Item 1. Business
General Development of Business LaBarge, Inc. (the "Company") became a Delaware corporation in 1968 as the successor by merger to a company founded in 1953. The Company is engaged in the engineering and manufacture of sophisticated electronic systems and devices and complex interconnect systems.
For the past four years, the Company has focused on expanding into commercial markets using the technologies it had historically developed for the defense and aerospace electronics markets. The Company focuses it marketing toward companies which require significant engineering effort to develop electronic products which are capable of surviving harsh environmental conditions including temperature, shock and vibration while maintaining high performance reliability. The Company's focus is on the following markets: telecommunications, geophysical, medical, aerospace and defense.
In fiscal 1996, the Company purchased the assets for $2.7 million and assumed $400,000 of the liabilities of SOREP Technology Corporation ("SOREP") in Houston, Texas. SOREP was renamed LaBarge/STC, Inc. and continues to operate at its Houston location. LaBarge/STC, Inc. is engaged in the design and manufacture of custom hybrid circuits and high temperature electronic assemblies used in oil and gas exploration, drilling and production. This acquisition supports the Company's efforts to expand in the geophysical market.
Also in fiscal 1996, the Company announced the formation of LaBarge Clayco Wireless L.L.C. ("LaBarge Clayco"), which is a 50%/50% joint venture of LaBarge Wireless, Inc., a wholly-owned subsidiary of LaBarge, Inc. and Clayco Construction Company. LaBarge Clayco provides engineering, project management, construction, installation and testing services for the rapidly growing wireless telecommunications industry.
This joint venture complements the Company's activities in the design and manufacture of sophisticated cable assemblies and electronic products used in wireless telecommunications.
In April 1997, TRANSMEDICA received clearance from the U.S. Food & Drug Administration ("FDA") to market a small medical laser for the purpose of perforating the skin to collect capillary blood for clinical testing. The Laser Lancet(R) was developed for TRANSMEDICA under a technology licensing agreement with TRANSMEDICA. The Company has begun manufacturing the device for distribution by TRANSMEDICA. Sales of the device were insignificant in fiscal 1997 and any impact on the Company's future sales cannot yet be determined.
In June 1997, the Company's Board of Directors approved additional equity investments in TRANSMEDICA of up to $2.0 million. This investment was made in July and the Company now owns approximately 9.5% of TRANSMEDICA.
In the second quarter of fiscal 1995, the Company sold its operations in Flippin, Arkansas for $10.5 million in cash and $2.9 million in assumed liabilities. The proceeds from the sale were used to reduce debt.
In March 1997, the Company entered into a revised and amended unsecured lending agreement with NationsBank, N.A. on terms more favorable than those previously available to the Company. The agreement provides a $4.0 million term loan requiring quarterly amortization of $250,000 beginning June 30, 1997 and a $17.0 million revolving working capital facility. Interest on the new loans is at LIBOR plus a premium and/or a discount from the prime interest rate and is based on certain operating criteria. The Company believes this loan agreement provides sufficient working capital to support planned business growth.
Financial Information About Industry Segments The Company conducts its operations through one industry segment, electronics design and manufacturing and markets its products to the telecommunications, geophysical, medical, aerospace and defense markets. In each market, the Company engineers and manufactures sophisticated electronic systems and devices and complex interconnect assemblies.
Narrative Description of Business GENERAL. The Company engineers, manufactures, tests and sells sophisticated electronic systems and devices and complex interconnect assemblies. Principal markets for the Company's products are: telecommunications (primarily the wireless segment), geophysical, medical equipment, aerospace, defense and various other commercial/industrial markets. The Company's manufacturing facilities are located in Arkansas, Missouri, Oklahoma and Texas. The Company employs approximately 800 people.
The Company's backlog at June 29, 1997, was approximately $61.3 million, as compared to $62.2 million at June 30, 1996. The backlog at June 29, 1997, consisted of: $36.6 million of orders for various defense products compared to $38.4 million at June 30, 1996 and $24.7 million of orders for commercial products compared to $24.8 million at June 30, 1996. Generally, lead times on commercial products are much shorter and orders are placed on a just-in-time delivery basis. Substantially all of the defense backlog at June 29, 1997 is pursuant to contracts containing cancellation and termination provisions. Approximately $7.2 million of this backlog is not scheduled to ship within the next 12 months pursuant to the shipment schedules contained in those contracts. This compares to $9.1 million at year-end 1996.
MARKETING. The Company has divided its business development efforts along market lines, each headed by a business unit manager. This approach allows each business unit to thoroughly understand and concentrate on the needs of the customers in that market. There are currently four such business units which in the aggregate are supported by approximately eleven additional sales personnel and approximately thirty-two design engineers and technicians. The Company seeks to develop strong, long-term customer relationships, which will provide the basis for future sales. These close relationships allow the Company to better understand the customers' business needs and identify ways to provide greater value to customers.
MANUFACTURING; ENVIRONMENTAL. The Company has organized its engineering and production to provide flexible independent plant locations with specific design and manufacturing capabilities, each of which can serve most, if not all, markets. This approach allows local management at each facility to concentrate the necessary attention on specific customer needs and at the same time control all key aspects of the engineering and manufacturing processes.
Compliance with federal, state and local environmental laws is not expected to materially affect the capital expenditures, earnings or competitive position of the Company.
DEFENSE MARKET. The Company designs and manufactures electronics products to Department of Defense ("DOD") and prime contractor specifications. The makeup of such products varies with customer needs. In the past, products have included military communications systems, multiplexers, command receivers, automatic direction finding systems, printed circuit board assemblies, flexible printed circuitry and various interconnect assemblies and systems. These products are used in numerous military programs, including, among many others, the AEGIS Radar System, Abrams M-1 Tank and the Bradley Fighting Vehicle, and are also utilized in various naval shipboard command, control and communications systems. Approximately 48% of total Company sales in fiscal 1997 and fiscal 1996 were defense related.
The Company is identifying new defense opportunities as many of the large prime contractors are consolidating and increasingly using outside engineering and manufacturing as a way to reduce overhead costs and increase profits.
COMMERCIAL AEROSPACE MARKET. The Company designs and manufactures high temperature cable assemblies for jet engines; complex wiring harnesses for space launch vehicles (including the Atlas/Centaur Rocket and the Space Shuttle); and a variety of cable assemblies and wiring harnesses for satellites. Approximately 8% of the Company's fiscal 1997 sales were for aerospace applications compared to 6% in fiscal 1996.
TELECOMMUNICATIONS MARKET. The Company's primary focus in telecommunications is on the rapidly growing wireless segment of the market, with special emphasis on Personal Communication Systems ("PCS"). The Company designs and manufactures sophisticated radio frequency, data and power cables; lightning protection equipment; and, a variety of ancillary electrical/electronic equipment. The products are predominantly used in wireless network construction, commonly referred to as infrastructure.
LaBarge Clayco provides cell-site engineering, project management, construction, equipment installation and testing services. The operating results of LaBarge Clayco are accounted for on the equity method. For fiscal 1997 this operation provided minimal income of $4,000, while in fiscal 1996 it resulted in a loss of approximately $93,000.
Approximately 16% of fiscal 1997 sales were attributable to the telecommunications market versus 26% in fiscal 1996. This lower percentage results from a decrease in sales of approximately $4 million in 1997 versus 1996 which decrease was caused by delays in the build-out of the overall PCS market as well as design changes in product offerings.
MEDICAL MARKET. The Company designed and developed the Laser Lancet(R), a small medical laser, for TRANSMEDICA under a technology licensing agreement with TRANSMEDICA. TRANSMEDICA received, in April 1997, FDA clearance to market the device for the purpose of perforating the skin to collect capillary blood for clinical testing. The Company will manufacture the Laser Lancet(R) for distribution by TRANSMEDICA. TRANSMEDICA is reviewing distribution agreements with several large medical supply operations, but has not yet entered into an agreement for marketing the product.
The Company believes there are other applications for the laser technology utilized in the Laser Lancet(R). One such application is laser- assisted transdermal drug delivery. During the year, TRANSMEDICA began clinical trials to demonstrate the viability of this application.
In addition to its laser work with TRANSMEDICA, the Company engineers and manufactures a variety of electronic and electro-mechanical assemblies for use in medical diagnostic equipment. Sales of all medical products accounted for approximately 4% of the Company's total sales in fiscal 1997 and 5% in fiscal 1996.
GEOPHYSICAL MARKET. The Company designs and manufactures a variety of electronic products used in oil and gas exploration, drilling and production. Products include cabling, seismic analysis computer, down-hole instrumentation and high-power drive controls. Through its subsidiary, LaBarge/STC, Inc., it also designs and produces hybrid circuits used in the same applications. Approximately 21% of fiscal 1997 sales were to the geophysical industry compared to 10% in fiscal 1996. This increase in volume is due to the volume associated with the acquisition of SOREP in late fiscal 1996, as well as development of new business within the market.
SALES AND DISTRIBUTION. The Company has fifteen employees whose primary responsibility is sales. Additionally, the Company's engineering and plant management employees are very involved in sales activities. The Company's 1997 sales were made primarily to existing or prior customers, and are based upon established relationships. With few exceptions, the Company's sales are made pursuant to fixed-price contracts. Larger, long-term government contracts generally have provisions for milestone or progress payments. The Company primarily carries inventories only related to specific contracts, and title passes to the customer when products are shipped.
COMPETITION. There is intense competition in all of the Company's target market areas. While the Company is not aware of another entity that competes in all of its markets, there are numerous companies, many larger than the Company, which compete in each of these markets. Frequently, the Company's customers have the
ability to produce the products contracted to the Company but, because of cost, capacity, engineering capability or other reasons, order such products from the Company. The principal methods of competition are engineering expertise, technical capability, quality and reliability, overall project management capability, service and price. In fiscal 1997, sales to 10 customers represented approximately 76% of the Company's total sales revenue; sales to 1 aerospace and defense customer accounted for approximately 24%; sales to 1 geophysical customer accounted for approximately 14%; sales to 1 telecommunications customer, approximately 11% and the U.S. Government, approximately 6%. In fiscal 1996, sales to 8 customers represented 78% of the Company's total sales revenue; sales to 1 aerospace and defense customer accounted for approximately 25%; 1 telecommunications customer, approximately 25%; and U.S. Government, approximately 6% of sales.
Financial Information About Foreign and Domestic Operations and Export Sales No information has been included hereunder because the Company's foreign sales in fiscal 1997 were less than 10% of total Company revenue.
Capital Structure HISTORY. Since fiscal 1987, the Company has undergone numerous changes in its capital structure. These changes have included the issuance and redemption of several classes of preferred stock and the borrowing and repayment of various debt.
During 1995, the Company sold its operation in Flippin, Arkansas for $10.5 million in cash and $2.9 million in assumed liabilities. The Company used $1.6 million of the proceeds plus $3.4 million in new 12% Subordinated Notes due in 1998 to redeem all $5 million of 15% Subordinated Notes due in 1997. The balance of the proceeds was used to reduce senior debt.
During fiscal 1996, the Company purchased the assets of SOREP Technology Corporation (renamed LaBarge/STC, Inc.) for approximately $2.7 million. The Company also committed approximately $250,000 in LaBarge Clayco through its LaBarge Wireless, Inc. subsidiary.
In March 1997, the Company entered into a revised and amended, unsecured lending agreement with NationsBank, N.A. (successor to Boatmen's National Bank) replacing its former agreement with NationsBank established in June 1996. The new agreement provides for a $4 million term loan requiring quarterly amortization of $250,000 beginning June 30, 1997 and a $17 million revolving working capital facility.
Interest on both loans is variable with prime or LIBOR. At June 29, 1997 the rate was 6.88%.
The ratio of debt to equity as of June 29, 1997 was .24 to 1.
Item 2.
Item 2. Properties
The Company's principal facilities, which are deemed adequate and suitable for the Company's business, are as follows:
Item 3.
Item 3. Legal Proceedings
The Company is a party to various legal proceedings arising out of the normal course of business. The Company believes that none of these proceedings, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of the security holders in the quarter ended June 29, 1997.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Reference is made to the information contained in the section entitled "Stock Price and Cash Dividends" on page 16 filed herewith.
Item 6.
Item 6. Selected Financial Data
Reference is made to the information contained in the section entitled "Selected Financial Data" on page 16 filed herewith.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reference is made to the information contained in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 36 through 39 filed herewith.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
Reference is made to the Index to Consolidated Financial Statements and Schedule contained on page 15 filed herewith.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
This information will be included in the Company's definitive proxy materials to be filed within 120 days after the end of the Company's fiscal year covered by this report.
Item 11.
Item 11. Executive Compensation
This information will be included in the Company's definitive proxy materials to be filed within 120 days after the end of the Company's fiscal year covered by this report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information will be included in the Company's definitive proxy materials to be filed within 120 days after the end of the Company's fiscal year covered by this report.
Item 13.
Item 13. Certain Relationships and Related Transactions
This information will be included in the Company's definitive proxy materials to be filed within 120 days after the end of the Company's fiscal year covered by this report.
PART IV
Item 14.
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K a. Consolidated Financial Statements.
See Index to Consolidated Financial Statements and Schedule which follows.
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the fourth quarter of fiscal 1997.
c. Exhibits
d. Consolidated Financial Statement Schedule.
See Index to Consolidated Financial Statements and Schedule which follows.
e. Exhibits.
Schedule Number Description Page - ------- ----------- ---- II Valuation and Qualifying Accounts. 40-41
All other schedules have been omitted as they are not applicable, not significant, or the required information is given in the consolidated financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 4, 1997 ------------------------
LaBarge, Inc.
By s/William J. Maender/s --------------------------------- William J. Maender Vice President - Finance (Chief Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Craig E. LaBarge and William J. Maender and each of them, and substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Report, any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report as been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
LABARGE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE NUMBER ----------- Consolidated Financial Statements ---------------------------------
Independent Auditors' Report 17
Consolidated Statements of Operations, Years Ended June 29, 1997, June 30, 1996 and July 2, 1995 18
Consolidated Balance Sheets, June 29, 1997 and June 30, 1996 19
Consolidated Statements of Cash Flows, Years Ended June 29, 1997, June 30, 1996 and July 2, 1995 20
Consolidated Statements of Stockholders' Equity, Years Ended June 29, 1997, June 30, 1996 and July 2, 1995 21
Notes to Consolidated Financial Statements, Years Ended June 29, 1997, June 30, 1996 and July 2, 1995 22-35
Management's Discussion and Analysis of Financial Condition and Results of Operations 36-39
Form SCHEDULE 10-K -------- ---------- II - Valuation and Qualifying Accounts 40-41
All other schedules have been omitted as they are not applicable, not significant, or the required information is given in the consolidated financial statements or notes thereto.
LaBarge, Inc. SELECTED FINANCIAL DATA (dollars in thousands except per share data)
Certain events occurring during the above reporting periods involving acquisitions, divestitures, joint ventures, refinancings, and deferred tax valuation adjustments affect the comparability of financial data presented on a year-to-year basis. No cash dividends have been paid during the aforementioned periods.
STOCK PRICE AND CASH DIVIDENDS: LaBarge, Inc.'s Common Stock is listed on the American Stock Exchange, under the trading symbol of LB. As of August 29, 1997, there were approximately 4,000 holders of record of LaBarge, Inc.'s Common Stock. The following table indicates the quarterly high and low closing prices for the stock for the fiscal years 1997 and 1996, as reported by the American Stock Exchange.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders LaBarge, Inc.:
We have audited the consolidated financial statements of LaBarge, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LaBarge, Inc. and subsidiaries as of June 29, 1997 and June 30, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 29, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
s/KPMG Peat Marwick LLP/s
St. Louis, Missouri August 8, 1997
LaBarge, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands except per share data)
See accompanying notes to consolidated financial statements.
LaBarge, Inc. CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share data)
See accompanying notes to consolidated financial statements.
LaBarge, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
See accompanying notes to consolidated financial statements.
LaBarge, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands except share data)
See accompanying notes to consolidated financial statements.
LaBarge, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 29, 1997, June 30, 1996 and July 2, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS LaBarge, Inc. and subsidiaries (the "Company") are engaged in the design, engineering, manufacturing and sale of electronic products and systems and complex interconnect assemblies. Primary markets where the Company's products are sold are: telecommunications, geophysical, medical, aerospace and defense.
USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of LaBarge, Inc. and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Investments in 20 - 50% owned companies are accounted for on the equity method. Investments in less than 20% owned companies are accounted for at cost.
ACCOUNTING PERIOD The Company uses a fiscal year ending the Sunday closest to June 30. Fiscal years 1997, 1996 and 1995 consisted of 52 weeks.
INCOME RECOGNITION Sales and related cost of sales are recognized as specific contract terms are fulfilled under the percentage-of-completion method (usually when units are shipped, the units-of-delivery method). The percentage-of-completion method gives effect to the most recent contract value and estimates of costs at completion. When appropriate, contract prices are adjusted for increased scope and other changes ordered or caused by the customer.
Since some contracts extend over a long period of time, revisions in cost and contract price during the progress of work have the effect of adjusting current period earnings applicable to performance in prior periods. When the current contract estimate indicates a loss, provision is made for the total anticipated loss.
INVENTORIES The Company procures materials and manufactures products to customer requirements.
Raw materials are stated at the lower of cost or market as determined by the weighted average cost method.
In accordance with industry practice, the Company's work in process consists of actual production costs, including factory overhead and tooling costs, reduced by costs attributable to units for which sales have been recognized. Such costs under contracts are determined by the average cost method based on the estimated average cost of all units expected to be produced under the contract. Consistent with industry practice, amounts relating to long-term contracts are classified as current assets although a portion of these amounts is not expected to be realized within one year.
Revenues to be realized on delivery of products against existing unfilled orders, contract modifications and estimated additional orders will be sufficient to absorb inventoried costs.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is carried at cost and includes additions and improvements which extend the remaining useful life of the assets. Depreciation is computed on the straight-line method.
INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
CASH EQUIVALENTS The Company considers cash equivalents to be temporary investments which are readily convertible to cash, such as certificates of deposit, commercial paper and treasury bills with original maturities of less than three months.
EMPLOYEE BENEFIT PLANS The Company has a contributory savings and profit-sharing plan covering certain employees. The Company's policy is to expense and fund savings plan and profit-sharing costs as incurred.
The Company offers a non-qualified deferred compensation program to certain key employees whereby they may defer a portion of annual compensation for payment upon retirement plus a guaranteed return. The program is unfunded; however, the Company purchases Company-owned life insurance contracts through which the Company will recover a portion of its cost upon the death of the employee.
EARNINGS PER COMMON SHARE Earnings per common share is computed as net earnings divided by the weighted average number of common shares outstanding during the year. The potential dilution from the exercise of stock options is not significant.
GOODWILL AND OTHER LONG-LIVED ASSETS Goodwill is amortized on a straight-line basis over a 10-year period. Impairment losses are recorded on goodwill and other long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets or related to the business acquired are less than the assets' carrying amount.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. The Company provides the financial statement disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation".
RECLASSIFICATIONS OF PRIOR YEAR AMOUNTS Certain prior year amounts have been reclassified to conform with the current year's presentation.
NEW ACCOUNTING STANDARDS In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share. SFAS No. 128 is effective for fiscal years beginning after December 15, 1997. The Company believes the adoption of this accounting standard will not have a significant impact on the computation and presentation of the Company's earnings per share.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which becomes effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 will not impact the Company's consolidated financial statements or results of operations.
Also in June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" which becomes effective for fiscal years beginning after December 15, 1997. Since the company only participates in one business segment, the design, engineering, manufacturing, and sale of electronics to its customer, the adoption of SFAS No. 131 will not impact the Company's consolidated financial statements, its results of operations or the notes thereto.
2. ACQUISITIONS AND DIVESTITURES OF BUSINESSES Acquisition On May 15, 1996, the Company, through its newly formed, wholly-owned subsidiary, LaBarge/STC, Inc., acquired the assets for cash of approximately $2.7 million and assumed approximately $400,000 of liabilities of SOREP Technology Corporation. The total acquisition cost exceeded the estimated fair value of the net assets acquired by $400,000 and is recorded as goodwill. The combination was accounted for by the purchase method. The results of operations of LaBarge/STC, Inc. have been included in the accompanying consolidated financial statements from the date of acquisition.
Pro forma unaudited consolidated results of operations for fiscal 1996 and 1995, as if the acquisition had been completed at the beginning of each period, follow:
(dollars in thousands except per share data)
The pro forma data has been adjusted, net of income taxes, to reflect interest expense and the amortization of goodwill. Such pro forma adjustments are not necessarily indicative of what the actual consolidated results of operations might have been had the acquisition been effective at the beginning of each year presented.
Joint Venture On May 7, 1996, the Company, through its wholly-owned subsidiary LaBarge Wireless, Inc., entered into a 50%/50% joint venture -- LaBarge Clayco Wireless L.L.C. The results of operations and investment in this joint venture have been reported using the equity method of accounting.
Divestiture On December 2, 1994, the Company divested its operation in Flippin, Arkansas. The business was sold for $10.5 million in cash and $2.9 million in assumed liabilities. $1.6 million of the proceeds plus $3.4 million in 12% Subordinated Notes, due in May 1998, were used to redeem $5 million of 15% Subordinated Notes due in 1997. The balance of the proceeds were used to reduce senior debt. Sales of the Flippin operation were $7.3 million in fiscal 1995 to the date of divestiture. The comparability of the results of operations for fiscal years 1996 and 1995 are affected by this divestiture.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following: (dollars in thousands)
Progress payments are payments from customers in accordance with contractual terms for contract costs incurred to date. Such payments are credited to the customer at the time of shipment.
Subsequent to June 29, 1997, the Company invested an additional $2 million in TRANSMEDICA. Payment for this investment included an exchange of approximately $1.2 million of current accounts receivable and $800,000 cash. The amount of the receivable, $1.2 million, was reclassified to other assets, net as of June 29, 1997. With this investment the Company owns approximately 10% of TRANSMEDICA Common Stock.
Other current receivables include funds on deposit in escrow and amounts due from employees for travel advances and other miscellaneous sources.
4. INVENTORIES
Inventories consist of the following: (dollars in thousands)
In accordance with contractual agreements, the government has a security interest in the inventories identified with related contracts for which progress payments have been received.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows: (dollars in thousands)
Property, plant and equipment depreciation and amortization expenses were $816,000, $695,000 and $739,000 for the fiscal years ended June 29, 1997, June 30, 1996 and July 2, 1995, respectively.
6. SHORT- AND LONG-TERM OBLIGATIONS
Short-term borrowings, long-term debt and the current maturities of long-term debt consist of the following: (dollars in thousands)
The average interest rate was computed by dividing the sum of daily interest costs by the sum of the daily borrowings for the respective periods.
Total cash payments for interest in 1997, 1996 and 1995 were $900,000, $1.4 million and $1.8 million, respectively.
In February 1997, the Company redeemed all $3.4 million of 12% Subordinated Notes due in May 1998 for cash.
SENIOR LENDER On March 20, 1997, the Company entered into an amended credit agreement with NationsBank, N.A. (successor to Boatmen's National Bank), its senior lender. The revised four-year unsecured lending agreement provides a $4.0 million term loan payable in quarterly installments of $250,000 beginning June 30, 1997 and a $17.0 million working capital revolver. The interest rate on both loans is variable based on a ratio of senior debt to earnings and is available as either a premium over LIBOR or a discount from prime rate at the Company's option.
Through various performance criterion, this rate can be lowered to 150 basis points below prime, or at the Company's option, 75 basis points over LIBOR. At June 29, 1997, the Company is at the lowest rates possible under the agreement, currently which ranges from 6.53% to 7%. Under the terms of the agreement, the Company pays a .20% fee on committed but unused funds.
The aggregate maturities of long-term obligations are as follows:
7. OPERATING LEASES
The Company operates certain of its manufacturing facilities in leased premises and with leased equipment under noncancellable operating lease agreements having an initial term of more than one year and expiring at various dates through 2007. The real property leases require the Company to pay maintenance, insurance and real estate taxes.
At June 29, 1997, the future minimum lease payments under operating leases with initial noncancellable terms in excess of one year are as follows:
Rental expense under operating leases is as follows: (dollars in thousands)
8. EMPLOYEE BENEFIT PLANS
The Company has a contributory profit-sharing plan which qualifies under Section 401(k) of the Internal Revenue Code for employees meeting certain service requirements. The plan allows eligible employees to contribute up to 15% of their compensation, with the Company matching 50% of the first $25 per month and 25% of the excess of the first 8% of this contribution. During 1997, 1996 and 1995, Company matching contributions were $187,000, $141,000 and $136,000, respectively.
At the discretion of the Board of Directors, the Company may also make contributions dependent on profits each year for the benefit of all eligible employees under the amended plan. There were no such contributions for the years ended June 29, 1997,
June 30, 1996 and July 2, 1995.
In 1992, the Company started a deferred compensation plan for selected employees who, due to Internal Revenue Service guidelines, could not take full advantage of the contributory profit-sharing plan. This plan, which is not required to be funded, allows eligible employees to defer portions of their current compensation and the Company guarantees a return of 2% over the prime interest rate on the deferral (compounded daily from the date of deferral).
To support the deferred compensation plan, the Company has elected to purchase Company-owned life insurance. The costs associated with the plan were $63,000, $45,000 and $37,000 for the guaranteed return; and ($20,000), ($8,000) and $2,000 of (income) expense for the Company-owned insurance in 1997, 1996 and 1995, respectively. The cash surrender value of the company-owned life insurance is in other assets and was $669,000 at June 29, 1997 compared to $525,000 at June 30, 1996. The liability for the deferred compensation is in accrued employee compensation and was $906,000 at June 29, 1997 versus $622,000 at June 30, 1996.
9. OTHER INCOME, NET
The components of other income, net are as follows: (dollars in thousands)
10. INCOME TAXES
Income tax expense (benefit) attributable to earnings from continuing operations consists of:
Income tax expense (benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 34% as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
A valuation allowance is provided, if necessary, to reduce the deferred tax assets to a level which, more likely than not, will be realized. The net deferred assets reflect management's estimate of the tax benefits which will be realized from future profitability which can be predicted with reasonable certainty. The effect of management's estimates in fiscal 1997 resulted in $1.2 million in incremental tax benefits for the year which increased net earnings $1.2 million or $.08 per common share.
The net change in the total valuation allowance for the years ended June 29, 1997 and June 30, 1996 were decreases of $3.6 million and $1.2 million, respectively.
At June 29, 1997, the Company has net operating loss carryforwards for federal income tax purposes of $8.0 million which are available to offset future federal taxable income through 2004. In addition, the Company has alternative minimum tax credit carryforwards and investment tax credits of approximately $584,000 which are available to reduce future regular federal income taxes.
Total cash payments for income taxes in all years presented were not significant.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers the carrying amounts of cash and cash equivalents, receivables and accounts payable to approximate fair value because of the short maturity of these financial instruments.
Amounts outstanding under the unsecured, senior lending agreement are also considered to be carried on the financial statements at their estimated fair values because they were entered into recently and accrue interest at rates which generally fluctuate with interest rate trends.
12. INDUSTRY SEGMENT INFORMATION
The Company is engaged in the design, engineering, manufacturing and sale of electronic systems and devices and complex cables and wiring harnesses principally for the telecommunications, geophysical, medical, aerospace and defense markets.
Customers accounting for more than 10% of net sales for the years ended June 29, 1997, June 30, 1996 and July 2, 1995 follow:
Sales for export did not exceed 10% of sales in any fiscal year.
13. LITIGATION AND CONTINGENCIES
The Company is involved in litigation arising in the normal course of business. In the opinion of management, the ultimate resolution of the litigation will not have a material adverse effect on the operating results, financial position or cash flows of the Company.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is set forth below: (dollars in thousands except per share data)
During fiscal 1997, management revised its estimate as to the future realizable value of its net tax operating loss carry forwards. This revaluation resulted in $1.2 million of incremental tax benefits in the fourth quarter and for the year which increased net earnings by the same amount and earnings per share by $.08.
Due to the acquisition of SOREP Technology Corp. in the fourth quarter of fiscal 1996, the comparability of quarterly data is impacted.
The significant increase in sales and profits in the third and fourth quarters of 1996 is largely due to sales to the telecommunication market.
15. STOCK OPTION PLANS
The Company has three incentive stock option plans for key management personnel. Under the 1987 Plan, the Company was authorized to grant options for up to 200,000 shares of common stock. The 1993 Plan authorized 300,000 shares to be granted. The 1995 Plan authorized 400,000 shares to be granted. Under all plans, the term of the granted options are ten years and the vesting period is two years.
Information regarding these option plans for 1997, 1996 and 1995 is:
The following table summarizes information about stock options outstanding:
All stock options are granted at fair market value of the common stock at the grant date.
The company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no compensation cost has been recognized for the stock option plans.
Had compensation cost for the Company's three stock option plans been determined based on the fair value at the grant date consistent with the provision of SFAS 123, the Company's pro forma net income and earnings per share for 1997 would have been $7.6 million and $.49 per share, respectively, and $3.4 million and $.22 per share in fiscal 1996, respectively. Because the SFAS 123 method of accounting has not been applied to options granted prior to July 3, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The fair market value of stock options granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.5%; expected dividend yield of 0%; expected life of three years and expected volatility of 60%.
16. WARRANTS
On May 28, 1996, warrants for 300,000 shares of common stock were exercised at $3 per share by the Company's former lender. These warrants were issued in 1992 as part of a refinancing. The Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission to register these shares for sale by the holder thereof.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL Statements contained herein which are not historical facts are forward looking statements that involve risks and uncertainties. Future events and the Company's actual results could differ materially from those contemplated by those forward looking statements. Important factors which could cause the Company's actual results to differ materially from those projected in, or inferred by, forward looking statements are (but are not necessarily limited to) the following: the impact of increasing competition or deterioration of economic conditions in the Company's markets; further cutbacks in defense spending by the U.S. Government; lack of acceptance by the market of the Laser Lancet(R) developed for TRANSMEDICA; unexpected increases in the cost of raw materials, labor and other resources necessary to operate the Company's business; and the availability, amount, type and cost of financing for the Company and any changes to that financing.
OVERVIEW LaBarge, Inc. designs, engineers and manufactures sophisticated electronic assemblies and complex interconnect systems on a custom basis for its customers. As such, the Company relies heavily on establishing new and maintaining existing partnering arrangements with its customers. The customers are primarily in the telecommunication (wireless), geophysical, commercial aerospace, defense and medical markets.
SIGNIFICANT EVENTS The Company has designed and developed the Laser Lancet(R), a small medical laser, for TRANSMEDICA, under a technology licensing agreement from TRANSMEDICA. TRANSMEDICA received FDA clearance in April 1997 to market the device for the purpose of perforating the skin to collect capillary blood for clinical testing. The Company will manufacture the Laser Lancet(R) for distribution by TRANSMEDICA. The method for such distribution is under review by TRANSMEDICA; and, until such plan is finalized, the Company cannot estimate the impact on future sales. To date, limited shipments of the product have been made.
In March 1997, the Company entered into a revised and amended unsecured lending agreement with NationsBank, N.A. replacing its former agreement with NationsBank, N.A. established in June 1996. The new agreement provided for a $4 million term loan requiring quarterly amortization of $250,000 beginning June 30, 1997 and a $17 million revolving working capital facility.
In March 1997, the Company announced it had received a two-year contract valued at $12.4 million to continue production of electronic assemblies for the U.S. Navy's AEGIS Weapons System from Lockheed Martin - Government Electronics Systems. This continues a program which the Company started in 1990 and for which it has received three awards for excellence.
Other significant orders announced during the year were: $3.7 million from USBI for cable assemblies for the Space Shuttle; $2.9 million from Sensis Corporation to produce printed circuit board assemblies for a new U.S. Marine Corps Radar System; and $1.4 million from Lockheed Martin to produce printed circuit board assemblies for use in a U.S. Air Force Radar System.
During the year, the Company continued to expand its commercial customer base. The
Company is focusing its resources primarily on users of electronic equipment in the telecommunications, geophysical, medical and aerospace markets. For the year, sales to commercial customers totaled approximately 52% of the Company's total sales versus 48% to defense customers. This compares with commercial sales of 54% in fiscal 1996 and 42% in fiscal 1995.
Backlog at June 29, 1997, was approximately $61.3 million of which 60% was for defense products and 40% was for commercial products. Of the backlog, $7.2 million is not due to ship for more than one year. Management believes this backlog provides a solid base for future years.
In fiscal 1996, the Company, through its wholly-owned subsidiary LaBarge/STC, Inc., acquired SOREP Technology Corporation in Houston, Texas. LaBarge/STC, Inc. manufactures electronic assemblies primarily used in the oil and gas industry. This acquisition furthered the Company's expansion in the geophysical market.
Also in fiscal 1996, the Company announced the formation of LaBarge Clayco Wireless L.L.C., which is a 50%/50% joint venture of LaBarge Wireless, Inc., a wholly-owned subsidiary of LaBarge, Inc. and Clayco Construction Company. LaBarge Clayco Wireless provides engineering, project management, construction, installation and testing services for the wireless telecommunications industry.
This joint venture complements the Company's activities in the design and manufacture of sophisticated cable assemblies and electronic products used in wireless telecommunications.
On December 2, 1994 (fiscal 1995), the Company sold its manufacturing operation in Flippin, Arkansas, for $10.5 million in cash and $2.9 million in assumed liabilities. The proceeds were used to reduce debt. Sales of $7.3 million from the Flippin operation were included in Company sales in fiscal 1995. Flippin sales in fiscal 1994 were $19.0 million. This affects the comparability of certain values year to year.
RESULTS OF OPERATIONS 1997 - 1996 - 1995 SALES Net sales for fiscal year 1997 were $96.7 million, up 29% from the $75.1 million in fiscal 1996 and compared with $61.6 million in fiscal 1995.
The sales increase in 1997 can be attributed primarily to growth in the geophysical and aerospace markets, and to a lesser extent, the defense market. The increase in geophysical is primarily attributable to the acquisition of SOREP Technology in late fiscal 1996. Sales to the telecommunications market were lower than expected due to delays in the build-out of the PCS infrastructure and due to design changes for products to one customer (Nortel). This impacted the second half of fiscal 1997 and will continue to do so in the first and second quarters of 1998 as the Company works to replace this decrease in business. Management expects to see continued growth in fiscal 1998.
Sales to the defense industry were approximately $46 million in fiscal 1997, $37 million in 1996 and $35 million in 1995. Sales to 10 customers accounted for 75.9% of revenues in fiscal 1997. Sales to units of Lockheed Martin accounted for 23.9% of revenue; to units of Schlumberger -- 13.8% and to Nortel - -- 11.4%.
GROSS MARGIN Gross margin as a percentage of net sales increased in 1997 due to the higher volume of sales in relation to fixed costs. Gross margin in 1997 was 19.9% compared with 18.6% in 1996 and 16.6% in 1995.
SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses were $11.4 million in 1997 versus $9.0 million in 1996 and $7.8 million in 1995. This increase in cost reflects increased marketing efforts, improvements in systems and new employment to support future anticipated growth.
OTHER Interest expense in 1997 is down compared with prior years due to the lower debt level throughout the period. In fiscal 1997 interest expense was $900,000 million versus $1.4 million in fiscal 1996 and $1.7 million in 1995. Interest costs are expected to decrease again in fiscal 1998, barring any significant rate increases during the year.
In the category shown as "Equity in gain (loss) of joint venture," $4,000 gain in fiscal 1997 and a $93,000 loss in fiscal 1996, represents the Company's 50% portion of the gain (loss) sustained by LaBarge Clayco Wireless L.L.C. during the respective periods. The results of operation of the joint venture are being reported using the equity method of accounting.
Other income, net, includes interest income from notes receivable and miscellaneous short-term and overnight investments. In addition, other items of income or expense not classified elsewhere, or minor in amount, are included in this heading. For fiscal 1997, the amount was $95,000 compared with $239,000 in 1996 and $291,000 in 1995.
PRETAX EARNINGS Pretax earnings in fiscal 1997 were $7.0 million, up 86% compared with $3.8 million in fiscal 1996 and compared with $1.0 million in fiscal 1995.
TAX BENEFITS In accordance with SFAS 109, management revalued its net deferred tax assets in fiscal 1997 to reflect its expectation that it is more likely than not the tax benefits will be realized. This revaluation resulted in $1.2 million in incremental tax benefits in fiscal 1997 which increased net earnings by the same amount or added $.08 to net earnings per share. Deferred tax assets were $4.4 million at June 29, 1997.
NET EARNINGS Net earnings for 1997 were $7.7 million compared with $3.5 million in 1996 and $1.3 million in 1995. Earnings per common share were $.50 in 1997, $.23 in 1996 and $.09 in 1995.
In the future, all earnings will be reported on a fully taxed basis which will cause earnings and earnings per share to be reported approximately 32% lower than in previous years. Had earnings been fully taxed in fiscal 1997, earnings per share would have been $.28 versus $.15 in fiscal 1996 and $.05 in fiscal 1995 on the same fully taxed basis.
FINANCIAL CONDITION AND LIQUIDITY Prior to fiscal 1997, the Company took important steps to improve its financial condition and position itself to grow in new commercial markets.
During 1995, the Company sold its operation in Flippin, Arkansas for $10.5 million in cash and $2.9 million in assumed liabilities. The Company used $1.6 million of the proceeds plus $3.4 million in new 12% Subordinated Notes due in 1998 to redeem all $5.0 million of 15%
Subordinated Notes due in 1997. The balance of the proceeds were used to reduce senior debt. As a result of the Flippin sale and the subsequent debt reduction, the Company's balance sheet was significantly strengthened in 1995.
During 1996, warrants to purchase 300,000 shares of common stock of the Company were exercised at $3 per share. The warrants were originally issued to the Company's then senior lender as part of a 1992 refinancing. This exercise provided $900,000 in additional equity to the Company.
In 1997, the Company entered into a revised and amended four-year loan agreement with NationsBank, N.A. which provides sufficient working capital to finance the anticipated internal growth of the Company over the next three years. The agreement provides for a $4.0 million term loan and a $17.0 million revolving credit facility. Both loans are unsecured and expire February 1, 2001. The entire facility bears interest at the prevailing prime rate or below. On June 29, 1997, the Company had $15.0 million in its revolving credit line available.
In February 1997, the Company redeemed all $3.4 million of 12% Subordinated Notes due in 1998, which further reduced interest costs.
The aggregate maturities of all debt over the next three years, excluding the revolving credit agreement, are $1.1 million in 1998, $1.1 million in 1999 and $1.0 million in 2000. The Company expects to meet these obligations with cash generated from operations and available funds under its revolving credit agreement.
Stockholders' equity increased to $25.5 million at June 29, 1997 from $17.8 million at June 30, 1996 and $13.3 million at July 2, 1995. Debt was $6.1 million at June 29, 1997, $11.5 million at June 30, 1996 and $10.6 million at July 2, 1995.
During the fiscal year 1997, the Company generated $8.2 million in cash from operating activities which it used to redeem $3.4 million in 12% Subordinated Notes, $1.9 million in bank borrowing and $1.7 million to purchase additional equipment for operating the business.
As of June 29, 1997, accounts receivable were up $500,000 compared with the prior year end. Inventories were down $3.3 million from the prior year end due to the change in product mix. Trade accounts payable were down $2.0 million due to continued efforts to pay all vendors within terms.
Subsequent to year end, the Company invested $2.0 million in TRANSMEDICA. The Company converted $1.2 million of other assets, net plus $800,000 in cash as payment for this investment.
At June 29, 1997, the Company's capital structure consisted of $25.5 million of common stockholders' equity and $6.1 million of debt.
Schedule II
LABARGE, INC.
VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 29, 1997 JUNE 30, 1996 AND JULY 2, 1995
Allowance for Doubtful Accounts
This account represents amounts which may become uncollectible in future periods.
Inventory Reserve
This account is used to write-off inventory which becomes valueless in future periods, but as of the balance sheet date, is included at cost.
Deferred Tax Asset Valuation Allowance
This account is used to reduce the value of the Company's Deferred Tax Asset as a result of Net Loss Carryforwards from prior periods.