ITEM 1. BUSINESS
GENERAL - -------
The company is a leading global manufacturer of products and provider of services and technology used to process engineered materials. Incorporated in Delaware in 1983, the company is a successor to a business established in 1884.
The company has three business segments: plastics technologies (formerly plastics machinery), machine tools and industrial products. The company's plastics technologies business includes injection molding machines, mold bases and components for injection molding, extrusion systems, blow molding machines and auxiliary equipment. The company's machine tool business consists of turning and machining centers, grinding machines, flexible manufacturing cells, advanced systems primarily for the aerospace industry and aftermarket parts and services. The company's industrial products business includes metalcutting tools, metalworking fluids, grinding wheels, carbide wear parts and industrial magnets.
The company has gone through a major transformation over the last five years, primarily through strategic acquisitions, accelerated new product development, expanded distribution, and the consolidation of its U.S. machine tool operations. As a result, the company has achieved a better balance among its segments' sales, and between its U.S. and non-U.S. sales, and has become less dependent upon the capital goods market. From 1992 to 1997, the company's consolidated sales have grown at a compound annual rate of 19% from $789 million to $1.9 billion.
In 1997, 39% of sales came from the plastics technologies segment, making it the company's largest business segment in that year. The industrial products segment was the second- largest business segment in 1997, with approximately 37% of sales, while the machine tools segment contributed about 24% of sales. The company expects the growth of sales in its industrial products and plastics technologies segments to offset the more severe business cycles of machine tools.
Today, the company sells products and provides services to industrial customers throughout the world. Sales to customers outside the U.S. increased from $298 million in 1993, representing 29% of total sales, to $817 million in 1997, representing 43% of total sales. The company has been successful in penetrating international markets through acquisitions, expanded distribution, increased exports, and license and joint venture agreements. The company believes its current geographic sales balance helps compensate for varying economic cycles around the world and that its increased presence outside the U.S. will reduce its dependence upon the U.S. economy. (See also the "Presence Outside the U.S." in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.)
Largely as a result of the acquisitions, the company's product mix has become more diversified among product types, thus becoming less susceptible to market downturns. In 1997, 45% of sales were generated through the sale of capital goods, with the balance coming from durable goods, consumables, and components and services.
The company has a long-standing reputation for quality and technological leadership. Virtually all of the company's machines in its plastics technologies and machine tools segments are computer controlled. Many of these machines are sold with advanced application software, like software to control machine tools that fabricate aircraft parts from composite materials.
STRATEGIC ACQUISITIONS AND DIVESTITURES - ---------------------------------------
The company continually explores acquisition, divestiture and consolidation opportunities when it believes such actions could expand markets, enhance product synergies or improve earnings potential for the long term. Over the last five years, the company has completed several strategic acquisitions and divestitures, which the company believes will increase its potential for further growth. In its plastics technologies segment, the company acquired FM Maschinenbau GmbH (Ferromatik), an injection molding machine business, including its international sales companies, from Kloeckner-Werke AG in 1993 and The Fairchild Corporation's D-M-E business (D-M-E) in 1996, as well as two smaller acquisitions which occurred in early 1998 and are discussed below.
Ferromatik is one of Europe's leading manufacturers of plastics injection molding machines. Ferromatik's market coverage expanded the company's plastics processing technology base and product line and enabled the company to achieve its objective of establishing a plastics machinery manufacturing and distribution base in Germany to serve Europe and other markets.
D-M-E is the largest U.S. producer of mold bases, components and supplies for the plastic injection moldmaking industry. D-M-E serves customers throughout the world with ten major manufacturing facilities, plus several international joint- venture operations. The company believes D-M-E will continue to enhance its plastics technologies business because it provides the mold bases, supplies and components used in the mold apparatus inside an injection molding machine. D-M-E is the U.S. market leader with a well-established reputation for high quality.
Also in February, 1998, the company made two smaller acquisitions in the plastics technologies segment: Wear Technology, with annual sales of approximately $10 million, serves the aftermarket for new and rebuilt screws for PVC (poly vinyl chloride) extrusion systems and Northern Supply, with annual sales of approximately $5 million, a regional catalog distribution company offering supplies to plastics processors for injection molding, blow molding, and extrusion.
In 1993, the company disposed of its Sano plastics technologies business, due in part to continuing operating losses. In addition, the Sano business did not serve a major global market with good long-term growth potential.
In the last five years, the company has made various strategic acquisitions in its industrial products segment: GTE Valenite Corporation (Valenite), Krupp Widia GmbH (Widia), Talbot Holdings, Ltd. (Talbot), Minnesota Twist Drill and Data Flute CNC, Inc., all of which have metalcutting and metalworking tools as their primary product lines. The company believes that it is now the second- largest U.S. and third-largest worldwide producer of carbide metalcutting tool systems.
Valenite was acquired in February, 1993. With principal operations in the U.S. and Canada, it is a leading producer of consumable industrial metalcutting tools.
Widia, acquired in February, 1995, is one of the world's leading producers of industrial metalworking products. Widia's strong presence in Europe and India complements Valenite's strengths in the North American and Japanese markets. Widia also enhances the company's technological base, diversifies its industrial consumable product line and expands its worldwide sales and distribution network. During 1995, the company implemented an integration plan to maximize the synergies between Valenite and Widia worldwide. The plan was substantially completed in the first half of 1996, except for certain personnel reductions at Widia. As a result of the actions included in the plan, the company is achieving annual cost savings in excess of $20 million.
The company acquired Talbot in July, 1995. Talbot is a major supplier of round high-speed steel and carbide metalcutting tools, such as mills and taps, and is the largest U.S. producer of end mills. These cutting tools, which are not produced by either Valenite or Widia, are sold through independent distributors and a direct sales force. The Talbot acquisition enabled the company to increase its product coverage from approximately 40% to 65% of the types of cutting tools consumed by the world market.
In September, 1997, the company acquired Minnesota Twist Drill, Inc. With sales of approximately $4 million for the four months it was owned by the company, Minnesota Twist Drill, Inc. manufactures standard high-speed twist drills which are sold mainly through private branding. Also, on June 30, 1997, the company acquired Data Flute CNC, Inc., a manufacturer of high-performance solid carbide end mills with sales of approximately $5 million during the six months it was owned by the company. Both acquisitions have been integrated as subsidiaries of Talbot.
In 1995 the company sold American Mine Tool, a small business that was purchased as part of the Valenite acquisition. This business did not serve a major global market with good long-term growth potential.
In its machine tools segment, the company sold its Electronic Systems Division (ESD) in December, 1995 for $104 million. Most of ESD's sales were to the company's other divisions. In addition, ESD had sales to unaffiliated customers which totaled approximately $30 million in 1995. ESD was sold to redeploy assets into the company's remaining businesses as well as to partially fund the acquisition of D-M-E. To maintain control system continuity and development, the company entered into a long-term supply and services agreement with the purchaser of ESD to continue to provide the company's machine tool and plastics technologies businesses with technologically advanced control systems.
In 1994, the company completed a major consolidation of its U.S. machine tool operations, closing two plants in South Carolina and moving all of its U.S. production to its main machine tool facilities in Cincinnati, Ohio.
PRODUCT DEVELOPMENT AND CAPITAL EXPENDITURES - --------------------------------------------
As part of its objective to enhance its growth potential and global competitiveness, the company continues to invest in research and development and in new capital equipment. Research and development investment in 1997 totaled $50 million, or 2.6% of sales. In 1997, the company invested $80 million for capital additions, primarily to install advanced technology and increase productive capacity systems throughout its operations worldwide. For 1998, the company is budgeting an increase in capital expenditures to $100 million.
To enhance its research and development effort, the company has implemented a major program for product development, process improvement and modernization. This program is named "Wolfpack" because of its emphasis on teamwork and fierce competitiveness. The objectives of Wolfpack are to design and produce new products at world-competitive levels of quality, performance, efficiency and cost. Substantially all of the company's current machine designs have been developed using the Wolfpack methodology.
PLASTICS TECHNOLOGIES BUSINESS - ------------------------------
The company believes it is the largest and broadest-line U.S. producer of plastics machinery and one of the three largest in the world, and the largest U.S. producer of mold bases, standard components and supplies for the moldmaking industry. In 1997, the company's plastics technologies segment sales were $736 million. The company sells plastics machinery and supplies for processing plastics to manufacturers in several key industries, including automotive, construction, electronics, consumer goods and packaging. The company believes it offers more varieties of machinery to process plastic than any other U.S. company.
One of the company's strengths in the plastics machinery business stems from having complete lines of machines for three major plastics processing technologies: injection molding machines, and systems for extrusion and blow molding machinery. Another strength is the company's presence in the durable goods market with the production of mold bases, standard components and supplies for the moldmaking industry. The company also sells specialty auxiliary equipment for plastics processing and rebuilds and retrofits older injection molding equipment manufactured by the company or others.
The company distributes all of its plastics machinery products through a combination of a direct sales force and independent agents who are geographically spread throughout the key markets of the world. Its mold bases, supplies and components are sold through a distribution network in the U.S. and Europe and through a large network of joint venture sales and service offices in Asia.
PLASTICS TECHNOLOGIES INDUSTRY
The market for plastics machinery and supplies for processing plastics has grown steadily over the past four decades, as plastics have continued to replace traditional materials such as metal, wood, glass and paper in an increasing number of manufactured products, particularly in the transportation, construction, housewares, electrical, and medical industries. Advancements in both the development of materials, which make plastic products more functional, and the capabilities of plastics processing equipment have been major contributors to the steady growth in the plastics technologies market. In addition, consumer demand for safer, more convenient and recyclable products has increased the general demand for plastic products. Like other capital goods markets, machines within the plastics technologies market are subject to economic cycles, but to a lesser degree than the machine tool market. In particular, the market for injection molding machines is driven by resin prices and production, the consumer economy and the automotive industry. From 1993, plastics technologies orders have been strong, although the company began to experience some softening of demand in early 1996 due to an expected short-term price increase in resin material, but demand picked up later in the year and through 1997 and the company expects continued future growth.
Custom molders, which produce a wide variety of components for many industries, are the single largest group of plastics technologies buyers. Other customer categories include the automotive industry, the electrical and packaging industries, the construction industry, manufacturers of housewares and appliances, and producers of consumer goods, toys and medical supplies. Among the factors that affect the plastics technologies market are the health of the consumer economy, residential and commercial construction and automotive production. Because of intense competition from international plastics technologies producers, currency exchange rates also have a significant impact. Fluctuations in the prices of petrochemical feed stocks for resin and subsequent supply of resin may affect the businesses of the customers for plastics technologies and, in turn, the market for this equipment.
Environmental concerns about plastics may have the potential to slow the growth of the plastics technologies market. However, some plastics raw materials suppliers, machinery makers and processors are developing methods of recycling to address environmental issues. The company believes that environmental concerns have not had any discernible negative effect on the market to date. Nevertheless, the company, through its membership in The Society of Plastics Industry (an industry trade association) and its affiliate, The American Plastics Council, is working with other leading companies within the plastics industry to address the role of plastics in the environment.
THE COMPANY'S PLASTICS TECHNOLOGIES BUSINESS
The company's plastics technologies segment consists of five products lines: injection molding machines, extrusion systems and blow molding machines, standardized mold bases, components, supplies for the plastics injection moldmaking industry and specialty equipment used in the processing of plastics.
INJECTION MOLDING. The company believes it is the largest U.S. producer of injection molding machines. Injection molding is the most common and versatile method of processing plastic, and it is used to make a wide variety of parts and products ranging from housewares and consumer goods to medical supplies and industrial components. The company manufactures many types of injection molding machines, almost all of which were developed using Wolfpack principles. The injection molding machine line includes machines powered conventionally (with hydraulics) as well as ones that are driven by servo motors (fully electric). Product standardization (which facilitates part commonality) and the modernization of the company's manufacturing facilities and methods, as well as increased volumes, have enabled the company to achieve significant economies of scale for the production of injection molding machines. The company believes these factors have enabled it to become the lowest-cost U.S. producer of these machines.
In November, 1993, the company acquired Ferromatik, one of Europe's leading producers of injection molding machines. Ferromatik is recognized for its high-end technology, including multi-color machines, multi-component systems and other specialty applications. The acquisition included the Ferromatik lines of hydraulic and electric injection molding machines and a modern manufacturing facility in Malterdingen, Germany, as well as Ferromatik's worldwide marketing, sales and service network. The Ferromatik acquisition expanded the company's plastics processing technology base and product line and enabled the company to achieve its objective of establishing a plastics machinery manufacturing and distribution base in Germany to serve Europe and other markets. Ferromatik has provided a complementary fit with the company's other injection molding machine businesses. The company sells several of its successful U.S. and Ferromatik plastics machinery lines to European customers through Ferromatik's sales and distribution network.
The company has completed a restructuring of Ferromatik to derive synergies between Ferromatik and other company operations and to improve Ferromatik operations through implementation of manufacturing techniques and methods currently being used in the company's U.S. plastics technologies operations. For example, Ferromatik has now implemented cellular manufacturing techniques which have significantly reduced manufacturing lead time, in-process inventory, and handling costs. In addition, using Wolfpack techniques, the company redesigned several major product lines resulting in lower product cost. The restructuring also reduced overall marketing costs through the consolidation of the company's former European marketing organization into the Ferromatik marketing organization. The company believes that this restructuring has helped, and will continue to help, it to achieve its cost reduction goals in both marketing and manufacturing.
In May, 1995, the company announced the formation of a joint venture, Cincinnati Milacron Pvt. Ltd. (CMPL), with a group of individuals experienced in the building of plastics machinery in Ahmedabad, India. This operation builds injection molding machines for domestic and world markets. In 1995, CMPL completed the implementation of its product introductions and opened sales offices throughout the major cities of India. In 1997, CMPL started construction of a new factory in Ahmedabad to support their operations.
EXTRUSION SYSTEMS. The company's extrusion systems business consists of the manufacture, sale and distribution of individual extruders and systems comprised of multiple units which are tooled to extrude a specific product in quantity. Such systems take longer to manufacture than injection molding machines. Extrusion systems, which are manufactured in both the U.S. and Austria, include twin-screw extruders and single-screw extruders. The company believes it has a strong competitive position in each of these lines, and that it is the largest worldwide maker of twin-screw extruders. Twin-screw extruders are used to produce continuous-flow products such as pipe, residential siding, sheet and window frames. As a result, the business is closely tied to construction market cycles. Single-screw extruders are used in a variety of applications and systems such as blow molding, blown-film and cast-film systems, pipe and profiles and wire and cable applications. In early 1998, the company acquired Wear Technology, which extends its business into the aftermarket for the new and rebuilt screw replacement business.
BLOW MOLDING MACHINES. The company's blow molding machine business consists of the manufacture, sale and distribution of extrusion blow molding machines, which are used to make a wide variety of products, including industrial parts, outdoor furniture, refuse containers, toys, and packaging containers.
MOLD BASES AND COMPONENTS. In January, 1996, the company completed the acquisition of D-M-E, which the company believes is the largest U.S. producer of mold bases, standard components and supplies for the moldmaking industry. D-M-E serves customers throughout the world with ten major manufacturing facilities and several international joint venture operations. Like most of the company's plastics business, D-M-E serves the largest segment of the market, the injection molding process. D-M-E complements the company's other businesses because D-M-E provides the mold bases, supplies and components used in the mold apparatus inside the injection molding machines. The company is achieving synergies in a number of areas, including manufacturing process, technology, marketing and distribution.
In early 1998, the company acquired Northern Supply, a regional catalog distribution company. Northern Supply's business is very complementary to the catalog business of D-M-E and will be managed by D-M-E.
SPECIALTY EQUIPMENT. The company sells a variety of specialty equipment used in the processing of plastics products, including peripheral auxiliary equipment such as material management systems, heat exchangers and product handling systems, all of which are manufactured by third parties to the company's specifications. The company also sells a line of vertical injection molding machines which are manufactured to the company's specifications by a third party. The company also rebuilds and retrofits older types of injection molding equipment manufactured by the company or others, refitting them with new controls and software.
PRODUCTION FACILITIES.
For the plastics technologies segment, the company maintains the following principal production facilities:
FACILITY PRODUCTS - -------- -------- Ahmedabad, India (a) Injection molding machines.
Batavia, Ohio Injection machines, blow molding machines and extrusion systems.
Charlevoix, Michigan Mold components.
Cincinnati, Ohio All electric injection molding machines.
Hillside, New Jersey Special mold base components.
Lewistown, Pennsylvania Mold components.
Madison Heights, Michigan Mold base components.
Malterdingen, Germany Injection molding machines.
Mechelen, Belgium Mold base components.
Melrose Park, Illinois Special mold base components.
Monterey Park, California Special mold base components.
Mt. Orab, Ohio Plastics machinery parts.
Neuenstadt am Kocher, Germany Special mold base components.
Vienna, Austria Extrusion systems.
Windsor, Ontario, Canada Special machinery for mold bases.
Youngwood, Pennsylvania Steel processing and mold components.
(a) The plant in Ahmedabad, India is leased from another party. Construction of a new facility began in 1997.
SALES, MARKETING AND CUSTOMER SERVICE
The company maintains a large direct sales force in the U.S. for its plastics technologies segment, which it supplements with independent agents. Internationally, the company uses both a direct sales force and independent agents. In the U.S., the plastics technologies business uses the company's Cincinnati, Ohio, headquarters, as well as sales and service centers in Allentown, Pennsylvania; Charlotte, North Carolina; Chicago, Illinois; Dallas, Texas; Detroit, Michigan; and Los Angeles, California to market its products and provide customer support and training. Through its Austrian and Ferromatik subsidiaries, the company has an extensive sales, marketing, service and distribution system throughout Europe. D-M-E operates through catalog and telemarketing sales, as well as distribution centers strategically located in industrial and manufacturing areas where most injection molding takes place. Distribution is through a broad distribution network in the U.S. and Europe. In Asia, D-M-E sells through a large network of joint venture sales and service offices. In 1997, the company formally dedicated a new sales and marketing office in Singapore and will continue to expand this presence.
COMPETITION
The markets for plastics technologies in North America and worldwide are highly competitive and are made up of a number of U.S., European and Asian competitors. The company believes it has a significant share of the U.S. market for the types of products it produces, and, believes it is the broadest-line maker of equipment, supplies and systems for plastics processing in the world. The company's competitors vary in size and resources; some are larger than the company, many are smaller, and only a few compete in more than one product category. Principal competitive factors in the plastics technologies industry are: product features, technology, quality, performance, reliability, speed of delivery, price and customer service. The Wolfpack program is designed to maintain and enhance the company's competitive position worldwide with respect to each of these competitive factors. In addition, the company focuses on new product development, the containment of costs, maintaining competitive market pricing and expanded marketing in order to maintain and grow its presence in the market.
MACHINE TOOL BUSINESS - ---------------------
The company is a leading U.S. producer of machine tools. A machine tool is a power-driven machine that is used to cut metal and other materials. Machine tools are typically installed as capital equipment in metalworking industries. In 1997, the company's machine tool segment sales were $458 million.
MACHINE TOOL INDUSTRY
The primary customers for the $25-billion worldwide market for metalcutting machine tools are the aerospace industry; the automotive industry; machine shops; producers of farm, construction, off-road and power generation equipment; manufacturers of bearings; the die and mold industry; and a variety of other metalworking manufacturers. The machine tool industry has historically been cyclical with relatively long lead times between orders and shipments. Machine tool sales are affected by capital spending levels, interest rates, tax and depreciation policies, international competition, currency exchange rates and general economic conditions.
THE COMPANY'S MACHINE TOOL BUSINESS
The company designs, builds and sells a variety of standard and advanced computer numerically controlled (CNC) metalcutting machine tools for various industries, including industrial components, job shops, fluid power, automotive and aerospace. The company's core machine tool operation, the standard machine tool business, manufactures horizontal machining centers, vertical machining centers, turning centers, centerless grinders and automated flexible manufacturing cells for the metalworking industry. The products of the company's advanced machine tool systems business include large, multi-axis metalcutting and composites processing systems for the aerospace industry; large, multi-axis machines for manufacturers of farm, construction, off-road vehicles and power generation equipment and for the die and mold industry. The company also provides aftermarket parts and comprehensive services to customers in all the industries listed above.
STANDARD MACHINE TOOL PRODUCTS
HORIZONTAL CNC MACHINING CENTERS. The company produces CNC horizontal machining centers for basic metalworking operations in a number of industries. These machines are suited to the manufacture of prismatic components such as transmission and gear casings, pump bodies or other box-like parts. Machines are equipped with standard automatic parts and tool changers, and precision rotary tables for multi- sided processing of a single or several parts. Typical operations involve highly precise milling, drilling, boring, tapping, reaming and routing.
VERTICAL CNC MACHINING CENTERS. Similar to the horizontal machining centers in the basic types of metal removal operations performed, vertical machining centers are better suited to the manufacture of flat, plate-like parts for a broad spectrum of industries including mold and die machining. All models utilize automatic tool interchange for efficient processing. Add-on features can further enhance productivity by automating the loading and unloading of parts. Reflecting the company's focus on product innovation, competitiveness and efficiency, its facility in Birmingham, England received the 1997 U.K. Manufacturing Industry Achievement Award for Management Excellence.
CNC TURNING CENTERS. Also called CNC lathes, turning centers shape cylindrical parts which are rotated at high speed against a stationary tool to perform metal removal operations. Typical examples of parts manufactured with CNC lathes are shafts, pulleys, spindles or similar rotating parts. Though primarily designed to provide a symmetrical cross-section, some models are capable of applying rotating tools such as milling cutters or drills. This expanded capability allows for more comprehensive part processing while the part is still in the turning center, a feature that can eliminate additional handling and processing on a separate machine.
CNC GRINDING MACHINES. CNC precision grinding machines are used to bring a part surface into a more precise dimension or surface finish. There are several kinds of grinding processes. The company specializes in centerless grinding machines, which grind external diameters of cylindrical parts such as bearings, compressor shafts and cam shafts. The company believes that it has a long-standing leadership position in the U.S. centerless grinding business with an installed base of several thousand machines.
AUTOMATED FLEXIBLE MANUFACTURING CELLS. Automated flexible manufacturing cells consist of one or more processing machines (usually standard machine tools), ancillary equipment for parts and tools handling and computer hardware and software to automate and integrate all necessary functions, allowing for lightly-manned or unattended operation. These systems are used widely throughout the metalworking industry and generally feature a number of computer-driven functions, such as work and tool scheduling and quality control. Automated flexible manufacturing cells are a major focus of a number of U.S. companies seeking to update plant and equipment to enhance their productivity and international competitiveness. The company believes that its Wolfpack-developed cell control hardware and software have enabled it to obtain a leadership position in the U.S. automated flexible manufacturing cells market.
ADVANCED SYSTEMS
METALCUTTING AND COMPOSITES PROCESSING SYSTEMS FOR AEROSPACE. The company believes it is one of the world's leading producers of large five-axis machining centers and profilers. These machines are generally used to create intricately contoured surfaces in components manufactured by the aerospace industry. Typical materials machined include aluminum and high-strength alloys such as titanium.
The company is also a pioneer and world leader in the development of new machines and systems to automate the manufacture of components made of advanced composite materials, such as carbon or graphite fibers in combination with epoxy. These systems are used by the aerospace industry to manufacture a variety of high strength-to-weight ratio structural and air surface components.
LARGE MACHINE TOOLS. The company makes large multi-axis metalcutting machines and systems for manufacturers of heavy machinery such as farm and construction implements and machinery, off-road vehicles and power generation equipment.
ELECTRONIC SYSTEMS. In December, 1995, the company sold its Electronic Systems Division. To maintain control system continuity and development, the company entered into an extensive seven-year supply contract with the purchaser for electronic controls used on the company's machine tools and plastics machinery. The company continues to develop and maintain its own applications software. The decision to sell ESD was made to redeploy assets to more strategic businesses.
PRODUCTION FACILITIES.
For the machine tools segment, the company maintains the following principal production facilities:
FACILITY PRODUCTS - -------- -------- Birmingham, England Standard vertical CNC machining centers and CNC turning centers.
Cincinnati, Ohio Standard machine tool products and (4 plants) advanced systems.
SALES, MARKETING AND CUSTOMER SERVICE
A strong distribution network is one of the cornerstones in the company's position in the global market for standard machine tools. The company markets machine tools in North America through a comprehensive network of independent distributors assisted by the company's factory support and direct sales force. Through these distributors, the company currently has approximately 330 sales people representing its machine tool business in North America.
The company believes that applications expertise, field- service engineering and customer support are important for all its products, especially for grinding machines, aerospace and special machines and automated flexible manufacturing cells. In addition to its sales headquarters in Cincinnati, Ohio, the company maintains regional sales offices in Detroit, Michigan; Birmingham, England; Offenbach, Germany; Paris, France; and Singapore.
The company believes that it has achieved a leading position in aftermarket support of current and older generations of machine tools. The company has a principal hub for parts, service and training in Cincinnati, Ohio and support hubs in Birmingham, England and Singapore. The hubs are electronically linked for global round-the-clock customer support and sales of parts and services.
COMPETITION
The worldwide machine tool industry is made up of a number of competitors, none of which has a dominant market share. The markets for the company's machine tools are highly competitive in the U.S. and internationally, with strong competition from U.S., European and Asian companies in all markets. The company's competitors vary in size and resources; some are larger than the company, many are smaller, and only a few compete in more than one product category.
Principal competitive factors for products in the machine tool business are product features or capabilities (including controls and software), quality, performance, reliability, technology, speed of delivery, price and customer service. The Wolfpack program is designed to enhance the company's competitive position with respect to each of these factors. In certain aerospace and grinding machine lines, the company has significant market positions and relatively few competitors. However, in the case of standard machine tool products and automated flexible manufacturing cells, there are many competitors and no one company has market dominance.
INDUSTRIAL PRODUCTS BUSINESS - ----------------------------
The company produces five basic types of industrial products: metalcutting tools, metalworking fluids, precision grinding wheels, carbide wear parts and industrial magnets, in total representing over 150,000 different products. In 1997, sales of the company's industrial products segment were $703 million. The company believes it is a leader in many new product technologies, including synthetic lubricants, use of synthetic ceramic abrasives, high- performance cutting tool coatings, and product designs using computer modeling. Over 75% of the company's industrial products sales are of consumable products and components, which means they are depleted during the process for which they are used, offering the company a continuous opportunity to sell replacement products to its customers. The company believes that its industrial products business complements its plastics technologies and machine tool businesses, because the industrial products business is exposed to less pronounced business cycles and, therefore, generates more consistent cash flows.
INDUSTRIAL PRODUCTS INDUSTRY
The company's industrial products business participates in a $35 billion world market, which traditionally has grown at a rate approximating the growth of the world GDP. The company's products address approximately $20 billion of the world market with heaviest market penetration in the U.S. and Europe, and in the case of metalcutting tools, India. The company serves customers in the industrial components and machinery, automotive and electrical industries, as well as job shops.
THE COMPANY'S INDUSTRIAL PRODUCTS BUSINESS
METALCUTTING TOOLS (CARBIDE INSERTS AND ROUND TOOLS). Metalcutting tools are made of carbide, steel and other materials and include systems to hold metalcutting tools that are used on machine tools for use in a wide variety of metalcutting operations. The company believes that, through its subsidiaries, Valenite, Widia and Talbot, it is the second-largest producer of carbide metalcutting tool systems in the U.S. and the third-largest worldwide. In addition, the company believes that it is also the third largest producer of round tools in North America. Valenite manufactures over 38,000 products, including an extensive line of cutting tool inserts in a wide variety of materials and geometries for turning, boring, milling and drilling, and standard and special steel insert holders. Valenite has an excellent market position in the automotive, off-road vehicle and truck industries and has strong market positions in carbide wear parts for metalforming and in products requiring the wear and corrosion-resistant properties of tungsten carbide.
In February, 1995, the company completed the acquisition of Widia, a major European metalcutting tool maker with key production facilities in Germany and other Western European countries. Widia also owns a 51% interest in Widia (India) Ltd., an Indian public company. Widia's product lines include tungsten carbide cutting tool inserts and steel insert holders needed for metalcutting operations, carbide wear parts used in forming and stamping metal, and both soft and permanent industrial magnets, used in automotive and other applications.
In 1995, the company initiated a $28 million plan to integrate certain Valenite and Widia operations, primarily in Europe and Japan. This plan involved the closing of two manufacturing plants, the downsizing of another plant, as well as the consolidation of numerous sales, customer service and warehousing operations in Europe and Japan. In total, the execution of the plan has resulted in the elimination of over 370 production and administrative personnel. As a result, the company is achieving annual cost savings in excess of $20 million.
In July, 1995, the company completed the acquisition of Talbot, a major supplier of round high-speed steel and carbide metalcutting tools and the largest U.S. producer of end mills, as well as a leading tap producer. Talbot, with annual sales of approximately $40 million, enables the company to enter the market for round tools, including high- speed steel and carbide end mills, taps, countersinks, counterbores and reamers. These products are highly complementary to the products made by Valenite and Widia. The company expects to expand Talbot products into non-U.S. markets.
In an effort to further broaden the company's product coverage in the metalworking tooling business, during 1997, the company made two smaller acquisitions. Minnesota Twist Drill, Inc., with annual sales of approximately $10 million, manufactures standard high-speed twist drills in its Chisholm, Minnesota plant. Data Flute CNC, Inc., also with annual sales of approximately $10 million, is a manufacturer of high-performance solid carbide end mills located in Pittsfield, Massachusetts. These acquisitions are highly complementary to the company's Valenite and Talbot product lines and broaden its already extensive product offering in the market place. In 1998, the company will initiate a $15 million expansion program which includes a second plant for Data Flute, a doubling of production capacity at Minnesota Twist Drill and the expansion of a Talbot facility.
METALWORKING FLUIDS. Metalworking fluids are proprietary chemical compounds and emulsions used as lubricants, coolants and corrosion inhibitors in a wide variety of metalcutting and metalforming operations. Major customers are producers of precision metal components for many industries, including manufacturers of automotive power trains, aerospace engines and bearings, as well as general metalworking shops. The company is a full-line supplier, offering water-based fluids (synthetics), water-based oil- bearing fluids (semi-synthetics) and oil-based fluids. Over the last four years, the company expanded its lines of soluble oils, base oils and synthetic fluids. The company has marketed these products under the Cimcool brand since the mid - 1940s. With the acquisitions of Valenite and Widia, the company has developed two additional brands of fluids. In 1994, the company developed the Valcool brand that is designed to work with all metalcutting tools which is being marketed through Valenite's market channels. In 1996, the company introduced through the Widia market channels the Widacool line of fluid in Europe.
The company also is the leader in providing certain customers with comprehensive fluid management programs. This involves the company's engineers working full-time on site at the customer's plant to oversee and optimize all wet chemistry, including metalworking fluids used in the plant. In 1997, the company launched MILPROT (Milacron Production Services) which is a program that manages 100% of the tooling, abrasives, chemicals and metalworking fluids in a customer's plant.
GRINDING WHEELS. Grinding wheels are rotating tools made of granular abrasive materials bonded together with vitreous or resin materials, which are used by manufacturers in the metalworking industry. The company believes that it is now the second-largest U.S. producer of grinding wheels. Major customers are producers of precision metal components for many industries, including manufacturers of automotive power trains, aerospace engines and bearings, as well as general metalworking machine shops. The company designs and manufactures a wide variety of precision abrasive grinding wheels, including resin-bonded, vitrified, cubic boron nitride (CBN), diamond and synthetic ceramic abrasive types.
The company believes, based on tests in its laboratories, as well as in customer plants, that the company's proprietary formulae and modern production equipment and techniques for the manufacture of precision grinding wheels give it advantages in terms of product quality, lower production costs and faster deliveries. The company believes that it has also benefited from technologies common to both grinding wheels and metalcutting fluids. The company achieves lower production costs, in part, by finishing its wheels on CNC machines designed and built by the company's machine tool business.
CARBIDE WEAR PARTS. Carbide wear parts represent various components made from sintered tungsten carbide having physical properties of very high hardness, wear resistance and resistance to chemical activity. Valenite and Widia manufacture three types of carbide wear parts: tooling components for metalforming, carbide rod for use in round tools, and metalforming and general wear parts to resist frictional wear and chemical activity.
INDUSTRIAL MAGNETS. Widia is a leader in injection molded plastic bonded magnets. Widia manufactures permanent industrial magnets and magnetic circuits for automotive, electrical and other industrial applications, as well as soft magnets for the telecommunications and construction industries.
PRODUCTION FACILITIES
For its industrial products segment, the company maintains the following principal production facilities:
FACILITY PRODUCTS - -------- -------- Andrezieux, France Carbide inserts.
Bangalore, India Carbide inserts, steel insert holders, carbide wear parts and special machine tools.
Carlisle, Pennsylvania Resin grinding wheels.
Chisholm, Minnesota High-speed twist drills.
Cincinnati, Ohio Metalworking fluids and precision grinding wheels.
Detroit, Michigan (metro area) (6 plants)(a) Carbide inserts, special steel products and gauging systems.
Essen, Germany (3 plants) Carbide inserts, magnets, metallurgical powders and carbide rods.
Gainesville, Texas (a) Tool holding systems for turning, milling and boring.
Hardenberg, The Netherlands Carbide wear parts.
Lichtenau, Germany Steel insert holders.
Millersburg, Pennsylvania (2 plants) End mills, taps and counterbores.
Nogales, Mexico (a) Resin grinding wheels.
Patancheru, India Rock tools.
Pittsfield, Massachusetts Carbide end-mills.
Sinsheim, Germany (a) Special steel tooling products.
Tokyo, Japan (a) Carbide inserts and steel tools.
Valley View, Ohio (a) End mills.
Vlaardingen, The Netherlands Metalworking fluids.
West Branch, Michigan (2 plants) Metallurgical powders and carbide wear parts.
Westminster and Seneca, South Carolina (5 plants) Carbide and diamond inserts.
(a) The Gainesville, Texas plant, Nogales, Mexico plant, Tokyo, Japan plant, Sinsheim, Germany plant, Valley View, Ohio plant and three plants in the Detroit, Michigan (metro area) are leased from unrelated third parties.
SALES, MARKETING AND CUSTOMER SERVICE
The company generally sells its industrial products under multiple brands through parallel market channels, using direct sales, industrial distributors, agents and manufacturers' representatives, as well as industrial catalog sales. Most of the company's sales are of products manufactured by the company and sold under company-owned brands. In addition, the company sells its products under the brand names of other companies through their market channels, as well as products under the Milacron brand names that are made by other companies.
COMPETITION
The company's main global competitors in its metalworking fluids business are large petrochemical companies and smaller companies specializing in similar fluids. There are a few large competitors in the U.S. grinding wheel market, one of which is significantly larger than the company. The company has many competitors for metalcutting tools but only two have higher worldwide sales.
PATENTS - -------
The company holds a number of patents, none of which is material to any business segment.
EMPLOYEES - ---------
During 1997, the company employed an average of 12,751 people, of whom 6,062 were employed outside the U.S. As of year-end 1997, the company employed 12,957 people.
BACKLOG - -------
The backlog of unfilled orders was $365 million at the end of 1997 and $373 million at the end of 1996. The backlog at year-end 1997 is believed to be firm and, in general, is expected to be delivered in 1998.
SEGMENT INFORMATION - -------------------
Financial data for the past three years for the company's business segments are shown in the following tables. The 1996 increases for plastics technologies are primarily attributable to the acquisition of D-M-E on January 26, 1996. The 1996 decreases for machine tools are partially attributable to the sale of ESD on December 30, 1995.
(In millions) Fiscal Year ---------------------------------
1997 1996 1995 --------- --------- --------- SALES - ----- Plastics technologies $ 735.7 $ 662.4 $ 570.1 Machine tools 458.0 371.8 409.0 Industrial products 703.0 695.5 670.2 -------- -------- -------- Total sales $1,896.7 $1,729.7 $1,649.3 ======== ======== ========
BACKLOG OF UNFILLED ORDERS - -------------------------- Plastics technologies $ 89.5 $ 105.6 $ 108.1 Machine tools 169.3 160.6 118.1 Industrial products 106.2 107.0 118.0 -------- -------- -------- Total backlog $ 365.0 $ 373.2 $ 344.2 ======== ======== ========
OPERATING EARNINGS - ------------------ Plastics technologies $ 59.7 $ 59.2 $ 54.3 Machine tools 14.5 4.9 7.7 Industrial products 81.2 73.7 62.1 Disposition of businesses (a) - - 71.0 Integration charge (b) - - (9.8) Corporate expenses (17.2) (16.8) (15.7) Other unallocated expenses (c) (11.1) (9.9) (10.5) -------- -------- -------- Operating earnings 127.1 111.1 159.1 Interest expense - net (26.5) (29.8) (24.8) -------- -------- -------- Earnings before income taxes $ 100.6 $ 81.3 $ 134.3 ======== ======== ========
IDENTIFIABLE ASSETS - ------------------- Plastics technologies $ 611.5 $ 612.6 $ 335.3 Machine tools 253.9 233.3 232.8 Industrial products 497.7 458.9 468.1 Unallocated corporate assets (d) 29.4 31.5 137.5 -------- -------- -------- Total assets $1,392.5 $1,336.3 $1,173.7 ======== ======== ========
CAPITAL EXPENDITURES - -------------------- Plastics technologies $ 26.7 $ 20.6 $ 16.6 Machine tools 18.0 15.7 8.6 Industrial products 34.8 28.9 27.1 -------- -------- -------- Total capital expenditures $ 79.5 $ 65.2 $ 52.3 ======== ======== ========
DEPRECIATION AND AMORTIZATION - ----------------------------- Plastics technologies $ 23.0 $ 21.4 $ 11.8 Machine tools 6.2 5.0 7.4 Industrial products 24.5 24.5 24.4 -------- -------- -------- Total depreciation and amortization $ 53.7 $ 50.9 $ 43.6 ======== ======== ========
(a) $66.0 million relates to the machine tools segment and $5.0 million relates to the industrial products segment. (b) Relates to the industrial products segment. (c) Includes financing costs related to the sale of accounts receivable and minority shareholders' interests in earnings of subsidiaries. (d) Includes cash and cash equivalents and the assets of the company's insurance and utility subsidiaries.
GEOGRAPHIC INFORMATION - ----------------------
The following table summarizes the company's U.S. and non- U.S. operations.
Sales of U.S. operations include export sales of $231.8 million in 1997, $199.6 million in 1996, and $166.9 million in 1995.
Total sales of the company's U.S. and non-U.S. operations to unaffiliated customers outside the U.S. were $816.5 million, $830.3 million, and $784.2 million in 1997, 1996 and 1995, respectively.
Fiscal Year ------------------------------ (In millions) 1997 1996 1995 -------- ------ ------
U.S. operations - --------------- Sales $1,204.4 $969.8 $938.3 Segment operating earnings 108.9 81.4 71.8 Disposition of businesses - - 62.1 Integration charge - - (2.9) Identifiable assets 813.9 731.6 484.1 Capital expenditures 50.8 41.7 31.4 Depreciation and amortization 33.7 28.9 21.6
Non-U.S. operations - ------------------- Sales 692.3 759.9 711.0 Segment operating earnings 46.5 56.4 52.3 Disposition of businesses - - 8.9 Integration charge - - (6.9) Identifiable assets 549.2 573.2 552.1 Capital expenditures 28.7 23.5 20.9 Depreciation and amortization 20.0 22.0 22.0
EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------
The following information is included in accordance with the provisions for Part III, Item 10:
POSITIONS HELD DURING NAME AND AGE POSITION LAST FIVE YEARS - ------------ -------- ---------------------
Daniel J. Meyer Chairman, President Elected Chairman and (61) and Chief Executive Chief Executive Officer Officer, Director in November, 1991. During 1997, was also elected President of the company. Has served as Director since 1985. Also, is a member of the Executive Committee.
Harold J. Faig Group Vice President- Elected Group Vice (49) Plastics President - Plastics Technologies Technologies in February, 1994. Prior thereto was Vice President - Injection Molding from 1990.
Kyle H. Seymour (a) Group Vice President- Elected Group Vice (37) Machine Tools President - Machine Tools in 1997. Prior thereto was Manager of U.S. Machine Tool Products from 1995, Manager of Horizontal Machining Center Business from 1994, Manufacturing Manager from 1993, and Assembly Operations Manager from 1991.
Alan L. Shaffer Group Vice President- Elected Group Vice (47) Industrial Products President - Industrial Products in 1986.
Ronald D. Brown Vice President- Elected Vice President - (44) Finance and Finance and Administration and Administration Chief Financial and Chief Financial Officer Officer in 1997. Prior thereto was Vice President-Finance and Chief Financial Officer from 1993 and Treasurer from 1989.
James R. Christie Vice President- Elected Vice President - (52) Industrial Products Industrial Products in 1997. Has served as President of Valenite since 1993.
William J. Gruber Vice President - Elected Vice President - (44) U.S. Plastics U.S. Plastics Technologies Technologies in 1996. Prior thereto was Manager of U.S. Plastics Technologies from 1995 and General Manager, Products Division from 1984.
Barbara G. Kasting (b) Vice President- Elected Vice President - (45) Human Resources Human Resources in 1997. Prior thereto was Assistant Treasurer from 1995, Director of Treasury Operations from 1994, and Corporate Quality Manager from 1992.
Richard L. Kegg Vice President - Elected Vice President - (62) Technology and Technology and Manufacturing Manufacturing Development Development in 1993. Prior thereto was Director, Corporate Research and Manufacturing Development from 1990.
James M. Stergiopoulos Vice President- Elected Vice President - (59) Plastics Plastics Technologies Technologies, Europe in 1995. Prior Europe thereto was Director, Plastics Technologies Europe from 1994 and General Manager, Cincinnati Milacron Austria from 1987.
Wayne F. Taylor Vice President- Elected Vice President - (54) General Counsel General Counsel and and Secretary Secretary in 1990.
Robert P. Lienesch (c) Controller Elected Controller in (52) 1989.
Kenneth W. Mueller (c) Treasurer and Elected Treasurer and (64) Assistant Assistant Secretary in Secretary 1993. Prior thereto was Acting Director of Standard Machine Tools from 1992.
Notes: Parenthetical figure below name of individual indicates age at most recent birthday prior to December 27, 1997.
There are no family relationships among the executive officers of the Registrant.
Officers of the company are elected each year by the Board of Directors.
(a) Kyle H. Seymour succeeds D. Michael Clabaugh, who retired from the company in March, 1997. (b) Barbara G. Kasting succeeds Theodore Mauser, who retired from the company in June, 1997. (c) Kenneth W. Mueller announced his intent to retire April 30, 1998. Robert P. Lienesch has been elected Vice President and Treasurer and Jerome L. Fedders has been elected Controller, both effective April 30, 1998.
ITEM 2.
ITEM 2. PROPERTIES
The information required by Item 2 is included in Part I on pages 8, 11, 14 and 15 of this Form 10-K.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management and counsel, there are no material pending legal proceedings to which the company or any of its subsidiaries is a party or of which any of its property is the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1997.
PART II -------
ITEM. 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common shares are listed on the New York Stock Exchange. Such shares are also traded on the Cincinnati Stock Exchange, Boston Stock Exchange, Pacific Stock Exchange, Philadelphia Stock Exchange and Midwest Stock Exchange, with options traded on the Philadelphia Stock Exchange. As of February 27, 1998, there were approximately 5,750 holders of record of the company's common shares. The company's preferred shares are not actively traded.
The table below shows the price range of the common shares for 1996 and 1997, as reported by the New York Stock Exchange. Cash dividends of $.09 per common share were paid for each quarter of 1996 and the first two quarters of 1997. A cash dividend of $.12 per common share was paid for the third and fourth quarters of 1997. In addition, cash dividends of $1.00 per preferred share were paid in each quarter of 1996 and 1997.
COMMON STOCK PRICE RANGE ---------------- FISCAL 1996, QUARTER ENDED HIGH LOW ------ ------ March 23 $29.25 $20.75 June 15 27.88 23.13 October 5 24.00 18.38 December 28 22.38 18.50
FISCAL 1997, QUARTER ENDED
March 22 $23.63 $19.13 June 14 25.50 17.88 October 4 28.38 23.88 December 27 29.88 24.38
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per-share amounts)
(a) During 1997, amortization of goodwill, which was previously included as a component of cost of products sold, is included in other costs and expenses-net in this schedule to conform to the company's presentation in its Consolidated Statement of Earnings. Amounts for prior periods have been reclassified to conform to the 1997 presentation.
(b) Represents a gain of $66.0 million ($52.4 million after tax) on the sale of the company's Electronic Systems Division and a gain of $5.0 million ($4.0 million after tax) on the sale of the company's American Mine Tool business.
(c) Represents a charge of $9.8 million ($7.8 million after tax) for the integration of certain Widia and Valenite operations.
(d) Represents a charge (with no current tax effect) for the disposition of a plastics technologies subsidiary.
(e) Represents a charge (with no current tax effect) for the consolidation of U.S. machine tool manufacturing operations.
(f) For 1993, diluted earnings per common share is equal to basic earnings per share because the inclusion of potentially dilutive securities would result in a smaller loss per common share.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The company operates in three business segments: plastics technologies (formerly plastics machinery), machine tools and industrial products. In the last four years, the company has achieved record sales in each succeeding year. The sales increases in 1994 through 1996 resulted principally from the growth of the plastics technologies and industrial products segments, largely as a result of acquisitions. The 1997 sales increase resulted principally from internal growth in the plastics technologies and machine tool segments. The 1997 sales level in the industrial products segment benefited from two small acquisitions, but its sales were held back by the translation effect of foreign currency exchange rate fluctuations.
ACQUISITIONS AND DIVESTITURES
In 1997, the company acquired two businesses: Data Flute CNC in June and Minnesota Twist Drill in September. Both businesses are included in the industrial products segment. These acquisitions resulted in an increase in 1997 new orders and sales of approximately $8 million.
On January 26, 1996, the company acquired D-M-E, which is included in the company's plastics technologies segment for eleven months of 1996. This acquisition had the effect of increasing new orders and sales by approximately $153 million in 1996, and $16 million in 1997 when compared with 1996.
In 1995, the company acquired two businesses: Widia in February and Talbot in July. Both businesses are included in the industrial products segment. The timing of these acquisitions caused an increase in new orders and sales in 1996 of approximately $50 million when compared with 1995.
On December 30, 1995, the company sold its Electronic Systems Division (ESD), which was included in the machine tools segment. While most of its sales were made to other Milacron businesses, ESD also contributed approximately $35 million and $30 million of new orders and sales, respectively, to external customers in 1995. ESD's operating earnings were $14.2 million in 1995, and its disposition resulted in a 1995 gain of $66.0 million before tax ($52.4 million after tax).
On January 27, 1995, the company sold its American Mine Tool (AMT) business which was formerly part of the industrial products segment. AMT's new orders, sales and operating earnings were immaterial, but its disposition resulted in a gain of $5.0 million before tax ($4.0 million after tax) in 1995.
PRESENCE OUTSIDE THE U.S.
In recent years, the company's growth outside the U.S. has allowed the company to become less dependent on the U.S. industrial sector. In 1997, markets outside the U.S. represented the following percentages of consolidated sales: Europe - 27%; Asia - 9%; Canada and Mexico - 5%; and the rest of the world - 2%.
As a result of the company's geographic sales mix, foreign currency exchange rate fluctuations affect the translation of sales and earnings, as well as consolidated shareholders' equity. The most important factors are the exchange rates of the British pound and the German mark. Throughout part of 1996, the financial statement effects of a weaker German mark and related European currencies were to some degree offset by the effects of a stronger British pound. In 1997, however, the pound somewhat stabilized while the mark has continued to weaken. As a result, the company has experienced more significant translation effects in 1997, resulting in negative currency effects on new orders and sales of $87 million and $69 million, respectively. The 1997 translation effect on net earnings approximated $2.1 million, or $.05 per share. In 1997, there was also a $25 million decrease in shareholders' equity due to cumulative foreign currency translation adjustments. If the mark remains at current levels or weakens further in 1998, the company will continue to experience a negative effect on translating its European new orders, sales and net earnings when compared with 1997.
About 3% of the company's 1997 sales were to customers located in Korea and the ASEAN countries - the areas most severely impacted by Southeast Asia market and currency difficulties toward the end of 1997. The net effect of these Asian difficulties was to reduce the company's net earnings by approximately $1 million in the fourth quarter of 1997. While it is impossible to forecast the ultimate worldwide impact of these difficulties, the company currently believes that the current magnitude of these issues is not likely to warrant major revisions to the company's 1998 expectations. The company further believes that Asian markets hold excellent potential for both sales and earnings growth over the long term.
EARNINGS PER COMMON SHARE
Beginning with the fourth quarter of 1997, earnings per common share (EPS) are being calculated in accordance with newly issued rules established by the Financial Accounting Standards Board. The new rules require the company to report two EPS amounts: "basic" and "diluted." For the company, the calculation for diluted EPS closely approximates the company's previously disclosed EPS figures under the old accounting rules. The company has restated prior year EPS figures under the new accounting rules whenever appropriate and EPS figures cited in this "Management's Discussion and Analysis" refer to diluted EPS amounts.
1997 COMPARED TO 1996
NEW ORDERS AND BACKLOG
New orders in 1997 were $1,886 million, which represented a $133 million, or 8%, increase from the $1,753 million in 1996. Orders for plastics technologies products increased by $65 million, or 10%, principally due to increased orders for U.S.-built injection molding machines. Machine tool orders increased by $51 million, or 12%, due to increased orders for U.S.-built horizontal machining centers and aerospace-related systems. Orders for industrial products increased by $17 million, or 2%, of which $8 million resulted from the 1997 acquisitions. Excluding the effect of acquisitions and foreign currency translation effects, new orders increased for this segment by 9% as all major U.S. product lines showed improvement.
U.S. export orders were $210 million in 1997 compared to $220 million in 1996.
The company's backlog of unfilled orders totaled $365 million at December 27, 1997. This compares to $373 million at December 28, 1996. These high levels are being maintained in large part by increased orders for U.S.- built machine tools for aerospace customers.
SALES
Sales in 1997 were $1,897 million, which represented a $167 million, or 10%, increase over 1996. This increase was caused principally by internal growth in the plastics technologies and machine tools segments. 1997 sales were affected by a $69 million negative effect of currency translation adjustments. Excluding the acquisitions and currency translation effects, sales increased by 12%.
Sales of plastics technologies increased by $73 million, or 11%, primarily due to increased sales of U.S.-built injection molding machines. Machine tool sales increased by $86 million, or 23%, due to increased U.S. sales, and despite reduced sales of U.K.-built machines. Industrial products sales increased by $8 million, or 1%. However, after excluding the acquisitions and currency translation effects, sales increased by $42 million, or 6%.
Sales of all segments to non-U.S. markets totaled $817 million, a decrease in 1997 of $14 million, and export sales totaled $232 million, an increase of $32 million. In 1997 and 1996, products manufactured outside the U.S. approximated 37% and 44% of sales, respectively, while products sold outside the U.S. approximated 43% and 48% of sales, respectively.
MARGINS, COSTS AND EXPENSES
Amortization of goodwill had, until 1997, been included in cost of products sold. Because of its increased significance as a result of acquisitions, the company has concluded that it more properly belongs in the caption, "other costs and expenses-net" in the Consolidated Statement of Earnings. Amounts for cost of products sold, manufacturing margins and related percentages, and other costs and expenses-net for prior years have been restated for consistency of presentation. Amortization expense has been as follows: $6.1 million, $5.8 million and $1.5 million in 1997, 1996 and 1995, respectively.
Manufacturing margins as a percent to sales, were 24.9% in 1997 and 25.3% in 1996. Margins for machine tools and industrial products improved in 1997, while margins for plastics technologies were depressed through the first three quarters of 1997 due to pricing pressures on U.S.- built injection molding machines. Plastics technologies' margins improved slightly in the fourth quarter of 1997.
Total selling and administrative expense increased in amount, as expected, due to increases in certain selling costs that vary with sales levels. Administrative expenses increased modestly. As a percent to sales, selling expense declined to approximately 15% of sales and administrative expenses remained at approximately 2% of sales.
The expense for minority shareholders' interests in earnings of subsidiaries relates principally to Widia's subsidiary in India. The increased expense is caused by the subsidiary's improved profitability.
Other expense-net, including amortization of goodwill, increased to $11.2 million in 1997 from $6.5 million in 1996. The increase was caused primarily by the absence of favorable settlements of legal claims that are included in the 1996 amount and the inclusion of severance expense of approximately $2.0 million in the first quarter of 1997 relating to approximately 60 employees at Ferromatik, the company's German injection molding machine subsidiary. As a result of this and other actions at Ferromatik, the company expects to achieve annualized savings of $3.5 million, which began to phase in during the second quarter of 1997.
Interest expense-net of interest income, was $26.5 million in 1997 compared with $29.8 million in 1996. The decrease was due to lower average debt levels and lower borrowing rates as well as the effects of foreign currency translation.
INCOME TAXES
The provision for income taxes in 1997, 1996 and 1995 includes U.S. federal and state and local income taxes, and income taxes in other jurisdictions outside the U.S. The company entered all three years with sizeable net operating loss (NOL) carryforwards, along with valuation allowances in certain jurisdictions against the NOL carryforwards and other deferred tax assets.
By December 30, 1995, the company had fully utilized its U.S. NOL carryforwards, but as of December 27, 1997, its non-U.S. NOL carryforwards totaled $112 million, most of which have no expiration dates.
The company's practice is to periodically reevaluate the future realization of all of its deferred tax assets. During the period, the company concluded that it is more likely than not that a portion of these assets will be offset against future taxable income. As a result, the company reversed valuation allowances in certain jurisdictions which caused the provision for income taxes to be less than the statutory rate. The company expects the utilization of these NOL carryforwards and reversal of additional valuation allowances to continue to cause the effective tax rate to be less than the U.S. statutory rate through at least 1998, although the overall rate is expected to increase to approximately 30% in 1998.
EARNINGS
Net earnings in 1997 were $80.6 million, or $2.01 per share, compared with $66.3 million, or $1.74 per share in 1996. Net earnings increased 21%, while per share earnings increased 16%, which also includes the effect of increased common shares outstanding throughout 1997.
1996 COMPARED TO 1995
NEW ORDERS AND BACKLOG
New orders for 1996 were $1,753 million, which represented a $118 million, or 7%, increase over 1995. Excluding the effects of acquisitions and divestitures, new orders decreased by $51 million, which approximates the decline caused by changes in currency exchange rates.
Orders for plastics technologies increased $100 million. Excluding the effects of the D-M-E acquisition, however, new orders for plastics technologies declined by $53 million, or 10%, due primarily to weaker order levels for injection molding machines in the U.S. in the first half of 1996. Machine tool orders totaled $414 million, virtually unchanged from 1995 level. However, after excluding the effect of the ESD divestiture, new orders for machine tools increased $31 million, or 8%, largely due to increased orders for U.K.-built standard machine tools and U.S.-built aerospace products. This segment experienced reduced orders for U.S.-built standard machine tools throughout much of the year, but orders improved in the fourth quarter. Orders for industrial products were $685 million. After excluding the effect of the Talbot and Widia acquisitions, new orders for industrial products declined $28 million, or 4%, due primarily to the weakening German mark throughout the year, and a weakening of the market for European cutting tools and industrial magnets in the last half of 1996.
U.S. export orders increased to $220 million in 1996, up over 34% from 1995 due primarily to the D-M-E acquisition and the receipt of a single $20 million export order.
At December 28, 1996, the backlog of unfilled orders was $373 million, up from $344 million at December 30, 1995. The increase relates primarily to increased orders for U.S.-built machine tools, including aerospace products.
SALES
Sales in 1996 were $1,730 million, which represented an $80 million, or 5%, increase over 1995. The increase was caused primarily by the D-M-E acquisition. Excluding the effect of acquisitions and divestitures, sales decreased by approximately $90 million, of which $43 million was due to the effect of currency translation adjustments.
Sales of plastics technologies increased by $92 million. Excluding the effects of the D-M-E acquisition, however, sales of plastics technologies declined by $61 million, or 11%, due primarily to weaker orders for U.S.-built injection molding machines in the first half of 1996 and European-built injection molding machines throughout the year. Machine tool sales declined $37 million. After excluding the ESD divestiture effect, however, sales for machine tools declined $7 million, or 2%, due to reduced sales of U.S.-built standard machine tools, in part offset by increased sales of U.K.-built standard machine tools and U.S.-built aerospace products. Industrial products' sales increased, although after excluding the acquisitions, sales declined $22 million, or 3%, due to currency translation effects and a weaker European market.
Sales of all segments to non-U.S. markets totaled $830 million, an increase in 1996 of $46 million, and export sales totaled $200 million, an increase of $33 million. The increases resulted primarily from the D-M-E acquisition. In both 1996 and 1995, products manufactured outside the U.S. approximated 44% of sales while products sold outside the U.S. approximated 48% of sales.
MARGINS, COSTS AND EXPENSES
Manufacturing margins, as a percent to sales, were 25.3% in 1996 compared with 25.0% in 1995; excluding ESD's margins from 1995, the ongoing business' margins increased from 24.3% in 1995 to 25.3% in 1996. Plastics technologies margins increased in the U.S. despite continued price pressures, but declined in Germany due to temporary excess staffing levels at Ferromatik. Machine tool margins also increased, after excluding ESD's margins from 1995 results. Industrial products' margins improved for the year but declined in the fourth quarter due to reduced sales volume in Widia's European businesses.
Selling and administrative expense increased in 1996 due to the D-M-E acquisition and increased sales. As a percent to sales, however, selling expense continued to approximate 16% of sales and administrative expense continued to approximate 2% of sales.
Other-net, including amortization of goodwill, declined in 1996 to $6.5 million from $10.9 million in 1995 due to reduced costs associated with the sale of accounts receivable, increased gains on sales of fixed assets, favorable settlement of legal claims and other similar items which may not recur in the future.
Interest expense, net of interest income, was $29.8 million in 1996 compared to $24.8 million in 1995. The expense increase was primarily attributable to the temporary use of debt to fund the D-M-E acquisition. This debt was later repaid from the proceeds of the equity offering described below and, accordingly, interest expense declined during the second half of the year.
EARNINGS
Net earnings in 1996 were $66.3 million, or $1.74 per share, compared with $105.6 million, or $3.07 per share in 1995. The 1995 net earnings included $48.6 million, or $1.42 per share, resulting from the combined effects of the gain on the disposition of two businesses, offset by an integration charge for Valenite. Excluding those items, 1996 net earnings increased by $9.3 million, or 16%, while per share earnings increased by $.09, or 6%, which also includes the effect of an increase in outstanding common shares.
YEAR 2000
The company is implementing plans to address potential exposures to various systems caused by the approach of the Year 2000. Many of the company's systems are already Year 2000 compliant, while other systems are being reprogrammed, and, in some cases, the company is using this opportunity to implement more modern systems which are already Year 2000 compliant. The financial impact of these changes is not expected to have a material effect on the company's consolidated financial position, results of operations or cash flows.
CHANGE IN FISCAL YEAR
In November, 1997, the Board of Directors approved management's plan to change the company's fiscal year from a 52-53 week year ending on the Saturday closest to December 31st to a calendar year ending on December 31st each year. In 1998, the transition year, the company's fiscal year will begin December 28, 1997 and conclude December 31, 1998. The change is not expected to have a material effect on financial condition, results of operations or cash flows for the year 1998. However, the company's 1997 calendar had 12 weeks each in quarters 1, 2 and 4, and 16 weeks in quarter 3, while the calendar in future years will have three months in each quarter. This change will cause inconsistency in quarterly reporting throughout 1998 due to the inclusion in 1998 of an additional 10 days in quarter 1, 7 days in quarter 2, 20 fewer days in quarter 3 and an additional 8 days in quarter 4 in comparison to 1997. Quarterly amounts for 1997 will not be restated because it is impracticable to do so.
LIQUIDITY AND SOURCES OF CAPITAL
At December 27, 1997, the company had cash and cash equivalents of $26 million, a decrease of $2 million during the year.
Operating activities provided $114 million of cash in 1997, compared with $60 million provided in 1996. Operating activities cash flows have been reduced by cash costs of $2.0 million and $13 million in 1997 and 1996, respectively, for Ferromatik severance payments in 1997, and the Widia/Valenite integration and restructuring in 1996.
Investing activities in 1997 resulted in a $100 million use of cash, primarily due to capital expenditures of $80 million and the cost of acquisitions. Investing activities in 1996 resulted in a $308 million use of cash, mostly due to the D-M-E acquisition, as well as $65 million of capital expenditures. Net cash used by investing activities in 1995 included $79 million for the Widia acquisition and $33 million for the Talbot acquisition. Also affecting 1995 was $120 million provided from the divestitures of ESD and AMT.
Financing activities used $16 million of cash in 1997, which includes the effect of a dividend increase and the purchase of treasury shares. Financing activities provided $143 million of cash in 1996, primarily due to $129 million of net proceeds from the issuance of 5.5 million additional shares of common stock. In 1995, financing activities provided $106 million of cash, primarily due to the issuance of $100 million of 7 7/8% notes.
As of December 27, 1997, the company's current ratio of 1.8 was unchanged from December 28, 1996.
At December 27, 1997, the company had lines of credit with various U.S. and non-U.S. banks of approximately $420 million, including a $200 million committed revolving credit facility which expires in January 2002. Under the provisions of the facility, the company's additional borrowing capacity totaled approximately $307 million at December 27, 1997. Subsequent to the end of 1997, the facility was increased to $250 million. The amended facility continues to impose restrictions on total indebtedness in relation to earnings before interest, income taxes, depreciation and amortization (EBITDA). The company anticipates that it will be able to continue to comply with these restrictions throughout the term of the facility.
The company had a number of short-term intercompany loans and advances denominated in various currencies totaling $47 million at December 27, 1997, that were subject to foreign currency exchange risk. The company also enters into various transactions, in the ordinary course of business, for the purchase and sale of goods and services in various currencies. The company hedges its exposure to currency fluctuations related to short-term intercompany loans and advances and the purchase and sale of goods under firm commitments by entering into foreign currency exchange contracts to minimize the effect of foreign currency exchange rate fluctuations. The company is currently not involved with any additional derivative financial instruments.
The interest rates on the lines of credit and the financing fees on the receivables purchase agreement fluctuate based on changes in prevailing interest rates in the countries in which amounts are borrowed or receivables are sold. At December 27, 1997, approximately $228 million was subject to the effects of fluctuations in interest rates under these arrangements. Future changes in interest rates will affect the company's interest expense and other financing costs.
Total debt was $372 million at December 27, 1997, a decrease of $1 million over December 28, 1996. Total shareholders' equity was $472 million at December 27, 1997, an increase of $26 million over December 28, 1996, despite the adverse effect of a $25 million change in the cumulative foreign currency translation adjustment caused by the effects of a stronger U.S. dollar. As a result, the ratio of total debt to total capital (debt plus equity) improved to 44% at December 27, 1997 from 46% at December 28, 1996.
During 1997, the company purchased 589,695 shares of the company's stock on the open market to satisfy the needs of management incentive, employee benefit and dividend reinvestment plans. Subsequent to year end, the company purchased an additional 338,000 shares for these plans' requirements. Additional purchases may be made later in the year. In addition, 1998 capital expenditures are expected to approximate $100 million. And, in the first half of 1998, the company expects to begin implementing a cost-cutting program to reduce staffing at Widia in Germany and in certain other European locations. This program is currently estimated to result in a $4 million net cash cost in 1998. The company believes that its cash flow from operations and available credit lines will be sufficient to meet these and other operating requirements.
OUTLOOK
The company's strategy primarily focuses on internal growth, which is somewhat dependent upon the worldwide economic climate, and productivity gains. In 1998, the company anticipates weakness in certain Asian markets but modestly improving economic conditions in Europe. In North America, the company recognizes that automotive production may weaken but expects most of the other key sectors of its business to remain at healthy levels. Based on this economic climate, among other things, the company's 1998 goals are for about a 7% sales increase coupled with a 12% increase in earnings per share.
The above forward-looking statements involve risks and uncertainties that could significantly impact expected results, as described more fully in the Cautionary Statement described below.
CAUTIONARY STATEMENT --------------------
The company wishes to caution readers about all its forward-looking statements in the "Outlook" section above and elsewhere. These include all statements that speak about the future or are based on the company's interpretation of factors that might affect its businesses. The company believes the following important factors, among others, could affect its actual results in 1998 and beyond and cause them to differ materially from those expressed in any of its forward-looking statements:
* global and regional economic conditions, consumer spending and industrial production, particularly in segments related to the level of automotive production and spending in the aerospace and construction industries;
* fluctuations in currency exchange rates of U.S. and foreign countries, including countries in Europe and Asia where the company has several principal manufacturing facilities and where many of the company's competitors and suppliers are based;
* fluctuations in domestic and non- U.S. interest rates which affect the cost of borrowing under the company's lines of credit and financing fees related to the sale of domestic accounts receivable;
* production and pricing levels of important raw materials, including plastic resins, which are a key material used by purchasers of the company's plastics technologies products, and steel, cobalt, tungsten and industrial grains used in the production of metalworking products;
* lower than anticipated levels of plant utilization resulting in production inefficiencies and higher costs, whether related to the delay of new product introductions, improved production processes or equipment, or labor relation issues;
* any major disruption in production at key customer or supplier facilities;
* alterations in trade conditions in and between the U.S. and non-U.S. countries where the company does business, including export duties, import controls, quotas and other trade barriers;
* changes in tax, environmental and other laws and regulations in the U.S. and non-U.S. countries where the company does business;
* unanticipated litigation, claims or assessments, including but not limited to claims or problems related to product liability, warranty, or environmental issues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Beginning on page 32 and continuing through page 49 are the consolidated financial statements with applicable notes and the related Report of Independent Auditors, and the supplementary financial information specified by Item 302 of Regulation S-K.
CONSOLIDATED STATEMENT OF EARNINGS CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions, except per-share amounts)
1997 1996 1995 -------- -------- -------- Sales $1,896.7 $1,729.7 $1,649.3 Cost of products sold 1,424.8 1,292.7 1,236.8 -------- -------- -------- Manufacturing margins 471.9 437.0 412.5
Other costs and expenses Selling and administrative 329.3 316.3 301.4 Gain on disposition of businesses - - (71.0) Integration charge - - 9.8 Minority shareholders' interests in earnings of subsidiaries 4.3 3.1 2.3 Other-net 11.2 6.5 10.9 -------- -------- -------- Total other costs and expenses 344.8 325.9 253.4 -------- -------- -------- Operating earnings 127.1 111.1 159.1
Interest Income 2.4 4.8 3.2 Expense (28.9) (34.6) (28.0) -------- -------- -------- Interest-net (26.5) (29.8) (24.8) -------- -------- --------
Earnings before income taxes 100.6 81.3 134.3 Provision for income taxes 20.0 15.0 28.7 -------- -------- -------- Net earnings $ 80.6 $ 66.3 $ 105.6 ======== ======== ======== Net earnings per common share Basic $ 2.03 $ 1.75 $ 3.11 ======== ======== ======== Diluted $ 2.01 $ 1.74 $ 3.07 ======== ======== ========
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions, except par value amounts)
1997 1996 -------- -------- ASSETS Current assets Cash and cash equivalents $ 25.7 $ 27.8 Notes and accounts receivable (less allowances of $13.0 in 1997 and $13.7 in 1996) 275.0 267.0 Inventories Raw materials 26.5 27.8 Work-in-process and finished parts 217.7 202.7 Finished products 146.2 159.2 -------- -------- Total inventories 390.4 389.7 Other current assets 60.0 43.4 -------- -------- Total current assets 751.1 727.9
Property, plant and equipment-net 343.1 319.1 Goodwill 231.1 229.9 Other noncurrent assets 67.2 59.4 -------- -------- Total assets $1,392.5 $1,336.3 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Amounts payable to banks $ 65.9 $ 65.7 Long-term debt due within one year 1.6 5.2 Trade accounts payable 153.7 134.9 Advance billings and deposits 35.7 34.5 Accrued and other current liabilities 168.5 169.3 -------- -------- Total current liabilities 425.4 409.6
Long-term accrued liabilities 191.0 178.6 Long-term debt 304.2 301.9 -------- -------- Total liabilities 920.6 890.1 -------- -------- Commitments and contingencies - -
SHAREHOLDERS' EQUITY 4% Cumulative Preferred shares 6.0 6.0 Common shares, $1 par value (outstanding: 39.6 in 1997 and 39.8 in 1996) 39.6 39.8 Capital in excess of par value 377.8 390.1 Reinvested earnings 83.5 19.9 Cumulative foreign currency translation adjustments (35.0) (9.6) -------- -------- Total shareholders' equity 471.9 446.2 -------- -------- Total liabilities and shareholders' equity $1,392.5 $1,336.3 ======== ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions, except share amounts)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions) 1997 1996 1995 ------ ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES CASH FLOWS Net earnings $ 80.6 $ 66.3 $ 105.6 Operating activities providing (using) cash Depreciation and amortization 53.7 50.9 43.6 Gain on disposition of businesses - - (71.0) Integration charge - - 9.8 Deferred income taxes (15.3) (7.0) (25.3) Working capital changes Notes and accounts receivable (20.7) (5.6) 3.9 Inventories (16.3) (20.7) (27.3) Other current assets (6.1) 7.4 (1.4) Trade accounts payable 21.8 16.8 4.2 Other current liabilities 7.6 (50.6) (1.3) Decrease (increase) in other noncurrent assets .1 (1.9) (2.0) Increase in long-term accrued liabilities 13.2 8.8 9.6 Other-net (4.7) (4.5) (7.5) ------ ------- ------- Net cash provided by operating activities 113.9 59.9 40.9 ------ ------- -------
INVESTING ACTIVITIES CASH FLOWS
Capital expenditures (79.5) (65.2) (52.3) Net disposals of property, plant and equipment 5.7 4.3 10.3 Acquisitions (25.9) (246.8) (113.5) Disposition of businesses - - 120.4 ------ ------- ------- Net cash used by investing activities (99.7) (307.7) (35.1) ------ ------- -------
FINANCING ACTIVITIES CASH FLOWS
Dividends paid (17.0) (13.6) (12.5) Increase in long-term debt 14.4 - 190.0 Repayments of long-term debt (4.9) (21.1) (33.0) Increase (decrease) in amounts payable to banks 3.7 47.6 (49.8) Issuance of common shares 2.2 129.6 13.1 Purchase of treasury and other common shares (14.7) - (2.0) ------ ------- ------- Net cash provided (used) by financing activities (16.3) 142.5 105.8 ------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2.1) (105.3) 111.6 Cash and cash equivalents at beginning of year 27.8 133.1 21.5 ------ ------- ------- Cash and cash equivalents at end of year $ 25.7 $ 27.8 $ 133.1 ====== ======= =======
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
The company's fiscal year ends on the Saturday closest to December 31 of each year. Fiscal year ends are as follows:
1997: December 27, 1997 1996: December 28, 1996 1995: December 30, 1995
In November, 1997, the Board of Directors approved management's plan to change the company's fiscal year to a calendar year ending on December 31st. In 1998, the transition year, the company's fiscal year will begin December 28, 1997, and end December 31, 1998. The change is not expected to have a material effect on financial condition, results of operations or cash flows for the year 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the company and its subsidiaries. All significant intercompany transactions are eliminated.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the company's non-U.S. operations are translated into U.S. dollars at period-end exchange rates. Net exchange gains or losses resulting from such translation are excluded from net earnings and accumulated in a separate component of shareholders' equity. Income and expense accounts are translated at weighted-average exchange rates for the period. Gains and losses from foreign currency transactions are included in other costs and expenses-net in the Consolidated Statement of Earnings. Gains and losses on foreign exchange contracts that are designated as hedges of foreign currency commitments are recognized as part of the specific transactions hedged under the deferral method of accounting consistent with the requirement for a firm commitment.
RECLASSIFICATION OF FINANCIAL STATEMENT
Beginning in 1997, amortization of goodwill, which was previously included as a component of cost of products sold, is included in other costs and expenses-net in the Consolidated Statement of Earnings. Amounts reported for prior years have been reclassified to conform to the 1997 presentation.
REVENUE RECOGNITION
The company's policy is to recognize sales when products are shipped to unaffiliated customers.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market, including provisions for obsolescence commensurate with known or estimated exposures. The principal methods of determining costs are last-in, first-out (LIFO) for certain U.S. inventories and average or standard cost, which approximates first-in, first-out (FIFO), for other inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost or, for assets acquired through business combinations, at fair value at the dates of the respective acquisitions. For financial reporting purposes, depreciation is generally determined on the straight-line method using estimated useful lives of the assets. Depreciation expense was $47.6 million, $45.1 million and $42.1 million for 1997, 1996 and 1995, respectively.
Property, plant and equipment that are idle and held for sale are valued at the lower of historical cost less accumulated depreciation or fair value less cost to sell. Carrying costs through the expected disposal dates of such assets are accrued at the time expected losses are recognized or, in the case of assets to be sold at a gain, charged to expense as incurred.
GOODWILL
Goodwill, which represents the excess of acquisition cost over the net assets acquired in business combinations, is amortized on the straight-line method over periods ranging from 25 to 40 years. The carrying amount of goodwill is reviewed annually using estimated undiscounted cash flows for the businesses acquired over the remaining amortization periods. Amortization expense charged to earnings amounted to $6.1 million, $5.8 million and $1.5 million in 1997, 1996 and 1995, respectively.
RETIREMENT BENEFIT PLANS
The company maintains various defined benefit and defined contribution pension plans covering substantially all U.S. employees and certain non-U.S. employees. For defined benefit plans, pension benefits are based primarily on length of service and compensation. The company's policy is to fund the plans in accordance with applicable laws and regulations.
STOCK-BASED COMPENSATION
The company accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations.
INCOME TAXES
The company provides deferred income taxes for cumulative temporary differences between the financial reporting basis and income tax basis of its assets and liabilities. Provisions are made for all currently payable federal and state and local income taxes at applicable tax rates. Provisions are also made for any additional taxes on anticipated distributions from subsidiaries.
EARNINGS PER COMMON SHARE
Beginning in 1997, earnings per common share data are computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share," which became effective for financial statements issued after December 15, 1997. Amounts for prior years have been restated.
RECENTLY ISSUED PRONOUNCEMENTS
During 1998, the company will adopt the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for year-end 1998. This standard requires that segment information be disclosed based upon how management internally evaluates the operating performance of its business units. Application of the disclosure requirements under this standard is not expected to have a material effect on the financial statements of the company in 1998.
DISPOSITION OF BUSINESSES
In December, 1995, the company completed the sale of its Electronic Systems Division (ESD) for $104 million in cash and recorded a fourth quarter pretax gain of $66.0 million ($52.4 million after tax). ESD's 1995 sales to unaffiliated customers were approximately $30 million.
In January, 1995, the company completed the sale of its American Mine Tool (AMT) business for $15 million resulting in a pretax gain of $5.0 million ($4.0 million after tax). The sale did not have a significant effect on the company's ongoing sales or operating earnings.
INTEGRATION CHARGE
In the second quarter of 1995, the company recorded a pretax charge of $9.8 million ($7.8 million after tax) to eliminate or downsize certain operations of Valenite in connection with the acquisition of Widia earlier in the year. The charge was recorded as a result of a plan formally approved by management in May, 1995, and later revised in December, 1995, which also involved the integration of certain Widia operations with Valenite. The total cost of the plan was $28.1 million. That portion of the overall plan that related directly to Widia was recorded through purchase accounting adjustments totaling $18.3 million. As it related to Valenite, the plan involved the closure of one manufacturing plant, the downsizing of another and the consolidation of numerous sales, customer service and warehousing operations in Europe and Japan.
ACQUISITIONS
In February, 1995, the company acquired Krupp Widia GmbH (Widia) for DM 120.8 million in cash (approximately $79 million), which included DM 7.1 million (approximately $4 million) for the settlement of all intercompany liabilities to the seller as of the closing date, and $13 million of assumed debt. Headquartered in Germany, Widia is one of the world's leading producers of industrial metalcutting products.
In July, 1995, the company acquired Talbot Holdings, Ltd. (Talbot) for approximately $33 million in cash and $5 million of assumed debt. Talbot is a major supplier of round high-speed steel and carbide metalcutting tools.
In January, 1996, the company acquired The Fairchild Corporation's D-M-E business (D-M-E) for approximately $246 million. D-M-E is the largest U.S. producer of mold bases, standard components and supplies for the plastics injection mold-making industry. The company financed the acquisition through the execution of promissory notes to the seller in the amount of $182 million and cash on hand of $64 million. The promissory notes were subsequently repaid using the proceeds from an equity offering (see Shareholders' Equity), available cash and borrowings under the company's existing lines of credit.
During 1997, the company acquired Minnesota Twist Drill, Inc., a maker of high-speed twist drills, and Data Flute CNC, Inc., a manufacturer of high-performance solid carbide end mills. Each business has annual sales of approximately $10 million. These acquisitions were financed by the use of available cash and bank borrowings. These acquisitions did not significantly affect the company's financial position or results of operations.
All of these acquisitions were accounted for under the purchase method. The aggregate cost of the acquisitions, including professional fees and other related costs, was $27.4 million in 1997, $248.1 million in 1996 and $111.1 million in 1995. The following table presents the allocation of the aggregate acquisition cost to the assets acquired and liabilities assumed.
ALLOCATION OF ACQUISITION COST
(In millions) 1997 1996 1995 ------ ------ ------- Cash and cash equivalents $ .6 $ 1.3 $ 3.1 Accounts receivable 3.6 25.5 51.7 Inventories 4.0 29.6 68.9 Other current assets .1 1.2 .6 Property, plant and equipment 7.0 43.9 60.6 Goodwill 14.4 162.5 51.9 Other noncurrent assets - 7.9 14.3 ------ ------ ------- Total assets 29.7 271.9 251.1 ------ ------ ------- Amounts payable to banks and long-term debt due within one year - - (9.3) Other current liabilities (2.1) (18.9) (70.6) Long-term accrued liabilities (.2) (4.9) (50.7) Long-term debt - - (9.4) ------ ------ ------- Total liabilities (2.3) (23.8) (140.0) ------ ------ ------- Total acquisition cost $ 27.4 $248.1 $ 111.1 ====== ====== =======
In the 1995 allocation, other current liabilities includes a reserve of $16.9 million for the restructuring of Widia and its integration with Valenite. Prior to the acquisition, the company`s management began to develop a plan for the integration of certain operations of Widia and Valenite and for restructuring actions to improve Widia's profitability. In May, 1995, the company's management formally approved this integration plan at an expected total cost of $17.1 million. The portion directly related to Valenite was recorded as a $9.8 million pretax charge to earnings in the second quarter of 1995. In December, 1995, the management of the company and Widia approved a revision to the original plan to provide for additional reductions in personnel levels at Widia. As a result, the total cost of the integration plan was $28.1 million.
As it related to Widia, the revised plan involved the closure of one manufacturing plant, the reduction of employment levels at its plant and headquarters in Germany, and the consolidation of numerous sales, customer service and warehouse operations in Europe and Asia at a total cost of $18.3 million. The actions contemplated by the integration plan were substantially completed by year-end 1996.
RESEARCH AND DEVELOPMENT
Charges to operations for research and development activities are summarized below. The amounts include expenses related to the company's Wolfpack product development and process improvement program. The decrease in 1996 relates principally to the sale of ESD in December, 1995.
RESEARCH AND DEVELOPMENT
(In millions) 1997 1996 1995 ----- ----- ----- Research and development $50.1 $49.0 $57.8 ===== ===== =====
RETIREMENT BENEFIT PLANS
Pension cost for all defined benefit plans is summarized in the following table. For all years presented, the table includes amounts for plans for certain employees in the U.S., the United Kingdom (U.K.) and Germany.
PENSION COST
(In millions) 1997 1996 1995 ------ ------ ------ Service cost (benefits earned during the period) $ 9.6 $ 9.5 $ 7.6 Interest cost on projected benefit obligation 38.9 37.5 37.0 Actual return on plan assets (77.9) (53.3) (87.9) Net amortization and deferral 31.5 11.1 46.3 ------ ------ ------ Pension cost $ 2.1 $ 4.8 $ 3.0 ====== ====== ======
The following table sets forth the funded status of the defined benefit pension plans that cover certain U.S. and U.K. employees.
FUNDED STATUS AT YEAR-END
(In millions) 1997 1996 ------- ------- Vested benefit obligation $(430.8) $(372.8) ======= ======= Accumulated benefit obligation $(451.8) $(389.4) ======= ======= Projected benefit obligation $(502.2) $(445.6) Plan assets at fair value 511.5 464.4 ------- ------- Excess of plan assets in relation to projected benefit obligation 9.3 18.8 Unrecognized net loss 2.3 5.2 Unrecognized net transition asset (7.7) (13.8) ------- ------- Prepaid pension cost $ 3.9 $ 10.2 ======= =======
The plans' assets consist principally of stocks, debt securities and mutual funds. The U.S. plan also includes common shares of the company with a market value of $25.4 million in 1997 and $16.5 million in 1996. Because of the funded status of the plans, contributions were not required for the U.S. plan in 1997 and for the U.K. plan in the three year period ended December 27, 1997. Contributions of $7.5 million and $3.4 million were made to the U.S. plan in 1996 and 1995, respectively.
The following table sets forth the status of the company's defined benefit pension plans for certain employees in Germany. Consistent with customary practice in Germany, these plans have not been funded.
STATUS AT YEAR-END
(In millions) 1997 1996 ------ ------ Vested benefit obligation $(32.1) $(34.8) ====== ====== Accumulated benefit obligation $(34.8) $(38.6) ====== ====== Projected benefit obligation $(38.1) $(42.6) Unrecognized net gain (.9) (.1) ------ ------ Accrued pension cost $(39.0) $(42.7) ====== ======
The following table presents the weighted-average actuarial assumptions used for all defined benefit plans in 1997, 1996 and 1995.
ACTUARIAL ASSUMPTIONS
1997 1996 1995 ---- ---- ---- Discount rate 7.4% 8.0% 7.5% Expected long-term rate of return on plan assets 9.6% 9.6% 9.6% Rate of increase in future compensation levels 5.2% 5.1% 4.3%
The company also maintains certain defined contribution and 401(k) plans. Participation in these plans is available to certain U.S. employees. Costs for these plans were $8.5 million, $7.7 million and $6.4 million in 1997, 1996 and 1995, respectively.
In addition to pension benefits, the company also provides varying levels of postretirement health care benefits to certain U.S. employees. Substantially all such employees are covered by the company's principal plan, under which benefits are provided to employees who retire from active service after having attained age 55 and ten years of service. The plan is contributory in nature. For employees retiring prior to 1980, such contributions are based on varying percentages of the current per-contract cost of benefits, with the company funding any excess over these amounts. For employees retiring after 1979, the dollar amount of the company's current and future contributions is frozen.
The following tables present the components of the company's liability for retiree health care benefits and postretirement health care cost under the principal U.S. plan.
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS
(In millions) 1997 1996 ------ ------ Accumulated postretirement benefit obligation Retirees $(26.6) $(29.1) Fully eligible active participants (5.3) (4.9) Other active participants (6.8) (6.3) ------ ------ (38.7) (40.3) Unrecognized net gain (4.7) (5.0) ------ ------ Accrued postretirement health care benefits $(43.4) $(45.3) ====== ======
POSTRETIREMENT HEALTH CARE COST
(In millions) 1997 1996 1995 ------ ------ ------ Service cost (benefits earned during the period) $ .3 $ .3 $ .3 Interest cost on accumulated postretirement benefit obligation 3.0 3.2 3.9 ------ ------ ------ Postretirement health care cost $ 3.3 $ 3.5 $ 4.2 ====== ====== ======
The discount rates used in calculating the accumulated postretirement benefit obligation were 7.5% for 1997 and 8.0% for 1996. For 1998, the assumed rate of increase in health care costs used to calculate the accumulated postretirement benefit obligation is 8.8%. This rate is assumed to decrease to varying degrees annually to 5.0% for years 2005 and thereafter. Because the dollar amount of the company's contributions for most employees is frozen, a one percent change in each year in relation to the above assumptions would not significantly change the accumulated postretirement benefit obligation or the total cost of the plan.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the company's deferred tax assets and liabilities as of year-end 1997 and 1996 are as follows:
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
(In millions) 1997 1996 ------ ------ DEFERRED TAX ASSETS Net operating loss and tax Credit carryforwards $ 48.5 $ 59.7 Accrued postretirement health care benefits 14.6 15.2 Inventories, principally due to obsolescence reserves and additional costs inventoried for tax purposes 8.7 8.7 Accrued employee benefits other than pensions and retiree health care benefits 11.8 10.7 Accrued pension costs 3.1 4.1 Accrued warranty costs 3.3 3.1 Accrued taxes 4.9 3.0 Accounts receivable, principally due to allowances for doubtful accounts 3.5 3.0 Accrued liabilities and other 23.0 20.5 ------ ------ Total deferred tax assets 121.4 128.0 Less valuation allowances (25.5) (59.4) ------ ------ Deferred tax assets net of valuation allowances $ 95.9 $ 68.6 ====== ======
DEFERRED TAX LIABILITIES Property, plant and equipment, principally due to differences in depreciation methods $ 25.7 $ 23.7 Accounts receivable and inventories 2.4 3.0 Prepaid pension costs 6.6 6.2 Undistributed earnings of non-U.S. subsidiaries 1.2 1.3 Other 11.7 7.1 ------ ------ Total deferred tax liabilities $ 47.6 $ 41.3 ====== ====== Net deferred tax assets $ 48.3 $ 27.3 ====== ======
Valuation allowances related to Widia's preacquisition net operating loss carryforwards are being applied to reduce goodwill arising from the acquisition as the related tax benefits are realized. During 1997 and 1996, reversals of valuation allowances applied to reduce goodwill totaled $5.7 million and $1.9 million, respectively. Additional reductions of goodwill in years subsequent to 1997 are not expected to exceed $4.0 million.
Summarized in the following tables are the company's earnings before income taxes, its provision for income taxes, the components of the provision for deferred income taxes and a reconciliation of the U.S. statutory rate to the tax provision rate.
EARNINGS BEFORE INCOME TAXES
(In millions) 1997 1996 1995 ------ ------ ------ United States $ 64.9 $ 33.9 $ 87.8 Non-U.S. 35.7 47.4 46.5 ------ ------ ------ $100.6 $ 81.3 $134.3 ====== ====== ======
PROVISION FOR INCOME TAXES
(In millions) 1997 1996 1995 ------ ------ ------ CURRENT PROVISION United States $ 15.3 $ 6.4 $ 32.6 State and local 5.3 2.8 8.9 Non-U.S. 14.7 12.8 12.5 ------ ------ ------ 35.3 22.0 54.0 ------ ------ ------ DEFERRED PROVISION United States (13.7) (2.9) (23.0) Non-U.S. (1.6) (4.1) (2.3) ------ ------ ------ (15.3) (7.0) (25.3) ------ ------ ------ $ 20.0 $ 15.0 $ 28.7 ====== ====== ======
COMPONENTS OF THE PROVISION FOR DEFERRED INCOME TAXES
(In millions) 1997 1996 1995 ------ ------ ------ Change in valuation allowances $(28.2) $ (6.7) $(19.6) Change in deferred taxes related to operating loss carryforwards 11.1 3.2 (6.0) Depreciation 2.0 (3.7) 8.9 Accrued pension and other employee costs .5 .5 (5.3) Tax effects of consolidation, restructuring and other reserves - .4 1.6 Other (.7) (.7) (4.9) ------ ------ ------ $(15.3) $ (7.0) $(25.3) ====== ====== ======
RECONCILIATION OF THE U.S. STATUTORY RATE TO THE TAX PROVISION RATE
1997 1996 1995 ------ ------ ------ U.S. statutory tax rate 35.0% 35.0% 35.0% Increase (decrease) resulting from Tax benefits from net reversal of valuation allowances (23.2) (10.5) (6.4) Losses without current tax benefits 9.9 5.3 3.0 Tax benefits from net reversal of U.S. temporary differences (.2) (4.4) (9.4) U.S. federal income tax credits (2.8) (5.9) - Effect of operations outside the U.S. (3.6) (4.6) (7.3) State and local income taxes, net of federal benefit 3.4 2.3 6.6 Other 1.4 1.3 (.1) ------ ------ ------ 19.9% 18.5% 21.4% ====== ====== ======
At year-end 1997, certain of the company's non-U.S. subsidiaries had net operating loss carryforwards aggregating approximately $112 million, substantially all of which have no expiration dates.
Undistributed earnings of foreign subsidiaries which are intended to be indefinitely reinvested aggregated $123 million at the end of 1997.
Income taxes of $25.2 million, $33.8 million and $21.0 million were paid in 1997, 1996 and 1995, respectively.
EARNINGS PER COMMON SHARE
Basic earnings per common share data are based on the weighted-average number of common shares outstanding during the respective periods. Diluted earnings per common share data are based on the weighted-average number of common shares outstanding adjusted to include the effects of potentially dilutive stock options and certain restricted shares.
The following tables present the calculation of earnings available to common shareholders and a reconciliation of the shares used to calculate basic and diluted earnings per common share.
EARNINGS AVAILABLE TO COMMON SHAREHOLDERS
(In millions) 1997 1996 1995 ------ ------ ------ Net earnings $ 80.6 $ 66.3 $105.6 Less dividends on Preferred shares (.2) (.2) (.2) ------ ------ ------ Net earnings available to common shareholders $ 80.4 $ 66.1 $105.4 ====== ====== ======
RECONCILIATION OF SHARES
(In thousands) 1997 1996 1995 ------ ------ ------ Weighted-average common shares outstanding 39,583 37,667 33,908 Effect of dilutive stock options and restricted shares 373 276 401 ------ ------ ------ Weighted-average common shares assuming dilution 39,956 37,943 34,309 ====== ====== ======
For 1997, weighted-average shares assuming dilution excludes 205,075 restricted shares subject to contingent vesting based on the attainment of specified earnings objectives that have not yet been achieved.
RECEIVABLES
In January, 1996, the company entered into a new three year receivables purchase agreement with an independent issuer of receivables-backed commercial paper. This agreement replaced a similar agreement that expired in January, 1996. Under the terms of the new agreement, the company agreed to sell on an ongoing basis and without recourse, an undivided percentage ownership interest in designated pools of accounts receivable. To maintain the balance in the designated pools of accounts receivable sold, the company is obligated to sell undivided percentage interests in new receivables as existing receivables are collected. The agreement permits the sale of up to $75.0 million of undivided interests in accounts receivable through January, 1999.
At December 27, 1997, December 28, 1996, and December 30, 1995, the undivided interests in the company's gross accounts receivable that had been sold to the purchasers aggregated $75.0 million, $75.0 million and $69.0 million, respectively. Increases and decreases in the amount sold are reported as operating cash flows in the Consolidated Statement of Cash Flows. Costs related to the sales are included in other costs and expenses-net in the Consolidated Statement of Earnings.
INVENTORIES
Inventories amounting to $130.1 million in 1997 and $129.0 million in 1996 are stated at LIFO cost. If stated at FIFO cost, such inventories would be greater by approximately $66.4 million in 1997 and $64.6 million in 1996.
As presented in the Consolidated Balance Sheet, inventories are net of reserves for obsolescence of $41.6 million and $45.6 million in 1997 and 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are shown in the following table.
PROPERTY, PLANT AND EQUIPMENT-NET
(In millions) 1997 1996 ------- ------- Land $ 14.9 $ 13.6 Buildings 179.4 178.0 Machinery and equipment 459.0 427.0 ------- ------- 653.3 618.6 Less accumulated depreciation (310.2) (299.5) ------- ------- $ 343.1 $ 319.1 ======= =======
LIABILITIES
The components of accrued and other current liabilities and long-term accrued liabilities are shown in the following tables.
ACCRUED AND OTHER CURRENT LIABILITIES
(In millions) 1997 1996 ------ ------ Accrued salaries, wages and other compensation $ 50.4 $ 51.9 Accrued and deferred income taxes 15.8 13.6 Other accrued expenses 102.3 103.8 ------ ------ $168.5 $169.3 ====== ======
LONG-TERM ACCRUED LIABILITIES
(In millions) 1997 1996 ------ ------ Accrued pension and other compensation $ 73.2 $ 67.1 Accrued postretirement health care benefits 46.4 48.4 Accrued and deferred income taxes 31.5 26.9 Minority shareholders' interests 16.7 12.7 Other 23.2 23.5 ------ ------ $191.0 $178.6 ====== ======
LONG-TERM DEBT
The components of long-term debt are shown in the following table.
LONG-TERM DEBT
(In millions) 1997 1996 ------ ------ 7 7/8 % Notes due 2000 $100.0 $100.0 8 3/8 % Notes due 2004 115.0 115.0 Revolving credit facility 80.3 80.3 Other 10.5 11.8 ------ ------ 305.8 307.1 Less current maturities (1.6) (5.2) ------ ------ $304.2 $301.9 ====== ======
Except for the 7 7/8% Notes due 2000 and the 8 3/8% Notes due 2004, the carrying amount of the company's long-term debt approximates fair value, which is determined using discounted cash flow analysis based on the company's incremental borrowing rate for similar types of financing arrangements. At year-end 1997, the fair value of the 7 7/8% Notes due 2000 was $102.1 million and the fair value of the 8 3/8% Notes due 2004 was $121.6 million. Such amounts are based on recent trade prices through registered securities brokers.
Certain of the above long-term debt obligations contain various restrictions and financial covenants relating principally to additional secured indebtedness.
Outstanding borrowings under the company's revolving credit facility of $10.0 million at December 27, 1997, and DM 125 million ($70.3 million at December 27, 1997, and $80.3 million at December 28, 1996) are included in long-term debt based on the expectation that these borrowings will remain outstanding for more than one year. These borrowings are at variable interest rates which had a weighted average of 4.3% at year-end 1997.
Interest paid was $29.1 million in 1997, $35.1 million in 1996 and $27.7 million in 1995.
Maturities of long-term debt for the five years after 1997 are:
1998: $ 1.6 million 1999: 2.3 million 2000: 101.8 million 2001: 1.8 million 2002: 80.3 million
The company leases certain equipment and facilities under operating leases, some of which include varying renewal and purchase options. Future minimum rental payments applicable to noncancelable operating leases during the next five years and in the aggregate thereafter are:
1998: $17.1 million 1999: 11.8 million 2000: 9.3 million 2001: 7.0 million 2002: 5.5 million After 2002: 34.2 million
Rent expense was $22.6 million, $23.6 million and $19.8 million in 1997, 1996 and 1995, respectively.
LINES OF CREDIT
At year-end 1997, the company had lines of credit with various U.S. and non-U.S. banks of approximately $420 million, including a $200 million committed revolving credit facility. These credit facilities support letters of credit and leases in addition to providing borrowings under varying terms. In March, 1997, the company amended the revolving credit facility to reduce the amount of credit available thereunder from $300 million to $200 million and to extend the term to January, 2002. The amended facility requires a facility fee on the total $200 million revolving loan commitment at a variable rate which was .18% per annum as of December 27, 1997. In addition, a restriction on total indebtedness in relation to total capital was replaced by a covenant of debt in relation to earnings before interest, income taxes, depreciation and amortization (EBITDA). Under the provisions of the revolving credit facility, the company's additional borrowing capacity totaled approximately $307 million at year-end 1997.
Subsequent to year end, the company amended the revolving credit facility to increase the line of credit available from $200 million to $250 million.
The weighted-average interest rate on short-term borrowings outstanding as of year-end was 6.6% for 1997 and 1996.
SHAREHOLDERS' EQUITY
During 1997, the company purchased 499,600 treasury shares on the open market at a cost of $12.2 million to partially meet current and future needs of management incentive, employee benefit and dividend reinvestment plans. An additional 90,095 shares were also purchased with respect to current year exercises of stock options in lieu of the issuance of authorized but unissued shares.
In May, 1996, the company issued an additional 5.5 million common shares through a public offering, resulting in net proceeds (after deducting issuance costs) of $128.5 million. The proceeds of the offering were used to repay a portion of the promissory notes issued to the seller in connection with the acquisition of D-M-E.
SHAREHOLDERS' EQUITY - PREFERRED AND COMMON SHARES
(In millions, except share and per-share amounts) 1997 1996 ------ ------ 4% Cumulative Preferred shares authorized, issued and outstanding, 60,000 shares at $100 par value, redeemable at $105 a share $ 6.0 $ 6.0 ====== ====== Common shares, $1 par value, authorized 50,000,000 shares, issued and outstanding, 1997: 39,635,829 shares, 1996: 39,846,397 39.6 39.8 ====== ======
The company has authorized ten million serial preference shares with $1 par value. None of these shares has been issued.
Holders of company common stock have one vote per share until they have held their shares for at least 36 consecutive months, after which they are entitled to ten votes per share.
CONTINGENCIES
The company is involved in remedial investigations and actions at various locations, including former plant facilities, and EPA Superfund sites where the company and other companies have been designated as potentially responsible parties. The company accrues remediation costs, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than the completion of a remediation feasibility study. The accruals are adjusted as further information becomes available or circumstances change. Environmental costs have not been material in the past.
Various lawsuits arising during the normal course of business are pending against the company and its consolidated subsidiaries.
In the opinion of management, the ultimate liability, if any, resulting from these matters will have no significant effect on the company's consolidated financial position or results of operations.
FOREIGN EXCHANGE CONTRACTS
The company enters into forward contracts to hedge foreign currency commitments on an ongoing basis for periods commensurate with known exposures. The purpose of this practice is to minimize the effect of foreign currency exchange rate fluctuations on the company's operating results. The company does not engage in speculation. The company's exposure to credit-related losses from these transactions is considered to be minimal due to the high credit ratings of the parties involved.
At December 27, 1997, the company had outstanding forward contracts totaling $27.5 million, which generally mature in periods of six months or less. These contracts require the company and its subsidiaries to exchange currencies at the maturity dates at exchange rates agreed upon at inception. Due to the short-term nature of these contracts, their fair values, which are not recognized in the financial statements, approximate their contract values as of December 27, 1997.
STOCK-BASED COMPENSATION
The 1997 Long-Term Incentive Plan (1997 Plan) permits the company to grant its common shares in the form of non- qualified stock options, incentive stock options, restricted stock and performance awards.
Non-qualified and incentive stock options outstanding under the 1997 Plan are granted at market value, vest in increments over a five year period, and expire ten years subsequent to the award. Of the 3,063,612 options outstanding at year-end 1997, 192,000 are incentive stock options.
Summaries of stock options granted under the 1997 Plan and prior plans are presented in the following tables.
STOCK OPTION ACTIVITY
Weighted- Average Exercise Shares Price --------- -------- OUTSTANDING AT YEAR-END 1994 1,969,436 18.73 Granted 581,009 20.69 Exercised (382,854) 18.77 Canceled (30,595) 21.15 --------- --------
OUTSTANDING AT YEAR-END 1995 2,136,996 19.22 Granted 626,800 25.75 Exercised (31,045) 20.51 Canceled (26,182) 22.95 --------- --------
OUTSTANDING AT YEAR-END 1996 2,706,569 20.70 Granted 568,600 23.25 Exercised (94,485) 17.64 Canceled (117,072) 24.28 --------- --------
OUTSTANDING AT YEAR-END 1997 3,063,612 21.13 ========= ========
EXERCISABLE STOCK OPTIONS AT YEAR-END
Stock Options --------- 1995 1,054,663 1996 1,147,869 1997 1,245,931
SHARES AVAILABLE FOR FUTURE GRANT AT YEAR-END
Stock Options --------- 1995 871,150 1996 131,675 1997 1,306,959
The following tables summarize information about stock options outstanding at December 27, 1997.
COMPONENTS OF OUTSTANDING STOCK OPTIONS
Average Weighted- Range of Remaining Average Exercise Number Contract Exercise Prices Outstanding Life Price ------------- ----------- --------- --------- $8.50 - 14.50 568,900 3.6 $13.35 17.13 - 25.75 2,494,712 7.0 22.90 ----------- $8.50 - 25.75 3,063,612 6.4 $21.13 ===========
COMPONENTS OF EXERCISABLE STOCK OPTIONS
Weighted- Range of Average Exercise Number Exercise Prices Exercisable Price ------------- ----------- --------- $8.50 - 14.50 568,900 $13.35 17.13 - 25.75 677,031 21.20 ----------- $8.50 - 25.75 1,245,931 $17.62 ===========
Under the 1997 Plan, performance awards are granted in the form of restricted stock awards which vest based on the achievement of specified earnings objectives over a three year period. The 1997 Plan also permits the granting of other restricted stock awards, which also vest three years from the date of grant. During the restriction period, restricted stock awards entitle the holder to all the rights of a holder of common shares, including dividend and voting rights. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The amount of compensation expense recognized for restricted stock, including performance awards, was $5.0 million, $.9 million and $.7 million in 1997, 1996 and 1995, respectively. Restricted stock award activity is as follows:
RESTRICTED STOCK ACTIVITY
1997 1996 1995 ------- ------ ------ Restricted stock awarded 281,190 58,746 47,600 ======= ====== ====== Weighted-average market value on date of grant $22.99 $25.55 $23.00 ======= ====== ======
Of the 281,190 shares of restricted stock awarded in 1997, 205,075 were performance awards subject to contingent vesting.
Cancellations of restricted stock, including shares canceled to pay employee withholding taxes at maturity, totaled 6,758 in 1997, 20,172 in 1996 and 16,323 in 1995.
During 1997, 10,210 shares related to performance awards earned under a prior plan were issued.
Pro forma earnings amounts prepared under the assumption that the stock options granted in 1997, 1996 and 1995 were accounted for based on their fair value as determined under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," are as follows:
PRO FORMA EARNINGS
(In millions, except per-share amounts)
1997 1996 1995 ----- ----- ------ Net earnings $77.5 $63.5 $104.4 ===== ===== ======
Net earnings per common share Basic $1.95 $1.68 $ 3.07 ===== ===== ====== Diluted $1.93 $1.67 $ 3.03 ===== ===== ======
The weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $7.51, $8.66 and $7.75, respectively. The fair value of the options was calculated as of the date of grant using the Black-Scholes option pricing model using the following assumptions:
FAIR VALUE ASSUMPTIONS 1997 1996 1995 --------- --------- --------- Dividend yield 2.06% 1.40% 1.74% Expected volatility 31 - 41% 30 - 41% 33 - 43% Risk free interest rate at grant date 5.9 - 6.3% 5.3 - 5.6% 7.3 - 7.5% Expected life in years 2 - 7 2 - 7 2 - 7
Statement of Financial Accounting Standards No. 123 does not apply to awards granted prior to 1995. Because additional awards in future years are anticipated, the pro forma effects of applying this statement presented above are not indicative of future amounts.
ORGANIZATION
Cincinnati Milacron Inc. is a worldwide manufacturer of machinery and supplies for processing plastics, and machine tools and industrial products for metalworking. The company has operations in the United States and other countries located principally in Western Europe.
The plastics technologies segment includes the production of injection molding machines, mold bases, systems for extrusion and blow molding and various other specialty equipment. The market is driven by the consumer economy and the automotive industry. The machine tools segment serves a broad range of markets, including the automotive industry, job shops and the aerospace industry. The industrial products segment serves a variety of metalworking industries, including the automotive industry. It produces five basic types of industrial products: metalcutting tools, metalworking fluids, precision grinding wheels, carbide wear parts and industrial magnets. The markets for all three business segments are highly competitive and can be cyclical in nature.
Financial data for the past three years for the company's business segments are shown in the following tables. The 1996 increases for plastics technologies are primarily attributable to the acquisition of D-M-E on January 26, 1996. The 1996 decreases for machine tools are partially attributable to the sale of ESD on December 30, 1995.
SALES BY SEGMENT
(In millions) 1997 1996 1995 -------- -------- --------
Plastics technologies $ 735.7 $ 662.4 $ 570.1 Machine tools 458.0 371.8 409.0 Industrial products 703.0 695.5 670.2 -------- -------- -------- $1,896.7 $1,729.7 $1,649.3 ======== ======== ========
OPERATING INFORMATION BY SEGMENT
(In millions) 1997 1996 1995 -------- -------- --------
OPERATING EARNINGS Plastics technologies $ 59.7 $ 59.2 $ 54.3 Machine tools 14.5 4.9 7.7 Industrial products 81.2 73.7 62.1 Disposition of businesses (a) - - 71.0 Integration charge (b) - - (9.8) Corporate expenses (17.2) (16.8) (15.7) Other unallocated expenses (c) (11.1) (9.9) (10.5) -------- -------- -------- Operating earnings 127.1 111.1 159.1 Interest expense-net (26.5) (29.8) (24.8) -------- -------- -------- Earnings before income taxes $ 100.6 $ 81.3 $ 134.3 ======== ======== ========
IDENTIFIABLE ASSETS Plastics technologies $ 611.5 $ 612.6 $ 335.3 Machine tools 253.9 233.3 232.8 Industrial products 497.7 458.9 468.1 Unallocated corporate assets (d) 29.4 31.5 137.5 -------- -------- -------- Total assets $1,392.5 $1,336.3 $1,173.7 ======== ======== ========
CAPITAL EXPENDITURES Plastics technologies $ 26.7 $ 20.6 $ 16.6 Machine tools 18.0 15.7 8.6 Industrial products 34.8 28.9 27.1 -------- -------- -------- Total capital expenditures $ 79.5 $ 65.2 $ 52.3 ======== ======== ========
DEPRECIATION AND AMORTIZATION Plastics technologies $ 23.0 $ 21.4 $ 11.8 Machine tools 6.2 5.0 7.4 Industrial products 24.5 24.5 24.4 -------- -------- -------- Total depreciation and amortization $ 53.7 $ 50.9 $ 43.6 ======== ======== ========
(a) $66.0 million relates to the machine tools segment and $5.0 million relates to the industrial products segment. (b) Relates to the industrial products segment. (c) Includes financing costs related to the sale of accounts receivable and minority shareholders' interests in earnings of subsidiaries. (d) Includes cash and cash equivalents and the assets of the company's insurance and utility subsidiaries.
Sales of U.S. operations include export sales of $231.8 million in 1997, $199.6 million in 1996, and $166.9 million in 1995.
Total sales of the company's U.S. and non-U.S. operations to unaffiliated customers outside the U.S. were $816.5 million, $830.3 million, and $784.2 million in 1997, 1996 and 1995, respectively.
The following table summarizes the company's U.S. and non- U.S. operations.
U.S. AND NON-U.S. OPERATIONS
(In millions) 1997 1996 1995 -------- ------ ------ U.S. OPERATIONS Sales $1,204.4 $969.8 $938.3 Segment operating earnings 108.9 81.4 71.8 Disposition of businesses - - 62.1 Integration charge - - (2.9) Identifiable assets 813.9 731.6 484.1 Capital expenditures 50.8 41.7 31.4 Depreciation and amortization 33.7 28.9 21.6
NON-U.S. OPERATIONS Sales 692.3 759.9 711.0 Segment operating earnings 46.5 56.4 52.3 Disposition of businesses - - 8.9 Integration charge - - (6.9) Identifiable assets 549.2 573.2 552.1 Capital expenditures 28.7 23.5 20.9 Depreciation and amortization 20.0 22.0 22.0
REPORT OF INDEPENDENT AUDITORS
Board of Directors Cincinnati Milacron Inc.
We have audited the accompanying Consolidated Balance Sheet of Cincinnati Milacron Inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the related Consolidated Statements of Earnings, Changes in Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 27, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cincinnati Milacron Inc. and subsidiaries at December 27, 1997 and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 27, 1997, 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.
/S/Ernst and Young, LLP
Cincinnati, Ohio February 6, 1998
SUPPLEMENTARY FINANCIAL INFORMATION
OPERATING RESULTS BY QUARTER (UNAUDITED)
(In millions, except per-share amounts) 1997 (a) ---------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 ------ ------ ------ ------ Sales $377.5 $452.1 $570.7 $496.4 Manufacturing margins 95.3 110.3 140.2 126.1 Percent of sales 25.2% 24.4% 24.6% 25.4% Net earnings 13.0 18.2 22.6 26.8 Per common share Basic .33 .46 .57 .67 Diluted .32 .46 .56 .67
1996 (a) ---------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 ------ ------ ------ ------ Sales $353.4 $411.4 $511.1 $453.8 Manufacturing margins (b) 91.6 101.7 130.2 113.5 Percent of sales (b) 25.9% 24.7% 25.5% 25.0% Net earnings 12.6 14.7 19.1 19.9 Per common share Basic .36 .41 .48 .50 Diluted .36 .40 .48 .50
(a) In 1997 and 1996, the fiscal year consists of thirteen four-week periods. The first, second and fourth quarters consist of twelve weeks each, and the third quarter, sixteen weeks. In 1998, the company will change its fiscal year to a monthly calendar. Amounts for prior quarters will not be restated to reflect the 1998 presentation because it is impracticable to do so. (b) Manufacturing margins for 1996 and the first quarter of 1997 have been restated to exclude the amortization of goodwill.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III - --------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is (i) incorporated herein by reference to the "Election of Directors" section of the company's proxy statement dated March 27, 1998 and (ii) included in Part I on pages 18 through 19 of this Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The "Components of Compensation" section of the company's proxy statement dated March 27, 1998 is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Principal Holders of Voting Securities" section of the company's proxy statement dated March 27, 1998 is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The paragraph captioned "Stock Loan Programs" of the company's proxy statement dated March 27, 1998 is incorporated herein by reference.
PART IV - -------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 14(a)(1)&(2)-- LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Cincinnati Milacron Inc. and subsidiaries are included in Item 8:
Page No. ---- Consolidated Statement of Earnings - 1997, 1996 and 1995 32 Consolidated Balance Sheet - 1997 and 1996 33 Consolidated Statement of Changes in Shareholders' Equity - 1997, 1996 and 1995 34 Consolidated Statement of Cash Flows - 1997, 1996 and 1995 35 Notes to Consolidated Financial Statements 36 Report of Independent Auditors 48 Supplementary Financial Information 49
The following consolidated financial statement schedule of Cincinnati Milacron Inc. and subsidiaries is included in Item 14(d) for the years ended 1997, 1996 and 1995:
Page No. ---- Schedule II- Valuation and Qualifying Accounts and Reserves 63
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Item 14 (a)(3) - LIST OF EXHIBITS
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession - not applicable
(3) Articles of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on June 16, 1983 - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 28, 1985, as amended by Amendment No. 1 thereto on Form 8 dated June 30, 1986, and Amendment No. 2 thereto' on Form 8 dated July 17, 1986 (File No. 1-8485)
3.2 Certificate of Amendment of the Restated Certificate of Incorporation dated April 22, 1986, and filed with the Secretary of State of the State of Delaware on April 22, 1986 - Incorporated herein by reference to the company's Form 10-Q for the quarter ended March 22, 1986 (File No. 1-8485)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation dated June 11, 1987, and filed with the Secretary of State of the State of Delaware on June 15, 1987 - Incorporated herein by reference to the company's Form 10-Q for the quarter ended March 28, 1987 (File No. 1-8485)
3.4 By-laws, as amended - Incorporated herein by reference to the company's Registration Statement on Form S-8 (Registration No. 33-33623)
(4) Instruments Defining the Rights of Security Holders, Including Indentures:
4.1 8-3/8% Notes due 2004 - Incorporated herein by reference to the company's Amendment No. 3 to Form S-4 Registration Statement dated July 7, 1994 (File No. 33-53009)
4.2 7-7/8% Notes due 2000 - Incorporated by reference to the company's Registration Statement on Form S-4 dated July 21, 1995 (File No. 33- 60081)
4.3 Cincinnati Milacron Inc. hereby agrees to furnish to the Securities and Exchange Commission, upon its request, the instruments with respect to long-term debt for securities authorized thereunder which do not exceed 10% of the registrant's total consolidated assets
(9) Voting Trust Agreement- not applicable
(10) Material Contracts:
10.1 Cincinnati Milacron 1987 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 27, 1987.
10.2 Cincinnati Milacron 1991 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 22, 1991.
10.3 Cincinnati Milacron 1994 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 24, 1994.
10.4 Cincinnati Milacron 1997 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 21, 1997.
10.5 Cincinnati Milacron 1996 Short-Term Management Incentive Plan - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 28, 1996.
10.6 Cincinnati Milacron Inc. Supplemental Pension Plan - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 31, 1988.
10.7 Cincinnati Milacron Inc. Supplemental Retirement Plan #2 - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 31, 1988.
10.8 Cincinnati Milacron Retirement Savings Plan - Incorporated herein by reference to the company's Registration Statement on Form S-8 (Registration No. 33-33623).
10.9 Cincinnati Milacron Inc. Plan for the Deferral of Directors' Compensation - Incorporated herein by reference to the company's Proxy Statement dated March 22, 1991.
10.10 Cincinnati Milacron Inc. Retirement Plan for Non-Employee Directors - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 29, 1990.
10.11 Cincinnati Milacron Supplemental Executive Retirement Plan - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended January 1, 1994.
10.12 Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc., Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 8-K dated February 1, 1995.
10.13 Amendment Number One, dated as of May 31, 1995 to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994, among Cincinnati Milacron Inc., Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 8-K dated May 31, 1995.
10.14 U.S. Asset Purchase Agreement dated as of December 15, 1995 between Cincinnati Milacron Inc. and TRINOVA Corporation. - Incorporated herein by reference to the company's Form 8-K dated December 30, 1995.
10.15 U.K. Asset Purchase Agreement dated as of December 15, 1995, between Cincinnati Milacron U.K. Limited and TRINOVA Limited. - Incorporated herein by reference to the company's Form 8-K dated December 30, 1995.
10.16 Amendment Number Two, dated as of January 23, 1996 to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 10-K dated December 30, 1995.
10.17 Amendment Number Three, dated as of April 26, 1996 to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 10-K dated December 28, 1996.
10.18 Underwriting Agreement between Cincinnati Milacron Inc, and CS First Boston Corporation, BT Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. - Incorporated herein by reference to the company's Registration Statement on Form S-3 (Registration No. 333-01739)
10.19 Asset Purchase Agreement dated as of January 23, 1996, between Cincinnati Milacron Inc., a Delaware corporation, The Fairchild Corporation, a Delaware corporation, RHI Holdings, Inc., a Delaware corporation, and the Designated Purchasers and Sellers named therein. - Incorporated herein by reference to the company's Form 8-K dated January 26, 1996.
10.20 Amendment Number Four, dated as of March 14, 1997, to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Quarterly Report on Form 10-Q for the quarter ended March 22, 1997.
10.21 Amendment Number Five, dated as of December 31, 1997, to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Filed herewith.
(11) Statement Regarding Computation of Per-Share Earnings
(12) Statement Regarding Computation of Ratios - not applicable
(13) Annual report to security holders, Form 10-Q or quarterly report to security holders - not applicable
(16) Letter re Change in Certifying Accountant - not applicable
(18) Letter Regarding Change in Accounting Principles - not applicable
(21) Subsidiaries of the Registrant
(22) Published Report Regarding Matters Submitted to Vote of Security Holders - Incorporated by reference to the company's Proxy Statement dated March 27, 1998.
(23) Consent of Experts and Counsel
(24) Power of Attorney - not applicable
(27) Financial Data Schedule
(99) Additional Exhibits - not applicable
Item 14(b)-- REPORTS ON FORM 8-K
On November 1, 1997, the company reported on Form 8-K a change in fiscal year from a 52 week, 13 period, fiscal year ending on the Saturday closest to December 31, to a calendar fiscal year ending on December 31. This change is effective for fiscal year 1998.
Item 14(c)&(d)-- EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The responses to these portions of Item 14 are submitted as a separate section of this report.
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.
CINCINNATI MILACRON INC.
BY: /s/ Daniel J. Meyer ---------------------- Daniel J. Meyer; Chairman, President and Chief Executive Officer (Chief Executive Officer)
BY: /s/ Ronald D. Brown ---------------------- Ronald D. Brown; Vice President- Finance and Administration and Chief Financial Officer (Chief Financial Officer)
BY: /s/ Robert P. Lienesch ------------------------- Robert P. Lienesch; Controller (Chief Accounting Officer)
Date: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Darryl F. Allen - ---------------------------------------- Darryl F. Allen; March 18, 1998 (Director)
/s/ Neil A. Armstrong - ---------------------------------------- Neil A. Armstrong; March 18, 1998 (Director)
/s/ Barbara Hackman Franklin - ---------------------------------------- Barbara Hackman Franklin; March 18, 1998 (Director)
/s/ Harry A. Hammerly - ---------------------------------------- Harry A. Hammerly; March 18, 1998 (Director)
ITEM 14(C) AND (D)-- INDEX TO CERTAIN EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page No.
Exhibit 10.21 Amendment Number Five, dated as of December 31, 1997, to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, Bound as agent. Separately
Exhibit 11 Computation of Per-Share Earnings 58
Exhibit 21 Subsidiaries of the Registrant 59
Exhibit 23 Consent of Experts and Counsel 61
Exhibit 27 Financial Data Schedule 62
Schedule II Valuation and Qualifying Accounts and Reserves 63
CINCINNATI MILACRON INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended 1997, 1996 and 1995 (In Thousands)
(a) Consists of reserves of subsidiaries purchased during the year. (b) Represents amounts charged against the reserves during the year. (c) Represents foreign currency translation adjustments during the year. (d) Reversal of excess Valenite restructuring reserve established in 1993. (e) Consists of reserves of businesses sold during the year.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per-share amounts)
(a) During 1997, amortization of goodwill, which was previously included as a component of cost of products sold, is included in other costs and expenses-net in this schedule to conform to the company's presentation in its Consolidated Statement of Earnings. Amounts for prior periods have been reclassified to conform to the 1997 presentation.
(b) Represents a gain of $66.0 million ($52.4 million after tax) on the sale of the company's Electronic Systems Division and a gain of $5.0 million ($4.0 million after tax) on the sale of the company's American Mine Tool business.
(c) Represents a charge of $9.8 million ($7.8 million after tax) for the integration of certain Widia and Valenite operations.
(d) Represents a charge (with no current tax effect) for the disposition of a plastics technologies subsidiary.
(e) Represents a charge (with no current tax effect) for the consolidation of U.S. machine tool manufacturing operations.
(f) For 1993, diluted earnings per common share is equal to basic earnings per share because the inclusion of potentially dilutive securities would result in a smaller loss per common share.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The company operates in three business segments: plastics technologies (formerly plastics machinery), machine tools and industrial products. In the last four years, the company has achieved record sales in each succeeding year. The sales increases in 1994 through 1996 resulted principally from the growth of the plastics technologies and industrial products segments, largely as a result of acquisitions. The 1997 sales increase resulted principally from internal growth in the plastics technologies and machine tool segments. The 1997 sales level in the industrial products segment benefited from two small acquisitions, but its sales were held back by the translation effect of foreign currency exchange rate fluctuations.
ACQUISITIONS AND DIVESTITURES
In 1997, the company acquired two businesses: Data Flute CNC in June and Minnesota Twist Drill in September. Both businesses are included in the industrial products segment. These acquisitions resulted in an increase in 1997 new orders and sales of approximately $8 million.
On January 26, 1996, the company acquired D-M-E, which is included in the company's plastics technologies segment for eleven months of 1996. This acquisition had the effect of increasing new orders and sales by approximately $153 million in 1996, and $16 million in 1997 when compared with 1996.
In 1995, the company acquired two businesses: Widia in February and Talbot in July. Both businesses are included in the industrial products segment. The timing of these acquisitions caused an increase in new orders and sales in 1996 of approximately $50 million when compared with 1995.
On December 30, 1995, the company sold its Electronic Systems Division (ESD), which was included in the machine tools segment. While most of its sales were made to other Milacron businesses, ESD also contributed approximately $35 million and $30 million of new orders and sales, respectively, to external customers in 1995. ESD's operating earnings were $14.2 million in 1995, and its disposition resulted in a 1995 gain of $66.0 million before tax ($52.4 million after tax).
On January 27, 1995, the company sold its American Mine Tool (AMT) business which was formerly part of the industrial products segment. AMT's new orders, sales and operating earnings were immaterial, but its disposition resulted in a gain of $5.0 million before tax ($4.0 million after tax) in 1995.
PRESENCE OUTSIDE THE U.S.
In recent years, the company's growth outside the U.S. has allowed the company to become less dependent on the U.S. industrial sector. In 1997, markets outside the U.S. represented the following percentages of consolidated sales: Europe - 27%; Asia - 9%; Canada and Mexico - 5%; and the rest of the world - 2%.
As a result of the company's geographic sales mix, foreign currency exchange rate fluctuations affect the translation of sales and earnings, as well as consolidated shareholders' equity. The most important factors are the exchange rates of the British pound and the German mark. Throughout part of 1996, the financial statement effects of a weaker German mark and related European currencies were to some degree offset by the effects of a stronger British pound. In 1997, however, the pound somewhat stabilized while the mark has continued to weaken. As a result, the company has experienced more significant translation effects in 1997, resulting in negative currency effects on new orders and sales of $87 million and $69 million, respectively. The 1997 translation effect on net earnings approximated $2.1 million, or $.05 per share. In 1997, there was also a $25 million decrease in shareholders' equity due to cumulative foreign currency translation adjustments. If the mark remains at current levels or weakens further in 1998, the company will continue to experience a negative effect on translating its European new orders, sales and net earnings when compared with 1997.
About 3% of the company's 1997 sales were to customers located in Korea and the ASEAN countries - the areas most severely impacted by Southeast Asia market and currency difficulties toward the end of 1997. The net effect of these Asian difficulties was to reduce the company's net earnings by approximately $1 million in the fourth quarter of 1997. While it is impossible to forecast the ultimate worldwide impact of these difficulties, the company currently believes that the current magnitude of these issues is not likely to warrant major revisions to the company's 1998 expectations. The company further believes that Asian markets hold excellent potential for both sales and earnings growth over the long term.
EARNINGS PER COMMON SHARE
Beginning with the fourth quarter of 1997, earnings per common share (EPS) are being calculated in accordance with newly issued rules established by the Financial Accounting Standards Board. The new rules require the company to report two EPS amounts: "basic" and "diluted." For the company, the calculation for diluted EPS closely approximates the company's previously disclosed EPS figures under the old accounting rules. The company has restated prior year EPS figures under the new accounting rules whenever appropriate and EPS figures cited in this "Management's Discussion and Analysis" refer to diluted EPS amounts.
1997 COMPARED TO 1996
NEW ORDERS AND BACKLOG
New orders in 1997 were $1,886 million, which represented a $133 million, or 8%, increase from the $1,753 million in 1996. Orders for plastics technologies products increased by $65 million, or 10%, principally due to increased orders for U.S.-built injection molding machines. Machine tool orders increased by $51 million, or 12%, due to increased orders for U.S.-built horizontal machining centers and aerospace-related systems. Orders for industrial products increased by $17 million, or 2%, of which $8 million resulted from the 1997 acquisitions. Excluding the effect of acquisitions and foreign currency translation effects, new orders increased for this segment by 9% as all major U.S. product lines showed improvement.
U.S. export orders were $210 million in 1997 compared to $220 million in 1996.
The company's backlog of unfilled orders totaled $365 million at December 27, 1997. This compares to $373 million at December 28, 1996. These high levels are being maintained in large part by increased orders for U.S.- built machine tools for aerospace customers.
SALES
Sales in 1997 were $1,897 million, which represented a $167 million, or 10%, increase over 1996. This increase was caused principally by internal growth in the plastics technologies and machine tools segments. 1997 sales were affected by a $69 million negative effect of currency translation adjustments. Excluding the acquisitions and currency translation effects, sales increased by 12%.
Sales of plastics technologies increased by $73 million, or 11%, primarily due to increased sales of U.S.-built injection molding machines. Machine tool sales increased by $86 million, or 23%, due to increased U.S. sales, and despite reduced sales of U.K.-built machines. Industrial products sales increased by $8 million, or 1%. However, after excluding the acquisitions and currency translation effects, sales increased by $42 million, or 6%.
Sales of all segments to non-U.S. markets totaled $817 million, a decrease in 1997 of $14 million, and export sales totaled $232 million, an increase of $32 million. In 1997 and 1996, products manufactured outside the U.S. approximated 37% and 44% of sales, respectively, while products sold outside the U.S. approximated 43% and 48% of sales, respectively.
MARGINS, COSTS AND EXPENSES
Amortization of goodwill had, until 1997, been included in cost of products sold. Because of its increased significance as a result of acquisitions, the company has concluded that it more properly belongs in the caption, "other costs and expenses-net" in the Consolidated Statement of Earnings. Amounts for cost of products sold, manufacturing margins and related percentages, and other costs and expenses-net for prior years have been restated for consistency of presentation. Amortization expense has been as follows: $6.1 million, $5.8 million and $1.5 million in 1997, 1996 and 1995, respectively.
Manufacturing margins as a percent to sales, were 24.9% in 1997 and 25.3% in 1996. Margins for machine tools and industrial products improved in 1997, while margins for plastics technologies were depressed through the first three quarters of 1997 due to pricing pressures on U.S.- built injection molding machines. Plastics technologies' margins improved slightly in the fourth quarter of 1997.
Total selling and administrative expense increased in amount, as expected, due to increases in certain selling costs that vary with sales levels. Administrative expenses increased modestly. As a percent to sales, selling expense declined to approximately 15% of sales and administrative expenses remained at approximately 2% of sales.
The expense for minority shareholders' interests in earnings of subsidiaries relates principally to Widia's subsidiary in India. The increased expense is caused by the subsidiary's improved profitability.
Other expense-net, including amortization of goodwill, increased to $11.2 million in 1997 from $6.5 million in 1996. The increase was caused primarily by the absence of favorable settlements of legal claims that are included in the 1996 amount and the inclusion of severance expense of approximately $2.0 million in the first quarter of 1997 relating to approximately 60 employees at Ferromatik, the company's German injection molding machine subsidiary. As a result of this and other actions at Ferromatik, the company expects to achieve annualized savings of $3.5 million, which began to phase in during the second quarter of 1997.
Interest expense-net of interest income, was $26.5 million in 1997 compared with $29.8 million in 1996. The decrease was due to lower average debt levels and lower borrowing rates as well as the effects of foreign currency translation.
INCOME TAXES
The provision for income taxes in 1997, 1996 and 1995 includes U.S. federal and state and local income taxes, and income taxes in other jurisdictions outside the U.S. The company entered all three years with sizeable net operating loss (NOL) carryforwards, along with valuation allowances in certain jurisdictions against the NOL carryforwards and other deferred tax assets.
By December 30, 1995, the company had fully utilized its U.S. NOL carryforwards, but as of December 27, 1997, its non-U.S. NOL carryforwards totaled $112 million, most of which have no expiration dates.
The company's practice is to periodically reevaluate the future realization of all of its deferred tax assets. During the period, the company concluded that it is more likely than not that a portion of these assets will be offset against future taxable income. As a result, the company reversed valuation allowances in certain jurisdictions which caused the provision for income taxes to be less than the statutory rate. The company expects the utilization of these NOL carryforwards and reversal of additional valuation allowances to continue to cause the effective tax rate to be less than the U.S. statutory rate through at least 1998, although the overall rate is expected to increase to approximately 30% in 1998.
EARNINGS
Net earnings in 1997 were $80.6 million, or $2.01 per share, compared with $66.3 million, or $1.74 per share in 1996. Net earnings increased 21%, while per share earnings increased 16%, which also includes the effect of increased common shares outstanding throughout 1997.
1996 COMPARED TO 1995
NEW ORDERS AND BACKLOG
New orders for 1996 were $1,753 million, which represented a $118 million, or 7%, increase over 1995. Excluding the effects of acquisitions and divestitures, new orders decreased by $51 million, which approximates the decline caused by changes in currency exchange rates.
Orders for plastics technologies increased $100 million. Excluding the effects of the D-M-E acquisition, however, new orders for plastics technologies declined by $53 million, or 10%, due primarily to weaker order levels for injection molding machines in the U.S. in the first half of 1996. Machine tool orders totaled $414 million, virtually unchanged from 1995 level. However, after excluding the effect of the ESD divestiture, new orders for machine tools increased $31 million, or 8%, largely due to increased orders for U.K.-built standard machine tools and U.S.-built aerospace products. This segment experienced reduced orders for U.S.-built standard machine tools throughout much of the year, but orders improved in the fourth quarter. Orders for industrial products were $685 million. After excluding the effect of the Talbot and Widia acquisitions, new orders for industrial products declined $28 million, or 4%, due primarily to the weakening German mark throughout the year, and a weakening of the market for European cutting tools and industrial magnets in the last half of 1996.
U.S. export orders increased to $220 million in 1996, up over 34% from 1995 due primarily to the D-M-E acquisition and the receipt of a single $20 million export order.
At December 28, 1996, the backlog of unfilled orders was $373 million, up from $344 million at December 30, 1995. The increase relates primarily to increased orders for U.S.-built machine tools, including aerospace products.
SALES
Sales in 1996 were $1,730 million, which represented an $80 million, or 5%, increase over 1995. The increase was caused primarily by the D-M-E acquisition. Excluding the effect of acquisitions and divestitures, sales decreased by approximately $90 million, of which $43 million was due to the effect of currency translation adjustments.
Sales of plastics technologies increased by $92 million. Excluding the effects of the D-M-E acquisition, however, sales of plastics technologies declined by $61 million, or 11%, due primarily to weaker orders for U.S.-built injection molding machines in the first half of 1996 and European-built injection molding machines throughout the year. Machine tool sales declined $37 million. After excluding the ESD divestiture effect, however, sales for machine tools declined $7 million, or 2%, due to reduced sales of U.S.-built standard machine tools, in part offset by increased sales of U.K.-built standard machine tools and U.S.-built aerospace products. Industrial products' sales increased, although after excluding the acquisitions, sales declined $22 million, or 3%, due to currency translation effects and a weaker European market.
Sales of all segments to non-U.S. markets totaled $830 million, an increase in 1996 of $46 million, and export sales totaled $200 million, an increase of $33 million. The increases resulted primarily from the D-M-E acquisition. In both 1996 and 1995, products manufactured outside the U.S. approximated 44% of sales while products sold outside the U.S. approximated 48% of sales.
MARGINS, COSTS AND EXPENSES
Manufacturing margins, as a percent to sales, were 25.3% in 1996 compared with 25.0% in 1995; excluding ESD's margins from 1995, the ongoing business' margins increased from 24.3% in 1995 to 25.3% in 1996. Plastics technologies margins increased in the U.S. despite continued price pressures, but declined in Germany due to temporary excess staffing levels at Ferromatik. Machine tool margins also increased, after excluding ESD's margins from 1995 results. Industrial products' margins improved for the year but declined in the fourth quarter due to reduced sales volume in Widia's European businesses.
Selling and administrative expense increased in 1996 due to the D-M-E acquisition and increased sales. As a percent to sales, however, selling expense continued to approximate 16% of sales and administrative expense continued to approximate 2% of sales.
Other-net, including amortization of goodwill, declined in 1996 to $6.5 million from $10.9 million in 1995 due to reduced costs associated with the sale of accounts receivable, increased gains on sales of fixed assets, favorable settlement of legal claims and other similar items which may not recur in the future.
Interest expense, net of interest income, was $29.8 million in 1996 compared to $24.8 million in 1995. The expense increase was primarily attributable to the temporary use of debt to fund the D-M-E acquisition. This debt was later repaid from the proceeds of the equity offering described below and, accordingly, interest expense declined during the second half of the year.
EARNINGS
Net earnings in 1996 were $66.3 million, or $1.74 per share, compared with $105.6 million, or $3.07 per share in 1995. The 1995 net earnings included $48.6 million, or $1.42 per share, resulting from the combined effects of the gain on the disposition of two businesses, offset by an integration charge for Valenite. Excluding those items, 1996 net earnings increased by $9.3 million, or 16%, while per share earnings increased by $.09, or 6%, which also includes the effect of an increase in outstanding common shares.
YEAR 2000
The company is implementing plans to address potential exposures to various systems caused by the approach of the Year 2000. Many of the company's systems are already Year 2000 compliant, while other systems are being reprogrammed, and, in some cases, the company is using this opportunity to implement more modern systems which are already Year 2000 compliant. The financial impact of these changes is not expected to have a material effect on the company's consolidated financial position, results of operations or cash flows.
CHANGE IN FISCAL YEAR
In November, 1997, the Board of Directors approved management's plan to change the company's fiscal year from a 52-53 week year ending on the Saturday closest to December 31st to a calendar year ending on December 31st each year. In 1998, the transition year, the company's fiscal year will begin December 28, 1997 and conclude December 31, 1998. The change is not expected to have a material effect on financial condition, results of operations or cash flows for the year 1998. However, the company's 1997 calendar had 12 weeks each in quarters 1, 2 and 4, and 16 weeks in quarter 3, while the calendar in future years will have three months in each quarter. This change will cause inconsistency in quarterly reporting throughout 1998 due to the inclusion in 1998 of an additional 10 days in quarter 1, 7 days in quarter 2, 20 fewer days in quarter 3 and an additional 8 days in quarter 4 in comparison to 1997. Quarterly amounts for 1997 will not be restated because it is impracticable to do so.
LIQUIDITY AND SOURCES OF CAPITAL
At December 27, 1997, the company had cash and cash equivalents of $26 million, a decrease of $2 million during the year.
Operating activities provided $114 million of cash in 1997, compared with $60 million provided in 1996. Operating activities cash flows have been reduced by cash costs of $2.0 million and $13 million in 1997 and 1996, respectively, for Ferromatik severance payments in 1997, and the Widia/Valenite integration and restructuring in 1996.
Investing activities in 1997 resulted in a $100 million use of cash, primarily due to capital expenditures of $80 million and the cost of acquisitions. Investing activities in 1996 resulted in a $308 million use of cash, mostly due to the D-M-E acquisition, as well as $65 million of capital expenditures. Net cash used by investing activities in 1995 included $79 million for the Widia acquisition and $33 million for the Talbot acquisition. Also affecting 1995 was $120 million provided from the divestitures of ESD and AMT.
Financing activities used $16 million of cash in 1997, which includes the effect of a dividend increase and the purchase of treasury shares. Financing activities provided $143 million of cash in 1996, primarily due to $129 million of net proceeds from the issuance of 5.5 million additional shares of common stock. In 1995, financing activities provided $106 million of cash, primarily due to the issuance of $100 million of 7 7/8% notes.
As of December 27, 1997, the company's current ratio of 1.8 was unchanged from December 28, 1996.
At December 27, 1997, the company had lines of credit with various U.S. and non-U.S. banks of approximately $420 million, including a $200 million committed revolving credit facility which expires in January 2002. Under the provisions of the facility, the company's additional borrowing capacity totaled approximately $307 million at December 27, 1997. Subsequent to the end of 1997, the facility was increased to $250 million. The amended facility continues to impose restrictions on total indebtedness in relation to earnings before interest, income taxes, depreciation and amortization (EBITDA). The company anticipates that it will be able to continue to comply with these restrictions throughout the term of the facility.
The company had a number of short-term intercompany loans and advances denominated in various currencies totaling $47 million at December 27, 1997, that were subject to foreign currency exchange risk. The company also enters into various transactions, in the ordinary course of business, for the purchase and sale of goods and services in various currencies. The company hedges its exposure to currency fluctuations related to short-term intercompany loans and advances and the purchase and sale of goods under firm commitments by entering into foreign currency exchange contracts to minimize the effect of foreign currency exchange rate fluctuations. The company is currently not involved with any additional derivative financial instruments.
The interest rates on the lines of credit and the financing fees on the receivables purchase agreement fluctuate based on changes in prevailing interest rates in the countries in which amounts are borrowed or receivables are sold. At December 27, 1997, approximately $228 million was subject to the effects of fluctuations in interest rates under these arrangements. Future changes in interest rates will affect the company's interest expense and other financing costs.
Total debt was $372 million at December 27, 1997, a decrease of $1 million over December 28, 1996. Total shareholders' equity was $472 million at December 27, 1997, an increase of $26 million over December 28, 1996, despite the adverse effect of a $25 million change in the cumulative foreign currency translation adjustment caused by the effects of a stronger U.S. dollar. As a result, the ratio of total debt to total capital (debt plus equity) improved to 44% at December 27, 1997 from 46% at December 28, 1996.
During 1997, the company purchased 589,695 shares of the company's stock on the open market to satisfy the needs of management incentive, employee benefit and dividend reinvestment plans. Subsequent to year end, the company purchased an additional 338,000 shares for these plans' requirements. Additional purchases may be made later in the year. In addition, 1998 capital expenditures are expected to approximate $100 million. And, in the first half of 1998, the company expects to begin implementing a cost-cutting program to reduce staffing at Widia in Germany and in certain other European locations. This program is currently estimated to result in a $4 million net cash cost in 1998. The company believes that its cash flow from operations and available credit lines will be sufficient to meet these and other operating requirements.
OUTLOOK
The company's strategy primarily focuses on internal growth, which is somewhat dependent upon the worldwide economic climate, and productivity gains. In 1998, the company anticipates weakness in certain Asian markets but modestly improving economic conditions in Europe. In North America, the company recognizes that automotive production may weaken but expects most of the other key sectors of its business to remain at healthy levels. Based on this economic climate, among other things, the company's 1998 goals are for about a 7% sales increase coupled with a 12% increase in earnings per share.
The above forward-looking statements involve risks and uncertainties that could significantly impact expected results, as described more fully in the Cautionary Statement described below.
CAUTIONARY STATEMENT --------------------
The company wishes to caution readers about all its forward-looking statements in the "Outlook" section above and elsewhere. These include all statements that speak about the future or are based on the company's interpretation of factors that might affect its businesses. The company believes the following important factors, among others, could affect its actual results in 1998 and beyond and cause them to differ materially from those expressed in any of its forward-looking statements:
* global and regional economic conditions, consumer spending and industrial production, particularly in segments related to the level of automotive production and spending in the aerospace and construction industries;
* fluctuations in currency exchange rates of U.S. and foreign countries, including countries in Europe and Asia where the company has several principal manufacturing facilities and where many of the company's competitors and suppliers are based;
* fluctuations in domestic and non- U.S. interest rates which affect the cost of borrowing under the company's lines of credit and financing fees related to the sale of domestic accounts receivable;
* production and pricing levels of important raw materials, including plastic resins, which are a key material used by purchasers of the company's plastics technologies products, and steel, cobalt, tungsten and industrial grains used in the production of metalworking products;
* lower than anticipated levels of plant utilization resulting in production inefficiencies and higher costs, whether related to the delay of new product introductions, improved production processes or equipment, or labor relation issues;
* any major disruption in production at key customer or supplier facilities;
* alterations in trade conditions in and between the U.S. and non-U.S. countries where the company does business, including export duties, import controls, quotas and other trade barriers;
* changes in tax, environmental and other laws and regulations in the U.S. and non-U.S. countries where the company does business;
* unanticipated litigation, claims or assessments, including but not limited to claims or problems related to product liability, warranty, or environmental issues.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Beginning on page 32 and continuing through page 49 are the consolidated financial statements with applicable notes and the related Report of Independent Auditors, and the supplementary financial information specified by Item 302 of Regulation S-K.
CONSOLIDATED STATEMENT OF EARNINGS CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions, except per-share amounts)
1997 1996 1995 -------- -------- -------- Sales $1,896.7 $1,729.7 $1,649.3 Cost of products sold 1,424.8 1,292.7 1,236.8 -------- -------- -------- Manufacturing margins 471.9 437.0 412.5
Other costs and expenses Selling and administrative 329.3 316.3 301.4 Gain on disposition of businesses - - (71.0) Integration charge - - 9.8 Minority shareholders' interests in earnings of subsidiaries 4.3 3.1 2.3 Other-net 11.2 6.5 10.9 -------- -------- -------- Total other costs and expenses 344.8 325.9 253.4 -------- -------- -------- Operating earnings 127.1 111.1 159.1
Interest Income 2.4 4.8 3.2 Expense (28.9) (34.6) (28.0) -------- -------- -------- Interest-net (26.5) (29.8) (24.8) -------- -------- --------
Earnings before income taxes 100.6 81.3 134.3 Provision for income taxes 20.0 15.0 28.7 -------- -------- -------- Net earnings $ 80.6 $ 66.3 $ 105.6 ======== ======== ======== Net earnings per common share Basic $ 2.03 $ 1.75 $ 3.11 ======== ======== ======== Diluted $ 2.01 $ 1.74 $ 3.07 ======== ======== ========
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions, except par value amounts)
1997 1996 -------- -------- ASSETS Current assets Cash and cash equivalents $ 25.7 $ 27.8 Notes and accounts receivable (less allowances of $13.0 in 1997 and $13.7 in 1996) 275.0 267.0 Inventories Raw materials 26.5 27.8 Work-in-process and finished parts 217.7 202.7 Finished products 146.2 159.2 -------- -------- Total inventories 390.4 389.7 Other current assets 60.0 43.4 -------- -------- Total current assets 751.1 727.9
Property, plant and equipment-net 343.1 319.1 Goodwill 231.1 229.9 Other noncurrent assets 67.2 59.4 -------- -------- Total assets $1,392.5 $1,336.3 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Amounts payable to banks $ 65.9 $ 65.7 Long-term debt due within one year 1.6 5.2 Trade accounts payable 153.7 134.9 Advance billings and deposits 35.7 34.5 Accrued and other current liabilities 168.5 169.3 -------- -------- Total current liabilities 425.4 409.6
Long-term accrued liabilities 191.0 178.6 Long-term debt 304.2 301.9 -------- -------- Total liabilities 920.6 890.1 -------- -------- Commitments and contingencies - -
SHAREHOLDERS' EQUITY 4% Cumulative Preferred shares 6.0 6.0 Common shares, $1 par value (outstanding: 39.6 in 1997 and 39.8 in 1996) 39.6 39.8 Capital in excess of par value 377.8 390.1 Reinvested earnings 83.5 19.9 Cumulative foreign currency translation adjustments (35.0) (9.6) -------- -------- Total shareholders' equity 471.9 446.2 -------- -------- Total liabilities and shareholders' equity $1,392.5 $1,336.3 ======== ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions, except share amounts)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS CINCINNATI MILACRON INC. AND SUBSIDIARIES FISCAL YEAR ENDS ON SATURDAY CLOSEST TO DECEMBER 31.
(In millions) 1997 1996 1995 ------ ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES CASH FLOWS Net earnings $ 80.6 $ 66.3 $ 105.6 Operating activities providing (using) cash Depreciation and amortization 53.7 50.9 43.6 Gain on disposition of businesses - - (71.0) Integration charge - - 9.8 Deferred income taxes (15.3) (7.0) (25.3) Working capital changes Notes and accounts receivable (20.7) (5.6) 3.9 Inventories (16.3) (20.7) (27.3) Other current assets (6.1) 7.4 (1.4) Trade accounts payable 21.8 16.8 4.2 Other current liabilities 7.6 (50.6) (1.3) Decrease (increase) in other noncurrent assets .1 (1.9) (2.0) Increase in long-term accrued liabilities 13.2 8.8 9.6 Other-net (4.7) (4.5) (7.5) ------ ------- ------- Net cash provided by operating activities 113.9 59.9 40.9 ------ ------- -------
INVESTING ACTIVITIES CASH FLOWS
Capital expenditures (79.5) (65.2) (52.3) Net disposals of property, plant and equipment 5.7 4.3 10.3 Acquisitions (25.9) (246.8) (113.5) Disposition of businesses - - 120.4 ------ ------- ------- Net cash used by investing activities (99.7) (307.7) (35.1) ------ ------- -------
FINANCING ACTIVITIES CASH FLOWS
Dividends paid (17.0) (13.6) (12.5) Increase in long-term debt 14.4 - 190.0 Repayments of long-term debt (4.9) (21.1) (33.0) Increase (decrease) in amounts payable to banks 3.7 47.6 (49.8) Issuance of common shares 2.2 129.6 13.1 Purchase of treasury and other common shares (14.7) - (2.0) ------ ------- ------- Net cash provided (used) by financing activities (16.3) 142.5 105.8 ------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2.1) (105.3) 111.6 Cash and cash equivalents at beginning of year 27.8 133.1 21.5 ------ ------- ------- Cash and cash equivalents at end of year $ 25.7 $ 27.8 $ 133.1 ====== ======= =======
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
The company's fiscal year ends on the Saturday closest to December 31 of each year. Fiscal year ends are as follows:
1997: December 27, 1997 1996: December 28, 1996 1995: December 30, 1995
In November, 1997, the Board of Directors approved management's plan to change the company's fiscal year to a calendar year ending on December 31st. In 1998, the transition year, the company's fiscal year will begin December 28, 1997, and end December 31, 1998. The change is not expected to have a material effect on financial condition, results of operations or cash flows for the year 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the company and its subsidiaries. All significant intercompany transactions are eliminated.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the company's non-U.S. operations are translated into U.S. dollars at period-end exchange rates. Net exchange gains or losses resulting from such translation are excluded from net earnings and accumulated in a separate component of shareholders' equity. Income and expense accounts are translated at weighted-average exchange rates for the period. Gains and losses from foreign currency transactions are included in other costs and expenses-net in the Consolidated Statement of Earnings. Gains and losses on foreign exchange contracts that are designated as hedges of foreign currency commitments are recognized as part of the specific transactions hedged under the deferral method of accounting consistent with the requirement for a firm commitment.
RECLASSIFICATION OF FINANCIAL STATEMENT
Beginning in 1997, amortization of goodwill, which was previously included as a component of cost of products sold, is included in other costs and expenses-net in the Consolidated Statement of Earnings. Amounts reported for prior years have been reclassified to conform to the 1997 presentation.
REVENUE RECOGNITION
The company's policy is to recognize sales when products are shipped to unaffiliated customers.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market, including provisions for obsolescence commensurate with known or estimated exposures. The principal methods of determining costs are last-in, first-out (LIFO) for certain U.S. inventories and average or standard cost, which approximates first-in, first-out (FIFO), for other inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost or, for assets acquired through business combinations, at fair value at the dates of the respective acquisitions. For financial reporting purposes, depreciation is generally determined on the straight-line method using estimated useful lives of the assets. Depreciation expense was $47.6 million, $45.1 million and $42.1 million for 1997, 1996 and 1995, respectively.
Property, plant and equipment that are idle and held for sale are valued at the lower of historical cost less accumulated depreciation or fair value less cost to sell. Carrying costs through the expected disposal dates of such assets are accrued at the time expected losses are recognized or, in the case of assets to be sold at a gain, charged to expense as incurred.
GOODWILL
Goodwill, which represents the excess of acquisition cost over the net assets acquired in business combinations, is amortized on the straight-line method over periods ranging from 25 to 40 years. The carrying amount of goodwill is reviewed annually using estimated undiscounted cash flows for the businesses acquired over the remaining amortization periods. Amortization expense charged to earnings amounted to $6.1 million, $5.8 million and $1.5 million in 1997, 1996 and 1995, respectively.
RETIREMENT BENEFIT PLANS
The company maintains various defined benefit and defined contribution pension plans covering substantially all U.S. employees and certain non-U.S. employees. For defined benefit plans, pension benefits are based primarily on length of service and compensation. The company's policy is to fund the plans in accordance with applicable laws and regulations.
STOCK-BASED COMPENSATION
The company accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations.
INCOME TAXES
The company provides deferred income taxes for cumulative temporary differences between the financial reporting basis and income tax basis of its assets and liabilities. Provisions are made for all currently payable federal and state and local income taxes at applicable tax rates. Provisions are also made for any additional taxes on anticipated distributions from subsidiaries.
EARNINGS PER COMMON SHARE
Beginning in 1997, earnings per common share data are computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share," which became effective for financial statements issued after December 15, 1997. Amounts for prior years have been restated.
RECENTLY ISSUED PRONOUNCEMENTS
During 1998, the company will adopt the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for year-end 1998. This standard requires that segment information be disclosed based upon how management internally evaluates the operating performance of its business units. Application of the disclosure requirements under this standard is not expected to have a material effect on the financial statements of the company in 1998.
DISPOSITION OF BUSINESSES
In December, 1995, the company completed the sale of its Electronic Systems Division (ESD) for $104 million in cash and recorded a fourth quarter pretax gain of $66.0 million ($52.4 million after tax). ESD's 1995 sales to unaffiliated customers were approximately $30 million.
In January, 1995, the company completed the sale of its American Mine Tool (AMT) business for $15 million resulting in a pretax gain of $5.0 million ($4.0 million after tax). The sale did not have a significant effect on the company's ongoing sales or operating earnings.
INTEGRATION CHARGE
In the second quarter of 1995, the company recorded a pretax charge of $9.8 million ($7.8 million after tax) to eliminate or downsize certain operations of Valenite in connection with the acquisition of Widia earlier in the year. The charge was recorded as a result of a plan formally approved by management in May, 1995, and later revised in December, 1995, which also involved the integration of certain Widia operations with Valenite. The total cost of the plan was $28.1 million. That portion of the overall plan that related directly to Widia was recorded through purchase accounting adjustments totaling $18.3 million. As it related to Valenite, the plan involved the closure of one manufacturing plant, the downsizing of another and the consolidation of numerous sales, customer service and warehousing operations in Europe and Japan.
ACQUISITIONS
In February, 1995, the company acquired Krupp Widia GmbH (Widia) for DM 120.8 million in cash (approximately $79 million), which included DM 7.1 million (approximately $4 million) for the settlement of all intercompany liabilities to the seller as of the closing date, and $13 million of assumed debt. Headquartered in Germany, Widia is one of the world's leading producers of industrial metalcutting products.
In July, 1995, the company acquired Talbot Holdings, Ltd. (Talbot) for approximately $33 million in cash and $5 million of assumed debt. Talbot is a major supplier of round high-speed steel and carbide metalcutting tools.
In January, 1996, the company acquired The Fairchild Corporation's D-M-E business (D-M-E) for approximately $246 million. D-M-E is the largest U.S. producer of mold bases, standard components and supplies for the plastics injection mold-making industry. The company financed the acquisition through the execution of promissory notes to the seller in the amount of $182 million and cash on hand of $64 million. The promissory notes were subsequently repaid using the proceeds from an equity offering (see Shareholders' Equity), available cash and borrowings under the company's existing lines of credit.
During 1997, the company acquired Minnesota Twist Drill, Inc., a maker of high-speed twist drills, and Data Flute CNC, Inc., a manufacturer of high-performance solid carbide end mills. Each business has annual sales of approximately $10 million. These acquisitions were financed by the use of available cash and bank borrowings. These acquisitions did not significantly affect the company's financial position or results of operations.
All of these acquisitions were accounted for under the purchase method. The aggregate cost of the acquisitions, including professional fees and other related costs, was $27.4 million in 1997, $248.1 million in 1996 and $111.1 million in 1995. The following table presents the allocation of the aggregate acquisition cost to the assets acquired and liabilities assumed.
ALLOCATION OF ACQUISITION COST
(In millions) 1997 1996 1995 ------ ------ ------- Cash and cash equivalents $ .6 $ 1.3 $ 3.1 Accounts receivable 3.6 25.5 51.7 Inventories 4.0 29.6 68.9 Other current assets .1 1.2 .6 Property, plant and equipment 7.0 43.9 60.6 Goodwill 14.4 162.5 51.9 Other noncurrent assets - 7.9 14.3 ------ ------ ------- Total assets 29.7 271.9 251.1 ------ ------ ------- Amounts payable to banks and long-term debt due within one year - - (9.3) Other current liabilities (2.1) (18.9) (70.6) Long-term accrued liabilities (.2) (4.9) (50.7) Long-term debt - - (9.4) ------ ------ ------- Total liabilities (2.3) (23.8) (140.0) ------ ------ ------- Total acquisition cost $ 27.4 $248.1 $ 111.1 ====== ====== =======
In the 1995 allocation, other current liabilities includes a reserve of $16.9 million for the restructuring of Widia and its integration with Valenite. Prior to the acquisition, the company`s management began to develop a plan for the integration of certain operations of Widia and Valenite and for restructuring actions to improve Widia's profitability. In May, 1995, the company's management formally approved this integration plan at an expected total cost of $17.1 million. The portion directly related to Valenite was recorded as a $9.8 million pretax charge to earnings in the second quarter of 1995. In December, 1995, the management of the company and Widia approved a revision to the original plan to provide for additional reductions in personnel levels at Widia. As a result, the total cost of the integration plan was $28.1 million.
As it related to Widia, the revised plan involved the closure of one manufacturing plant, the reduction of employment levels at its plant and headquarters in Germany, and the consolidation of numerous sales, customer service and warehouse operations in Europe and Asia at a total cost of $18.3 million. The actions contemplated by the integration plan were substantially completed by year-end 1996.
RESEARCH AND DEVELOPMENT
Charges to operations for research and development activities are summarized below. The amounts include expenses related to the company's Wolfpack product development and process improvement program. The decrease in 1996 relates principally to the sale of ESD in December, 1995.
RESEARCH AND DEVELOPMENT
(In millions) 1997 1996 1995 ----- ----- ----- Research and development $50.1 $49.0 $57.8 ===== ===== =====
RETIREMENT BENEFIT PLANS
Pension cost for all defined benefit plans is summarized in the following table. For all years presented, the table includes amounts for plans for certain employees in the U.S., the United Kingdom (U.K.) and Germany.
PENSION COST
(In millions) 1997 1996 1995 ------ ------ ------ Service cost (benefits earned during the period) $ 9.6 $ 9.5 $ 7.6 Interest cost on projected benefit obligation 38.9 37.5 37.0 Actual return on plan assets (77.9) (53.3) (87.9) Net amortization and deferral 31.5 11.1 46.3 ------ ------ ------ Pension cost $ 2.1 $ 4.8 $ 3.0 ====== ====== ======
The following table sets forth the funded status of the defined benefit pension plans that cover certain U.S. and U.K. employees.
FUNDED STATUS AT YEAR-END
(In millions) 1997 1996 ------- ------- Vested benefit obligation $(430.8) $(372.8) ======= ======= Accumulated benefit obligation $(451.8) $(389.4) ======= ======= Projected benefit obligation $(502.2) $(445.6) Plan assets at fair value 511.5 464.4 ------- ------- Excess of plan assets in relation to projected benefit obligation 9.3 18.8 Unrecognized net loss 2.3 5.2 Unrecognized net transition asset (7.7) (13.8) ------- ------- Prepaid pension cost $ 3.9 $ 10.2 ======= =======
The plans' assets consist principally of stocks, debt securities and mutual funds. The U.S. plan also includes common shares of the company with a market value of $25.4 million in 1997 and $16.5 million in 1996. Because of the funded status of the plans, contributions were not required for the U.S. plan in 1997 and for the U.K. plan in the three year period ended December 27, 1997. Contributions of $7.5 million and $3.4 million were made to the U.S. plan in 1996 and 1995, respectively.
The following table sets forth the status of the company's defined benefit pension plans for certain employees in Germany. Consistent with customary practice in Germany, these plans have not been funded.
STATUS AT YEAR-END
(In millions) 1997 1996 ------ ------ Vested benefit obligation $(32.1) $(34.8) ====== ====== Accumulated benefit obligation $(34.8) $(38.6) ====== ====== Projected benefit obligation $(38.1) $(42.6) Unrecognized net gain (.9) (.1) ------ ------ Accrued pension cost $(39.0) $(42.7) ====== ======
The following table presents the weighted-average actuarial assumptions used for all defined benefit plans in 1997, 1996 and 1995.
ACTUARIAL ASSUMPTIONS
1997 1996 1995 ---- ---- ---- Discount rate 7.4% 8.0% 7.5% Expected long-term rate of return on plan assets 9.6% 9.6% 9.6% Rate of increase in future compensation levels 5.2% 5.1% 4.3%
The company also maintains certain defined contribution and 401(k) plans. Participation in these plans is available to certain U.S. employees. Costs for these plans were $8.5 million, $7.7 million and $6.4 million in 1997, 1996 and 1995, respectively.
In addition to pension benefits, the company also provides varying levels of postretirement health care benefits to certain U.S. employees. Substantially all such employees are covered by the company's principal plan, under which benefits are provided to employees who retire from active service after having attained age 55 and ten years of service. The plan is contributory in nature. For employees retiring prior to 1980, such contributions are based on varying percentages of the current per-contract cost of benefits, with the company funding any excess over these amounts. For employees retiring after 1979, the dollar amount of the company's current and future contributions is frozen.
The following tables present the components of the company's liability for retiree health care benefits and postretirement health care cost under the principal U.S. plan.
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS
(In millions) 1997 1996 ------ ------ Accumulated postretirement benefit obligation Retirees $(26.6) $(29.1) Fully eligible active participants (5.3) (4.9) Other active participants (6.8) (6.3) ------ ------ (38.7) (40.3) Unrecognized net gain (4.7) (5.0) ------ ------ Accrued postretirement health care benefits $(43.4) $(45.3) ====== ======
POSTRETIREMENT HEALTH CARE COST
(In millions) 1997 1996 1995 ------ ------ ------ Service cost (benefits earned during the period) $ .3 $ .3 $ .3 Interest cost on accumulated postretirement benefit obligation 3.0 3.2 3.9 ------ ------ ------ Postretirement health care cost $ 3.3 $ 3.5 $ 4.2 ====== ====== ======
The discount rates used in calculating the accumulated postretirement benefit obligation were 7.5% for 1997 and 8.0% for 1996. For 1998, the assumed rate of increase in health care costs used to calculate the accumulated postretirement benefit obligation is 8.8%. This rate is assumed to decrease to varying degrees annually to 5.0% for years 2005 and thereafter. Because the dollar amount of the company's contributions for most employees is frozen, a one percent change in each year in relation to the above assumptions would not significantly change the accumulated postretirement benefit obligation or the total cost of the plan.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the company's deferred tax assets and liabilities as of year-end 1997 and 1996 are as follows:
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
(In millions) 1997 1996 ------ ------ DEFERRED TAX ASSETS Net operating loss and tax Credit carryforwards $ 48.5 $ 59.7 Accrued postretirement health care benefits 14.6 15.2 Inventories, principally due to obsolescence reserves and additional costs inventoried for tax purposes 8.7 8.7 Accrued employee benefits other than pensions and retiree health care benefits 11.8 10.7 Accrued pension costs 3.1 4.1 Accrued warranty costs 3.3 3.1 Accrued taxes 4.9 3.0 Accounts receivable, principally due to allowances for doubtful accounts 3.5 3.0 Accrued liabilities and other 23.0 20.5 ------ ------ Total deferred tax assets 121.4 128.0 Less valuation allowances (25.5) (59.4) ------ ------ Deferred tax assets net of valuation allowances $ 95.9 $ 68.6 ====== ======
DEFERRED TAX LIABILITIES Property, plant and equipment, principally due to differences in depreciation methods $ 25.7 $ 23.7 Accounts receivable and inventories 2.4 3.0 Prepaid pension costs 6.6 6.2 Undistributed earnings of non-U.S. subsidiaries 1.2 1.3 Other 11.7 7.1 ------ ------ Total deferred tax liabilities $ 47.6 $ 41.3 ====== ====== Net deferred tax assets $ 48.3 $ 27.3 ====== ======
Valuation allowances related to Widia's preacquisition net operating loss carryforwards are being applied to reduce goodwill arising from the acquisition as the related tax benefits are realized. During 1997 and 1996, reversals of valuation allowances applied to reduce goodwill totaled $5.7 million and $1.9 million, respectively. Additional reductions of goodwill in years subsequent to 1997 are not expected to exceed $4.0 million.
Summarized in the following tables are the company's earnings before income taxes, its provision for income taxes, the components of the provision for deferred income taxes and a reconciliation of the U.S. statutory rate to the tax provision rate.
EARNINGS BEFORE INCOME TAXES
(In millions) 1997 1996 1995 ------ ------ ------ United States $ 64.9 $ 33.9 $ 87.8 Non-U.S. 35.7 47.4 46.5 ------ ------ ------ $100.6 $ 81.3 $134.3 ====== ====== ======
PROVISION FOR INCOME TAXES
(In millions) 1997 1996 1995 ------ ------ ------ CURRENT PROVISION United States $ 15.3 $ 6.4 $ 32.6 State and local 5.3 2.8 8.9 Non-U.S. 14.7 12.8 12.5 ------ ------ ------ 35.3 22.0 54.0 ------ ------ ------ DEFERRED PROVISION United States (13.7) (2.9) (23.0) Non-U.S. (1.6) (4.1) (2.3) ------ ------ ------ (15.3) (7.0) (25.3) ------ ------ ------ $ 20.0 $ 15.0 $ 28.7 ====== ====== ======
COMPONENTS OF THE PROVISION FOR DEFERRED INCOME TAXES
(In millions) 1997 1996 1995 ------ ------ ------ Change in valuation allowances $(28.2) $ (6.7) $(19.6) Change in deferred taxes related to operating loss carryforwards 11.1 3.2 (6.0) Depreciation 2.0 (3.7) 8.9 Accrued pension and other employee costs .5 .5 (5.3) Tax effects of consolidation, restructuring and other reserves - .4 1.6 Other (.7) (.7) (4.9) ------ ------ ------ $(15.3) $ (7.0) $(25.3) ====== ====== ======
RECONCILIATION OF THE U.S. STATUTORY RATE TO THE TAX PROVISION RATE
1997 1996 1995 ------ ------ ------ U.S. statutory tax rate 35.0% 35.0% 35.0% Increase (decrease) resulting from Tax benefits from net reversal of valuation allowances (23.2) (10.5) (6.4) Losses without current tax benefits 9.9 5.3 3.0 Tax benefits from net reversal of U.S. temporary differences (.2) (4.4) (9.4) U.S. federal income tax credits (2.8) (5.9) - Effect of operations outside the U.S. (3.6) (4.6) (7.3) State and local income taxes, net of federal benefit 3.4 2.3 6.6 Other 1.4 1.3 (.1) ------ ------ ------ 19.9% 18.5% 21.4% ====== ====== ======
At year-end 1997, certain of the company's non-U.S. subsidiaries had net operating loss carryforwards aggregating approximately $112 million, substantially all of which have no expiration dates.
Undistributed earnings of foreign subsidiaries which are intended to be indefinitely reinvested aggregated $123 million at the end of 1997.
Income taxes of $25.2 million, $33.8 million and $21.0 million were paid in 1997, 1996 and 1995, respectively.
EARNINGS PER COMMON SHARE
Basic earnings per common share data are based on the weighted-average number of common shares outstanding during the respective periods. Diluted earnings per common share data are based on the weighted-average number of common shares outstanding adjusted to include the effects of potentially dilutive stock options and certain restricted shares.
The following tables present the calculation of earnings available to common shareholders and a reconciliation of the shares used to calculate basic and diluted earnings per common share.
EARNINGS AVAILABLE TO COMMON SHAREHOLDERS
(In millions) 1997 1996 1995 ------ ------ ------ Net earnings $ 80.6 $ 66.3 $105.6 Less dividends on Preferred shares (.2) (.2) (.2) ------ ------ ------ Net earnings available to common shareholders $ 80.4 $ 66.1 $105.4 ====== ====== ======
RECONCILIATION OF SHARES
(In thousands) 1997 1996 1995 ------ ------ ------ Weighted-average common shares outstanding 39,583 37,667 33,908 Effect of dilutive stock options and restricted shares 373 276 401 ------ ------ ------ Weighted-average common shares assuming dilution 39,956 37,943 34,309 ====== ====== ======
For 1997, weighted-average shares assuming dilution excludes 205,075 restricted shares subject to contingent vesting based on the attainment of specified earnings objectives that have not yet been achieved.
RECEIVABLES
In January, 1996, the company entered into a new three year receivables purchase agreement with an independent issuer of receivables-backed commercial paper. This agreement replaced a similar agreement that expired in January, 1996. Under the terms of the new agreement, the company agreed to sell on an ongoing basis and without recourse, an undivided percentage ownership interest in designated pools of accounts receivable. To maintain the balance in the designated pools of accounts receivable sold, the company is obligated to sell undivided percentage interests in new receivables as existing receivables are collected. The agreement permits the sale of up to $75.0 million of undivided interests in accounts receivable through January, 1999.
At December 27, 1997, December 28, 1996, and December 30, 1995, the undivided interests in the company's gross accounts receivable that had been sold to the purchasers aggregated $75.0 million, $75.0 million and $69.0 million, respectively. Increases and decreases in the amount sold are reported as operating cash flows in the Consolidated Statement of Cash Flows. Costs related to the sales are included in other costs and expenses-net in the Consolidated Statement of Earnings.
INVENTORIES
Inventories amounting to $130.1 million in 1997 and $129.0 million in 1996 are stated at LIFO cost. If stated at FIFO cost, such inventories would be greater by approximately $66.4 million in 1997 and $64.6 million in 1996.
As presented in the Consolidated Balance Sheet, inventories are net of reserves for obsolescence of $41.6 million and $45.6 million in 1997 and 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are shown in the following table.
PROPERTY, PLANT AND EQUIPMENT-NET
(In millions) 1997 1996 ------- ------- Land $ 14.9 $ 13.6 Buildings 179.4 178.0 Machinery and equipment 459.0 427.0 ------- ------- 653.3 618.6 Less accumulated depreciation (310.2) (299.5) ------- ------- $ 343.1 $ 319.1 ======= =======
LIABILITIES
The components of accrued and other current liabilities and long-term accrued liabilities are shown in the following tables.
ACCRUED AND OTHER CURRENT LIABILITIES
(In millions) 1997 1996 ------ ------ Accrued salaries, wages and other compensation $ 50.4 $ 51.9 Accrued and deferred income taxes 15.8 13.6 Other accrued expenses 102.3 103.8 ------ ------ $168.5 $169.3 ====== ======
LONG-TERM ACCRUED LIABILITIES
(In millions) 1997 1996 ------ ------ Accrued pension and other compensation $ 73.2 $ 67.1 Accrued postretirement health care benefits 46.4 48.4 Accrued and deferred income taxes 31.5 26.9 Minority shareholders' interests 16.7 12.7 Other 23.2 23.5 ------ ------ $191.0 $178.6 ====== ======
LONG-TERM DEBT
The components of long-term debt are shown in the following table.
LONG-TERM DEBT
(In millions) 1997 1996 ------ ------ 7 7/8 % Notes due 2000 $100.0 $100.0 8 3/8 % Notes due 2004 115.0 115.0 Revolving credit facility 80.3 80.3 Other 10.5 11.8 ------ ------ 305.8 307.1 Less current maturities (1.6) (5.2) ------ ------ $304.2 $301.9 ====== ======
Except for the 7 7/8% Notes due 2000 and the 8 3/8% Notes due 2004, the carrying amount of the company's long-term debt approximates fair value, which is determined using discounted cash flow analysis based on the company's incremental borrowing rate for similar types of financing arrangements. At year-end 1997, the fair value of the 7 7/8% Notes due 2000 was $102.1 million and the fair value of the 8 3/8% Notes due 2004 was $121.6 million. Such amounts are based on recent trade prices through registered securities brokers.
Certain of the above long-term debt obligations contain various restrictions and financial covenants relating principally to additional secured indebtedness.
Outstanding borrowings under the company's revolving credit facility of $10.0 million at December 27, 1997, and DM 125 million ($70.3 million at December 27, 1997, and $80.3 million at December 28, 1996) are included in long-term debt based on the expectation that these borrowings will remain outstanding for more than one year. These borrowings are at variable interest rates which had a weighted average of 4.3% at year-end 1997.
Interest paid was $29.1 million in 1997, $35.1 million in 1996 and $27.7 million in 1995.
Maturities of long-term debt for the five years after 1997 are:
1998: $ 1.6 million 1999: 2.3 million 2000: 101.8 million 2001: 1.8 million 2002: 80.3 million
The company leases certain equipment and facilities under operating leases, some of which include varying renewal and purchase options. Future minimum rental payments applicable to noncancelable operating leases during the next five years and in the aggregate thereafter are:
1998: $17.1 million 1999: 11.8 million 2000: 9.3 million 2001: 7.0 million 2002: 5.5 million After 2002: 34.2 million
Rent expense was $22.6 million, $23.6 million and $19.8 million in 1997, 1996 and 1995, respectively.
LINES OF CREDIT
At year-end 1997, the company had lines of credit with various U.S. and non-U.S. banks of approximately $420 million, including a $200 million committed revolving credit facility. These credit facilities support letters of credit and leases in addition to providing borrowings under varying terms. In March, 1997, the company amended the revolving credit facility to reduce the amount of credit available thereunder from $300 million to $200 million and to extend the term to January, 2002. The amended facility requires a facility fee on the total $200 million revolving loan commitment at a variable rate which was .18% per annum as of December 27, 1997. In addition, a restriction on total indebtedness in relation to total capital was replaced by a covenant of debt in relation to earnings before interest, income taxes, depreciation and amortization (EBITDA). Under the provisions of the revolving credit facility, the company's additional borrowing capacity totaled approximately $307 million at year-end 1997.
Subsequent to year end, the company amended the revolving credit facility to increase the line of credit available from $200 million to $250 million.
The weighted-average interest rate on short-term borrowings outstanding as of year-end was 6.6% for 1997 and 1996.
SHAREHOLDERS' EQUITY
During 1997, the company purchased 499,600 treasury shares on the open market at a cost of $12.2 million to partially meet current and future needs of management incentive, employee benefit and dividend reinvestment plans. An additional 90,095 shares were also purchased with respect to current year exercises of stock options in lieu of the issuance of authorized but unissued shares.
In May, 1996, the company issued an additional 5.5 million common shares through a public offering, resulting in net proceeds (after deducting issuance costs) of $128.5 million. The proceeds of the offering were used to repay a portion of the promissory notes issued to the seller in connection with the acquisition of D-M-E.
SHAREHOLDERS' EQUITY - PREFERRED AND COMMON SHARES
(In millions, except share and per-share amounts) 1997 1996 ------ ------ 4% Cumulative Preferred shares authorized, issued and outstanding, 60,000 shares at $100 par value, redeemable at $105 a share $ 6.0 $ 6.0 ====== ====== Common shares, $1 par value, authorized 50,000,000 shares, issued and outstanding, 1997: 39,635,829 shares, 1996: 39,846,397 39.6 39.8 ====== ======
The company has authorized ten million serial preference shares with $1 par value. None of these shares has been issued.
Holders of company common stock have one vote per share until they have held their shares for at least 36 consecutive months, after which they are entitled to ten votes per share.
CONTINGENCIES
The company is involved in remedial investigations and actions at various locations, including former plant facilities, and EPA Superfund sites where the company and other companies have been designated as potentially responsible parties. The company accrues remediation costs, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than the completion of a remediation feasibility study. The accruals are adjusted as further information becomes available or circumstances change. Environmental costs have not been material in the past.
Various lawsuits arising during the normal course of business are pending against the company and its consolidated subsidiaries.
In the opinion of management, the ultimate liability, if any, resulting from these matters will have no significant effect on the company's consolidated financial position or results of operations.
FOREIGN EXCHANGE CONTRACTS
The company enters into forward contracts to hedge foreign currency commitments on an ongoing basis for periods commensurate with known exposures. The purpose of this practice is to minimize the effect of foreign currency exchange rate fluctuations on the company's operating results. The company does not engage in speculation. The company's exposure to credit-related losses from these transactions is considered to be minimal due to the high credit ratings of the parties involved.
At December 27, 1997, the company had outstanding forward contracts totaling $27.5 million, which generally mature in periods of six months or less. These contracts require the company and its subsidiaries to exchange currencies at the maturity dates at exchange rates agreed upon at inception. Due to the short-term nature of these contracts, their fair values, which are not recognized in the financial statements, approximate their contract values as of December 27, 1997.
STOCK-BASED COMPENSATION
The 1997 Long-Term Incentive Plan (1997 Plan) permits the company to grant its common shares in the form of non- qualified stock options, incentive stock options, restricted stock and performance awards.
Non-qualified and incentive stock options outstanding under the 1997 Plan are granted at market value, vest in increments over a five year period, and expire ten years subsequent to the award. Of the 3,063,612 options outstanding at year-end 1997, 192,000 are incentive stock options.
Summaries of stock options granted under the 1997 Plan and prior plans are presented in the following tables.
STOCK OPTION ACTIVITY
Weighted- Average Exercise Shares Price --------- -------- OUTSTANDING AT YEAR-END 1994 1,969,436 18.73 Granted 581,009 20.69 Exercised (382,854) 18.77 Canceled (30,595) 21.15 --------- --------
OUTSTANDING AT YEAR-END 1995 2,136,996 19.22 Granted 626,800 25.75 Exercised (31,045) 20.51 Canceled (26,182) 22.95 --------- --------
OUTSTANDING AT YEAR-END 1996 2,706,569 20.70 Granted 568,600 23.25 Exercised (94,485) 17.64 Canceled (117,072) 24.28 --------- --------
OUTSTANDING AT YEAR-END 1997 3,063,612 21.13 ========= ========
EXERCISABLE STOCK OPTIONS AT YEAR-END
Stock Options --------- 1995 1,054,663 1996 1,147,869 1997 1,245,931
SHARES AVAILABLE FOR FUTURE GRANT AT YEAR-END
Stock Options --------- 1995 871,150 1996 131,675 1997 1,306,959
The following tables summarize information about stock options outstanding at December 27, 1997.
COMPONENTS OF OUTSTANDING STOCK OPTIONS
Average Weighted- Range of Remaining Average Exercise Number Contract Exercise Prices Outstanding Life Price ------------- ----------- --------- --------- $8.50 - 14.50 568,900 3.6 $13.35 17.13 - 25.75 2,494,712 7.0 22.90 ----------- $8.50 - 25.75 3,063,612 6.4 $21.13 ===========
COMPONENTS OF EXERCISABLE STOCK OPTIONS
Weighted- Range of Average Exercise Number Exercise Prices Exercisable Price ------------- ----------- --------- $8.50 - 14.50 568,900 $13.35 17.13 - 25.75 677,031 21.20 ----------- $8.50 - 25.75 1,245,931 $17.62 ===========
Under the 1997 Plan, performance awards are granted in the form of restricted stock awards which vest based on the achievement of specified earnings objectives over a three year period. The 1997 Plan also permits the granting of other restricted stock awards, which also vest three years from the date of grant. During the restriction period, restricted stock awards entitle the holder to all the rights of a holder of common shares, including dividend and voting rights. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The amount of compensation expense recognized for restricted stock, including performance awards, was $5.0 million, $.9 million and $.7 million in 1997, 1996 and 1995, respectively. Restricted stock award activity is as follows:
RESTRICTED STOCK ACTIVITY
1997 1996 1995 ------- ------ ------ Restricted stock awarded 281,190 58,746 47,600 ======= ====== ====== Weighted-average market value on date of grant $22.99 $25.55 $23.00 ======= ====== ======
Of the 281,190 shares of restricted stock awarded in 1997, 205,075 were performance awards subject to contingent vesting.
Cancellations of restricted stock, including shares canceled to pay employee withholding taxes at maturity, totaled 6,758 in 1997, 20,172 in 1996 and 16,323 in 1995.
During 1997, 10,210 shares related to performance awards earned under a prior plan were issued.
Pro forma earnings amounts prepared under the assumption that the stock options granted in 1997, 1996 and 1995 were accounted for based on their fair value as determined under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," are as follows:
PRO FORMA EARNINGS
(In millions, except per-share amounts)
1997 1996 1995 ----- ----- ------ Net earnings $77.5 $63.5 $104.4 ===== ===== ======
Net earnings per common share Basic $1.95 $1.68 $ 3.07 ===== ===== ====== Diluted $1.93 $1.67 $ 3.03 ===== ===== ======
The weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $7.51, $8.66 and $7.75, respectively. The fair value of the options was calculated as of the date of grant using the Black-Scholes option pricing model using the following assumptions:
FAIR VALUE ASSUMPTIONS 1997 1996 1995 --------- --------- --------- Dividend yield 2.06% 1.40% 1.74% Expected volatility 31 - 41% 30 - 41% 33 - 43% Risk free interest rate at grant date 5.9 - 6.3% 5.3 - 5.6% 7.3 - 7.5% Expected life in years 2 - 7 2 - 7 2 - 7
Statement of Financial Accounting Standards No. 123 does not apply to awards granted prior to 1995. Because additional awards in future years are anticipated, the pro forma effects of applying this statement presented above are not indicative of future amounts.
ORGANIZATION
Cincinnati Milacron Inc. is a worldwide manufacturer of machinery and supplies for processing plastics, and machine tools and industrial products for metalworking. The company has operations in the United States and other countries located principally in Western Europe.
The plastics technologies segment includes the production of injection molding machines, mold bases, systems for extrusion and blow molding and various other specialty equipment. The market is driven by the consumer economy and the automotive industry. The machine tools segment serves a broad range of markets, including the automotive industry, job shops and the aerospace industry. The industrial products segment serves a variety of metalworking industries, including the automotive industry. It produces five basic types of industrial products: metalcutting tools, metalworking fluids, precision grinding wheels, carbide wear parts and industrial magnets. The markets for all three business segments are highly competitive and can be cyclical in nature.
Financial data for the past three years for the company's business segments are shown in the following tables. The 1996 increases for plastics technologies are primarily attributable to the acquisition of D-M-E on January 26, 1996. The 1996 decreases for machine tools are partially attributable to the sale of ESD on December 30, 1995.
SALES BY SEGMENT
(In millions) 1997 1996 1995 -------- -------- --------
Plastics technologies $ 735.7 $ 662.4 $ 570.1 Machine tools 458.0 371.8 409.0 Industrial products 703.0 695.5 670.2 -------- -------- -------- $1,896.7 $1,729.7 $1,649.3 ======== ======== ========
OPERATING INFORMATION BY SEGMENT
(In millions) 1997 1996 1995 -------- -------- --------
OPERATING EARNINGS Plastics technologies $ 59.7 $ 59.2 $ 54.3 Machine tools 14.5 4.9 7.7 Industrial products 81.2 73.7 62.1 Disposition of businesses (a) - - 71.0 Integration charge (b) - - (9.8) Corporate expenses (17.2) (16.8) (15.7) Other unallocated expenses (c) (11.1) (9.9) (10.5) -------- -------- -------- Operating earnings 127.1 111.1 159.1 Interest expense-net (26.5) (29.8) (24.8) -------- -------- -------- Earnings before income taxes $ 100.6 $ 81.3 $ 134.3 ======== ======== ========
IDENTIFIABLE ASSETS Plastics technologies $ 611.5 $ 612.6 $ 335.3 Machine tools 253.9 233.3 232.8 Industrial products 497.7 458.9 468.1 Unallocated corporate assets (d) 29.4 31.5 137.5 -------- -------- -------- Total assets $1,392.5 $1,336.3 $1,173.7 ======== ======== ========
CAPITAL EXPENDITURES Plastics technologies $ 26.7 $ 20.6 $ 16.6 Machine tools 18.0 15.7 8.6 Industrial products 34.8 28.9 27.1 -------- -------- -------- Total capital expenditures $ 79.5 $ 65.2 $ 52.3 ======== ======== ========
DEPRECIATION AND AMORTIZATION Plastics technologies $ 23.0 $ 21.4 $ 11.8 Machine tools 6.2 5.0 7.4 Industrial products 24.5 24.5 24.4 -------- -------- -------- Total depreciation and amortization $ 53.7 $ 50.9 $ 43.6 ======== ======== ========
(a) $66.0 million relates to the machine tools segment and $5.0 million relates to the industrial products segment. (b) Relates to the industrial products segment. (c) Includes financing costs related to the sale of accounts receivable and minority shareholders' interests in earnings of subsidiaries. (d) Includes cash and cash equivalents and the assets of the company's insurance and utility subsidiaries.
Sales of U.S. operations include export sales of $231.8 million in 1997, $199.6 million in 1996, and $166.9 million in 1995.
Total sales of the company's U.S. and non-U.S. operations to unaffiliated customers outside the U.S. were $816.5 million, $830.3 million, and $784.2 million in 1997, 1996 and 1995, respectively.
The following table summarizes the company's U.S. and non- U.S. operations.
U.S. AND NON-U.S. OPERATIONS
(In millions) 1997 1996 1995 -------- ------ ------ U.S. OPERATIONS Sales $1,204.4 $969.8 $938.3 Segment operating earnings 108.9 81.4 71.8 Disposition of businesses - - 62.1 Integration charge - - (2.9) Identifiable assets 813.9 731.6 484.1 Capital expenditures 50.8 41.7 31.4 Depreciation and amortization 33.7 28.9 21.6
NON-U.S. OPERATIONS Sales 692.3 759.9 711.0 Segment operating earnings 46.5 56.4 52.3 Disposition of businesses - - 8.9 Integration charge - - (6.9) Identifiable assets 549.2 573.2 552.1 Capital expenditures 28.7 23.5 20.9 Depreciation and amortization 20.0 22.0 22.0
REPORT OF INDEPENDENT AUDITORS
Board of Directors Cincinnati Milacron Inc.
We have audited the accompanying Consolidated Balance Sheet of Cincinnati Milacron Inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the related Consolidated Statements of Earnings, Changes in Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 27, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cincinnati Milacron Inc. and subsidiaries at December 27, 1997 and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 27, 1997, 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.
/S/Ernst and Young, LLP
Cincinnati, Ohio February 6, 1998
SUPPLEMENTARY FINANCIAL INFORMATION
OPERATING RESULTS BY QUARTER (UNAUDITED)
(In millions, except per-share amounts) 1997 (a) ---------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 ------ ------ ------ ------ Sales $377.5 $452.1 $570.7 $496.4 Manufacturing margins 95.3 110.3 140.2 126.1 Percent of sales 25.2% 24.4% 24.6% 25.4% Net earnings 13.0 18.2 22.6 26.8 Per common share Basic .33 .46 .57 .67 Diluted .32 .46 .56 .67
1996 (a) ---------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 ------ ------ ------ ------ Sales $353.4 $411.4 $511.1 $453.8 Manufacturing margins (b) 91.6 101.7 130.2 113.5 Percent of sales (b) 25.9% 24.7% 25.5% 25.0% Net earnings 12.6 14.7 19.1 19.9 Per common share Basic .36 .41 .48 .50 Diluted .36 .40 .48 .50
(a) In 1997 and 1996, the fiscal year consists of thirteen four-week periods. The first, second and fourth quarters consist of twelve weeks each, and the third quarter, sixteen weeks. In 1998, the company will change its fiscal year to a monthly calendar. Amounts for prior quarters will not be restated to reflect the 1998 presentation because it is impracticable to do so. (b) Manufacturing margins for 1996 and the first quarter of 1997 have been restated to exclude the amortization of goodwill.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III - --------
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is (i) incorporated herein by reference to the "Election of Directors" section of the company's proxy statement dated March 27, 1998 and (ii) included in Part I on pages 18 through 19 of this Form 10-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The "Components of Compensation" section of the company's proxy statement dated March 27, 1998 is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Principal Holders of Voting Securities" section of the company's proxy statement dated March 27, 1998 is incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The paragraph captioned "Stock Loan Programs" of the company's proxy statement dated March 27, 1998 is incorporated herein by reference.
PART IV - -------
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 14(a)(1)&(2)-- LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Cincinnati Milacron Inc. and subsidiaries are included in Item 8:
Page No. ---- Consolidated Statement of Earnings - 1997, 1996 and 1995 32 Consolidated Balance Sheet - 1997 and 1996 33 Consolidated Statement of Changes in Shareholders' Equity - 1997, 1996 and 1995 34 Consolidated Statement of Cash Flows - 1997, 1996 and 1995 35 Notes to Consolidated Financial Statements 36 Report of Independent Auditors 48 Supplementary Financial Information 49
The following consolidated financial statement schedule of Cincinnati Milacron Inc. and subsidiaries is included in Item 14(d) for the years ended 1997, 1996 and 1995:
Page No. ---- Schedule II- Valuation and Qualifying Accounts and Reserves 63
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Item 14 (a)(3) - LIST OF EXHIBITS
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession - not applicable
(3) Articles of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on June 16, 1983 - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 28, 1985, as amended by Amendment No. 1 thereto on Form 8 dated June 30, 1986, and Amendment No. 2 thereto' on Form 8 dated July 17, 1986 (File No. 1-8485)
3.2 Certificate of Amendment of the Restated Certificate of Incorporation dated April 22, 1986, and filed with the Secretary of State of the State of Delaware on April 22, 1986 - Incorporated herein by reference to the company's Form 10-Q for the quarter ended March 22, 1986 (File No. 1-8485)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation dated June 11, 1987, and filed with the Secretary of State of the State of Delaware on June 15, 1987 - Incorporated herein by reference to the company's Form 10-Q for the quarter ended March 28, 1987 (File No. 1-8485)
3.4 By-laws, as amended - Incorporated herein by reference to the company's Registration Statement on Form S-8 (Registration No. 33-33623)
(4) Instruments Defining the Rights of Security Holders, Including Indentures:
4.1 8-3/8% Notes due 2004 - Incorporated herein by reference to the company's Amendment No. 3 to Form S-4 Registration Statement dated July 7, 1994 (File No. 33-53009)
4.2 7-7/8% Notes due 2000 - Incorporated by reference to the company's Registration Statement on Form S-4 dated July 21, 1995 (File No. 33- 60081)
4.3 Cincinnati Milacron Inc. hereby agrees to furnish to the Securities and Exchange Commission, upon its request, the instruments with respect to long-term debt for securities authorized thereunder which do not exceed 10% of the registrant's total consolidated assets
(9) Voting Trust Agreement- not applicable
(10) Material Contracts:
10.1 Cincinnati Milacron 1987 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 27, 1987.
10.2 Cincinnati Milacron 1991 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 22, 1991.
10.3 Cincinnati Milacron 1994 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 24, 1994.
10.4 Cincinnati Milacron 1997 Long-Term Incentive Plan - Incorporated herein by reference to the company's Proxy Statement dated March 21, 1997.
10.5 Cincinnati Milacron 1996 Short-Term Management Incentive Plan - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 28, 1996.
10.6 Cincinnati Milacron Inc. Supplemental Pension Plan - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 31, 1988.
10.7 Cincinnati Milacron Inc. Supplemental Retirement Plan #2 - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 31, 1988.
10.8 Cincinnati Milacron Retirement Savings Plan - Incorporated herein by reference to the company's Registration Statement on Form S-8 (Registration No. 33-33623).
10.9 Cincinnati Milacron Inc. Plan for the Deferral of Directors' Compensation - Incorporated herein by reference to the company's Proxy Statement dated March 22, 1991.
10.10 Cincinnati Milacron Inc. Retirement Plan for Non-Employee Directors - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended December 29, 1990.
10.11 Cincinnati Milacron Supplemental Executive Retirement Plan - Incorporated herein by reference to the company's Form 10-K for the fiscal year ended January 1, 1994.
10.12 Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc., Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 8-K dated February 1, 1995.
10.13 Amendment Number One, dated as of May 31, 1995 to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994, among Cincinnati Milacron Inc., Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 8-K dated May 31, 1995.
10.14 U.S. Asset Purchase Agreement dated as of December 15, 1995 between Cincinnati Milacron Inc. and TRINOVA Corporation. - Incorporated herein by reference to the company's Form 8-K dated December 30, 1995.
10.15 U.K. Asset Purchase Agreement dated as of December 15, 1995, between Cincinnati Milacron U.K. Limited and TRINOVA Limited. - Incorporated herein by reference to the company's Form 8-K dated December 30, 1995.
10.16 Amendment Number Two, dated as of January 23, 1996 to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 10-K dated December 30, 1995.
10.17 Amendment Number Three, dated as of April 26, 1996 to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Form 10-K dated December 28, 1996.
10.18 Underwriting Agreement between Cincinnati Milacron Inc, and CS First Boston Corporation, BT Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. - Incorporated herein by reference to the company's Registration Statement on Form S-3 (Registration No. 333-01739)
10.19 Asset Purchase Agreement dated as of January 23, 1996, between Cincinnati Milacron Inc., a Delaware corporation, The Fairchild Corporation, a Delaware corporation, RHI Holdings, Inc., a Delaware corporation, and the Designated Purchasers and Sellers named therein. - Incorporated herein by reference to the company's Form 8-K dated January 26, 1996.
10.20 Amendment Number Four, dated as of March 14, 1997, to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH the lenders listed therein, and Bankers Trust Company, as agent. - Incorporated herein by reference to the company's Quarterly Report on Form 10-Q for the quarter ended March 22, 1997.
10.21 Amendment Number Five, dated as of December 31, 1997, to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, as agent. - Filed herewith.
(11) Statement Regarding Computation of Per-Share Earnings
(12) Statement Regarding Computation of Ratios - not applicable
(13) Annual report to security holders, Form 10-Q or quarterly report to security holders - not applicable
(16) Letter re Change in Certifying Accountant - not applicable
(18) Letter Regarding Change in Accounting Principles - not applicable
(21) Subsidiaries of the Registrant
(22) Published Report Regarding Matters Submitted to Vote of Security Holders - Incorporated by reference to the company's Proxy Statement dated March 27, 1998.
(23) Consent of Experts and Counsel
(24) Power of Attorney - not applicable
(27) Financial Data Schedule
(99) Additional Exhibits - not applicable
Item 14(b)-- REPORTS ON FORM 8-K
On November 1, 1997, the company reported on Form 8-K a change in fiscal year from a 52 week, 13 period, fiscal year ending on the Saturday closest to December 31, to a calendar fiscal year ending on December 31. This change is effective for fiscal year 1998.
Item 14(c)&(d)-- EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The responses to these portions of Item 14 are submitted as a separate section of this report.
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.
CINCINNATI MILACRON INC.
BY: /s/ Daniel J. Meyer ---------------------- Daniel J. Meyer; Chairman, President and Chief Executive Officer (Chief Executive Officer)
BY: /s/ Ronald D. Brown ---------------------- Ronald D. Brown; Vice President- Finance and Administration and Chief Financial Officer (Chief Financial Officer)
BY: /s/ Robert P. Lienesch ------------------------- Robert P. Lienesch; Controller (Chief Accounting Officer)
Date: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Darryl F. Allen - ---------------------------------------- Darryl F. Allen; March 18, 1998 (Director)
/s/ Neil A. Armstrong - ---------------------------------------- Neil A. Armstrong; March 18, 1998 (Director)
/s/ Barbara Hackman Franklin - ---------------------------------------- Barbara Hackman Franklin; March 18, 1998 (Director)
/s/ Harry A. Hammerly - ---------------------------------------- Harry A. Hammerly; March 18, 1998 (Director)
ITEM 14(C) AND (D)-- INDEX TO CERTAIN EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page No.
Exhibit 10.21 Amendment Number Five, dated as of December 31, 1997, to the Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 among Cincinnati Milacron Inc, Cincinnati Milacron Kunststoffmaschinen Europe GmbH, the lenders listed therein, and Bankers Trust Company, Bound as agent. Separately
Exhibit 11 Computation of Per-Share Earnings 58
Exhibit 21 Subsidiaries of the Registrant 59
Exhibit 23 Consent of Experts and Counsel 61
Exhibit 27 Financial Data Schedule 62
Schedule II Valuation and Qualifying Accounts and Reserves 63
CINCINNATI MILACRON INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended 1997, 1996 and 1995 (In Thousands)
(a) Consists of reserves of subsidiaries purchased during the year. (b) Represents amounts charged against the reserves during the year. (c) Represents foreign currency translation adjustments during the year. (d) Reversal of excess Valenite restructuring reserve established in 1993. (e) Consists of reserves of businesses sold during the year.