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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-5881
BROWN & SHARPE MANUFACTURING COMPANY
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(Exact name of Registrant as specified in its charter)
DELAWARE 050113140
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
PRECISION PARK, 200 FRENCHTOWN ROAD, NORTH KINGSTOWN, RHODE ISLAND 02852
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code 401-886-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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CLASS A COMMON STOCK-PAR VALUE $1.00 NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
9 1/4% CONVERTIBLE SUBORDINATED NEW YORK STOCK EXCHANGE
DEBENTURES DUE DECEMBER 15, 2005
Securities registered pursuant to Section 12 (g) of the Act:
CLASS B COMMON STOCK - PAR VALUE $1.00
(Title of Class)
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. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405) 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]
The aggregate market value (as calculated under the rules) of the voting common
stock held by non-affiliates of the Registrant was approximately
$181,000,000 as of March 12, 1997.
There were 12,686,978 Shares of Class A Common Stock and 515,862 Shares of Class
B Common Stock, each having a par value of $1.00 per share, outstanding as of
March 12, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents have been incorporated by reference in the following
parts of the Form 10-K: (1) Definitive Proxy Statement for the April 25, 1997
Annual Meeting incorporated by reference (to the extent specified) in Part III.
Page 1
BROWN & SHARPE MANUFACTURING COMPANY
INDEX
Page
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PART I
Item 1 Business............................................................. 3 - 13
General................................................................... 3
Repositioning Initiatives................................................. 3 - 4
Business Strategy......................................................... 4 - 5
Metrology Industry........................................................ 5 - 6
MS Group.................................................................. 7
PMI Division.............................................................. 7
CM Division............................................................... 7 - 8
Sales and Distribution.................................................... 8
Engineering and Product Development....................................... 8 - 9
Foreign Operations........................................................ 9
Raw Materials and Sources of Supply....................................... 9
Patents, Licenses, Trademarks, and Proprietary Information................ 9 - 10
Environmental Matters..................................................... 10
Employees................................................................. 10 - 11
Competition............................................................... 11
Backlog................................................................... 11
Significant Customers..................................................... 12
Working Capital........................................................... 12
Segment Information....................................................... 12
Item 2 Properties........................................................... 12 - 13
Item 3 Legal Proceedings.................................................... 13 - 14
Item 4 Submission of Matters to a Vote of Security Holders.................. 14
Item 4A Executive Officers of the Registrant................................. 14 - 15
PART II
Item 5 Market Price of the Registrant's Common Stock and Related Security
Holder Matters....................................................... 15
Item 6 Selected Financial Data.............................................. 16
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 16 - 22
Item 8 Financial Statements and Supplementary Data.......................... 23 - 43
Item 9 Disagreements With Accountants on Accounting and Financial
Disclosure........................................................... 44
PART III
Item 10 Directors and Executive Officers of the Registrant................... 44
Item 11 Management Remuneration and Transactions............................. 44
Item 12 Security Ownership of Certain Beneficial Owners and Management....... 44
Item 13 Certain Relationships and Related Transactions....................... 44
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 44 - 45
Signatures.................................................................... 46
Directors..................................................................... 47
Officers...................................................................... 47
Investor Information.......................................................... 47 - 48
Financial Statement Schedules................................................. 49
Exhibit Index................................................................. 50 - 55
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PART I
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ITEM 1 - BUSINESS
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General
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The Company, which was founded in 1833, is a leading designer, manufacturer
and marketer of metrology products worldwide under numerous internationally
recognized brand names. Metrology is the science of the physical measurement
of objects using various precision instruments and equipment. The Company's
high precision products measure physical dimensions of, and inspect and verify
conformance to specifications of, components and products and are used in
manufacturing, quality control and product development operations. The
Company's product line ranges from hand tools and instruments to customized
computer-controlled metrology systems which integrate hardware and software
and are augmented by service, training and aftermarket support. The Company
markets its metrology products and services in North America, Europe, Asia,
South America and the Middle East. Important end user markets for the
Company's products include the automotive, aerospace, industrial machinery,
electronics and computer industries, and the Company's customers include Ford
Motor Co., Daimler Benz, Toyota, Chrysler, BMW, Boeing Co., Eastman Kodak Co.
Inc., International Business Machines Corp., Hewlett-Packard Co., General
Electric Co., Caterpillar Inc., United Technologies Corp., Motorola Inc.,
Phillips, Samsung and Xerox Corp.
The Company's operations are conducted through three management units:
Measuring Systems, Precision Measuring Instruments and Custom Metrology.
* THE MEASURING SYSTEMS GROUP, which accounted for approximately 69% of
the Company's net sales in 1996, manufactures and markets a wide range
of manual and computer-controlled, high precision CMMs including "in-
process" measuring systems under the Brown & Sharpe, DEA, and Leitz,
brand names. The Company believes it is the worldwide market leader for
CMMs as measured by net sales and installed base. The Company believes
it has an installed base of over 18,000 CMMs worldwide.
* THE PRECISION MEASURING INSTRUMENTS DIVISION, which accounted for
approximately 28% of the Company's net sales in 1996, manufactures a
wide range of mechanical and electronic measuring and inspection tools
(including height gauges, calipers, dial indicators, micrometers and
gauge blocks) which are marketed under the Brown & Sharpe, Tesa, Etalon,
Interapid, Standard Gage, Select Gauge, Mauser, Mercer and Roch brand
names through more than 450 distributors and catalog houses worldwide.
* THE CUSTOM METROLOGY DIVISION designs and engineers, under the Tesa
brand name, specialty products and systems that provide customized
solutions for unique measurement or inspection problems primarily
utilizing non-contact technology. Technologies and custom applications
developed by the CM Division with customer funding have been directly
applied to the design of standard products or systems distributed by the
MS Group or the PMI Division.
Repositioning Initiatives
-------------------------
Over the past several years, the Company has undertaken a series of
divestitures, acquisitions and other strategic initiatives which have
repositioned the Company from its historical origins as a machine tool
manufacturer into a leader in the field of metrology. These repositioning
initiatives included:
* Divestiture of Non-Core Operations. The divestiture of non-strategic
operations, including the machine tool, pump and hydraulics businesses,
which enabled the Company to focus on its core metrology technologies
and market distribution strengths.
* Strategic Metrology Acquisitions. Strategic acquisitions which enabled
the Company to increase greatly the breadth of its metrology product
offering and the strength of its distribution system. These
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acquisitions included the 1994 acquisitions of DEA, Roch and certain
intellectual property and assets of Metronic Ltd.
* Rationalization and Consolidation of Operations. Lowering the Company's
overhead cost structure by reducing duplicative functions and associated
headcount and by consolidating and rationalizing the Company's
manufacturing facilities and operations, which enabled the Company to
increase productivity and efficiency.
Business Strategy
-----------------
The Company is implementing its strategy based on the following elements:
* Continue Cost Improvements. The Company intends to continue to
implement measures designed to reduce its product costs through: (i)
standardizing product designs worldwide; (ii) increasing the cost-
effectiveness of product designs; (iii) outsourcing components and
products; (iv) increasing supplier partnering; and (v) focusing on core
manufacturing processes. The Company also intends to streamline its
sales, marketing and general and administrative processes in an effort
to reduce selling, general and administrative expenses as a percentage
of sales.
* Develop New Products and End User Markets. The Company's goal is to
increase net sales by expanding penetration of served industrial end
user markets and by capitalizing on high growth end user markets such as
the electronics, computer and medical industries where metrology needs
are growing rapidly. To expand in these high growth industries, the
Company intends to focus on development of software and emerging non-
contact metrology technologies through continued internal development
and through strategic acquisitions and technical partnerships (such as
the acquisition of certain intellectual property and assets of Metronic
Ltd. and the ASI joint venture). To expand its penetration of served
industrial end user markets, the Company expects to continue the
introduction of new metrology systems utilizing both contact and non-
contact technologies, and to develop sensors and other sophisticated
products that can be imbedded in a variety of manufacturing processes.
The Company plans to form technical and commercial alliances with
manufacturers of process equipment to provide enhanced combined
manufacturing systems utilizing the Company's sensors and other
products.
* Enhance Existing and Develop New Software. The Company intends to
emphasize research and development of software systems and applications
designed to meet the evolving metrology needs of its end users. To that
end, the Company intends to leverage off its software development team
of software and applications engineers and technicians (including
engineers of ASI) in the following four areas: (i) metrology software
for inspection and verification of piece-part integrity and conformance
to design specifications; (ii) process control software designed to
detect and correct drifts in part tolerances before the manufacturing
process produces scrap or improperly configured components; (iii)
enhanced management information systems that report statistical and
quality information from the manufacturing process; and (iv) new
software that will link the Company's CMMs and, therefore, the
manufacturing process with computer-aided engineering and manufacturing
systems that will provide the means for real-time feedback, analysis
and, ultimately, control of manufacturing to design specifications. The
Company believes that its existing library of metrology software,
together with newly developed software, should enable it to respond to
the growing demand in manufacturing for on-line inspection and
verification. The Company also believes that its experience with CMM
software and manufacturing processes are critical to the successful
development of software that is linked with computer aided engineering
systems.
* Leverage Worldwide Distribution Capability. Through the acquisitions of
DEA and Roch, Brown & Sharpe has expanded its product lines and
strengthened its marketing and distribution capabilities in Europe,
South America, the Middle East, India and China. The Company plans to
continue to strengthen and expand its worldwide distribution capability,
principally by continuing to rationalize its existing distribution
network and by opening new demonstration centers and adding direct sales
capacity and distributors where cost effective. The Company also
intends to capitalize on the strength of its
Page 4
global distribution network by increasing the number of Company-designed
and third-party sourced products sold through its distribution channels
in an effort to increase gross profit without a corresponding increase
in selling, general and administrative expenses.
* Increase Aftermarket Sales and Services. The Company intends to
increase its focus on higher margin aftermarket sales and services,
including calibration and rebuilding of CMMs, software upgrades, and
parts sales. The Company believes that the worldwide installed base of
CMMs, estimated at over 60,000 (including 18,000 of the Company's CMMs),
creates a significant demand for such aftermarket services.
The Company believes that the level of customer service it provides, as
measured by third-party surveys of its customers, is superior to that of its
principal competitors, and expects to further strengthen its customer
relationships through enhanced aftermarket support and increased partnering
efforts. The Company's net sales attributable to aftermarket sales and
service in 1996 were estimated to be approximately 25% of MS Group net sales
for the same period.
Metrology Industry
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GENERAL
Metrology products and systems range from hand tools for simple measuring
tasks to complex integrated systems of hardware and software that can measure,
digitize, inspect and verify manufactured parts and components to exacting
specifications. Manufacturers depend upon metrology hardware and software
products to monitor consistent product conformance to their exacting
specifications, thereby improving the reliability, fit and finish of their
products. In addition to these quality and performance benefits, metrology
products help manufacturers lower costs by reducing errors, scrap, rework and
warranty expense, improving the manufacturing process, lowering throughput
time, increasing capacity and reducing work-in-progress inventories. In recent
years, manufacturers have accelerated the integration of quality control
functions directly into the production process by incorporating the use of
metrology products on the factory floor. In addition, manufacturers are
demanding more precise, capable and flexible metrology systems as their
products become smaller, more complex and/or must meet more stringent quality
and safety standards. Their exacting product specifications often require
measurement to an accuracy of less than one micron (one millionth of a meter
or approximately 1/100th of the thickness of a human hair) or, in some special
cases, measurement of nanometers (one billionth of a meter or the unit of
measurement for the wavelength of light). Increasingly, metrology systems
must incorporate a mix of traditional contact and newer non-contact
technologies because of reduced part sizes and the great diversity of new
materials used in manufactured products. Metrology systems are purchased by
customers regardless of their need for additional production capacity because
of ever-increasing quality requirements and the need to reduce product costs.
Metrology products serve a broad range of measurement requirements. The
simplest metrology products include devices such as calipers, dial gauges,
micrometers, surface plates and height gauges. These are generally
inexpensive hand-held tools that measure in one dimension to within an
accuracy of between two (80 millionths of an inch) and 25 microns (1/100th of
an inch). Fixed gauges are often more expensive devices that inspect and
verify in one to three dimensions to within an accuracy of between one and 25
microns and are typically used where manufacturers need to measure a single,
uniform product at a high rate of speed. Fixed gauges tend to make simple,
comparative measurements of products in a manufacturing process. CMMs are
more sophisticated, complex machines that use a variety of technologies to
measure in three dimensions to an accuracy of between 0.5 and 100 microns.
These technologies range from advanced probes that physically "contact" the
product being measured to highly sophisticated non-contact vision, optical,
laser and scanning probes that collect precise data without touching the
product being measured. While some CMMs are manually operated, most are now
controlled by software systems that not only compare the product to a
manufacturer's CAD/CAM models, but also provide the manufacturer with
dimensions of the product to be converted into the CAD/CAM model. CMMs are
highly flexible machines that can measure different products for a
manufacturer without re-tooling or other significant changes as opposed to
fixed gauges that may require expensive and time-consuming retooling. The
price points of metrology products range from $100 for a caliper to over $1.5
million for a sophisticated CMM such as those used to measure car and truck
bodies.
Page 5
MARKETS
Participants in the metrology industry generally compete in one or more of six
broad product areas: (i) simple and relatively inexpensive tools that measure
in one dimension, such as calipers, dial gauges, micrometers, surface plates
and transfer gauges; (ii) digital electronic height gauges of varying
accuracies and sizes; (iii) sophisticated special purpose metrology systems
including fixed gauges; (iv) general purpose and application-specific CMMs;
(v) alternative technologies such as vision tunnels or surface finish and
geometry measurement; and (vi) customized metrology solutions to specific
metrology problems. The Company competes in all of the foregoing product
areas other than fixed gauges and most of the alternative technologies.
Sales of simple metrology products and less sophisticated height gauges are
driven by price, brand, product innovation, ease of purchase and effectiveness
of distribution. Products in this category are generally hand-held or
relatively small devices that permit a manufacturer to make measurements in
one or occasionally two dimensions. These products are generally inexpensive,
providing a cost-effective solution to simple metrology problems where the
industrial customer does not need the increased capabilities of fixed gauges,
CMMs or certain other sophisticated metrology systems. However, simple
metrology products are generally limited in terms of accuracy, flexibility
and/or their ability to collect data. Further, they are dependent upon
skilled operators. The market for simple metrology products is fragmented,
with many regional suppliers. End user markets for these products include
most basic industries, including the automotive, construction, industrial
machinery, appliance and farm equipment industries.
Sales of fixed gauges have traditionally been driven by manufacturers' needs
for one, two or three dimensional metrology on the factory floor. Products in
this category, typically more expensive than simple metrology products,
compete directly with CMMs regarding inspection and verification of
manufactured parts. Fixed gauge systems are frequently a more expensive
investment than comparable CMM systems, but for the specific purpose intended,
may be less expensive over the long run. Fixed gauges can range from simple
one dimensional tools to semi- and fully-automatic three dimensional factory
floor systems that quickly compare production parts to "master parts."
However, because these gauge systems are "fixed," they are inherently
inflexible. The fixed gauge must be reworked or a new gauge designed and
built every time manufacturers make dimensional changes in the part being
measured. The trend of the industry is away from fixed gauges and toward
flexible gauges because of the need to make costly changes to fixed gauges
when the part they measure changes.
Sales of CMMs and more sophisticated height gauges are driven by
manufacturers' needs for high accuracy, flexibility, speed and information.
Products in this category, while typically more expensive than simple
metrology products and some fixed gauges, are generally more versatile
machines that can measure, digitize, inspect and verify diverse manufactured
parts. The accelerating use of more sophisticated software has played an
important role in the evolution of CMMs in response to the marketplace.
Improved software and linkage to CAD/CAM and network technologies enable CMMs
both to compensate automatically for the position of the piece to be measured,
eliminating the need for the time consuming manual positioning necessary with
less advanced metrology products, such as surface plate gauges, and also to
relay information to the manufacturer's CAD/CAM model to facilitate production
process adjustments. Although CMM-type software can be added to on-machine
gauging and a small percentage of fixed gauges, CMMs are easier to use, more
flexible, and generally provide more analytical information than most products
using competing technologies. Presently, CMMs are installed at sites ranging
from highly controlled laboratory sites to hostile, factory floor industrial
settings, and can measure objects ranging in size from a semiconductor chip to
an aircraft exterior, and can provide accuracies with tolerances of 0.5 to 100
microns. CMMs can achieve this through contact or non-contact probing
methods, depending upon the manufacturer's needs. The market for CMMs is
dominated by five competitors, including the Company.
Sales of customized metrology products are driven by specific needs in
specific industries and, in Brown & Sharpe's case, tend to focus on emerging
metrology technologies. Generally, custom metrology challenges arise where
existing metrology products and systems cannot adequately address a narrow yet
important manufacturing task. This product category requires research,
development and innovation and often includes the development of new
applications for optical, laser and scanning sensor probes.
Page 6
MS Group
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The MS Group, the largest of Brown & Sharpe's three units, accounted for
approximately 69% of Brown & Sharpe's net sales in 1996. The MS Group is
headquartered in North Kingstown, Rhode Island and manufactures and markets
CMMs. MS Group products sold under the Brown & Sharpe name are manufactured
at the Company's North Kingstown facility, MS Group products sold under the
DEA name are manufactured in Turin, Italy, and MS Group products sold under
the Leitz name are manufactured in Wetzlar, Germany. The primary end user
markets for the Company's CMM products include the automotive (including
automotive suppliers), heavy transport, aerospace, electronics, computer,
industrial machinery and medical industries.
MS Group products range from small, manually operated CMMs to large, high
speed, high precision automatic CMMs. In addition to these standard and
custom-configured CMMs, Brown & Sharpe also produces and sells high-speed
process control systems. The smallest machines can measure in a volume up to
16x14x12 inches and are priced at approximately $10 thousand, while the
larger, high speed, high accuracy CMMs with integrated software systems can
cost over $1.5 million. The MS Group also provides laser scanning and
optically based measuring machinery from microscopes to vision systems.
The Company believes that its "user-friendly" CMM application software gives
it a competitive advantage in the marketplace for CMMs. These proprietary
software products provide the MS Group's customers with an understandable,
icon-based inspection analysis capability, graphical user interfaces and
outputs, and the capability to network with manufacturing systems. The MS
Group also provides its customers with special software and systems that
integrate the MS Group's products with the customer's host information and
communications network. In addition to sales of CMMs, the MS Group provides
aftermarket sales and service, including calibration and rebuilding of CMMs,
software upgrades and parts sales, for Brown & Sharpe CMMs and competing CMMs.
The Company's net sales attributable to aftermarket sales and services in 1996
were estimated to be approximately 25% of MS Group net sales for the same
period.
PMI Division
------------
The principal products of Brown & Sharpe's PMI Division are precision
measuring tools and related instruments such as micrometers, dial indicators,
calipers, electronic height gauges and gauge blocks. PMI Division products
accounted for approximately 28% of Brown & Sharpe's net sales in 1996. The
PMI Division's products have broader applications and lower unit list prices
(with a range of $100 to approximately $13 thousand) than the prices of the MS
Group's products. These tools and instruments typically measure in one or two
dimensions, and are often used in comparative measuring where an unknown part
or dimension is compared to a previously measured part or dimension. Some PMI
Division products also include systems and application software for measuring
and statistical process control. The Company believes that the primary end
user markets for the products of Brown & Sharpe's PMI Division are the
automotive, aerospace, metal processing and defense industries, although Brown
& Sharpe's PMI Division products are used in virtually all types of industrial
settings. Brown & Sharpe's PMI Division is headquartered in Renens,
Switzerland, and its products are manufactured at its plants in Rolle and
Renens, Switzerland; Poughkeepsie, New York; Leicester, St. Albans, and
Plymouth, England; and Luneville, France. The Company also purchases
components and products from third parties located in various countries.
CM Division
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The CM Division is an engineering division headquartered in Telford, England.
The CM Division designs and engineers specialty products primarily utilizing
non-contact technologies and systems to provide customized solutions for
unique customer measurement or inspection problems generally with customer
funding. Recent examples of CM Division products include a system for
measuring the thickness and shape of the metal top of a beverage can and the
depth and contour of the groove scored around the can's pop-up tab, so that
the manufacturer could ensure the consistency with which the can could be
opened without rupture by the end user, and an automatic multi-sensor (laser
scanning, laser ranging, optical and tactile) system to measure, inspect and
verify the ceramic substrates on which semiconductors are placed. The CM
Division also manufactures laser interferometers, measuring sensors and
factory networks, contact and optical measuring machines and fixtures
Page 7
aimed at specific niche markets. Prices for CM Division products range from
approximately $20 thousand to $1.0 million.
The primary end user markets for the custom-designed products of the CM
Division are package and can manufacturing, oil drilling, standards
laboratories, semiconductors, aerospace and defense. Sales of these products
typically involve a close, highly technical relationship with the customer.
This direct relationship with the customer is reinforced by strong and
continuing efforts to provide superior customer service through ongoing
customer training and technical support.
The Company believes that the CM Division provides it with cost-effective
access to emerging applications and technologies as the technologies and
custom applications developed by the CM Division with customer funding have
been directly applied to the design of standard products or systems
distributed by the MS Group or the PMI Division.
Sales and Distribution
----------------------
The MS Group distributes its products primarily through a 120-person worldwide
sales force directly to U.S. and European customers, and utilizes a network of
independent agents and distributors to cover the Pacific Rim, South American
and African markets. The typical MS Group sales process involves lengthy,
technical, one-on-one discussions between the salesperson or the
distributor/sales agent and customer and is often part of a competitive bid
process. As an important part of its marketing and distribution strategy,
Brown & Sharpe provides in-depth training to its customers at 31 support and
demonstration centers located throughout the United States, Europe and Asia.
The Company's direct sales force also provides the Company with important
opportunities to cross-sell the products of its PMI and CM Divisions.
In contrast to the MS Group, the PMI Division generally distributes its
products through international import companies, regional distributors and
catalog houses throughout the world. As of December 31, 1996, the PMI
Division utilized in excess of 450 distributors located in over 60 countries
to market its products. The Company believes that the PMI Division's
established distribution network provides it with a competitive advantage and
intends to capitalize on this network to increase sales of internally
developed and third-party products.
The CM Division primarily designs and manufactures products and services in
response to specific customer inquiries. The CM Division maintains a staff of
approximately 15 sales/project engineers to respond to customer inquiries,
and, upon receipt of an order, to develop tailored solutions and manage
projects to completion. The CM Division typically targets sales to end user
markets with a small number of participants in which the Company has little or
no competition. As a result, the Company believes that the CM Division
benefits from comparatively lower selling expenses.
The Company has no single customer which accounts for 10% or more of its
consolidated net sales; however, several well recognized major automotive
manufacturers (without regard to their suppliers) account for a significant
portion of the Company's net sales. The loss of a few of these major
manufacturers would have a substantial effect upon the Company.
Engineering and Product Development
-----------------------------------
Brown & Sharpe's commercial success is dependent upon its ability to develop
products, enhancements, and applications that meet changing customer metrology
needs and anticipate and respond to technological changes. Brown & Sharpe
designs, develops and refines its products internally through engineering
departments within its product groups and divisions. Brown & Sharpe employs
approximately 445 engineers and technicians in its design engineering
activities. ASI employs 50 software engineers. The development activities of
ASI are devoted to the creation and development of CMM-related metrology
software solutions. Together Brown & Sharpe and ASI employ 495 engineers and
technicians of which 320, or approximately 65%, are directly involved with
software, firmware, or applications development efforts that are core to Brown
& Sharpe's strategy. When it is more cost-effective to do so, Brown & Sharpe
purchases product designs or portions of product designs from engineering
subcontractors or acquires rights to such designs through licensing
arrangements. Brown & Sharpe also benefits from research and development
efforts which are subsidized by customer funds and, in certain
Page 8
countries, by government research grants. Brown & Sharpe research, development
and manufacturing engineering activities are conducted in the United States,
Italy, France, Switzerland, Germany, the United Kingdom and Lithuania.
Brown & Sharpe derived substantial net sales in 1996 from the sale of products
that it introduced after 1993. Brown & Sharpe has introduced at least one
major new product every year since 1987. The Company's current design and
engineering focus is the continued integration of the DEA and Roch
technologies with Brown & Sharpe's previously existing technologies, software
development and non-contact metrology products. In 1996, Brown & Sharpe
invested $13.9 million, or 4.0% of its net sales during that period in product
design and manufacturing engineering. In 1994 and 1995, Brown & Sharpe
expended $9.2 million and $15.8 million, respectively, for product design,
development, refinement and manufacturing engineering. The increase from $9.2
million in 1994 to $15.8 million in 1995 was due to the inclusion of DEA for
all of 1995.
Foreign Operations
------------------
Brown & Sharpe manufactures and sells substantial amounts of its metrology
products in foreign countries. As of December 31, 1996, approximately 69%
(based on book values) of the Company's assets, 61% of the Company's net sales
(based on customer location) and 73% of its employees were located outside the
United States. The Company's manufacturing operations are located in Italy,
Switzerland, Germany, England and France, as well as in the United States, and
Brown & Sharpe's products are sold in over 60 countries worldwide. The
Company's cost of sales for products manufactured and assembled in certain
foreign locations has been adversely impacted, as compared with some of its
competitors, by the appreciation of the respective local currencies of such
locations relative to the U.S. dollar. Nevertheless, the Company believes
that the geographic diversity of its end user markets helps to mitigate the
adverse effects of the cyclicality of the metrology industry, as an economic
downturn in any of the Company's geographic end user markets may be offset by
relatively healthy conditions in others.
Raw Materials and Sources of Supply
-----------------------------------
Brown & Sharpe purchases raw materials, supplies and other components from a
variety of suppliers, and considers its sources of supply to be adequate. At
times, the Company depends upon various sole sources of supply for certain
components used by the Company (generally of items designed by Brown &
Sharpe), but has not experienced any significant difficulty in meeting
delivery obligations because of its reliance on such a supplier. In addition,
the Company currently purchases substantially all of its externally sourced
low to medium accuracy electronic touch trigger sensor probes and heads from a
publicly held United Kingdom company which is the dominant supplier of such
sensor probes to CMM manufacturers. No alternative supplier for this class of
electronic sensor probes, which are a key component of substantially all of
the Company's lower accuracy CMMs, is currently available and developing an
alternative source for the probes and heads could take more than a year.
Brown & Sharpe continues to explore means of lowering production costs through
selective outsourcing in situations where Brown & Sharpe can achieve its high
quality standards via subcontractors. The Company has established a corporate
function to direct its world-wide efforts to standardize product designs
throughout its operations and coordinate and direct its outsourcing efforts.
Patents, Licenses, Trademarks, and Proprietary Information
----------------------------------------------------------
The Company's business is not significantly affected by or dependent upon the
procurement or maintenance of patents covering the Company's products.
Nevertheless, the Company pursues, where appropriate, patent protection for
inventions, developments and improvements relating to its products both in the
United States and abroad. In addition, the Company relies on a combination of
copyrights, trade secret law and contracts to protect its proprietary
information (principally related to its software and software development).
Despite these precautions, it may be possible to copy or otherwise obtain and
use the Company's proprietary information without authorization. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries.
Brown & Sharpe and its subsidiaries own, or have the right to use, a number of
trademarks which they believe are valuable in promoting the sale of certain of
their principal products. The Company and its subsidiaries have
Page 9
registered, or have applied to register, the trademarks owned by them in the
United States and in some foreign countries. In addition, the Company uses the
Leitz and Mauser brand names under royalty-free license agreements entered
into in connection with the Company's acquisition of these product lines.
These licenses expire in 1997 and 1999, respectively. The Company believes it
will be able to negotiate satisfactory extensions of these licenses prior to
their expiration and/or that the failure to renew these licenses would not
have a material adverse effect on the Company.
Environmental Matters
---------------------
The Company is not significantly affected by compliance with rules and
regulations promulgated under environmental laws since its manufacturing
processes do not produce, as a by-product, material amounts of waste, water
discharges or air emissions deemed hazardous under such laws. However, the
Company is subject from time to time to environmental claims. See Note 8,
"Contingencies" of Notes to Consolidated Financial Statements in Item 8 of
this Annual Report.
Employees
---------
At December 31, 1996, Brown & Sharpe had 2,383 employees, (as compared with
2,392 at December 31, 1995), including approximately 1,748 employees located
outside the United States. Brown & Sharpe considers its relations with its
employees to be good, although there can be no assurance that Brown & Sharpe's
cost-cutting efforts or other factors will not cause a deterioration in these
relations.
Approximately 901 of Brown & Sharpe's employees located at sites in the United
States, Italy, Switzerland, England, Germany, and France are covered by
collective bargaining agreements which expire at various times between
December 31, 1997 and June 30, 1998. Brown & Sharpe expects that these
collective bargaining agreements will be renegotiated successfully prior to
their expiration. However, there can be no assurance that successor
collective bargaining agreements will be successfully negotiated, that
negotiations will not result in work stoppages, or that a work stoppage would
not materially interfere with Brown & Sharpe's ability to produce the products
manufactured at the affected location.
In addition to the collective bargaining agreements that cover workers at
certain of Brown & Sharpe's foreign subsidiaries, it is customary for these
employees to be represented by various works or shop councils. These councils
are governed by applicable labor laws and are comprised of members who are
elected or appointed by the work force. Except for the top level of
management, these councils represent the entire work force at their location
in its dealings with senior management on matters affecting the work force or
arising under the relevant labor contracts in effect at the location.
A collective bargaining agreement with the International Association of
Machinists and Aerospace Workers (the "IAM") relating to certain manufacturing
employees in North Kingstown, Rhode Island expired in October 1981. Brown &
Sharpe and the IAM failed to reach agreement on the terms of a successor
collective bargaining agreement, resulting in a strike by the IAM. See Item 3
"Legal Proceedings" in this Report. No successor collective bargaining
agreement was entered into, although the IAM remains the representative of the
bargaining unit. Brown & Sharpe continues to satisfy its obligation to
bargain with respect to, proposed changes to the terms and conditions of
employment, although no collective bargaining has occurred in recent years,
and although the manufacturing employees represented by the IAM remain
technically on strike, no work stoppage or picket activity has occurred since
1985 and management does not anticipate that any such activities will occur in
the future. Following the strike in 1981, and the impasse reached in
negotiations, Brown & Sharpe hired new employees to replace striking
employees. Since that time, many of the striking employees have been rehired
by Brown & Sharpe, but such employees are not working under an IAM contract.
The continuing strike by the IAM does not have a material adverse effect on
the operations of Brown & Sharpe. See Note 8, "Contingencies" of Notes to
Consolidated Financial Statements in Item 8 of this Annual Report.
Page 10
The following table sets forth the location of Brown & Sharpe's employees as
of December 31, 1996:
COUNTRY EMPLOYEES (1)
------- -------------
France........................... 216
Germany.......................... 275
Italy............................ 462
Japan............................ 26
Spain............................ 18
Switzerland...................... 331
United Kingdom................... 420
United States.................... 635
-----
TOTAL............................ 2,383
=====
- ---------------
(1) Part-time employees are included on a full-time equivalent basis.
Competition
-----------
The Company's MS Group currently has four principal direct domestic and
foreign competitors, some of which are owned by entities that have greater
financial and other resources than the Company. The MS Group also faces
indirect competition from other types of metrology firms such as manufacturers
of fixed gauging systems. The primary industries to which the MS Group sells
its products are characterized by a relatively small number of large
participants with significant purchasing power. In addition, the MS Group
generally sells its products through a competitive bid process in which at
least one and frequently several of the Company's competitors have submitted
competing bids. As a result, the Company experiences severe pricing
competition in connection with sales by its MS Group which can have an adverse
impact on the Company's net sales and margins. During periods when the
metrology industry suffers from overcapacity, downward pricing pressure
experienced by the MS Group is likely to be more intense and the Company's
margins may be more severely impacted. In addition, certain of the Company's
competitors that have access to greater financial resources may be able to
withstand such pricing pressure more effectively than the Company. The MS
Group competes with Mitutoyo/MTI Corp., a subsidiary of Mitutoyo Solsakusho
Co. Ltd., a Japan-based company, which is the largest supplier of metrology
equipment and products worldwide. In addition to Mitutoyo, the MS Group's
main competitors are Carl Zeiss, Inc., a subsidiary of Carl Zeiss-Stiftung AG,
the Sheffield Measurement Division of Giddings & Lewis, Inc., and LK Tool Co.
Ltd., a subsidiary of TransTech Ltd.
The market for the PMI Division's products is fragmented and the PMI Division
competes with a large number of competitors, including the market leader in
this area, primarily on the basis of the strength of its third party
distribution network, price and product innovation. New competitors from
emerging industrialized countries with lower cost products than the Company's
represent a significant competitive challenge to the Company. As a result,
the PMI Division's continued success and profitability will be dependent on
its ability to continue to develop cost-effective and innovative products.
The primary competitors of the PMI Division are Mitutoyo, L.S. Starrett Co.
and Federal Products Co. (Inc.), a subsidiary of Esterline Technologies
Corporation.
To date, the CM Division has sold its custom solutions to markets in which
there is little or no effective competition in custom metrology systems.
However, in certain niche markets where the Company does not generally sell,
Marposs S.p.A., an Italian company, provides custom metrology products.
Backlog
-------
The Company's backlog of product orders was approximately $51 million at year-
end 1996, compared to approximately $59 million and $61 million at year-end
1995 and 1994, respectively.
All of the orders included in the Company's year-end 1996 backlog were
requested to be filled and completed within one year and are, subject to
possible customer cancellation, expected to be completed in 1997.
Page 11
Significant Customers
---------------------
The Company has no single customer which accounts for 10% or more of its
consolidated net sales; however, several well recognized major automotive
manufacturers (excluding their suppliers) account for a significant portion of
the Company's net sales. The loss of a few of these major manufacturers would
have a substantial effect upon the Company.
Working Capital
---------------
A substantial amount of working capital investment in inventory and accounts
receivable is required to operate the Company's businesses. Working capital
was approximately $108 million at year-end 1996 compared to approximately $76
million at year-end 1995. See the discussion of working capital in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Annual Report.
Segment Information
-------------------
(Dollars in thousands)
The Company operates exclusively in the Metrology Business. See Note 1 for a
further description of the Company's business. Sales to unaffiliated
customers from Europe are defined as sales of products that are primarily
assembled in a foreign country.
1996 1995 1994
---- ---- ----
GEOGRAPHIC AREA:
Sales to Unaffiliated Customers From:
United States $132,956 $128,482 $ 93,061
Europe 211,921 199,549 116,308
-------- -------- --------
$344,877 $328,031 $209,369
======== ======== ========
Transfers Between Geographic Areas:
From United States $ 8,066 $ 3,870 $ 3,144
From Europe 34,630 33,713 19,288
-------- -------- --------
$ 42,696 $ 37,583 $ 22,432
======== ======== ========
Operating Profit (Loss):
United States $ 5,237 $ 492 $ 1,303
Europe 11,351 10,572 (7,352)
-------- -------- --------
$ 16,588 $ 11,064 $ (6,049)
======== ======== ========
Identifiable Assets:
United States $ 78,374 $ 77,726
Europe 215,916 211,412
Corporate 20,158 6,262
-------- --------
$314,448 $295,400
======== ========
ITEM 2 - PROPERTIES
- ---------------------------
The following table sets forth certain information concerning Brown & Sharpe's
major operating facilities:
OWNED/ APPROXIMATE
LOCATION LEASED PRINCIPAL USE SQUARE FOOTAGE
-------- ------ ------------- --------------
UNITED STATES
N. Kingstown, Rhode Island Owned Manufacturing, Engineering, Sales, and Administration 343,000 (1)
Poughkeepsie, New York Owned Manufacturing 58,000
Wixom, Michigan Leased Sales and Administration 37,600
Page 12
OWNED/ APPROXIMATE
LOCATION LEASED PRINCIPAL USE SQUARE FOOTAGE
-------- ------ ------------- --------------
ITALY
Moncalieri Leased Engineering, Sales, and Administration 260,000 (2)
Grugliasco Leased Assembly 105,000 (3)
Moncalieri Leased Manufacturing 70,000 (3)
SWITZERLAND
Renens Owned Manufacturing, Engineering, Sales, and Administration 139,000
Rolle Owned Manufacturing 51,000
GERMANY
Wetzlar Owned Manufacturing, Engineering, Sales, and Administration 280,000
Ludwigsburg Leased Sales 15,000 (3)
UNITED KINGDOM
St. Albans Owned Manufacturing and Sales 36,000
Telford Leased Manufacturing, Engineering, Sales, and Administration 32,000
Leicester Owned Manufacturing 14,000
Swindon Leased Sales 5,200 (3)
Torpoint Leased Manufacturing, Sales, and Administration 5,000 (3)
FRANCE
Luneville Leased Manufacturing, Engineering, and Sales 77,100 (3)
Villebon Leased Sales 18,000 (3)
SPAIN
Barcelona Leased Sales 16,000 (3)
(1) Excludes approximately 417,000 square feet leased to unrelated parties.
(2) The Company expects to vacate these premises in the first quarter of 1997
in connection with the consolidation of its Grugliasco and Moncalieri
operations, which will include approximately 1,700 square feet of
additional leased space at Grugliasco.
(3) The leases in Grugliasco, Moncalieri, Ludwigsburg, Swindon, Torpoint,
Luneville, Villebon and Barcelona expire on December 31, 2002, December
31, 1997, September 30, 2003, September 28, 1997, August 18, 2001, March
23, 2003, October 20, 2001, and January 4, 1998, respectively.
In addition, Brown & Sharpe leases smaller sales offices located in the United
States, Europe, and Asia. In the opinion of management, Brown & Sharpe's
properties are in good condition and adequate for Brown & Sharpe's business as
presently conducted.
ITEM 3 - LEGAL PROCEEDINGS
--------------------------
Other Environmental Matters
----------------------------
The nature of the Company's current operations are not significantly affected
by environmental laws, rules and regulations. However, because the Company
and its subsidiaries and predecessors have conducted heavy manufacturing
operations in the past, sometimes at facilities which have been divested or
sold and often in locations at which or adjacent to which, other industrial
operations were conducted, from time to time the Company is subject to
environmental claims. As with any such operations that involve the use,
generation, and management of hazardous materials, it is possible that
practices, including practices that were deemed acceptable by regulatory
authorities in the past, may have created conditions which could give rise to
liability under current or future environmental laws. Because the law in this
area is developing rapidly, including in many
Page 13
European countries, and such environmental laws are subject to amendment and
widely varying degrees of enforcement, the Company may be subject to, and
cannot predict with any certainty the nature and amount of, potential
environmental liability related to these operations or locations that it may
face in the future.
Litigation
----------
Refer to Note 8 "Contingencies" of Notes to Consolidated Financial Statements
in Item 8 of this Annual Report.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
There were no matters submitted to a vote of the security holders during the
quarter ended December 31, 1996.
ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
----------------------------------------------
The following table summarizes information regarding Executive Officers of the
Company as of March 12, 1997:
Name Age Positions Held During the Last Five Years
---- --- -----------------------------------------
Frank T. Curtin 62 President & Chief Executive Officer and a
Director of the Company since May 2, 1995; from
1992 to May 1995, Vice President, National Center
for Manufacturing Sciences, a research and
development organization, Ann Arbor, MI; from
1989 to May 1995, President, Curtin & Associates,
a software development company, Santa Barbara, CA
and Ann Arbor, MI.
Charles A. Junkunc 54 Vice President & Chief Financial Officer since
May 1, 1992; previously self-employed consultant
since November 1990.
Antonio Aparicio 46 Vice President & General Manager - Precision
Measuring Instruments since September 1991;
previously Marketing Director - Precision
Measuring Instruments.
Marcus Burton 38 Vice President & General Manager - Custom
Metrology Division since January 1997; previously
Director of Strategic Planning - Brown & Sharpe
Manufacturing Co. since July 1995; Managing
Director - Thomas Mercer Ltd. (a subsidiary)
since June 1992; Special Projects Manager -
Thomas Mercer Ltd. since October 1990.
Robert D. Batting 55 Vice President & General Manager - Measuring
Systems U.S.A. since October 1995; previously
President, Clearing-Niagra Inc. since October
1993; Business Consultant - self-employed since
September 1991; Group Vice President, Textron
Inc. prior to September 1991.
Sergio Cappa 49 Vice President & General Manager - DEA-Brown &
Sharpe - S.p.A. since January 1997; previously
Managing Director, DEA, since May 1995. From
1992, Mr. Cappa was a general manager with the
Hurth Group, and from 1989 to 1992, he was a
general manager with the SIV Group, both German
industrial companies.
John Cooke 60 Vice President & Chief Technical Officer since
January 1997; previously Vice President & General
Manager - Custom Metrology since 1992.
Edward J. LaGraize 53 Vice President & General Manager - Commercial
Operations, Measuring Systems since August 1996;
previously President of Linotype-Hell, Co., the
U.S. subsidiary of Linotype-Hell AG, a
manufacturer of systems for the commercial
printing industry, since April 1994. From June
1991, he served as executive Vice President of
Gerber Scientific Inc., a manufacturer of
computer-aided design and manufacturing systems.
Page 14
Karl J. Lenz 51 Vice President since September 1991; General
Manager - Leitz-Brown & Sharpe Messtechnik GmbH
since June 1990; previously General Manager -
Messtechnik Division of Leica
Industrieverwaltung.
James W. Cooper 51 Vice President - Procurement since August 1996;
previously Vice President - Purchasing of Delco
Remy America, an automotive supplier, since March
1995. From 1981 to March 1995, Mr. Cooper was
Vice President - Materials Management of Simpson
Industries, an automotive supplier.
Christopher J. Garcia 40 Vice President - Marketing since November 1996;
previously Vice President - Business Development
since January 1991; Vice President - Research and
Development Valisys Corporation since June 1994;
previously Vice President - Marketing Valisys
Corporation since June 1990.
Alfred J. Corso 60 Controller and Principal Accounting Officer since
June 1, 1995; previously Partner with Ernst &
Young LLP.
To the best of the knowledge of the Registrant, none of the Executive Officers
has any family relationships with any of the others. Each Executive Officer
holds office until the first meeting of the Board of Directors following the
next Annual Stockholders' meeting and until his successor is elected or
appointed and qualified, unless he dies, resigns, is removed or replaced.
PART II
-------
ITEM 5 - MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
---------------------------------------------------------------------------
HOLDER MATTERS
--------------
The Class A Common Stock is listed on the New York Stock Exchange with a
symbol "BNS". At March 12, 1997, the Company had approximately 1,154
shareowners of record of its Class A Common Stock and 916 shareowners of
record of its Class B Common Stock. The quarterly high and low closing prices
of the Class A Common Stock on the New York Stock Exchange were a high of
$15.63 and a low of $12.25 in 1997 through March 12 and were reported during
fiscal 1996 and 1995 as presented below. The Class B Common Stock is not
itself traded and is subject to restrictions to transfer. However, the Class
B Common Stock is convertible at all times into Class A Common Stock on a
share-for-share basis. A stockholder who does not wish to complete the prior
conversion process may effect a sale by simply delivering the certificate for
shares of Class B Stock to a broker, properly endorsed and the broker may then
present the certificate to the Company's Transfer Agent which, if the transfer
is otherwise in good order, will issue to the purchaser a certificate for the
number of shares of Class A Common Stock so sold.
Fiscal Year High Low
----------- ------ ------
1996
4th Quarter $15.38 $11.50
3rd Quarter 13.63 9.25
2nd Quarter 10.38 9.50
1st Quarter 10.13 8.63
1995
4th Quarter $11.88 $ 9.25
3rd Quarter 10.63 6.38
2nd Quarter 7.25 6.25
1st Quarter 7.50 5.63
No dividends have been paid by the Company since 1990. Dividend payments have
been suspended in order to conserve cash. Also, payment of dividends is
currently not permitted under an existing loan facility.
Page 15
ITEM 6 - SELECTED FINANCIAL DATA
--------------------------------
The following selected consolidated financial data should be reviewed in
conjunction with Part II, Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto in Item 8 of this Annual Report.
(dollars in thousands, except per share data,
number of shareowners, and employees) 1996 1995 1994 1993 1992
CONTINUING OPERATIONS FOR THE YEAR:
Net sales $344,877 $328,031 $209,369 $159,518 $162,524
Operating profit (loss) $ 16,588 $ 11,064 $ (6,049) $ 604 $ (8,532)
Percent 4.8% 3.4% (2.9)% 0.4% (5.2)%
Net income (loss) $ 7,805 $ 1,926 $(14,335) $ (2,416) $ (7,984)
Average shares outstanding and
common stock equivalents (thousands) 9,670 8,773 6,057 4,969 4,899
Per common share:
Primary $ 0.81 $ 0.22 $ (2.37) $ (0.49) $ (1.63)
Fully Diluted $ 0.78 $ 0.22 $ (2.37) $ (0.49) $ (1.63)
AT YEAR-END:
Backlog $ 51,000 $ 59,000 $ 61,000 $ 26,000 $ 30,000
Assets $314,448 $295,400 $272,274 $165,871 $166,086
Current ratio 1.93:1 1.59:1 1.95:1 1.73:1 1.81:1
Long-term debt $ 36,725 $ 56,839 $ 70,215 $ 32,696 $ 34,626
Total notes payable and long-term debt $ 69,206 $102,068 $ 92,613 $ 64,500 $ 60,700
Equity $140,400 $ 85,857 $ 78,925 $ 63,520 $ 66,674
Per share $ 10.63 $ 9.85 $ 9.12 $ 12.78 $ 13.43
Debt ratio .330 .543 .540 .504 .477
Shareowners of record 2,104 4,400 4,100 4,900 5,400
Employees 2,383 2,373 2,370 1,543 1,768
(1) In 1995, the Company changed its accounting period from a fiscal year
ending on the last Saturday in December to a calendar year ending on the
last day in December. All periods presented above contain 52 weeks,
except 1993, which contains 53 weeks. See Note 1 to Consolidated
Financial Statements for more information.
(2) The consolidated financial data for the periods from 1996 to 1994 include
the results of operations and year-end data of DEA and Roch acquisitions
discussed in Note 2 to Consolidated Financial Statements.
(3) Net income for 1995 includes a $640 adjustment relating to a revaluation
of a 1994 foreign denominated liability recorded at an incorrect foreign
exchange rate. See Note 1 to Consolidated Financial Statements for
further information.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
During 1995 and 1994, the Company undertook a number of divestitures and
acquisitions in its continuing effort to reposition itself from its historical
origins as a machine tool manufacturer to a leader in the field of metrology.
These initiatives included the acquisition in March 1994 of Roch, the
acquisition in September 1994 of DEA, the acquisition in December 1994 of
certain intellectual property and other assets of Metronic Ltd. and the
consolidation in 1994 and 1995 of the operations of DEA and Roch with the MS
Group and the PMI Division, respectively.
Page 16
Subsequent to the repositioning initiatives described above, the Company
commenced the realignment of its structure and culture towards a more focused
and integrated metrology business, with an emphasis on cost reduction and
profitability. Since recruiting its current President and Chief Executive
Officer in May 1995, the Company has recorded positive net income in each of
its fiscal quarters. The Company's ongoing operating strategy is intended to
further reduce product costs and, as part of this strategy, the Company
intends to standardize product designs worldwide, undertake more cost-
effective product designs, outsource components and products, increase
supplier partnering and focus on core manufacturing processes. The Company
also intends to streamline its sales, marketing and general and administrative
processes in an effort to further reduce selling, general and administrative
expenses as a percentage of net sales.
The Company currently operates entirely in the metrology industry through
three management units: the MS Group, which manufactures and markets manual
and computer-controlled, high precision CMMs and accounted for approximately
69% of the Company's net sales in 1996; the PMI Division, which manufactures
mechanical and electronic measuring and inspection tools and accounted for
approximately 28% of the Company's net sales in 1996; and the CM Division,
which designs and engineers specialty metrology products and systems primarily
utilizing non-contact technologies and accounted for less than 3% of the
Company's net sales in 1996. MS Group net sales include revenue from
aftermarket sales and service for CMMs which the Company estimates, during
1996, comprised approximately 25% of total MS Group net sales. Approximately
61% of the Company's net sales in 1996 were located outside the United States
(based on customer location).
FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward looking statements concerning the
Company's operations, economic performance and financial condition. Such
statements are subject to various risks and uncertainties, including those set
forth in "Risk Factors," and actual performance could differ materially from
that currently anticipated by the Company. In addition, this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Annual Report.
Set forth below are certain results of operations of the Company,
calculated as a percentage of net sales:
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- -----
Net sales..................................... 100.0% 100.0% 100.0%
Cost of goods sold............................ 65.1 64.3 65.5
----- ----- -----
Gross profit margin.......................... 34.9 35.7 34.5
Research and development...................... 3.1 3.3 2.7
Selling, general, and administrative expense.. 26.9 28.9 32.7
Restructuring charges......................... - 0.1 2.0
----- ----- -----
Operating profit (loss)...................... 4.9 3.4 (2.9)
Interest expense.............................. 2.4 2.8 3.1
Other income, net............................. 0.1 0.2 0.3
----- ----- -----
Income (Loss) before income taxes............ 2.6 0.8 (5.7)
Income tax provision.......................... 0.3 0.2 1.1
----- ----- -----
Net income (loss)............................ 2.3% 0.6% (6.8)%
===== ===== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased 5.2%, or $16.9 million, to $344.9 million
in 1996 from $328.0 million in 1995. Foreign currency exchange rate
fluctuations caused a decrease in net sales of $4.9 million during 1996 as
compared to an increase of $12.1 million in 1995. Excluding these foreign
currency effects, net sales for 1996 increased 6.6%, or $21.8 million, over
1995. The MS Group was responsible for approximately $19.8 million of
Page 17
the $21.8 million increase and the PMI and CM Divisions were responsible for
the remaining $2.0 million of the increase. The increase in MS Group net sales
was due to increased sales of more fully configured CMMs with higher sales
price along with an increase in unit volumes of lower priced CMMs. New
products and service revenue also contributed to the increase. The increase in
PMI Division net sales was attributable to the U.S. catalog and distribution
business.
Gross Profit. Gross profit increased 2.7%, or $3.2 million, to $120.3
million in 1996 from $117.1 million in 1995. The improvement in gross profit
for the MS Group was due to increased sales volume and product mix. The PMI
Division had lower gross profit margins due to less absorption of fixed costs
as they reduced inventory and production requirements and some start up costs
for new products. The CM Division had lower gross margins due to volume
variances. As a percentage of net sales, gross profit decreased to 34.9% from
35.7% due to a decrease in the PMI and CM Divisions' gross profit margins of
4.5% and 4.1%, respectively, and offset by a slight increase in the MS Group's
gross profit margin of 0.9%. The MS Group's gross profit margin increased
slightly, primarily as a result of increased unit volumes of more fully
configured higher price CMMs offset only partially by increased unit volumes
of lower priced CMMs.
Research and Development Expense. Research and development expense was
$10.8 million in 1996 and 1995, respectively.
Selling, General and Administrative Expense. SG&A decreased 2.1%, or $2.0
million, to $92.9 million in 1996 from $94.9 million in 1995, and decreased as
a percentage of net sales to 27.0% from 28.9%. Exclusive of foreign currency
transaction gains or losses, which amounted to a $1.8 million loss in 1996 and
a $0.6 million gain in 1995, and agent commissions of $8.3 million and $7.7
million in 1996 and 1995, respectively, SG&A decreased as a percentage of net
sales to 24.0% from 26.8%. The decrease in SG&A was primarily attributable to
reductions in duplicative distribution, management and administrative
functions in the MS Group and PMI Division.
Interest Expense. Interest expense decreased 8.8%, or $0.8 million, to
$8.3 million in 1996 from $9.1 million in 1995. A decrease in average
borrowings to $96.2 million in 1996 from approximately $100.0 million in 1995
resulted in decreased interest expense in 1996. The decrease in average
outstanding borrowing balances occurred after the equity offering, which was
completed in October of 1996.
Income Tax Expense. Income taxes were provided at a rate of 11% in 1996
compared with a rate of 26.5% in 1995. This decrease in the effective tax
rate is primarily due to the $4.7 million reduction of a previously recorded
deferred income tax valuation allowance. For further information concerning
the provision for income taxes, as well as information regarding differences
between the effective tax rates and statutory rates, see Note 4 of the Notes
to the Consolidated Financial Statements. It is expected that the 1997
effective tax rate will exceed 11%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased 56.7%, or $118.6 million, to $328.0 million
in 1995 from $209.4 million in 1994. Foreign currency exchange rate
fluctuations caused an increase in net sales of $12.1 million during 1995 as
compared to an increase of $3.3 million in 1994. Excluding these foreign
currency effects, net sales for 1995 increased $106.5 million over 1994. The
MS Group was responsible for approximately $95.4 million of the $106.5 million
increase and the PMI and CM Divisions were responsible for the remaining $11.1
million of the increase. The increase in MS Group net sales was primarily
attributable to the DEA acquisition ($69.5 million of the increase) and an
increase in unit volumes of lower priced CMMs. The increase in PMI Division
net sales was attributable to the Roch acquisition and the introduction of new
products and new customers.
Gross Profit. Gross profit increased 62.0%, or $44.8 million, to $117.1
million in 1995 from $72.3 million in 1994. This increase was primarily a
result of the full-year sales effect during 1995 of the acquisitions of DEA
and Roch and their continued integration into the operations of the MS Group
and the PMI Division, respectively, as well as an improvement in the gross
profit margin of the PMI Division. The improvement in gross profit included
the effect of an inventory writedown of $3.7 million in 1994 primarily due to
the discontinuance of certain product
Page 18
lines as a result of the consolidation of DEA and Roch as compared to a
positive net inventory adjustment in 1995 of $0.3 million. As a percentage of
net sales, gross profit increased from 34.5% to 35.7% due to an increase in
the PMI Division's gross profit margin, offset partially by a slight decrease
in the MS Group's gross profit margin. Increased gross profit margin at the
PMI Division resulted from better product mix and the impact of improved
absorption of fixed costs as a result of increased PMI Division sales and
production volume. The MS Group's gross profit margin decreased slightly,
primarily as a result of increased unit volumes of lower priced CMMs offset
partially by increased unit volumes of more fully configured CMMs.
Research and Development Expense. Research and development expense
increased to $10.8 million from $5.7 million due to the inclusion of DEA for
the whole year rather than the last quarter of 1994.
Selling, General and Administrative Expense. SG&A increased 38.5%, or
$26.4 million, to $94.9 million in 1995 from $68.5 million in 1994, and
decreased as a percentage of net sales to 28.9% from 32.7%. Exclusive of
foreign currency transaction gains or losses, which amounted to a $0.6 million
gain in 1995 and a $1.1 million gain in 1994, SG&A decreased as a percentage
of net sales to 29.1% from 33.2%. The decrease in SG&A as a percentage of net
sales was primarily attributable to consolidation savings that were planned
and achieved as a result of the consolidation of DEA sales and distribution
operations with those of the MS Group and the consolidation of Roch with the
PMI Division. Foreign currency transaction gains in 1995 include a gain of
$0.9 million due to a revaluation of a 1994 foreign denominated liability that
was incorrectly recorded at a historical, rather than current, foreign
exchange rate in the Company's previously issued consolidated financial
statements.
Restructuring Charges. Restructuring charges amounted to $0.3 million in
1995 and $4.2 million in 1994. Restructuring charges in 1994 were due
principally to employee severance costs incurred in connection with sales
office closings associated with integrating Brown & Sharpe's existing
operations with those of DEA ($2.4 million) and severance costs ($1.8 million)
in connection with the consolidation of Roch and a restructuring at TESA-Brown
& Sharpe S.A. ("TESA").
Interest Expense. Interest expense increased 37.9%, or $2.5 million, to
$9.1 million in 1995 from $6.6 million in 1994. An increase in average
borrowings to approximately $100.0 million in 1995 from approximately $81.0
million in 1994 resulted in increased interest expense in 1995. The increase
in average outstanding balances occurred after the DEA acquisition in
September 1994 as a result of additional working capital requirements arising
from increased sales and the payment of costs associated with restructuring
and achieving the acquisition consolidation savings.
Income Tax Expense. Income taxes were provided at a rate of 26.5% in 1995.
This compared with a tax provision that was applied to a pretax accounting
loss in 1994. This difference in the effective tax rate was attributable to
income earned in certain jurisdictions during 1995 offset by net operating
losses and other tax deductions for which no previous tax benefit was
provided. The 1994 effective tax rate resulted from taxes in jurisdictions
which have historically been profitable, losses in jurisdictions that could
not receive tax benefits and adjustments to prior tax provisions. For further
information concerning the provision for income taxes, as well as information
regarding differences between effective tax rates and statutory rates, see
Note 4 of the Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Over the last several years, prior to the 1996 equity offering, the Company
has funded its working capital, capital expenditure, research and development
and other cash needs from operating cash flows, sales proceeds from
discontinued businesses, borrowings under short-term credit facilities, an
aggregate of $33.5 million of term and mortgage indebtedness incurred in 1994.
In October 1996 a $48 million public equity offering of 4.4 million new shares
of common stock was completed. At December 31, 1996, the Company's
outstanding indebtedness was $69.2 million, including $68.5 million of long-
term indebtedness (including current portion) and $0.7 million of short-term
borrowings, and the Company's cash and cash equivalents were $20.2 million.
During 1996, the Company refinanced $10.5 million of outstanding Swiss
mortgages. The Company has a domestic secured revolving credit facility ("the
Facility") which provides for maximum aggregate borrowings of $25.0 million
and foreign credit facilities which provide for maximum aggregate borrowings
of $48.3 million. The Facility is available for working capital and general
corporate purposes. Of the foreign credit facilities, $22.7 million is
Page 19
available for working capital and general corporate purposes to the Company's
foreign subsidiary in the country where borrowed, $16.2 million is available
on presentment of certain local and export related eligible invoices and $9.4
million is available to support letters of credit and performance and bid
bonds. Actual availability under the Facility is limited on the basis of
eligible United States accounts receivable and inventory. At December 31,
1996, giving effect to such borrowing base limitations and outstanding
borrowings, the Company had no outstanding borrowings under the Facility, and
the Company's maximum available additional borrowings under the Facility were
$20.1 million and its maximum available additional borrowings and letters of
credit under its foreign credit facilities were $44.1 million.
The commitments under the Facility continue until September 1997 and
automatically renew thereafter for one year periods, subject to the
termination provisions contained in the Facility. The Facility is secured by
substantially all of the Company's domestic assets and 65% of the shares of
certain foreign subsidiaries and contains a number of covenants, including the
obligation to maintain certain financial ratios and a prohibition on the
payment of dividends. The Company's foreign credit facilities are generally
due on demand and certain of such facilities are secured by certain of the
Company's foreign assets. On March 31, 1996 and June 30, 1996, the Company
breached the current ratio covenant contained in the Facility. Such breaches
were waived. Since the $48 million public equity offering discussed above,
the Company has paid all outstanding balances under the Facility and has cash
balances amounting to $20.2 million. Therefore, loan covenant violations
occurring in the ensuing year are unlikely.
At December 31, 1996, the annual maturities of the Company's long-term debt
were $31.8 million, $4.7 million, $9.8 million, $4.7 million and $6.3 million
for 1997, 1998, 1999, 2000 and 2001, respectively.
Management believes that, the public equity offering and the additional
borrowing capacity it allows along with the available existing short- and
long-term borrowings, cash on hand and future cash flow from operations will
be sufficient to meet foreseeable cash requirements of the Company for the
next three to four years. Significant acquisitions or strategic partnerings
could, however, increase the Company's capital requirements, and in such event
the Company might seek to raise additional debt or equity.
Cash Flow. Net cash provided by operations in 1996 was $7.8 million, as
compared to net cash used in operations of $0.1 million in 1995. For the year
ended December 31, 1996, net income of $7.8 million increased by depreciation
and other non-cash items of $12.3 million was offset by increases in working
capital of $12.3 million. For the year ended December 31, 1995, net income of
$1.9 million, decreased by an increase in working capital of $15.3 million,
was offset by depreciation and other non-cash items of $13.3 million.
Net cash used in investment transactions in 1996 was $13.1 million as
compared to net cash used in investment transactions during 1995 of $10.4
million. During 1996, investment transactions included capital expenditures
of $11.6 million. During 1995, investment transactions included capital
expenditures of $12.1 million.
Cash provided by financing transactions was $16.1 million during 1996
compared with $6.9 million for the same period in 1995. Financing
transactions during 1996 consisted of $48 million of funds arising from the
equity offering described above, a $33.1 million decrease in short-term
borrowings, a $3.8 million increase of long-term debt to finance the new CM
facility in Telford, England and the repayment of $5.1 million of long-term
debt. Financing transactions during 1995 included $10.9 million of short-term
borrowings offset by $3.4 million of long-term debt payments.
Working Capital. Working capital was $108.0 million at December 31, 1996
compared to $76.2 million at December 31, 1995. Inventories increased to
$77.6 million at December 31, 1996, an increase of $0.5 million from the end
of 1995, and accounts receivable increased $5.1 million from December 31,
1995. In addition, total short- and long-term borrowing decreased $32.9
million to a total of $69.2 million at December 31, 1996 as compared to $102.1
million at December 31, 1995 primarily due to the repayment of $33 million of
short-term debt using funds provided by the equity offering completed during
the fourth quarter of 1996.
Page 20
Capital Expenditures. The Company's capital expenditures were
approximately $11.6 million in 1996, of which $3.7 million was for the new CM
facility in Telford, England, compared to $12.0 million and $8.9 million for
the years 1995 and 1994, respectively.
Product Design and Manufacturing Engineering. The Company invested $13.9
million, or 4.0% of net sales, $15.8 million, or 4.8% of net sales, and $9.2
million, or 4.4% of net sales, in 1996, 1995 and 1994, respectively, for
product design and manufacturing engineering.
RISK FACTORS
COMPETITION
The Company's MS Group currently has four principal direct domestic and
foreign competitors, some of which are owned by entities that have greater
financial and other resources than the Company. The MS Group also faces
indirect competition from other types of metrology firms such as manufacturers
of fixed gauging systems. The primary industries to which the MS Group sells
its products are characterized by a relatively small number of large
participants with significant purchasing power. In addition, the MS Group
generally sells its products through a competitive bid process in which at
least one and frequently several of the Company's competitors submit competing
bids. As a result, the Company experiences significant pricing competition in
connection with sales by its MS Group which can have an adverse impact on the
Company's net sales and margins. During periods when the metrology industry
suffers from overcapacity, downward pricing pressure experienced by the MS
Group is likely to be more intense and the Company's margins may be more
severely impacted. In addition, certain of the Company's competitors have
access to greater financial resources and may be able to withstand such
pricing pressure more effectively than the Company. Accordingly, there can be
no assurance that the MS Group will be able to continue to compete effectively
against existing competitors or new competitors, especially during periods of
overcapacity.
The market for the PMI Division's products is fragmented and the PMI
Division competes with a large number of competitors, including the market
leader in this area, primarily on the basis of the strength of its third-party
distribution network, price and product innovation. New competitors from
emerging industrialized countries with lower production costs than the
Company's represent a significant competitive challenge to the Company. As a
result, the PMI Division's continued success and profitability will be
dependent on its ability to continue to develop cost-effective sourcing and
innovative products.
CYCLICALITY OF END USER MARKETS
The primary end user markets for the Company's products, which include the
aerospace, heavy transport and automotive (including automotive suppliers)
industries, experience cyclicality in connection with recessionary periods.
As a consequence, the price of and margins for the Company's products have
been and are likely to continue to be adversely impacted by decreases in
capital spending by such end user markets during recessionary periods. In
addition, because the PMI Division sells primarily through distributors, the
PMI Division is likely to experience significant declines in sales volumes
during recessionary periods because catalog houses and distributors typically
reduce purchases of the Company's products at the onset of such recessionary
periods even more than the decline in their end user markets' demands would
dictate, in order to reduce their inventories. There can be no assurance that
the Company will be able to operate profitably during any recessionary
downturn.
FOREIGN OPERATIONS
As of December 31, 1996, approximately 69% (based on book values) of the
Company's assets, 61% of the Company's net sales (based on customer location)
and 73% of its employees were located outside the United States. Foreign
operations are subject to special risks that can materially affect the sales,
profits, cash flows and financial position of the Company, including taxes on
distributions or deemed distributions to the Company or any
Page 21
U.S. subsidiary, currency exchange rate fluctuations, inflation, maintenance
of minimum capital requirements, import and export controls, exchange controls
and social (labor) programs.
In addition, the wide-spread geographic locations of the Company's
facilities and operations make it more difficult for the Company to coordinate
its financial and operating reporting and oversee its operations and
employees. In response to these difficulties, the Company has taken various
personnel and procedural actions to improve its reporting and operating
procedures. While the Company believes that these actions have resulted in
satisfactory financial and operational reporting and oversight for its present
business, additional system revisions may be needed if the Company should
experience a further increase in the number of foreign facilities.
DEPENDENCE ON KEY SUPPLIER
The Company currently purchases the vast majority of its externally sourced
low to medium accuracy electronic touch trigger sensor probes and heads from a
publicly held United Kingdom company (the "Supplier") which is the dominant
supplier of such sensor probes to CMM manufacturers. No alternative supplier
for this class of electronic sensor probes, which are a key component of
substantially all of the Company's lower accuracy CMMs, is currently available
and developing an alternative source for the probes and heads could take more
than a year. Although adequate supplies of such probes and heads for at least
several months is potentially available from current inventories of the
Company and its customers, any reductions or interruptions in supply or
material increases in the price of electronic sensor probes purchased from the
Supplier could cause the Company to suffer disruptions in the operation of its
business or incur higher than expected costs, which could have a material
adverse effect on the Company.
TECHNOLOGY
As the size of some components measured by metrology products decreases and
the required speed and precision of such measurements increases, the Company's
products may become obsolete unless the Company develops more sophisticated
software and metrology systems. Although the Company's strategy is to focus
research and development in the area of software development and non-contact
technologies, there can be no assurance that the Company will be successful in
competing against new technologies or competitors, some of whom may not now
participate in the metrology industry.
INDEBTEDNESS
The Company has completed the equity offering which enabled the Company to
reduce borrowings significantly. At December 31, 1996, the Company had total
outstanding indebtedness and total shareowners' equity of $69.2 million and
$140.4 million, respectively.
Nevertheless, the Company's outstanding indebtedness could have important
consequences to the Company's stockholders, including the following: (i) the
Company may face difficulties in satisfying its obligations with respect to
its indebtedness; (ii) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions or other
general corporate purposes may be impaired; (iii) certain of the Company's
debt instruments contain financial and other restrictive covenants which could
limit the Company's operating and financial flexibility and, if violated,
would result in an event of default which, if not cured or waived, could
preclude the Company's access to credit under such borrowing arrangements or
otherwise have a material adverse effect on the Company; (iv) the Company's
$25.0 million domestic secured revolving credit facility (the "Facility")
prohibits the payment of dividends by the Company; and (v) the Facility and
$25.0 million of additional term indebtedness of the Company (guaranteed by
Finmeccanica) mature in September 1997, requiring the Company to seek
refinancing of such debt at that time or before.
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL
The success of the Company is dependent to a significant extent upon the
continuing services of a limited number of key executives of the senior
management team. Loss of the services of one or more of these senior
executives could have a material adverse effect on the Company.
Page 22
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Index to Financial Statements Page Number
----------------------------- -----------
Report of Independent Auditors - Ernst & Young LLP 24
Report of Independent Accountants - Coopers & Lybrand L.L.P. 25
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 26
Consolidated Balance Sheets at December 31, 1996 and 1995 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 28
Consolidated Statements of Shareowners' Equity for the Years
Ended December 31, 1996, 1995 and 1994 29
Notes to Consolidated Financial Statements 30 - 43
Page 23
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors
of Brown & Sharpe Manufacturing Company
We have audited the accompanying consolidated balance sheets of Brown & Sharpe
Manufacturing Company as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
the years then ended. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1996 and 1995 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Brown & Sharpe Manufacturing Company at December 31, 1996 and
1995, and the consolidated results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related 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.
ERNST & YOUNG LLP
Providence, Rhode Island
February 5, 1997
Page 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Directors
of Brown & Sharpe Manufacturing Company:
We have audited the accompanying consolidated financial statements and
financial statement schedule of Brown & Sharpe Manufacturing Company for the
year ended December 31, 1994, listed in Item 14 of this Form 10-K. These
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Brown & Sharpe
Manufacturing Company as of December 31, 1994 and the consolidated results of
its operations and its cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information required to be included
therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 29, 1995
Page 25
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
-------- -------- ---------
Net sales $344,877 $328,031 $209,369
Cost of goods sold 224,542 210,967 137,082
Research and development expense 10,818 10,762 5,694
Selling, general and administrative expense 92,929 94,902 68,473
Restructuring expense - 336 4,169
-------- -------- --------
Operating profit (loss) 16,588 11,064 (6,049)
Interest expense 8,280 9,129 6,575
Other income, net 462 688 689
-------- -------- --------
Income (loss) before income taxes 8,770 2,623 (11,935)
Income tax provision 965 697 2,400
-------- -------- --------
Net income (loss) $ 7,805 $ 1,926 $(14,335)
======== ======== ========
Net income (loss) per common share:
Primary $ 0.81 $0.22 $ (2.37)
======== ======== ========
Fully diluted $ 0.78 $0.22 $ (2.37)
======== ======== ========
The accompanying notes are an integral part of the financial statements.
Page 26
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 20,158 $ 6,262
Accounts receivable, net of allowances for doubtful accounts
of $3,226 and $3,030 118,685 113,579
Inventories 77,572 77,145
Deferred income taxes 2,217 3,322
Prepaid expenses and other current assets 5,585 5,436
-------- --------
Total current assets 224,217 205,744
Property, plant and equipment:
Land 7,094 7,141
Buildings and improvements 41,840 37,447
Machinery and equipment 90,337 95,482
-------- --------
139,271 140,070
Less-accumulated depreciation 84,865 87,183
-------- --------
54,406 52,887
Goodwill, net 10,806 11,529
Other assets 25,019 25,240
-------- --------
$314,448 $295,400
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable and current installments of long-term debt $ 32,481 $ 45,229
Accounts payable 45,507 44,936
Accrued expenses and income taxes 38,217 39,423
-------- --------
Total current liabilities 116,205 129,588
Long-term debt 36,725 56,839
Other long-term liabilities 4,700 6,310
Deferred income taxes 1,420 2,765
Unfunded accrued pension cost 5,801 5,823
Termination indemnities 9,197 8,218
Commitments and Contingencies (Notes 8 and 11)
Shareowners' Equity:
Preferred stock, $1 par value; authorized 1,000,000 shares; none issued - -
Common stock:
Class A, par value $1; authorized 15,000,000 shares; issued 12,689,234 shares
in 1996 and 8,195,795 in 1995 12,689 8,196
Class B, par value $1; authorized 2,000,000 shares; issued 517,604
shares in 1996 and 522,575 in 1995 518 523
Additional paid-in capital 110,737 66,863
(Deficit) earnings employed in the business (227) (8,032)
Cumulative foreign currency translation adjustment 17,175 18,926
Treasury stock; 42,592 shares in 1996 and 23,592 shares in 1995, at cost (455) (270)
Unearned compensation (37) (349)
-------- --------
Total shareowners' equity 140,400 85,857
-------- --------
$314,448 $295,400
======== ========
The accompanying notes are an integral part of the financial statements.
Page 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
CASH PROVIDED BY (USED IN) OPERATIONS:
Net Income (Loss) $ 7,805 $ 1,926 $(14,335)
Adjustment for Noncash Items:
Depreciation and amortization 9,957 11,010 6,743
Pension credits and charges 1,609 1,369 212
Deferred income taxes (208) 376 (1,900)
Termination indemnities 590 331 -
Deferred compensation 312 216 213
Changes in Working Capital:
Increase in accounts receivable (7,121) (4,324) (15,912)
(Increase) decrease in inventories (4,019) (7,389) 7,103
(Increase) decrease in prepaid expenses
and other current assets (224) 1,208 1,001
Increase (decrease) in accounts payable
and accrued expenses (914) (4,798) 6,693
-------- -------- --------
Net Cash Provided by (Used in) Operations 7,787 (75) (10,182)
-------- -------- --------
INVESTMENT TRANSACTIONS:
Capital expenditures (11,632) (12,054) (8,929)
Proceeds from dispositions 785 2,096 3,456
Cash equivalent pledged - - 6,078
Other investing activities (2,273) (445) (1,988)
-------- -------- --------
Net Cash (Used in) Investment Transactions (13,120) (10,403) (1,383)
-------- -------- --------
FINANCING TRANSACTIONS:
Increase (decrease) in short-term debt (33,082) 10,915 (16,420)
Proceeds from issuance of long-term debt 3,811 - 33,500
Principal payments of long-term debt (5,144) (3,444) (1,661)
Issuance of common stock 47,968 - -
Other financing transactions 2,533 (600) 353
-------- -------- --------
Net Cash Provided by Financing Transactions 16,086 6,871 15,772
-------- -------- --------
Effect Of Exchange Rate Changes on Cash 3,143 3,193 375
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the year 13,896 (414) 4,582
Beginning balance 6,262 6,676 2,094
-------- -------- --------
Ending balance $ 20,158 $ 6,262 $ 6,676
======== ======== ========
Supplementary Cash Flow Information:
Interest paid $ 8,222 $ 8,004 $ 6,223
======== ======== ========
Taxes paid $ 579 $ 2,598 $ 1,496
======== ======== ========
The accompanying notes are an integral part of the financial statements.
Page 28
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
(DEFICIT) CUMULATIVE
COMMON EARNINGS FOREIGN
STOCK ADDITIONAL EMPLOYED CURRENCY
$1 PAR PAID-IN IN THE TRANSLATION TREASURY UNEARNED
VALUE CAPITAL BUSINESS ADJUSTMENT STOCK COMPENSATION
------- ----------- --------- ------------ ----------- -------------
Balance December 25, 1993 $ 4,980 $ 45,710 $ 4,377 $ 9,394 $(163) $(778)
Net Loss - - (14,335) - - -
Acquisitions 3,625 20,413 - - - -
Treasury Stock Transactions - - - - 12 -
Restricted Stock Transactions 10 (8) - - - 213
ESOP Contribution 42 297 - - - -
Foreign Currency Translation
Adjustment - - - 5,136 - -
------- -------- -------- ------- ----- -----
Balance December 31, 1994 8,657 66,412 (9,958) 14,530 (151) (565)
------- -------- -------- ------- ----- -----
Net Income - - 1,926 - - -
Treasury Stock Transactions - - -