partner in the law firm of Bogle & Gates, Seattle, Washington. Ms. Greenberg has a J.D. degree from Northwestern University School of Law and a B.A. degree from Portland State University. Mr. George has been Treasurer and Controller since June 1997. From October 1995 to June 1997, he was Group Vice President Finance for Zurn Power Systems Group. Previously, he served as Vice President Finance for the Energy Division of Zurn Industries from March 1989 until October 1995. Mr. George has a M.B.A. from the Fuqua School of Business at Duke University and a B.A. degree from Drew University. Item 11. Executive Compensation The Company hereby incorporates by reference the information set forth under "Executive Compensation" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 3, 1999, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 15, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management The Company hereby incorporates by reference the information with respect to stock ownership set forth under "Security Ownership of Certain Beneficial Owners and Management" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 3, 1999, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 15, 1999. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements. The following consolidated financial statements, together with the report thereon of Deloitte & Touche LLP, dated December 9, 1998, appearing on pages 42-61 of the Company's Annual Report to Shareholders for the year ended October 31, 1998, are hereby incorporated by reference: 14
Annual Report Page Number ------------- Consolidated Statement of Operations-Years ended October 31, 1998, 1997 and 1996 42 Consolidated Balance Sheet-October 31, 1998 and 1997 43 Consolidated Statement of Cash Flows-Years ended October 31, 1998, 1997 and 1996 44 Consolidated Statement of Shareholders' Equity-Years ended October 31, 1998, 1997 and 1996 45 Notes to Consolidated Financial Statements 46-60 Report of Independent Auditors 61
(a)(2) Financial Statement Schedules. The following additional financial data should be read in conjunction with the consolidated financial statements in the Annual Report to Shareholders for the year ended October 31, 1998: Independent Auditors' Report Schedule VIII-Valuation and Qualifying Accounts and Reserves, see page 22. (a)(3) Exhibits. See Exhibits Index on Pages 17-20. (b) Reports on Form 8-K. The Company filed a report on Form 8-K under Item 2 on August 26, 1998, as amended by Form 8-K/A on October 23, 1998. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ESTERLINE TECHNOLOGIES CORPORATION (Registrant) By /s/ Robert W. Stevenson ---------------------------------- Robert W. Stevenson Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) By /s/ Robert D. George ---------------------------------- Robert D. George Treasurer and Controller (Principal Accounting Officer) Dated: January 15, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Wendell P. Hurlbut Director, Chairman and January 15, 1999 - -------------------------- Chief Executive Officer ---------------- (Wendell P. Hurlbut) (Principal Executive Officer) Date /s/ Robert W. Stevenson Executive Vice President, January 15, 1999 - -------------------------- Chief Financial Officer ---------------- (Robert W. Stevenson) and Secretary Date (Principal Financial Officer) /s/ Robert D. George Treasurer and Controller January 15, 1999 - -------------------------- (Principal Accounting Officer) ---------------- (Robert D. George) Date /s/ Richard R. Albrecht Director January 15, 1999 - -------------------------- ---------------- (Richard R. Albrecht) Date /s/ Gilbert W. Anderson Director January 15, 1999 - -------------------------- ---------------- (Gilbert W. Anderson) Date 16 /s/ Robert W. Cremin Director January 15, 1999 - -------------------------- ---------------- (Robert W. Cremin) Date /s/ John F. Clearman Director January 15, 1999 - -------------------------- ---------------- (John F. Clearman) Date /s/ E. John Finn Director January 15, 1999 - -------------------------- ---------------- (E. John Finn) Date /s/ Robert F. Goldhammer Director January 15, 1999 - -------------------------- ---------------- (Robert F. Goldhammer) Date /s/ Jerry D. Leitman Director January 15, 1999 - -------------------------- ---------------- (Jerry D. Leitman) Date /s/ Jerome J. Meyer Director January 15, 1999 - -------------------------- ---------------- (Jerome J. Meyer) Date /s/ Paul G. Schloemer Director January 15, 1999 - -------------------------- ---------------- (Paul G. Schloemer) Date /s/ Malcolm T. Stamper Director January 15, 1999 - -------------------------- ---------------- (Malcolm T. Stamper) Date 17 Exhibit Number Exhibit - ------- ------- 3.1 Composite Restated Certificate of Incorporation of the Company as amended by Certificate of Amendment dated March 14, 1990. (Incorporated by reference to Exhibit 19 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1990 (Commission File Number 1-6357).) 3.2 By-laws of the Company, as amended and restated December 15, 1988. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1988 (Commission File Number 1-6357).) 4.2 Form of Rights Agreement, dated as of December 9, 1992, between the Company and Chemical Bank, which includes as Exhibit A thereto the form of Certificate of Designation, Preferences and Rights of Series A Serial Preferred Stock and as Exhibit B thereto the form of Rights Certificate. (Incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A filed December 17, 1992 (Commission File Number 1-6357).) 10.1 Amendment of Lease and Agreement, dated March 11, 1959, between the City of Torrance, California, and Longren Aircraft Company, Inc., as original lessee; Lease, dated July 1, 1959, between the City of Torrance and Aeronca Manufacturing Corporation, as original lessee; and Assignment of Ground Lease, dated September 26, 1985, from Robert G. Harris, as successor lessee under the foregoing leases, to Excellon Industries, Inc., relating to principal manufacturing facility of Excellon at 24751 Crenshaw Boulevard, Torrance, California. (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1986 (Commission File Number 1-6357).) 10.4 Industrial Lease dated July 17, 1984, between 901 Dexter Associates and Korry Electronics Co., First Amendment to Lease dated May 10, 1985, Second Amendment to Lease dated June 20, 1986, Third Amendment to Lease dated September 1, 1987, and Notification of Option Exercise dated January 7, 1991, relating to the manufacturing facility of Korry Electronics at 901 Dexter Avenue N., Seattle, Washington. (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991 (Commission File Number 1-6357).) 10.4a Fourth Amendment dated July 27, 1994, to Industrial Lease dated July 17, 1984 between Houg Family Partnership, as successor to 901 Dexter Associates, and Korry Electronics Co. (Incorporated by reference to Exhibit 10.4a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 (Commission File Number 1-6357).) 10.5 Industrial Lease dated July 17, 1984, between 801 Dexter Associates and Korry Electronics Co., First Amendment to Lease dated May 10, 1985, Second Amendment to Lease dated 18 June 20, 1986, Third Amendment to Lease dated September 1, 1987, and Notification of Option Exercise dated January 7, 1991, relating to the manufacturing facility of Korry Electronics at 801 Dexter Avenue N., Seattle, Washington. (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991 (Commission File Number 1-6357).) Exhibit Number Exhibit - ------- ------- 10.5a Fourth Amendment dated March 28, 1994, to Industrial Lease dated July 17, 1984, between Michael Maloney and the Bancroft & Maloney general partnership, as successor to 801 Dexter Associates, and Korry Electronics Co. (Incorporated by reference to Exhibit 10.5a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 (Commission File Number 1-6357).) 10.9 Note Agreement, dated as of July 15, 1992("1992 Note Agreement"), among Esterline Technologies Corporation, certain of its subsidiaries, The Northwestern Mutual Life Insurance Company and New England Mutual Life Insurance Company relating to 8.75% Senior Notes due July 30, 2002 of Esterline Technologies Corporation and certain of its subsidiaries. (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1992 (Commission File Number 1-6357).) 10.9a Amendment to Note Agreement, executed as of October 31, 1993, to the 1992 Note Agreement. (Incorporated by reference to Exhibit 10.9a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 (Commission File Number 1-6357).) 10.9b Amendment No. 1 to Note Agreement, effective September 30, 1998, to the 1992 Note Agreement. 10.10 Compensation of Directors. (Incorporated by reference to first paragraph under "Other Information as to Directors" in the definitive form of the Company's Proxy Statement, relating to its 1999 Annual Meeting of Shareholders to be held on March 3, 1999, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 15, 1999.) 10.21 Credit Agreement executed and effective as of October 31, 1996 among Esterline Technologies Corporation and certain of its subsidiaries, various financial institutions and Bank of America, National Trust and Savings Association, as Agent. (Incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 (Commission File Number 1-6357).) 10.22 Real Property Lease and Sublease, dated June 28, 1996, between 810 Dexter L.L.C. and Korry Electronics Co. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 (Commission File Number 1-6357).) 19 10.23 Single Tenant Industrial Lease, dated April 1, 1994, between G&G 8th Street Partners, Ltd., James and Loralee Cassidy and Mason Electric Co. (Incorporated by reference to Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997 (Commission File Number 1-6357).) 10.23a Single Tenant Industrial Sublease, dated August 1, 1996, between Mason Electric Company, Inc. and ME Acquisition Co. (Incorporated by reference to Exhibit 10.23a to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997 (Commission File Number 1-6357).) Exhibit Number Exhibit - ------- ------- 10.23b Amendment of Lease, Estoppel, and Consent to Sublease, dated August 6, 1996, between G&G 8th Street Partners, Ltd., Mason Electric Company, Inc. and ME Acquisition Co. (Incorporated by reference to Exhibit 10.23b to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997 (Commission File Number 1-6357).) 10.25 Property lease between Slibail Immobilier and Norbail Immobilier and Auxitrol S.A., dated April 29, 1997, relating to the manufacturing facility of Auxitrol at 5, allee Charles Pathe, 18941 Bourges Cedex 9, France, effective on the construction completed date (December 5, 1997). (Incorporated by reference to Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1998 (Commission File Number 1-6357).) 10.26 Industrial and build-to-suit purchase and sale agreement between The Newhall Land and Farming Company, Esterline Technologies Corporation and TA Mfg. Co., dated February 13, 1997 include Amendments. The agreement is for land and building located at 28065 West Franklin Parkway, Valencia, CA 91384, effective upon acceptance of construction completion (May 12, 1998). (Incorporated by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1998 (Commission File Number 1-6357).) 11 Schedule setting forth computation of earnings per share for the five fiscal years ended October 31, 1998. 13 Portions of the Annual Report to Shareholders for the fiscal year ended October 31, 1998, incorporated by reference herein. 21 List of subsidiaries. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule (EDGAR only). 20 Exhibit Number Exhibit - ------- ------- Management Contracts or Compensatory Plans or Arrangements ---------------------------------------------------------- 10.13 Amended and Restated 1987 Stock Option Plan. (Incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1992 (Commission File Number 1-6357).) 10.15 Esterline Corporation Supplemental Retirement Income Plan for Key Executives. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1989 (Commission File Number 1-6357).) 10.16g Esterline Technologies Corporation Long-Term Incentive Compensation Plan, fiscal years 1997-1999. 10.19 Executive Officer Termination Protection Agreement. (Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 (Commission File Number 1-6357).) 10.20e Esterline Technologies Corporation Corporate Management Incentive Compensation Plan for fiscal year 1999. 10.24 Esterline Technologies Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit A in the definitive form of the Company's Proxy Statement, relating to its 1997 Annual Meeting of Shareholders held on March 5, 1997, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 17, 1997 (Commission File Number 1-6357).) 21 Report of Independent Auditors To the Shareholders and the Board of Directors Esterline Technologies Corporation Bellevue, Washington We have audited the consolidated financial statements of Esterline Technologies Corporation (the Company) as of October 31, 1998 and 1997, and for each of the three years in the period ended October 31, 1998, and have issued our report thereon dated December 9, 1998; such financial statements and report are included in your 1998 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company, listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Seattle, Washington December 9, 1998 22A ESTERLINE TECHNOLOGIES CORPORATION AND SUBSIDIARIES SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) For Years Ended October 31, 1998, 1997 and 1996
Deduction for Balance at Additions Purpose for Balance Beginning Charged which Reserve at End Description of Year to Income was Created of Year ----------- --------- --------- ------------- ------- Reserve for Doubtful Accounts Receivable Years Ended October 31 - ---------------------- 1998 $2,860 $584 $ (457) $2,987 ====== ==== ======= ====== 1997 $4,084 $742 $(1,966) $2,860 ====== ==== ======= ====== 1996 $4,117 $782 $ (815) $4,084 ====== ==== ======= ====== Inventory Valuation Reserves Years Ended October 31 - ---------------------- 1998 $ 500 $ - $ $ 500 ====== ==== ======= ====== 1997 $1,195 $ - $ (695) $ 500 ====== ==== ======= ====== 1996 $1,195 $ - $ - $1,195 ====== ==== ======= ======
22B EX-10 2 EXHIBIT 10.9B Exhibit 10.9b AMENDMENT NO. 1 TO NOTE AGREEMENT THIS AMENDMENT dated as of September 30, 1998 (this "Amendment") to the Note Agreement dated as of July 15, 1992 and as amended (the "Note Agreement") is between Esterline Technologies Corporation, a Delaware corporation (the "Company"); Angus Electronics Co., a Delaware corporation; Armtec Defense Products Co., a Delaware corporation; Auxitrol Co., a Delaware corporation; Auxitrol U.S.A., Inc., a Delaware corporation; Equipment Sales Co., a Connecticut corporation; Excellon Automation Co., a California corporation; Excellon U.K., a California corporation; Federal Products Co., a Delaware corporation; Federal Products U.K. Ltd., a Delaware corporation; H.A. Sales Co. (formerly Hollis Automation Co.), a Delaware corporation; Hytek Finishes Co., a Delaware corporation; Scientific Columbus Co. (formerly Jemtec Electronics Co.), a Delaware corporation; Korry Electronics Co., a Delaware corporation; Midcon Cables Co., a Delaware corporation; Republic Electronics Co., a Delaware corporation; TA Mfg. Co., a California corporation; Tulon Co., a California corporation; W.A. Whitney Co., an Illinois corporation (each of the foregoing being a direct or indirect subsidiary of the Company and hereinafter referred to individually a "Co-Obligor" and collectively as "Co-Obligors"); and The Northwestern Mutual Life Insurance Company and the Metropolitan Life Insurance Company (the "Noteholders"). RECITALS: A. The Company, together with the Co-Obligors, and the Noteholders have heretofore entered into the Note Agreement. The Company and such Co-Obligors have heretofore issued the $40,000,000 Original Principal Amount of 8.75% Senior Notes Due July 30, 2002 (the "Notes") pursuant to the Note Agreement. The Noteholders are the holders of 100% of the outstanding principal amount of the Notes. B. The Company, the Co-Obligors and the Noteholders now desire to amend the Note Agreement and the Notes as of September 30, 1998 (the "Effective Date") in the respects, but only in the respects, hereinafter set forth. C. Capitalized terms used herein shall have the respective meanings ascribed thereto in the Note Agreement unless herein defined or the context shall otherwise require. NOW THEREFORE, upon the full and complete satisfaction of the conditions precedent to the effectiveness of the Amendment set forth in [Section Sign]4.1 hereof, and in consideration of good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company, the Co-Obligors and the Noteholders do hereby agree as follows: SECTION 1. AMENDMENTS - ---------------------- 1.1. Tulon Co. shall be deleted from the title page of the Note Agreement and the definition of Co-Obligor and Co-Obligors and shall cease to be a Co-Obligor under the Note Agreement and the Note. 23 1.2. The Note shall be amended to reflect the deletion described above in Section 1.1 of this Agreement. SECTION 2. AFFIRMATION OF THE COMPANY AND CO-OBLIGORS - ------------------------------------------------------ 2.1. The Company and each Co-Obligor confirms to the Noteholders that, both before and after giving effect to the Amendment, its respective obligations under the Note Agreement and the Note remain in full force and effect, and reaffirms its obligations thereunder. SECTION 3. REPRESENTATIONS AND WARRANTIES - ------------------------------------------ 3.1. To induce the Noteholders to execute and deliver this Amendment, the Company and each Co-Obligor represents and warrants to the Noteholders (which representations shall survive the execution and delivery of this Amendment) that: (a) this Amendment has been duly authorized, executed and delivered by it and this Amendment constitutes the legal, valid and binding obligation, contract and agreement of the Company and each Co-Obligor enforceable against it in accordance with its terms except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Note Agreement, as amended by this Amendment, constitutes the legal, valid and binding obligation, contract and agreement of the Company and each Co-Obligor enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by the Company and each Co-Obligor of this Amendment (i) have been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) do not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, (B) violate or require any consent under or with respect to any provision of any material indenture, agreement or other instrument to which it is a party or by which its properties or assets are or may be bound, or (C) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument; (d) as of the date hereof and after giving effect to this Amendment, no Default or Event of Default has occurred which is continuing; and (e) since October 31, 1997, there has been no change in the financial condition, operations, business or properties of the Company or any Subsidiary that, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the financial condition, operations, business or properties of the Company and its subsidiaries. 24 SECTION 4. CONDITIONS PRECEDENT; MISCELLANEOUS. - ------------------------------------------------ 4.1. This Amendment shall not become effective until each and everyone of the following conditions shall have been satisfied: (a) executed counterparts of this Amendment, duly executed by the Company, each Co-Obligor and the Noteholders, shall have been delivered to the Noteholders; and (b) The Noteholders shall have received a certificate, in form satisfactory to it, of an appropriate officer of the Company to the effect that the representations and warranties of the Company and each Co-Obligor set forth in [Section Sign]3 hereof are true and correct on and with respect to the date hereof. Upon receipt of all of the foregoing, this Amendment shall become effective as of the Effective Date referred to in Paragraph B of the Recitals. 4.2. This Amendment shall be construed in connection with and as part of the Note Agreement, and except as modified and expressly amended by this Amendment, all terms, conditions and covenants contained in the Note Agreement and the Notes are hereby ratified and shall be and remain in full force and effect. 4.3. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Amendment may refer to the Note Agreement without making specific reference to this Amendment but nevertheless all such references shall include this Amendment unless the context otherwise requires. 4.4. The descriptive headings of the various Sections or parts of this Amendment are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. 4.5. This Amendment shall be governed by and construed in accordance with Illinois law. 4.6. This Amendment may be executed in any number of counterparts, each executed counterpart constituting an original, but all together only one agreement. ESTERLINE TECHNOLOGIES CORPORATION By: /s/ R.W. Stevenson ----------------------------------- Title: Executive Vice President and Chief Financial Officer ANGUS ELECTRONICS CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President 25 ARMTEC DEFENSE PRODUCTS CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President AUXITROL CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President AUXITROL U.S.A., INC. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President EQUIPMENT SALES CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President EXCELLON AUTOMATION CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President EXCELLON U.K. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President FEDERAL PRODUCTS CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President FEDERAL PRODUCTS U.K. LTD. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President H.A. SALES CO. (formerly Hollis Automation Co.) By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President 26 HYTEK FINISHES CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President SCIENTIFIC COLUMBUS CO. (formerly Jemtec Electronics Co.) By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President KORRY ELECTRONICS CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President MIDCON CABLES CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President REPUBLIC ELECTRONICS CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President TA MFG. CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President TULON CO. By: /s/ R.W. Stevenson 1 ----------------------------------- Title: Vice President W.A. WHITNEY CO. By: /s/ R.W. Stevenson ----------------------------------- Title: Vice President Accepted and Agreed to as of September 30, 1998: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: /s/ John M. Bremen ----------------------------------- Its: Executive Vice President, General Counsel & Secretary 27A METROPOLITAN LIFE INSURANCE COMPANY By: _________________________________ Title: ______________________________ 27B EX-11 3 EXHIBIT 11 Exhibit 11 Page 1 ESTERLINE TECHNOLOGIES CORPORATION Computation of Earnings Per Common Share - Basic (in thousands, except per share amounts)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net Earnings $30,084 $25,321 $21,354 $17,381 $ 7,563 ======= ======= ======= ======= ======= Weighted-Average Number of Common Shares Outstanding 17,290 17,124 15,842 13,292 13,026 Earnings Per Common Share - Basic $ 1.74 $ 1.48 $ 1.35 $ 1.32 $ .58 ======= ======= ======= ======= =======
28 Exhibit 11 Page 2 ESTERLINE TECHNOLOGIES CORPORATION Computation of Earnings Per Share - Diluted (in thousands, except per share amounts)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net Earnings $30,084 $25,321 $21,354 $17,381 $ 7,563 ======= ======= ======= ======= ======= Weighted-Average Number of Common Shares Outstanding 17,290 17,124 15,842 13,136 13,026 Net Shares Assumed to be Issued for Stock Options 428 484 492 604 116 ------- ------- ------- ------- ------- Total Common Shares - Diluted 17,718 17,608 16,334 13,740 13,142 ======= ======= ======= ======= ======= Earnings Per Common Share - Diluted $ 1.70 $ 1.44 $ 1.31 $ 1.26 $ .58 ======= ======= ======= ======= ======= Earnings Per Common Share - Basic $ 1.74 $ 1.48 $ 1.35 $ 1.32 $ .58 ======= ======= ======= ======= ======= Dilutive Effect Per Common Share $ .04 $ .04 $ .04 $ .06 $ None ======= ======= ======= ======= =======
29 EX-13 4 EXHIBIT 13 Exhibit 13 ESTERLINE TECHNOLOGIES Management's Discussion and Analysis. General - ------- Esterline Technologies (the "Company") completed its second consecutive year of record sales and earnings in 1998. A two-for-one stock split was declared for shareholders of record on March 31, 1998 and became effective April 20, 1998. During the year, the Company completed seven acquisitions with cash (four companies and three product lines) for a combined total purchase price of $127.2 million. The largest acquisition, Kirkhill Rubber Co., significantly bolsters the Aerospace and Defense Group. Kirkhill is a manufacturer of high-performance custom-engineered elastomer products for the aerospace industry and a broad array of specialty elastomer products for other markets. Two subsidiaries, Auxitrol and TA Mfg., moved into new, larger facilities enabling them to meet growing customer demand, allowing for new product expansions and providing for increased operating efficiencies. The Company divested Tulon Co., a small drill bit manufacturer, which no longer fit the strategic criteria used to evaluate the Company's ongoing businesses. Subsequent to year-end, the Company completed a $100 million private placement of senior notes. A portion of the proceeds was used to retire the bridge facility used for the Kirkhill acquisition, and the remainder will be used to finance continued expansion efforts as opportunities are identified. The Company focuses on developing businesses with strategically-positioned niche products managed through three groups: Automation, Aerospace/Defense, and Instrumentation. The groups focus on multiple, counter-cyclical industrial markets and on high quality, capital-intensive engineered products. These markets include aerospace, defense, electronic equipment, automotive, metal fabricating and general manufacturing industries. Results of Operations - --------------------- Year Ended October 31, 1998 Compared to Year Ended October 31, 1997 Sales for 1998 grew 16% when compared with the prior period. Sales by Group were as follows:
increase (decrease) dollars in thousands from prior year 1998 1997 Automation (5%) $143,356 $150,522 Aerospace and Defense 35% 189,569 140,200 Instrumentation 21% 120,977 100,236 - ---------------------------------------- -------- -------- $453,902 $390,958 ======== ========
30 Sales in the Aerospace/Defense and Instrumentation Groups grew substantially in 1998. The growth was primarily attributable to continued strong aerospace market demand and acquisitions. In the past several years, both Groups have benefited from the increased production of new aircraft. The Company expects the rate of growth in new aircraft deliveries to begin to slow over the next few years. However, production supporting maintenance, repair and retrofit for the active fleet of aircraft will continue to grow. The Automation Group experienced a downturn during the last half of the year primarily due to sluggish worldwide market demand for printed circuit board ("PCB") manufacturing equipment. A contributing factor was the destabilized Asian economy. Sales to foreign customers, including export sales by domestic operations, totaled $120.2 million and $129.6 million, and accounted for 26% and 33% of the Company's sales for 1998 and 1997, respectively. Gross margin as a percentage of sales was 38% for both 1998 and 1997. On a comparative basis, the Aerospace/Defense Group's gross margin improved due to favorable commercial aerospace market conditions, while decreases were experienced in the Instrumentation and Automation Groups. A key factor in the Instrumentation Group's gross margin decrease was the fourth quarter weakness in the market for quality control instrumentation products related to a strike at General Motors. The Automation Group's margin deteriorated due to the economic instability in Asia that directly affected pricing and demand for PCB manufacturing equipment. The Company expects that this dampening effect will continue through 1999. In addition, consolidation of the customer base has resulted in larger, but fewer buyers in the PCB manufacturing markets. Gross margins by Group ranged from 34% to 41% in 1998, compared with 35% to 41% in the prior year. Selling, general and administrative expenses (which include corporate expenses, and research, development and related engineering costs) increased to $122.6 million in 1998 compared with $108.5 million in the prior year. As a percentage of sales, selling, general and administrative expenses improved to 27% in 1998 compared with 28% in 1997. Research, development and related engineering spending increased to $20.3 million in 1998 from $17.6 million in 1997, and remained constant as a percentage of sales. A core strategy of the Company is to invest in the future through research and development notwithstanding business cycles. New laser technology, specialized materials, and lighting solutions for aircraft cockpits were some of the projects being pursued in 1998 which resulted in new and enhanced products. Operating earnings (excluding corporate expenses) increased 26% to $60.1 million compared with $47.6 million in the prior year. The Aerospace/Defense and Instrumentation Groups posted operating earnings of $35.6 million and $13.4 million in 1998 compared with $22.3 million and $9.9 million in 1997. Strong aerospace and defense markets were the primary factors for improved operating earnings in both Groups. In addition, current year acquisitions and the prior year divestiture of Angus Electronics Co. contributed to improved operating earnings. The Automation Group's operating earnings decreased 28% for the year to $11.1 million from $15.5 million in the prior year primarily due to the difficult PCB manufacturing environment. 31 As available cash was used to complete acquisitions, interest income decreased to $1.6 million compared with $2.4 million in the prior year. Interest expense remained essentially unchanged at $3.8 million during 1998 from $3.6 million in the prior year. The effective income tax rate increased to 35.9% in 1998 from 33.5% in 1997 primarily due to non-deductible goodwill resulting from acquisitions made during the year. Net earnings in 1998 were $30.1 million, or $1.70 per share on a diluted basis, compared with $25.3 million, or $1.44 per share, in the prior year. Orders received in 1998 increased 7% to $448.5 million from $417.8 million in the prior year. Backlog at October 31, 1998 was $168.4 million compared with $154.1 million at the end of the prior year. Approximately $17.7 million of backlog is scheduled to be delivered after 1999. Backlog is subject to cancellation until delivery. Year Ended October 31, 1997 Compared to Year Ended October 31, 1996 Sales for 1997 grew 11% when compared with the prior period. Sales by Group were as follows:
increase dollars in thousands from prior year 1997 1996 Automation 3% $150,522 $146,698 Aerospace and Defense 26% 140,200 111,691 Instrumentation 6% 100,236 94,454 - ---------------------------------------- -------- -------- $390,958 $352,843 ======== ========
Sales were a record $391 million and showed increases across all Groups for 1997. The improvement was driven by the Aerospace/Defense Group which benefited from the overall strong aerospace market demand and the effects of a full year of operation from Mason Electric, acquired in August 1996. The Instrumentation Group also improved due to the strengthening order rate in aerospace-related and quality control instrumentation markets, despite the divestiture of Angus Electronics in May. Sales activity for the Automation Group began the year at the slow pace experienced during the second half of 1996. Indications of improvement in the electronic component industry noted in the first quarter of 1997 were realized by the Group over the remainder of the year. Sales to foreign customers, including export sales by domestic operations, totaled $129.6 million and $122.6 million, and accounted for 33% and 35% of the Company's sales for 1997 and 1996, respectively. Total gross margin as a percentage of sales was 38% during 1997 compared with 39% in the prior year. On a comparative basis, the Aerospace/Defense Group's gross margin increased due to overall favorable commercial aerospace market conditions. Both the Instrumentation and Automation Groups experienced decreases in gross margins. The decreases were primarily the result of pricing pressures due to the strong U.S. dollar. Other contributing factors were consolidation within the printed circuit board 32 manufacturing industry and new product/program start-up costs. Gross margins by Group ranged from 35% to 41% in 1997, compared with 38% to 39% in the prior year. Selling, general and administrative expenses (which include corporate expenses, and research, development and related engineering costs) increased to $108.5 million in 1997 compared with $103.4 million in the prior year. Just under half of the overall increase was from research, development and related engineering spending which increased to $17.6 million in 1997 from $15.4 million in 1996. As a percentage of sales, selling, general and administrative expenses improved to 28% in 1997 from 29% in 1996. Operating earnings (excluding corporate expenses) increased 11% to $47.6 million compared with $42.8 million in the prior year. The Aerospace/Defense and Instrumentation Groups posted operating earnings of $22.3 million and $9.9 million in 1997 compared with $13.6 million and $5.5 million in 1996. Strong aerospace markets, operating earnings generated by Mason, the sale of Angus and increased demand for quality control instrumentation contributed to this improvement. The Automation Group's operating earnings decreased 35% for the year to $15.5 million from $23.7 million in the prior year primarily as a result of the foreign pricing pressures, the slow start at the beginning of the year and increased spending for research and new product development. Increased levels of investment resulted in interest income of $2.4 million, compared with $2 million in the prior year. Interest expense decreased to $3.6 million during 1997 from $4.3 million in the prior year, primarily due to the annual repayment on the Senior Notes. Net earnings were $25.3 million, or $1.44 per share on a diluted basis, for 1997 compared with $21.4 million, or $1.31 per share, in the prior year. Orders received in 1997 increased 16% to $417.8 million from $361.4 million in the prior year. Backlog at October 31, 1997 was $154.1 million compared with $127.3 million at the end of the prior year. Approximately $19.8 million of backlog was scheduled to be delivered after 1998. Backlog is subject to cancellation until delivery. Liquidity and Capital Resources - ------------------------------- The Company completed seven acquisitions during 1998, the most significant of which was Kirkhill Rubber Co. While most of the transactions were structured using available cash, the Kirkhill transaction required additional funds provided through a bridge facility available to the Company. Essentially all major asset categories other than cash increased due to acquisition activity. In each case, the majority of the increase was attributed directly to the acquisition of Kirkhill. In November 1998, the Company completed a private placement of senior notes for $100 million. The placement has maturities ranging from 5 to 10 years and interest rates from 6% to 6.77%. A portion of the cash received from this placement retired the bridge facility and residual proceeds will be used for other internal expansion and acquisition activities. Management believes cash on hand (including cash from the subsequent private placement of senior notes) and funds generated from operations will adequately service operating cash requirements and capital expenditures through 1999. 33 Cash and equivalents at October 31, 1998 totaled $8.9 million compared to $56 million in the prior year. Net working capital decreased to $70.1 million at October 31, 1998 from $99.4 million at October 31, 1997, primarily due to the cash reduction for acquisitions. Total debt at October 31, 1998 was $89.9 million, an increase of $53.9 million from a year earlier, and is principally due to the Kirkhill acquisition. The existing 8.75% Senior Notes have a scheduled payment of $5.7 million, which will continue annually until maturity on July 30, 2002. Debt was comprised of the $50 million bridge facility used in the Kirkhill transaction, $22.9 million under the Company's 8.75% Senior Notes, $15.4 million under various foreign currency debt agreements, and $1.6 million for revenue bonds assumed as part of a smaller acquisition completed during the year. Domestic and foreign credit facilities totaled $96 million, of which $34.6 million was available at October 31, 1998. To the extent that foreign sales are transacted in a foreign currency, the Company would be subject to the risk of losses due to foreign currency fluctuations. In addition, the Company has substantial assets denominated in foreign currencies that are not offset by liabilities denominated in such foreign currencies. These net foreign currency investments are subject to material changes in the event of fluctuations in foreign currencies against the U.S. dollar. Capital expenditures for 1998 (excluding acquisitions) were comprised of two new plants, expansion of certain existing plants, machinery and equipment, and enhancements to information technology systems in order to support growth and operational effectiveness. Capital expenditures are anticipated to be approximately $21 million for 1999 compared with $29.8 million in 1998. In 1999, the Company expects to continue to support expansion through investments in machinery, equipment and improvements to information technology, however there are no current plans for plant expansion. The Company is aware of the issues associated with programming codes in existing computer systems as the year 2000 ("Y2K") approaches and is utilizing both internal and external resources to address Y2K compliance. The Company continues to assess the Y2K risk from failure of its internal systems as low. It is the Company's belief that the impact of a Y2K failure at any one location would not have a material impact due to its diversified and decentralized nature. Although risk is assessed as low, the Company recognizes that not all of its internal computer systems are compliant and steps are being taken to resolve these issues. Currently, it is expected that the systems will be materially compliant by March 1999, even though efforts on ancillary and supporting modules will continue throughout the year. Based on current information available, it is estimated that the cost of compliance will be less than $1 million. While the Company does not have a complete assessment of third party exposure for Y2K issues, its decentralized structure minimizes the reliance on single product vendors and most third party relationships are deemed replaceable. Forward-Looking Statements - -------------------------- Certain statements in the above commentary and throughout this annual report contain forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve risks and 34A uncertainties regarding matters that could significantly affect expected results, including information about industry trends, growth, Y2K, orders, currency fluctuations, backlog, capital expenditures and cash requirements. The Company is susceptible to economic cycles and financial results can vary widely based on a number of factors, including domestic and foreign economic conditions and developments affecting specific industries and customers. A significant portion of the sales and profitability of some Company businesses is derived from telecommunications, electronics, computer, automotive, aerospace and defense markets. The products sold by most of the Company's businesses represent capital investment or support for capital investment by either the initial customer or the ultimate end-user. 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, actual results may vary materially from these forward-looking statements. 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 Pronouncements - -------------------------------- Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components. Comprehensive income represents net income plus certain items that are charged directly to shareholders' equity. This Statement will be effective for the Company in fiscal 1999. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the disclosure of information relating to operating segments. This Statement will be effective for the Company in fiscal 1999. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," an amendment of SFAS Nos. 87, 88, and 106. The objective of this amendment is to provide disclosures that are more comparable, understandable and concise. This Statement will be effective for the Company in fiscal 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and established standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. The Statement will become effective in the Company's fiscal 1999 third quarter. The Company is studying each of these pronouncements to determine their effect, including additional disclosure requirements that may be necessary. 34B
Selected Financial Data. in thousands, except per share amounts for the years ended October 31, 1998 1997 1996 1995 1994 Operating Results Sales $453,902 $390,958 $352,843 $351,897 $294,044 Cost of sales 282,135 243,197 215,015 215,934 178,397 Selling, general and administrative 122,611 108,474 103,415 107,113 100,845 Restructuring credit - - - (2,067) - Interest income (1,594) (2,397) (1,989) (1,156) (113) Interest expense 3,803 3,603 4,328 5,598 6,098 Income tax expense 16,863 12,760 10,720 9,094 1,254 Net earnings 30,084 25,321 21,354 17,381 7,563 Net earnings per share - diluted $ 1.70 $ 1.44 $ 1.31 $ 1.26 $ .58 -------------------------------------------------------------------------------------- Financial Structure Total assets $387,179 $289,847 $276,646 $225,714 $217,524 Long-term debt, net 74,043 27,218 29,007 35,543 41,714 Shareholders' equity 196,376 165,718 142,304 83,706 65,491 Weighted average shares outstanding - diluted 17,718 17,608 16,334 13,740 13,142 -------------------------------------------------------------------------------------- Market Price of Esterline Common Stock. Principal Market - New York Stock Exchange for the years ended October 31, 1998 1997 High Low High Low Quarter First $19.13 $15.81 $14.00 $11.25 Second 23.13 16.50 14.88 12.56 Third 24.50 17.63 19.25 14.13 Fourth 21.88 15.50 21.75 17.28 ---------------------------------------------------------------------
At October 31, 1998 there were approximately 860 holders of record of the Company's common stock. 35
Consolidated Statement of Operations. in thousands, except per share amounts for the years ended October 31, 1998 1997 1996 Sales $453,902 $390,958 $352,843 Costs and Expenses Cost of sales 282,135 243,197 215,015 Selling, general and administrative 122,611 108,474 103,415 Interest income (1,594) (2,397) (1,989) Interest expense 3,803 3,603 4,328 -------------------------------------------------- -------- -------- 406,955 352,877 320,769 -------------------------------------------------- -------- -------- Earnings Before Income Taxes 46,947 38,081 32,074 Income Tax Expense 16,863 12,760 10,720 -------------------------------------------------- -------- -------- Net Earnings $ 30,084 $ 25,321 $ 21,354 ======== ======== ======== Net Earnings Per Share - Basic $ 1.74 $ 1.48 $ 1.35 ======== ======== ======== Net Earnings Per Share - Diluted $ 1.70 $ 1.44 $ 1.31 ======== ======== ========
see notes to consolidated financial statements 36
Consolidated Balance Sheet. in thousands, except share and per share amounts October 31, 1998 1997 Assets Current Assets Cash and equivalents $ 8,897 $ 56,045 Accounts receivable, net of allowances of $2,987 and $2,860 77,477 67,520 Inventories 71,835 53,386 Deferred income taxes 15,693 14,186 Prepaid expenses 4,055 3,290 ------------------------------------------------------ -------- Total Current Assets 177,957 194,427 Property, Plant and Equipment Land 13,400 2,885 Buildings 66,451 47,899 Machinery and equipment 126,253 124,831 ------------------------------------------------------ -------- 206,104 175,615 Accumulated depreciation 112,042 117,239 ------------------------------------------------------ -------- 94,062 58,376 Other Non-Current Assets Goodwill and intangibles, net 99,344 22,925 Other assets 15,816 14,119 ------------------------------------------------------ -------- $387,179 $289,847 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 23,307 $ 20,475 Accrued liabilities 68,275 64,208 Credit facilities 9,533 2,467 Current maturities of long-term debt 6,358 6,386 Federal and foreign income taxes 385 1,472 ------------------------------------------------------ -------- Total Current Liabilities 107,858 95,008 Long-Term Liabilities Long-term debt, net of current maturities 74,043 27,218 Deferred income taxes 8,902 1,903 Commitments and contingencies - - 37A Shareholders' Equity Common stock, par value $.20 per share, authorized 30,000,000 shares, issued and outstanding 17,317,178 and 17,285,822 shares 3,463 3,457 Capital in excess of par value 46,793 46,831 Retained earnings 149,091 119,007 Cumulative translation adjustment (2,971) (3,577) ------------------------------------------------------ -------- Total Shareholders' Equity 196,376 165,718 ------------------------------------------------------ -------- $387,179 $289,847 ======== ========
see notes to consolidated financial statements 37B
Consolidated Statement of Cash Flows. in thousands for the years ended October 31, 1998 1997 1996 Cash Flows Provided (Used) by Operating Activities Net earnings $ 30,084 $ 25,321 $ 21,354 Depreciation and amortization 18,316 17,404 16,269 Deferred income taxes (447) 4,764 (413) Working capital changes, net of effect of acquisitions Accounts receivable (2,344) (436) (4,319) Inventories (4,920) (8,947) (2,694) Prepaid expenses (222) (862) (291) Accounts payable 167 447 (2,399) Accrued liabilities (1,557) (3,525) 605 Federal and foreign income taxes (1,542) (2,611) 1,886 Other, net (2,420) (1,099) 2,411 ------------------------------------------------------ -------- -------- 35,115 30,456 32,409 ------------------------------------------------------ -------- -------- Cash Flows Provided (Used) by Investing Activities Capital expenditures (29,773) (17,390) (17,203) Capital dispositions 9,421 1,820 1,054 Acquisitions (113,304) - (20,485) ------------------------------------------------------ -------- -------- (133,656) (15,570) (36,634) ------------------------------------------------------ -------- -------- Cash Flows Provided (Used) by Financing Activities Net change in credit facilities 6,579 (2,417) (2,214) Repayment of long-term debt (5,079) (1,922) (6,812) Proceeds from bridge facility 50,000 - - Net proceeds provided by sale of common stock - - 38,365 ------------------------------------------------------ -------- -------- 51,500 (4,339) 29,339 ------------------------------------------------------ -------- -------- Effect of exchange rates (107) (938) (775) ------------------------------------------------------ -------- -------- Net increase (decrease) in cash and equivalents (47,148) 9,609 24,339 Cash and equivalents - beginning of year 56,045 46,436 22,097 ------------------------------------------------------ -------- -------- Cash and equivalents - end of year $ 8,897 $ 56,045 $ 46,436 ========= ======== ======== Supplemental Cash Flow Information Cash paid during the year for Interest $ 3,244 $ 3,720 $ 4,480 Income taxes 17,517 7,015 6,357
see notes to consolidated financial statements 38
Consolidated Statement of Shareholders' Equity. in thousands, except share amounts for the years ended October 31, 1998 1997 1996 Common Stock, Par Value $.20 Per Share Beginning of year $ 3,457 $ 3,401 $ 2,657 3,600,000 shares issued - - 720 Shares issued under stock option plans 6 56 24 --------------------------------------------------- -------- -------- End of year 3,463 3,457 3,401 --------------------------------------------------- -------- -------- Capital in Excess of Par Value Beginning of year 46,831 46,716 9,061 3,600,000 shares issued - - 37,645 Shares issued under stock option plans (38) 115 10 --------------------------------------------------- -------- -------- End of year 46,793 46,831 46,716 --------------------------------------------------- -------- -------- Retained Earnings Beginning of year 119,007 93,686 72,332 Net earnings 30,084 25,321 21,354 --------------------------------------------------- -------- -------- End of year 149,091 119,007 93,686 --------------------------------------------------- -------- -------- Cumulative Foreign Currency Translation Adjustments Beginning of year (3,577) (1,499) (344) Change in foreign currency translation 606 (2,078) (1,155) --------------------------------------------------- -------- -------- End of year (2,971) (3,577) (1,499) --------------------------------------------------- -------- -------- Shareholders' Equity $196,376 $165,718 $142,304 ======== ======== ========
see notes to consolidated financial statements 39 Notes to Consolidated Financial Statements. Note 1. Accounting Policies - ---------------------------- Nature of Operations Esterline Technologies (the "Company") - through its three groups - 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 To prepare financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 Inventories are stated at the lower of cost or market. Two subsidiaries value their inventories under the last-in, first-out (LIFO) method while the remainder use the first-in, first-out (FIFO) method. Inventory cost includes material, labor and factory overhead. Research, Development and Related Engineering Costs Research, development and related engineering costs approximated $20,250,000, $17,556,000 and $15,373,000 in 1998, 1997 and 1996, 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. Depreciation is generally provided on the straight- line method. 40 Goodwill and Intangibles Intangible assets and the excess purchase price paid over net assets of businesses acquired are amortized on a straight-line basis over the period of expected benefit which ranges from 5 to 40 years. Accumulated amortization as of October 31, 1998 and 1997 was $28,876,000 and $25,612,000, respectively. Asset Valuation The carrying amount of long-lived assets is reviewed periodically for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is generally determined based upon discounted future cash flow. Environmental Environmental exposures are provided for at the time they are known to exist or are considered reasonably probable and estimable. 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. Stock Split In April 1998, the Company effected a two-for-one stock split on all outstanding shares of common stock. All share and per share data have been restated. Earnings Per Share All prior period earnings per share data have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings per share are computed on the basis of the weighted average number of common shares outstanding during the year. Diluted earnings per share also include the dilutive effect of stock options. The weighted average number of shares outstanding used to compute basic earnings per share was 17,290,000, 17,124,000 and 15,842,000 for the years ended October 31, 1998, 1997 and 1996, respectively. The weighted average number of shares outstanding used to compute diluted earnings per share was 17,718,000, 17,608,000 and 16,334,000 for the years ended October 31, 1998, 1997 and 1996, respectively. Cash Equivalents Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. Fair value of cash equivalents approximates carrying value. 41 Note 2. Inventories - -------------------- Inventories at October 31 consisted of the following:
in thousands 1998 1997 Raw materials and purchased parts $27,239 $17,502 Work in process 33,284 26,191 Finished goods 11,312 9,693 - -------------------------------------------------- ------- $71,835 $53,386 ======= =======
Inventories stated under the last-in, first-out method totaled $8,845,000 and $11,945,000 at October 31, 1998 and 1997, respectively. Had the first- in, first-out method been used, these inventories would have been $5,621,000 and $5,274,000 higher than reported at October 31, 1998 and 1997, respectively. Note 3. Accrued Liabilities - --------------------------- Accrued liabilities at October 31 consisted of the following:
in thousands 1998 1997 Payroll and other compensation $24,762 $19,354 Self-insurance 5,137 6,329 Interest 1,240 2,244 Warranties 7,212 9,356 State and other tax accruals 8,077 8,292 Other 21,847 18,633 - ----------------------------------------------- ------- $68,275 $64,208 ======= =======
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 for benefit obligations on plan assets of 6.5% for 1998 and 7.5% for both 1997 and 1996 and annual compensation increases of 5%. The expected long-term rate of return on plan assets was assumed at 8.5% for 1998 and 1997 and 7.5% for 1996. Plan assets primarily consist of publicly traded common stocks, bonds and government securities. 42 Total pension expense (benefit) for all benefit plans, including defined benefit plans, was ($971,000), $1,758,000 and $2,329,000 for the years ended October 31, 1998, 1997 and 1996, respectively. Net periodic pension expense (benefit) for the Company's defined benefit plans for the years ended October 31 consisted of the following:
in thousands 1998 1997 1996 Service cost - benefits earned during the year $ 2,639 $ 3,150 $ 2,871 Interest cost on projected benefit obligation 5,645 5,598 5,154 Actual return on plan assets - investment gains (7,144) (26,279) (8,074) Net amortization and deferral (3,208) 18,297 1,319 - ----------------------------------------------------------- -------- ------- Net pension expense (benefit) $(2,068) $ 766 $ 1,270 ======= ======== =======
The funded status of the defined benefit pension plan at October 31 was as follows:
in thousands 1998 1997 Plan assets at fair value $109,663 $113,001 Projected benefit obligation for service rendered to date 87,272 77,751 - --------------------------------------------------------------------------- -------- Plan assets in excess of projected benefit obligation 22,391 35,250 Unrecognized prior service cost 634 - Unrecognized net gain (8,635) (23,091) Unrecognized transition asset (963) (1,444) - --------------------------------------------------------------------------- -------- Prepaid pension expense, included in other assets $ 13,427 $ 10,715 ======== ======== Actuarial present value of accumulated benefit obligation, including vested benefits of $73,083 and $67,360 $ 73,620 $ 67,744 ======== ========
The Company also has an unfunded supplemental retirement plan for key executives providing for periodic payments upon retirement. The related liability was $3,774,000 and $3,169,000 as of October 31, 1998 and 1997, respectively. This has been accounted for in accrued liabilities. 43 Note 5. Income Taxes - --------------------- Income tax expense (benefit) for the years ended October 31 consisted of the following:
in thousands 1998 1997 1996 Current U.S. Federal $14,799 $ 5,776 $ 9,309 State 1,295 1,200 1,394 Foreign 1,216 1,020 430 - --------------------------------------- ------- ------- 17,310 7,996 11,133 Deferred U.S. Federal (429) 3,138 (593) State (18) 196 (17) Foreign - 1,430 197 - --------------------------------------- ------- ------- (447) 4,764 (413) - --------------------------------------- ------- ------- $16,863 $12,760 $10,720 ======= ======= =======
U.S. and foreign components of income before income taxes for the years ended October 31 were:
in thousands 1998 1997 1996 U.S. $45,608 $34,121 $30,444 Foreign 1,339 3,960 1,630 - --------------------------------------- ------- ------- $46,947 $38,081 $32,074 ======= ======= =======
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: 44A
in thousands 1998 1997 Reserves and liabilities $ 17,108 $ 15,776 Employee benefits 4,306 4,067 - ------------------------------------------------------- -------- Total deferred tax assets 21,414 19,843 Depreciation and amortization (10,869) (4,806) Retirement benefits (3,496) (2,754) Other (258) - - ------------------------------------------------------- -------- Total deferred tax liabilities (14,623) (7,560) - ------------------------------------------------------- -------- $ 6,791 $ 12,283 ======== ========
A valuation allowance was not required due to the nature of and circumstances associated with the temporary tax differences. 44B 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:
1998 1997 1996 U.S. statutory income tax 35.0% 35.0% 35.0% State income taxes 1.8 2.0 2.8 Foreign taxes 1.3 0.5 (0.3) Foreign sales corporation (1.5) (1.8) (2.1) Tax exempt interest (0.3) (0.7) (1.5) Non-deductible goodwill 0.9 - - Other, net (1.3) (1.5) (0.5) - ----------------------------------------------- ---- ---- Effective income tax rate 35.9% 33.5% 33.4% ==== ==== ====
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 1998 1997 Bridge facility $50,000 $ - 8.75% Senior Notes, due 2002 22,857 28,571 Other 7,544 5,033 - ---------------------------------------------- ------- 80,401 33,604 Less current maturities 6,358 6,386 - ---------------------------------------------- ------- $74,043 $27,218 ======= =======
The Senior Notes are unsecured and payable in equal annual installments. Interest is payable semi-annually in January and July of each year. The unsecured bridge facility was retired in November 1998 from the proceeds of the private placement senior notes of $100,000,000. Maturities of these debt instruments range from 5 years to 10 years, with interest rates from 6.0% to 6.77%. Maturities of long-term debt are as follows: 45A
in thousands 1999 $ 6,358 2000 6,645 2001 6,692 2002 6,290 2003 30,366 2004 and thereafter 24,050 - --------------------------------------- $80,401 =======
45B Short-term credit facilities at October 31 consisted of the following:
1998 1997 ----------------------- ----------------------- Outstanding Interest Outstanding Interest in thousands Borrowings Rate Borrowings Rate U.S. dollar $ - - $ - - Foreign 9,533 4.22% 2,467 7.7% - ---------------------------------- ------ $9,533 $2,467 ====== ======
The Company's primary U.S. dollar credit facility totals $35,000,000 through a group of banks. The credit agreement is unsecured and interest is based on standard inter-bank offering rates. An additional $11,000,000 of unsecured foreign currency credit facilities have been extended by foreign banks for a total of $46,000,000 available companywide. The underlying agreements contain various covenant restrictions which include maintenance of net worth, payment of dividends, interest coverage and limitations on additional borrowings. The Company is in compliance with these covenants. Available credit under the above credit facilities was $34,617,000 at October 31, 1998, when reduced by outstanding borrowings and letters of credit of $1,850,000. The fair value of the Company's long-term debt and short-term borrowings was estimated at $91,000,000 and $36,800,000 at October 31, 1998 and 1997, 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. Commitments and Contingencies - -------------------------------------- Net rental expense for operating leases totaled $4,628,000, $3,754,000 and $3,159,000 in 1998, 1997 and 1996, respectively. The Company's rental commitments for noncancelable operating leases with a duration in excess of one year are as follows:
in thousands 1999 $ 3,532 2000 3,219 2001 3,136 2002 3,099 2003 3,085 2004 and thereafter 6,102 - --------------------------------------- $22,173 =======
46 The Company has various lawsuits and claims, both offensive and defensive, and contingent liabilities arising from the conduct of business, 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. Note 8. Stock Option Plans - --------------------------- The Company provides a non-qualified stock option plan for officers and key employees. At October 31, 1998, the Company had 1,849,500 shares reserved for issuance to officers and key employees, of which 536,250 shares were available to be granted in the future. The Board of Directors authorized the Compensation and Stock Option Committee to administer option grants and their terms. Awards under the plan may be granted to eligible employees of the Company over a 10-year period ending March 4, 2007. Options granted become exercisable over a period of four years following the date of grant and expire on 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 table summarizes the changes in outstanding options granted under the Company's stock option plans:
1998 1997 1996 ----------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price Outstanding, beginning of year 1,190,000 $ 8.472 1,516,250 $ 6.089 1,509,250 $ 4.893 Granted 187,000 18.644 271,000 14.304 258,000 11.155 Exercised (63,750) 4.261 (589,750) 5.086 (243,500) 4.112 Cancelled - - (7,500) 3.750 (7,500) 3.813 - --------------------------------------------- ------- --------- ------- --------- ------- Outstanding, end of year 1,313,250 $10.125 1,190,000 $ 8.472 1,516,250 $ 6.089 - --------------------------------------------- ------- --------- ------- --------- ------- Exercisable, end of year 741,500 $ 6.893 574,750 $ 5.511 950,500 $ 4.946 ========= ======= ========= ======= ========= =======
The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Additional disclosures as required under the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," are included below. The Black-Scholes option-pricing model was used to calculate the estimated compensation expense that would have been recognized under these guidelines. If only options granted after 1995 were included, as prescribed by SFAS No. 123, pro forma net income would have been $28,971,000, $24,517,000 and $21,089,000, respectively. Basic earnings per share for 1998, 1997 and 1996 would have been $1.68, $1.43 and $1.33, respectively. Diluted earnings per share for 1998, 1997 and 1996 would have been $1.64, $1.40 and $1.29, respectively. The pro forma disclosures presented below include the fair value compensation expense for all options that would have been amortized during 1998, 1997 and 1996. 47A
in thousands, except per share amounts years ended October 31, 1998 1997 1996 Net earnings as reported $30,084 $25,321 $21,354 Pro forma net earnings 28,928 24,400 20,852 Basic earnings per share as reported $ 1.74 $ 1.48 $ 1.35 Pro forma basic earnings per share $ 1.67 $ 1.43 $ 1.32 Diluted earnings per share as reported $ 1.70 $ 1.44 $ 1.31 Pro forma diluted earnings per share $ 1.63 $ 1.39 $ 1.28 - ---------------------------------------------------------------------------
47B The weighted average Black-Scholes value of options granted during 1998, 1997 and 1996 was $10.870, $7.320 and $6.012, respectively. The assumptions used in the Black-Scholes option-pricing model for 1998, 1997, and 1996 were as follows:
1998 1997 1996 Volatility 55.3% 41.6% 44.6% Risk-free interest rate 4.1 - 4.57% 5.73 - 5.92% 6.12 - 6.38% Expected life (years) 5 - 8 5 - 8 5 - 8 Dividends - - - - ---------------------------------------------------------------------------
The following table summarizes information for stock options outstanding at October 31, 1998:
Options Outstanding Options Exercisable --------------------------------------- -------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Prices Shares Life (years) Price Shares Price $ 3.6875 - 4.3750 278,000 4.74 $ 4.0226 278,000 $ 4.0226 4.5000 - 6.4375 295,000 4.92 5.9820 252,500 5.9053 6.9375 - 11.6875 286,000 7.38 10.8433 147,000 10.7700 13.2500 - 17.8125 261,250 8.33 14.0308 57,500 13.7310 18.2500 - 19.8750 193,000 9.16 18.8964 6,500 19.8750 - -----------------------------------------------------------------------------------------------
Note 9. 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, 1998, there were no shares of preferred stock outstanding. All prior share and per share data have been restated for the two-for-one stock split effected in April 1998. The Company has a Shareholder Rights Plan providing for the distribution of one Preferred Stock Purchase Right (Right) for each share of common stock held. 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 48 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 10. Acquisitions - ---------------------- The Company completed seven acquisitions during 1998. The acquisitions were financed with available cash and credit facilities. Following is a table summarizing the acquisitions:
Purchase Date Description Company Fluid 11/97 Manufacturer of advanced hydraulic controls Regulators Co. and components for the commercial aerospace and defense industries Kai R. Kuhl Co. 1/98 Manufacturer of high-performance seals for the aerospace industry Memtron 5/98 Manufacturer of membrane switches and panels Technologies Co. for medical, industrial computer and other commercial markets Kirkhill 8/98 Manufacturer of high-performance custom- Rubber Co. engineered elastomer products for the aerospace industry and broad array of other specialty elastomer products for other markets Product Line Sagem 11/97 An aerospace pressure sensor product line Illinois Tool Works 11/97 A Boeing 777 cockpit switch product line Advanced 8/98 Manufacturer of dedicated routers for the printed Technology, Inc. circuit board industry, primarily for populated board applications
The total purchase price (including post-closing adjustments and third-party acquisition costs) for Kirkhill Rubber Co. and the other acquisitions were $93,140,000 and $34,022,000, respectively, and the purchase method of accounting was applied. For each transaction, the purchase price exceeded net assets resulting in goodwill which will be amortized over a range of 10 to 40 years using the straight-line method. The consolidated financial statements include the operating results from the date of the acquisition. In conjunction with these acquisitions, liabilities were assumed as follows: 49
in thousands Fair value of assets acquired $139,967 Cash paid 122,812 - ------------------------------------------------- Liabilities assumed $ 17,155 ========
The following unaudited pro forma information gives effect to the acquisition of Kirkhill had the acquisition occurred as of the beginning of the prior year. Pro forma results have not been presented for the other acquisitions since they are not material, both individually and in the aggregate, when compared to the pro forma results being presented. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of the future financial position or future results of operations of the combined company, or of the financial position or results of operations of the combined company had the acquisition actually occurred as of the beginning of the prior period:
1998 1997 Sales $498,419 $448,354 Net Income 31,595 27,125 Earnings per share - basic $ 1.83 $ 1.58 Earnings per share - diluted $ 1.78 $ 1.54 - -----------------------------------------------------------
On August 1, 1996, the Company acquired all of the operating assets of Mason Electric Co. The purchase method of accounting was used, with the results of operations included from the date of acquisition. In 1996, the Company also acquired a noncontrolling equity interest in a company. 50 Note 11. Business Segment Information - -------------------------------------- Details of the Company's operations by business segment for the years ended October 31 were as follows:
in thousands 1998 1997 1996 Sales Automation $143,356 $150,522 $146,698 Aerospace and Defense 189,569 140,200 111,691 Instrumentation 120,977 100,236 94,454 - ------------------------------------------ -------- -------- $453,902 $390,958 $352,843 ======== ======== ======== Earnings Before Income Taxes Automation $ 11,101 $ 15,450 $ 23,684 Aerospace and Defense 35,623 22,273 13,649 Instrumentation 13,419 9,889 5,507 - ------------------------------------------ -------- -------- Operating Earnings $ 60,143 $ 47,612 $ 42,840 ======== ======== ======== Corporate expense (10,987) (8,325) (8,427) Interest income 1,594 2,397 1,989 Interest expense (3,803) (3,603) (4,328) - ------------------------------------------ -------- -------- $ 46,947 $ 38,081 $ 32,074 ======== ======== ======== Identifiable Assets Automation $ 66,757 $ 67,957 $ 67,360 Aerospace and Defense 222,065 88,399 86,303 Instrumentation 64,653 50,691 46,507 Corporate(1) 33,704 82,800 76,476 - ------------------------------------------ -------- -------- $387,179 $289,847 $276,646 ======== ======== ======== Capital Expenditures Automation $ 5,653 $ 4,301 $ 7,379 Aerospace and Defense 16,368 9,851 3,414 Instrumentation 6,827 6,995 5,926 Corporate 925 461 484 - ------------------------------------------ -------- -------- $ 29,773 $ 21,608 $ 17,203 ======== ======== ======== Depreciation and Amortization Automation $ 4,894 $ 5,037 $ 4,667 Aerospace and Defense 7,946 7,144 5,705 Instrumentation 4,888 4,814 5,618 Corporate 588 409 279 - ------------------------------------------ -------- -------- $ 18,316 $ 17,404 $ 16,269 ======== ======== ======== 51A Primarily cash, prepaid pension expense (see Note 4) and net deferred tax assets (see Note 5).
51B Note 11. Business Segment Information (Continued) - -------------------------------------------------- The Company's operations by geographic area for the years ended October 31 were as follows:
in thousands 1998 1997 1996 Sales Domestic Unaffiliated customers - U.S. $333,678 $261,391 $230,286 Unaffiliated customers - export 58,926 67,194 57,130 Intercompany 11,042 10,202 11,367 - -------------------------------------------- -------- -------- 403,646 338,787 298,783 - -------------------------------------------- -------- -------- France Unaffiliated customers 47,056 40,467 41,690 Intercompany 9,552 9,576 - - -------------------------------------------- -------- -------- 56,608 50,043 41,690 - -------------------------------------------- -------- -------- All Other Foreign Unaffiliated customers 14,242 21,906 23,737 Intercompany 1,761 1,815 1,900 - -------------------------------------------- -------- -------- 16,003 23,721 25,637 - -------------------------------------------- -------- -------- Eliminations (22,355) (21,593) (13,267) - -------------------------------------------- -------- -------- $453,902 $390,958 $352,843 ======== ======== ======== Operating Earnings(1) Domestic $ 58,579 $ 43,439 $ 41,517 France 2,485 3,587 2,647 All other foreign (1,025) (122) (1,742) Eliminations 104 708 418 - -------------------------------------------- -------- -------- $ 60,143 $ 47,612 $ 42,840 ======== ======== ======== Identifiable Assets(2) Domestic $302,977 $165,216 $158,004 France 39,343 28,986 29,378 All other foreign 11,155 12,845 12,788 $353,475 $207,047 $200,170 ======== ======== ======== 52A Before corporate expense, shown on page 58. Excludes corporate, shown on page 58.
The Company's principal foreign operations consist of manufacturing facilities located in France and Spain, and include sales and service operations located in England, Germany, Italy, Japan, Singapore and France. The sales above 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. 52B Product lines contributing more than 10% of total sales in any of the years ended October 31 were as follows:
1998 1997 1996 Printed circuit board drilling equipment 16% 22% 22% Aerospace switches and Indicators 13% 12% 9% Gauge products 10% 11% 12% - ------------------------------------------------------------------
Note 12. 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, 1998 Sales $132,730 $110,891 $114,551 $95,730 Gross margin 48,860 42,051 44,149 36,707 Net earnings 9,417 7,919 7,912 4,836 Net earnings per share - basic $ .54 $ .46 $ .46 $ .28 Net earnings per share - diluted $ .53 $ .45 $ .45 $ .27 - ------------------------------------------------------------------------------ Year ended October 31, 1997 Sales $108,741 $102,068 $ 97,951 $82,198 Gross margin 39,130 37,822 38,720 32,089 Net earnings 8,035 6,925 6,602 3,759 Net earnings per share - basic $ .47 $ .40 $ .39 $ .22 Net earnings .per share(1) - diluted $ .45 $ .39 $ .38 $ .21 - ------------------------------------------------------------------------------ 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 and the effects of rounding for each period.
53 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended October 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1998 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Seattle, Washington December 9, 1998 54 EX-21 5 EXHIBIT 21 Exhibit 21 SUBSIDIARIES The subsidiaries of the Company as of October 31, 1998 are as follows:
Jurisdiction of Name of Subsidiary Incorporation - ------------------ --------------- Armtec Defense Products Co. Delaware Auxitrol Co. Delaware Equipment Sales Co. Connecticut Esterline Technologies (Hong Kong) Limited Hong Kong Excellon Automation Co. California Excellon U.K. California Excellon Europa GmbH Germany Amtech Automated Manufacturing Technology, Inc. Utah Excellon Japan Co. Japan Federal Products Co. Delaware Federal Products U.K. Ltd. Delaware Fluid Regulators Corporation Ohio Hytek Finishes Co. Delaware Kirkhill Rubber Co. California Korry Electronics Co. Delaware Memtron Technologies Co. Delaware Mason Electric Co. Delaware Midcon Cables Co. Delaware TA Mfg. Co. California Kai R. Kuhl Company, Inc. California W.A. Whitney Co. Illinois Auxitrol Technologies S.A. France Auxitrol S.A. France Auxitrol International France Auxitrol Industries France
55A The above list excludes certain subsidiaries that, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of October 31, 1998. 55B EX-23 6 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- We consent to the incorporation by reference in Registration Statement No. 2-89293, No. 33-22321, No. 33-22322, No. 33-37134, No. 33-52851, No. 33-58281, No. 33-58375 and No. 333-43843 of Esterline Technologies Corporation on Form S-8 and No. 33-62625 on Form S-3 of our reports dated December 9, 1998 appearing in and incorporated by reference in this Annual Report on Form 10-K of Esterline Technologies Corporation for the year ended October 31, 1998. /s/ Deloitte & Touche LLP Seattle, Washington January 15, 1999 56 EX-10 7 EXHIBIT 10.16G EXHIBIT 10.16g ESTERLINE TECHNOLOGIES CORPORATION ---------------------------------- LONG-TERM INCENTIVE COMPENSATION PLAN ------------------------------------- FISCAL YEARS 1997 through 1999 ------------------------------ PURPOSE OF PLAN - --------------- This Plan is for the fiscal years 1997 through 1999 and is intended to provide a program to retain and compensate Esterline officers and selected senior executives based on the long-term performance of Esterline Technologies. The Plan is designed to reward successful employment of Esterline's resources to achieve superior performance against three broad objectives, specifically: improvement of shareholder value; specified strategic initiatives; and good operating performance in relation to a comparable peer group of companies. MEMBERSHIP IN PLAN - ------------------ Esterline officers and senior executives shall be eligible for membership in the Plan after appointment and return of a signed acceptance of the appointment letter specifying the member's award level each year. The Plan may be modified, amended or terminated at any time; but any such modification, amendment or termination shall not, without a member's written consent, affect his/her incentive compensation accrued prior to such modification, amendment or termination of the Plan. Nothing in this Plan limits Esterline from exercising the right to terminate an employee at any time for any reason. APPOINTMENTS AND PERFORMANCE TARGETS - ------------------------------------ Each appointee to the Plan shall be entitled to incentive compensation based on Esterline's combined annual performance in three equally weighted objective groups. Each of these groups, in turn is made up of several individual targets which may be changed by the Compensation Committee of the Board of Directors at the beginning of any fiscal year. No award will be earned for a target if the performance is less than minimum. No additional award will be earned for any performance above the maximum for each target. Awards will be prorated for other performance levels. However, actual annual payment to each appointee is subject to an overall maximum of 150% of an individual's annual target award dollar amount. Additionally, if directed, the above computed awards for plan members may be further adjusted, up or down, by the Compensation & Stock Option Committee of the Board of Directors by an amount not to exceed the greater of 25% of an individual's computed award or annual target. The performance targets for each objective group are: 57 Objective Group I: Improvement of shareholder value. Target a. Grow earnings per share; 10% per year. Target b. Maintain return on equity above 15%. Objective Group II: Specified strategic initiatives. Target a. Accomplish smooth transition to a new chief executive officer. Target b. Maintain a strategic plan that focuses on profitable growth. Target c. Take appropriate action on under-performing units; and take action to encourage improved performance by all other units. Objective Group III: Operating performance compared to a peer group of companies. Target a. Change in earnings per share Target b. Current period return on equity COMPUTATION OF AWARDS EACH YEAR - ------------------------------- Esterline's performance is calculated relative to each performance target individually. Each year the discretionary evaluations of Esterline's progress toward accomplishment of long-term objectives is made by the Compensation Committee using the individual targets. Achievement of each criteria at the target level earns the full targeted weight of the individual's award for each performance target. (See Attachment A, B, and C). Overall, annually each individual can only receive 150% of his/her annual dollar target unless the Compensation Committee makes an overall adjustment as described above (see "Appointments and Performance Targets"). The Compensation Committee's evaluated performance is recommended to the Board of Directors for approval before payment. PAYMENT OF AWARDS - ----------------- The amount of each annual payment, if any, based on annual evaluation, will be made prior to the following March 1 after the close of each of the three fiscal years. These partial payments under this plan, once paid, are not refundable to Esterline Technologies. A Plan member must be an employee on October 31, 1997, 1998 or 1999 to receive payment related to that year. However, if an employee's participation in the Plan is terminated during any Plan year due to normal retirement, death or disability, a pro rata share of his/her annual award will be determined after completion of the incomplete fiscal year, and paid no later than the following March 1. In the case of death, payments shall be made to his/her estate. /s/ W. P. Hurlbut - ------------------------ W. P. Hurlbut Chairman and Chief Executive Officer 58 ATTACHMENT A ESTERLINE TECHNOLOGIES CORPORATION PROPOSED WEIGHTING SYSTEM LONG-TERM INCENTIVE COMPENSATION GROUP I OBJECTIVES (GROUP I WEIGHT AT TARGET PERFORMANCE(1) =1/3 OF PLAN)
MAXIMUM OBJECTIVE MINIMUM TARGET 2X TARGET --------- --------------------- --------------------- --------------------- Performance Weight Performance Weight Performance Weight ----------- ------ ----------- ------ ----------- ------ Ia. EPS no growth = 0% 10% growth= 16 2/3% 20% growth= 33 1/3% Ib. ROE(2) 7 1/2% return 22 1/2% or less= 0% 15% return= 16 2/3% return= 33 1/3% --- ------- ------- 0% 33 1/3% 66 2/3% Performance prorated between minimum and target, and between maximum and target. Based on the average of each year's audited beginning and ending common shareholder equity, excluding any amounts for any preferred shares.
59 ATTACHMENT B ESTERLINE TECHNOLOGIES CORPORATION PROPOSED RATING SYSTEM - CONTINUED GROUP II OBJECTIVES (GROUP II WEIGHT AT TARGET PERFORMANCE(1) =1/3 OF PLAN)
MAXIMUM OBJECTIVE(3) MINIMUM TARGET 2X TARGET ------------ ------------------- ------------------- ------------------- Rating(2) Weight Rating(2) Weight Rating(2) Weight --------- ------ --------- ------ --------- ------ IIa. CEO Transition 0 = 0% 6 = 11.1% 9 = 22.2% IIb. Maintain Strategic Plan 0 = 0% 6 = 11.1% 9 = 22.2% IIc. Action RE: Improved Unit Performance 0 = 0% 6 = 11.1% 9 = 22.2% --- ------- ------- 0% 33 1/3% 66 2/3% Performance prorated between minimum and target, and between maximum and target. At each year end, performance for each specific objective is scored/rated on a scale of "1 to 9". Objectives renamed to reflect 2/25/97 proposed objectives.
60 ATTACHMENT C ESTERLINE TECHNOLOGIES CORPORATION PROPOSED WEIGHTING SYSTEM-CONTINUED GROUP III OBJECTIVES (GROUP III WEIGHT AT TARGET PERFORMANCE(1) =1/3 OF PLAN)
MAXIMUM OBJECTIVE MINIMUM TARGET 2X TARGET --------- --------------------- --------------------- --------------------- Company Company Company vs. Peer vs. Peer vs. Peer Performance Weight Performance Weight Performance Weight ----------- ------ ----------- ------ ----------- ------ IIIa. vs. Peer EPS Behind peers Ahead of Change(2) by 50% or Match peers by 50% more= 0% peers= 16 2/3% or more= 33 1/3% IIIb. vs. Peer ROE(2) Behind peers Ahead of by 50% or Match peers by 50% more= 0% peers= 16 2/3% or more= 33 1/3% --- ------- ------- 0% 33 1/3% 66 2/3% Performance prorated between minimum and target, and between maximum and target. For Group III targets the "peer group" shall be computed by equal weighting of the following industries as reported by Value Line: Machine Tool, Computer and Peripherals, Electronics, Aerospace/Defense.
61 ATTACHMENT D ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN PERCENTAGE OF APPOINTEE'S AWARD EARNED AT VARYING LEVELS OF COMPANY PERFORMANCE
Performance % of Award % of Award % of Award Relative to from Sum of from Sum of from Sum of Total % of Target Level Group I Targets Group II Targets Group III Targets Award Earned - ------------ --------------- ---------------- ----------------- ------------ Less than Minimum 0% 0% 0% 0% Minimum Level 0% 0% 0% 0% Target Level 33 1/3% 33 1/3% 33 1/3% 100% Maximum Level 66 2/3% 66 2/3% 66 2/3% 200% However, each actual annual payment to an appointee is subject to an overall maximum of 150% of an individual's target award dollar amount.
62 EX-10 8 EXHIBIT 10.20E EXHIBIT 10.20e ESTERLINE TECHNOLOGIES CORPORATION ---------------------------------- CORPORATE MANAGEMENT INCENTIVE COMPENSATION PLAN ------------------------------------------------ FISCAL YEAR 1999 ---------------- PURPOSE OF PLAN - --------------- This Plan is intended to reward eligible officers and key employees of Esterline's corporate staff for successful management in fiscal year 1999. It is believed that the Plan will provide incentives to put forth maximum efforts to employ Esterline's assets effectively. MEMBERSHIP IN PLAN - ------------------ Officers and key employees of the Esterline corporate staff shall be eligible for membership in the Plan after appointment and return of a signed acceptance of the appointment letter. The Plan may be modified, amended or terminated at any time; but any such modification, amendment or termination shall not, without a member's written consent, affect his/her incentive compensation accrued prior to such modification, amendment or termination of the Plan. Nothing in this Plan limits Esterline from exercising the right to terminate an employee at any time for any reason. TERMS AND CONDITIONS - -------------------- 1. Individual participant's payouts will vary from 5% to 60%, as stipulated in his/her appointment letter, of fiscal year-end 1999 salary. These target nomination awards will be earned if earnings per share of $1.70 are achieved. 2. Actual earnings per share will be as audited before extraordinary items for the year ending October 31, 1999. 3. Awards will be pro-rated for performance and will be interpolated on the following basis. EPS Award --- ----- Below $1.70 Pro-rata share of target award At $1.70 performance 100% of target award 120% or more of $1.70 150% of target award 63 4. Actual individual payouts earned from earnings per share computations are limited to 150% of target nomination. 5. If directed, computed awards for officers may be further adjusted, up or down, by the Compensation & Stock Option Committee of the Board of Directors by an amount not to exceed greater than 25% of the computed award or target award for the Plan, whichever is greater. 6. Payout of awards will be no later than March 1, 1999 if the auditors have issued an opinion; otherwise payout is delayed until an opinion is issued for FY 1999. 7. If a Plan member is terminated for any reason other than retirement, or death or disability prior to the end of fiscal 1999, he/she shall not receive the benefits provided by the Plan. (However, Esterline retains the right to grant a pro-rata award to a terminated employee, based upon salary earned prior to termination, except those terminated for cause.) a. If the company in its sole discretion specifically determines that the employment of a Plan member has been terminated prior to the end of such fiscal year because of retirement or disability, the Plan member will be paid a pro-rata amount based on the time he/she was a Plan member prior to his/her termination for disability. b. For any Plan member who dies prior to the end of Esterline's fiscal 1999, a pro-rata amount based on the time he/she was a Plan member prior to the date of death will be paid to his/her estate. 8. An employee who becomes a Plan member as of a date after the beginning of Esterline's fiscal 1999 will be paid a pro-rata amount based on the time the employee participates in the Plan. /s/ Wendell P. Hurlbut - ------------------------ Wendell P. Hurlbut Chairman and Chief Executive Officer 64 EX-27 9 EXHIBIT 27
5 The Schedule Contains Summary Financial Information Extracted from the Esterline Technologies Corporation Consolidated Balance Sheet at October 31, 1998 and the Related Consolidated Statement of Operations for the Year then Ended and is Qualified in its Entirety by Reference to Such Financial Statements. 1,000 12-MOS OCT-31-1998 NOV-01-1997 OCT-31-1998 8,897 0 80,464 2,987 71,835 177,957 206,104 112,042 387,179 107,858 74,043 0 0 3,463 192,913 387,179 453,902 453,902 282,135 282,135 122,611 0 2,209 46,947 16,863 30,084 0 0 0 30,084 1.74 1.70
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