-----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, Goqt5gCMV+MfYPr5hNlFexrDYeC2SOxzyQLCIKELv7DMxKjuftCKQELNexp6buLf Oz46NqMQa+vD/5lCcGt/3w== 0001047469-98-002552.txt : 19980130 0001047469-98-002552.hdr.sgml : 19980130 ACCESSION NUMBER: 0001047469-98-002552 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 001-06357 FILM NUMBER: 98516918 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-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1997 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. /X/ As of January 22, 1998, 8,642,911 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 $285,976,000 (based upon the closing sales price of $33.50 per share). DOCUMENTS INCORPORATED BY REFERENCE Portions of Annual Report to Shareholders for Fiscal Year ended October 31, 1997--Parts I, II and IV. Portions of Definitive Proxy Statement relating to the 1998 Annual Meeting of Shareholders, to be held on March 4, 1998--Part III. PART I 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 is strategically aligned to focus its efforts on growth through acquisitions and product development. During 1997, the Company completed the acquisition of a small product line that was integrated into Excellon and introduced several new products including Excellon's Century 2001, Whitney's 3400 Fabricating Center, Auxitrol's radar-based marine measurement system and Korry's LED cockpit switch line. In November 1997, the Company purchased a small Ohio-based company, Fluid Regulators Corporation, and two products lines: the Boeing 777 cockpit switch line and an aerospace pressure sensor line. And on January 26,1998 the Company also purchased a small California-based elastomeric product line. The Company continues to investigate candidates for acquisition and potential product development opportunities. (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, 1997, 1996 and 1995 is incorporated herein by reference to Note 13 to the Company's Consolidated Financial Statements (pages 52-53) of the Annual Report to Shareholders for the year ended October 31, 1997. (c) NARRATIVE DESCRIPTION OF BUSINESS. The Company consists of 12 individual businesses segmented into three groups. Specific comments covering all of the Company's business segments and operating units are set forth below. AUTOMATION GROUP The Automation Group consists of four subsidiaries--Excellon Automation Co. ("Excellon"), Equipment Sales Co. ("ESCI"), Tulon Co. ("Tulon") and W.A. Whitney Co. ("Whitney"). These units produce and/or sell automated equipment for use by printed circuit board manufacturers; and construction, agricultural, mining and transportation equipment manufacturers. The Automation Group accounted for 39% and 42% of the Company's net sales in 1997 and 1996, respectively. Excellon is a leading manufacturer of highly efficient automated drilling systems for the printed circuit board ("PCB") manufacturing industry. PCB manufacturers are faced with the need to increase production capacity and drill more complex boards, creating additional market opportunities for Excellon. As the number of electronic applications multiply, board designers are forced to integrate increasingly more functions into smaller packages, requiring more holes, 2 smaller holes and tighter tolerances between holes. Management believes that Excellon's drilling systems enable customers to achieve one of the lowest costs per hole, an increasingly important consideration in the cost-conscious electronics industry. In addition, Excellon's high level of research and development expenditures are key to maintaining its important technology lead. Printed circuit board drilling equipment accounted for 22%, 22% and 26% of the Company's consolidated net sales in 1997, 1996 and 1995, respectively. ESCI acts as a sales representative for various manufacturers' products sold to the PCB assembly industry, including high-speed "pick and place" equipment. Tulon produces tungsten carbide drill and router bits, commonly ranging in size from 7mm down to .25mm--but some are as small as .10mm--for use in PCB drilling equipment. Tulon utilizes computerized equipment which automatically inspects drill bits and provides the product consistency customers need for high technology drilling. Tulon's products can be used in most drilling machines, including those produced by Excellon. Whitney designs and builds highly productive automated machine tool and material handling systems 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. Whitney's 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 to lower inventory and costs. Management believes that Whitney's proprietary TRUECut-TM- oxygen plasma cutting technology virtually eliminates rejected parts and additional finish work, resulting in improved throughput and reduced cost per part. In its niche, Whitney is the leading supplier in the United States and has market positions in both Europe and Asia. Whitney continually evaluates new approaches to metal cutting such as laser technology. BACKLOG At October 31, 1997 the backlog of the Automation Group was $28.1 million (all of which is expected to be shipped during 1998) compared with $19.2 million at October 31, 1996. The increase is attributable to demand for PCB drilling equipment and high factory capacity utilization levels stimulating demand for automated machine tools. AEROSPACE AND DEFENSE GROUP The Aerospace and Defense Group consists of six subsidiaries--Armtec Defense Products Co. ("Armtec"), Auxitrol S.A. ("Auxitrol"), Hytek Finishes Co. ("Hytek"), Mason Electric Co. ("Mason"), Midcon Cables Co. ("Midcon") and TA Mfg. Co. ("TA"). These units primarily serve aerospace and defense markets (including the U.S. government), as well as shipbuilders, European electric utilities and electronic markets. The Aerospace and Defense Group accounted for 36% and 32% of the Company's net sales in 1997 and 1996, 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. producer of combustible ordnance products 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 3 M-1A2 tanks, the 60mm, 81mm and 120mm combustible mortar increments and the 155mm combustible case for artillery ammunition. As opposed to metal cartridge casings, Armtec's products are part of the ammunition propulsion system and are combusted when fired. In 1996, Armtec was designated by the U.S. Army as having the preferred technology for its new generation 155mm artillery system. Auxitrol, headquartered in France, manufactures high precision temperature and pressure sensing devices used primarily in aerospace applications; liquid level measurement devices for ships and storage tanks; pneumatic accessories (including pressure gauges and regulators); and industrial alarms. Auxitrol's principal customers are jet and rocket engine manufacturers, aerospace equipment manufacturers, shipbuilders, petroleum companies and electric utilities. Temperature and pressure sensing equipment designed into jet and rocket engines constitutes a significant portion of Auxitrol's sales. Auxitrol also distributes products manufactured by others, including valves, temperature and pressure switches and flow gauges. Auxitrol manufactures electrical penetration devices for nuclear power plants under license for sale in territories that cover Europe and certain other foreign countries. These penetration devices permit electrical signals to pass safely through the containment dome while maintaining pressure integrity and signal continuity. Auxitrol is also part of a joint venture with a Russian company to facilitate use of its penetration devices in nuclear plants for Eastern Europe. Hytek provides specialized metal finishing and inspection services, including plating, anodizing, polishing, nondestructive testing and organic coatings, primarily for aerospace applications. Hytek also serves the semiconductor industry using an automated tin-lead plating line that employs some of the most advanced automated plating technology available. Mason primarily manufactures control sticks, grips and wheels as well as specialized switching systems for commercial and military aeorspace applications. In addition, a variety of these products are manufactured for land-based military vehicles such as tanks and missile launchers. Midcon manufactures electronic and electrical cable assemblies and cable harnesses for the military, government contractors and the commercial electronics market, offering both product design services and product assembly to customer specifications. TA designs and manufactures specialty clamps and elastomeric compounds in custom molded shapes for wiring and tubing installations for airframe and jet engine manufacturers as well as military and commercial airline aftermarkets. TA's products include proprietary elastomers that are specifically formulated for various extreme applications, including high-temperature environments on or near a jet engine. BACKLOG At October 31, 1997 the backlog of the Aerospace and Defense Group was $81.5 million (of which $11.6 million is expected to be shipped after 1998) compared with $71.6 million at October 31, 1996. This solid increase is due to improving aerospace markets. INSTRUMENTATION GROUP The Instrumentation Group consists of two subsidiaries--Federal Products Co. ("Federal") and Korry Electronics Co. ("Korry"). These units serve aerospace, automotive, ordnance, bearing, farm implement, construction and medical equipment manufacturers. The Instrumentation Group accounted for 25% and 26% of the Company's net sales for 1997 and 1996, respectively. 4 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 Federal equipment for direct shop-floor inspections to reduce costly rework at more advanced production stages. Federal's 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 1997, 1996 and 1995, gauge products manufactured by Federal accounted for 11%, 12% 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 that act as human interfaces in a broad variety of control and display applications. Korry's products have been designed into many existing aircraft systems, and as a result, Korry enjoys a considerable spares and retrofit business. Korry's customers include original equipment manufacturers and the aftermarkets (equipment operators and spare parts distributors), primarily in the commercial aviation, airborne military, ground-based military equipment and shipboard military equipment markets. Korry's proprietary products provide its customers with a significant technological advantage in such areas as night vision--a critical operational requirement--and active matrix liquid crystal displays, a technology expected to have broad usage in commercial aerospace and military applications. Aerospace switches and indicators manufactured by Korry and Mason accounted for 12%, 9% and 8% of the Company's consolidated net sales in 1997, 1996 and 1995, respectively. BACKLOG At October 31, 1997, the backlog of the Instrumentation Group was $44.5 million (of which $8.1 million is expected to be shipped after 1998) compared with $36.4 million at October 31, 1996. The Instrumentation Group's backlog is benefiting from the increased order activity in the aerospace and quality control instrumentation markets. 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. Preserving 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 operating units maintains its own separate and distinct sales force, outside representatives or distributor relationships. In particular: Automation Group products manufactured by Excellon are marketed domestically principally through employees and in foreign markets through employees and independent distributors. Whitney products are sold principally through independent distributors and representatives. Aerospace and Defense Group products manufactured by Auxitrol and Armtec are marketed through employees and independent representatives. 5 Instrumentation Group products manufactured by Federal and Korry are marketed domestically principally through employees and outside sales representatives and in foreign markets through both employees and independent representatives. RESEARCH AND DEVELOPMENT Currently, the Company's subsidiaries conduct product development and design programs with approximately 171 professional engineers, technicians and support personnel, supplemented by outside engineering and consulting firms when needed. In 1997, approximately $17.6 million was expended for research, development and engineering, compared with $15.4 million in 1996 and $16.6 million in 1995. FOREIGN OPERATIONS The Company's principal foreign operations consist of Auxitrol's manufacturing facilities located in France and Spain. Other locations include Tulon's manufacturing facility in Mexico, Excellon's sales and service operations located in England, Germany and Japan, and sales offices for TA and Korry in England and France, respectively. Whitney also has a small distribution facility in Italy. For further information regarding foreign operations, reference is made to Note 1 to the Consolidated Financial Statements (pages 42-43) and Note 13 to the Consolidated Financial Statements (pages 52-53) of the Company's Annual Report to Shareholders for the year ended October 31, 1997, which is incorporated herein by reference. EMPLOYEES The Company and its subsidiaries had 3,360 employees at October 31, 1997. Less than 10% of these employees were members of an organized labor union. 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. Although only 3% of the Company's sales are made directly to the United States Government, the Company's subcontracting activities account for approximately 9% of additional sales. Therefore, close to 12% of the Company's sales are governed by rules favoring the government's contractual position. 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, or 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 subsidiaries experience varying degrees of competition with respect to their products and services. The Company competes in most markets it serves with other companies, 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 6 features that render the Company's products obsolete or less marketable. Excellon's principal competitors are Hitachi, Ltd., Schmoll and Pluritec. Whitney's principal competitors are Cincinnati, Inc., Trumpf, Mazak and U.S. Amada. Auxitrol's principal competitors are Ametek and Rosemount. Federal's principal competitors are Mitutoyo, Brown & Sharpe and Starrett. Korry's principal competitors are Eaton-MSC and Ducommun Jay-El. Collectively, the Company holds a number of patents but in general relies on technical superiority, continual product improvement, exclusive features in their equipment, service to customers and marketing to meet competition. Licenses that help maintain a significant competitive advantage include a long-term license agreement under which Auxitrol manufactures and sells electrical penetration assemblies. 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, a few components for Whitney and certain other raw materials and components for other subsidiaries are purchased from single sources. In such instances, ongoing efforts are conducted to develop alternative sources and design modifications to help avoid the possibility of any business impairment. 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. However, the Company believes 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 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 7 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 Certain statements in the Form 10-K and documents incorporated by reference 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 uncertainties, certain of which are discussed below, regarding matters that could significantly affect expected results including information about industry trends, growth and backlog. Thus, these forward-looking statements may be materially different from actual future outcomes. The Company does not undertake any obligation to publicly release the results of any revisions that may be made to these forward-looking statements to reflect any future events or circumstances. CYCLICALITY OF BUSINESS. The Company's business is susceptible to economic cycles and its results can vary widely based on a number of factors, including domestic and foreign economic conditions and developments affecting the specific industries and customers served. The products sold by most of the Company's businesses represent capital investment or support for capital investment by either the initial customer or the ultimate end-user. Also, a significant portion of the sales and profitability of some Company businesses is derived from the telecommunications, computer, aerospace and defense markets as well as other 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. There can be no assurance that such trends will continue at their current levels. DEPENDENCE ON MAJOR CUSTOMERS; BACKLOG. Certain of the Company's subsidiaries are dependent on a relatively small number of customers and defense programs, which change from time to time. For example, Armtec does significant business with the U.S. Army. Significant customers in 1997 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's subsidiaries take precautionary steps to protect their technological advantages and rely in part on patent, trademark, trade secret and copyright law to protect their intellectual property. 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 8 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 33% of the Company's total sales in 1997. 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 any claims that may arise. VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter 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 stockholders 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 substantial penalties upon the Company in the event of a change of control. The Company's Stockholder 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 9 engaging various "business combination" transactions with any "interested stockholder" for a period of three years after the date of the transaction in which such person became an "interested stockholder," 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 stockholders. 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 subsidiaries as of October 31, 1997: Approximate Type of Number of Owned Location Facility Square Feet or Leased -------- -------- ----------- --------- 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 Kent, WA Office and Plant (D) 93,000 Owned Joplin, MO Office and Plant (D) 92,000 Owned Bourges, France Plant (D) 69,000 Owned San Fernando, CA Office and Plant (D) 50,000 Leased - --------------- The Company group (business segment) 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 In January 1998, the plant in Bourges, France was relocated to a new facility within the same city that is approximately 101,000 square feet. This leased facility may be purchased at the end of a 12-year period for a nominal amount. ITEM 3. LEGAL PROCEEDINGS 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. 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, 1997. 10 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 1997 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, 1997 and 1996, respectively, (page 37 of the Annual Report to Shareholders). (b) Restrictions on the ability to pay future cash dividends (Note 6 to the Consolidated Financial Statements, page 47 of the Annual Report to Shareholders). No cash dividends were paid during the years ended October 31, 1997 and 1996 as the Company continued its policy of retaining all internally generated funds to support the long-term growth of the Company and to retire debt obligations. On January 17, 1998, there were approximately 927 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 36 of the Company's Annual Report to Shareholders for 1997. 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 30-35 of the Company's Annual Report to Shareholders for 1997. 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, 1997, which appear on pages 38-55 of the Company's Annual Report to Shareholders for 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 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 4, 1998, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 23, 1998. (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 23, 1998 are as follows: Name Position with the Company Age - ------------------ ------------------------------------------------ --- Wendell P. Hurlbut Chairman and Chief Executive Officer 66 Robert W. Cremin President and Chief Operating Officer 57 Robert W. Stevenson Executive Vice President, Chief Financial Officer 58 and Secretary Larry A. Kring Group Vice President 57 Stephen R. Larson Group Vice President 53 Marcia J. M. Greenberg Vice President, Human Relations 45 Robert D. George Treasurer and Controller 41 Mr. Hurlbut has served as Chairman and Chief Executive Officer of the Company since September 1997. Prior thereto, 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. 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. 12 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. Prior thereto, 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 4,1998, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 23, 1998. 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 4, 1998, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 23, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 13 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, 1997, appearing on pages 38-55 of the Company's Annual Report to Shareholders for 1997, are hereby incorporated by reference: Annual Report Page Number ------------- Consolidated Statement of Operations--Years ended October 31, 1997, 1996 and 1995 .......................... 38 Consolidated Balance Sheet--October 31, 1997 and 1996 ....... 39 Consolidated Statement of Cash Flows--Years ended October 31, 1997, 1996 and 1995 .......................... 40 Consolidated Statement of Shareholders' Equity--Years ended October 31, 1997, 1996 and 1995 .......................... 41 Notes to Consolidated Financial Statements .................. 42-54 Report of Independent Auditors .............................. 55 (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, 1997: Independent Auditors' Report Schedule VIII--Valuation and Qualifying Accounts and Reserves, see page 21. (a)(3) Exhibits. 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).) 14 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 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).) 15 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, 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 that certain Note Agreement, dated and effective as of July 15, 1992, 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 10.9a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 (Commission File Number 1-6357).) 10.10 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 1998 Annual Meeting of Shareholders to be held on March 4, 1998, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 23, 1998.) 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).) 16 Exhibit Number Exhibit ------- ------- 11 Schedule setting forth computation of earnings per share for the five fiscal years ended October 31, 1997. 13 Portions of the Annual Report to Shareholders for the fiscal year ended October 31, 1997, incorporated by reference herein. 21 List of subsidiaries. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule (EDGAR only). 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).) 10.20d Esterline Technologies Corporation Corporate Management Incentive Compensation Plan for fiscal year 1998. 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.) (b) Reports on Form 8-K. There were no Reports on Form 8-K filed during the fourth quarter of fiscal year 1997. 17 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 29, 1998 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 29, 1998 - -------------------------- Chief Executive Officer ----------------- (Wendell P. Hurlbut) (Principal Executive Officer) Date /s/ Robert W. Stevenson Executive Vice President, January 29, 1998 - ------------------------- Chief Financial Officer ----------------- (Robert W. Stevenson) and Secretary (Principal Date Financial Officer) /s/ Robert D. George Treasurer and Controller January 29, 1998 - ------------------------- (Principal Accounting ----------------- (Robert D. George) Officer) Date /s/ Richard R. Albrecht Director January 29, 1998 - ------------------------- ----------------- (Richard R. Albrecht) Date 18 /s/ Gilbert W. Anderson Director January 29, 1998 - ------------------------- ----------------- (Gilbert W. Anderson) Date /s/ John F. Clearman Director January 29, 1998 - ------------------------- ----------------- (John F. Clearman) Date /s/ Edwin I. Colodny Director January 29, 1998 - ------------------------- ----------------- (Edwin I. Colodny) Date /s/ E. John Finn Director January 29, 1998 - ------------------------- ----------------- (E. John Finn) Date /s/ Robert F. Goldhammer Director January 29, 1998 - ------------------------- ----------------- (Robert F. Goldhammer) Date /s/ Jerome J. Meyer Director January 29, 1998 - ------------------------- ----------------- (Jerome J. Meyer) Date /s/ Paul G. Schloemer Director January 29, 1998 - ------------------------- ----------------- (Paul G. Schloemer) Date /s/ Malcolm T. Stamper Director January 29, 1998 - ------------------------- ----------------- (Malcolm T. Stamper) Date 19 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, 1997 and 1996, and for each of the three years in the period ended October 31, 1997, and have issued our report thereon dated December 9, 1997; such financial statements and report are included in your 1997 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Esterline Technologies Corporation, 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, 1997 20 ESTERLINE TECHNOLOGIES CORPORATION AND SUBSIDIARIES SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) For Years Ended October 31, 1997, 1996 and 1995 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 Year Ended October 31 - --------------------- 1997 $ 4,084 $ 742 $ (1,966) $ 2,860 ========== ========== =========== ========== 1996 $ 4,117 $ 782 $ (815) $ 4,084 ========== ========== =========== ========== 1995 $ 2,201 $ 2,095 $ (179) $ 4,117 ========== ========== =========== ========== Inventory Valuation Reserves Year Ended October 31 - --------------------- 1997 $ 1,195 $ -- $ (695) $ 500 ========== ========== =========== ========== 1996 $ 1,195 $ -- $ -- $ 1,195 ========== ========== =========== ========== 1995 $ 3,546 $ -- $ (2,351) $ 1,195 ========== ========== =========== ========== 21 EX-11 2 EXHIBIT 11 Exhibit 11 Page 1 ESTERLINE TECHNOLOGIES CORPORATION Computation of Primary Earnings Per Common Share (in thousands, except per share amounts)
1997 1996 1995 1994 1993 ------- ------- ------- ------ -------- Net Earnings (Loss) $25,321 $21,354 $17,381 $7,563 $(25,635) ======= ======= ======= ====== ======== Weighted-Average Number of Common Shares Outstanding 8,562 7,921 6,568 6,513 6,512 Net Shares Assumed to be Issued for Stock Options 242 246 302 58 67 ------- ------- ------- ------ -------- Total 8,804 8,167 6,870 6,571 6,579 ======= ======= ======= ====== ======== Earnings (Loss) Per Common Share - Primary Basis $ 2.88 $ 2.61 $ 2.53 $ 1.15 $ (3.90) ======= ======= ======= ====== ========
Exhibit 11 Page 2 ESTERLINE TECHNOLOGIES CORPORATION Computation of Fully Diluted Earnings Per Common Share (in thousands, except per share amounts)
1997 1996 1995 1994 1993 ------- ------- ------- ------ -------- Net Earnings (Loss) $25,321 $21,354 $17,381 $7,563 $(25,635) ======= ======= ======= ====== ======== Weighted-Average Number of Common Shares Outstanding 8,562 7,921 6,568 6,513 6,512 Net Shares Assumed to be Issued for Stock Options 276 253 362 269 67 ------- ------- ------- ------ -------- Total Common Shares on a Fully Diluted Basis 8,838 8,174 6,930 6,782 6,579 ======= ======= ======= ====== ======== Earnings (Loss) Per Common Share - Fully Diluted Basis $ 2.87 $ 2.61 $ 2.51 $ 1.12 $ (3.90) ======= ======= ======= ====== ======== Earnings (Loss) Per Common Share - Primary Basis $ 2.88 $ 2.61 $ 2.53 $ 1.15 $ (3.90) ======= ======= ======= ====== ======== Dilutive Effect Per Common Share $ .01 $ None $ .02 $ .03 $ None ======= ======= ======= ====== ========
EX-13 3 EXHIBIT 13 MANAGEMENT'S DISCUSSION + ANALYSIS GENERAL Esterline's (the Company) record sales performance in 1997 reaffirmed management's strategy of serving multiple industrial markets with high quality, capital-intensive engineered products. Management focused significant attention on converting the Company's strong capital position into growth through investment in product development and acquisitions. Completed acquisitions included a product line during 1997 and, subsequent to year-end, two additional product lines and a small manufacturing company. Management continues to pursue other acquisition opportunities. The Company consists of 12 separate operating units organized into three business groups - Automation (4 units), Aerospace/Defense (6 units) and Instrumentation (2 units). Combined, Excellon, Auxitrol and Korry - the largest units in each Group - account for 49% and 51% of net sales and 41% and 54% of operating earnings in 1997 and 1996, respectively. RESULTS OF OPERATIONS YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996 Net sales for 1997 grew 11% when compared with the prior period. Sales by Group were as follows: increase from dollars in thousands 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 ==================================================================== Net 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. Net 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 net sales for 1997 and 1996, respectively. Total gross margin as a percentage of net 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 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 net 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 $2.88 per share, for 1997 compared with $21.4 million, or $2.61 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 is scheduled to be delivered after 1998. All orders in backlog are subject to cancellation until delivery. YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995 Net sales remained consistent with the prior period at $352.8 million in 1996 compared with $351.9 million in 1995. Automation Group sales declined 6% to $146.7 million compared with $156.1 million for the prior year. Much of the revenue decline was attributed to uncertainty among automated manufacturing equipment users, especially in the printed circuit board industry, as they delayed capital purchase decisions. The Instrumentation Group also experienced a slight decrease in sales of 3% to $94.5 million compared with $97.8 million in 1995. However, on a pro forma basis when results are restated for Scientific Columbus which was sold late in 1995, the Group experienced an increase in net sales of 6%. The Aerospace/ Defense Group compensated for the slight declines in revenues experienced by the other two segments by posting a 14% increase in net sales totaling $111.7 million compared with $98 million for the prior year. A recovering aerospace market and the acquisition of Mason Electric Co., which was completed at the beginning of the fourth quarter of 1996, were primarily responsible for the improvement. Net sales to foreign customers, including export sales by domestic operations, totaled $122.6 million and $124.1 million in 1996 and 1995, respectively, and accounted for 35% of the Company's net sales in both years. Net sales for the year ended October 31, by Group, were as follows: dollars in thousands 1996 1995 Automation $146,698 $156,116 Aerospace and Defense 111,691 98,027 Instrumentation 94,454 97,754 - ------------------------------------------------- $352,843 $351,897 ================================================= Total gross margin as a percentage of sales remained consistent with the prior year at 39%. On a comparative basis, in 1996, the Automation and Aerospace/Defense Groups' gross margins increased while the Instrumentation Group's gross margin decreased. The gross margins by Group ranged from 38% to 39% in 1996, compared with 38% to 41% in the prior year. Selling, general and administrative expenses (which include corporate expenses, and research, development and related engineering costs) decreased in large measure due to the absence of selling, general and administrative expenses at Scientific Columbus in 1996. As a percentage of sales, these expenses improved to 29% in 1996 from 30% in 1995. Research, development and related engineering costs decreased to $15.4 million in 1996 from $16.6 million in 1995. In 1996, operating earnings (excluding corporate expenses) increased 15% to $42.8 million from $37.3 million in the prior year. The primary areas of improvement were in the Aerospace/ Defense Group where operating earnings more than doubled to $13.6 million in 1996 from $6.5 million in the prior year. Recovery in aerospace markets as well as the operating earnings generated by Mason contributed to this increase. The Automation Group's operating earnings decreased 2% to $23.7 million in 1996 from $24.2 million in 1995 reflecting a slowdown in electronics industry capital expenditures. The Instrumentation Group's operating earnings decreased to $5.5 million in 1996 when compared with $6.6 million in the prior year. Cash, generated from operations and the proceeds of a public offering, was primarily invested in tax-exempt securities and generated interest income of $2 million in 1996. Interest expense decreased $1.3 million in 1996 to $4.3 million compared with $5.6 million in 1995. This reduction is primarily related to a continuing decline in debt which included the initial principal payment on the Senior Notes. The effective income tax rate for 1996 was 33% compared with 34% in the prior year. The decrease in the effective rate is attributed primarily to tax-exempt interest generated in the current year. Net earnings were $21.4 million, or $2.61 per share, for 1996 compared with net earnings of $17.4 million, or $2.53 per share, in the prior year period. In 1995, earnings included $.20 per share and $.12 per share from the restructuring credit and proceeds from a patent infringement settlement, respectively. Without these items, 1995 earnings per share from operations was $2.21. Orders for 1996 increased 1% to $361.4 million from $358.3 million in the prior year period. Backlog at October 31, 1996 was $127.3 million compared with $103.2 million a year earlier. The increase in backlog relates to the aerospace recovery and the Mason acquisition. Approximately $24.6 million of back-log was scheduled to be delivered after 1997. All orders in backlog are subject to cancellation until delivery. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents at October 31, 1997 totaled $56 million, an increase of $9.6 million from the prior year and was generated primarily through operations. Net accounts receivable decreased $1.6 million to $67.5 million due to the collection of foreign accounts that were included in allowance for doubtful accounts in the prior year. Trade accounts receivable remained essentially unchanged even with a sales volume increase of 11%. Inventory increased $8 million to $53.4 million in 1997 to support backlog at year-end and increased levels of business. Current liabilities decreased $4.4 million to $100.9 million primarily as the result of a decrease in foreign short-term debt and income taxes payable. Net working capital increased 27% to $93.5 million at October 31, 1997 from $73.4 million at October 31, 1996. Total debt at October 31, 1997 was $32.1 million, an $8.8 million decrease from a year earlier. The decrease is attributable to a scheduled principal payment of $5.7 million on the Company's Senior Notes and a reduction in foreign notes outstanding. The scheduled payments will continue annually until maturity on July 30, 2002. Debt was comprised of $28.6 million under the Company's Senior Notes and $3.5 million under various foreign currency debt agreements. Domestic and foreign credit facilities totaled $43 million, of which $38.3 million was available at October 31, 1997. Capital expenditures, consisting of buildings, machinery, equipment and computers, are anticipated to be approximately $28 million during 1998 compared with $21.6 million in 1997. The increase in capital expenditures for 1998 supports management's expectation for continued growth, creating the need to reinvest in new technology and add capacity. Capital expenditures for 1997 (excluding acquisitions) were comprised of expenditures for 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. Management believes cash on hand, funds generated from operations and available bank credit lines will adequately service operating cash requirements, including capital expenditures, through 1998. SUBSEQUENT EVENTS In November 1997, the Company completed the purchase of an Ohio-based company, Fluid Regulators Corporation, and two product lines, a Boeing 777 cockpit switch from Illinois Tool Works and an aerospace pressure sensor product line from SAGEM S.A. Fluid Regulators Corporation, a designer and manufacturer of advanced hydraulic controls and components for the commercial aerospace and defense industries, and the aerospace pressure sensor product line will operate under the direction of the Company's France-based Auxitrol S.A. The cockpit switch will be integrated into the operations at Korry Electronics. The purchases were funded with available cash. FORWARD-LOOKING STATEMENTS Certain statements in the above commentary and throughout this annual report contain forward-looking information that involve risks and uncertainties, including industry trends, currency fluctuations, backlog, capital expenditures and cash requirements. The Company's business is susceptible to economic cycles and its results can vary widely based on a number of factors, including domestic and foreign economic conditions and developments affecting the specific industries and customers served. The products sold by most of the Company's businesses represent capital investment or support for capital investment by either the initial customer or the ultimate end-user. A significant portion of the sales and profitability of some Company businesses is derived from the telecommunications, electronics, computer, aerospace and defense markets. Changes in general economic conditions or conditions in these and other specific industries, capital acquisition cycles and government policies, collectively or individually, can have a significant effect on the Company's results of operations and financial condition. Thus, these forward-looking statements may be materially different from actual future outcomes. The Company does not undertake any obligation to publicly release the results of any revisions that may be made to these forward-looking statements to reflect any future events or circumstances. RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which supersedes APB Opinion No. 15 and will require the Company to report earnings per outstanding share in addition to diluted earnings per share. Diluted earnings per share under the new standard would be the same as currently reported primary earnings per share under APB Opinion No. 15. The standard becomes effective for financial statements for both interim and annual periods ending after December 15, 1997. Early application is not permitted. SELECTED FINANCIAL DATA dollars in thousands, except per share amounts for the years ended 10.31 1997 1996 1995 1994 1993 Operating Results Net sales $390,958 $352,843 $351,897 $294,044 $285,152 Cost of sales 243,197 215,015 215,934 178,397 175,568 Selling, general and administrative 108,474 103,415 107,113 100,845 100,669 Restructuring provision (credit) - - (2,067) - 40,626 Interest income (2,397) (1,989) (1,156) (113) (122) Interest expense 3,603 4,328 5,598 6,098 6,446 Income tax expense (benefit) 12,760 10,720 9,094 1,254 (12,400) Net earnings (loss) 25,321 21,354 17,381 7,563 (25,635) Net earnings (loss) per share $ 2.88 $ 2.61 $ 2.53 $ 1.15 $ (3.90) Financial Structure Total assets $289,847 $276,646 $225,714 $217,524 $205,672 Long-term debt, net 23,209 29,007 35,543 41,714 62,267 Shareholders' equity 165,718 142,304 83,706 65,491 55,323 Weighted average number of shares outstanding 8,804 8,167 6,870 6,571 6,579 MARKET PRICE OF ESTERLINE COMMON STOCK principal market: new york stock exchange dollars for the years ended 10.31 1997 1996 Quarter High Low High Low First $28.00 $22.50 $24.00 $19.13 Second 29.75 25.13 23.88 20.38 Third 38.50 28.25 26.00 18.75 Fourth 43.50 34.56 23.38 20.00 At October 31, 1997 there were approximately 938 holders of record of the Company's common stock. CONSOLIDATED STATEMENT OF OPERATIONS dollars in thousands except per share amounts for the years ended 10.31 1997 1996 1995 Net Sales $390,958 $352,843 $351,897 Costs and Expenses Cost of sales 243,197 215,015 215,934 Selling, general and administrative 108,474 103,415 107,113 Restructuring credit - - (2,067) Interest income (2,397) (1,989) (1,156) Interest expense 3,603 4,328 5,598 - --------------------------------------------------------------------------- 352,877 320,769 325,422 - --------------------------------------------------------------------------- Earnings Before Income Taxes 38,081 32,074 26,475 Income Tax Expense 12,760 10,720 9,094 - --------------------------------------------------------------------------- Net Earnings $ 25,321 $ 21,354 $ 17,381 Net Earnings Per Share $ 2.88 $ 2.61 $ 2.53 =========================================================================== see notes to consolidated financial statements CONSOLIDATED BALANCE SHEET dollars in thousands except share and per share amounts 10.31 1997 1996 Assets CURRENT ASSETS Cash and equivalents $ 56,045 $ 46,436 Accounts receivable, net of allowances of $2,860 and $4,084 67,520 69,120 Inventories 53,386 45,399 Deferred income taxes 14,186 15,321 Prepaid expenses 3,290 2,504 - ------------------------------------------------------------------------------- Total Current Assets 194,427 178,780 - ------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 2,885 3,619 Buildings 47,899 43,875 Machinery and equipment 124,831 113,116 - ------------------------------------------------------------------------------- 175,615 160,610 Accumulated depreciation 117,239 106,813 - ------------------------------------------------------------------------------- 58,376 53,797 Intangibles, net and Other Assets 37,044 44,069 - ------------------------------------------------------------------------------- $289,847 $276,646 =============================================================================== Liabilities and Shareholders' Equity CURRENT LIABILITIES Accounts payable $ 20,475 $ 20,836 Accrued liabilities 70,120 68,492 Credit facilities 2,467 5,242 Current maturities of long-term debt 6,386 6,660 Federal and foreign income taxes 1,472 4,105 - ------------------------------------------------------------------------------- Total Current Liabilities 100,920 105,335 - ------------------------------------------------------------------------------- Long-Term Debt 23,209 29,007 SHAREHOLDERS' EQUITY Common stock, par value $.20 per share, authorized 30,000,000 shares, issued and outstanding 8,642,911 and 8,501,668 shares 1,729 1,700 Capital in excess of par value 48,559 48,417 Retained earnings 119,007 93,686 Cumulative translation adjustment (3,577) (1,499) - ------------------------------------------------------------------------------- Total Shareholders' Equity 165,718 142,304 - ------------------------------------------------------------------------------- $289,847 $276,646 =============================================================================== see notes to consolidated financial statements CONSOLIDATED STATEMENT OF CASH FLOWS dollars in thousands for the years ended 10.31 1997 1996 1995 CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES Net earnings $ 25,321 $ 21,354 $ 17,381 Restructuring credit - - (2,067) Depreciation and amortization 17,404 16,269 16,599 Deferred income taxes 4,764 (413) (2,969) Working capital changes, net of effect of acquisitions Accounts receivable (436) (4,319) 280 Inventories (8,947) (2,694) (9,496) Prepaid expenses (862) (291) (176) Accounts payable 447 (2,399) 4,121 Accrued liabilities 484 605 7,196 Federal and foreign income taxes (2,611) 1,886 897 Other, net (1,099) 2,411 882 - ------------------------------------------------------------------------------- 34,465 32,409 32,648 - ------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES Capital expenditures (17,390) (17,203) (11,461) Capital dispositions 1,820 1,054 3,773 Acquisitions - (20,485) - - ------------------------------------------------------------------------------- (15,570) (36,634) (7,688) - ------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES Net change in credit facilities (2,417) (2,214) 7,483 Repayment of long-term debt (5,931) (6,812) (19,837) Net proceeds provided by sale of common stock - 38,365 - - ------------------------------------------------------------------------------- (8,348) 29,339 (12,354) - ------------------------------------------------------------------------------- Effect of exchange rates (938) (775) 415 - ------------------------------------------------------------------------------- Net increase in cash and equivalents 9,609 24,339 13,021 Cash and equivalents - beginning of year 46,436 22,097 9,076 - ------------------------------------------------------------------------------- Cash and equivalents - end of year $ 56,045 $ 46,436 $ 22,097 =============================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for Interest $ 3,720 $ 4,480 $ 4,577 Income taxes 7,015 6,357 10,452 see notes to consolidated financial statements CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY dollars in thousands for the years ended 10.31 1997 1996 1995 COMMON STOCK, PAR VALUE $0.20 PER SHARE Beginning of year $ 1,700 $ 1,328 $ 1,302 1,800,000 shares issued - 360 - Shares issued under stock option plans 29 12 26 - ------------------------------------------------------------------------------- End of year 1,729 1,700 1,328 - ------------------------------------------------------------------------------- CAPITAL IN EXCESS OF PAR VALUE Beginning of year 48,417 10,390 10,482 1,800,000 shares issued - 38,005 - Shares issued under stock option plans 142 22 (92) - ------------------------------------------------------------------------------- End of year 48,559 48,417 10,390 - ------------------------------------------------------------------------------- RETAINED EARNINGS Beginning of year 93,686 72,332 54,951 Net earnings 25,321 21,354 17,381 - ------------------------------------------------------------------------------- End of year 119,007 93,686 72,332 - ------------------------------------------------------------------------------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Beginning of year (1,499) (344) (1,244) Change in foreign currency translation (2,078) (1,155) 900 - ------------------------------------------------------------------------------- End of year (3,577) (1,499) (344) - ------------------------------------------------------------------------------- Shareholders' Equity $165,718 $142,304 $83,706 =============================================================================== see notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES NATURE OF OPERATIONS Esterline Technologies Corporation (the Company) - through its 12 separate operating units - designs, manufactures and markets a broad array of capital-intensive engineered products. The Company principally serves the aerospace and defense industry, electronic equipment manufacturers, metal fabricators and general manufacturing industries throughout the world. BASIS OF PRESENTATION The consolidated financial statements include all subsidiaries. All significant intercompany accounts and transactions have been eliminated. Classifications have been changed for certain amounts in the preceding period to conform with the current year's presentation. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. FOREIGN CURRENCY TRANSLATION Foreign currency assets and liabilities are translated into their U.S. dollar equivalents based on year-end exchange rates. Revenue and expense accounts are generally translated at average exchange rates. Aggregate exchange gains and losses arising from the translation of foreign assets and liabilities are included in shareholders' equity. Transaction gains and losses are included in income and have not been significant in amount. INVENTORIES 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 $17,556,000, $15,373,000 and $16,638,000 in 1997, 1996 and 1995, 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 provided generally on the straight-line method. For income tax purposes, depreciation is computed using various methods prescribed by the taxing authorities. INTANGIBLES Intangible assets arise primarily from business acquisitions and include the cost of purchased businesses in excess of amounts assigned to identifiable assets. Intangible assets are being amortized over estimated lives of up to 30 years. ASSET VALUATION The carrying amount of long-lived assets is reviewed periodically. If the asset carrying amount is not recoverable, the asset is considered to be impaired and the carrying amount is adjusted. ENVIRONMENTAL Environmental exposures are provided for in total at the time they are known to exist or are considered reasonably probable 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. EARNINGS PER SHARE Earnings per share is computed using the weighted average number of common and common equivalent shares outstanding during each year. The weighted average number of shares were 8,804,000, 8,167,000 and 6,870,000 in 1997, 1996 and 1995, respectively. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with maturities of three months or less. Fair value of cash equivalents approximates carrying value. 2. INVENTORIES Inventories at October 31 consisted of the following: dollars in thousands 1997 1996 Raw materials and purchased parts $17,502 $15,880 Work in process 26,191 23,195 Finished goods 9,693 6,324 ------------------------------------------------------------ $53,386 $45,399 ============================================================ Inventories stated under the last-in, first-out method totaled $11,945,000 and $9,653,000 at October 31, 1997 and 1996, respectively. Had the first-in, first-out method been used, these inventories would have been $5,274,000 and $4,450,000 higher than reported at October 31, 1997 and 1996, respectively. 3. ACCRUED LIABILITIES Accrued liabilities at October 31 consisted of the following: dollars in thousands 1997 1996 Payroll and other compensation $19,354 $19,670 Self-insurance 6,329 8,649 Interest 2,244 2,321 Warranties 9,356 9,065 State and other tax accruals 10,195 8,554 Other 22,642 20,233 ------------------------------------------------------------- $70,120 $68,492 ============================================================= 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 7.5% and annual compensation increases of 5%. The expected long-term rate of return on plan assets was assumed at 8.5% for 1997 and 7.5% for both 1996 and 1995. Plan assets primarily consist of publicly traded common stocks, bonds and government securities. Total pension expense for all benefit plans, including defined benefit plans, was $1,758,000, $2,329,000 and $2,016,000 for the years ended October 31, 1997, 1996 and 1995, respectively. Net periodic pension expense for the Company's defined benefit plans for the years ended October 31 consisted of the following: dollars in thousands 1997 1996 1995 Service cost - benefits earned during the year $ 3,150 $ 2,871 $ 2,316 Interest cost on projected benefit obligation 5,598 5,154 4,698 Actual return on plan assets - investment gains (26,279) (8,074) (13,496) Net amortization and deferral 18,297 1,319 7,599 --------------------------------------------------------------- Net pension expense $ 766 $ 1,270 $ 1,117 =============================================================== The funded status of the defined benefit pension plan at October 31 was as follows: dollars in thousands 1997 1996 Plan assets at fair value $113,001 $91,509 Projected benefit obligation for service rendered to date 77,751 71,066 --------------------------------------------------------------- Plan assets in excess of projected benefit obligation 35,250 20,443 Unrecognized net gain (23,091) (7,576) Unrecognized transition asset (1,444) (1,925) --------------------------------------------------------------- Prepaid pension expense, included in other assets $ 10,715 $10,942 =============================================================== Actuarial present value of accumulated benefit obligation, including vested benefits of $67,630 and $62,012 $ 67,744 $62,329 =============================================================== The Company also has an unfunded supplemental retirement plan for key executives providing for periodic payments upon retirement. The related accrued pension liability was $3,169,000 and $2,630,000 as of October 31, 1997 and 1996, respectively. 5. INCOME TAXES Income tax expense (benefit) for the years ended October 31 consisted of the following: dollars in thousands 1997 1996 1995 Current $ 7,996 $11,133 $12,063 Deferred 4,764 (413) (2,969) --------------------------------------------------------------- $12,760 $10,720 $ 9,094 =============================================================== 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: dollars in thousands 1997 1996 Reserves and liabilities $15,776 $17,546 Employee benefits 4,067 4,007 Foreign tax loss carryforward - 1,430 --------------------------------------------------------------- Total deferred tax assets 19,843 22,983 Depreciation and amortization (4,806) (2,902) Retirement benefits (2,754) (3,034) --------------------------------------------------------------- Total deferred tax liabilities (7,560) (5,936) --------------------------------------------------------------- $12,283 $17,047 =============================================================== A valuation allowance was not required due to the nature of and circumstances associated with the temporary tax differences. A reconciliation of the United States federal statutory income tax rate to the effective income tax rate for the years ended October 31 was as follows: 1997 1996 1995 U.S. statutory income tax rate 35.0% 35.0% 35.0% State income taxes 2.0 2.8 3.5 Foreign tax rates 0.5 (0.3) (1.5) Foreign sales corporation (1.8) (2.1) (1.7) Tax exempt interest (0.7) (1.5) - Other, net (1.5) (0.5) (1.0) --------------------------------------------------------------- Effective income tax rate 33.5% 33.4% 34.3% =============================================================== 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. 6. DEBT Long-term debt at October 31 consisted of the following: dollars in thousands 1997 1996 8.75% Senior Notes, due 2002 $28,571 $34,285 Other 1,024 1,382 --------------------------------------------------- 29,595 35,667 Less current maturities 6,386 6,660 --------------------------------------------------- $23,209 $29,007 =================================================== The Senior Notes are unsecured and payable in equal annual installments. Interest is payable semi-annually in January and July of each year. Maturities of long-term debt are as follows: dollars in thousands 1998 $ 6,386 1999 5,788 2000 5,824 2001 5,819 2002 5,778 --------------------------------------------------- $ 29,595 =================================================== Short-term credit facilities at October 31 consisted of the following: 1997 1996 dollars outstanding interest outstanding interest in thousands borrowings rate borrowings rate ------------------------------------------------------------- U.S. dollar $ - - $ - - Foreign 2,467 7.7% 5,242 7.8% ------------------------------------------------------------- $2,467 $5,242 ============================================================= 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 $8,000,000 of unsecured foreign currency credit facilities have been extended by foreign banks for a total of $43,000,000 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 $38,333,000 at October 31, 1997, when reduced by outstanding borrowings and letters of credit of $2,200,000. The fair value of the Company's long-term debt and short-term borrowings was estimated at $32,800,000 and $41,900,000 at October 31, 1997 and 1996, respectively. These estimates were derived using interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities. 7. LEASE COMMITMENTS Net rental expense for operating leases totaled $3,754,000, $3,159,000 and $3,103,000 in 1997, 1996 and 1995, respectively. The Company's rental commitments for noncancelable operating leases with a duration in excess of one year are as follows: dollars in thousands 1998 $ 3,588 1999 2,777 2000 2,294 2001 2,202 2002 2,216 2003 and thereafter 7,414 --------------------------------------------------- $ 20,491 =================================================== As of October 31, 1997, the Company has accrued approximately $4.2 million relating to a commitment to execute a capital lease obligation for a new plant facility. The lease, which commences upon the completion of the facility in December 1997, will have a 12 year term and result in a total obligation of approximately $4.4 million. 8. STOCK OPTION PLANS The Company provides a non-qualified stock option plan for officers and key employees. At October 31, 1997, the Company had 956,625 shares reserved for issuance to officers and key employees, of which 361,625 shares were available for future grant. The Board of Directors authorized the Compensation and Stock Option Committee to administer option grants, and their terms, under both plans. Awards under the 1997 Plan may be granted to eligible employees of the Company over a 10-year period ending March 4, 2007. Options granted under the plans 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:
1997 1996 1995 weighted weighted weighted average average average shares price shares price shares price Outstanding, beginning of year 758,125 $12.179 754,625 $ 9.786 1,038,500 $ 8.907 Granted 135,500 28.608 129,000 22.309 105,000 13.435 Exercised (294,875) 10.007 (121,750) 8.225 (381,375) 8.406 Cancelled (3,750) 7.500 (3,750) 7.625 (7,500) 9.313 - --------------------------------------------------------------------------------------- Outstanding, end of year 595,000 $16.944 758,125 $12.179 754,625 $ 9.786 ======================================================================================= Exercisable, end of year 287,375 $11.022 475,250 $ 9.808 470,375 $ 9.311 =======================================================================================
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 the Company had elected to recognize stock-based compensation expense based on the fair value of options at the grant date, net income and earnings per share would have been as follows: dollars in thousands, except per share amounts years ended 10.31 1997 1996 Net earnings as reported $25,321 $21,354 Pro forma net earnings 24,414 20,864 Earnings per share as reported $ 2.88 $ 2.61 Pro forma earnings per share 2.80 2.56 The pro forma disclosures presented above include the fair value compensation expense for all options that would have been amortized during 1997 and 1996. If only options granted during 1997 and 1996 were included, as prescribed by SFAS No. 123, pro forma net income would have been $24,511,000 and $21,085,000, respectively. Earnings per share for 1997 and 1996 would have been $2.86 and $2.66, respectively. The weighted-average Black-Scholes value of options granted during 1997 and 1996 were $14.216 and $11.673, respectively. The weighted-average assumptions used in performing this calculation at October 31, 1997 and 1996 were as follows: risk-free interest rate of 5.81% and 6.16%, respectively; expected volatility of 41.6% and 44.6%, respectively. An expected holding period of 6 years with no dividend yield was used for both years. The following table summarizes information for stock options outstanding at October 31, 1997: options outstanding options exercisable - ----------------------------------------------------------------------------- weighted average weighted weighted range of remaining average average exercise prices shares life (years) price shares price $ 7.375 - $11.249 186,500 5.713 $ 8.062 163,625 $ 8.125 11.250 - 17.749 136,500 6.140 12.387 89,000 12.070 17.750 - 26.499 136,500 8.441 22.059 34,750 21.981 26.500 - 39.750 135,500 9.271 28.608 - - ------- 595,000 287,375 ======= ======= 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, 1997, there were no shares of preferred stock outstanding. On February 8, 1996 the Company completed the public offering of 1.8 million shares of common stock priced at $23 per share, generating net proceeds of $38.4 million. These funds provide additional financial resources for general corporate purposes, including the acquisition of other companies. The Company has a Shareholder Rights Plan providing for the distribution of one Preferred Stock Purchase Right (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 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. 10. CONTINGENCIES 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. 11. ACQUISITIONS 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 since the date of acquisition. In 1996, the Company also acquired a noncontrolling equity interest in a company, and executed an agreement to acquire a product line. The total purchase price, including closing and other direct costs of these purchase transactions was approximately $22,000,000 and included excess of cost over identifiable tangible and intangible assets of approximately $12,000,000. On a pro forma basis, prepared as though the business combination had occurred at the beginning of fiscal 1995, consolidated revenues would be $365,108,000 and $365,685,000, net earnings would be $21,910,000 and $17,729,000, and net earnings per share would be $2.68 and $2.58, for the years ended October 31, 1996 and 1995, respectively. These pro forma results are unaudited, have been prepared for comparative purposes only, and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 1995, or of results which may occur in the future. 12. RESTRUCTURING PROVISION The Company recorded a restructuring charge in the fourth quarter of 1993. In the third quarter of fiscal year 1995 the Company recorded a credit of $2,067,000 ($1,400,000, or $.20 per share, net of income tax) representing the substantial completion of the 1993 restructuring. 13. BUSINESS SEGMENT INFORMATION Details of the Company's operations by business segment for the years ended October 31 were as follows: dollars in thousands 1997 1996 1995 Net Sales Automation $150,522 $146,698 $156,116 Aerospace and Defense 140,200 111,691 98,027 Instrumentation 100,236 94,454 97,754 ---------------------------------------------------------------------- $390,958 $352,843 $351,897 ====================================================================== Earnings Before Income Taxes Automation $ 15,450 $ 23,684 $ 24,215 Aerospace and Defense 22,273 13,649 6,493 Instrumentation 9,889 5,507 6,627 ---------------------------------------------------------------------- Operating Earnings $ 47,612 $ 42,840 $ 37,335 ====================================================================== Corporate expense (8,325) (8,427) (8,485) Restructuring credit - - 2,067 Interest income 2,397 1,989 1,156 Interest expense (3,603) (4,328) (5,598) ---------------------------------------------------------------------- $ 38,081 $ 32,074 $ 26,475 ====================================================================== Identifiable Assets Automation $ 67,957 $ 67,360 $ 57,849 Aerospace and Defense 88,399 86,303 68,785 Instrumentation 50,691 46,507 45,412 Corporate(1) 82,800 76,476 53,668 ---------------------------------------------------------------------- $289,847 $276,646 $225,714 ====================================================================== Capital Expenditures Automation $ 4,301 $ 7,379 $ 5,848 Aerospace and Defense 9,851 3,414 2,750 Instrumentation 6,995 5,926 2,833 Corporate 461 484 30 ---------------------------------------------------------------------- $ 21,608 $ 17,203 $ 11,461 ====================================================================== Depreciation and Amortization Automation $ 5,037 $ 4,667 $ 4,388 Aerospace and Defense 7,144 5,705 6,002 Instrumentation 4,814 5,618 5,754 Corporate 409 279 455 ---------------------------------------------------------------------- $ 17,404 $ 16,269 $ 16,599 ====================================================================== (1) Primarily cash, prepaid pension expense (see Note 4) and net deferred tax assets (see Note 5). The Company's operations by geographic area for the years ended October 31 were as follows: dollars in thousands 1997 1996 1995 NET SALES Domestic Unaffiliated customers - U.S. $261,391 $230,286 $227,810 Unaffiliated customers - export 67,194 57,130 61,051 Intercompany 10,202 11,367 11,132 -------------------------------------------------------------- 338,787 298,783 299,993 -------------------------------------------------------------- Foreign Unaffiliated customers 62,373 65,427 63,036 Intercompany 11,391 1,900 1,073 -------------------------------------------------------------- 73,764 67,327 64,109 -------------------------------------------------------------- Eliminations (21,593) (13,267) (12,205) -------------------------------------------------------------- Net Sales $390,958 $352,843 $351,897 ============================================================== OPERATING EARNINGS(1) Domestic $ 42,905 $ 41,227 $ 38,238 Foreign 3,999 1,195 (80) Eliminations 708 418 (823) -------------------------------------------------------------- $ 47,612 $ 42,840 $ 37,335 ============================================================== IDENTIFIABLE ASSETS(2) Domestic $164,467 $157,069 $134,897 Foreign 42,580 43,101 37,149 -------------------------------------------------------------- $207,047 $200,170 $172,046 ============================================================== (1) Before restructuring credit and corporate expense, shown on page 52. (2) Excludes Corporate, shown on page 52. The Company's principal foreign operations consist of manufacturing facilities located in France, Spain and Mexico, and include sales and service operations located in England, Germany, Italy, Japan, Singapore and France. The net 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. Product lines contributing more than 10% of total sales in any of the years ended October 31 were as follows: 1997 1996 1995 Printed circuit board drilling equipment 22% 22% 26% Aerospace switches and indicators 12% 9% 8% Gauge products 11% 12% 12% 14. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly financial information: dollars in thousands, except per share amounts year ended 10.31.97 fourth third second first Net 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 $ .91 $ .79 $ .75 $ .43 year ended 10.31.96 Net sales $ 98,142 $ 81,729 $88,975 $83,997 Gross margin 36,519 32,205 35,802 33,302 Net earnings 6,782 5,028 6,195 3,349 Net earnings per share(1) $ .78 $ .58 $ .75 $ .48 (1) The sum of quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted-average shares outstanding for each period. 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Esterline Technologies Corporation and its subsidiaries as of October 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche DELOITTE & TOUCHE LLP Seattle, Washington December 9, 1997 EX-21 4 EXHIBIT 21 Exhibit 21 SUBSIDIARIES The subsidiaries of the Company as of October 31, 1997 are as follows: Jurisdiction of Name of Subsidiary Incorporation - ------------------ ---------------- Armtec Defense Products Co. Delaware Auxitrol Co. Delaware Equipment Sales Co. Connecticut Excellon Automation Co. California Tulon Co. California Excellon U.K. California Excellon Europa GmbH Germany Amtech Automated Manufacturing Technology, Inc. Utah Federal Products Co. Delaware Federal Products U.K. Ltd. Delaware Hytek Finishes Co. Delaware Korry Electronics Co. Delaware Mason Electric Co. Delaware Midcon Cables Co. Delaware TA Mfg. Co. California W.A. Whitney Co. Illinois Auxitrol Technologies S.A. France Auxitrol S.A. France Auxitrol International France Auxitrol Industries France 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, 1997. EX-23 5 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, 1997 appearing in and incorporated by reference in this Annual Report on Form 10-K of Esterline Technologies Corporation for the year ended October 31, 1997. /s/ Deloitte & Touche LLP Seattle, Washington January 29, 1998 EX-10.16G 6 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: 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 FOUR-YEAR AWARDS 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 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%
(1) Performance prorated between minimum and target, and between maximum and target. (2) Based on the average of each year's audited beginning and ending common shareholder equity, excluding any amounts for any preferred shares. 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%
(1) Performance prorated between minimum and target, and between maximum and target. (2) At each year end, performance for each specific objective is scored/rated on a scale of "1 to 9". (3) Objectives renamed to reflect 2/25/97 proposed objectives. 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%
(1) Performance prorated between minimum and target, and between maximum and target. (2) 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. 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. EX-10.20D 7 EXHIBIT 10.20D EXHIBIT 10.20d ESTERLINE TECHNOLOGIES CORPORATION CORPORATE MANAGEMENT INCENTIVE COMPENSATION PLAN FISCAL YEAR 1998 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 1998. 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 participants payouts will vary from 5% to 60%, as stipulated in his/her appointment letter, of fiscal year-end 1998 salary. These target nomination awards will be earned if earnings per share of $3.14 are achieved. 2. Actual earnings per share will be as audited before extraordinary items for the year ending October 31, 1998. 3. Awards will be pro-rated for performance and will be interpolated on the following basis. EPS AWARD --------------------- --------- Below $3.14 Pro-rata share of target award At $3.14 performance 100% of target award 120% or more of $3.14 150% of target award 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 1998. 7. If a Plan member is terminated for any reason other than retirement, or death or disability prior to the end of fiscal 1998, 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 1998, 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 1998 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 EX-27 8 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ESTERLINE TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE AT OCTOBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS OCT-31-1997 NOV-01-1996 OCT-31-1997 1 56,045 0 70,380 2,860 53,386 194,427 175,615 117,239 289,847 100,920 23,209 0 0 1,729 163,989 289,847 390,958 390,958 243,197 243,197 108,474 0 1,206 38,081 12,760 25,321 0 0 0 25,321 2.88 2.87
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